When does it make sense to buy vs rent?

The cost of rent keeps increasing. And you’ve heard the buzz that it’s currently a buyer’s market. The decision to rent vs. buy an apartment or house is intensely personal. Although part of the American Dream includes homeownership, it is not the right choice for everyone.

At what threshold does it make more sense both financially and for your lifestyle to buy an apartment instead of renting one? There are pros and cons to both choices, and you need to factor in monthly payments, a downpayment, and the investment aspect of buying vs. flexibility of renting.

We’ve broken down each of these factors to help you decide what the best next choice is for you.

Should I Buy or Rent?
Reasons To Buy An Apartment
Reasons To Rent

Should I Buy or Rent?

In New York City, nearly 70 percent of its residents rent their apartments. This is because of the high cost of buying and the long-term commitment involved with staying in one place.

But rent is still costly in a city like New York, and depending on how much you could put down for a downpayment, your monthly payments could be lower if you own your apartment.

Before deciding if you should rent or buy, you should ask yourself a few questions:

How long do I want to live in New York City? How long would I want to live in this neighborhood? Consider your career, your family, etc.
How many bedrooms would I need?
If I were to purchase an apartment, how much can I put for a downpayment?
Am I in any debt? Could I handle more with a mortgage?
What features are you looking for in a home?

The Cost of Owning vs. Renting

By owning your home, you have the potential for capital appreciation and tax deductions for mortgage interest and property taxes. In simpler terms, you can get some money back or even make money off of your apartment.

But buying an apartment requires a down payment; and you’ll have to pay closing costs, monthly mortgage payments, property taxes (which tend to rise every year), possible renovation costs, and insurance.

Renters typically pay less per month, and the savings can be; invested. To secure a lease, a renter must pay first month’s rent; security deposit and usually is required to have renters insurance. There is also the potential for rental increases annually, which is generally about 3%.

So which is better, renting or buying?

If you can afford it; buying is almost always a better long-term decision. Your monthly mortgage payment will likely come back to you in the form of capital appreciation when you eventually do sell your place. You’ll also receive more tax benefits from owning your home. The federal government subsidizes a considerable part of homeownership by making most mortgage payments tax-deductible.

In New York, there will always be a demand for real estate, making your new home a strong investment piece for you as well.

Rent payments are just a monthly expense that does nothing to build your personal wealth.

But be careful before jumping into homeownership. First, if there is any real chance of defaulting on your debt like your job is unstable, then you should keep in mind that doing so can ruin you financially for many years. A good rule of thumb is don’t have your debt to income ratio surpass 25%.

But if you can afford it, and you know you are going to be in the city for a while, homeownership is the way to go.

Reasons To Buy An Apartment

Tax deductions

The number one reason to consider, buying a home is the tax deductions. Any interest you pay on your mortgage loan is deductible from your gross income, as is a portion of your monthly maintenance. Your mortgage and maintenance could save you thousands of dollars in taxes per year; which means you pay less to the IRS and there is more money in your pocket.

No rent increases

New York City is the second most expensive place to rent an apartment, just behind San Francisco. And prices are continuing to go up.

The beauty of a fixed-rate mortgage is that your monthly note will remain the same until you sell the apartment or pay it off. This can help you plan financially for years to come. While, with renting, the increase is typically 3%, but it could go higher if your apartment springs a renovation on you.

Your maintenance, however, will increase a percentage annually since building taxes and operating costs will also increase. If you’re living in a co-op, you’re actually considered a shareholder, or owner of the building. Investing in working elevators, or a new communal gym will help you sell your apartment down the line.

You’ll build equity

In 2018, The New York Post stated that rents are at their highest; Manhattanites pay an average of $4,081 a month. Rather than throwing thousands of dollars out the window every year, when you own a slice of real estate (no matter how small in square footage or price), you start building equity immediately.

This means you’re helping build your financial future, oppose to just funding a large management company.

Potential revenue stream

Depending on the rules of your co-op or condo, you could potentially rent out your apartment. This can be a potential revenue stream for you and help pay down your mortgage.

There’s more inventory to choose from

Depending on your needs and the time of year you start your apartment search, you’ll probably have more options to buy. New York’s vacancy rate stays unbelievably low. Currently, it’s at about one percent, which means scoring a great rental in your preferred area of town might be next to impossible. However, when it comes to buying, it’s a buyer’s market.

Reasons To Rent

Mobility

Many city dwellers value their flexibility and freedom. Renting allows tenants to make a short-term commitment to a neighborhood and offers a particular lifestyle.

If you’re new to the city, it can be hard to understand that a second-floor apartment in Hells Kitchen does not offer the same serene feeling like a 20th floor Upper East Side apartment.

If you’re not sure which neighborhood you want to live in, or how long you’ll be in New York, renting is the way to go.

This also applies to your family — or lack thereof — situation. If you’re single, but wish you weren’t, buying a studio might not be the best long term investment. If you’re newly married and trying for kids, you might be looking to upgrade to that 2-bedroom or even move to the suburbs soon.

In short, if you’re not looking to stay in the same place for at least two to three years, renting is the better choice versus buying.

You can rent an apartment quickly

Although renting still requires a lot of paperwork, buying real estate in New York can take months.

Buying is a grueling process; which includes visiting dozens of open houses, scouting apartment buildings, submitting financials and interviewing with co-op boards, inspections and more.

If you need a place to live, quickly, renting an apartment can be done in a couple of days if you’re willing to compromise.

You don’t need to spend money upkeeping the apartment

When you buy an apartment, the upkeep is your responsibility. This means when a paint job is needed, you’re buying the paint. If the toilet floods the downstairs apartment, it’s on you to pay for the repairs.

When you rent an apartment, these responsibilities ultimately fall on your landlord and management company.

There’s no downpayment

The main reason people decide not to buy vs. rent is a significant amount of money required for the down payment. A one-bedroom apartment costs $700,000 on average in New York City, and at least 20% is expected as a down payment to buy it. High closing costs are an additional expense as well as insurance costs and attorney’s fees.

Anyone who wants to purchase a New York City apartment should have no less than $100,000 in their bank accounts as well as a cash reserve of up to six months for mortgage payments and standard common charges. There will also be requirements you need to fulfill the purchase, such as a credit check, rental and owner history, and approval by a condo association or a coop board.