‘Rent vs Buy’ calculators look at the question the wrong way…
Purchasing a home will likely be one of the biggest financial decisions of your life. While there are a number of ‘rent vs buy’ calculators available, that question frames the decision incorrectly. There is no strict calculation in which buying a home will mathematically pencil out as a net plus to renting in most New York City neighborhoods. Home values and minimum down payment requirements would have to drop considerably (while rent stayed the same), as would long term stock market forecasts, before a strict financial cost / benefit analysis favored purchasing and keeping equity in self-occupied real estate versus renting and investing elsewhere. In the short term, mortgage interest + taxes + common charges (or + maintenance in a coop) will almost always be a higher monthly outlay than rent. In the long term, 8% average, long-term stock market appreciation with an average exit cost of 2% will always out perform 4.5% average, long-term value appreciation for NYC real estate with an average exit cost of 8%. This will hold up even after taking into account the tax benefits of owning.
So why purchase a primary residence?
The decision to purchase versus rent is not a financial decision, it’s a commitment to a certain quality of life, security, and piece of mind. Rent in Manhattan will always go up, an average of 4.5% per year. Once a mortgage is locked in, monthly outlay associated with owning is much more consistent, save the 2-3% per year maintenance and taxes can be expected to rise. This is especially attractive in a lending environment where interest rates are below inflation. Architecturally, rental buildings tend to be converted tenements, short on charm, and limited in layout by lot size, as well as owners’ tendency to maximize return by creating ever smaller apartments. The sort of rambling pre-war layouts, preserved detail, and skyline views we covet are found almost exclusively in coop purchase inventory. If modern, luxury high-rises are more your thing, while there’s plenty of that inventory in the rental market, there is no price point you can rent at that won’t subject you to a large, impersonal rental management company. There is virtually no such thing as a good rental property management company in New York City. Renting in a luxury building over the long term inevitably means subjecting yourself to round-the-clock construction, indefinitely closed amenities, and volatile lease renewal negotiations. Coop and condo boards are typically much more competent and ethical managers of buildings than rental management companies. After all, your board members are fellow owners, and they don’t want to live in a poorly run building or compromise their home values any more than you do. They also don’t want every neighbor they pass in the lobby to be unhappy with their performance!
The most important reason to purchase is so that your home is yours. You can renovate it how you like, your long term occupancy isn’t up for negotiation every year, and every improvement you make isn’t simply an expense, but an investment. Over the long term, your quality of life will be higher, your space will be better suited to your needs, and both your home and your neighborhood will be just that… yours.