Over the past year, perhaps even longer, we’ve had several buyers looking for 1-bedroom condos in the $700-900K price range end up renting instead of buying. Why? Why not might be the better question in a market like this in which buyers are looking for fabulous deals and sellers are clinging to ask prices they’ll never fetch for their units. Its the perennial problem between buyers and sellers and finding middle-ground can be tough during volatile markets. The answer for some buyers might be to rent an apartment and watch the market for the next 1-2 years. We had a client go through this process a year ago and is now having better success with his negotiating than he did last year. In the meanwhile, he tells us, his stock and bond portfolio recovered some money as well.
Because there’s no definite answer as to when real estate prices in New York City will stabalize and eventually start climbing again, its quite difficult to determine whether buying or renting will be the better move. But one thing is for sure: renting helps people avoid many of the major financial risks associated with buying. When you rent, you know exactly how much money you will be spending, and for how long. For example, a one-bedroom for $3,500/month will cost the renter $42,000 over that 12-month period, plus small added expenses such as cable, electric, etc. And with the rental market softening, $3,500/month will rent you the same 1-bedroom condo which would sell in that popular $700-900K range. Let’s look at some risks to the buyer:
- The buyer has to pay closing costs. For new developments this can include steep transfer fees. Total closing costs often approach 5% of the sale price, or $40,000 for an $800,000 condo.
- In this economy, you’re looking at 20% down at a minimum in most cases. On the same $800,000 example, that’s $160,000 down. When you factor in closing costs, you must lay out $200,000 up front to move in. That same $200,000 invested at 5% would generate about $10,000 per year.
- Exact move-in dates are often hard to determine, especially with new developments that need to obtain approval from the city to begin closings. This can delay you for a year, or in some cases more as we’ve learned about from many buyers in many condos around NYC.
- A mortgage, at a competitive interest rate of 6%, would cost about $4,000 per month. Factor in your taxes, maintenance, etc, you’re probably looking at $5,000+ per month to carry your new apartment.
- The amortization on 30-year mortgages is awful for buyers–of that $4,000 payment only about $500 pays down principal on your apartment. The result? After 12 months you’ve paid off about $6,000 on your apartment and paid the bank a hefty $42,000. Coincidence or not, that’s the same amount of money it would have cost you to rent that 1-bedroom all year.
- But your principal is growing, right? Not last year, not this year, maybe not next year… how long do you plan on holding the place? Betting on real estate appreciating any more than 3-4% per year for the next few years would be irresponsible.
So, like I said above, renting takes all of the bulleted headaches above and gets rid of them. I stick to the opinion that if you’re looking to stay put in the same apartment for 5-10 years (preferrably closer to 10) then the math will probably come out in your favor. Any less than that and its a true gamble which deserves careful thought.
Making the case for renting even sweeter are the deals out there right now. Back in 2004-2006, rents were expensive and incentives were out there but much harder to come by than they are now. All over New York you’re seeing 2 months free on a 13-month lease, even 3 months free on 14-month leases. If you’re paying $$3,500/month but getting 3 months free your net effective rent is only $2,750! What kind of apartment will that rent you?
Look at Columbus Square to start. This massive rental project on 96th Street between Amsterdam and Columbus is brand new and really beautiful. We’ve had a handful of readers report to us that the amenities package and apartment finishes are tough to beat. With net effective rents coming in at $2,800-$3,000 per month for one-bedrooms this place is a must-see. Add to that the Whole Foods in the building (wow), a modern fitness facility, pool, resident’s lounge, etc, and this place will not only save you money but prop up your lifestyle too! If you’re concerned about living on 96th Street, I can tell you from spending lots of time up there that its really a nice neighborhood.
You’ll also find fantastic incentives at the new Silver Towers. Larry Silverstein went through hell to get this plot of land cleaned up and build these two massive rental towers. I remember because I was living across the street back in 2006 and used to watch them clear out this hole in the ground for years. Unfortunately for him the projected rents are now 30% below where he envisioned them to be. 1-bedrooms with this kind of view and amenities package should be $4,000/month. You can get them for under $3,000 now (net effective).
Just some food for thought. Getting tied up in a nasty real estate purchase can be a valuable but expensive lesson to learn. Always consider all of your options and feel free to e-mail the Condo Blog team for any questions or advice.
James Hathaway
NY Condo Blog
www.ncyondoblog.com
Manhattan House
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The Aldyn
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