Rent vs buy scenario

[Nikii]

Hello,
We live in a HCOLA (greater NYC area) and are currently wondering if buying a condo is beneficial in our scenario.

Our current rent is 2400$ for a 2 BR/ 1 BA condo and are expecting it around $2500 mid next year.
We are considering buying a condo (2BR/2BA) in the same building which is on market for 450,000$. The HoA fees is $650/ month and the property taxes are $6800 annually. The approx. PITI would be between $2900-3000/ month.
Please note the HoA includes water, gas, heat, trash.

Our current take home pay is $11500/ month and if we decide to buy, we will be putting a 20% downpayment. In this scenario, what would you suggest? Thanks!

[NeonPegasus]

So, rent will be $2.5k. I'm guessing you don't pay for water, gas, heat and trash separately, right?

Owning will be ~$3k. Does that include the HOA fee of $650? What maintenance expenses would you expect other than for things affecting the interior of your condo? Will you occasionally get assessed for common area items?

From the figures provided, it appears you will be paying more out of pocket to own. You will get another bathroom but you will also have the responsibility for maintenance, at least on the interior. Generally speaking, you should budget 1% of the value in maintenance each year ($4500 in your case/$375/mo) but that may be too high if there are a lot of maintenance costs already built into the HOA fee. Even so if you cut the maintenance cost to $200/mo, you're looking at $700/mo more to own.

ALSO, that doesn't include the lost opportunity of investing 20% into the condo rather than the market. The market averages a 7% return. Most real estate values just keep up with inflation. Your area might be different, however. Try to research the long term increase in home values over the past 20-30 years and see what the annual return is there.

I cannot truly see any scenario in which buying would be more beneficial than renting. You will be tying up your down payment, taking on the responsibility for maintenance costs and paying more per month for PITI versus rent.

[Nikii]

Thank you for your response  NeonPegasus!

So, rent will be $2.5k. I'm guessing you don't pay for water, gas, heat and trash separately, right?

Yes- we only pay for electricity and internet. Please note that the rent goes by over 100$ every year. Also the current rent for a 2BR/ 2BA is around $2800.

Owning will be ~$3k. Does that include the HOA fee of $650? What maintenance expenses would you expect other than for things affecting the interior of your condo? Will you occasionally get assessed for common area items?

Yes, $3000 is inclusive of HoA.. I don't think I will be assessed for any common area items

From the figures provided, it appears you will be paying more out of pocket to own. You will get another bathroom but you will also have the responsibility for maintenance, at least on the interior. Generally speaking, you should budget 1% of the value in maintenance each year ($4500 in your case/$375/mo) but that may be too high if there are a lot of maintenance costs already built into the HOA fee. Even so if you cut the maintenance cost to $200/mo, you're looking at $700/mo more to own.

ALSO, that doesn't include the lost opportunity of investing 20% into the condo rather than the market. The market averages a 7% return. Most real estate values just keep up with inflation. Your area might be different, however. Try to research the long term increase in home values over the past 20-30 years and see what the annual return is there.

I cannot truly see any scenario in which buying would be more beneficial than renting. You will be tying up your down payment, taking on the responsibility for maintenance costs and paying more per month for PITI versus rent.

I agree it is more out of pocket costs, however we would eventually need the 2nd bathroom (already facing issues with 2 kids, 4 and almost 2). We have about 80k saved for downpayment in a savings account that are not working for us in any way.
Also we would like to have a paid-off property by the time we retire in 30 years.

[rubybeth]

I like Michael Bluejay's calculator for this, because it lets you play with a lot of different parameters (click on the "Deluxe" tab at the top).

https://michaelbluejay.com/house/rentvsbuy.html

[Nikii]

Thank you! this is helpful..

I like Michael Bluejay's calculator for this, because it lets you play with a lot of different parameters (click on the "Deluxe" tab at the top).

https://michaelbluejay.com/house/rentvsbuy.html

[humbleMouse]

I don't think the numbers look good on this.  If I were you I would wait until the next real estate squeeze, which will likely happen in the next 1-4 years.  When that happens, take your cash and scoop up a good deal.  I understand your desire to own property - however, a condo in the greater NYC area seems like a terrible "investment" to me. 

You make plenty of money.  If you really want another bathroom just rent the more expensive place for $2800/month.  You'll save much more money in the long run not owning one of these condos, and you get added flexibility for moving in the future. 

Question - how long has this condo been on the market?  How long have other condos in your building lasted on the market?

[Nikii]

Thanks for your input HumbleMouse!

Question - how long has this condo been on the market?  How long have other condos in your building lasted on the market?

usually it is less than a week.. the previous condo we were looking at last week, was gone in 2 days..

[Nikii]

also, this particular condo that we are looking at now, was just listed yesterday.. and most of these condos go over asking price because of its proximity to the train station, schools, daycares, etc

Question - how long has this condo been on the market?  How long have other condos in your building lasted on the market?

usually it is less than a week.. the previous condo we were looking at last week, was gone in 2 days..
[/quote]

[Cwadda]

Rent is $2400/month

Ownership is $3000/month for PITI and HOA fees, plus another $570/month in taxes. There is also maintenance, call that another $100/month.  So you're looking at about $3700/month for ownership.  Seems like renting is the better option, and gives you flexibility to move whenever you wish.

I would take that $80k cash and the additional $1300/month you're saving by not owning. Invest that and FIRE sooner. Perhaps well below 30 years from now.

[Nikii]

Ownership is $3000/month for PITI and HOA fees, plus another $570/month in taxes. There is also maintenance, call that another $100/month.  So you're looking at about $3700/month for ownership.  Seems like renting is the better option, and gives you flexibility to move whenever you wish.

Thanks Cwadda for your input! just a clarification- 3000 includes the taxes as well.. here is the breakdown
P&I- approx. 1700
Taxes- approx. 570
HOA-650
Ins- approx. 70

[Cwadda]

Do you intend to stay there for another 8+ years?  Buying could be a good option, but only if you are anticipating living there for a longer period of time.

[Nikii]

Do you intend to stay there for another 8+ years?  Buying could be a good option, but only if you are anticipating living there for a longer period of time.

Yes, that is the plan. In the worst case scenario, we can rent it out since the rental market is very hot here.

Also, I wanted to ask you one more thing based on your advice of putting the current cash we have in the market.. what happens if we pass on this condo but like another property 1-2 years down the line? Do you still suggest putting that money in the investment account or hold that money in savings for a potential down payment. I just hate all that money sitting there not earning even 0.1%. Thanks

[undercover]

The numbers look pretty good in favor of buying presuming you plan on staying 5+ years.

If less than two years out, I'd just keep the money in a high yield savings account (Ally/Discover). If two years passes and you haven't found a home or have given up looking, I'd get more aggressive with returns (stocks) at that point.

[Nikii]

The numbers look pretty good in favor of buying presuming you plan on staying 5+ years.

If less than two years out, I'd just keep the money in a high yield savings account (Ally/Discover). If two years passes and you haven't found a home or have given up looking, I'd get more aggressive with returns (stocks) at that point.

Thanks for your input!

[Cwadda]

Also, I wanted to ask you one more thing based on your advice of putting the current cash we have in the market.. what happens if we pass on this condo but like another property 1-2 years down the line? Do you still suggest putting that money in the investment account or hold that money in savings for a potential down payment. I just hate all that money sitting there not earning even 0.1%. Thanks

Do you already max all your tax-sheltered investment vehicles? 401k, Roth/Traditional IRA, HSA, etc?

[Nikii]

Also, I wanted to ask you one more thing based on your advice of putting the current cash we have in the market.. what happens if we pass on this condo but like another property 1-2 years down the line? Do you still suggest putting that money in the investment account or hold that money in savings for a potential down payment. I just hate all that money sitting there not earning even 0.1%. Thanks

Do you already max all your tax-sheltered investment vehicles? 401k, Roth/Traditional IRA, HSA, etc?

Yes, we have been maxing our 401ks and backdoor ROTHs for the last 2 years. No HSA yet, have been researching this as well..

[Cwadda]

Also, I wanted to ask you one more thing based on your advice of putting the current cash we have in the market.. what happens if we pass on this condo but like another property 1-2 years down the line? Do you still suggest putting that money in the investment account or hold that money in savings for a potential down payment. I just hate all that money sitting there not earning even 0.1%. Thanks

Do you already max all your tax-sheltered investment vehicles? 401k, Roth/Traditional IRA, HSA, etc?

Yes, we have been maxing our 401ks and backdoor ROTHs for the last 2 years. No HSA yet, have been researching this as well..

Definitely max those HSAs too, if you are able and it makes sense for your situation.  Beyond that, you could either do a high yield checking account or some stocks/bonds in a taxable brokerage account.

[Nikii]

Just wanted to give an update.. we put an offer on the condo ($450k) but it went over asking price and its still being outbid (over 485k at the moment)

We are a little disappointed, but at the same time not very sure of the next steps. I am a little hesitant to invest all our downpayment savings in the market, since we would really like to own a property (currently we don't have any assets except for around $60-70k in 401ks). So going with what a few of you mentioned, I would put it in an online savings account for now.

[Cwadda]

Just wanted to give an update.. we put an offer on the condo ($450k) but it went over asking price and its still being outbid (over 485k at the moment)

We are a little disappointed, but at the same time not very sure of the next steps. I am a little hesitant to invest all our downpayment savings in the market, since we would really like to own a property (currently we don't have any assets except for around $60-70k in 401ks). So going with what a few of you mentioned, I would put it in an online savings account for now.

One thing I will say about home buying is to try your best not to get emotionally involved too much.

If you're definitely serious about buying, I recommend finding an excellent realtor who can represent you as a buyer's agent.

[ZMonet]

I wouldn't chase the market unless you are absolutely sure you are in this for the longer term and you absolutely love where you live (transportation, proximity to activities/shopping, schools, etc.).  As your kids age, is 2 BR/ 2 BA going to be enough or will you want to move into something bigger/to the suburbs? You should be really honest with yourselves, especially given how close the rent/buy equation is on this one.

Also, regarding special assessments, don't assume there won't be any.  For those who have gotten a special assessment, they know they can be substantial.  Is the building newer/remodeled?  A new roof, or large maintenance to common areas can get pricey.  I'd make sure to ask some of the owners in the building if whether there is any discussion of special assessments.

[ooeei]

Just wanted to give an update.. we put an offer on the condo ($450k) but it went over asking price and its still being outbid (over 485k at the moment)

We are a little disappointed, but at the same time not very sure of the next steps. I am a little hesitant to invest all our downpayment savings in the market, since we would really like to own a property (currently we don't have any assets except for around $60-70k in 401ks). So going with what a few of you mentioned, I would put it in an online savings account for now.

Why do you want to own a property? You're currently spending less than 1/4 of your income on housing, that's a pretty good place to be even if in absolute terms it seems expensive.  You also have the flexibility to move as the kids age if you need to.

[Nikii]

Why do you want to own a property? You're currently spending less than 1/4 of your income on housing, that's a pretty good place to be even if in absolute terms it seems expensive.  You also have the flexibility to move as the kids age if you need to.

Thanks, that's a good perspective to look at it as well.. my concern is that we are spending almost $30,000 in rent every year without gaining anything in equity.

[ooeei]

Why do you want to own a property? You're currently spending less than 1/4 of your income on housing, that's a pretty good place to be even if in absolute terms it seems expensive.  You also have the flexibility to move as the kids age if you need to.

Thanks, that's a good perspective to look at it as well.. my concern is that we are spending almost $30,000 in rent every year without gaining anything in equity.

Don't think about gaining equity, think about all of the other expenses that have nothing to do with equity that are involved in owning a home. Transaction costs. Down payments. Taxes. Insurance. Repairs. Interest. Lack of flexibility for new jobs, neighborhood, or family changes. These are all real costs associated with owning, none of which give you any sort of benefit financially.

Buying a house for equity is almost like buying a new TV for the credit card rewards, or increasing your federal withholding for a bigger tax refund next year. What matters for a house you live in is the net cost over a given time period, not some sort of "bonus" you get out of the deal. There are advantages to consider like being able to change certain things, and possible appreciation, but there are significant negatives that I pointed out above.

For certain situations it works out really well, but it's not as clear cut as "buy = good, rent = throwing money away." Additionally if you're the type who can't make yourself save any money (as many people are), houses can be an effective forced savings plan. 

[Laserjet3051]

I like Michael Bluejay's calculator for this, because it lets you play with a lot of different parameters (click on the "Deluxe" tab at the top).

https://michaelbluejay.com/house/rentvsbuy.html

Excellent calculator, thanks! This tool helped confirm my original calculations that in my situation, renting was, and continues to be, the better option in the rent/buy decision. I really like that one of the variables in the calculator is projected annual appreciation rate for the home in question, as this variable impacts the decision tremendously, especially in HOT markets that never seem to die down.

[Nikii]

I wouldn't chase the market unless you are absolutely sure you are in this for the longer term and you absolutely love where you live (transportation, proximity to activities/shopping, schools, etc.).  As your kids age, is 2 BR/ 2 BA going to be enough or will you want to move into something bigger/to the suburbs? You should be really honest with yourselves, especially given how close the rent/buy equation is on this one.

We could think of ourselves living here long term, just because of the convenience and its proximity to schools, train station, activities, etc. I am not very keen on moving to the suburbs as that will increase our commute drastically

Also, regarding special assessments, don't assume there won't be any.  For those who have gotten a special assessment, they know they can be substantial.  Is the building newer/remodeled?  A new roof, or large maintenance to common areas can get pricey.  I'd make sure to ask some of the owners in the building if whether there is any discussion of special assessments.

point taken :)

[rubybeth]

I like Michael Bluejay's calculator for this, because it lets you play with a lot of different parameters (click on the "Deluxe" tab at the top).

https://michaelbluejay.com/house/rentvsbuy.html

Excellent calculator, thanks! This tool helped confirm my original calculations that in my situation, renting was, and continues to be, the better option in the rent/buy decision. I really like that one of the variables in the calculator is projected annual appreciation rate for the home in question, as this variable impacts the decision tremendously, especially in HOT markets that never seem to die down.

Yeah, I really like this one vs. the NYTimes version or others, since it has many more variables to play around with. I especially like that this one reminds you to include increased utilities/maintenance.