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Category: Home and Apartments : Apartment Hunting
If a place is a good value and epitomizes your dream pad, it might still make sense to buy in select circumstances, even if you are an uncommitted young miscreant with limited resources.
Before you do so, though, you must first attain a firm grasp of the real costs of owning versus renting.
The cost of renting, if you do not anticipate moving into another rental, is merely the monthly rent. If you plan on moving anytime soon, your cost increases by the one-time broker fee you will likely have to pay divided by the number of months you plan on living in your new location.
So, if you are weighing the choice of buying a new place versus moving into a new rental, at $1,500 per month, and incurring a standard broker fee of $2,700, or 15% of a year's rent, your cost of renting must also include the broker fee divided by the number of months you plan on living there. If you assume three years, this cost is $75 per month. Thus, your gross cost of renting is $1,575. You must then add the cost of lost income on your two month security deposit (the $3,000 you are keeping in the landlord's pocket instead of investing in the market). If you assume an after tax return of 8%, you are wasting $240 per year, or $20 a month on the deposit, bringing your total cost of renting to $1,595.
The cost of buying is more difficult to calculate. In today's market, the same studio that rents for $1,500 would probably sell for $140,000. But, since you have read this far already, you already know that you should only consider buying if you are getting a phenomenal deal. And you also know not to touch a studio with a ten foot pole, since the market will collapse someday and, when it does, you will die.
So, is it best you step it up and buy a true one bedroom that might ordinarily rent for $2,500?
Let's say you can find a good one for $180,000, which would be a great deal by market standards but practically the bare minimum to get the attention of you, the smart consumer. Assuming you win the bid (a long shot assumption, given the vast money supply chasing the few good offerings on the market), you must add to the purchase price something like $5,000 in one-time, non-refundable lawyer, title, and mortgage fees. This amount is relatively constant regardless of the size or price of your apartment, further dooming the option of buying a studio.
You must then come up with the down payment, which can be 10%-20% for a condo, or 20%-25% for a co-op. Assume we are buying a condo here because, having read Part I of this series, we now know that co-ops are so disadvantageous to the young, fleeting buyer as to be almost unthinkable. After a down payment of $27,750 (15% of $185,000), which you must provide in cash within days of agreeing to buy, you can finance the rest with a mortgage.
A mortgage is a type of loan for which you make equal monthly payments for a number of years each payment consisting of a principal portion and an interest portion. If you can get a 30 year mortgage with a 7% interest rate, your fixed monthly payment on the $157,250 loan (the portion of your home you must finance, after laying down the payment) will be about $1,050, about $900 of which will initially consist of interest. The good news is that the interest portion is tax deductible. So, your monthly cost of the mortgage is $1,050 less a $315 tax refund (assuming a combined 35% tax rate on the $900 interest portion of each payment), or $735 per month.
Now you must add the condo fees and real estate taxes. If it's a condo you're moving into, assume a bare minimum of 80 cents per square foot, or about $500 a month for a decent sized one bedroom, about one third of which will be tax deductible. Doing some quick math gets our after-tax cost of the monthly fee to about $440. Adding this figure to the mortgage cost gets us to $1,175.
Next we must factor in the lost income associated with your hefty $27,750 down payment. If the market can get you a 6% better return than a piece of Manhattan real estate, we're talking about $1,665 a year, or $140 a month you're losing in potential lost income, bringing the total monthly cost of ownership to $1,315 in this case, not counting selling costs.
When you sell, you will need to use a broker, who will take 6% of the sale price. Needless to say, the first thing that happens after you sell and pay your broker is pay off your remaining mortgage balance, which will be in excess of 95% of your initial mortgage balance if you sell in under four years. If you sell in three years at the same price for which you bought the place, this fee will equal nearly $11,000. Spacing it out over the three year period adds another $300 to the monthly cost of renting.
Now we're at $1,615 which is less than the $2,500 a month the kickass one bedroom you snagged for a song might rent for, but about the same as your adequate little studio. Keep in mind that if this were not a condo and instead a co-op (as most smaller apartments are), your monthly cost would be another $300-$400 due to higher down payments and monthly maintenance fees. And good luck trying to sell it (see Part I for details). Also keep in mind that the example meticulously detailed herein would be a steal by current standards and is not likely to duplicate what would actually happen if you were to actually go out into the great blue yonder.
Of course, if you have a five year time horizon or greater, or if you really find the perfect place that makes your heart sing and the numbers work, then go for it. Just be aware of the real costs and benefits of ownership in this crazed metropolis before you do something insane (as I almost did). Now secure in my knowledge of how the market really works, writing that rent check every month has never felt so good.
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Submitted By
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Dave |
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Market Guru |
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Other Articles in this Category
10 Tips to Getting (and Keeping) a Good Deal on an Apartment
by Gary Rimar
Buy or Rent an Apartment in NYC? Part 1: Condo vs. co-op
by Dave Feinstein
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