The Decision to Rent vs. Buy

For the past several months, the low inventory of available apartments for purchase in Manhattan has proven challenging for buyers and their agents. It has given rise to nasty bidding wars, that are contributing to even loftier prices, and many people losing out on multiple bids for what they envisioned could be their dream homes. And the dream of owning one's own home, and seeing your wealth grow with the appreciation of its value, is elusive again. But despite being bummed because of all this, you should be excited because you were prevented from making a poor financial decision - to pay more for the privilege of ownership. Nearly every purchase transaction today implies 10 or more years where it is notably more expensive to own than rent. Through the years, even in NYC with its complex rental regulations, homeowners when accounting for tax benefits have typically spent less money to own than rent in any given year. This relationship accounts for the risks that come from ownership, like repair costs, or risks to the overall value of a home should the real estate market behave as it did in 2007-2010. Real estate has a unique set of complexities, and transacting in it or owning it has a financial impact. I am excited at the opportunity to work with my clients to help them gain understanding, so this financial impact can be as positive one as possible!

Given the low inventory of 1 and 2 bedroom condos that most of my friends and their friends would like to purchase in an ideal world, I continue to suggest that they look at coops if they are dead set at buying right now. Yes, we have all heard co-op horror stories, but they are not all bad – and we NYCers should thank co-ops for sparing NYC the home price volatility we saw not only in other cities, but throughout our own NE region over the past 5 yrs. (this is a place where a good Realtor will help you through the process).

But if you have some patience, and can stick it out for one or two more years, there should be a more normal apartment inventory situation, especially as several new developments will bring with them new 1 and 2 bedroom condo units. So in the meantime, why not live in a condo just like you wanted, but rent it instead? As an example, I would suggest any client looking to buy a 2 bed/2 bath in Hell's Kitchen to consider Unit 42J at The Atelier for a variety of reasons (good layout, spectacular view, quality and above market appreciation potential). Based on the listing price of $1.425MM, and assuming a 30 year Jumbo Mortgage with 20% down, and a today’s 4.5% rate + current taxes and maintenance, the monthly costs for this unit are about $7200/month, or $5700/month post typical tax benefits. And don't forget to consider up front closing costs, 1% Mansion and 1% transfer taxes, which all add up to around $35,000. For comparison, Unit 43J is available for rent for $5400/month, and is identical to 42J in every way except that is a floor higher. With no upfront costs, as brokers fees are paid by owner, the choice to rent delivers a nearly identical living experience while having a significantly lower cost than buying. By renting, you also take on significantly less risk during the term of your lease than with a sales transaction. Specifically, you eliminate the investment/liquidity risk of having your money tied up in the down payment, as well as the market risk that could cause price volatility, especially in the short-term. Perhaps, unique to this situation is that renting gives you the opportunity to try before you buy, thereby reducing the risk you take when buying a place you have never slept in, or even spent more than a few minutes at a time in before closing the transaction. Knowing how "discerning" some of my friends and clients are, this is a real concern. It is much easier, and much cheaper to get out of a lease that it is to turn around and sell whatever you have just bought and decided you couldn't live with.

As you think about your own decision of where to live, might I recommend doing your own analysis of comparing your rental options to your purchase choices? A handy tool that I recommend to do a simpler, but also effective analysis like the above is the NY Times Buy or Rent calculator. Plug in a few figures and it tells you how many years you have to live in the property you buy to make the potential return more attractive than continuing to rent. (P.S. The NY Times calculator says that it will be greater than 11 years for the purchase in the above scenario to be more attractive than the rental).