Own a house versus renting; expenses

[mathjak107]

Here in nyc we are both renters and property owners.  The apartment we live in we rent,we have had an incredible deal since my wife has lived here for 20 years and we are covered under nyc rent stabilization. To buy a place like ours is about 300,000-350,000 for a 2 bedroom co-op plus 800-1,000 a month maintaince. We rent for 1600.00 a month,others not covered by the guidlines pay 2400.00 a month.  We are saving about 10,000 a year by not buying,especially at this point late in the game. Just the interest on the money we would have spent pays our rent ,not counting another 10,000 a year in maintaince we would have to pay.

On the other hand we own 4 spectacular apartments that are in a prestious building over looking central park south.  Its an archetectural landmark called the 200 central park south building,you can view pictures on-line by just typing the address.  .  The 4 remaining tenants are rent stabilized too.  These apartments are valued at between 1.3  and 2.2 million each. The tenents pay around 1700.00 a month ,these should be around 4,000- 5000.00 a month.  We have offered all the tenants 50,000 to 100,000 cash to move. We started with 9 apartments and all but these 4 took the offer.  God bless nyc and rent control laws,even though i benefit too they are rediculous and really hurt the rental market for everyone else driving rents upward because of shortages.

 

[ShokWaveRider]

I can give you all an exact example, I have tracked this over a period of 1 year exactly (August 2005 to August 2006) and have tracked the trends in my (current) area. We sold our home for over 15 years in SoCal in late 2002 to travel for 2 years then, unsure of where to buy, rented in Florida.

Now when you rent you have to be realistic, a lot of us would not buy the place we rent, some of us would, so there is a margin for error on the up side there, (I personally would buy a more expensive place, ergo greater cost, so that does reflect a savings of sorts)

Current Scenario: 3 Bed 3 Bath Condo on The San Sabastian River in St. Augustine, Florida.

Property Costs (I know the owner's costs it is public record) They purchased the place 2 years ago for $177k, It is currently worth $250k, was worth $295k last October 2005 and is still decreasing in value. I would not personally buy this property, it is poorly built, HOA does not do much at all.

OK so Let us say it is worth $250k (There is a $100k mortgage on the property)

Taxes are based on a 1.7% Mil Rate and the home is assessed at $187k last time I looked. No Homestead deduction. So taxes are about $265 per month.
HOA = $250 per month.
Water, Internet, Electricity averages out to $160 per month.
This year the AC went out ($1000), we replaced 2 ceiling fans and a garborator ($250) I did all the maintenance for free with the exception of the AC. I also did all the general wear and tear stuff like filters, toilet failures, replaced vacuum belts etc, but did not charge the owners. The unit is furnished.

Up until now we have paid an all inclusive rent of $800 per month but we will have to pay utilities ($160ish after January 1st 2007) Now I made it very clear that we were exceptional renters and have proved that to them. I think they pay a premium to have us renting versus students etc. The owners did indicate it would probably be empty, or only rented to friends for short periods if we were not here. We go away on vacation and they come to stay, we still pay the rent when we are not here. We are very flexible, reliable and fix everything before it becomes a REAL problem. We are well familiar with responsible home ownership.

FYI Going rents in the area for a similar unit is $900 - $1000 + Utils unfurnished, so we do get a deal, but we earn it.

Today's cost for owner monthly =

Mortgage (guess 4.5%) = $506
Insurance = $20
HOA = $250
Taxes = $265
Utilities = $160
Maintenance = $104

Total = $1305 per Month. - Notice they are out of pocket with us renting. But there are a gazillion rentals in this area available. If you look you can get a 3 bed 2 bath 2 car garage detached for $1000 + Utils. We have no garage.

Our current costs as mentioned are $800 from January 1st they will be $960 + $20 renters insurance per month.

Now in order to do the rent versus buy calculation you have to assume you finance the whole place, remember we have $250k in the bank or wherever earning return of about 5% - 6% let us not talk taxes as it does work it's way out in the wash. The owners can depreciate and write off repairs etc, we have tax credits and lower income so less taxes.

So by my book what this home would cost me per month (and remember I would not buy it, I would buy a home in these parts in the $400k range) is as follows:

Mortgage at 6% for $240k ($10k down) = $1438
Insurance = $20
HOA = $250
Taxes = $265
Utilities = $160
Maintenance = $104
Incidentals that I paid this year = $20

So my Total Out of Pocket Cost If I owned the place would be $2257 per month!

Interest alone on the $240k I have not spent at 6% is $1200 per month.

So I keep renting until it is in my interest to buy. Home prices are going down here in NE Florida there are some great deals. There are also a gazillion homes for sale and not selling.

A typical home I would buy rents for about $1400 - $1800 per month and is valued at about $400k - $500k

$400k invested at 6% gets $2000 per month.

The ONLY and I mean ONLY argument in my books at least why RENTING is FAR better NOW than buying, is because that in general we are in a down RE market.

I will be the first to agree that the rules change very quickly when it reverses. But most of us on this board, for the most part have the luxury to rent until such a time we see the advantage of buying. The most it will cost us/me is a few months rent, as now we are on a 60 day lease (cancel with 60 days notice from both parties). Not bad insurance IMHO for some peace of mind and no yard work.

SWR

 

[mathjak107]

i dont even figure price appreciation in my equation because for most areas except for 2 time periods the appreciation has not been spectaular over all or even good over time. . I always mention the fact that the newsletter i follow, fidelity insight has a growth mix which i have followed since 1987.  100,000 in the mix in 87 is worth over 1,000,000 today. now in 1987 my ex wife and i bought our first home for 165,000. We sold it in 2003 when we divorced for 335,000 or so.   

We could actually have rented a similar home all these years and invested even more in the newsletter.  Today we could buy 2 homes with the difference.

 

[lets-retire]

...or you could have put 35,000 down, invested the remaining 130,000 you paid for it. When you sold it you would have had the 1,300,000+/- from the investment, and 200,000 appreciation from the sale of the house.

 

[mathjak107]

I think you left out all the mortgauge interest,real estate taxes,repairs,maintainice in that figure. I didnt run the numbers but ill bet just the interest from having taken a mortgage instead would have doubled the price of buying the house ,even after subtracting out everything after the standard deductions. Remember even renters get the standard deduction so everything else has to be figured over and above.

If you figure it out the portfilio averaged 13% per year for the time period . Real estate was about 5-6% if i remember.

 

[lets-retire]

Ok so you paid double with interest that makes the sale a wash. You still MADE over a million on the investment. I'm sure you didn't put that much into improvments. Property taxes, maintence, and repairs are also a wash when you rent the a comparable house your landlord has included those bills in your rent payment, just like a mortgage. Of course you do live in New York City where rent controls are in place so the free market can't control things.

 

[mathjak107]

yep.it was the portfolio that made the money.
  The house was basically a wash in that scenerio.

When i origonally did the comparison the rents we figured each year were the actual rents as we were town houses and the house next door was a rental all those years by its owner. So that was taking the rents into consideration we would have paid.


But a house is still great to have for quality of life, or when you retire having fairly fixed living costs that are low if your payed off,the ability to do it your way and add things to the house.

All these theses things are priceless,  i love the area we live in but lets face it as nice as our building is going from a house to a 2 bedroom apartment is culture shock for me.

Thats why we are now looking at different areas and 55+ master communities. Im the least handy guy in the world when it comes to a house so i need everything done for us, but we do want a small house again.

 

[lets-retire]

The point was the purchase and sale of the house was a wash they were roughly equal (actually assuming an 8% interest rate you'd be ahead just short of 10,000). Renting of a house and moving out would have been a total loss. Assuming rent averaged $800 per month that is a total loss of over 150,000.

I know you don't take itemizing into consideration. The way I look at it is, if mortgage interest makes me able to itemize, then everything above the standard deduction is a deduction because of the purchase of the house and needs to be taken into consideration. Every house I have purchased has allowed me to take deductions in excess of the standard deduction by many thousands of dollars. Several times these deductions have put me into a lower tax bracket so the savings is even greater.


This debate between us is really mute. You bought the house as a place to live not an investment. The returns really can't be compared to that of an investment. You would have done several things differently if you actually purchased the place as an investment rather than just a place to live. It sounds like in this particular situation you would have made out for the better by renting.

 

[mathjak107]

agreed!

I think the point was even subtracting out the rent at the end the portfolio would have bought almost 2 homes as i think the portfolio was closer to maybe even 1.2 million ill have to look at the newsletter . The sale of the house would have bought just 1 house.

 

[neo]

Property taxes, maintence, and repairs are also a wash when you rent the a comparable house your landlord has included those bills in your rent payment, just like a mortgage.

Maybe that was true years ago before housing prices started zooming up, and is still true in some areas. But in areas I've lived in or am in now, rents will not cover a typical 80% mortgage + taxes + insurance, at current inflated house prices, not even close. And any maintenance on an older house makes an even bigger gap.

 

[lets-retire]

I think once the banks start tightening the mortgage funds you'll see rents start to creep up. If the banks start to foreclose on too many houses they will have to make it tougher to obtain a mortgage, in order to stay in business. With the high prices of houses and the higher interest rates many people are effectively locked out of a house. Unless the prices of houses comes back into the atmosphere or interest rates plunge again soon, the rents will have no choice but start to go up.

 

[mathjak107]

Even when mortgages were low ,rents were far lower and covering  the expenses of buying is  near impossible in most desireable areas. We have not had a commercial rental building built in nyc in 20 years.

   Not counting the co-ops we own in that prestious building in manhattan the other rental property we have in queens ny took a decade before my tenent actually paid more in rent then i did to own.   
It was only the deppreciation factor making it a wash all those years.I bought  the co-op in 1987 one week before the stock market crashed for 77,000 with 15,000 down plus closing costs. .   For anyone who thinks real estate cant go down the value fell subsequntly to about 57,000 over the next few years.  So here we are 20 years later and i can get about 145-150,000 for it .  About a 5% gain per year on average.   However when the recaptured depriciation is subtracted out if i sold it what a piss poor return. ,i wont even figure the 8,000 in renovations and repairs after the last tenant and the fact it took 3 months of no rent to evict them, it was all hardley worth the effort. id never be an amateur landlord ever again.  Rents finally went from 800.00 a month when i bought it to 1100 a month now. 

if someone was buying it today  the rent is lower than buying it.

 

[lets-retire]

I was going to respond but your post confused me. You said you received a loss from the rents on your co-op and depreciation made everything a wash. Depreciation would increase your loss. I'm confused.

 

[mathjak107]

Depreciation is a plus that adds money back in to your pocket. But  only a temporary plus. The depreciation allowance lets you subtract off your regular income every year that depreciation amount plus any additional rental  losses you may have.  It is a loss that actually puts more income back in your pocket since you are writing off a loss on something that hopefully is appreciating over time and getting a tax write off now.   You take the purchsase price plus all costs and divide it by 27.5 years and each year you write that amount off. . Unfourtunatly all the depreciation you wrote off thru the years gets recaptured and subtracted off your cost basis when sold and that amount is taxed at regular income rates because it was written off at regular income rates even though every thing in gains after that is 15%. Only way to get around the recapture really is to die and keep the property .  The depreciation is erased when your kids inheirit it.

 

[mathjak107]

Plain and simple depreciation is not a true loss since its a theoretical allowance based on your building wearing out. Truth is hopefully your building keeps going up in value .

non the less you can write this fictious loss off yor regular income giving you a nice tax break. For a while anyway,until you sell.

 

[lets-retire]

So as I understand it and you explained it to us, depreciation on real estate is essentially a tax deferred income stream for 27.5 years, until you sell. So you essentially bought a co-op for 15,000 had zero income/loss from it year over year, which was really a tax deferred income, and are complaining that the ROI is only 5% because the property is only worth $145,000? When I work the numbers out, I understand and don't expect you to divulge all the details of your finances to some bozo on the internet, the interest is over 10%.

 

[mathjak107]

Well there were some years that were at a real losses as we had no tenent for a month or so here and there while waiting for board approval ,we had a bad tenent that stiffed us for 3 months,we had 8,000 in repairs and some renovations after they moved out. Overall it wasnt a good deal.About the best thing i can say about it is my son has been living in it the last year  for just the cost of the maintence while going to law school.

Did you deduct roughly 3800.00 in depreciation x almost 20 years that has to have the taxes paid back if i sold at rougly 25% federal 12% state and local?
its probley about 29,000 in taxes

oooouch.

 

[mathjak107]

Heres a little tid bit to remember when depreciatiing a co-op thats a rental:

A co-op is tricky as there are 2 parts to the value of your apartment. The first part is the price you paid ,the 2nd part is your share of the outstanding mortgage that the building has which you pay thru your maintaince payment. The 2 of them together equal your depreciation allowance. In the above example the total of the 2 was about 105,000.00

Another tid bit,,make sure you take the depreciation on your rental because whether you declare the depreciation or not you will have to pay the recapture at the end when you sell ,even if you never actually took it. Yep you will end up paying tax on money you never even got back.