OPEN THREAD WEDNESDAY: HEAT WAVE

pool
Photo by Sarah Ackerman.

Okay Upper West Siders, what’s on your minds? One question on our minds: Has anyone been apartment-hunting lately? Are the open houses as packed as they were this spring?

NEWS | 38 comments | permalink
    1. dannyboy says:

      The Heat Wave IS on my mind. I went out to Riverside Park for some exercise earlier, but needed to cut it short due to the heat.

      Went back to my apartment of 35+ years; so no, I haven’t been apartment-hunting lately. I do, however have some thoughts on Real Estate industry practices that I will share, based on others’ Comments.

    2. 9d8b7988045e4953a882 says:

      I have given up hope of ever being able to buy an apartment on the UWS (unless I win the lottery).

      • James says:

        I understand how it feels that you can’t afford to purchase a home on the UWS which you may want to do.

        My family is in the same situation – We have a young family and make good salaries but the fast rising costs of real-estate, the large requirements for down-payments, and the additional requirements placed on buyer’s in co-ops makes home-ownership in this neighborhood out of reach.

        However, perhaps the following anecdote will make you feel better – We were renting in a co-op building from a private owner for the last several years. We paid market rent which was by no means cheap; it was comparable to equivalent rental properties in the neighborhood.

        The owner did not renew our lease this year and we moved to another spot in the neighborhood (suffering another broker’s fee and rent increase). The co-op owner turned around the put the property on the market immediately.

        Based on the owner’s sale price, a 30-year fixed mortgage with 20% down would have cost us 40% more per month in costs than what we were paying for our rent! In addition to the increased carrying costs for a mortgage on this property, the costly down-payment would be locked-up in the property, and the co-op rules would have forced us to set aside another 10% to qualify. The buildings maintenance costs alone are $1800 per month, and the apartment was only 900 square feet!!

        The saying always goes that rent is “throwing your money down the toilet” and when you buy you “build equity in your home.” It’s rare that we get to see an apples to apples comparison of rent vs buy, but my recent scenario is a pretty good one because the exact same apartment was under market-rent and then was sold.

        My family saves heavily in our tax-advantaged accounts (401k, 403b, IRA, Roth IRA, 529 for our kids). The thought of buying a home would mean that we would need to redirect some of the same funds (because we only have so much money!) from these tax-advantaged accounts and save them instead for a down-payment on a home. In doing so we would lose the tax advantages of these accounts, compounding interest, and also drive up our taxable income which will affect our income taxes. Because income is scarce (we don’t have so much money that we can save for retirement and also save for a house), what we would essentially be doing is shifting money meant for retirement into real-estate.

        Secondly, the equity benefits of a mortgage are overstated for folks who do not have the cash to put a large amount down on the home. Mortgages are front-loaded with interest (which is equivalent to rent), and maintenance charges are also another form of “rents.” Lastly, while you can deduct mortgage interest, my family can also take the standard deduction (which equates to about $1050 per month), and mortgage interest deduction is capped if you wind up hitting AMT. So, in other words, tax benefits of a mortgage have both a floor and a ceiling to their benefit (They have no tax-benefit unless you pay more than $1050 in interest per month [which is the same as rent], and they don’t benefit you beyond the point which you’d qualify for AMT).

        Finally, let’s not forget that the actual dollar for dollar monthly cost of the mortgage on an identical apartment is 40% more than what I was paying in rent (and remember, this was market rent that was comp to the neighborhood, it’s not like we were getting a wicked deal).

        While home ownership is stable and great, even in NYC it’s not as great a deal as it seems – A friend of mine was extremely excited that they felt their co-op in the neighborhood could sell for 70% more than they paid 5 years ago. That sounds like a great deal, except when you compare it to, for example, the S&P 500 which went up 90% over the same period. The “return” on their real-estate performed 20% worse than a market-benchmark. In addition, putting money into a diversified mutual fund has carrying and maintenance costs that are infinitesimal compared to the costs of owning and maintaining a home (You don’t need to get the bathroom renovated every 15-years on your mutual funds). And remember, you only earn a return on the equity portion of your home which comes after all those interest charges, maintenance charges, and any other special expenses that come with owning a home.

        Home ownership is great. I hope one day to own a home, and I would be lucky if I could afford it on the UWS. But I’m not going to lose sleep over it based on the current state of real-estate and based on how I can allocate my scarce income at the present time. In fact, if I needed to “own” for some reason I would have priced myself right out of the neighborhood. Because I rent, and take advantage of that 40% ‘discount’ in monthly costs, I can live in this neighborhood. And though I may not be “building equity” in my home as owners are, I’m still saving, and I’m taking advantage of any tax-benefits for which I’m eligible.

        • Lisa says:

          James – I appreciate your thoughtful comments. For the last several years I’ve felt like my husband and I were missing the boat because we haven’t been able to buy, but after reading your analysis, I feel much better about being a renter!

        • 9d8b7988045e4953a882 says:

          James, great post, thanks. The main reason that I’ve been wanting to buy is that my rent has increased a lot and I’d like to make housing more a fixed expense and have some hope of staying in the UWS long term. However, with the taxes and market-rate rent it is almost impossible to save up enough for down payment, closing costs, and co-op liquidity requirements. I too put as much money as possible into 401k to lower my taxable income and have some money for retirement. You make some good points about not wanting to shift your investments from a diversified portfolio into largely real estate.

        • Niko says:

          James, great analysis. When I turned 38 (a while ago) I thought it was time I stop “throwing my money away on rent” and decided to purchase a condo. After 2-3 years I realized that what I was really throwing money away on was the outrageous HOA fees, taxes and maintenance on my purchase. The tax benefits were barely noticeable and at best gave me an extra $300 at the end of the year, which didn’t even put a dent in the amount of money I was paying for things like electricians/plumbers and again, those outrageous HOA fees.
          Thus, after deciding to sell, I’ve been so incredibly relaxed. I’ve been able to not only save more money but to just be able to call the landlord/super to fix an issue I may run into with the place is a luxury now. So unless I get a huge windfall and have an excessive amount of throwaway money (or move to another state), I’m satisfied with renting.

          • James says:

            Thank you both. Decision of renting vs buying is a deeply personal one and one that can be hotly debated. I think many of those online “rent vs Buy” calculators really ignore the true cost of owning a home (the popular Rent vs Buy calculator on the NY Times estimates that you spend just 1% yearly on home maintenance and renovaction; this is very low imo).

            Many of the discussions about renting vs buying ignore the important concept of scarcity – That most of us do not make enough money where we can satisfy all our financial objectives and still have money left over – We need to decide how to spend a limited amount. This is important because most analysis of renting vs buying does not consider the opportunity cost of, for example, not funding your work retirement account or kids’ college-savings account or whatever.

            We are lucky that in NYC there are so many rentals, even for middle and upper income folks, that we can choose to either rent or buy and still have the quality of life we desire.

            I know there are many rental to condo conversions going on, and that many new properties are out of reach except for upper-income earners. But compared to other parts of the country, we still have a good deal of choice among quality rental properties.

        • Eric says:

          james
          your posts are quite insightful and based on solid analysis. a rarity on this board.

          thanks!

        • Meredith says:

          In my [now retired] commercial & residential field we’re trained to use the word “property” with a seller and “home” with a buyer. Americans struggle with emotion vs. logic; aesthetics vs. location. Strong returns on real estate investment go to trenders who sniff out the next hot location while it’s lukewarm or savvy contractors with a strong expediter. We sold our LI house and decided to rent on the UWS for the reasons you listed.

        • john says:

          Interesting analysis. I haven’t spent enough time with it to whether say it is totally correct, but it looks like you put some work into it. I was in the same boat and the math looked different. That said, even before I think about your math, two points: 1) don’t forget your mortgage is fixed and “brokers fees and rent increases” are not and 2) there is some non-monetary utility in owning a home, esp when you have kids and schools, stability, etc enter the equation.

          • James says:

            John,
            Thanks for your comment. You raise a very valid point that paying market rent subjects you to indefinite increases whereas a mortgage is fixed. Obviously there are periods where rents decrease but in the long-term they will rise if for no other reason than inflation. With a mortgage, you are subject to increases in taxes as well as maintenance fees over time; but they may very well increase at a lesser rate than market-rent.

            Perhaps the important thing is to save, no matter what form that takes (equity in a home vs a diversified investment portfolio). If you “rent and save” you take advantage of the positives of renting, and you build your nest-egg for the future. You do this owning a home also; my point is only that not all is lost as a renter.

            When you are young, the money you can stow away for retirement will pay you big dividends (no pun intended) down the line due to compounding interest – But many young people focus on a down payment as their first step towards financial stability.

            Taxes are perhaps the second biggest annual expense after housing (for many people, taxes is the largest expense) and thus every dollar you save on taxes also pays dividends in your overall financial well-being and gives you the greatest “bang for your buck.”

            Additionally, the significant sum you need for a down-payment could very well make up the difference in increased rent through it’s own return in another investment vehicle. Some tax-advantaged vehicles like Roth IRAs, 401k’s, some forms of life insurance (etc.) allow you to withdraw or borrow for the purchase of your first home – In this way you do not need to make savings for retirement and savings for a home mutually exclusive (though it’s probably advisable to do so anyway).

            My point wasn’t that renting always beats buying, and I think it’s totally impossible to come to a conclusive answer as to what is better in any given circumstance for any given person. My point was only that renters can still do many things to take advantage of their financial situation, build equity for the future, and be tax efficient. In this way they shouldn’t sweat it that they don’t own.

            People assume NY real estate will be desirable forever. But who knows, maybe one day it will be a buyer’s market. Or maybe, by savings for retirement first, one can take that big mortgage a few years from now knowing you haven’t emptied your pockets of everything you’ve got.

            🙂

        • Nathan says:

          I’ve been in much the same boat. My rent is below market rate, albeit for a shabby apartment. But I think your analysis is off on a few points:

          1. Yes, the deduction is only worth the amount greater than the standard deduction. But, if if you live in New York and enjoy our high city and state taxes, you’re probably well past the standard deduction before taking interest payments into account.

          2. Again, thanks to our high city and state taxes, my marginal rate is ~40% making the deduction worth a lot more to me than someone with less income.

          3. You can actually borrow up to 50% of your vested balance in your 401k. There’s obviously an opportunity cost here, but at least you can use the money you’ve already saved to your advantage if you so choose.

          4. Your 70% gain doesn’t take leverage into account. A 70% gain with 5-to-1 leverage (I’m simplifying a bit here) is actually a 350% return on equity. So unless you bought your stocks on margin, you didn’t do nearly as well. Of course the flip side to this is that, when the market goes down, you’re equity gets wiped out.

          5. The extra liquidity co-ops require is kind of pointless, but it is annoying. You just have to show the extra 10% (or whatever that co-cop requires) is in a liquid account when you purchase. To achieve this, consider borrowing from your 401k when you buy, and immediately returning the money after.

          Where I agree with you wholeheartedly is the insane cost of buying. The rents many of these apartments could get are too low to justify the high cost of purchase. I rent in a co-op building and asked about buying my apartment, but it was more out of curiosity because I know the purchase price (and resulting mortgage payment) would be well above my current rent. And that allows me to save a lot.

        • Vince says:

          If you analyze your rent vs buy options using conventional methods, you might consider leaning toward renting. However, 15 years ago, I started to look “outside the box” and incorporated creative ways in buying real estate. I was making around 70K a year back then, with very little money saved up. I was renting on the UWS. But then I started studying how the very rich do business. Since that time, I bought 3 properties, and already sold two of them at a huge profit. Even through the 2008 RE crisis. I kept the one I am currently living in, and it’s practically all paid for…had I followed conventional analysis, I would be broke. Don’t bother to ask, how I did it, it’s different for everyone, based on your level of risk taking, and ability to be creative.

    3. anon says:

      My husband and I have started apartment hunting on the UWS and down in Chelsea/Village. So far we haven’t encountered any super crowded/busy open houses – went to about 10 of them two Saturdays ago and 1 this past Sunday where we were 1 of only 2 people on the sign-in list (and we went near the end)

    4. D.R. says:

      On my mind:
      #1) I reviewed WSR’s September 27, 2012 piece on Fairway-Rats, curious as to whether anyone questioned how the store passed DOH inspections during all these years. No one did. Are you surprised?

      #2) Does anyone know how their café survives without a DOH letter grade?
      (I’m including a 40-second video on the café matter.)
      https://www.youtube.com/watch?v=Hn3eWzAb0io

    5. James says:

      Would somebody on here comment on how an “as of right” development means that a developer can place a building of any height into a space?

      I am confused by yesterday’s post about a possible “as of right” development on 81st and Broadway – Are there no zoning ordinances in this location that would limit the height of the building?

      • guy_on_the_corner says:

        “As of right” does not mean you can build anything you choose to build.
        Here is a very simplistic overview:
        All properties have zoning which determines what can be built there such as R6 which generally means residential property that can be built up to 6 times the area of the lot (meaning a 6 story building on the entire lot or a 12 story building taking up half the lot). Other zoning types are M (manufacturing) or C (commercial/stores). Of course there are also some height restrictions and other factors that weigh into the zoning and “as of right” issues too.

        A good overview of one type of zoning is here:
        http://www.nyc.gov/html/dcp/html/zone/zh_r6.shtml

        Building “as of right” means you can build to the maximum allowed by your zoning without asking for any special permission. If someone wants to build bigger/higher, they need a zoning variance which is where negotiations such as public/neighborhood amenities and affordable housing come in.

    6. CW says:

      While I set my A.C. at 78 (as asked to do so we don’t have outages and to be environmentally conscious) I pass store after store with their A.C. set to freezing and their doors wide open. Why is the law prohibiting this not enforced? They need to be shamed into compliance if the police won’t do anything.

      • JD says:

        Exactly, these stores should be ticketed. Imaging the amount of money the city could collect from this alone.

        • guy_on_the_corner says:

          The law only applies to stores with 30 or more locations or stores that are bigger than 4000 square feet – generally big chains.

          In my walking around the city, I’m pretty sure that most of these stores are in compliance.

      • Lisa says:

        The very wasteful “open door” practice is relatively new in NYC, a result of the proliferation of mall chains. In malls, the store doors are open. (It is my understanding that in an urban streetscape, it is a myth that open doors result in more sales. Open doors certainly result in higher energy costs)

        The City Council bill was much weaker than originally proposed because Mayor Bloomberg was against it – did not want to impede business (unless business he did not like such as cigarettes or soda?)

        I read that the city was sending out a group on inspectors last week. And NBC did a story.

        Besides being incredibly wasteful, it impacts on the power grid. Not right for stores to blast air conditioning and keep doors open when people are losing power in some places.

        Maybe someone can develop a shaming app?

    7. Mike says:

      We need 2 new tenants to finally move into West 96 to West 95th St on Bway on the west side of the Street. That corner has been empty forever!

      What is the reason for being empty all this time? Too much loitering also happening there with no tenants.

      • dannyboy says:

        The reason that those 2 storefronts are empty is that the asking rents are too high in a location where no one wants to stop on Broadway.

    8. Steve says:

      One more thing to consider in the rent vs buy analysis is the situation I now am in. After 18 years living in my coop apartment and 2 refinances to lower the interest rate, this week I paid off my mortgage after having made significant additional payments to principal each month. So now I “only” have to pay the monthly coop maintenance which is considerably less than the cost of renting.

      • James says:

        No debate there Steve; that is the dream. Because now you truly own. There’s no bank holding part of the equity, it’s yours. Congratulations.

      • Bruce Bernstein says:

        “props” to James and others for an intelligent and fact-based discussion of the economics of housing costs on the UWS.

    9. jsf says:

      This UWSider experiencing great distress along with approx. 175 UWS seniors – many of us here for decades! Why? The Salvation Army wants us OUT! The Williams is closing down and the Army says they will”relocate” us to 125th St. and 3rd Ave! No Riverside Park, no Symphony Space, no coffee shops, no Manhattan Diner or City Dinner, no 5thAve. bus! Why? The Salvation Army gets a lot of $$$ 0 that’s what it’s about!

      • Anon says:

        There are no coffee shops in your new area? Also, at 125 and third you are much closer to the 5th ave bus then you would be here on the western edge of the UWS.

        • lisa says:

          No. 5 bus route southbound: Riverside Drive to Broadway to Fifth Avenue….

          • anon says:

            oh the M5! gotcha. Well, on the Upper East Side you can catch several buses that all travel down 5th ave if you want so you should easily be able to get down 5th anytime.

      • Bruce Bernstein says:

        i feel for the Williams residents. What the Salvation Army is doing is appalling.