The Rent vs Buy Argument

With my whole mold dilemma going on it has me revisiting the idea of buying.

I’ve been in the real estate business for about seven years now doing mainly rentals and I’ve always thought that buying and renting are personal decisions. For the most part they are, but with everything happening in my life right now, I’m leaning towards buying.

I’d say it’s also heavily dependent on your financial situation. For some, renting is the only option.

Here Are The Benefits Of Renting.

1)It’s Flexible.

I like the idea of having a lease that’s short term. Either 6 months, 1 year or 2 years, it’s nice to know that you’re not fully committed to a property. I can leave at the end of my lease if I’m unhappy or if it becomes too expensive. You can usually leave mid-lease if you’re able to find a takeover tenant that qualifies. Overall, I believe that the flexibility is great for people who travel for their job, relocate or need something that offers financial flexibility. (Example: if you work on commission and earnings change year to year)

2)Initial Costs Are Low.

Most of the time you can find an apartment without a broker by contacting the property management directly. Websites like Apartments.com, Zillow and Trulia make this possible.

Even if you have to pay a brokers fee, it’s usually no more than 1 months rent. Up front fees include security deposit which could be as low as $500 to 2+ months of rent.

Compare that to your closing costs which are 2%-5% of a homes value plus a 20% down payment! Not everyone has that kind of money available.

3) Allows You To Stay Liquid.

And that brings me to my next point, if you’re you’re able to put together a down payment and closing costs, that means you have the financial opportunity to pursue other investments.

Generally it’s said that a home isn’t a good investment. The only value you really get is a roof over your head at a somewhat stable cost. It gains an average of 4-6% value each year depending on your location and that’s with inflation plus the updates you’ll need to put into it. Compare that to the stock market, the Dow Jones historically has gained 8-9% each year. So stock would be a better return but is more volatile than buying a home.

Pitfalls To Renting

1) Neighbors

Generally, you’re not in control of who your neighbors are and they are a lot closer to you when you’re renting. Renters usually are in apartment buildings where neighbors are sharing walls and tight living quarters. If you buy, you can choose the neighborhood and even a property that is more isolated with less risk of a nuisance neighbor.

2) Absentee Landlord.

The owner of a rental is obligated to make the apartment habitable and make reasonable repairs to the apartment. Somehow that doesn’t motivate some management companies to act correctly and do basic work like fixing leaky pipes or sealing drafty windows. I would say most landlords, even those with massive wealth, would rather wait for the attorney letter demanding repairs than make major repairs of their own free will. Repairs tend to cut into their profit and they hate that.

The Benefits To Buying

1) Tax Incentives

The tax incentives for buying a home and getting a mortgage are pretty nice. It’s almost like a rebate on part of your purchase, that’s how good of an incentive it is. You can write off your closing costs, mortgage interest, and any major repairs on your house. My dad once told me his housing tax incentive was equivalent to a $6000 tax credit.

It’s also a great way to shield your income from tax obligations if you’re in a higher tax bracket.

2) Control Over The Property

As I learned with my whole mold situation, I have no control over my environment as a renter. Mold is literally growing underneath my floorboards and I had no idea and no control. When issues arise, the landlord can choose how they want to fix problems and sometimes they go for the quick fix.

By owning a home, you have complete control over the property. And can choose the best and most efficient option to repair. You can do your own repairs, if you’re skilled enough, and you can make changes to the finishes as you wish.

3) Building Equity

Like I mentioned before, buying a home isn’t the best option for an investment when you’re looking for a high return but you’re still building equity and personal wealth by paying off the principle of your mortgage.

There is some flexibility if you want to increase your liquidity for investments or capital ventures but they involve more risk. Once you’ve paid a significant enough percentage of your principal balance, you can apply to refinance and get a personal loan, apply for a line of credit against your home or for a second mortgage. This is a bit more risk, since defaulting could result in foreclosure, but this allows banks to lend money to you at a better and lower interest rate.

Pitfalls To Buying.

1) Fluctuating Costs

The nice thing about renting is that you always know what your rent is going to be. It’s not a surprise and any repairs that need to be done, the landlord is supposed to be able to fix. Housing costs for a renter should remain stable.

Compare that to a home, which depending on the condition you bought it in, may have some major renovation costs down the road.

My parents have owned their house since 1991 and I’ve watched them pour money into it like it was a bottomless pit. Over the 30 years they’ve owned their home they’ve done a bathroom renovation, built a bathroom out, windows replacements, insulation installments, kitchen demolition and renovation, roof work, landscaping each summer, boiler replacement, basement refinishing, installed backyard and front yard pavers, tree removal, central air installation and bought new laundry appliances. This is an exhaustive list.

After all that work, I don’t feel like my parents came out with much of a profit. There were definitely months where they had to go into debt or take loans to make these payments. They bought their home in 1991 for $190K and it’s probably worth $450-500K at this point. But with 30 years of inflation and renovation costs, it’s not a particularly great deal.

2) Less Flexibility

Because the initial costs to buy and sell a home are so high, including closing costs and broker fees, buying a home is impractical if you plan to move within 5 years.

A home is more of a long term investment just to break even with the costs.

If you’re a person that’s constantly relocating or unsure of where you’ll be in 5 years, renting is a better option.

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Overall, for me the choice seems to be leaning towards buying. The uncertainty of renting is starting to wear on me.

Buying is one the biggest financial decisions of your life so take your time and weigh all the options.

Here’s a great buy versus rent calculator. You can find out which is a financially better option. I’ve always used it to consider whether my apartment was a good deal.

Happy real estate shopping! ūüôā

How Do People Afford To Live In NYC?

 

When I graduated high school my biggest desire was to live in the city.  I would google apartment buildings I wanted to live at, look up what it would take for me to live the high life in NYC.  After a little research, I realized that it was a little out of my reach even if I was to be a high flying lawyer or doctor after college.  It was A LOT upfront to live in the city or even to live on your own in the Tri-State area!

Well, I ended up not becoming a high flying lawyer or doctor but rather the lowly rental broker, which I later learned was like a cockroach in the world of real estate sales.  Literally the bottom totem in the hierarchy of professions you could have.  Those stories are for another day but with that experience I learned a lot about how on what it took to live in NYC.  I consider NYC to be the most expensive city to live in within the United States.  Very few cities in the world can truly rival the costs of living in prime Manhattan neighborhoods. Here are the ways I found that people are able to live in NYC:

  1. Rent Stabilized Apartments:
    • There is still a lot of rent stabilized and some rent controlled apartments. These apartments are significantly lower than market rate. There are people paying $2000 and under for 1 and 2 BR apts. those people NEVER LEAVE. They do the best they can with the finishes and condition of the apt, sometimes negotiating with the landlord for some basic upgrades but they NEVER LEAVE. They even treat their stabilized or controlled status as a sort of asset that can be passed down to other relatives who are occupants to the apt. So if you’re paying very low rent, this can definitely help you with cost of living.
    • I had a friend whose family had a rent stabilized apartment in midtown. ¬†I was amazed by it. ¬†It was a full service doorman building with amenities and laundry in building. ¬†His family was paying almost nothing for a 3BR apartment. They had moved into the building when Times Square was still known for it’s seedy nature and risqu√© activities, before Broadway really made a culture out of it. ¬†I was so enamored with the idea of living in a building like that and here he was so lucky to have his parents rent in a stabilized luxury building paying nearly nothing.
    • Getting a rent stabilized apartment is actually really hard. ¬†NYC landlords will only stabilize their properties if there are major tax incentives for it. ¬†Unfortunately, our local governments have been puling back on these incentives for new developments. ¬†Although for the past two years, stabilized apartments have seen a rent freeze, there has also been the removal of certain programs (421A) that have incentivized landlords to build more rent stabilized units. ¬†So chances are if you don’t already have a rent stabilized apartment, you never will.
  2. Roommates
    • Roommate culture is huge in NYC. Many people survive with roommates cutting the rent in half or more depending on how many roommates. There is such a thing as “Flexing” an apartment so to make an extra room out of the living room. A 600sqft 1BR can potentally be “Flexed” into a 600sqft 2BR with no living room A cheap 2300 1BR split between 2 is only $1150 a month each. To qualify for that portion of the rent you only need to make $46K which is really a starting salary for young professionals in NYC.
    • I’m actually not a huge fan of the whole roommate culture. ¬†I feel like it overcrowds apartments, causes tenement conditions and can be a strain on neighborhood resources. ¬†NYC neighborhoods are only so big and when you have 3 occupants for every 500sqft 1BR, thats going to cause more trash, issues with overcrowded schools, and a gentrification of neighborhoods.
    • Think about it, if previously a neighborhood was not able to command a rent of $3000 for a 1BR but suddenly you see an influx of roommates splitting a 1BR three ways to afford the rent this is going to push the overall rental prices up. ¬†Seniors, long-time locals, and families are going to see their rents sky rocket in a market that is inflated with roommates.
  3. Higher Salaries
    • NYC salaries are huge compared to other parts of the country. And that’s mainly because they account for the higher cost of living. You can be starting at $55K and still struggling if your looking to live in prime NYC neighborhoods. People working on Wall Street with big five figure bonuses are really just making upper middle class. Especially families that choose to stay in the city. Include the cost of childcare and you can easily be living hand to mouth.
    • If you’re not in a rent stabilized apartment you’ll need to make at least 80K to afford a rinky-dinky studio in the upper east side with no amenities or laundry in building. ¬†I mean, think about that. ¬†When I started in real estate, I would rent hole in the wall apartments to analysts! ¬†Not saying I’m proud of it, just saying I did it. ¬†Because literally that was the maximum they could afford and qualify for.
  4. Rich Kids from other parts of the country:
    • They say NYC is the playground for the rich. For some reason all the young rich kids like to live in this city. They have parents who are able to co-sign on their apartments. Mind you, a requirement for a consigning on a apt that costs $2500 is $200K in income. The cost upfront for an apartment can easily exceed 10K. I’ve seen parents give their kids 3K monthly stipends! If only their parents could adopt me!

There’s a variety of factors that make it possible for people to afford city living. I would consider prime (south of 96th st) NYC to be difficult for most people to afford. The cost of living for basic things like groceries and dry cleaning tend to be higher in these neighborhoods.

Good thing there are other reasonable nearby neighborhoods in Brooklyn, Queens, Upper Manhattan, and New Jersey where you can still find reasonable rent but with a short commute.