Who’s on first? Where in the world is Carmen San Diego? And why do hot dog buns and hot dogs never come in packages that match quantities? Those are just some of the age-old questions that we’ve yet to get clear answers on. One question that is equally as trivial for some, but certainly doesn’t have to be is: should you rent or buy your home?
Almost all of us have thought about this question at one point or another – and if you haven’t thought about it yet, you certainly will. When thinking about this, it’s crucial to have a clear understanding of what’s important to you: are you simply concerned about the next 6-12 months OR are the next 6-12 years where your focus is?
Whatever the case may be, it’s important to have a professional break these numbers down for you to analyze your scenario. To give you a sense of what this looks like, I used the average rent in NYC, which is around $5,000/mo. and compared that to the average coop listing price which is around $975K. And here’s what I found.
A lot of numbers are coming your way. Take a deep breath. It’s all going to make sense and it’s not as bad as it looks. 😊
Cash Flow:
After determining the average rent and average price for a coop in NYC, I compared the cash flow difference between each over a 6-year period. The reason for this is because 6 years is around the average length of time someone will hold onto a loan before they refinance, payoff the loan or sell the property. Here’s what that cashflow difference looks like:
| RENTING | OWNING: Purchase Price: $975K; Loan Size: $780K* |
| Rent: $5,000/mo. | Mortgage Payment at 6.5%: $4,930/mo. |
| Renter’s Insurance: $50/mo. | Homeowner’s Insurance: $125/mo. |
| Total Payment: $5,050/mo. | Coop’s Maintenance: $1,800 |
| *Assuming a 3% rent increase every year… | Total Payment: $6,855/mo. |
| Total Cash Flow over 6 years: = $391,705 | Total Cash Flow over 6 years: = $493,569 |
*Assuming a 20% down-payment
Difference in Cash Flow: – $101,865
Appreciation Gain:
Buying a home at this point doesn’t seem so great yet. You’re thinking, “in 6 years I’m down down $100K+.” But wait, keep reading.
If you bought a home at $975K, using historical appreciation rates in NYC of 5.75%, in 6 years the value of the home would be $1,363,600.
Appreciation Gain: $388,600
Amortization Gain:
You started with a loan of $780K and in 6 years, assuming you didn’t make any additional payments, the loan balance would be $718,110.
Amortization Gain: $61,890
6 Years Later…
When it comes time to sell the home, at a price of $1,363,600 or more, the commission to pay your real estate agent for marketing, staging, scheduling open houses, negotiating on your behalf, working with the managing agent, analyzing market data, and so much more will be 6% of the sales price, which comes to $81,816.
Commission Paid on Sale: $81,816
Tax Benefit:
Disclaimer: I’m not an accountant or CPA, so please consult with your tax advisor to learn more about the tax benefits of owning home.
This is a very simple/conservative calculation and there’s a lot more you can do here with your CPA to assess the true tax benefit, but this is what we did. Assuming you’re in the 22% tax bracket, the standard deduction, which is the fixed amount the IRS will allow single or married individuals to deduct against their income, is $25,900 for a couple ($12,950 for a single person).
So, stay with me here, at an interest rate of 6.5%, the total interest paid in the first year would be $50,700. When you take that amount and subtract the standard deduction of $25,900, you get $24,800. You then multiply 22% (the tax bracket we’re using) by $24,800 and you get $5,456. If you do that each year you end up with a tax benefit in 6 years of $31,345.
Tax Benefit Over 6 Years: $31,345
When it’s all said and done…
In this calculation we’re making a lot of assumptions, and these are rough estimates, but it’s most likely as detailed an analysis as you’ll see.
And when you add up all of the green and subtract the red, you get…
Thanks for reading and please feel free to contact me with any questions.
– Scott Nadler
Scott Nadler
Vice President of Lending
CrossCountry Mortgage, LLC
C: 973.769.8180
scott.nadler@ccm.com
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