While your friends outside of NYC are basically amateur real estate moguls -- having already purchased their first starter homes, flipped them, made a tidy profit, and moved onto their next -- you bleed your bank account dry every month for an apartment that at the end of the day ISN’T EVEN YOURS. How is this fair? Well, it’s not, which begs the question: should you just bite the bullet and put down roots?
We chatted with Tara King-Brown, a realtor with The Corcoran Group, to find out at what point you are, in fact, wasting your money as a renter in New York and should buy an apartment.
But first... what’s a condo vs. a co-op?
Before you buy, it’s important to become snuggly close with the overabundance of real estate terminology that will no doubt confuse you right back into the lukewarm embrace of the rental market. In terms of buying, there are two types of properties in New York: condos and co-ops.
“In a co-op, you are purchasing shares in a corporation. In a condo situation, you actually own that apartment. As a co-op, there’s one parcel of ownership and you own shares in that ownership based on square footage of your apartment,” says King-Brown.
Seems simple enough. The majority of first-time buyers in New York are going to go co-op because that’s what’s available. Unless, of course, you’re a Rockefeller, Vanderbilt, or Kardashian. Then you will probably go condo and you could have stopped reading by now. Most people would LOVE to get into the condo business, but there’s a sizable price difference as two-thirds of the inventory in NYC is a co-op.
So what happens once you go co-op?
So let’s say you’ve decided (because you had no other choice... ) to go co-op. GREAT! Or... greatish. It’s really not up to you. It’s up to the co-op board, a team of strangers who will probe further into your personal business than your gynecologist.
“You typically have an interview with the board, and the individuals that are on the board are the ones that approve you. There are financial requirements, but once you meet that and provide them with an array of your financial history, they still want to sit down with you. It’s invasive. You feel like these people are practically living in your apartment.” says King-Brown.
So, assuming you’re cool with handing over your bank statements, previous loans, your mom’s social security number, past parking tickets, and your most recent STD test, now it comes down to...
Can you actually afford this?
Usually, the answer is “hell no.”
“The ‘debt to income’ should generally not exceed 25%,” says King-Brown. “This is based on the numbers once you close/own the subject property, so the debt portion factors one mortgage payment plus building maintenance fee plus other bank and auto loans relative to the individual’s gross income.”
Plainspeak: the actual cost of the mortgage that you hypothetically will have, plus the monthly maintenance, plus the basic housing cost should not be more than 25% of your total income. Breaking that down, let’s say the cost per month of the apartment is $4,300, which is $50,000 a year in annual cost. If you make just under $200,000 per year before taxes and other expenses, based on the carrying costs, once you actually close on that apartment, you would be at 25-26% of your income, so you would JUST meet the requirement.
King-Brown likes to qualify her clients by asking their timeline. If you’re looking to own an apartment for two to three years max, then buying does not make sense for you.
But even if you have the money in the bank to actually buy the apartment and fit snugly in the debt-to-income zone, there’s still the “liquid asset” requirement. Uggghhhhhhh what now?
What’s a liquid asset requirement?
“This should consist of at least two years of housing costs after closing on the property,” says King-Brown. “The building wants to make sure that the buyer has the financial health in order to maintain maintenance fees [for co-ops] or common charges and taxes [for condos] once they own.”
This means that anyone looking to buy an apartment in the $500,000-$1,000,000 range (which is on the LOW END in NYC. Like seriously, good luck finding less than that), should have a couple hundred thousand dollars left over in their bank account after the purchase.
Considering you sit in a cubicle and subsist on happy hours that tout half-priced appetizers, this should be no problem for you.
So... when is the right time to buy?
The honest answer for most New Yorkers is never. There’s a reason why this city is a renters market. But hypothetically, if you have been in New York for 10 years, are in your early- to mid-30s, and are looking to spend $3,000-$5,000 in rent per month, then it WOULD make sense to buy. And you would be looking at a half-million dollar apartment, which would be a big one-bedroom in Manhattan (or an even bigger one-bedroom in Brooklyn). You would put 20-30% percent down and still have more than $200,000 left over after the closing. If this is you, congratulations. And also, drinks are on you.
Another example: let’s say you are looking at a $1.5 million apartment. Your mortgage would be $1.2 million if you put 20% down. If interest is 3.6% over a 30-year fix, you're looking at mortgage payments of $5,500. Common charges on something that size would be just over $2,000... and then there’s insurance and electricity. This puts you roughly at $8,000/month, paid out of pocket for a small two-bedroom, whereas paying $8,000 a month in rent would get you... sizably more. But, here’s the snag: 50-60% of that mortgage payment is going toward the principal, so you would be building equity. Out of pocket that ends up being $4,600 as the cost of owning in New York. If you take that over the year, the average appreciation of the property exceeds the cost.
This scenario makes perfect sense for someone who is going to be living in this apartment for five years minimum. “The cost of getting in and out of property in NYC, such as the transaction costs, mansion tax, mortgage recording tax, property transfer tax, and then, of course, the broker fees, is totally worth it if you’re going to be here for a long time. In this market it takes two to three years to break even, all things considered.” MANSION tax?! The mathematical nightmare that is purchasing real estate is probably enough to keep you happily renting until the end of your days. First and last month’s rent plus security doesn’t seem so absurd now, does it? Oh a 15% broker’s fee? I ACTUALLY KNOW WHAT THAT MEANS!
What’s the bottom line?
“You want to own something for five to seven years or more in order for it to make sense financially,” says King-Brown. This is, of course, in addition to all the other aforementioned financial hoopla.
“The reality is why New York City so heavily skews toward rental. There’s nothing wrong with being here and spending what you spend on rent. There’s the freedom of renting,” says King-Brown. “If you own and your $8,000 fridge breaks down, that’s your responsibility. If you rent, it’s your landlord’s problem. Any maintenance issues and headaches you can pass along to the landlord. People are working, they have social lives, they don’t come to New York to flounder. They don’t want to deal with headaches. They come here to get things done. ”
So if you’ve been living here for 10 years, dropping $2,000 a month on rent and dying a little inside because your bestie back home is having BBQs in his backyard with a pool that he owns free and clear, just remember that what you’re doing is TOTALLY normal. And you’re doing it in New York. If you want to own in Iowa, Iowa can have you.
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Meagan Drillinger is a contributing writer for Thrillist and gave up all hope of owning after the MTA raised the MetroCard fare to $2.75.