Soon after my wife and I got married, we started to look for a house to buy. Well we live in NYC, so when I say house, I mean a co-op. A house, even a starter house in a decent area would be well north of $500,000. When you buy a co-op, you don’t actually own your apartment. Instead, you own shares of a co-op corporation that owns the building. The larger your apartment, the more shares within the corporation you own. Monthly maintenance fees cover building expenses including heat, hot water, insurance, staff salaries, and real estate taxes. My mother was incredulous when I told her that we were going to rent an apartment for a few years instead of buying a place. She told me what I have heard from many people: renting is flushing money down the drain! Why didn’t I buy a place instead and build equity? This was four years ago.
This issue is coming up again as our family is expanding and we might need a slightly bigger place. Should we rent? Should we buy? I don’t know yet. But, recently, my mother-in-law said that my wife and I have wasted about $80,000 on rent in the last four years.
They say that hindsight is 20/20 so let’s go back into history and see whether we were better off buying a place and whether we indeed wasted $80,000. Back in 2009, my wife and I were looking at different co-ops and we actually made an offer on two of them, but the deal fell through. It was at that point we decided that we would just rent for a few years and try to save up for a house. I’m going to do a very basic and simplistic calculation to see which decision would have been the better one…financially.
In my four years renting, we paid $72,060 in rent (It would be close to $80,000 if you include parking charges, but I would have paid for parking whether I rented or bought the co-op). The co-op that we thought about purchasing would have cost $225,000. After a 20% downpayment of $45,000, the monthly mortgage would come out to be $937.35 based on an interest rate of 4%. The monthly maintenance for that co-op was $720 which comes out to a total monthly payment of $1657.35. In four years we would have paid $79,552.80 in mortgage and maintenance payments.
I want to note that this is really not an apples to apples comparison. The co-op we were looking into purchasing was a 2-bedroom apartment whereas the apartment we rent is a 1-bedroom apartment. Yes if we bought, we’d buy a bigger place as most do. When buying, people generally consider their future need for more room, whereas with renting, you can move easily and get a bigger place when you actually need it. Also, the neighborhood where our apartment is located in is a more desirable area. We would probably not have been able to afford a 2-bedroom co-op in this area.
This is the most significant point in the argument for purchasing a house. In my case, based on the amortization calculator, we would have paid $13,475 towards the principal and $27,773 in interest. The value of the co-ops in that complex has stayed about the same so there has been no appreciation. We would have $13,475 in home equity whereas we saved $7552.80 by renting but have built up no equity. It’s not looking to good for my decision so far.
Renting: $7552 (Money saved by renting: $79,552.80 mortgage and maintenance payments minus $72,060 in rent paid)
This includes attorney fees, bank fees and transfer tax. NYC has one of the highest closing costs but the costs are slightly lower for co-ops when compared to a house. The average closing cost for a co-op that I thought about purchasing is $5,000.
I have neither the time nor patience to go through our last four years of tax returns to see how much we could have saved from the mortgage and real estate tax deductions. I know for a fact that we would have been able to itemize and take advantage of these deductions. Based on an understanding of our tax returns, I’m going to estimate that we would have saved an additional $9000 in taxes by itemizing the above deductions.
So where am I at now?
Buying: $8,475 home equity plus $9000 from tax deductions = $17,475
If we had bought the co-op and used our savings for the downpayment we would have lost the use of that money. We eventually used a portion of our savings to pay down high interest student loan debt and the rest stayed in a high-yield savings account (high-yield sadly meaning 1% to 2%). So by paying down the loans and adding the interest that we would have earned, we would be ahead $3,000.
We would have bought the co-op with the intention of eventually moving to an area which has a better school district. Also, the location of the co-op would not be as convenient for my job, and possible jobs for my wife if she were to return to work in the future. Renting gives us the flexibility to move easily. If we had bought, we would have to put the co-op on the market (subletting co-ops are more difficult than renting out a house). Selling costs are about 6% which results in commission to real estate agents in the amount of $13,500.
Buying: $3,975 (subtracting the commission of $13,500 from the $22,475)
So did we waste $80,000 in rent? No! Were we better off renting? I don’t know! Sorry, you guys read all this but there is no conclusive right or wrong answer. Financially speaking, it seems to be a close call. Appreciation is the X-factor in the equation because with some appreciation, buying may have been a better choice financially. Moreover, we plan on staying in our rental at least another year so it would help the argument for buying. Long term I think buying is a good deal, but in the short term, renting can be a better alternative. Ultimately buying a house is a big commitment. We were newly married and still new in our careers so flexibility was important. Also, buying a house cannot just be based on a financial calculation. While I don’t think we flushed money down the drain by renting, I do see many benefits of buying a place. Hopefully, we will be able to do that in the near future.
Am I missing anything in my equation? How did you decide whether to rent or buy a place?