Author Topic: Buying or Renting in NYC Area?  (Read 4368 times)

jonmchan

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Buying or Renting in NYC Area?
« on: February 24, 2014, 11:28:30 AM »
I wrote this originally as an email to Mr. MM, but he probably doesn't have enough time to look at this... so I'm asking the community. Any insight would be much appreciated!

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I'm writing to ask to be considered for a Reader Case Study. I noticed you don't have a blog post on renting vs. buying a house (if you do and I couldn't find it, sorry!). I would love your opinion on the matter. I know in most of the country, the low price of housing makes buying a house a no-brainer, but in urban areas where housing prices are significantly higher, I don't know which is better. Here's my story...

I am currently 26 years old making a decent salary (100-125k) in NYC. My wife and I are expecting our first kid in May and I know we are going to soon outgrow our cozy 1 bedroom apartment. We currently rent it for $1430/month. I don't have much of stash yet, my goal so far is 100k by the end of 2014 and 200k by the end of 2015. At that time, I should have enough money for a down payment. I'm not sure though what makes the most sense - using the stash and putting it into property or keeping it in investments and continue renting. Here's my options so far.

Option #1 - Renting: We could probably just move into a bigger apartment or rent a house we'd like for $1700-$2000/month. Not having to worry about maintaining and taking care of my own house is definitely a pro to this. (Every time it snows like it did so many times this year, I'm glad I live in an apartment and it is somebody else's job to shovel all the snow!) The thing I start wondering though is am I throwing $1700-2000 out every month in living expense that could be contributing to my stash?

Option #2 - Buying a 1-Family Home: I have been getting a feel for the housing market in the area and the neighborhoods we want to live in run 400,000-600,000 for a single family house. I could technically afford it with a mortgage, but it would set back my retirement date by probably 10 years because I would have to put most of my money into paying off the mortgage instead of building up my stash. The pro to this though is it would dramatically lower my cost of living once I pay it off as I wouldn't have to worry about monthly rent!

Option #3 - Buying a 2-Family Home: Trying to think out of the box, I also looked into duplex houses. They run around $700,000-900,000. I could rent out the 2nd unit for the same $1700-$2000 I was looking to pay as a renter and use that to help pay off the mortgage. In the end, I would have a place to live in and some income! But again, it probably will make adding to my stash very difficult and I don't know how financially independent (aka retired) I would be with a $500k-$700k debt on top of me!


My wife and I already decided that living with our family and friends in NY is part of our happiness - so moving to a cheaper area of the country is out of the question. Besides, I think Mustachian lifestyle can work here in the city too! So... what are your takes on renting vs. buying? Is getting a mortgage not a mustachian thing to do? Please shed insight for all the city-dwelling mustachians. Thanks!

meteor

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Re: Buying or Renting in NYC Area?
« Reply #1 on: February 24, 2014, 12:00:15 PM »
I think NY is similar to the Bay Area.  All your options are what we went through too.  We ended up buying a 1/2 price house for cash (very unusual situation) but I will say, even though our house is paid for, between the property taxes and upkeep, we are paying close to what we were paying in rent. If we had bought our house in the normal price range, those taxes would be double.  For example, the woman down the street pays $1,000 a month in taxes. So, you need to plan on that.  To me, property taxes "feel" like throwing money away, but  I know we need them to support city services.

I don't feel like paying rent is throwing money away. Being in debt in a long term mortgage and all the expenses that go along with that is throwing money away.  If you do buy, don't get sucked into the expensive kitchen remodels, trying to justify it will add a large value to your house. Since we paid cash for the house, we can accumulate money because we aren't paying a mortgage and we are not "remodel" types of people.  We only fix broken things. No matter how many people tell you the numbers work out great with a low interest rate, you still have to pay monthly expensive mortgage and you are tied to the house and emotionally feel you don't have as many options. We just paid $10,000 to replace rotten windows in our house.  I honestly think, between all the taxes and expenses, you probably break even at best when buying a house.  I don't think it's always realistic to look at them as an investment unless you are a contractor flipping property. 

We live across the street from a family who pays about $2,000 a month rent and I've watched 3 babies born there and grow up.  There's nothing wrong with raising a family in a rental.

« Last Edit: February 24, 2014, 12:18:14 PM by meteor »

RhythmKats

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Re: Buying or Renting in NYC Area?
« Reply #2 on: February 24, 2014, 12:00:53 PM »
Not sure if you read jlcollins as well, but he and MMM are amigos and their blogs are kind of complimentary. He has a couple of posts on buying vs. renting.

http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

I live in NYC also...western Qns to be more specific. I'm not in a position to buy here. If I had the money, I'm not sure I would. I prefer to stay more "mobile" in terms of my ability to switch things up as the city changes. I'm not sure where you're looking, but from what I've heard/read, in my 'hood $400K - $600K will get you into something, but you'll need to put a bit of work into it. Sounds like you need to think about how important your FIRE date is to you and if it's worth putting that off to own here.

I'm sure others will chime in with unseen expenses of home ownership. Having never owned a home I can't speak about those, but things come up. I'd also check out the flood zone map for NYC. It seems like in the long term, it's going to be a problem here. You may want to avoid coastal areas like South Brooklyn or SI.

One other thing....you're 26. You'd be amazed how quickly things can change in life. I'm 33, not much older than you, but I feel like my mid 20's are a world away. I moved here at 25 and the first few years I was convinced I couldn't live anywhere else. While I'm not ready to leave, my opinion has softened. As you know, this city changes fast. And I think we do have a big affordability problem that could affect how interesting NYC is as a city. Though it sounds like you have family in the area which I'm sure is a huge draw.

I agree that you can be mustachian here and it's a fantastic place to live! Living here definitely changes the way you live...at least it has for me.

Anyway, I hope others will be more helpful in terms of home owning specifics, but from technical/number point of view, check out jlcollins.

jonmchan

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Re: Buying or Renting in NYC Area?
« Reply #3 on: February 24, 2014, 02:26:49 PM »
I'm looking to stay in Brooklyn. Thanks for everyone's replies so far. I am going to read up on jlcollins articles and see what I think. Good find!

foobar

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Re: Buying or Renting in NYC Area?
« Reply #4 on: February 24, 2014, 02:47:09 PM »
Neither is throwing money away. In both cases you are exchanging money for a good.  In general rent versus buy is all about time. If you are going to be there 30 year it is really hard to make renting be cheaper.  That 2k rental might be cheaper than a 3k mortgage&taxes now but in 20 years when the rent is 5k/month and the mortgage&taxes is 3.5k the situation switches. 




I don't feel like paying rent is throwing money away. Being in debt in a long term mortgage and all the expenses that go along with that is throwing money away.

jonmchan

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Re: Buying or Renting in NYC Area?
« Reply #5 on: February 24, 2014, 03:09:04 PM »
Good point, I started renting my apartment at 1300 just 2 years ago. I'm already at 1430.



Neither is throwing money away. In both cases you are exchanging money for a good.  In general rent versus buy is all about time. If you are going to be there 30 year it is really hard to make renting be cheaper.  That 2k rental might be cheaper than a 3k mortgage&taxes now but in 20 years when the rent is 5k/month and the mortgage&taxes is 3.5k the situation switches. 




I don't feel like paying rent is throwing money away. Being in debt in a long term mortgage and all the expenses that go along with that is throwing money away.

KingCoin

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Re: Buying or Renting in NYC Area?
« Reply #6 on: February 24, 2014, 03:25:06 PM »
Renting is a no brainer here. Not only does it make the most financial sense, it gives your growing family the most flexibility going forward.

Option #3 is especially bad. Paying a marginal $300-400k to generate $1850 in rent is an abysmal return (probably around 2.5-3.5% when you strip out expenses). You'd have no problem generating more than twice the rent with a similar capital outlay elsewhere in the country (you'd simply use a property manager rather than being hands on).

I get the emotional appeal of owning (I've tried to convince myself that it makes sense in NY) but it's impossible to justify here.

jonmchan

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Re: Buying or Renting in NYC Area?
« Reply #7 on: February 24, 2014, 08:31:45 PM »
Renting is a no brainer here. Not only does it make the most financial sense, it gives your growing family the most flexibility going forward.

Option #3 is especially bad. Paying a marginal $300-400k to generate $1850 in rent is an abysmal return (probably around 2.5-3.5% when you strip out expenses). You'd have no problem generating more than twice the rent with a similar capital outlay elsewhere in the country (you'd simply use a property manager rather than being hands on).

I get the emotional appeal of owning (I've tried to convince myself that it makes sense in NY) but it's impossible to justify here.

I noticed you're from Manhattan. It is definitely more pricey there. One thing that I am considering is I plan to be here for a long time - next 20-30 years at least. The point foobar makes about rent outpacing a fixed price mortgage does get me thinking. In 15-20 years, I may be renting the place out for 3-4k and have a place to live where I want to live without having to worry about rent. Isn't that something to take into consideration? In my mind, it would seem to be difficult to retire early in 15-20 years when I will still have to pay 3000/month for rent or whatever it may be.

KingCoin

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Re: Buying or Renting in NYC Area?
« Reply #8 on: February 25, 2014, 08:35:30 AM »
Renting is a no brainer here. Not only does it make the most financial sense, it gives your growing family the most flexibility going forward.

Option #3 is especially bad. Paying a marginal $300-400k to generate $1850 in rent is an abysmal return (probably around 2.5-3.5% when you strip out expenses). You'd have no problem generating more than twice the rent with a similar capital outlay elsewhere in the country (you'd simply use a property manager rather than being hands on).

I get the emotional appeal of owning (I've tried to convince myself that it makes sense in NY) but it's impossible to justify here.

I noticed you're from Manhattan. It is definitely more pricey there. One thing that I am considering is I plan to be here for a long time - next 20-30 years at least. The point foobar makes about rent outpacing a fixed price mortgage does get me thinking. In 15-20 years, I may be renting the place out for 3-4k and have a place to live where I want to live without having to worry about rent. Isn't that something to take into consideration? In my mind, it would seem to be difficult to retire early in 15-20 years when I will still have to pay 3000/month for rent or whatever it may be.

The problem with that argument is that it ignores opportunity cost; essentially, the compound interest on money saved in the meantime. So while rent will rise at 2-3% over time, your investments will likely rise 6-10% over time. Buying a loser now in hopes that it's a winner 20 or 30 years down the road is not a good strategy. You want to own something that makes sense now (Warren Buffett's recent shareholder letter is a good read on this point). Over time, you'll come out way ahead renting cheaply and investing in higher yielding assets.

I actually own property out of state, while renting my place in NY. If you run the numbers I think you'll find that $300k of property out of state will pay the rent for $600k of property in New York. Not only that, you still benefit from the upsides of owning real estate like rent appreciation and inflation protection.

jonmchan

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Re: Buying or Renting in NYC Area?
« Reply #9 on: February 27, 2014, 06:10:15 PM »
Renting is a no brainer here. Not only does it make the most financial sense, it gives your growing family the most flexibility going forward.

Option #3 is especially bad. Paying a marginal $300-400k to generate $1850 in rent is an abysmal return (probably around 2.5-3.5% when you strip out expenses). You'd have no problem generating more than twice the rent with a similar capital outlay elsewhere in the country (you'd simply use a property manager rather than being hands on).

I get the emotional appeal of owning (I've tried to convince myself that it makes sense in NY) but it's impossible to justify here.

I noticed you're from Manhattan. It is definitely more pricey there. One thing that I am considering is I plan to be here for a long time - next 20-30 years at least. The point foobar makes about rent outpacing a fixed price mortgage does get me thinking. In 15-20 years, I may be renting the place out for 3-4k and have a place to live where I want to live without having to worry about rent. Isn't that something to take into consideration? In my mind, it would seem to be difficult to retire early in 15-20 years when I will still have to pay 3000/month for rent or whatever it may be.

The problem with that argument is that it ignores opportunity cost; essentially, the compound interest on money saved in the meantime. So while rent will rise at 2-3% over time, your investments will likely rise 6-10% over time. Buying a loser now in hopes that it's a winner 20 or 30 years down the road is not a good strategy. You want to own something that makes sense now (Warren Buffett's recent shareholder letter is a good read on this point). Over time, you'll come out way ahead renting cheaply and investing in higher yielding assets.

I actually own property out of state, while renting my place in NY. If you run the numbers I think you'll find that $300k of property out of state will pay the rent for $600k of property in New York. Not only that, you still benefit from the upsides of owning real estate like rent appreciation and inflation protection.


Well, it'll be the renters life for me... at least as of right now! I'm going to go with my option #1 and find a bigger 2 bedroom apartment and continue putting my money into investments. It is tough though, I was hoping to move out of a building into maybe a detached house, but on initial search, everything that is for rent is for buildings or by a cranky old lady that loves cats and probably won't stand a baby crying at night! (last part is a partial joke).