Thursday, September 15, 2005

Golden Handcuffs

A comment on the previous post brings up a good point. Usually, in a rent vs. buy equation, you'd have to calculate in a yearly rent increase, in line with inflation, or perhaps rent stabilization laws, if you're lucky.
Well, in my case, I'm really lucky. I've been in the same apartment for 5 years and my rent has gone up 0%. When I lived in Manhattan after first moving to NYC, I had a similar situation for a couple of years.
I have always rented in small, owner-occupied buildings. Sometimes, this can be a great way to go. If your landlord's costs are relatively stable, it will be more important to them that you are a good tenant-- quiet, clean, reliable with the rent-- than to make a big profit off of you. I'd feel the same way-- if you live in and own the building, a good tenant is the best way to protect your investment and your quality of life. The flip side of this is that if your landlord wants to screw you over, they can. When your lease expires, they can raise your rent as much as they want. I think a lot of people probably will get in trouble this way soon-- in a lot of neighborhoods, people have bought brownstones and renovated them, counting on rental income to make their mortgage payments work. Property taxes have gone up a lot, house prices are through the roof-- these recently-renovating resident landlords are going to have to ask a lot of their tenants.
I expect my rent to go up at some point, but after than it would probably stay the same for a while again. This is what makes my rent vs. buy question so difficult right now! If my rent had gone up each year and been at current market rate, it would be even more attractive to me to buy, but the reality of my life is that it hasn't gone up and probably won't go up much. So for me, the problem is not just that co-ops are too expensive, it's that my rent is too low!
How many New Yorkers do you hear bitching about that?!?
But it's not unheard of-- in NYC, you hear many a tale of people who have inherited rent-controlled apartments and deal with terrible landlords, apartments in disrepair, family drama, marital crises and all sorts of hellishness, all because they live in some pre-war building on the Upper West Side for $400 a month and can't bear to give it up.


Anonymous said...

I went back and took some numbers from your spreadsheet. I revised my interest rate from 6 to 5.8%. And the purchase price to 220,000. I plugged this into a spread sheet where I took a rate of appreciation of 4%, and also used that to adjust the property tax/maintenance. I made this a straight 2.4% of the property value.

This gave a cost of $17367.18 for the first year, and I think this should match your spreadsheet. At the end of the 30 years, I have the $220,000 property valued at $713547.45.

For comparison, I have investments earning 8% a year, with a starting balance of $50000 (was the downpayment money). To this, each year I am adding 90% of your maintenance fee (as you listed it as 40% deductible and 25% tax bracket), and the difference between the mortgage payment and rent less the 25% of interest payments. For verification, this was $12087.18-10,200-2,465+4752=4174.18 in the first year.

It says that your mortgage payment will be less than your rent in 18 years (net of taxes). If over the 30 years, your investments return 8% then you are better off buying your house from the investments, as they will be worth $718,625.31 (5,100 more than the property value). These numbers are very close though.

If I change the inflation number to 3 instead of 4, then investment is much better than owning a home (difference of 281,458). If instead of 8%, I choose 6% for investment returns, then owning is much better (difference of 302,630). Or you could say investments over the next 30 years earn more than 8% (10% gives 519,598 favoring renting).

The spreadsheet suprised me, as I thought it would show that the investment of the difference would be much better. I still think NY prices are too high compared to the rent.

I think however that your budget of 22% of gross going to paying housing costs is reasonable.

Anonymous said...

Tough call, I know people in rent controlled apartments that say they will never own because their rent is so cheap. I would probably feel the same way you do. Only problem is if you choose to not own, then you may miss the opportunity of future increases in housing prices. I don't know if prices are going to keep going up. That use to worry me before I bought a place, beause if the price went up too much I couldn't afford it anymore. I think NYC real estate is a very good investment, but that doesn't mean that prices won't drop either. Once you own a place, it's much easier to trade up too.

There are lots of people in your shoes. Good luck.

Madame X said...

Walter-- thanks for the detailed comment. I'll have to look at it that way too-- for now, I'm just looking at what the results would be after 5 years, and 10 years, as I'd like to think I won't live in a small studio apartment for 30 years, regardless of whether I own it or rent it!