Should you buy or rent in NYC?
You’ve been living in the city for a few years, and you’re asking yourself if you should buy an apartment or keep renting. It seems like a pretty straightforward question, but it’s not always a simple answer. Whenever clients ask us this question, we always suggest thinking about the following:
- Your immediate future
- The difference in financial requirements for buying vs. renting
What do we mean when we say think about your immediate future?
No one really knows what their future holds, but we like to plan and dream. Buying real estate is a long-term investment, so if you think you might want a change of scenery in the next few years, you should probably keep renting. You should also ask yourself about your household life. Are you married, engaged, single, have kids? If you’re single, do you think you’ll be getting married in the next 3-5 years? If you’re married, will you be having kids soon? The answers to all these questions will determine if your housing needs will change or not. Unless of course you have the means to buy large and just wait to fill your home with a loving family.
What are the financial requirements to buy a home in NYC?
It’s now time to determine how much you can afford after deciding whether or not you should buy.
The demands of the landlord are known to all. They are fairly straightforward: either earn about 40x the rent or obtain a guarantor. It becomes a little trickier to buy.
The majority of the requirements will be imposed by your bank if you’re buying a condo or a house. In general, plan on making a 10% down payment and keeping your debt-to-income ratio under 43%. Co-ops will require you to meet more stringent financial criteria. The typical requirements are 20% down, a debt-to-income ratio of under 30%, and post-closing liquidity of 12 to 24 months, though every building is different. If you’re making a cash purchase, co-ops will still require post-closing liquidity and a debt-to-income ratio of under 30%.
What about monthly payments?
When you’re renting, all you have to think about is rent and utilities. With buying, you have to consider monthly maintenance fees, property taxes, homeowners’ insurance, etc.
A mortgage includes your principal loan amount and the interest charged for the loan.
Mortgage: Despite being a financial expense, it is not a true cost, as it’s more like forced savings. Your principal payment reduces your loan balance dollar for dollar, and as a result, you have more equity (ownership) in the property.
Interest: Similar to rent, once interest it’s paid, it’s gone. We suggest you consider this payment “after tax” because interest on the first $750,000 of the principal can be deducted from your taxes. You multiply it by one and subtract your tax bracket to get there. For instance, someone paying $10,000 in interest in the 32% tax bracket would actually pay $6,800 because they would not have to pay $3,200 in taxes.
Building or maintenance fees differ slightly from condos to co-ops.
When purchasing a condo, you’ll receive two bills: one for your unit’s property taxes and the other for the building’s shared expenses. In a co-op, these two will be combined into a single maintenance payment. Consider all of the monthly building payments to be equivalent to rent for the sake of simplicity. Property tax adjustments may be possible in some circumstances, but most buyers won’t be affected by them because of the 2017 tax overhaul.
So, do you buy or rent?
Renting is easy, straightforward, and your life can change in an instant without negatively impacting your home and finances. Buying a home has often led to building individual wealth, but it requires some significant startup cash, monthly expenses, and an emergency fund. By considering all the factors discussed in this article, only you can decide what is best for you and your future. Whatever that choice may be, your brokers at Pinpointe Group will help you every step of the way!
