Home ownership still pays greater dividends than renting, but too many people who could own are just not in the game. There is an old saying from a NY lottery TV commercial that my younger readers will not remember. The line was simple: “You’ve got to be in it to win it.”
In order to benefit from the advantages of home ownership, you have to own a home. It doesn’t matter if it’s a small co-op. In fact, small is becoming the new large…
Renting has become chic for no good reason. At least no good financial reason. Further, if you are like most of the 99%, and ever aspire to own a luxury condo or a house with a yard, you will need to take baby steps to build up the equity you will need. If you are renting a studio or 1BR apartment, waiting for that magic day that you can afford the luxury property you are dreaming of, you will probably be waiting for the rest of your life.
You need to buy a starter home. You may not fall instantly in love with it. But NOTHING, not even the stock market, builds the equity you need faster or more effectively than owning your own place.
In a previous blog post about the Trump tax reform and its impact on the real estate market, I mentioned that I would take several purchaser “snapshots”. This is the first of that series.
Full disclosure before we begin: I am not an accountant, I don’t even play one on TV. Also, everyone’s taxes are as unique as they are. Always consult an accountant when it comes to details and specifics.
There is no doubt in my mind that the new tax laws are going to have an impact on certain segments of the New York real estate market. This is particularly true when it comes to affordability.
Having said all that, for entry level co-op purchases, these concerns simply don’t exist.
There are very few scenarios at this price-point that would make renting a better financial bet over a purchase. For creating equity and minimizing outlay, buying beats renting every.single.time. There simply is no comparison.
Let’s look at a couple of snapshots…
Ashley works for a marketing company in NYC and makes $70,000 a year. She is trying to decide between renting a small studio for near $1600 a month(close to the median rate) in New Rochelle or purchase a studio cooperative for $75,000. The studio she would buy would need a bit of modernizing, but the outlay including taxes and monthly payment on the 80% financing, would amount to about $900/month.
On that basis alone, why is this even a question? Ashley is saving $700 a month! That’s $8400 a year! Assuming rents remain stable (and they tend to go up, not down) she would save $42,000 over the next five years. That’s more than enough to add a new kitchen with granite countertops and update the bathroom and still have money to sock away. Better still, she would get much of the money she spends on renovations back when she decides to upgrade into something larger.
Home values are increasing close to 4% a year. Let’s say the unit increases a more modest 3% in value over five years. On top of saving over $40,000 on outlay, Ashley would gain about $12,000 in equity annually.
Speaking of equity, as Ashley pays down her mortgage (let’s assume a fixed rate 30 year loan at 4%) she will gain another $6000 in equity over 5 years
So over a five year period, Ashley can gain about $18,000 in equity while saving $42,000 in outlay. That’s $60,000 in benefits that Ashley would lock in if she decided to buy.
If Ashley decided to continue renting, she’d be out that $42,000 and would have built no equity. The only person making money in this scenario is Ashley’s landlord.
This is how equity is built! You have to take baby steps. Too many people won’t consider a purchase unless it has every perk they could possibly want. People get to that level by starting small. They use the money they save and the equity they build, to move up later on.
Tanya and Phil Johnson have been renting a 1 BR apartment for a couple of years. They aren’t anywhere near ready to start a family, but they are concerned that by continuing to rent, they are throwing their money out the window. They have a decent combined income of $120,000 a year, but are chafing at paying $2300 a month for an apartment that gives them no equity.
They have every right to be concerned. Although their rent is only about 23% of the annual income, they are still forking out nearly $28,000 in rent. They decide to consider a cooperative for $150,000. The maintenance is $730/month and they would have to get a loan for $120,000. At 4% interest, that would amount to a payment of roughly $570/month.
Certainly, the savings in outlay alone are worth considering. The cooperative would reduce their monthly payments by $1000 a month or $12,000/year or $60,000 over 5 years.
Payment on an 80% loan over the same five years would result in $11,500 in equity. Further, a moderate 3% rate of growth in home values, would create an additional $24,000 in equity.
Putting this all together, you have an additional $95,000 in equity over 5 years..
Now add back the original $30,000 the Johnson’s used as a down payment and they now have a nest egg of $125,000 to put down on a new home.
Even if their co-op’s value didn’t rise, they would still have about $100,000.
The bottom line is that the type of equity home ownership builds is hard to come by in any other way. To get anywhere close to the benefits of home ownership with that original $30k or $15k, the stock market would have to rise at 25% a year for five years, even then, if you reinvested every penny, you still wouldn’t get there.
Some food for thought as well: Stocks are not an investment you can call home. You STILL have to have a place to live. Why not make it work FOR you instead of against you?
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