Key advantages to buying vs. renting in NYC include building equity over time, participating in real estate appreciation, obtaining inexpensive leverage through a mortgage, saving money on rent, adding value through renovations and feeling a greater sense of security when it comes to your home.
The advantages of renting vs. buying in NYC include option value and general flexibility, the possibility of lower monthly housing expenses and the ability to invest savings in the stock market instead of using it as a down payment.
Should you rent or buy in NYC? Is it true that renting is cheaper than buying in NYC? How much are buyer closing costs in NYC? In this article, we comprehensively explain the pros and cons of buying vs. renting in NYC.
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Owning real estate in NYC is the easiest and most passive way to build your net worth over time. While it’s true that a monthly rent payment in NYC is often lower than a mortgage payment for the same apartment, this simplistic cash flow analysis ignores the fact that buying allows you to borrow a huge amount of money at a historically low interest rate for decades.
Leverage Builds Wealth
Even if annual stock market returns are higher than real estate appreciation rates in NYC, the total return for real estate would be higher since it’s much easier to borrow against real estate compared to a stock portfolio.
Investing $200k in the stock market may yield a ~6% annualized return on $200k. However, using $200k as a down payment on a $1m apartment in NYC would give you upside on $1m (vs. on $200k).
A mortgage is one of the only ways for an individual to borrow a large amount of money which is not is not ‘marked to market’ against the value of your apartment.
If you borrow money against stocks or another asset class, you’ll have to post additional margin (cash) or pay back some or all of the loan based on the temporary fluctuations of the asset’s value. Being forced to sell an investment at a temporary market low to pay down a loan or to meet a margin call is a nightmare, and this is one of the main reasons why financial investors using leverage often get ‘wiped out.’
A mortgage is not ‘marked to market’ which means that you’ll never have to pay the back early even if the value of the property you purchase temporarily decreases for a few years.
Buying an apartment in NYC with only 20% down gives you 100% long term upside on the full purchase price without any risk of your financing (i.e. leverage) being pulled from under you. As long as you keep paying your mortgage payment, your financing is guaranteed to remain in place.
Buyer closing costs in NYC are high, but so are rental broker fees. Is it really a good idea to pay a 12% to 15% broker fee every few years when you rent a new apartment because you feel that buyer closing costs are too high? Furthermore, are high buyer closing costs a valid excuse to say no to 4% to 6% annual long-term upside on a $1,000,000 condo in Lower Manhattan?
Reduce Your Closing Costs
While buyer closing costs in NYC are between 1.5% to 5% of the purchase price, you only pay them one time compared to a 12% to 15% rental broker fee which you have to pay every year or two.
Furthermore, any cash flow savings you may achieve by renting vs. buying are a rounding error compared to the potential long-term upside on a $1m to 2m condo in NYC with 80% financing.
Profits are made in real estate when you buy, not when you sell. Not all apartments are equally good investments in NYC. Buying instead of renting only makes sense if the apartment you decide to buy has attractive fundamentals.
As a buyer, you should pay close attention to price per square foot, rentability, carrying costs as well as the cost of anticipated future apartment and building repairs. The length of your hold period also impacts how you analyze each of these items.
Price Per Square Foot
Overpaying for an apartment is the easiest way to ensure that you will make no money or even lose money when it comes time to sell.
However, ‘overpaying’ doesn’t imply that engaging in a bidding war is a bad idea. There are many apartments which attract bidding wars that have solid fundamentals and long-term upside. This is partly the reason why these listings are prone to receiving multiple offers in the first place.
Overpaying for a property means that you pay a price per square foot which has limited long-term upside.
For example, let’s say there are two apartments for sale in neighboring buildings in the Lower East Side, Manhattan. The first apartment is approximately 15 years old and is asking $1,500 PPSF. The second apartment is new construction and is asking $2,100 PPSF. They have similar layouts and views/exposure.
Does it make more sense for the price of the new construction condo to increase more than the adjacent apartment over time, or is it more reasonable to expect the pricing ‘basis’ between the two apartments to narrow over time?
We would expect the pricing basis between the two apartments to narrow over time since they have an identical location and the ‘new construction’ of today will simply be ‘existing construction’ in a few years, just like the other apartment.
The only exceptions to this logic would be in the case your lifestyle demands new construction or if you’re an investor and the new construction apartment commands significantly higher rent such that its cap rate is the highest.
Apartment carrying costs, like all other expenses, do one thing over time: go up.
Buying a condo that has above average common charges or a co-op with unusually high monthly maintenance is generally a bad idea unless you are paying much less for the apartment to compensate for the high monthlies.
When looking for apartments, it’s a good idea to have your buyer’s agent investigate the 5 year history of monthly maintenance increases for the building.
If the building has a history of large and consistent annual increases, it suggests that the building either has an unsustainable cost structure or the building is poorly managed.
One key benefit of renting is that you are typically not responsible for the cost of building and apartment repairs. However, the amount of rent charged by your landlord is partly determined by the landlord’s long-term cost of ownership, which include the cost of anticipated repairs and upgrades.
When buying an apartment in NYC, it’s always a good idea to have your buyer’s broker find out when the building’s costliest components were most recently repaired or replaced. Reviewing the building’s financials is also helpful in checking for any income or expense fluctuations, assessing the size of the reserve fund and identifying any planned assessments, pending litigation or other issues.
The most expensive repair bills for apartment buildings in NYC typically relate to elevators, boilers and heating systems, façade work as well as roof and sidewalk/vault repairs. Buying into a building which has recently upgrade some or all of these components will help minimize the risk of receiving a special assessment in the first few years after closing.
If you anticipate moving for work every few years, then renting in NYC is a better financial decision than buying.
The reason for this is that the high buyer and seller closing costs in NYC will take a bite out of your net worth every time you buy and sell. If you are likely to move, buying only makes sense if you can still afford to hold onto your NYC apartment as an investment property once you’ve relocated.
If you anticipate moving but holding onto your NYC apartment and renting it out, then you should consider buying a condo as opposed to a co-op apartment.
Co-op apartments are less expensive than condos, however they are primarily designed for owner-occupancy and most co-ops have subletting restrictions.
Buying an apartment in NYC requires a long-term mindset, both emotionally and financially.
This is because home ownership in NYC, despite the wealth it will generate for you, can come with unanticipated expenses as well as other headaches from time to time.
Let’s say you close on a $700k condo in Park Slope, only to receive a special assessment bill a week later from your condo board for roof repairs in the amount of $10,000.
Expect the Unexpected
Assuming you did everything you could to detect potential future building repair expenses before buying, this bill should have zero impact on your financial well-being or mental stability.
In other words, you need to have a financial position and resilient mindset which would not be affected by this bad news because you are confident that the apartment will increase in value consistently over time.
Here’s another example: you complete a $70,000 renovation of your new apartment only to be told by the condo board that you bought windows that aren’t permitted by the condo board and that they need to be replaced at the cost of $15,000.
Being a homeowner in an apartment building in NYC means that you have to deal with neighbors, some of which are nosy, rude or seemingly on a mission to cost you time, emotion and money. While you should always advocate for your self-interest and defend against injustices, being open to compromise is a requirement for owning an apartment in NYC.
Posted: 6/14/18 | Last Updated: November 29th, 2019
Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided. Hauseit LLC is a Licensed Real Estate Broker, licensed to do business in New York under license number 10991232340. Principal Office: 244 Fifth Avenue, Suite 2950, New York, NY 10001.