Rent vs. buy math

The answer is you aren't going to get a legitimate answer because it depends on too many individual variable to be meaningful when generalized. You need to understand fundamental considerations as steve has so meticulously laid out, and then understand how your own situation alters the calculus. Time horizon, credit rating as it impacts mortgage rate, amount down, what you would be doing with the down payment if not in RE (not everyone puts it into aggressive growth funds), how high a quality rental you would need to live in if you couldn't buy something to fix up to make your own, how much risk can you tolerate and for how long...

This is why for the largest purchase of one's life (for most of us) it is crucial to have an independent financial advisor working with you.

pick a sample of 50 people you know who have rented over the past 10 or 20 years, and pick a sample of 50 people you know who have owned. I bet that you will find that in 99.9% of cases the owners are now much better off financially than the renters - most likely exponentially better of.

petrfitz, run that study and then report back to us. You'll realize how difficult it is to do so pretty quickly.

perfitz, at the end of the biggest bull run in nearly half a century, ofcourse the owners will be better off than renters (much the same way people who bought dot-com stocks on the margin were very well off in 2000.

question is if this will be repeated over the next 10 years.

new buyer99, check out www.housemath.us - the calculations, etc are on wiki so you can cross check for yourself. To plug in numbers, do your own research to find out comparable rent and buy apartments.

To be fair, make sure that each population had roughly the same net worth at the start of the period (at the time of apartment purchase). I mean, to say that your friends who have owned real estate over the past couple of decades are, on average, better off than those that rented is probably a very biased argument to begin with.

please cite any well known examples of renters outperforming owners.

petrfitz, you posited the theory, so you should probably get the ball rolling. The point is (as jaspernonbeliever just wrote), you'd need to take samples with identical (or as close as possible) financial situations at the start of your study, and then make sure that, other than costs of living, every other financial decision they make is roughly the same. Otherwise, you really aren't showing anything because you're not isolating the condition you want (ie: home ownership). To say that owners are better off financially isn't particularly valuable. It's like saying rich people are better off than poor people.

"please cite any well known examples of renters outperforming owners."

It's not a circus.

Anyone who bought in Manhattan in 1988 would have suffered miserable losses through 1998 - 25% to 50%. That is a well-known fact.

Anyone who bought into the Chelsea Stratus where the per-floor premium is now $275,000 has lost 5+ years of comparable rent.

Examples abound.

newbuyer99, here is some interesting information from Fortune magazine:

http://money.cnn.com/magazines/fortune/price_rent_ratios/

Here's a good discussion on Wikipedia (I know, I know) of how to measure home affordablility:

http://en.wikipedia.org/wiki/Housing_bubble

Here's another discussion on the rent-to-price ratio:

http://www.cnbc.com/id/25625777

I'm not being unfair (if that's your claim). I'm looking at the historic data and the fundamentals, and I believe that property prices are unsustainable at these levels.

"I've yet to see anything resembling consensus."

You won't, because there are people like me who cite real examples and real data and real facts, and those like petrfitz who make outlandish claims with no support whatsoever.

It's as simple as doing the math using the market constraints. To rent an apartment you need income of 40x monthly rent. If your apartment costs $2,500 a month, you need to make $100,000 a year to afford the apartment. If you make $100,000, using an average PITI of 30%, your total maximum yearly payments would be $30,000. Divided by 12 = $2,500.

That's the market constraint. And here is why the 12x figure works so neatly. You rent for $2,500. 12x that annualized = $360,000. An 80% mortgage would give you a mortgage of $288,000. At 6.75% you would have monthly mortgage payments of $1,867.96. Add in taxes and insurance - the other components of PITI - and you have a number that hovers around 12x - $2,500 - varying with the interest rate.

Yes there is a tax benefit, but it's not taken into account when you apply for a mortgage. There is also an opportunity cost. There are also transaction costs and a risk premium for owning, since it's riskier.

The 12x ratio is the simplest one. Imputed rent and owner's equivalent rent (sometimes also called the price-to-rent ratio) are two other more detailed ways of doing the same calculation, which explicitly take into account the factors that you are interested in, and the ratios will therefore be somewhat different, but the relationships will not.

lets go back to early 2000. Ask 50 people who invested in tech stocks and 50 people who invested in bonds. Ask them who made out better. 99.9% of the time, it was the stocks. So buy stocks and just HOLD.

You'll do great!

Kylewest nailed it. There are no simple answers, just a general framework that will yield very different answers depending on assumptions and personal circumstances.

Article few weeks ago stated the following

Many experts look to price-to-rent ratios to estimate where house prices should be in a region. Because renting is a direct alternative to buying, and because rents tend to be less volatile than prices, rents are often considered to be a good shorthand for figuring out the intrinsic value of a home.

In the past decade, the price-to-rent ratio in many markets has exploded, indicating that people have been paying much more for their homes than the property is actually worth. From 1994 to 2002, for example, Phoenix had an average ratio of 11, according to data from Moody’s Economy.com. After peaking in the last quarter of 2002 at 22.5, it cooled to about 17.3 in the first quarter of this year.

This measure is popular but problematic because some economists say many of the homes that people rent (apartments in multifamily buildings) may not be comparable to the types of homes that people buy (single-family houses).

Another ratio that housing economists watch is the ratio of home prices to per-capita income. This is telling because it shows whether Americans can actually afford the houses in their area.

petrfitz, a renter who invested the price of a house in gold 10 years ago would be massively ahead of the real estate owner. Someone with your logic would then conclude it is now prudent to lever up to your eyeballs in gold. I say pick the asset class with the best forward-looking cash flow characteristics.

Arguing this point with petrfitz is probably not useful. Although he's the only poster who seems to find his "owners are richer than renters" logic persuasive, that doesn't seem to deter him.

Appreciate all the links, websites, color, etc. I certainly agree with those that give reasons why an apples-to-apples comparison is very difficult. That's part of my frustration with this topic, since the rent vs. buy financial comparisons are such a huge part of the decision.

Steve, your example with 12x is quite helpful. I understand the simplifying assumptions think they're generally reasonable.

"Yes there is a tax benefit, but it's not taken into account when you apply for a mortgage. There is also an opportunity cost. There are also transaction costs and a risk premium for owning, since it's riskier."

If I'm reading that right, you're saying that the opportunity cost, transaction costs and risk premium of owning approximately offset the tax benefit. While I would never tell someone that's "wrong", I don't agree with it, in my case. My downpayment in your example is 20% while my tax rate is between 45-50%. Transaction costs become much less of a factor with a long enough time horizon. And my risk premium is actually negative, since in the long run I prefer to own for both investment and personal reasons.

To be clear, I am not at all trying to convince you, just pointing out an example of a personal situation and personal preferences that significantly impact the math and the decision (as others have pointed out).

spunkster, all ratios are problematic in one way or another. You have to look at several all at once, and make a personal decision based on your personal circumstances.

However, please explain how this quotation of yours is relevant to Manhattan: "some economists say many of the homes that people rent (apartments in multifamily buildings) may not be comparable to the types of homes that people buy (single-family houses)."

when 99.1% of all Manhattan real-estate is multifamily?

"you're saying that the opportunity cost, transaction costs and risk premium of owning approximately offset the tax benefit. While I would never tell someone that's "wrong", I don't agree with it, in my case."

What I'm saying is that over long periods of time, given that the tax benefit decreases while the opportunity cost of investing elsewhere accrues, then that is indisputable. Except in recent years owner-occupied residential real estate increases in value only at the rate of increases in personal income. Other assets - stocks, for example - appreciate at a far faster rate.

Real estate is also highly leveraged, meaning that any decrease in value could very dramatically affect your personal worth.

"while my tax rate is between 45-50%."

That would be your marginal rate; you need to use your effective (average) rate to do the calculation, so as not to skew all your benefits toward mortgage interest and taxes (the former of which is limited to a $1 million mortgage, the latter of which is lost under AMT).

Others will protest, but they are wrong.

"my risk premium is actually negative." No risk premium is negative. It measures the difference between the risk-free (Treasury) rate and the risk involved in investing your money into a risky asset, like real estate. Real estate is risky because it is highly illiquid; unlike stocks which are risky because they are highly volatile.

"Transaction costs become much less of a factor with a long enough time horizon" is true only if property prices increase in value to offset them. If they stay the same, the costs remain, albeit lower on an annual basis.

I think steve's 12x ratio is too simplistic and undervalues a reasonable purchase price on a comparable apartment. Let's take his $2,500 rent example. For someone to own an apartment with a similar after-tax monthly costs, they could purchase an apartment priced around the $500,000 range, depending on the amount of monthly maintenance or common charges and property taxes.
steve - now try to stick to the issues and don't get so grouchy because I disagree with you and presented logical reasons to support my opinion.

steve, don't go through the effective/marginal rate issue again. You cannot use your effective rate to calculate the tax benefit of the mortgage interest deduction. We've been through this. Please spare us going through it again.

Also don't forget that over time, your rent payments will likely increase at a far greater rate than your monthly ownership costs.

I'm an agent who serves both buyers and renters, but I'm biased towards buyers because I make more money off of them. However, once I wrote a book the personal finance media asked me this question a lot - I think I've hit it in such diverse venues as More magazine and Alaska Airlines' inflight mag -- so I guess I'm considered an "expert."

I have to say, if you are running rent-versus-buy calculations and feel on the fence, you should be a renter.

The drivers towards homeownership should be emotional -- where am I going to spend time that's private? where am I going to raise a family? -- not financial. Even when the rent/buy calculation "works" in favor of buying, and real estate prices seem to be rising over time, a piece of property is a ridiculously undiversified, illiquid asset with an unpredictable stream of future costs. To think of it the way you would think of a mutual fund is, in my opinion, just asking for trouble.

A third of people in this country rent, and the percentage is even higher in Manhattan. It's no shame to be in their ranks. If you're not just aching to be somewhere where you can paint your own walls, keep renting.

ali r.
{downtown broker}

LICComment makes an obvious point:

"Also don't forget that over time, your rent payments will likely
increase at a far greater rate than your monthly ownership costs."

This is true. So if I bought my apartment in 2000 with a fixed monthly mortgage/maintenance
of $2000 my monthly payment is still $2000 whereas the rent on a comparable apt doubled to $4000.
So, basically I am now renting my apartment from the bank for half the market rate.

So while I agree rent/buy ratios are out of whack, one does insulate oneself from an inflationary
rental market through buying. Not that I would do that anytime soon.

Why is this never considered in the endless buy vs rent arguments?

newbuyer99, I will have to disagree with front_porch in your case, although I agree with him in many other cases.

Newbuyer99 makes the market for a certain class of properties in Manhattan. Has has nearly a 50% effective tax rate, but doesn't make so much money that the mortgage interest deduction is phased out or the AMT disallows property tax deduction. Nearly all of his carrying costs will throw off a 50% tax credit!

Newbuyer99 shows up at an open house with prospective buyers on his left and right grumbling that this place costs twice what it does to rent! But Newbuyer99 is confused by the fact that it seems about the same to him net of tax, so Newbuyer99 goes to a real estate blog seeking advice.

He runs into some strange characters there, including a real estate agent that writes for in-flight mazagines that thinks that homebuying decisions should be driven primarily by emotional rather than rational means.

If her were to take into account Newbuyer99's tax status, he might alter his message a little bit and say that for Newbuyer99 he is the man! He makes the market in his sector, and anyone with a lower effective tax rate should run away screaming from any open house he attends because it is worth more to Newbuyer99 than it is to them. But for Newbuyer99 he might say that since he makes the market in this sector, he really shouldn't stress over the rent-vs-buy equations and instead focus on the where he wants to go in his life.

So Newbuyer99 heeds his advice and closes on a nice apartment where he wants to stay and raise his family. His monthy cash outflow for housing doubles, but he also files a revised W4 increasing his deductions causing this increase in outflow to be offset by his reduced tax deductions.

Everybody on the real estate blogs mocks him. Doesn't everybody know it cost twice as much to buy? The price to rent multiple is through the roof and will revert to historical norms! Well, maybe outside of Newbuer99's niche.

jrd: ali r. is a woman. just sayin'.

I have a question for stevejhx. I generally agree with you about the market and that the price to rent ratio is way out of wack, but I am always concerned that I will wait and then prices will take off because some idiot down the road will think that it is worthwhile to get a cap rate of 3.5%. So reluctantly I continue to watch the market closely. What info do you have to show that the per floor premium for the Chelsea Stratus is $275,000?. That is incredible and that is probably higher than at 15 CPW or Time Warner. Are you referencing for sale units now, or what was sold by the developer during presales?

I didn't say "emotional rather than rational" -- I said "emotional rather than financial." There is nothing irrational about noting that an illiquid asset, no matter how cute the fireplace, presents dangerous, perhaps unpriceable risks. Robert Kiyosaki has built an entire career as one of the top personal financial advisors in the world saying this.

I gave a couple of my print bona fides in case newbuyer99 thinks I'm "just another broker" -- I'm not, I'm known nationally as a source of real estate expertise. I picked odd publications because they're publications where I had answered THIS SPECIFIC QUESTION. If you want more general publications where I've been quoted, then: New York Times, Money Magazine, Wall Street Journal.

Thanks for thinking I'm a guy though. I worked on Wall Street for two years, so I recognize that as a compliment.

Alison R.
{downtown broker}

Thanks for the additional characters beyond Ali. But you have resonded to everything but the substance of my critique of you post. What should someone with a 50% net tax bill and 100% deductible interest and real estate tax do in this market?

jrd: I think she answered your question, but the answer is a complex function of the individual's risk tolerance, not of some simple arithmetic formula.

OMG, West81st, which is someone for whom I have come to respect. So I would like to understand your point of view.

My point of view, is that on the demand side, there are people who can deduct a large portion of their cost of carry and have large effective tax rates.

If you have a lower effective tax rate, or can deduct a smaller portion of your cost of carry you are at a disadvantage.

Many people on this board are of the opinion that it costs twice as much to buy as rent. My opinion is that this simply explains that they are at a tax disadvantage relative to others.

jrd: My opinion is that you are self-evidently correct. The tax system makes homeownership especially attractive to some people, and less so to others. It doesn't follow, however, that everyone with a high tax rate and full deductibility should buy a home. As Ali said, there are risks inherent in buying (risks that may or may not be especially severe now) so an honest assessment of one's own risk tolerance should be a key part of the decision.

Has anyone considered distinguishing the monthly cost from the investment.

In other words calculate the after tax amount per month (mortgage payment per month, plus maintenance and taxes minus any tax benefits) and then compare that to rent. That would give the cost equation. Some would suggest that you should also deduct principal since your essentially paying it to yourself. But I'd say that goes more the investment side of transaction.

Then, to calculate the investment part of the equation, you subtract the purchase price from the sales price.

Someone on another thread suggested something like this and stated that his monthly cost to own was about the cost of rent. I find the same to be the case, and I'm paying a lot less if I subtract the "amount I am paying to myself," though I think that goes more to the investment aspect.

So, I'll see in 10 years whether my initial investment pays off (ie, intial payment, closing costs, etc). But in the meantime, I have relatively stable monthly payments and continue to establish equity.

Right now, I'd rather live in my investment than watch my wealth change day to day in the stock market roller coaster.

Just a perspective.

Sorry, I didn't mean to be self evident. I don't really think that the community apreciates the extent to which they discount tax benefits. I would agree that that someone in a high tax bracket with full deductability should still think hard about what to do, but I would add that the person who is not should get the heck out.

I actually find this discussion both helpful and interesting (and civil so far). Glad people are interested in the topic.

jrd: Your description of my "niche" is fairly accurate, and does describe my family to a large extent. for better or worse, we're renting now, and when we do buy, it will most likely be bigger/nicer apartment, meaning we're probably only going to be able to deduct a part of the mortgage (Unless prices fall by 50% or more, which I am not expecting but would very much welcome).

I totally agree that there's a meaningful subset of Manhattan residents that are like me in the way you described. In fact, some fit your description even better - they are single, and thoughts of needing a family apartment are much less immediate for them than for me.

Two things about your post concerned me - you reference a phasing out of the mortgage deduction if we make too much, and the disallowance of it by the AMT. My tax advisor, who is not cheap, indicated neither ever happens. If he's wrong, I could have a very big problem. Would you mind sharing the source of your info? Thanks.

Steve, a few comments/clarifications:

1) Yes, the tax benefit decreases/disappears over time, while the opportunity cost accrues. However, "over time" is a totally different ball game, if nothing else than for the fact that rents increase over time, as others have pointed out. We're talking strictly what's cheaper at a point in time - buying or renting. I recognize that's only one facet of the decision (what happens over time is another), but I am just focused on nailing down that one facet.

2) I've seen the marginal vs. effective tax rate debates. I think I am on the side of the marginal, but it doesn't even matter, let's not rehash the debates. My effective tax rate is pretty damn close to that same range, so my point stands regardless of which you use.

3) I should've been clearer on the risk premium. I meant that if the math is equal (accounting for everything quantifiable), I prefer to buy for all the intangible reasons people have discussed, which for me (and for the right place, long enough time horizon, etc.), more than offset the risk.

"The drivers towards homeownership should be emotional."

That's really silly.

LICC - we've already had you do the calculation at the "blended" rate, as you called it, which is the weighted average tax rate.

The 12x ratio is simple, but elegant, and arithmetic bears the example out. A person maxed out on rent at any figure - take $1,000 a month, for example - simply cannot afford a virtually identical apartment at these prices because PITI precludes it. It may well be that the monthly costs are the same after-tax, but you can't get financing for that price.

newbuyer99: "We're talking strictly what's cheaper at a point in time - buying or renting."

Exactly. Buying is equivalent to capitalizing rent and amortizing it over time. If that is cheaper out-of-pocket than renting, then buy. If the difference is marginal, then buy. But if there is a huge premium to own then rent, because in the end you get the same thing: someplace to live.

steve, you are incorrect about the blended rate. It is not the weighted average tax rate. In circumstances where an itemized deduction takes a taxpayer from a higher marginal tax bracket into the next lower marginal tax bracket, it is the weighted average rate among the those two highest tax rates. This is different from the taxpayer's effective rate, which would blend all the lower tax rates and produce a lower rate. Therefore, using the effective rate when measuring the benefit of an itemized deduction would undervalue the benefit.

Your point about the 12x ratio is flawed because you assume that people rent at the max amount that they can qualify based on the 40x rent ratio, and you also assume that all landlords abide by the 40x limit. Not everyone who can qualify for a $400,000 mortgage (roughly $140,000 - $150,000 annual salary) is paying as much as $3700-$4000+ in rent, even though they could qualify to rent at that level.

LICC, again with the dumb things. First you say "It is not the weighted average tax rate."

Then you say, "In circumstances where an itemized deduction takes a taxpayer from a higher marginal tax bracket into the next lower marginal tax bracket, it is the weighted average rate among the those two highest tax rates."

Which is the same thing.

"Not everyone who can qualify for a $400,000 mortgage (roughly $140,000 - $150,000 annual salary) is paying as much as $3700-$4000+ in rent, even though they could qualify to rent at that level."

You're absolutely correct - Not Everybody. But lots. But the point is, what you can rent for $3,700-$4,000, you cannot buy with a $400,000 mortgage in today's Manhattan market. You would need a mortgage of twice to three times that amount, so you can't afford to buy what you can rent.

Thar she blows!!!!

Does anyone know ANYBODY who has rented their way to success? Meaning does anyone on this board know ANYONE who has purposely decided to rent, then put all the money they would have invested into a house into investments, continued to invest monthly the money that would have went to a mortgage payment into investments and are now ahead of home owners who purchased in the last 10 or 20 years?

I cannot cite 1 example of everyone that I know who has taken the rental route and succeeded.

Your renting and investing to out perform owners is like saying "if you could have any super power what would it be?"

Meaning in the real world where you dont actually live out hypothetical situations owning is the most achieveable and long term successful financial strategy.

Renting and investing the same amount that you would in a home in stocks is ridiculous and is not done in the real world.

You guys keep arguing your hypothetical situations, and keep sending me your rent checks each month. I love getting over 50% of your take home each month. All I have to do is open the envelope.

steve, LICC is right. If you took the time to read the post you'd see. If I'm $20,000 above the threshold for when the federal tax rate changes from 28% to 33%, my marginal tax rate is 33%. If a potential mortgage interest deduction is $40,000, I can't use 33% in my calculations. Half of that offsets 33% federal, half offsets 28% federal, meaning an effective 30.5% tax rate when calculating the mortgage tax benefit. And that's just federal - add state/city brackets and it gets a whole lot more complicated.

There goes steve, acting all grouchy again and spewing insults again when his points are countered or shown to be incorrect. steve, just give up on your effective rate v. marginal rate stance. It does you no good to show everyone how you can't just admit when you made a mistake.

I agree that you can't buy with a $400k mortgage what you can rent for $4000, but you can buy with a $400k mortgage what you can rent for the $2500 and under range with similar monthly costs. Plenty of people rent below their 40x limit and can afford to buy.

Perfitz: "Does anyone know ANYBODY who has rented their way to success? "

The earliest i could have bought a place (given graduation from grad school, etc) was in 2006. I figured prices are way out of whack. Now, I'm glad I invested my $200K (which has grown by about 20% since then - with the present crisis notwithstanding.

Had I bought an overpriced condo for $1M, I would have stood to lose most of the $200K.

So, let's see:

I rented, and have $200K
IF I had bought, I would NOT have $200K

what does that say about renting vs buying?

eric cartman - so you are saying that the stock market and all other investments are down over 20% over the last year but you are up 20% over the last year?

What have you invested in?

Also sinve 2006 you have spent about $100K in rent, and didnt get several tens of thousands in tax breaks/incentives of owning.

eric cartman - my properties that I own are up significantly versus 2006. However, my only cash outlay was the downpayment. for e xample in 2004, I bought a duplex in the LES for $400K, put down $80K. Rented it since then. My renter has paid my mortgage and all carrying costs. The place is now vlaued at $1.3 million. $900K increase in 4 years means approx $225K per year gain off a $80K investment.

I think that is a little better than 20%...........

tech_guy, you're arguing exactly what I'm arguing. LICC is arguing you need to use your 33% tax rate.

"I agree that you can't buy with a $400k mortgage what you can rent for $4000, but you can buy with a $400k mortgage what you can rent for the $2500 and under range with similar monthly costs."

Then it makes no sense to buy.

Perfitz, I am happy for you - good to know your properties are up "significantly" since 2006. Clearly, you got a great deal back then that is unaffected by the bear market - which must put you in the top 5 - 10% of properties. You found a place where mortgage + maintenance is lower than rent - I do not believe it is possible in this market (at least, not since 2006).

You asked me for an example of someone being better off renting vs buying, I gave you one. I am not disagreeing with those that made money in the real estate market in the 03's and '04's. I am only humbly submitting that it is not possible to do so anymore. I dare you to find me a place on the market today anywhere in Manhattan where mortgage + maintenance is lower than rent (only caveat - if you deduct tax on the mortgage side, be sure to deduct it on the rent side as well).

As for what I invested in to get me 20% growth over two years (since 2006), it was a combination of a couple of mutual funds I trust (FAIRX and CGMFX) and some commodity ETFs. I did, however, lose money in my emerging market ETFs (which forms a small part of my portfolio)

As for my spending $100K in rent - I would have spent more than that on interest, common charges, and taxes (even if adjusted for tax benefits of paying interest) - so it's a wash. I believe I can buy today what I passed up in 2006 at around the same price. I also believe I can buy similar units for cheaper in the next 2 - 3 years.

Broadly, though, unless real estate continues to appreciate at 4 - 6%, it is a losing proposition to buy at these prices. At bout 4 - 6% appreciation (one particular example I cited earlier put it at 7%), buying BREAKS EVEN with renting. Anything appreciation less than that, owning costs you more than renting.

steve, you are a walking contradiction. First, you have always argued to use an effective rate to measure a deduction benefit. This is wrong, because the effective rate incorporates the tax rates applied at the lowest income levels, all the way up to your highest rate. After it finally sunk in to you that you were wrong, you tried to claim that you said all along that you must blend the top two rates, but you keep calling it an "effective" rate when in reality it is not. My point was that if you are going to pick between the two, you will always be more accurate using the marginal rate rather than the effective rate. However, the most accurate rate to use would be a weighted average of the top two rates, based upon how much of your deducted income would have been in the top bracket if you did not have the deduction.

If your after-tax monthly costs to own are approximately the same as to rent, such as comparing a $400k mortgage with a $2500 rent, then it makes perfect sense to buy. Unless you live in steve's bizarro world, where it never makes sense to own.

eric, saying that real estate appreciation at 4-6% only breaks even with renting doesn't make sense. Assuming you can rent or buy a comparable place at comparable monthly after-tax costs (or even within the same range), when you buy, you generally are leveraging your investment, so you are gaining appreciation on a much higher level of assets than your initial cash outlay, and over time, rents will increase to a much greater extent than your monthly ownership costs.

"Assuming you can rent or buy a comparable place at comparable monthly after-tax costs " ..

you said the magic word, my friend.

If you CAN indeed rent or buy at comparable units for comparable costs, then it does not need to appreciate at 4 - 6% to break even. In such a case, I would buy. At current prices, the only way you can justify paying a 80 - 100% premium to buy over rent is if it appreciates. Why else would someone pay $7K per month to buy, when he/she could rent similar unit for 3 or 4K?

eric, it is a myth that you can rent at half the cost of buying. A $4k rent has comparable monthly after-tax costs of an apartment in the $800k-$900k range. A $3k rent would equate to a $650k - $700k apartment.

LIC, I beg to differ. I have been looking on and off for a while now, and I disagree. I believe to buy a condo (not a coop with high degree of restrictions), you would need to pay 80 - 100% premium to buy over rent.

Be sure to add expenses and taxes in your calculation, as well as (rightfully) account for tax benefits, and oppty costs of 7% on downpayment.

If I find buying in the 10% range of renting, I would buy. Even now.

eric, are you saying that to buy an an apartment comparable to a $3k rent, you need to pay $1.2 - $1.4 million? That for a $4k apartment you need to pay $1.5 million - $1.8 million? That doesn't sound right.

LIC, buying a $1M apt in today's market costs about $45,000 per year, or ~ $4000 per month in tax-adjusted interest, about $1000 in common charges, and about $1000 in taxes. Clearly, these parameters vary with specifics of apt, credit rating, etc. This is a total of $6000 per month (not counting principal, insurance, broker fees, etc)

I believe you can rent it for about $3 - 4K. That is 66% - 100% more than what it costs to buy. Note again, that I have not included principal repayment in this.

What am I missing?

I think you are overestimating the monthly common charges and taxes. I could be wrong, but most listings I see show them combined at $1500 or under. After the tax break on your property taxes, that could be in the $900-$1200 range. Also, your $4k per month depends on the interest rate and could come in a little lower depending on available rates. Beyond that, I had said that a $4k apartment equated to the $800-$900k range.

1. You should consider the total taxes (not the "teaser" $1 per year tax for 10 years and then KA-BOOM $12,000). You can add back the NPV of tax benefits for 10 years if you would like, to compare apples to apples. Reason :eventually you have to sell it, and your buyer will calculate similarly. Broadly, though - I will concede this point. For older condos, the taxes plus maintenance could be in the $1500 range.

2. Interest rates are now 7.5% for jumbo. Depending on various factors (credit rating, points), you could get it down a little - but not much. From what i hear from my friends who are in the market, it's getting hard to even just GET a mortgage with 20% down payment, but maybe it was jut them ..

3. 4K apt do not equate to $900K range for condo. (maybe coops - but that's a mess I dont want to get into)

I agree, why pay in over-priced places unless you can put down a lot and/or rent it out for the long term? As a comparison, I rent out a 1.5 BR lux condo in Carroll Gardens -- after putting down 20% in April 07. I break even with the rent covering my monthly nut and the renters are fine and I'm fine with them paying down my principal.
$3000/mo ~ $375k mortgage at 6.125% $200 tax $500 maintenance.
Staging, putting up a wall for a baby room or study, and persuading the condo board to add a gym helped lock them in for 2 years.
Petrfitz has a point, albeit one that is a less conservative mindset that i share: IF you do your homework, putting money down on a apt can build passive income. who can argue with that? i find it an ideal time to buy -- since most are scared shitless, but as long as you get the price you want (in a negotiating-friendly market), you should be ok. 2 BR 2 BA has been a challenge to make the numbers work however...

Isn't it a bit silly to try and generalize *anything* to all of Manhattan if you discount all coops?

"I cannot cite 1 example of everyone that I know who has taken the rental route and succeeded."

"Renting and investing the same amount that you would in a home in stocks is ridiculous and is not done in the real world."

Perfitz, you can buy a home on leverage (let's say historically 20% down so 5 to 1 ratio of asset to equity) whereas for the most part, it's difficult to leverage more than 2 to 1 on any investment portfolio and I agree, most people do not even do that. But make no mistake about it, if you were to leverage 5 to 1 on a long-term (say 20 year) stock portfolio, the return on that equity would far exceed any investment in housing, which trends up basically with the PCE Deflator (inflation).

But I agree with you, its not realistic. The way I think about renting vs buying is this: to make money on your investment in your house, the after tax annualized asset appreciation (in absolute dollar terms) must be greater than:
After-tax cost of financing and real estate taxes
+ non-tax maintenance/common charges
- comparable rent for that same unit
+ opportunity cost of return on down payment

Sort of simple. And yes, you can make tons of money (as evidently you have) when that asset increases. But with all that leverage (in many cases 0%, 5% and 10% down resulting in infinite, 20x and 10x leverage respectively), when the asset decreases, you lose out, and you lose out fast. So to answer your question: there are millions of people who have been completely wiped out buying, tragically in many cases their entire life savings. Have you seen the headlines on foreclosures?? On top of that there are tens of millions who also have or will soon have negative equity but have not yet foreclosed.

What do you think they would say about the virtues of buying over renting?

Not one post so far has mentioned rent stabilization (or rent control). Roughly 50% of the apartments in the city are rent regulated.

"I love getting over 50% of your take home each month."

If you accept renters paying over 50% of their take-home pay in rent, then I daresay you don't understand risk.

"steve, you are a walking contradiction."

No, I am being completely, entirely consistent. That is not what the comment I was discussing said.

"If your after-tax monthly costs to own are approximately the same as to rent, such as comparing a $400k mortgage with a $2500 rent, then it makes perfect sense to buy."

Find me where the "tax benefit" is included in Principal, Interest, Taxes, Insurance = what gets counted to qualify for a loan.

"it is a myth that you can rent at half the cost of buying."

I believe we have cited dozens of examples. You have yet to prove your case, LICC.

eric_cartman is correct: "LIC, buying a $1M apt in today's market costs about $45,000 per year, or ~ $4000 per month in tax-adjusted interest, about $1000 in common charges, and about $1000 in taxes. Clearly, these parameters vary with specifics of apt, credit rating, etc. This is a total of $6000 per month (not counting principal, insurance, broker fees, etc)

"I believe you can rent it for about $3 - 4K. That is 66% - 100% more than what it costs to buy. Note again, that I have not included principal repayment in this."

We've been through this. We're all tired. Show us some examples of a property to rent that costs more than a virtually identical one to buy on a PITI basis.

Can't be done.

steve, thanks for rehashing old comments that I have already addressed and to which I have responded. You like to ignore the points that show you are wrong and just repeat yourself over and over.

steve, the fundamental disconnect between you and everybody else is PITI. Your argument is essentially saying its easier to *qualify* for a rental vs. a purchase, when looking at equivalent properties. But that's pretty obvious. Buying has substantially higher risk for the other party involved (mortgage bank) than renting (landlord). Of course its harder to qualify.

That's not realistic to rent vs. buy decisions. Assuming you can qualify for both when looking at equivalent apartments, which is a better deal? The fact that you *could* upgrade to a much nicer rental (but not necessarily a much nicer purchase) is completely outside the scope of the discussion.

To give more concrete examples: I claim the 1 bedroom I just purchased is break-even to renting an equivalent 1 bedroom. Your claim is "but you can afford to rent a 2 bedroom, and you can't afford to buy a 2 bedroom!". And you're 100% correct. Except that I don't want a 2 bedroom at all.

Well said tech_guy.

"that I have already addressed and to which I have responded."

LICC - all you have responded with is nonsense, no figures, except when I forced you to do the math and you came up with my answer - effective tax rate - and then claimed that it was your figure.

Show one example where out-of-pocket it costs the same to buy as to rent.

"Except that I don't want a 2 bedroom at all."

Fine. Except you could also get a much nicer 1-bedroom for the same price.

"Buying has substantially higher risk for the other party involved (mortgage bank) than renting (landlord). Of course its harder to qualify."

Somewhat higher, but not substantially higher as the mortgagee has a security interest in the property such that even if the property fell 20% in price, it would still break even.

The mortgagor is the person with the higher risk, as real-estate is illiquid.

And in any case it is immaterial - those risks should be factored into the price, which they are not.

So much so, in fact, that if indeed owning is riskier for both the mortgagor and the mortgagee than renting is for the landlord and tenant - which is true - why, then, is owning more expensive? Given the added risk, it should be cheaper.

steve, you are becoming a sad figure. After you have been shown to be embarrassingly wrong, you still can't just admit or drop it, and you devolve to double talk and lies. Everyone who reads the comments sees it. You used to have some amusement value, but you are just becoming a repetitive nuisance.

LICC: "After you have been shown to be embarrassingly wrong.

stevejhx: "Show one example where out-of-pocket it costs the same to buy as to rent."

LICC: "you devolve to double talk and lies."

stevejhx: you're starting to sound like Hugo Chavez. "¡Huele a azufre!"

Might I add in Fidel Castro and Mao Tse Tung.

You do what people with no real argument do: resort to insult (and then deny you insult!).

Show one example where out-of-pocket it costs the same to buy as to rent.

Just look at the numbers in the above comments. There you go.

steve, as for insults, you are the classic man living in a glass house throwing stones.

tech_guy, would you mind illustrating the 1-bedroom example you gave with numbers? I tried to do the same (for my current apartment, which is a decent-size junior 4), and came up with 10-40% premium to buy, depending on some specific assumptions. In other words, my math is in between those that say it costs twice as much to buy and those that say it costs the same/less.

newbuyer99, did you add in the following:
(a) maintenance
(b) tax on the house
(c) insurance
(d) transaction costs (e.g., mortgage tax while buying, 6% broker fees while selling)

Also, did you consider the somewhat more controversial aspects
(e) investment of downpayment and the money you will save by renting
(f) adjusted tax benefits (i.e., most people just calculate tax benefits of buying to equal the total tax $s saved on the interest component of the loan. However, unless you already itemize, this is incorrect - since most of us have up to $12K in standard deductions, which is what most people take - so the tax benefits need to be adjusted accordingly. Also, if you are in the AMT window, be aware that NY property tax is not deductable under AMT)

"as the mortgagee has a security interest in the property such that even if the property fell 20% in price, it would still break even"

Then why all the turmoil in the mortgage industry? Banks don't want to foreclose. Foreclosure auctions rarely return fair market value anyway (the new owner has to evict the defaulter, who probably just stripped the interior of anything remotely valuable, and maybe even vandalized it in spite).

"Except you could also get a much nicer 1-bedroom for the same price"

You seem to be smart - don't play dumb. I could afford a bigger/nicer place (much bigger if rental, slightly bigger if purchase). But I'd rather save my money. Again, that choice is very much outside the rent vs. buy discussion.

"So much so, in fact, that if indeed owning is riskier for both the mortgagor and the mortgagee than renting is for the landlord and tenant - which is true - why, then, is owning more expensive? Given the added risk, it should be cheaper."

Upside and downside risk. Stocks with large growth potential often have high P/E ratios. Nobody asks why buying their future earnings is more expensive than value stocks. The growth stocks (like real estate, and very much unlike renting) has upside potential as well.

Besides, there are deals to be had. housemath.us (using default numbers for everything except purchase price, maintenance, and mortgage interest of course) tells me that my place is *cheaper* than renting an equivalent place. By a few hundred/month. Lowering the time horizon from the default 10 to 5 makes it break-even with renting. That's a very acceptable risk for me - sure it may go down, but it may go up too.

"(e) investment of downpayment and the money you will save by renting"

Yes, everyone on this board claims they make a 20% return investing their down payment money in the market. No one on streeteasy has lost a dime investing in stocks, so it is a much safer than buying a home. I think 95% of the renters that claim this are getting their ass handed to them in the market and would benefit by locking up capital in owner occupied real estate. Eric_cartman can talk about this all he wants, but if the renters on this board did a rent vs. buy analysis correctly, they would include the negative returns achieved on their portfolio. The rent vs. buy calculator would show an overwhelming buy scenario and they would stop making this claim.

How much capital has been lost by renters invested in the market over the last 18 months? I guarantee you this number will be WAY more than equity lost in any Manhattan real estate correction.

tech_guy: "Then why all the turmoil in the mortgage industry?"

This is an historical aberration, one never before and never to be seen again. There are many reasons why it occurred all of which have been discussed to death. You can start another thread if you like.

Historically, foreclosure rates are very low. You can't extrapolate what's happening now to what has or will happen.

stevejhx: "Show one example where out-of-pocket it costs the same to buy as to rent."

LICC: "Just look at the numbers in the above comments."

That's what I thought. You can't do it.

JuiceMan: "I think 95% of the renters that claim this are getting their ass handed to them in the market and would benefit by locking up capital in owner occupied real estate."

And when the market tanks here - as it's starting to - they will have locked in a long-term loss they may never recover from.

Stocks are in the short-term very volatile - that's the risk. Real estate in the short-term is highly illiquid - that's the risk.

"if the renters on this board did a rent vs. buy analysis correctly, they would include the negative returns achieved on their portfolio. The rent vs. buy calculator would show an overwhelming buy scenario and they would stop making this claim."

That's sheer nonsense in the long-term. You are now arguing that the rent vs. buy analysis must be done in the short-term, which will, of course, accentuate the volatility of the stock market rather than the illiquidity of the real-estate market. Historically since the end of WWII the pattern of returns is consistent.

Moreover, if you - as you have - argue that owner-occupied residential real estate is not to be viewed as an investment, how can you make the above statement?

"Stocks with large growth potential often have high P/E ratios. Nobody asks why buying their future earnings is more expensive than value stocks. The growth stocks (like real estate, and very much unlike renting) has upside potential as well."

I hate to break it to you but NYC real estate is essentially driven off finance income. That is the furthest cash flow stream from a "growth stock" that I can think of. This is not Google we're talking about (yet NYC real estate trades at similar mulitples to Google). I love paying high P/E ratios if the underlying cash flows are growing fast enough to make it worthwhile. The cash flow underlying NYC real estate (finance income & rents) is falling. How does that deserve a big multiple?

while you guys have been arguing rent vs buy for the past year, each month you have sent me over 50% of your take pay in rent. In Steve's case he is payig his landlord about $60K per year.

We love that you guys debate this topic and never come to a resolution. Keep on debating but keep on sending your rent checks on time or us landlords will have to levy a late payment fee.

Thanks for paying our mortgages, for our vacations, and for our boats!

Eric_Cartman (btw, I have a magnet nominating you for president on my fridge):

(a) maintenance
yes

(b) tax on the house
apartment, but yes

(c) insurance
no, is this significant?

(d) transaction costs (e.g., mortgage tax while buying, 6% broker fees while selling)
no. This is a key reason (although not the only one) I am not buying now, because anything I buy now, my family will grow out of in 2-5 yeas, and with that short a time horizon, transaction costs are huge. With a longer time horizon, they become much less relevant.

Also, did you consider the somewhat more controversial aspects
(e) investment of downpayment and the money you will save by renting
yes, at the same rate as my mortgage, which admittedly is a totally arbitrary assumption

(f) adjusted tax benefits (i.e., most people just calculate tax benefits of buying to equal the total tax $s saved on the interest component of the loan. However, unless you already itemize, this is incorrect - since most of us have up to $12K in standard deductions, which is what most people take - so the tax benefits need to be adjusted accordingly. Also, if you are in the AMT window, be aware that NY property tax is not deductable under AMT)
Really good point. I was at my tax guy's yesterday finalizing my 2007 return, and we talked about all of the above. He says for us, 40% tax benefit was a good approximation. I think he's an optimist, 35% is probably a better number. I said higher up in this thread that I thought it was 45-50%, but I now realize that was wrong.

I am still not getting anywhere near the "double", but within that 10-40% range, the assumptions to get to the low end of that range are probably unrealistic.

How's this for an idea (I've only been on the boards for a couple of weeks, so maybe it's been tried), check out:

http://www.streeteasy.com/nyc/rental/388190-coop-4-lexington-avenue-gramercy-park-manhattan

and

http://www.streeteasy.com/nyc/sale/320562-coop-4-lexington-avenue-gramercy-park-manhattan

It seems safe to assume that these are the same apartment, given the pictures, broker, and time on market.

Now, some one with decent excel skills (I will volunteer, although mine are good not great - can't write macros, although I don't know if we want that due to the virus/security issue) can build a model that will do a rent vs. buy calculation. There is enough brain power on this board that collectively we should be able to build a kick ass model that will at least have everything built in that should/could be considered when making the comparison.

That is not say that there won't still be some differences of opinion on the various inputs (rates of appreciation, etc.) that will never be reconciled. Also, the conclusion for this specific apartment may not yield the same result as if we selected another example. However, we could at least approach this in a more systematic way and come to agreement on many issues and then understand why we may never come to a consensus on others. It would also be a tool that anyone can use for their own purposes to make whatever assumptions they want for the variables and come to their own conclusions on what they are comfortable with in terms of making the decision to rent vs. purchase.

Let's just do it from a bull standpoint.
Buying
-0% effective tax rate
-15% annual appreciation
-0% increase in taxes or maint/cc
-1% interest-only ARM
Renting
-10% annual increases
-0% return on DP

We can build off this model folks!

Rent vs. buy on 4 Lex, using housemath.us. Default values (on coop-nyc from the dropdown) for everything except price and maintenance (damn that listing has high maintenance compared to price/size!). housemath.us says buying is the equivalent of starting to pay $2,080.26 rent today, at 4% increase annually, over the next 10 years (when it assumes you'll sell). Purchase price vs. that rent puts you at the exact same financial situation at the end of 10 years. Rental listing is $2,495.

I like jaspernonbeliever's idea - this is kind of what I was trying to propose in starting this thread, but I didn't have any examples.

In his example, before running the math, Steve's simple ratio, price/annual rent gets you 13.3. Surprisingly close to the 12x number that he says is equilibrium, and certainly within the 12-15x range that he's referred to at times. But then you look at the very high maintenance and realize it throws the ratio off.

So I ran the numbers with 6.5% interest rate, 20% down, 35% tax deduction on mortgage, no tax deduction on maintenance, 6.5% opportunity cost on downpayment. Came up with about $3200 month to own. Note this still doesn't include transaction costs (which I don't have a good way to account for, especially since they exist in renting too), or insurance (which I just don't know).

With those caveats, owning this apartment appears about 28% more expensive than renting it for $2495. Certainly not double, but noticeably more expensive. Am I missing anything significant? Do people agree or disagree?

tech_guy, the asking rent is 20% higher than your implied "equivalent" rent. So you're saying it's 20% more expensive to buy, I am saying 28%. Not that far off, and I suspect the difference is the assumption of rent increases.

Why are you using an opportunity cost on downpayment, but not an appreciation in value of the apartment? What about increasing rent costs?

LICC: "Why are you using an opportunity cost on downpayment.

In fact, LICC, the opportunity cost is on the entire amount of the property since that's how much you're investing, borrowed or not.

"but not an appreciation in value of the apartment?"

What about depreciation?

"What about increasing rent costs?"

What about stagnant rents?

For the rental, that's IF they can get that much rent (though it seems reasonably priced for the area). And for rentals, you can only count 11 months' income per year, because that's the cash flow a bank will lend on, to account for vacancies, people trashing the apartment, etc.

stevejhx to LICC: Show one example where out-of-pocket it costs the same to buy as to rent.

Going rate for coops in that region is $800 psf. THis is $650 psf - so this is a good price - but let's do the rough math anyways:

400K - 20% down is 80K
Mortgage needed = 320K
7% interest is 22,400 in just interest (not principal) -- (1)

1450 maintenance => 17,400 per year maintenance
assuming 50% is tax deductable (just being generous to bulls) that is 8700 that is tax deductable -- (2)

total tax deductable expenditure = 22,400 + 17,400 = 39,800 -- (3)
tax benefits (assuming 35%) is 13,930

but wait!! you already have 12K in standard deduction for family of two ... so unless you already itemize, this is just worth ~ $2K
Let's increase this by other minor charitable donations and other stuff you will gain as a result of now itemizing - bringing it to, say, $4K in tax benefits. -- (4)

Total spend (from #3) is 40K - 4K = 36K per year
That is $3K per month of just "money down the toilet" - between interest, taxes, etc, compared to rent of $2450. Right here, you have a $550 / $2450 = 25% premium. So, in my opinion this is well priced given the market. (if you already itemize, in this case cost of renting = cost of buying)

Now, the fun starts.
Let's say you can put the 80K in CDs for 4% - after tax, that's 3% - this will give you ~$250 per month
Condo insurance runs at about 0.5 - 1% per year (someone please correct me here) - let's say $2400 / yr = $200 per month

Now it gets even more exciting
A buy-sell transaction (buying an apt, and then selling it at end of 5 - 6 yrs), costs you about 10% - i.e., 6% to broker, about 1% in mortgage taxes, 3 - 6 months of keeping apt empty to sell it, etc. If you amortize $40 K over the 5 years you will hold the unit, taht's $8k per year, or $650 per month.

I'll let you add up all this "soft" stuff any which way you want to add it.

btw, one thing I forgot to mention:

Coop is less than complete ownership (since it comes with strings) - so you would need to really compare it to a condo - not a coop.

newbuyer99: my numbers (really, housemath.us's numbers) say buying is 20% *cheaper*, not more expensive.

eric_cartman: NYers already write off state and city taxes from their federal return. For income levels we're talking about, that amount already surpasses the standard deduction.

tech_guy, what appreciation rate did you plug in?

I ran some numbers on housemath with 1% appreciation and the equilibrium it reached (assuming ten year time frame) was a monthly purchase expense of 65% higher than equivalent monthly rent expense. How on earth could that be true? I thought equilibrium was when monthly rent = monthly purchase costs?

steve, please deconstruct housemath.us, tell us why its not credible, and why 12x is the only measure that can accurately measure the Manhattan real estate market.

stevejhx: In fact, LICC, the opportunity cost is on the entire amount of the property since that's how much you're investing, borrowed or not.

This is ridiculous. Do you actually think that instead of putting $80k down on an apartment, a person is going to take it, borrow $320k, and then invest it all in long-term investments? Welcome to more of steve's bizarro world.

eric - are you comparing the deductions correctly? The standard deduction comes off your income, just as an itemized deduction would. You can't compare the actual tax benefit of an itemized deduction to the effect on income level of the standard deduction. The tax benefit of the standard deduction in your example would be closer to $4,000, or even less, not $12,000. Or you can compare the $12k in deductions to the $39.8k in itemized deductions. Also, you are assuming married status. The standard deduction for a single person is under $6k.

eric: left the numbers the default that housemath.us uses. 4% inflation, 4.5% nominal appreciation before inflation is accounted for. the 0.5% real appreciation is the nationwide average over many decades.

tech_guy, I read your post wrong, my mistake.

However, appreciation assumptions are outside of the scope of rent vs. buy math (just like qualifying for a mortgage is on the other side of the argument). The question is very simple - does it cost me more to buy an apartment, and how much more? Whether I expect it to appreciate is a whole another question, along with many others one might ask.

Eric Cartman and I ran the math and came up with answers that were fairly similar (I think he's too harsh on interest rate and tax deduction, but both can be debated). Do you disagree with our logic?

Eric Cartman - I agree with much in your calculation, except for the deduction. I think most people in NYC itemize for federal because they pay so damn much in state and local taxes, which are a deduction. I can't say for sure for the type of buyer that would be interested in this apartment, only for myself. 35% is an approximation of "effective" tax benefit, after taking everything into account - again for me, not sure how much it would differ for others.

newbuyer99: You're trying to model liquidity into the numbers. You count down payment opportunity costs because they can be realized monthly (depending on the type of investment). You don't count the appreciation because it can't be realized until you sell. That's a fair way to look at it, but of course its going to bias any comparison towards renting, because you give such a large bonus to liquidity. Nobody, not even the shill'iest of the brokers, claims that buying is more liquid than renting.

Personally, if I invested the down payment, it would sit in dividend-reinvesting Vanguard index funds for years. So liquidity is less of a concern, and I count illiquid appreciation equally to liquid opportunity cost.

eric miscalculated the benefit of the tax deduction by $1,000 per month. In addition, as newbuyer says, you really can't reduce the benefit by the standard deduction because most NYers who would buy at these prices itemize regardless.

steve, here is a building where the rent v. buy numbers look reasonable to purchase, on a monthly out-of-pocket basis. This took about ten seconds to find.

http://www.streeteasy.com/nyc/building/245-east-54-street-new_york

Are mortgage interest expenses deductable on state and city tax returns?

Ok, if you itemize anyway, like I mentioned in my post, on a cash-out basis, you will come out equal.

Now the most contentious items (opportunity cost of capital, transaction costs, and expected growth of your condo) are the only deciding factors - and reasonable people can disagree about it. I, for one, believe that growth over the next 3 - 5 years will be minimal, resulting in my math showing continue to rent.

Also, bear in mind the two other caveats:
1. This one unit might be well priced - look for a rental comp before you buy any unit
2. bear in mind that most coops do not form the best "apples to apples" comparison because they are restricted ownership

good luck

LICComment: I guess it depends what you mean by reasonable. I took the midpoint $3100 rent and the midpoint $599K purchase price, ran it with the same assumptions as I ran for the studio on Lexington (plus adding in $200/month in insurance, as someone suggested), and I am coming up with buying still 20%+ more expensive.

newbuyer - I don't think insurance is $200/month. I think it is closer to $200/year. Regardless, you are getting over $3700 in monthly costs at $599k? How? Assuming an 80% mortgage and given this building's maintenance, I'm am seeing the after-tax monthly cost more at the $3000 range.

"Do you actually think that instead of putting $80k down on an apartment, a person is going to take it, borrow $320k, and then invest it all in long-term investments?"

What?

The opportunity cost is the opportunity cost for what you invest, no matter the source of money.

tech_guy, AMT eats up the local and state tax deductions.

JuiceMan: "steve, please deconstruct housemath.us, tell us why its not credible."

I don't know how you manipulated your figures to get your desired result, JuiceMan, but here's a DIRECT QUOTE from housemath:

"Enter appreciation and return expectations.This is guesswork, but very important. Most of the recent price inflation is due to assumptions of continuing, excessive appreciation. Historically, Real Estate has appreciated about 4.5% annually. The stock market, on the other hand, has returned around 10%."

Well, look at that: housemath says the historical appreciation rates are about exactly what I've said they are.

How do you like that?

Then the add: "But no one is letting you buy stocks with 10% down with a 6.25% 30-year margin loan. See a difference?"

Try to borrow with 10% down today, or at 6.25% on a jumbo loan. Fidelity's margin rates for over $750,000 borrowed is 4%.

And they conveniently forget everything else that goes into owning a home that doesn't go into owning stocks: property tax, maintenance, transaction costs, etc.

The 4% margin rate at Fidelity appears to take effect at $500k. However, there are very limited securities for which it will lend you 4x your account value - basically only Treasuries. Perhaps some would consider that a fair comparison as a conforming mortgage basically has the government guarantee and the expected appreciation on real estate to approximate a 30 year bond yield, currently at 4.57% (although this is non-compounding whereas appreciation on the apartment will). The problem with margin rates is that they are variable and will fluctuate as compared to a fixed rate mortgage; I would venture a guess that Fidelity's rate was a couple of points higher two years ago before the fed slashed rates. Also, the appreciation that you are assuming on investment is not in line with investment in treasuries, it's stocks where you can borrow about 3.3x.

A simplifying assumption you can make in calculation, newbuyer, is to assume you are borrowing 100% of the cost. (implicit assumption is that this is your opportunity cost of capital).

My rule of thumb, quick n dirty - is usually -
total monthly "cash in trash" cost = ( house_price * 4.5% ) + maintenance + tax

I only consider condos (so no question of tax-deductable maintenance)

If this is lower than rent, then it's valuable to take it seriously. Ofcourse, there are other costs - most notably the transaction costs, etc.

Also, LIC: I am not talking about insuring stuff that is IN your apartment - I am talking about insuring your apartment itself. It's way more than $200 per month.