Friday, November 04, 2005

More on the rent/buy conundrum

Commenter (& new blogger) 2¢worth suggests "rent AND buy" as an alternative to "rent OR buy." I've thought about this-- I have a sweet deal and love my rental apartment, even though I wish I had more space. I've even wondered if I could somehow sublet it after buying another place, just to not let it slip away! And in general, being a simultaneous renter in one place and landlord in another could be the perfect thing for someone like me who has a down payment saved up but needs to keep the monthly budget in line-- I'd get the tax break now and own a place I could move into later when my income caught up with its monthly costs.

But here's the reality of the situation in New York:
I'm looking at studio apartments in the Park Slope Brooklyn area. The going rate for most studios in this area seems to be around $270-280,000 and up. The NY Times website currently shows only 34 apartments listed for sale in the "Park Slope Prospect Heights" area at prices of $300,000 or less. Almost all of these are small to average size studios. About half are over $250k, and actually a few at the bottom end are listing errors, so really there are probably 30 apartments for sale at that price. I've been tracking the number of apartments that are on the market and this is a pretty typical level. If I assume a price of $275k, with maintenance of $500 (probably average for a studio co-op) and a 6% interest rate, with a 20% down payment, my monthly cost would be about $1,819 up front, or about $1,489 after taking tax refunds into account. So let's say I want to cover my after-tax costs and make $100 or so on top of that to break even after any incidental expenses. (Which seems like a pretty thin margin to me.) Based on that, I'd want to ask for about $1,600 in monthly rent. I'd be in the red by $200 every month but would hopefully make it up when I got my tax refund.

So what about the rental market in this neighborhood? There are 88 apartments listed for rent at $1,500-2,000 a month. A few are studios, but most are 1- and even 2-bedrooms. There are 52 more apartments listed at $1,000-1,500, and most of these are 1-bedrooms until you get down to around $1,200. Even if you figure some of these are bogus bait & switch listings, see how out of whack this is? For the kind of studio I'd be likely to buy, I'd be incredibly lucky if I could rent it for $1,300 or $1,400, let alone $1,600 or $1,800. So I'd be losing maybe $4,000 or $5,000 a year before you even factor in things like tenants trashing the place, or a month's gap between renters. My landlord recently had a studio go empty for more than 3 months even though the rent was under $1,000-- and this is a small but newly renovated studio with a big kitchen and lots of sun from a southern exposure overlooking gardens.
It's true that Park Slope has gotten incredibly expensive in the past few years, but the story remains the same even if you go further out in Brooklyn-- the sale prices drop, but so do the rents. This rent vs. buy price gap wasn't always the case, and it's part of the reason I think some air has to come out of the housing bubble soon.

Here's a link to my (new & improved!) real estate spreadsheet that I used to calculate the purchase costs. (Hope it will work, these free file-hosting things can be a little unreliable.) [UPDATE: the download link seems to work now. You can skip past the ads, just hit "cancel" in the popup box and click the link that says "download ready".]

6 comments:

Poe said...

Hi

I hope you don't mind.. I added your blog as a link on my site. You can add mine on your link if you want, of course.

I love those house hunting posts!

Poe
Orange County Budget Living
http://www.ocbudget.blogspot.com

optioned unarmed said...

madame x,
i'm new to your blog, so i apologize if i am misunderstanding your situation. (found you through the housingbubble2 blog).

You seem very happy with your rental apartment, you have a great deal and seem to be saving a lot of money by not owning. You have also mentioned noticing a divergence between cost to rent vs. cost to buy (with cost to buy rising disproportionatly to rents). You seem to be a housing bubble believer.

So where does your strong desire to buy a home come from? Is it out of a desire for the security of having a predictable long-term living situation (regardless of what happens to the market), or is it possible that the frenzied energy of the housing bubble has caused you to be more house-obsessed than you otherwise would have been? (not out of greed or speculation, but just by inadvertantly absorbing the newly exaggerated "owning a home is super-important" vibe?)

Just curious. Personally, I never cared to buy, enjoying cheap rent and the freedom of mobility, but lately i've been feeling a lot of pressure to buy even though my head knows better.

If you like your current situation but are worried about the insecurity of your landlord possibly selling, etc., then maybe you could talk to your landlord, get a longer term lease. A good landlord values a good tenant, and in the weak rental market you described, maybe your landlord fears losing you too... Just a thought.

2¢ Worth said...

Ouch!

Haven't been able to download the file (some problem - it keeps going back to the download page) but from the details you've provided, I can see why you're in a quandary.

Under the circumstances, waiting seems to be the best option with regard to NYC property, until one of these options comes by

a) Prices drop sufficiently to change the equation, which seems to be unlikely
b) Rentals rise - not a preferred option given that you're renting right now, but if you can escape the rent rise ...
c) Interest rates drop down (at around 3% or less, you should be able to build some equity from the rental payment
d) Combination of the above.
e) You find a property which has a much lower than average maintenance ($200 or so) or can pass on the maintenance expense to the tenant (over and above the rental).

That's as far as NYC goes. If you think it's going to be a long wait (a couple of years plus) it might be worthwhile to explore buying a pure rental property at some other city where the deal cashflow is positive - you'd build up a better return and equity, to be used when you find it appropriate to buy in NYC. Of course, buying in another location has its risks and added costs, too.

Best wishes

NYC Money said...

Why didn't you buy something early? Seems like you had the money, park slope prices only went up no more than 3 or 4 years ago.

Nina Smith said...

2¢ worth offers some good advice... you should look at areas outside of NYC for a rental property that could easily provide positive cash flow. It is not that difficult to be a remote landlord especially if you use a property mgmt company.

In San Antonio, TX you can still buy a nice home for under $120K. This would be a better long-term investment than trying to buy in NY where the correction will have a bigger impact and the rents do not = positive cash flow. That's my 2¢... for what it's worth.

Madame X said...

Thanks for all these great comments, you all have good points.
Nina-- I once sort of acted as the local agent for a friend who was renting out her condo as a remote landlord, and I guess that experience left me feeling that it wouldn't be worth the trouble, and I've always figured the cost of an agent would take away whatever margin I'd have. Also, then my down payment money would be sunk into that place when I wanted to buy something for myself, unless it became really profitable really quickly! But if the market ever seemed to be in a real slump someday and I had cash left after buying a primary residence, I'd consider it again.
NYCMoney-- I used to own a place in Park Slope that I bought with a partner in 1997, which was GREAT timing. I cashed out of my half in 2001, which was ok timing. I had a down payment then but my salary was a lot less. Also, I thought I might be moving to Europe for a while, though that didn't pan out.
And Optioned-- when I was a homeowner before, I just liked the sense of ownership, of investing in and controlling my own space, and of building equity. But at times I also have that same feeilng of not wanting to be tied down to a place, and I am definitely leery about buying now because of the bubble situation, so it is a real dilemma for me. But I just figure that in NYC prices always seem to go up more than they ever go down so if I find the right place, I might as well go for it.
2cents-- I'll try posting a new link on Monday
Poe-- thanks!