2010-03-08 19:01 - Opinion
First off, plenty of people pointed out to me that I neglected to consider the value of the owned home, post mortgage completion. So I'll repeat the table, with an extra line for that. The resale price is based off of Manhattan Market Report 1996-2005 (find the link in that page). But of course, today we should all know that trusting the value of a home to appreciate (or even not depreciate!) can be very risky, so I included a zero-appreciation figure too.
| |
Renting |
Owning |
| Gross Income |
$900,000 |
$900,000 |
| Direct costs |
$186,571 |
$227,544 |
| Deductible costs |
$0 |
$101,214 |
| Tax Costs |
$300,000 |
$266,262 |
| Net Income |
$413,429 |
$304,980 |
| Resale income |
$0 |
$179,000 to $677,432 |
| Net Income, after resale |
$413,429 |
$483,980 to $982,412 |
Yes, everyone, that makes the picture much rosier for ownership. But that's out on the far edges of Brooklyn. What are the figures deep in the heart of the city? Well, I'll have to guess. I did my best selecting 15 representative sales and rentals of approximately the same type, size, quality, etc. But even my best here is rough, information is limited. That gives a median sale and monthly cost of $399,000 and $784 for owning, and a median monthly cost of $2473 for renting. Using the same numbers from my last post for interest and so on, that gives:
| |
Renting |
Owning |
| Gross Income |
$900,000 |
$900,000 |
| Direct costs |
$542,812 |
$533,845 |
| Deductible costs |
$0 |
$226,823 |
| Tax Costs |
$300,000 |
$224,392 |
| Net Income |
$57,188 |
$-85,060 |
| Resale income |
$0 |
$399,000 to $1,510,029 |
| Net Income, after resale |
$57,188 |
$313,940 to $1,452,219 |
Sheesh. Nearly break even, even if you throw away the house when you're done with it. And way better if you sell it, instead. And I know this income amount probably doesn't make as much sense with a two to three times higher home cost, but the specific number doesn't matter too much, what matters is how it goes up and down after considering the costs.
I'm not sure if renting is comparably worse in Manhattan, or if I didn't pick perfectly representative rentals vs. sales. Either way, factoring in the resale price, even if rent cost only half as much, owning might still come out on top.
I guess it's time for me to eat crow.
2010-03-07 08:20 - Opinion
I like, whenever possible, to reveal both good analysis and real data, where
it is often otherwise lacking. Sadly, social pressure is strong enough that I'm
not going to share with you (the few of you that actually read my little blog)
the actual numbers of my annual income. So I'll make up an income of $60,000
and equally easy-to-calculate overall tax rate of exactly one third.
Now to why! I've done some calculations on
rent vs. own
before. But I've recently gotten a bit more serious on the owning idea.
Because I think I finally know enough to have it make sense. I really pay $850
per month for rent right now. One of the really nice things about renting is
that it's really that simple. I pay a fixed amount every month, for the
duration of the lease, and that's it. But the amount goes up with each lease.
Taking
rent stabilized
apartments as an example, rent going up by 6% every two years is a baseline.
Owning, assuming an underlying mortgage, is more complicated. First there's
the mortgage payments, part of which is interest, and then there's property
taxes. The amount of mortgage payment that is interest changes, as the
principal is paid off there is less to charge interest on but the payment
remains constant. So to figure the effect of the interest we have to consider
the whole life of the loan. Property tax also changes over time. I found a
document called
The
Property Tax in New York State (PDF) which seems to say (see Appendix A)
that property tax went up by 62% over the course of 12 years. That's just about
4.1% compounded annually for 12 years. I'll assume a mortgage for 80% of the
value (a common maximum in New York). But how much does the place cost?
I searched online to find ten apartments for sale that seem similar to the
one I'm renting now. I ended up with a median price of $179,000 and monthly
maintenance of $385; about half of the maintenance is (deductible) property
tax. Finally, mortgage
rates of 4.4% are available now.
So there's the numbers I'm working with! Now for the analysis.
Renting costs $850/mo, increasing by 6% every two years. Over the course of
fifteen years, that's a total of $186,571 (for two years each, per month:
$850, $901, $955, $1,012, $1,073, $1,137, $1,206, and for the last year:
$1,278). None of this is deductible.
Owning means a down payment of $35,800 (plus various closing costs, ignored
for convenience). The
mortgage
calculator at bankrate.com tells me that, with $143,200 left of the purchase price to borrow, there will be
$52,669 extra paid in interest over a 15 year loan (deductible). There would
be $97,090 in maintenance over 15 years (monthly each year: $385, $408, $433,
$459, $486, $515, $546, $579, $614, $650, $689, $731, $775, $821), half of
which ($48,544) would be deductible.
So the totals involved, over 15 years:
| |
Renting |
Owning |
| Gross Income |
$900,000 |
$900,000 |
| Direct costs |
$186,571 |
$227,544 |
| Deductible costs |
$0 |
$101,214 |
| Tax Costs |
$300,000 |
$266,262 |
| Net Income |
$413,429 |
$304,980 |
So, there's one more analysis clearly in favor of renting. It costs over
$100k more to own. At least in this neighborhood. And I've ignored a set of
costs involved in buying (closing, lawyers, etc.). I'll have to repeat this
for the costs in Manhattan.
