In recent years, renting has become the new thing to do. Sort of a post-modern version of “shabby chic” that was so popular in the 80s that I remember in high school and college. Since the beginning of the recession in 2008, rents have been low which has been a wonderful gift to former home owners who had sold their homes by doing the unthinkable….bringing money to the closing table. They needed a break – and ironically, just about the only break this terrible recession gave anyone was in the form cheap rent.
But all good things come to an end. Over the past two months or so, I have been getting rather harried calls from tenants either looking to buy or asking about affordable rentals. I don’t do all that much in the rental market, but I have a good feel for the prices – so I would fire up the MLS – pull up the usual suspects – and my eyes would literally pop out of my head. Surely these are typos????? Ahhhhh…..noooooo…..rents have taken a major turn northward and inventory is almost nonexistent. If its been on the market for more than a week- chances are there is a problem – like you need a Hazmat suit to enter safely.
People who have fallen in love with renting won’t want to hear this:
For those newly enamored with renting – I am about to break your heart…..Renting has always been a double-edged sword. Apart from the obvious – that there is no build up in equity and no tax advantage – renting tends to be a roller coaster ride for two major reasons…
Rent increases seldom occur in a vacuum. They are simply a product of supply and demand. If one landlord is raising rents , its because they can, which means that this is probably happening across the board. So finding anything comparable in the immediate area will probably mean an automatic downgrade in living standards. As a tenant you have three choices: live with the higher rates, stay local and move into less desirable digs or move to another location with all that that implies…including losing your community, changing your commute and if you have children, dislocating them from their school.
The weak economy had created something of a sweet spot for tenants. Many had become complacent – rentals were plentiful and relatively cheap – why roll the dice on a precarious housing market? However, just like the housing boom was bound to come to an end – the days of easy rentals are now numbered and tenants are being reminded as to why in past years – people made a conscious choice to buy.
Why buy when you can rent?
One of the reasons people bought condos and coops in the past was because they understood that as long as they are renting – the residence you reside in will never truly be your “home” because as a renter – you can not call your own shots. You are not even in control of whether you will stay or leave. A tenant may love his rental, but his or her ability to stay there is at the pleasure of the landlord.
Another reason is that purchasing – even at an inflated “bubble price” did one thing – it created a home owner who was finally free of the price gyrations of the rental market. Purchasing stabilizes costs because your mortgage is fixed – and generally comprises over 50 % of your overall costs. In the case of condos and coops the rest of the fees comprise taxes and maintenance. Maintenance fees do increase over time, but they tend to reflect inflation and the same can be said for property taxes. In a bad year taxes and and maintenance might jump about 6% – but that comprises about half your outlay – so your overall increase is a modest 3%. Rental markets are another animal altogether. Recently, rents have jumped over 10% in less than a year in a couple of popular condo complexes. Yet a cooperative that I have listed has had a more modest 3.7% increase in maintenance fees. Now assuming that the owner holds an 80% mortgage and they buy at list price – that would translate into 1.7% increase in their cost of living. Obviously ownership has its benefits.
The question should really be – Why rent when you can buy?
Granted, it is hard to get a loan. But if you have great credit and can afford a downpayment you are now better off buying. The cost of living is less. I currently have a cooperative on the market for $230,000. Assuming you pay full price and that you have a down payment of 20% and thanks to near record low interest rates – your gross outlay is $1711 a month. The average price for a comparable rental was $1875 a month. That’s a savings of $164 a month – or $1968 a YEAR. You can’t beat that – well – yes you can if you take into consideration the tax advantages.
So what do the tax deductions do?
Once you pay the rent – it is gone. You are’t paying down a loan, you are not getting any tax benefits. So here is a rough idea of the net outlay after factoring in tax savings. Once again I’m assuming a fixed rate loan and a low interest rate. Assuming that the buyer is in the 28% marginal rate – the net outlay would be about $1411 a month. Now – I’m not an accountant and I don’t even play one on TV – so this is rough and dirty. But it amounts to an overall savings. That’s a savings of $464 a month or $5568 a year. Now you are talking real money.
But we aren’t finished yet…
The portion of you loan that is not interest is amortized – or a payment of principle. This amounts to over $3200 the first year of equity that you give to yourself.
The cooperative unit used in this example is….
21 North Chatsworth Ave. #3C in the Larchmont PO. If you want to see the breakdown of the numbers and for more information on this unit – CLICK HERE. It’s a walk to all – steps from town and train doorman building. Check it out. There is an open house this Sunday – August 7 – from 1-4 PM.
So here is the GOOD NEWS – if you have good credit and a downpayment buying a cooperative or condo is an ideal way to stabilize your outlay in a rental market that seems to be headed northwards at a very rapid clip.
©2011 – Ruthmarie G. Hicks – https://thewestchesterview.com – All rights reserved.
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