You don’t live in the PRICE, you live in the PAYMENT
If you’ve spoken to me enough about buying, you’ve heard me say the previous phrase many times. Because it is a huge consideration in deciding whether buying is an option, and what you can afford. It’s also something I address in my presentation that’s fast approaching (on Wednesday, yikes!!!).
I’m not going to go crazy talking about psychology, but there is something psychological about seeing the high sticker price on a 600 sq ft one-bedroom and becoming disheartened. I could NEVER buy something like that! I would NEVER pay that off! 30 years is so long to be paying a mortgage!
So I open my presentation talking about rent, because that’s something we can all wrap our heads around. You look at a rental online and envision yourself there for a couple years, doing the yearly cost in your head. OK, $3000/month, so $36,000/yr. Not cheap, but if you’re looking at prices around $700,000 to buy, it seems so much more digestible.
Until, of course, you look at what that turns into after 5, 10, or 15 more years renting. Suddenly that $36,000 turns into hundreds of thousands, and you’re left with nothing but a history of on-time payments (hopefully). If you own, you have something to “show for it” after the same period of time.
Also, something to note, is that NYC real estate does appreciate over time. No one is expecting you to stay in one apartment for 30 years and pay off the entire mortgage, although that does happen. But what is more likely is that after 5-7 years you will sell and upgrade, or move neighborhoods, aiming to get more space or other amenities you couldn’t initially afford. And suddenly you use the earnings from your sale to pay off your mortgage and, lo and behold, are left with MORE than the down payment you put in, potentially more than your down payment PLUS any common charges. So you have been making “waking up money” this whole time, just by living your life. The returns are relatively similar to many financial products, but you can’t LIVE in stock. You won’t look back years later fondly on all the evenings you spent curled up on a couch in your Fidelity portfolio.
Yes, the down payment and closing costs really do add up. And many of us do not have parents who can lend us a helping financial hand. It’s a lot of money to plop down at once, but again, you’re only doing this once! Once you have your foot on the ladder, when you sell you are getting back that initial down payment plus any appreciation plus the actual mortgage you’ve paid off during your tenure in the apt. So if you are in a position where you maybe think you’re spending a little more than you need to and can start saving a bit more, it’s in your best interest to do so. I am going to put together a quick post later about different savings apps that I, a notoriously horrible at saving person, have found extremely valuable.
So let’s do a little math here. $2500, $3500, or $4500 a month are pretty typical NYC rents (I’m so sorry; at least it isn’t SF!). And you can see below how they add up over time.
But let’s look at some apartments currently for sale. Although the “sticker prices” may seem high, the monthly payments (assuming you put 20% down) match up pretty closely to the rents in the previous slide. If you are able to put more down, the monthly costs drop further. If you have amazing credit and can get a better mortgage rate, they go down as well. There are ways to keep monthlies low while purchasing a more expensive apartment; it just involves having more cash saved.
And FYI, because I should be promoting my new listing, here’s another real world example. The owner of the studio I’m selling works in non-profits and did not have a particularly high salary when she bought, but she was very good at saving. She bought her apartment for $300,000, meaning she had to put down $60,000 in cash plus closing costs, then have “two years of post-closing liquidity” in the bank. But she didn’t QUITE have that. It was closer to one year. But because of other positives in her application the board worked with her and she was able to purchase. Now she’s leaving the city and is forced to sell after only 3 years instead of the recommended 5-7, but it is still unlikely she is going to lose ANY money. In fact, she’s more likely to walk away with extra in her pocket.
But the MAIN reason I bring this up now is her monthly payments: $1600. That’s less than any number I use in my rent analyses. The new buyer will owe more like $1800/month because interests rates have gone up a bit and it’s a higher purchase price, therefore a bigger loan amount, but that’s still a very reasonable monthly payment for this market.
I know there are other considerations when buying: you are responsible for things that break, have to pay property taxes that are no longer as-deductible as they once were, what if property values in the area actually go down? But the same barriers to entry that make NYC expensive also help protect you. Your monthly payments to the building go towards fixing anything that may go wrong. You do not need to have separate savings account for when things go wrong. The SALT deduction is capped, but if you’re buying an entry-level apt at a lower price point you won’t be as affected, and what it will look like is different for everyone, so talk to your tax person rather than just feeling defeated. And even in today’s soft market (when compared with the crazy growth that ended in 2017) and in neighborhoods that have become less desirable, we are mostly seeing property values remain flat rather than actually decrease. This is not an instance like what I’ve read so much about, when someone bought and now regrets it because they owe more than the value of the home. But these considerations are also why you should always work with professionals instead of winging it with only StreetEasy as your guide. StreetEasy doesn’t care about whether you’ll be able to resell or what your tax burden will be. Because StreetEasy isn’t an advisor looking to have a lifelong relationship with you.
And I’m not saying it will be easy, or that it is the right thing for 100% of people. I’m simply stepping in to say that if you CAN, and you want to stay in NYC for at least another few years, it’s a great option. And what’s the worst case scenario? You save more money and then can use it for something else BESIDES buying? Seems ok to me!
So go forth, buy something small (LIKE MY NEW CO-OP LISTING!) and stop paying rent. I promise I’m right behind you.