nexesn wrote: ↑
Sun May 27, 2018 10:01 pm
I find this to be an interesting thread. I'd like to add New York City into the mix. I know earlier in the thread someone said that buying in NYC made a lot of sense. However, I've come to think it seems a little crazy, at least right now. However, I might look back and think that I was crazy not to try and buy now.
Here are the numbers.
Electric, internet, etc all being similar in price.
Buying a 2 bedroom 2 bath apartment in NYC, in a good school district (Roughly 1100 - 1200 sqf):
20% - 30% required downpayment.
Cost of apartment is 2.2 - 2.8 million (obviously there are more expensive 2 bedrooms)
One time 1% tax on total purchase due to home costing over 1 million (Known as the Millionaires tax in NYC)
Monthly Maintenance (this includes property taxes) $2000 - $3000
-If one decided to sell said apartment, you must pay brokers fee of 6% (3% to buyers agent and 3% to sellers agent). Most places also require that you pay a 1 - 2 percent seller tax to the apartment unit.
Renting a 2 bedroom 2 bath in similar neighborhood in NYC (sqf might be a little less):
$6000 - $8000
Are you still better off buying? Seems to me one is better off renting....
Nose-bleed prices! Let's calculate the yield on owning this condo in NYC.
RENT: $7,000 * 12 = $84,000
OWNING: $2,500 * 12 = $30,000
So $2.5 million buys you an tax free rental savings of $84,000 - $30,000 = $54,000/yr. That's a tax shielded real return of $54,000/$2.5 million = 2.2% with no real price appreciation. With a real price appreciation of .5% or 1%, that becomes 2.7% or 3.2%. (The higher price to rent ratio in cities like New York reflects the market's belief that there will be greater price appreciation than average.)
So putting aside the substantial transaction costs of buying and selling, that's a good return in the current environment. It's less than stocks, and more than bonds. If you're young or risk tolerant and have close to 100% of your portfolio in stocks, there's no reason to switch. But if you have a lot of bonds in your portfolio, consider substituting with home equity -- the risk to reward ratio is better IMO.
Now for those transaction costs: 1% millionaire's tax at buy, 6% commission at sell, and 1.5% sales tax at sell, all add up to a whopping 8.5%. So even if you stay for 8 years, you're losing about 1% per year. That brings down the real yield to 1.2% (no appreciation) to 2.2% (1% appreciation). So with these transaction costs, you would have to either live there for a very long time to amortize the transaction costs, or expect some price appreciation in real terms. Another option is to try to lower the 6% commission costs by using flat fee brokers both when you buy and when you sell. I used a flat fee broker when I bought my current house, and got a substantial rebate. I intend to do the same when I sell as well. It's a substantial reduction in the transaction costs of owning a house.
On a more general note, when we see nose-bleed high real estate prices like $2.5 million for a condo in NYC, it feels really expensive. And yes, it is really expensive compared to what it used to be. But the past is the past. We have to compare it to the other options on the table now. All assets have gotten really expensive. Stocks are much more expensive than they used to be. Bonds are much more expensive than they used to be. Compared to these, a condo in NYC, even when priced at $2.5 million, could be a good deal. If you don't like these slim pickings, the only alternative is to hope that the current low-yield environment will revert to historical norms, park your money in cash or short term bonds, and wait for asset prices to fall. But that's market timing, and I haven't figured out know how to do that successfully. If I had stopped investing when I felt prices became too high and yields became too low, I would have stopped investing several years ago.