Tuesday, June 13, 2006

Rent vs. Buy: a new way of looking at it...

If you have been reading this blog long enough to have seen some of my real estate spreadsheets, you know I did a lot of detailed analysis of the costs of renting my current apartment vs. buying a place. (I'll repost the latest version of the spreadsheet soon, I keep tweaking it!)
The fact that I currently live in an $850/month studio means that I am setting the bar pretty high in these comparisons. There is very little you can buy in NYC right now that would work out to $850 a month! But for the place I'm buying, when you factor in tax breaks of ownership, and the part of the monthly payment that goes towards building equity, I'm closer to breaking even than you'd think.
But there is one other big factor to consider here: what I'm getting for the money. So I decided to break the monthly cost down by square footage. Check this out:

Current cost of renting: $3.51 per square foot per month (PSFPM)
Cost of new condo: $2.57 PSFPM
Cost of new condo after tax deductions: $2.08 PSFPM
Cost of new condo "out the window"**: $1.89 PSFPM

**"Out the Window" costs is, to me, the best comparison to renting. It's the total monthly cost less tax deductions less the amount that goes to equity, which can be considered sort of equivalent to cash savings. I also include estimated utility costs in my "out the window" calculation, since I pay none now but will have to pay them in the new place.

Boy, did those numbers make me happy! And looking at square footage still doesn't take into account the additional amenities of the new place, such as the outdoor space, laundry in the basement, nicer kitchen, etc. Even when you consider that I'm moving to a neighborhood where prices per square foot are in general lower than where I live now, if you indexed my costs against neighborhood averages, I think I'd still be coming out ahead.
Now someone is sure to point out that I am using the McDonald's Value Meal argument, whereby you buy more than you need or want of something just because its unit cost is lower and end up spending more money overall. True, I can (and do) survive in an extremely small apartment, and I didn't really NEED one quite as big as I'm buying, but we're not talking a McMansion here! (Or SuperSize fries, for that matter.) It's still quite small, but just big enough for me to have guests visit more comfortably and to feel like I am living a bit more like a civilized, almost-40 year old adult! And most importantly, the overall amount I'm spending is still in line with my budget and goals.
But I do love a bargain, and now I feel like I'm getting one!


Anonymous said...

Are you planning to publish the templates of different spreadsheets that you use at some point in time? I am pretty sure it will be helpful for many folks.

mOOm said...

What you need to add is the opportunity cost of the capital tied up in equity. And what does the cost of new condo include? Does that include property tax, condo fees, maintenance costs etc?

Madame X said...

I have published my spreadsheets in a couple of previous posts, but the links to the files seem to expire after a while-- free file hosting services aren't that great!
In those spreadsheets, I do look at monthly costs (with all taxes and fees included) as well as comparing possible investment results of the money that goes to equity vs. possible gains in the property value.
I'll try to post them again soon!