Same Apartment for Rent and for Sale

"So you're losing $4,113 a month, even including the tax benefit, because you can't deduct more from your taxes than you make in income."

You would have good points steve if you didn't try and exaggerate the numbers. How many times do we need to go through this? This argument is completely false IF you can afford to buy it. FALSE FALSE FALSE. If you can't afford to buy it guess what? You don't get the tax deduction because you can't buy it. If you can afford it than guess what? You get the tax deduction. WOW! Really difficult stuff steve.

Is it over priced? Yes. Would it be stupid to buy it? Yes. Are your numbers correct. No.

you are dead on with this one. that apartment is a stretch to rent for $6,500. The idea that it could sell for over 11k/month is completely insane.

I agree - place is way overpriced for both rental and sale. It's a 2BR with seemingly low ceilings, a narrow living room, and "garden view" (aka no light) for almost $2 million. I think it should rent for about $5000 if not less.

You can buy a 3 bedroom with higher ceilings and more light and more entertaining space for that amount.

http://realestate.nytimes.com/sales/detail/44-1290621/30-WEST-13TH-STREET-NY-10012

.. And here is a 3 bedroom I've always liked for almost $1.25 million in Central Village. Granted, it has some flaws and isn't perfect, but it's priced well I think even for today's market and I think with better furniture could look nice.

http://realestate.nytimes.com/sales/detail/185-1526142/520-LAGUARDIA-PLACE-1S-NY-10012

Wrong, JuiceMan. Read the argument again. Although the result is the same, I approached this as an investment property: what if you were to buy this apartment to rent at market rates to a third party?

YOU'D LOSE YOUR SHIRT, even with all the tax benefits included.

So, the argument goes, if you wouldn't buy the apartment to rent to a third party because you'd lose your shirt, why would you buy it effectively to rent it to yourself? Which is really all you're doing if you buy someplace to live: capitalizing the rent then amortizing it over the life of the property.

There is NO WAY you can make this make economic sense.

But on to your criticisms:

"If you can afford it than guess what? You get the tax deduction."

First of all, since I approached this as an investment property, you get MORE deductions. If you buy it for yourself to live in you are subject to AMT limitations and the $1 million mortgage interest deduction cap. Therefore, my argument is more beneficial to the owner than yours, and it's still not economical.

"This argument is completely false IF you can afford to buy it."

No it's not. In fact, it only works IF you can afford to buy it, as it's an investment property. Try again.

If you don't accept the well-accepted economic theory of imputed rents, then maybe you're right. Here's the theory:

"Imputed rent is an imputation for the net rental income of owner-occupied housing. It is based on the assumption that owner-occupants are in the rental business and that they are renting the houses in which they live to themselves: As tenants, they pay rent to the landlords (that is, to themselves); as landlords, they collect rent from their tenants (that is, from themselves), they incur expenses, and they may have a profit or a loss from the rental business."

http://www.bea.gov/regional/definitions/nextpage.cfm?key=Imputed%20rent

I don't make this stuff up.

Now then, since it plainly doesn't work as an investment property or under the imputed rent model, let's look at it in a different way.

12x annual rent = $936,000 purchase price.

At that price your mortgage would be $5,235.72, plus $1,700 in tax and common charges (increasing over time) and you get a monthly carrying cost of $6,935. Since in the first year your (nondeductible) principal would be about $500 a month, at this price you would have expenses of about $6,400 versus income of $6,500, that is, you'd break even, including all deductible expenses.

VOILA! The real price! Which is, as so often shown, the same as 40x monthly rent / 30% PITI.

If you don't like these figures, JM, provide your own.

Facts are facts: since you are gaining the same right - a place to live - the method of paying for that right should not materially change the price. Yet here it's 2:1. If you can afford to rent it you should be able to afford to buy it. But to rent it you would need an income of $260,000, to buy it you would need an income of $471,000.

Makes no sense: it's the same product.

WOW! Really difficult stuff JuiceMan.

Of course I'm willing to take a look at how you would make these current prices make sense, or what price you would pick.

You know, JuiceMan, your arguments are really funny now that I think about it.

Let's look at bank fees. They charge a fee to cash a check, either directly or indirectly through minimum deposits. The fees are waived for the wealthy.

People with good credit scores get more and cheaper credit.

People with a lot of money get to fly first class.

The poor have to take out payday loans.

So here you have it - ONLY in Manhattan real estate are the RICH - who can afford to buy these apartments - being forced to pay MORE than the merely WELL-TO-DO who afford to rent the place. Everywhere else in the economy people with more money pay LESS to buy things than people with less money. People pay LESS for risky products (owned real estate) than for safer products (rented real estate), EXCEPT in Manhattan real estate.

Your concept of what property prices should be in Manhattan MAKES NO SENSE under any economic theory or any practical example. Basically, buying Manhattan real estate right now is like taking out a payday loan when you have a bank account with millions in it.

It makes no sense.

I think this place is unusually overpriced, and that there are SOME deals out there right now by sellers who "get it" that actually would cost the same amount to buy as to rent on a monthly basis. There aren't many of these deals but they do exist. So, I would never make the blanket statment "you are in idiot to buy anything," I would just say "be very careful and make sure you can't rent something nicer for cheaper and be aware rents will likely come down too."

... Although I have yet to see any good data on what happens to NY rents in a downturn. I remember them decreasing a hair during 2001-2002, but not very much, they mostly just stayed flat.

"I think this place is unusually overpriced"

Unfortunately, it's the norm in Manhattan right now. Look around. Here's a 2-bedroom 2-bath apartment in Chelsea for $4,500 a month:

http://www.bandlmanagement.com/Search/Apartment/Chelsea/120-W-21st-St/301.htm#

Find one to buy, get back to me on the monthly costs.

FYI property prices fell 20% nominally in Manhattan from 1988 through 1998, 40%-50% real.

Investment property? I missed that. You have always discussed owner occupied real estate which is where your logic fails. My bad.

"It makes no sense."

What doesn't make sense is your inability to grasp that a tax benefit is different depending on how much you earn. There is also no possible scenario where you can do a rent vs. buy comparison on a purchased unit between someone that can afford it and someone that can't. It's mentel masturbation at its highest level.

that would be mental not mentel.

"It's mentel masturbation at its highest level."

First, as I told you, I did this as an investment property which has more tax benefits, but IT MAKES NO DIFFERENCE. Under no scenario do current prices make sense. Here are my thoughts:

1) If you wouldn't buy it to rent out to a third party you shouldn't buy it to rent it to yourself (imputed rent)

2) If you can afford to rent it you should be able to afford to buy it (since it's the same good)

3) In a normal property market the costs and benefits ownership vs. rents (tax benefits, opportunity costs) are already discounted into market prices.

4) It should not cost more for a rich person to buy a riskier good than it would cost a poorer person to enjoy that same good with no risk.

If you don't understand the first three, you should be able to understand the last one, and why it turns your "if you can afford to buy it" theory upside down. You have already agreed that owning is riskier than renting. It is apparent that everywhere else in the economy the rich have cheaper access to goods than the poor. These are both "risk" concepts. You are now arguing that someone with a lower risk profile (a rich person) should pay more to enjoy a riskier good (owning property rather than renting it) than a person with a higher risk profile (a poor person) would pay to enjoy that exact same good with less risk (renting rather than owning).

Do you not see how your argument turns all risk theory upside down, and why it makes no sense?

stevejhx, as per your favorite website, nybits.com, the median rent for a 2BR in Chelsea is $5,695. You went over this very same exercise (also with 99 Jane) months ago - why bring it up again? You self-select apartments that are quite overpriced in terms of purchase price (99 Jane) and quite underpriced in terms of rent (West 21st), relative to the norm for the type and area. While the data you present are somewhat encouraging to the potential patient buyer, these units aren't the norm, and therefore unlikely to be of much use to most buyers/renters here. A FAR more interesting study would involve compiling this kind of analysis over a much larger sample of units. My guess is you'd see it's more expensive to buy, but not 2x. This comes off as fodder for your 50% decline argument, which nearly everyone here is well aware of.

In the same spirit, check this one out. Your pick: buy for $16k per month or rent for $8k.

http://www.streeteasy.com/nyc/sale/320571-condo-15-broad-street-financial-district-new-york

http://www.streeteasy.com/nyc/rental/415491-condo-15-broad-street-financial-district-new-york

"If you wouldn't buy it to rent out to a third party you shouldn't buy it to rent it to yourself (imputed rent)"

Read my first post steve. I agreed that this place makes no sense to own. What I was arguing with was your numbers (based on an assumption this was an owner occupied scenario).

"If you can afford to rent it you should be able to afford to buy it (since it's the same good)"

Why? What if I don't have a down payment?

"In a normal property market the costs and benefits ownership vs. rents (tax benefits, opportunity costs) are already discounted into market prices."

We have always disagreed here steve. The economic papers say this is true and it is for Anniston, AL when your mortgage is $100k. When your mortgage is $1M and your income is high, it changes the game significantly. Like it or not.

"It should not cost more for a rich person to buy a riskier good than it would cost a poorer person to enjoy that same good with no risk."

I agree, but the benefits are different. Ownership makes more sense to me than it does for someone that earns a quarter of what I earn. That's the truth, and that's life.

Just for giggles, here's one that simplifies the tax-deduction argument, since you can only deduct the interest on the first $1MM anyway:

Buy for $8.595MM (reduced from $9.5MM): http://www.streeteasy.com/nyc/sale/229507-condo-219-west-81st-street-upper-west-side-new-york

Rent for $35K (reduced from $38K): http://www.streeteasy.com/nyc/rental/427647-219-west-81st-street-upper-west-side-new-york

I'll let somebody smarter do the math. The crazy part is that I visited friends there last week, and I was shocked. None of the touted amenities are even close to being implemented. The lobby has been demo'd, so you enter through a side door, then cross a battlefield of exposed, crumbling brick, broken glass and smashed sheetrock. Rodents of unusual size gambol in the barricaded courtyard. $35K per month? Sure, I'd take this over a 3BR at 15 CPW. It's bigger!

I can't believe you're still doing this type of comparison.

Why not look at the asking rent for an investor-owned condominium and then check the purchase price at which they closed their purchase of it. You could start with any number of condos that sold out and closed at the peak of the market in 2006/2007 in order to get the highest purchase price possible. Then do a search for available rentals in that building.

Lowery: The apartment I mentioned below sold for a little under $8MM - probably around $8.25MM with closing costs on a purchase from the sponsor.

"My guess is you'd see it's more expensive to buy, but not 2x. This comes off as fodder for your 50% decline argument, which nearly everyone here is well aware of."

Completely agree - I don't think it's really a 2x difference across the board, although I think plenty of examples exist that are 2x. I maintain there are a *few* motivated sellers out there right now who are listing their places at a price that makes it equally cheap to buy as to rent. I also believe there are plenty of sellers right now who may not be listing their places at that level, but who would take such an offer. I think a smart seller would actually - markets typically over-correct, and historically, it has been cheaper to buy than to rent.

I think if somebody *can* find such a deal, has a 10 year plus horizon, and completely loves the place, it may not be the worst thing to buy now, although there is little doubt in my mind there will be a "paper loss" over the next few years or that a nicer place will be available for less in a couple of years. Nonetheless, some people want a permanent place, and if the monthly buying costs considering all factors is less than renting the equivalent place, I think is awfully arrogant to make the blanket statment "it's stupid to buy." Generally, on a purely economic basis, it's probably not the best choice, but there are always good deals/unique circumstances out there.

"Generally, on a purely economic basis, it's probably not the best choice, but there are always good deals/unique circumstances out there."

The more this downturn is playing out, the less I'm convinced it has anything to do whatsoever with rent-v-buy ratios. When the bubble is inflating, no price is too high; when it pops, every price is too high. If people are/were waiting on the sidelines for "equilibrium," they seem to have changed their reasons now for buying vs. renting, i.e., they're more concerned about buying into an immediate paper loss than they are about how their mortgage/tax/maintenance compares to market rents.

"So, tech_guy and others, can you PLEASE tell me why you would rent this apartment to a third party for $6,500 a month, but if you buy it it will cost you twice that much essentially to rent it to yourself."

I wouldn't do either. That apartment is overpriced, especially considering that the mortgage goes above the 1M range.

You shouldn't blindly attribute me to supporting something when you quite clearly have *NO* understanding of my view on the matter. That's incredibly poor taste.

Just because I think there are some bargains in this market where price to rent ratios make sense, doesn't mean I think every property ever offered in Manhattan is correctly priced. In fact, I know (from doing the math) that most (but not all) are overpriced.

You'd have a more interesting debate if you looked for attractively priced properties instead of absurdly priced properties. But then again, we've established time and time again, that you're not at all interested in interesting debate. "Mental masturbation" is a perfect description for you.

"You went over this very same exercise (also with 99 Jane) months ago - why bring it up again?"

Different apartments.

"You self-select apartments that are quite overpriced in terms of purchase price (99 Jane) and quite underpriced in terms of rent (West 21st), relative to the norm for the type and area."

No. They're different sizes. W21st is about 950 square feet, the others are about 1,100 square feet on higher floors.

"A FAR more interesting study would involve compiling this kind of analysis over a much larger sample of units. My guess is you'd see it's more expensive to buy, but not 2x."

There have been many threads that showed the exact same thing - the very same apartment twice to rent as to buy. Not all are, but it is prevalent. And, in fact, other people have posted the links right here.

JuiceMan: "When your mortgage is $1M and your income is high, it changes the game significantly. Like it or not."

Show me the empirical evidence, or explain to me why it's true. Why do you insist that a person with a lower risk profile would have to pay more to assume a greater risk, when ALL economic theory says that people with lower risk profiles would pay less to assume a greater risk?

It makes no sense, so tell me why besides that it's your opinion.

"What if I don't have a down payment?"

Exactly why the risk is greater.

"Ownership makes more sense to me than it does for someone that earns a quarter of what I earn. That's the truth, and that's life."

Why? Because unless you make several million dollars a year, it makes more sense to me to own.

"the benefits are different."

Absolutely.

tech_guy: "You shouldn't blindly attribute me to supporting something when you quite clearly have *NO* understanding of my view on the matter."

So then you accept that, based on the theory of imputed rent, the out-of-pocket expense to buy should be equal to the out-of-pocket expense to rent, since the imputed rent model takes full advantage of the "tax benefit" and ignores the opportunity cost?

Good. I'm glad. Because it is empirically true.

"I think there are some bargains in this market where price to rent ratios make sense"

Based on your acceptance of the theory of imputed rent - that it should not cost you more out-of-pocket to buy than to rent, which is the same as saying that you wouldn't pay more to rent to yourself than it would cost you to rent to a third party - I defy you to find ONE apartment in Manhattan where the rent ratio makes sense.

Just one. Search for the same or virtually the same apartment for sale and for rent, and tell me - using the imputed rent theory which you just accepted - whether the rent ratio makes sense.

Remember - the imputed rent theory allows you to deduct everything except the principal, as if you were renting the apartment to a third party instead of renting it to yourself.

Good luck.

"You went over this very same exercise (also with 99 Jane) months ago - why bring it up again?"

Different apartments.

"You self-select apartments that are quite overpriced in terms of purchase price (99 Jane) and quite underpriced in terms of rent (West 21st), relative to the norm for the type and area."

No. They're different sizes. W21st is about 950 square feet, the others are about 1,100 square feet on higher floors.

"A FAR more interesting study would involve compiling this kind of analysis over a much larger sample of units. My guess is you'd see it's more expensive to buy, but not 2x."

There have been many threads that showed the exact same thing - the very same apartment twice to rent as to buy. Not all are, but it is prevalent. And, in fact, other people have posted the links right here.

JuiceMan: "When your mortgage is $1M and your income is high, it changes the game significantly. Like it or not."

Show me the empirical evidence, or explain to me why it's true. Why do you insist that a person with a lower risk profile would have to pay more to assume a greater risk, when ALL economic theory says that people with lower risk profiles would pay less to assume a greater risk?

It makes no sense, so tell me why besides that it's your opinion.

"What if I don't have a down payment?"

Exactly why the risk is greater.

"Ownership makes more sense to me than it does for someone that earns a quarter of what I earn. That's the truth, and that's life."

Why? Because unless you make several million dollars a year, it makes more sense to me to own.

"the benefits are different."

Absolutely.

tech_guy: "You shouldn't blindly attribute me to supporting something when you quite clearly have *NO* understanding of my view on the matter."

So then you accept that, based on the theory of imputed rent, the out-of-pocket expense to buy should be equal to the out-of-pocket expense to rent, since the imputed rent model takes full advantage of the "tax benefit" and ignores the opportunity cost?

Good. I'm glad. Because it is empirically true.

"I think there are some bargains in this market where price to rent ratios make sense"

Based on your acceptance of the theory of imputed rent - that it should not cost you more out-of-pocket to buy than to rent, which is the same as saying that you wouldn't pay more to rent to yourself than it would cost you to rent to a third party - I defy you to find ONE apartment in Manhattan where the rent ratio makes sense.

Just one. Search for the same or virtually the same apartment for sale and for rent, and tell me - using the imputed rent theory which you just accepted - whether the rent ratio makes sense.

Remember - the imputed rent theory allows you to deduct everything except the principal, as if you were renting the apartment to a third party instead of renting it to yourself.

Good luck.

http://realestate.nytimes.com/sales/detail/185-1526142/520-LAGUARDIA-PLACE-1S-NY-10012

My husband and I are in the maximum tax bracket, and after you put 20% down, you're pretty much right on the maximum mortgage deductible amount. This means I can apply approximately 40% to the roughly 6,000 a month I am paying in interest. So we would be paying $5500 after taxes and including manintence (and assuming none of that maintenence is tax deductible) a month for a 3 bedroom in PS 41 school disrict. It's also an elevator, pre-war building. Sure, this isn't a perfect 3 BR, but where am I going to find one that is perfect for $5,500 a month in a good public school district below 14th street?

And this is assuming we couldn't get it for less than asking ....

Look, I generally think this is a crappy time to buy. But, I think it's ridiculous to say "anybody who buys is an idiot" without knowing what kind of deal they got, etc.

"Different apartments."

That's a bit of a cop-out. This building is over-priced. We get it.

"No. They're different sizes. W21st is about 950 square feet, the others are about 1,100 square feet on higher floors."

950sqft for a 2/2 is pretty small. That explains why it's that much cheaper than the median.

"Not all are, but it is prevalent."

Well that I can more or less agree with. It depends what is meant by "prevalent," but there are apartments out there where it's much closer than 2x. Here's one I pulled fairly quickly: http://www.streeteasy.com/nyc/building/1200-5-avenue-new_york.

kspeak, that last sentence really nails it on the head. People who say "don't buy!" OR "buy buy buy!" blindly have either an absurdly simplistic view of how purchasing a home works, or have a vested interest in the outcome of housing pricing.

> People who say "don't buy!" OR "buy buy buy!" blindly have either an absurdly simplistic view of how
> purchasing a home works, or have a vested interest in the outcome of housing pricing.

Or were absolutely right a few months back...

;-)

"That explains why it's that much cheaper than the median."

Yes. But also it's mid-block with no view and without "luxury" appointments. Just basically a comfortable place to live.

kspeak: "My husband and I are in the maximum tax bracket, and after you put 20% down, you're pretty much right on the maximum mortgage deductible amount."

Well yes if you skew the finances you will get the result you want. You need to apply your effective tax rate not your top marginal tax rate to the mortgage interest deduction.

If you take out a $1 million mortgage at 7.5% you will have monthly payments of $6,992.15. Plus common charges of $1,411. Total cost = $8,403 a month. Less nondeductible principal of about $750 and nondeductible portion of the common charges of $700 a month, your total cost is $6,953 a month.

Could you rent a 3-bedroom apartment in that area for $7,000 a month. Probably, but 3-bedroom rentals are hard to come by.

Maybe here's why:

01/24/2006 Previously listed in StreetEasy by Corcoran for $1,095,000
07/06/2006 Corcoran listing unavailable at $1,095,000
03/10/2008 Listed in StreetEasy by Halstead Property at $1,700,000
04/21/2008 Price decreased to $1,500,000
09/02/2008 Price decreased to $1,495,000
09/17/2008 Price decreased to $1,395,000
10/08/2008 Price decreased to $1,275,000
10/20/2008 Halstead Property listing entered contract

I don't know the sale price this time, but it's certainly close to the 2006 price of $1.1 million.

"have a vested interest in the outcome of housing pricing."

What?

A recent condo project which sold out at the time of the peak was 45 Park

Searching today for available rentals in 45 Park via streeteasy:

$15,000 - 3 beds 3 baths - 2,367 ft²

$8,800 - 2 beds 2 baths - 1,494 ft²

$5,700 - 1 bed 1 baths - 859 ft²

$7,000 - 1 bed 1 baths - 859 ft²

$5,200 - 1 bed 1 baths - 800 ft²

$9,000 - 2 beds 2.5 baths - 1,500 ft²

↓ $9,000 - 2 beds 2 baths - 1,330 ft²

$5,500 - 1 bed 1 baths - 906 ft²

Clicking on at least one of the above listings to go to the broker's web site, one comes to a smaller square foot claim, and we know to be skeptical of those. Floor plans are probably no longer available on the 45 Park Ave web site, since they sold out in 2007. I remember that there were different sizes of 1-brms, and that the least expensive 1-brms with the smaller floor plan were $800,000 and up. I can guess from the photos of the less expensive 1-brms in the above search that the broker is saying "750" or "800" or "850" for the smaller line (really about 650 sq ft), but I can't be sure.

If you know the exact unit number of any of the above rentals, you can get its closed purchase/sale price via ACRIS. Let the mortgage calculations begin, but I'm assuming an investor would have had to put down at least 25% even in 2006/2007, so it's within the realm of possibility that the above listed one-brms are somewhere in the breakeven ballpark not counting vacancy cost. My memory is that most of the one-brms were over a million. Calculate away.

Sorry, steve. To make it easier:

have a vested interest in the outcome of housing pricing = have an agenda

"Or were absolutely right a few months back..."

What? Who was right? My point is, neither was/is/will be.

"Could you rent a 3-bedroom apartment in that area for $7,000 a month. Probably, but 3-bedroom rentals are hard to come by."

That's exactly the point! Also, I know I can get a mortgage for less than 7.5% a month - I have talked to mortgage brokers. Also, I'm not skewing the finances - I am talking about the true effective tax rate. We can debate this all day but already I have shown that there is one example out there where the math might work for somebody. Again, I am NOT saying "buy, buy, buy" - I generally think right now there are few places like this - but to make the blanket statment it never makes sense is misguided.

[tech_guy: "You shouldn't blindly attribute me to supporting something when you quite clearly have *NO* understanding of my view on the matter."

So then you accept that, based on the theory of imputed rent, the out-of-pocket expense to buy should be equal to the out-of-pocket expense to rent, since the imputed rent model takes full advantage of the "tax benefit" and ignores the opportunity cost?]

Wow, can you also deduce the price of tea in China from what you quoted?

> "Or were absolutely right a few months back..."
> What? Who was right? My point is, neither was/is/will be.

It was a joke, but I'd say "don't buy" in 2007 was about as close to a universal truth for RE as one ever gets. Yes, always exceptions, but I can't really imagine any prices that couldn't be beat now... and we're only getting started.

Here's why "renting to yourself" doesn't capture the tax benefit: The rent I get from renting to someone else counts as taxable income. My mortgage is a tax deduction. The 2 count against each other and cancel out. No more mortgage tax deduction.

If I rent to myself, the rent I'm *not* paying does *not* count as income. If yo think that's unfair, write your Congressman. But I still get the mortgage deduction. It counts against my salary income. So its cheaper to "rent to myself" vs. renting to someone else.

"That's exactly the point!"

It's a difficult comparison to make because of the dearth of 3-bedroom apartments, but it seems reasonable from an imputed rent perspective. Likely, then, that other valuation methods would work, and they do: 12x annual rent = approximately $1.1 million, which is close enough for me.

So there's one!

"can you also deduce the price of tea in China from what you quoted?"

So tech_guy, I just told kspeak that the price she paid is about equal to the imputed rent model and the 12x annual rent p/e. I'm still trying to get you to say EXACTLY how you evaluate when an apartment is worth the price.

Probably through the "modulo transaction cost" method.

"Show me the empirical evidence, or explain to me why it's true. Why do you insist that a person with a lower risk profile would have to pay more to assume a greater risk, when ALL economic theory says that people with lower risk profiles would pay less to assume a greater risk?"

I'm not "insisting" that someone pays more, I'm insisting that the benefits of owning are different for different income levels. Stop trying to turn my words around, you know I'm right.

"steve: If you can afford to rent it you should be able to afford to buy it (since it's the same good)

JuiceMan: Why? What if I don't have a down payment?

steve: Exactly why the risk is greater."

Prime example of steve getting off track with his argument. He starts with affordability then answers with risk. You are talking apples and oranges here steve. You said you should be able to afford to buy and rent the same property. You are incorrect because of the down payment. The risk is greater to buy but that has nothing to do with your original statement. Why do you confuse yourself so much?

Try using this sentence once in a while steve, it will make you feel better.

"Fair point JuiceMan, I not only agree with you but I admire your intellect and creativity. You are really groovy"

"Show me the empirical evidence, or explain to me why it's true. Why do you insist that a person with a lower risk profile would have to pay more to assume a greater risk, when ALL economic theory says that people with lower risk profiles would pay less to assume a greater risk?"

I'm not "insisting" that someone pays more, I'm insisting that the benefits of owning are different for different income levels. Stop trying to turn my words around, you know I'm right.

"steve: If you can afford to rent it you should be able to afford to buy it (since it's the same good)

JuiceMan: Why? What if I don't have a down payment?

steve: Exactly why the risk is greater."

Prime example of steve getting off track with his argument. He starts with affordability then answers with risk. You are talking apples and oranges here steve. You said you should be able to afford to buy and rent the same property. You are incorrect because of the down payment. The risk is greater to buy but that has nothing to do with your original statement. Why do you confuse yourself so much?

Try using this sentence once in a while steve, it will make you feel better.

"Fair point JuiceMan, I not only agree with you but I admire your intellect and creativity. You are really groovy.".

"I'm still trying to get you to say EXACTLY how you evaluate when an apartment is worth the price."

housemath.us is the best to capture the details. A very good estimate though is to add up the following:

1) Down payment times 8%, divided by 12 (monthly) to get the opportunity cost

2) Take annual mortgage interest (up to 1M cap), multiply by .6 (~30% federal, ~10% state/city, for .4 deduction) or look up your actual marginal tax rate from your previous year's return.

3) Add in non-deductable maintenance (plus whatever condo-specific fees there are, but I stick to coops because they're more attractively priced. I don't know the details for condos)

4) Add in deductable maintenance times .6

Those 4 are roughly your effective rent. Your cash flow will be lower (down payment cost is opportunity cost, not actual cost) but I care more about effective rent, not cash flow.

"Here's why "renting to yourself" doesn't capture the tax benefit"

Oh tech_guy! Yet one more accepted economic principle that you deny!

Why on earth do you insist that it makes sense to buy an apartment to rent to yourself for twice what you could get for renting it to someone else, including all tax benefit? Now you're denying that I'm including the tax benefit, when I plainly am, because you don't like the result.

Fine. We'll do it your way. Buy a $100,000 apartment with $20,000 down and an $80,000 mortgage. Monthly mortgage payments of $479.64. Assume $100 a month each in tax and interest. Total monthly cost $680.

First year deductible interest of $395 a month, tax of $100 a month = $495 a month. 25% tax bracket (that's generous at these prices) = total tax savings of $123.75 a month. Total net cost = $556 a month.

Take your same $20,000, leverage it to the max gives you a net investment of $60,000. Yield at the historical 11% S&P = $6,600 a year, $550 a month. Assume 7% interest on $40,000 as the cost of funds = $2,800. $6,600 - $2,800 = $3,800 / 12 = $316 a month in income.

If you buy the apartment to live in your net cost under this scenario would be $556 a month after tax. If you rent it for the gross price of $680 a month and invest your down payment as indicated, your monthly payment would be $680 - $316 = $364 a month. Say you pay 20% tax on that $316 a month (qualified dividends), the figure would then be $253. $680 - $253 = $427 a month.

So, if you rent the place for the same price as buying it and leverage the down payment as you would to buy the property, your net after tax cost would be $427 a month. If you buy the place and apply the tax benefit it will cost you $556 a month.

It's still cheaper to rent than to buy.

When you take both sides of the equation into account.

If you lower the S&P to 8% (which I'd agree with) you get net cost about the same.

Are you happy?

tech_guy, where can you get an 8% return after tax on your down payment money? I would put -10% as an opportunity cost and that would be generous.

"housemath.us is the best to capture the details. A very good estimate though is to add up the following:"

oops! I come up with a very modest amount roughly equivalent to renting a comparable apartment to mine. Well, not exactly. This apt has a private terrace, and the rentals one block away that Douglas Elliman advertises don't have terraces. And also not exactly comparable because the rentals one block away that Douglas Elliman advertises cost anywhere from $100 - $400/month more.

Something must be wrong, tech_guy, because this simply can't be.... ;)

OTOH, it would be nigh impossible to rent my apt as a landlord for the exact gross out of pocket costs I would have, in case I lose my job in the next two years and high-tail it for Argentina, Colombia or Czech Republic. That would require substantial renovation and marketing costs, to say nothing of risks, and then my cost basis would have to factor.

Either way, I think stevehjx, while he has many admirable qualities, is not a subtle enough thinker to be a financier or a business executive, because of an obstinacy that gets in the way of changing course, looking at things from a variety of perspectives to try to the most complete picture, etc. I agree with him that condo prices are too high, and that one symptom of that is the apparent gap between market rents and carrying costs.

"I'm insisting that the benefits of owning are different for different income levels. Stop trying to turn my words around, you know I'm right."

No I don't know you're right. You're saying that the most capable people in the world - those who make a lot of money - are making the most irrational decisions. That makes no sense to me, and it is not borne out by any historical real estate data in Manhattan or elsewhere. That is why property prices are falling.

"You said you should be able to afford to buy and rent the same property. You are incorrect because of the down payment."

I've never denied the down payment is a barrier to purchasing. But the fact that you have to put down so much money is one of the risks involved in owning real estate. Is that too complicated for you to understand?

"He starts with affordability then answers with risk."

No. I have been discussing both at the same time.

How about this: "I don't agree with you because nothing you say is borne out by any data or research, but I admire your tenacity and creativity. You ARE really groovy"

tech_guy: "housemath.us is the best to capture the details."

How do you know that when they don't publish their algorithm?

A very good estimate though is to add up the following:

1) Down payment times 8%, divided by 12 (monthly) to get the opportunity cost

Okay. $20,000 down payment. x 8% = $1,600 / 12 = $133.

You're calling this my "opportunity cost." Ok.

2) Take annual mortgage interest (up to 1M cap)

Ok. $4,773.28.

multiply by .6 (~30% federal, ~10% state/city, for .4 deduction) or look up your actual marginal tax rate from your previous year's return.

Ok. $2,864.

I assume we need to divide this by 12 = $239.

3) Add in non-deductable maintenance (plus whatever condo-specific fees there are, but I stick to coops because they're more attractively priced. I don't know the details for condos)

Ok. $50 a month.

4) Add in deductable maintenance times .6

Ok. $150 * .6 = $90.

You want me to add all of these together?

Ok.

$133 opportunity cost (we'll get back to this as #1)
$239 mortgage interest (we'll get back to this as #2)
$50 nondeductible maintenance expenses (we'll get back to this as #3)
$90 deductible maintenance (we'll get back to this as #4)

Total = $512.

Now what am I supposed to do? Because by your stupid way of doing this, I have a total mortgage expense of $479.64 + $200 in tax and insurance = $680, less (apparently) $512 in "deductions" means it only costs me $168 a month to live here.

Not.

#1. You don't "add in" the opportunity cost. You subtract it out, and you need to use the risk-adjusted rate.

#2. Mortgage interest (and all other deductions) are a) deducted at your average tax rate, not your (highest) marginal tax rate, and b) no one in America pays an average tax rate of anywhere near 60%, which is what your model does. A closer rate for Manhattan would be 30%.

#3. WHY are you deducting nondeductible expenses?

#4. Deductible maintenance - see #2 about the rate you picked.

Unless I'm grossly misreading your algorithm, tech_guy, I think you don't know what you're talking about.

"where can you get an 8% return after tax on your down payment money?"

Preferred stock, for one. Would you like a quote?

"I think stevehjx, while he has many admirable qualities, is not a subtle enough thinker to be a financier or a business executive, because of an obstinacy that gets in the way of changing course."

I change course all the time, and my thinking is quite subtle because I've analyzed this from myriad angles. If someone can show me one accepted theory that would support home prices at these levels, I'll entertain them. But when faced with the nonsense tech_guy just published....

Actually, you can get MUNIS at 5% now. After tax... well, do your own math.

steve, you must not have understood the "housemath" formula, based on your supposed example of it, but that's my whole point about you, you don't want to understand it, and you ALWAYS resort to calling anyone dumb or stupid if they seem to disagree with you, even when sometimes they aren't disagreeing with you, or not as much as you seem to think they do. But that's not about real estate; that's about being obstinate and argumentative, which is I'm sure you could never be an executive. You simply would not get along with others in an organization and would have to go work on an independent project all by yourself, perhaps at home.

lowery, the only one who used the word "dumb" here is you. I said "stupid" was the "formula" that tech_guy published - I did not call him stupid.

That said, I did not "misunderstand" the housemath formula. I never saw it. "My" formula is based on the theory of imputed rent. If you can show me housemath's formula, I'll look at it. IF it involves subtracting the opportunity cost from the monthly payment, however, it is wrong.

"You simply would not get along with others in an organization and would have to go work on an independent project all by yourself, perhaps at home."

Actually I did quite well in organizations and when I left Price Waterhouse they begged me to stay, but thank you for your concern. Now then, rather than accuse me of (nonexistent) ad hominem attacks while engaging in them yourself, perhaps you could explain the housemath.us algorithm, so a poor old man who doesn't get along well with others?

Wow steve. I'm humbled that you think I'm groovy. Anyway,

"No I don't know you're right. You're saying that the most capable people in the world - those who make a lot of money - are making the most irrational decisions. That makes no sense to me, and it is not borne out by any historical real estate data in Manhattan or elsewhere. That is why property prices are falling."

No. I'm not saying that. What I'm saying (listen carefully now) is that home ownership has different benefits for different income levels. It is possible for two people to spend the same amount on an apartment and have a very different "equilibrium". It is a very simple statement that is 100% correct, one which you will never admit because it destroys your economic white paper theories.

JuiceMan: You said you should be able to afford to buy and rent the same property. You are incorrect because of the down payment.

Steve: I've never denied the down payment is a barrier to purchasing. But the fact that you have to put down so much money is one of the risks involved in owning real estate. Is that too complicated for you to understand?"

Not complicated at all steve, but that wasn't the statement you made was it? I'll copy it again so all can see:

"steve: If you can afford to rent it you should be able to afford to buy it (since it's the same good)

JuiceMan: Why? What if I don't have a down payment?

steve: Exactly why the risk is greater."

Please stop avoiding that you were wrong here steve and chalk this one up to fast typing or something. Your comeback of risk is comical.

"Preferred stock, for one. Would you like a quote?"

No, I think I'll hold off on the investment advice from you steve. I fear the track record is a bit suspect.

"Why on earth do you insist that it makes sense to buy an apartment to rent to yourself for twice what you could get for renting it to someone else, including all tax benefit? Now you're denying that I'm including the tax benefit, when I plainly am, because you don't like the result."

You are including the tax benefit. You're not including the tax liability. I pay tax on rent I collect from someone else. I don't pay tax on the rent I collect from myself (ie: rent I don't have to pay). This is a very simple concept - I don't understand why its so difficult for you.

"#1. You don't "add in" the opportunity cost. You subtract it out, and you need to use the risk-adjusted rate. ... WHY are you deducting nondeductible expenses?"

I add both in to the cost of buying. Shows how much you attempt to understand other people's views - this was very obvious to anyone who bothered reading. You type so much - spend half that time reading, and you might learn a thing or two.

"Mortgage interest (and all other deductions) are a) deducted at your average tax rate, not your (highest) marginal tax rate"

Incorrect. Ask any tax accountant. This is incredibly basic factual information.

"tech_guy, where can you get an 8% return after tax on your down payment money? I would put -10% as an opportunity cost and that would be generous."

8% is the historical (~75 year) return on a 50% stock, 50% bond portfolio. As I can't predict the short term future of the stock market, I use long term history as my guide.

"What I'm saying (listen carefully now) is that home ownership has different benefits for different income levels."

There is no research anywhere to prove that this is true. It is a conjecture of yours. Never in the history of the world (until now) has there been such a disconnect between market rents and purchase prices, not in Manhattan or anywhere. For historical reference look at what happened to Japan's property market after its bubble burst 10 years ago. Look at what's happening to prices in Miami and Las Vegas and San Diego and Los Angeles at ALL price levels. Nothing supports your conjecture except your desire that it be true. It wasn't true in Manhattan before 2003, and it won't be true here again.

"If you can afford to rent it you should be able to afford to buy it (since it's the same good)"

I understand your criticism of what I said and yes it is true that there is an obstacle to buying which is the down payment, where one is required. Criticism accepted, but it doesn't change the fundamental logic of the argument, especially when viewed from the imputed rent perspective, which you have not yet addressed.

"I think I'll hold off on the investment advice"

It wasn't advice. It was merely a reference. To say that the opportunity costs are -10% is quite silly, especially as real estate has already fallen in some places nearly 20%.

talk about diarrhea of the mouth. steve, how many words do you type per minute?

CCdevi is the most negative poster I've ever seen. EVERYONE HIT IGNORE FOR CCDEVI.

yes I am Mr Negative, always trying to bring down all the bright spirits on this board.

"how many words do you type per minute"

As many as I want.

"I pay tax on rent I collect from someone else. I don't pay tax on the rent I collect from myself (ie: rent I don't have to pay). This is a very simple concept - I don't understand why its so difficult for you."

Actually, I do understand it, and in some countries people are taxed on their imputed rents. You are taxed on your imputed rent in New York City property tax. So you do pay tax on your benefit, which is not paid by the tenant. It's called property tax, and it's calculated at the rate of imputed rent, and it's not paid by the tenant.

"This is incredibly basic factual information."

No. You calculate all tax benefits at the average rate of tax. Else you are assigning greatest weight to the last expense, when tax isn't paid that way.

For example, when you pay income tax in January your income is lower so you should withhold a lesser amount, right? Wrong. It's extrapolated to your full year income precisely because all income is taxed at the average rate for the year, which changes the more income you make.

Ask any tax accountant.

Here's an example. 2 tax brackets:

$0 - $100 = 5%
$101 - $200 = 10%.

You make $125. You have $50 in deductions. $25 is in state income tax, $25 is in mortgage interest. What rate do you deduct the mortgage interest at?

Let's see. You'd pay ($100 * .05) + ($25 * .10) = $5 + $2.50 = $7.50 in tax without the deductions. If you deduct the mortgage interest first, then that benefit will be worth $2.50 to you. But if you deduct it second it's only worth half that, or $1.25. So what's it really worth?

The average of the two. $1.875.

"I add both in to the cost of buying."

Why do you add the opportunity cost into the cost of buying, and then subtract it from the cost of owning? Why do you do that with nondeductible expenses, as well?

"Shows how much you attempt to understand other people's views"

It's not that I didn't attempt to understand your "views": I don't understand them, tried to work them out using your numbers, and they made no sense. Perhaps you could do the example with your own numbers and show me how it works. I'll listen.

"you might learn a thing or two"

I'm waiting to.

"There is no research anywhere to prove that this is true. It is a conjecture of yours."

Conjecture? This is an undeniable fact. Answer this steve, why do you think it will be better to own a home once Obama implements his tax hikes on people making over $250k? Where is that in your formulas?

"Criticism accepted, but it doesn't change the fundamental logic of the argument, especially when viewed from the imputed rent perspective, which you have not yet addressed."

I agree with the imputed rent perspective. The cost to buy should be equal to or less than the cost to rent. Where we differ is, I don't agree that equilibrium needs to occur in the first year, but rather over the entire period of homeownership. If at the end of x years, if I have spent $1 less (net of appreciation) by owning rather than renting, than it was a good financial investment. Additionally, my calculation of this equilibrium will be different based upon mortgage rate, tax bracket, etc.
It is quite simple really, I do not support the one size fits all formulas as you seem to.

"This is an undeniable fact."

No it's not.

http://pewsocialtrends.org/charts/?chartid=504&topicid=4

There is no material difference between home ownership among those making from $50,000 to $99,999, and those making over $100,000. There is a greater difference in home ownership by race than there is by income. And judging by the figures, since Hispanics and blacks tend to make less, that would account for why the ownership rate is lower for lower income levels.

Is it economic or social? I have no idea. But your theory is disproved, JuiceMan.

You can read the whole report here:

http://pewsocialtrends.org/pubs/706/middle-class-poll

So now that we've dispelled your nonsense-myth, I'm glad that you agree with the imputed rent perspective, and I agree that equilibrium does not have to be exact if you use it to make a decision on whether to buy as an owner-occupier (though it does as an investment property) because other factors do come into play. What I don't agree with is "If at the end of x years" - if you invest in another asset class, it will accrete in value while your mortgage interest tax benefit amortizes. It must be close in the short-term.

"(net of appreciation)"

Do you mean "(net of depreciation)" in today's environment? It's likely to be severe.

"I do not support the one size fits all formulas as you seem to."

You know that I don't support a "one-size-fits-all" formula. I've looked at it from many perspectives, and none currently makes sense. If one ever did I'd say so, as I did to kspeak, above.

Get real, JuiceMan. Get real.

"Answer this steve, why do you think it will be better to own a home once Obama implements his tax hikes on people making over $250k?"

I never said it would or wouldn't be. I have no idea what Obama plans to do. I voted for him by default. I like Hilary.

"Actually, I do understand it, and in some countries people are taxed on their imputed rents. You are taxed on your imputed rent in New York City property tax."

Now you're double counting. I pay the same property tax whether I rent to myself or I rent to someone else. Yet if I rent to myself, that rent has no additional tax. If I rent to someone else, that rent is taxed as income.

You're really not smart enough to figure this out on your own? I'm tired of hand-holding you through basic analysis.

"No. You calculate all tax benefits at the average rate of tax. Else you are assigning greatest weight to the last expense, when tax isn't paid that way."

Except that tax is paid that way. See below.

"$0 - $100 = 5%
$101 - $200 = 10%.

You make $125. You have $50 in deductions. $25 is in state income tax, $25 is in mortgage interest. What rate do you deduct the mortgage interest at?"

7.5%. But if you only have $25 in total deductions, you deduct that entire $25 at 10%. Realistically, most people buying (myself included) make enough such that even after the deduction, they're still in the 28% bracket (some may be higher, but not me). That means we can deduct everything at 28%.

"Why do you add the opportunity cost into the cost of buying, and then subtract it from the cost of owning? Why do you do that with nondeductible expenses, as well?"

I don't subtract it from the cost of owning.

As to your discussion with JuiceMan: do you *really* not understand how 2 people buying the exact same house, exact same tax deduction, the one paying a higher tax rate will pocket more money from the deduction, compared to the person with the lower tax rate? Again, why do you need to have your hand held through dirt-simple analysis?

"That means we can deduct everything at 28%."

No. It means that your average rate may be close to 28%, but it is NEVER 28%.

"Now you're double counting. I pay the same property tax whether I rent to myself or I rent to someone else. Yet if I rent to myself, that rent has no additional tax. If I rent to someone else, that rent is taxed as income."

No you don't. If you own a single property then the property tax is at one rate, but if you own a building with 4 or more units then it's a different rate. If you rent it to yourself you pay the appropriate rate (commercial or residential) but if you rent it from a third party that third party may or may not be able to cover the tax in the rent.

That said, it's not me who is confused: there are different ways of approaching the analysis, all of which need to be looked at simultaneously. If you use the simple imputed rent model, you would NEVER pay more out-of-pocket for a property than you could get to rent it. You are correct that if you owned it as an investment you would be taxed on the income that rental produced (if any), but it does not diminish the value of the analysis.

Now then, "I'm tired of hand-holding you through basic analysis."

You're starting to sound like LICComment!

Nonetheless, you gave me an example above as to how you would calculate the opportunity cost versus the tax benefit. I gave you an example where they offset each other (which they do). Please hold my hand through it, give me your numbers - not just "add this all up": do it please, so I can see how it works in your mind. It doesn't make sense in mine.

"the one paying a higher tax rate will pocket more money from the deduction, compared to the person with the lower tax rate?"

What does that have to do with anything? Of course I see that, and I also see that if they invest in another asset they will pay less on the gains in that asset. It's a wash.

Just hold my hand, do the math in your "simple case," above, so I can see what you're doing. It's not clear to me.

"that third party may or may not be able to cover the tax in the rent."

Oops!

"you the landlord may or may not be able to cover the tax with the rent."

ccdevi is a 300 sq/ft studio owner

"No. It means that your average rate may be close to 28%, but it is NEVER 28%."

You are 100% wrong. Seriously - look up tax code. You add income, subtract deductions, and after that, figure out your tax bracket. $125 income, $25 deduction is identical to $100 income, $0 deduction.

You're unqualified to make rent vs. buy decisions until you understand the tax benefit.

"Just hold my hand, do the math in your "simple case," above, so I can see what you're doing. It's not clear to me."

You don't understand opportunity costs, you don't understand tax deductions, and when I prove you wrong about property taxes, you go on a stupid tangent about how buildings with 4 or more units are taxed differently than others. If you don't understand the basic building blocks, simple economic principles that others understand, putting them all together in a rent vs. buy analysis is a waste of my time.

tech_guy is LICComment! I knew he went somewhere!

"effective tax rate: Actual income tax paid divided by net taxable income before taxes, expressed as a percentage."

http://www.investorwords.com/1668/effective_tax_rate.html

That's what you use. The actual amount you pay divided by how much taxable income you have. It will approach your marginal rate, but never get there.

I don't understand tax deductions?

"$125 income, $25 deduction is identical to $100 income, $0 deduction."

A $25 deduction = a $0 deduction?

LMAO!

"putting them all together in a rent vs. buy analysis is a waste of my time."

I guess you're trapped. Else you'd do it.

Good night!

"That's what you use. The actual amount you pay divided by how much taxable income you have. It will approach your marginal rate, but never get there."

I know what effective tax rate is. Deductions are applied to your marginal tax rate however.

"Deductions are applied to your marginal tax rate however."

Not really. All of your income is added up and all of your deductions are added up. The sum total of all of your deductions are deducted from all of your income. There are graduated rates (tax brackets), but you can't make an arbitrary decision to deduct mortgage interest at 28%, say, and state income tax at 21%. They all get added together. Every next deduction is, in fact, applied at your marginal rate, but you can't arbitrarily decide to apply one deduction at one rate and another at a different one. Just like you can't apply a lower tax rate in January than you do in December because you'd made less income for the year in January than in December.

That's the problem with your analysis. You can't choose to deduct city tax at one rate, state tax at another, mortgage interest at a third, and margin interest at a fourth, because it will skew the result. You need to take all of your deductions at the rate they average out to be.

Now then, can you do your math?

kspeak: Do you really think 520 LAGUARDIA PLACE 1S is having SOME flaws? It is on the corner to Bleecker Street on the second floor. The noise level there at night is beyond imagination. I used to live on Bleecker Street on the 7th floor (yes, a walk-up); although the BR was to the back you heard the noise til 4 am. Whoever buys this place you will regret it until the bitter end.

I can't argue with you there, pyxis, and I thought about it. But it doesn't take away from the fact that you could rent it for $7,000 a month.

What you described is different from effective tax rate.

How about this exercise: lets say I add up all my income, but ignore every deduction (even the standard deduction). Hypothetically, lets say that puts me in the 28% tax bracket. Now, I add in every deduction I have, including the mortgage deduction. I'm still in the 28% tax bracket. What's my marginal tax bracket for my mortgage deduction?

In fact, you said this: "Not really. All of your income is added up and all of your deductions are added up. The sum total of all of your deductions are deducted from all of your income."

Yet that matches *exactly* what I said earlier, and here was your reaction:

["$125 income, $25 deduction is identical to $100 income, $0 deduction."

A $25 deduction = a $0 deduction?

LMAO!]

"What's my marginal tax bracket for my mortgage deduction?"

You don't have a marginal tax bracket for a specific deduction, because they are all added together. I don't deny that you have a marginal tax bracket, but I do deny that you can choose the order in which you apply your income or your deductions.

It's best explained here:

http://www.moneychimp.com/features/tax_brackets.htm

Federal Tax Brackets

Your tax bracket is the rate you pay on the "last dollar" you earn; but as a percentage of your income, your tax rate is generally less than that...

To take an example, suppose your taxable income (after deductions and exemptions) was exactly $100,000 in 2003 and your status was Married filing separately; then your tax would be calculated like this:

( $ 7,000 - 0 ) x .10 : $ 700
( 28,400 - 7,000 ) x .15 : 3,210
( 57,325 - 28,400 ) x .25 : 7,231
( 87,350 - 57,325 ) x .28 : 8,407
( 100,000 - 87,350 ) x .33 : 4,175
Total: $ 23,723

This puts you in the 33% tax bracket; but as a percentage of your income, your tax is about 23.7%.

It is undeniably true that each next deduction gives you the benefit at the highest marginal rate. But you only get there by applying all the preceding ones, and when they cause you to cross tax brackets (which they do) you can't pick and choose between them.

Here's a simple breakdown of a fictitious place, just so you can see the math. $1M purchase price, coop, 20% down, $1000 maintenance, 50% of which is tax-deductable. 7.5% interest, 30 year fixed. *After* taking the mortgage deduction (and every other deduction too), couple pays 40% marginal tax to federal+state+city. We'll use this as their mortgage deduction tax rate (actual rate may be higher, but can't be lower).

1) Opportunity cost: 200k, 8%, $1333/month gross, 15% interest rate (LTCG), $1133 net.

2) Mortgage interest after tax benefit: $5000/month interest, remove 40% due to deduction, $3000 net.

3) Non-deductible maintenance: $500 net.

4) Deductible maintenance: $500, remove 40% due to deduction, $300 net.

Add up the above 4 numbers: 1133+3000+500+300 = 4933 effective rent. This assumes no appreciation, depreciation, inflation, or amortized transfer costs. This is just a *ballpark* figure to see if a place is reasonable. housemath.us does the above 4 calculations exactly as I do, but they also take into account the other factors (all set-able by the user).

I think this is as close as I can possibly get to having someone as closed minded as steve agree with me.

"There is no material difference between home ownership among those making from $50,000 to $99,999, and those making over $100,000. There is a greater difference in home ownership by race than there is by income."

Clouding the issue again aren't are we steve? Simple question (once again). If I am in the 35% tax bracket, is it more financially beneficial for me to own real estate than someone in a 25% tax bracket? I know you like to use low income and low mortgage examples because that is the only way your formulas work, but how about looking at it from and income and mortgage level for areas such as Manhattan?

"So now that we've dispelled your nonsense-myth,"

Have we now steve? Please tell me again that income doesn't matter to home ownership. It makes me laugh every time you say it.

"Get real, JuiceMan. Get real."

I'm real and you admitted I was groovy as well.

"I never said it would or wouldn't be. I have no idea what Obama plans to do. I voted for him by default. I like Hilary."

Assuming that Obama raises taxes for people that make over $250k, deductions will be more valuable than they are today. This is not a reason to buy, but something to figure into your equilibrium isn't it? Of course it is!

"Clouding the issue again aren't are we steve?"

No. You made a statement. "What I'm saying (listen carefully now) is that home ownership has different benefits for different income levels."

Apparently it doesn't because the rates of ownership are the same.

"If I am in the 35% tax bracket, is it more financially beneficial for me to own real estate than someone in a 25% tax bracket?"

It depends entirely on how much rent you would pay for the same place. You may get a bigger tax benefit (maybe not if you're in AMT), but if you're paying twice as much to own as to rent, you're still losing out.

"Please tell me again that income doesn't matter to home ownership. It makes me laugh every time you say it."

Income doesn't matter to home ownership. Let me repeat:

"There is no material difference between home ownership among those making from $50,000 to $99,999, and those making over $100,000."

http://pewsocialtrends.org/pubs/706/middle-class-poll

So apparently it doesn't matter, since the rates of ownership are the same.

"Assuming that Obama raises taxes for people that make over $250k, deductions will be more valuable than they are today."

Perhaps, unless he gets rid of AMT, or it remains more economical to rent than to buy.

My dear steve, I think you're catching on to the conspiracy. I encourage you to go public with your profound knowledge, instead of dwelling on this forum with its limited audience. Please do the world a favor and go quietly write a book or something... produce a documentary on pbs. I mean what is really point in debating day after day ad nauseum preaching to the same choir? I can't believe you're still doing this. Do you seriously have nothing better to do? I believed you were just providing entertainment as a devil's advocate, if you will, but now I think you need help. Damn, get some help man... please

steve: You're wrong about JuiceMan also. Quoting a poll is dumb because quite obviously, there will be other factors. If you don't see how higher income results in a more advantageous tax benefit, you *still* don't understand tax deductions, and are *still* too unqualified to make rent vs. buy decisions. Reread this entire thread again and again until it clicks, because we gave you everything you need to know. All you have to do is open your mind.

"It depends entirely on how much rent you would pay for the same place. You may get a bigger tax benefit (maybe not if you're in AMT), but if you're paying twice as much to own as to rent, you're still losing out"

I'm not talking about rent. I'm talking about how incomes have an impact on home ownership. This was my point 8 hours ago and it is still my point. Which, as you said here, is correct.

"Income doesn't matter to home ownership. Let me repeat:"

You just admitted incomes do impact home ownership, because of the deduction. Let me repeat. You are incorrect!

"Quoting a poll is dumb because quite obviously, there will be other factors."

It's not a poll. It is a fact of how many people own versus rent at what income levels.

"If you don't see how higher income results in a more advantageous tax benefit"

I have always seen that. It just does not follow that that will cause more people to buy, because according to the data, it hasn't.

"you *still* don't understand tax deductions"

I do. NO ONE gets a 40% tax deduction for anything.

"and are *still* too unqualified to make rent vs. buy decisions"

I think I've proved my point.

"I'm not talking about rent. I'm talking about how incomes have an impact on home ownership. This was my point 8 hours ago and it is still my point. Which, as you said here, is correct."

This thread is about the cost to rent vs. to buy. Incomes have an effect on what deductions you take, but according to the statistics they are irrelevant to the level of home ownership.

I've shown you the statistics. Show me yours where people at higher income levels have a higher level of home ownership. It's just NOT TRUE.

"Income doesn't matter to home ownership. Let me repeat:"

It doesn't matter to the rate of home ownership.

"You just admitted incomes do impact home ownership, because of the deduction. Let me repeat. You are incorrect!"

No. It affects the finances, but it appears, according to the statistics, not to affect home ownership rates. Sorry.

Home ownership rate for incomes above $100,000 = 85%
Home ownership rate for incomes between $50,000 and $99,999 = 82%.

Not much of an effect by income, is there?

tech_guy:

"1) Opportunity cost: 200k, 8%, $1333/month gross, 15% interest rate (LTCG), $1133 net."

Dude, you deduct the opportunity cost from the cost of owning. No one has a 15% interest rate. I don't know what the long-term capital gains rate is.

I'm not going any further. That's just stupid.

Plain stupid.

Stupid.

Stupid.

Stupid.

The opportunity cost is what you would have earned had you invested in something else.

OMH. You are now ignored.

One day making tracks in the Prairie of Prax...

"Dude, you deduct the opportunity cost from the cost of owning."

I did exactly that. Are you really too dense to notice?

"No one has a 15% interest rate. I don't know what the long-term capital gains rate is."

Please tell me you're being sarcastic, because the above line is just TOO funny if you were serious!

"You are now ignored."

Good - I want this to be the last message in the thread, because its a perfect summary of the rest of the thread. I plan to link this each and every time you bring up incorrect rent vs. buy math.

omh = omg.

Err, no, I add the opportunity cost to the cost of owning. Same question: really too dense to notice? I put 4 costs up and added them all together. Really, whats so complicated about that? If you can't even understand that, you're far too dumb for any of this.

tech_guy dude, NOBODY has a 40% tax rate. Period. Can't happen.

What does the 15% capital gains tax rate have to do with the opportunity cost? NOTHING.

Why is opportunity cost added into anything?

Where's the risk premium for owning versus renting?

Where's AMT?

You go right ahead and use housemath.us. And when property prices fall 50% as they will because they have elsewhere in the country and they are far out of line with rents and incomes, come back to me and tell me what housemath.us does for you.

OMG.

It's true - tech_guy is LICComment.

Sussed.

"If you can't even understand that, you're far too dumb for any of this"

I understand it. It just makes no sense. Here's how the Fed says to do it. If you can figure it out, get back to me:

The formula for the annual cost of home ownership, also known in the housing literature as the “imputed rent,” is the sum of six components representing both costs and offsetting benefits (Hendershott and Slemrod, 1983;Poterba, 1984). The first component is the cost of foregone interest that the homeowner could have earned by investing in something other than a house. This one-year cost is calculated as the price of housing times the risk-free interest rate. The second component is the one-year cost of property taxes, calculated as house price times the property tax rate. The third component is actually an offsetting benefit to owning, namely, the tax deductibility of mortgage interest and property taxes for filers who itemize on their federal income taxes. This can be estimated as the effective tax rate on income times the estimated mortgage and property tax payments. The fourth term reflects maintenance costs expressed as a fraction of home value. Finally, the fifth term is the expected capital gain (or loss) during the year, and the sixth term, represents an additional risk premium to compensate homeowners for the higher risk of owning vs. renting. The sum of these six components gives the total annual cost of home ownership.

Equilibrium in the housing market implies that the expected annual cost of owning a house should not exceed the annual cost of renting. If annual ownership costs rise without a commensurate increase in rents, house prices must fall to convince potential home buyers to buy instead of renting. The converse happens if annual ownership costs fall. This naturally correcting process implies a “no arbitrage” condition which states that the one-year rent must equal the sum of the annual costs of owning.

You can find it here:

www.ny.frb.org/research/staff_reports/sr218.pdf

When you use the formula, you will find that any time negative appreciation is forecast, NO ONE will buy.

And you'll also find that the opportunity cost is calculated on the full value of the property (leverage and all) and taxes are calculated at the effective tax rate. Read it.

Weep.

Federal tax at around 160k is 33%. New York State at that income level is about 7%. That's 40% right there. City taxes add on to that further. Yet again you're wrong.

steve, I'm done with you. I know I said that before, but this thread, I *really* thought you'd finally open your mind to obvious and overwhelming evidence against you. This is the best I can do - if you still insist on believing an incorrect theory, that's your own loss.

Bookmark this thread. When you've calmed down and decide to actually learn how this all works, maybe in a few years when the current housing crisis blows over, come back and reread this.

tech_guy, you're LICComment.

Since you're happy making up your own formulas and ignore all the ones proved by economists:

Ignoring comment by tech_guy

Thank you.

...came a north-going Zax and a south-going Zax.

Don't know what the means, W81, but I do know that tech_guy remains as obdurate at his alter-ego.

JuiceMan, were you able to find any empirical evidence that people who make more money have a higher rate of home ownership than people who make less? Since it's entirely untrue according to the statistics, and since it's entirely untrue it seems that the "tax benefit" of owning versus renting doesn't have much of an effect as you move up the economic ladder.

One more JuiceMan theory bites the dust. Like the fall in LIBOR to still-historically high levels would revive the housing market. Also not true.

Though I now know why LICC lives in Long Island City - because he's tech_guy the computer programmer, who can't afford to live in Manhattan.

He's likewise ignored.

steve, I can't believe you are trying your average tax rate argument again. You have been shown to be a complete fool with this argument of yours, yet you keep at it like an insane person. I have proven you wrong, and many people, including me, have run the numbers and explained how you are misreading the Fed report you keep citing for your support, but you keep pushing your disproven argument, probably because of some insecurity complex you have where you can't admit you are wrong. It is the dumbest thing to say that a mortgage deduction benefit should be measured by your average tax rate instead of your marginal rate. The benefit is obviously measured by the marginal rate. If you didn't have the deduction, you would pay taxes on those dollars at your marginal rate. The only caveat is if your deduction takes you down one bracket; but in that instance, using the actual marginal rate is underestimating the benefit. Using the average or effective rate will always incorrectly underestimate the benefit.
fyi, I'm not tech guy, I just haven't logged in all day.

Don't worry LICC, once steve starts to realize that everybody else calculates taxes the same way you and I do, he'll think they're us also. The IRS must also be us, changing tax code from underneath steve's nose... its one giant conspiracy, and everybody's in on it!

Rents go up over time. Factor in a 4-5 percent rental inflation rate over the next 20 years. NYC is at the center of a globalized economy.

Also, NYC has had a price-to-rent multiple of 20 since the days of John Jacob Astor. Look it up. 5% real, same as a muni bond, but with a rental-inflation kicker.

I am assuming a cash purchase, tax benefits are secondary. No short term market timing predictions offered.

OMG! LICC is talking to himself through his alter-ego tech_guy! He's making comments and then answering them himself!

"Don't worry LICC, once steve starts to realize that everybody else calculates taxes the same way you and I do, he'll think they're us also."

LMAO!

The Federal Reserve: "The third component is actually an offsetting benefit to owning, namely, the tax deductibility of mortgage interest and property taxes for filers who itemize on their federal income taxes. This can be estimated as the effective tax rate on income times the estimated mortgage and property tax payments."

"NYC has had a price-to-rent multiple of 20 since the days of John Jacob Astor. Look it up."

Show me where to look it up, H.O. If you use the formula provided by the Fed, you will get 20x. If you use the standard (and simpler) p/e ratio, you will get 12x.

http://money.cnn.com/2007/11/06/real_estate/home_prices.fortune/index.htm

Metro area-----June 2007-----15-year avg.----% Correction
New York........17.8..........11.7..............-34.6

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

Sorry to burst your bubble, and housing's.

And I don't think that John Jacob Astor's peeps kept these data.

Also, rents do go up over time, but never more than incomes + inflation, and rarely 5% per year. Housing prices also fall, sometimes precipitously. I'd rather have a slight increase in rent than major home deflation, which is what we have.

"http://pewsocialtrends.org/charts/?chartid=504&topicid=4

There is no material difference between home ownership among those making from $50,000 to $99,999, and those making over $100,000."

Steve, this is a bit suspect, especially given that respondents self-selected themselves as "middle class," and these incomes don't translate too well to Manhattan middle-class incomes. If you want a broader look at the effects of income on home ownership, it's right there in the same survey:
http://pewsocialtrends.org/pubs/?chartid=517

steve, your misapplication of that Fed paper has been addressed already. The Fed uses effective rates when reviewing entire regions because there is no other practical way. It is an imperfect method they used because it was the easiest way. When reviewing an individual situation, you have to use marginal rates. This is very easy to understand, but you are too dense to admit you are wrong. You have a pattern of not being capable of original thought. You read someone else's analysis and parrot it, but since you don't understand it, you misapply it. I've seen you do this often.

steve's 12x ratio is flawed, as usual with his theories. One major deficiency is that he doesn't take into account the mortgage tax deduction benefit. And when he does try to analyze the deduction benefit, he distorts it because he can't understand an easy concept of the difference between effective and marginal rates.

"JuiceMan, were you able to find any empirical evidence that people who make more money have a higher rate of home ownership than people who make less?"

Don't have as much time today to fart on your fuzzy logic but I do find it funny how you have changed the topic of the conversation to rate of home ownership. I have never made a comment regarding the rate of ownership. Read my posts, I have been discussing how the benefits of home ownership differ based on incomes. You already said I was correct, not sure why you have changed the subject to rate of home ownership (besides the obvious shiny object when I'm wrong strategy).

"this is a bit suspect"

Not really.

"these incomes don't translate too well to Manhattan middle-class incomes"

Incomes in Manhattan are much lower than you would think.

The first component is the cost of foregone interest that the homeowner could have earned by investing in something other than a house. This one-year cost is calculated as the price of housing times the risk-free interest rate. The second component is the one-year cost of property taxes, calculated as house price times the property tax rate. The third component is actually an offsetting benefit to owning, namely, the tax deductibility of mortgage interest and property taxes for filers who itemize on their federal income taxes. This can be estimated as the effective tax rate on income times the estimated mortgage and property tax payments. The fourth term reflects maintenance costs expressed as a fraction of home value. Finally, the fifth term is the expected capital gain (or loss) during the year, and the sixth term, represents an additional risk premium to compensate homeowners for the higher risk of owning vs. renting. The sum of these six components gives the total annual cost of home ownership.

LICC, are you speaking to tech_guy, or are you mad at yourself?

"The Fed uses effective rates when reviewing entire regions because there is no other practical way."

LMAO:

"The first component is the cost of foregone interest that THE HOMEOWNER could have earned by investing in something other than a house."

"The second component is the one-year cost of property taxes, calculated as HOUSE PRICE times the property tax rate."

"The third component is actually an offsetting benefit to owning, namely, the tax deductibility of mortgage interest and property taxes FOR FILERS WHO ITEMIZE on their federal income taxes"

"The fourth term reflects maintenance costs expressed as a fraction of HOME VALUE."

"Finally, the fifth term is the EXPECTED CAPITAL GAIN (or loss) during the year"

"The sixth term, represents an additional risk premium to compensate HOMEOWNERS for the higher risk of owning vs. renting."

I see your point, LICC: the paper's formula CLEARLY discusses these figures for individual homeowners, but the "effective rate" is used for the region.

LMAO.

"I have been discussing how the benefits of home ownership differ based on incomes."

And you used it to prove that that would make it more valuable for the wealthy to own homes. I don't disagree with your premises, just that conclusion, since there is no material difference among homeownership rates between the middle class and the wealth.

Apparently, that "benefit" isn't worth very much.