In defense of renters: Why buying isn't always the right decision
Many of us have it ingrained in our minds that true "adulting" can only be achieved when you actually own your home, and that renting should just be a temporary thing—a brief detour on the way to home ownership. But considering that nearly two-thirds of New Yorkers City residents are renters, the "American Dream" trajectory just doesn't work the same way here as it does elsewhere in the country.
The reason is manifold: Co-ops and condos here are expensive and often out of reach for many New Yorkers, the restrictions in place from co-ops and condo boards turn off and disqualify many buyers; plus there's just a lot more rental housing stock.
Given this, we've decided to ask those in the know—brokers, a financial advisor, and one New Yorker who has owned, rented, and owned again, all in the last four years—to find out more about how the buying-versus-renting conundrum plays out in this city, and how the pros and cons stack up against each other.
[This article was originally published in March 2017.]
While buying has its advantages (and we'll get to those), it's not always exactly the slam dunk you might think. Here's why:
Your money could be working harder elsewhere
People are often shocked to hear about New Yorkers who pay five-digits-and-up rents each month. Why don't they just buy for that money?, they ask. The answer: Buying a property ties up a lot of money. There's the down payment, the closing costs, the mortgage, and maintenance fees. Those who rent and only have to lay out month-to-month payments can instead take that same amount of money and invest it in the stock market, a mutual fund, or a 401K retirement account. "That’s money that’s not making money for you on the market," says Avani Ramnani, a financial advisor with Francis Financial. "Real estate prices in NYC hold up well, but returns may not match up to the stock market," says Ramnani. "Those are considerations you need to take."
And if you're buying a co-op (which is less pricey in most cases), you'll have to show the board you have a certain amount of money available to you in a bank account post-close (for a rainy day, basically). It's called "post-closing liquidity" and most boards will want to see that you have at least two year's worth of monthly costs (both maintenance and mortgage payments) in a bank account after you close.
Maintenance costs are high
Kobi Lahav, managing director of Mdrn. Residential, says he suggests those who are debating whether or not to buy to first do some math on one of the many rent-versus-buy calculators available online (the New York Times has a good one.) And keep in mind that you're not just on the hook for mortgage payments.
"People sometimes are shocked to find out a building's maintenance costs," says Lahav. In a co-op, those include the cost of upkeep for the building and taxes. For condos, the numbers are usually somewhat lower, are called common charges, and don't include taxes. Condo property taxes are paid separately, but many new condos come with tax abatements, or discounts.
"Maintenace costs cost you a lot of money, and the money just goes up in the air. It's not like you see much for it," says Lahav. "People often figure that their mortgage will cost the same as their rent, but they're forgetting about an extra $2,000 or so they may be paying for building maintenance each month."
Ramnani adds that it's important to take a close look at a building's maintenance fees (it's a lawyer's job to do due diligence). "Sometimes there's a retail store in the building, and they've decided not to renew their lease. The building's owners will be on the hook to make up for it and their maintenance will increase as a result. There are just a ton of specifics to keep an eye out for," says Ramnani.
Perks are less common
Lahav points out that many co-op and condo buildings have fewer amenities than rental buildings. "Let's say you're a first-time buyer and you're looking at a one-bedroom in a desirable neighborhood for about $800,000. The building where you're going to find that is likely going to have less perks than a building that's gonna have one-bedrooms for about $4,000 a month to rent." The reason: The housing stock for co-ops, especially, is usually older, and in rentals, landlords try and attract tenants more with shiny extras.
In the current market, too, concessions like a month's free rent are common., he adds. You don't often get extras when buying.
Sometimes the payout isn't what you'd hoped for
Assuming you're buying in a neighborhood that's already popular, you're paying a lot for your apartment to begin with. That lowers your profit margin, and when it's time for you to unload the property, "your apartment won't double in price," says Lahav. (Those days are long gone, at least for many parts of NYC.) Also remember that when you sell, you have to pay a broker, transfer fees in a co-op (in most cases), and, in many instances, a flip tax in a condo. Those can be as high as 2 percent of the purchase price. All told, you can be looking at around $20,000 to $30,000 in fees on an average apartment, says Lahav. You'll also have to pay capital gains taxes on any money you make (which could, all told, cost you about 35 percent of your gains... but there are ways to lessen the pain, too.) "It's not always a slam dunk," he says.
In most cases in New York, you’re not buying real estate to make a huge return, unless you're buying in a neighborhood that's really coming up, says Paul Magyar of Mirador Real Estate. "That idea of a diamond in the rough doesn’t exist in Manhattan anymore. Theoretically, it’s still there in the outer boroughs, and in places like Jersey City, but they're fewer and farther between," he says.
One important thing to look at, says Magyar, is air rights. If there are air rights available around your building, that means that your prized view could become blocked in the coming years, thus lowering the value of your apartment.
You have to make a longer commitment
"In general, people view real estate as a disposable investment; it’s not," says Magyar. "If you’re not going to be in there for at least five years, it’s a bad idea to buy," he says. In order to recoup closing costs, you need to give it that much time.
Plus, Lahav adds that subletting rules can be stringent (especially in co-ops), and there are fees associated with renting your place out, so moving out early and seeing it as an investment is tricky, too.
But even for clients willing to commit to five years in a home, Magyar encourages them to sit down with a broker and with an accountant and do the math. "You can generally rent more for your dollar than you can buy for," he says. "So you need to talk long-term goals," says Magyar. Sometimes, he says, his clients decide to buy their first properties outside the city instead to build equity but spend less, and with fewer restrictions.
Issues of upkeep
In a rental, when something goes wrong, it's usually the super and landlord's responsibility to fix. When you own a co-op, condo, or even a brownstone, every little issue is yours to face head on—both with time and money.
Lahav says that in his own co-op building, there have been assessments when the lobby or roof needed repairs. "That can easily be another $1,000 a month you're on the hook for.... Sometimes, the American Dream can become the American nightmare."
Now, a word from the pros
Of course, you'll be building equity (and being forced to save money), and there are tax benefits to buying a home, namely that you can write off interest payments on your mortgage. But keep in mind that both of those advantages come with caveats. "In the beginning, you're not building as much equity as you think, since you’re still paying off a large mortgage, and paying very little off the principal," says Ramnani.
While the interest portion of your mortgage payment is tax-deductible, "in the beginning years, a much bigger part of your payment goes to interest than principal. Gradually it reduces, and your tax deductions decrease over time."
That said, co-ops and condos can be personalized and renovated to exactly your liking. Plus, "some people like that they can be more selective about the building and the neighbors in a co-op or condo," says Mirador's Magyar. "Renters are more transient."
For Rebecca Chasan—a Brooklynite who, within the last three years, sold a co-op on the Upper East Side, rented another one in Prospect Heights, and bought a townhouse in Crown Heights—the biggest benefit of buying both her first apartment and her current house was locking in the same monthly expenses. "We thought it made more financial sense to buy. Especially in Crown Heights where we are, rents just keep going up. If we'd waited to buy, our rent would have kept increasing, and we would have eventually been priced out of buying too. We've secured our payments to be the same each month."
And "in the long-run, once we pay off the renovation, our monthly mortgage payments will be less than our rent was in Prospect Heights. And if we can make money off a rental unit we have downstairs, it'll be even better." Renting, Chasan says "means that every year you're at the risk of having to move or pay a lot more money if your landlord decides to increase your rent."
The verdict then? "There's no one answer," says Magyar. "You don’t jump into a rash decision one way or another. You need to look at all those components. There’s always gonna be some compromise, so need to make priority list. Is it location? The personal satisfaction of a certain address? Of having your very own place? Make your prioritiy list and stick to it as much as you can."
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