Author Topic: How much apartment to buy?  (Read 6572 times)

mustachecat

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How much apartment to buy?
« on: September 21, 2012, 05:47:49 PM »
Hey Mustachians, lemme get your thoughts on this.

My fiance and I are thinking about buying an apartment together in Brooklyn sometime in the next year (maybe two). We could put 30% down on a $175K one-bedroom, or 20% down on a $250K two-bedroom. Assuming a 15-year mortgage at 3%, the monthly payments, including maintenance, would be $1,146 and $1,765; 30 years at 3.5% would be $850 and $1,282. As a comparison, we currently pay $1,600/month in rent for our two-bedroom, which is considered a good deal.

The NY Times Buy vs. Rent calculator says that we'd do better after two years on a one-bedroom, three years on the two-bedroom. We'd plan to live in this apartment for a minimum of five years and possibly much longer.

So, how much apartment should we buy?

From a need perspective, we only need one bedroom. And why buy more than we need?

On the other hand... a second bedroom gives us more flexibility. We could use the space as an office. Also, my fiance's mother visits New York frequently, and she could have her own room instead of sleeping on the couch or an air mattress. We could rent it out on Airbnb. If we left without selling it, a larger range of people might be interested (roommates, couples, young families) vs. for a one-bedroom (couples, some singles).

We could also stay longer in a two-bedroom when/if we have kids. But when/if we have kids, we would probably want to leave the city sooner or later.

What factors should we take into account in deciding how much apartment to buy? And, assuming that rates stay low, is there any compelling reason to get a 15-year over a 30-year mortgage? It's compelling to have everything paid off in half the time, but if we invested the difference, we'd probably come out significantly ahead over 15-30 years, right?

Please also make arguments for us not to buy. I'm sure that the New York real-estate market seems insane to most people. And the neighborhood we're looking at has seen a crazy run-up in value; in 2010 and 2011, they had the second-highest rate of appreciation in the entire city. That said, properties are pretty undervalued compared to the surrounding neighborhoods; in the neighborhoods immediately north and south, similar one-bedrooms are in the mid-$200Ks. We're not hoping to sell in five to six years with a huge payout, but we'd hope to make some gains vs. renting.

gooki

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Re: How much apartment to buy?
« Reply #1 on: September 21, 2012, 08:52:19 PM »
Generally I'd select the 2 bedroom provided you can easily afford it. Simply from a resale/growth point of view. However with the prices youve quoted the premium you pay for the extra bedroom is astronomically high if you look at it from percentage of total cost point of view.

c

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Re: How much apartment to buy?
« Reply #2 on: September 21, 2012, 09:29:11 PM »
I did the NYT Rent vs Buy when I was looking into buying and it came out at renting, but I'm not sure what it actually takes into account. We moved around frequently when we rented and there were costs involved in that. When I ran my own personal numbers I came out ahead with buying. The interest and maintenance I pay is less than my previous rent and the difference, so far, has more than broken even for the home-owner issues I've had to deal with - old plumbing mostly. The calculators are great for giving you an idea, but you need to look at your own habits.

I bought a small apartment. Initially I wanted a larger space as I have friends and family over from home often. I wanted them to have their own room, but in reality it's only for a few weeks a year, spread over different people, and they're thrilled they get to come over and not pay for a hotel, so the blow up mattress in the lounge works well. I also converted the closet into an office. It's tight, but it works.

I won't lie, there are times when I wish we had a little more space, but overall I love the space and neighborhood, and have made it work.

If you plan on having a baby (or more) in the near future the two bedroom would be better, but then you'd need to look into things you don't care about now - good school district and other parental concerns - which may change the price range you are looking at.

I don't regret buying at all. Yes, the market here is crazy, but every month I'm building equity and there's a sense of security that I've never had before. Renting here is such a crap shoot. So many landlords are selling, raising rent etc as these neighborhoods grow in popularity. 

ETA Have you actually been given numbers of 3% for a 15yr loan etc? You mention maintenance, which implies you are looking at co-ops. Co-op loans are much more difficult to get and come at higher interest rates, so this is something worth looking into if you haven't yet spoken to lenders about firm numbers.



« Last Edit: September 21, 2012, 09:48:43 PM by c »

Jamesqf

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Re: How much apartment to buy?
« Reply #3 on: September 21, 2012, 09:51:02 PM »
If you use the second bedroom as an office, and have business income (from freelancing, side jobs, etc), you might be able to deduct part of your expenses (motgage interest, taxes, utilities, etc) from the business income.  Get the IRS pub on business use of your home.

Lars

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Re: How much apartment to buy?
« Reply #4 on: September 21, 2012, 10:43:12 PM »
I vote for the one bedroom. I wouldn't get the second bedroom unless you have a concrete plan in place for the second room - something that brings you significant value - as it has the extra costs of higher insurance costs, higher property taxes, and, most importantly, lost investment earning due to a lower savings rate. Personally, I find that if I purchase something with "room to grow" without a solid plan for the extra feature that it is 50/50 chance I just wasted some money.

With today's rates, I like the 30 year loans if you're going to be investing the difference and you've got a few years before FI. If you are going to pay down the loan faster than normal anyway or plan to stay there until retirement, I think a fifteen year loan makes more sense - you might as well benefit from a lower interest rate if you are going to pay it off that quickly anyway.

ch12

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Re: How much apartment to buy?
« Reply #5 on: September 21, 2012, 11:04:44 PM »
I'd say to buy the 2 bedroom for 20% down and use it for Airbnb. That'll give you a little extra cash to throw into the mortgage. It has the added benefit of serving as a room for your future MIL or as a room for your baby whenever they come. It'll give you a) cash and b) flexibility. Since you have the money and it'll cost less than you're paying in rent while building equity, I'd say to go for it.

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Re: How much apartment to buy?
« Reply #6 on: September 22, 2012, 04:43:11 AM »
As a Brooklynite with 2 kids coming up on school age - if you are telling yourself you might use the second bedroom for a child, please PLEASE take a long look at the local public school first. We sure wish we had - we could have bought in a better school neighborhood in a cheaper Brooklyn real-estate market (we bought back in 2003) and now are agonizing over moving vs very expensive private school. I know you think you'll move out of the city when you have kids, but you might change your mind, and even if you don't - a good school zone will help support your resale value.

FYI, the basic rundown of the school system is: the city is divided into school districts, and each elementary school has a zone (the local neighborhood). You're allowed to apply to any school in the city BUT elementary schools must give preference to kids in zone. If there are still places left, then they offer them to kids in the district. Only after that can kids from out of district get in. As you can imagine, this drives real estate prices sky-high in the neighborhoods zoned for the best public schools - and as those schools fill up, they usually start shrinking the zone to keep from going too far over capacity, increasing the real estate competition.

A good place to start finding out about the neighborhood you're considering is http://insideschools.org/

BTW, as a fellow Brooklynite, I'm dying to know what neighborhood you're looking at! :-)

mustachecat

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Re: How much apartment to buy?
« Reply #7 on: September 24, 2012, 11:17:46 AM »
However with the prices youve quoted the premium you pay for the extra bedroom is astronomically high if you look at it from percentage of total cost point of view.

Agreed. However, that premium is actually much lower for this neighborhood than for others--it's just how this market is.

ETA Have you actually been given numbers of 3% for a 15yr loan etc? You mention maintenance, which implies you are looking at co-ops. Co-op loans are much more difficult to get and come at higher interest rates, so this is something worth looking into if you haven't yet spoken to lenders about firm numbers.

Thanks for flagging that, c. I am looking at co-ops and hadn't realized that rates differ (can you tell this is our first dance?).  I've reached out to two mortgage brokers, although we're so early in the process, everything is hypothetical. If you don't mind me asking, if you have a co-op, how much of a premium did you pay? Happy to hear that overall, you're pleased with buying!

If you use the second bedroom as an office, and have business income (from freelancing, side jobs, etc), you might be able to deduct part of your expenses (motgage interest, taxes, utilities, etc) from the business income.  Get the IRS pub on business use of your home.

Yes, I've done that in the past, and it could be a consideration in the future. But per the IRS, the space doesn't have to be separate/partitioned off; it just needs to be "separately identifiable," like a desk and filing cabinets in the corner of the living room. So we could potentially do this with a one-bedroom, although the deductible space/deduction would be smaller.

Personally, I find that if I purchase something with "room to grow" without a solid plan for the extra feature that it is 50/50 chance I just wasted some money.

I agree. It's just tough because while we don't have concrete plans, there is a good chance that we will outgrow a one-bedroom in the next seven years, and I wonder if two-bedrooms will be out of our price range by then. OTOH, the amount of equity we could build in a one-bedroom would allow for a healthy down payment on a larger place down the road. OTOH... ugh. We need to get a better fix on rates and run a bunch of numbers.

I'd say to buy the 2 bedroom... Since you have the money and it'll cost less than you're paying in rent while building equity, I'd say to go for it.

Oh, man, so many differing opinions in this thread! Which is kind of a relief. We're really bouncing back and forth, and the lack of consensus here shows that there are so many different ways to look at this.

BTW, as a fellow Brooklynite, I'm dying to know what neighborhood you're looking at! :-)

Hey, fellow Brooklynite! I'm looking at Sunset Park. Have any thoughts on that particular nabe? I've heard good things about PS 172, although it does seem very testing-centric.

Where are you, if you don't mind me asking?

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Re: How much apartment to buy?
« Reply #8 on: September 24, 2012, 11:35:40 AM »
Hey, fellow Brooklynite! I'm looking at Sunset Park. Have any thoughts on that particular nabe? I've heard good things about PS 172, although it does seem very testing-centric.

Where are you, if you don't mind me asking?

Hey Mustachecat - I think it's an up-and-coming nabe, I hear a lot of stories of first-time buyers moving there these days. We looked at it for a hot minute, but ended up in Prospect Park South - at the corner of the south end of the park, Windsor Terrace, Kensington, and Ditmas Park. That puts us in school district 17. Our local elementary school is above average, but it feeds into schools that are absolutely failing - primarily PS 375, where only 15% of 8th graders passed their math tests.

I hear positive things about PS 172 - it's a very traditional (not progressive) education - learn by rote, etc - but seem to get the fundamentals down solid. They teach to the test, but their resulting scores are a whole lot better than many other schools that try to do the same. It was high on our early list, but too far away for us to commute daily from our current 'nabe - we'd have to move to Sunset Park.

If we had paid attention to this stuff in 2003, we probably would have ended up in District 15 somewhere, which includes Prospect Park South & Windsor Terrace.

mustachecat

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Re: How much apartment to buy?
« Reply #9 on: September 24, 2012, 02:04:12 PM »
Use it up, we actually looked at a place by the Parade Grounds a year ago, just for kicks. The apartment was beautiful, and the proximity to the park was amazing, but we didn't click with the neighborhood. I'm sorry to hear about the schools, though. It's sounds like a very tough situation for kids and parents.

So, I've spent some time on insideschools.org--thank you for the link!--and the DOE website, and I think I finally have a handle on it. Sunset Park is also District 15, so that's good. It does seems like most of the big co-op buildings are in the 40s, around 7th Avenue, and all the addresses I've tried so farare zoned for PS 169, not 172. But the district options for middle school seem doable.

(Not that that matters, of course, I have full faith that my unborn, completely hypothetical children will test into the best selective middle schools, end up top of their class at Stuyvesant, and then get full rides to Harvard because our early-retirement incomes will be less than $65K.)

(That's all so much joking, if that's not clear.)

Use it up, wear it out...

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Re: How much apartment to buy?
« Reply #10 on: September 24, 2012, 03:06:19 PM »
Glad you're doing the research. Good luck, whatever you decide.

kkbmustang

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Re: How much apartment to buy?
« Reply #11 on: September 24, 2012, 06:22:36 PM »
Actually, the full ride to Harvard because your early retirement income being less than 65k is a most excellent point. I never thought about that because the grandparents have funded tuition for our kids college fund, but pretty sure it can be used for grad school.  Getting a scholarship because their parents don't make enough annual income due to early retirement is brilliant. I don't remember, does the FAFSA look only at income, not assets/net worth?

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Re: How much apartment to buy?
« Reply #12 on: September 24, 2012, 06:49:34 PM »
Federal financial aid includes your assets, not just your income.

http://www.actstudent.org/finaid/need.html

I'm sure Harvard also takes assets into acount.

mustachecat

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Re: How much apartment to buy?
« Reply #13 on: September 24, 2012, 07:08:20 PM »
Per Harvard: "We do not consider retirement assets or home equity in our financial aid calculations."

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Re: How much apartment to buy?
« Reply #14 on: September 25, 2012, 08:51:17 AM »
The interesting question then becomes - where does Harvard draw the line between assets & retirement assets? I really don't know.

etselec

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Re: How much apartment to buy?
« Reply #15 on: September 25, 2012, 09:43:04 PM »
I believe that when colleges say they exclude retirement assets, they mean assets held in tax-preferenced retirement accounts (e.g. 401(k), 403(b), IRA). Assets held in normal taxable accounts would be considered in determining financial aid.

mustachecat

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Re: How much apartment to buy?
« Reply #16 on: September 28, 2012, 10:02:51 AM »
Just an update that I spoke with a mortgage broker this morning, and he was very sanguine about our chances of getting a 15-year mortgage on a coop at 2.75%-3%. Keep your fingers crossed for us that rates stay low!