Better to Buy or Rent?
The Times took a look this weekend at the math underlying the rent-versus-buy decision. One conclusion of the study was that is was about twice as expensive to buy right now in New York than rent on a purely monthly after-tax cash flow basis. The conclusion seems to be that buying right now only makes…
The Times took a look this weekend at the math underlying the rent-versus-buy decision. One conclusion of the study was that is was about twice as expensive to buy right now in New York than rent on a purely monthly after-tax cash flow basis. The conclusion seems to be that buying right now only makes sense if you believe prices will continue to rise:
For new home buyers, prices in New York would need to rise roughly another 13 percent over the next five years for the average buyer to do better than the average renter over that span. In Northern California, where the gap between house prices and rents is largest, home values would need to go up about 19 percent by 2010. Over the next decade, the break-even increase is about 25 percent in New York and 40 percent in California.
The article also points out that it’s impossible to account for the psychic benefit someone may derive from owning. True, but the psychic toll of losing equity also isn’t being accounted for!
Is It Better to Buy or Rent? [NY Times]
A simple way to answer the question (which I don’t believe is a question at all) is to compare Apples to Apples. If you have the option to own a 4 story brownstone, rent out the 2 rental units and live in the owner’s duplex in a particular neighborhood, or simply Rent a duplex in a brownstone in that same particular neighborhood.
Owning, you not only have the offset of a tax break, you also have rental income that offsets your total monthly out lay. For argument sake let’s assume you have a $1MM mortgage with 3K in annual taxes and $2K for insurance. Your monthly expenses with respect to your home are $6633. assuming a 6% fixed 30yr int.rate Lets also assume you can rent out both of your 2 bedroom apartements for $2200 ea. in park slope. that offsets your mortgage by $4400 leaving $2233.
Now the question is can you find a nice 3 or 4 bedroom Duplex in Park Slope for less than $2,233? If you can, then it’s cheaper to rent than to buy, but according to Craigslist, A duplex like this would be somewhere around $3,000 per month.
*note* this doesn’t include the tax break at year end for owning. but for those that are number intensive the deductible interest for the year is about $120K. assuming you split the loans in two because loans over $999K are not tax deductible.
My rant for the day.
While we were out there looking to rent, there was an apt for rent at $8500. The owners decided to sell, and will probably end up at 2.1 or 2.2, the taxes + cc are $3000. You do the calculations on whether it would be better to rent or buy this apt.
I am really NOT a numbers person, but owning a multi-family property helps bump up owner savings considerably.
In addition to the tax deduction for interest, you also deduct depreciation on the rental. That makes it a much better deal (I think).
Excellent article and very accurate – one of the most ignored aspects of this calculation often missed in NYC is this quote from the article:
“In the Northeast and California, homeowners now have so many deductions that some must pay the alternative minimum tax.”
Given our very high state and local taxes the mortgage deduction is very quickly being eliminated in NYC due to the AMT and very few people realize this when they tout the great beneifts of owning.
“A lot of people hugely overvalue the mortgage deduction,” said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal group in Washington, “because they compare it to no deduction instead of comparing it to the standard deduction.”
I know the deduction was a significant incentive for us to buy. Anyone care to comment on this?
Linus and others:
In various parts of NYC, esp. Manhattan, it is much cheaper to rent indefinitely given what the prices are at. You raised a good point about being 5 years ahead in the mortgage game – you are not necessarily behind if you rent because the amount that you should be saving by renting more than covers the amount of principal that would have been paid in 5 years.
For example:
The condo we rent now would cost at least $2m to buy, with tax + cc of $2000. Now, let’s compare apples to apples – we’re not moving out to Brooklyn to save $, we want to stay in Manhattan. We’re renting this apartment for $7k. We have enought $ to put 20% down on the apt.
1.6 million mortgage at 6.5%, assuming a 30-amortization – that’s $10113. Let’s say that most of that is deductible (and bearing in mind that mortgage interest is deductible, but starts getting capped out at our income level and at $1million total indebtedness). For argument’s sake, say my AFTER-tax deduction lost forever to the bank as the cost of borrowing is $7000 (which is very generous by the way, considering what it works out to). Taxes on the condo are deductible, not the cc. So we’re up to $7000 + $1000 + $600 / month = $8600. Add that to the 4% interest I know I can get by buying long-term bonds on the $400,000 principal – $1333 (which is approx. the amount of principal I’m paying back on the mortgage).
So with my example, you can see that I’m ahead of the game by renting. Also, the taxes & cc on the condo will increase over time.
Back in 2000, when we bought our first apt, it cost $4000 to rent that apt and only $3500 (after taxes) to own it. And I thought it had appreciation protential because the area was undervalued.
9:40 anon, what with all the resentment towards landlords. Let’s say you took your $2700 and got yourself a mortgage. @ 6% you could get a $450K mortgage. I’m not sure what you’d buy with a $450K mortgage and downpayment, but anyway.
Instead of ‘throwing money away’ at the landlord you take that 100K and throw it at the bank. After three years you will have paid off a whopping 18K. So you think your ahead of the game? Now factor in additional homeowners costs of insurance, taxes, heat and hot water. There goes the 18K that you thought you were saving. On a monthly cashflow basis, are you really better off now.
I think most people DON’T pay off their mortgages. Isn’t the average time people spend in a house about seven years?
Anon 10:09. If you don’t aspire to pay off your mortgage, then what is the point of owning ? Flipping for ever larger amount of money until you die ?