5 Reasons Not to Buy a House in New York City
Over the past 10 years, I’ve had occasion to represent both buyers, sellers, lenders, and developers in the purchase and sale of properties, and I’ve learned things along the way because I’m essentially a disinterested party. I provide legal advice and make sure that the client is protected whether they’re buying or selling, whether they’re lending on a piece of property. But I’m not the one saying: “Yes you should buy this,” or “No, you shouldn’t buy this.” But what about the reasons not to buy a house in New York City?
This post is a departure. It focuses on the 5 reasons not to buy a house in New York City.
When I first began practicing law, the majority of my work was representing clients filing for Chapter 7 Bankruptcy. My client was the individual that wanted to buy a condo in Florida. The man or woman who put a deposit down but couldn’t get a mortgage to finish the purchase, and lost everything they had. The husband and wife that bought a place in Staten Island, who financed at an incredibly low teaser rate, just to see the rate reset a few years later, and lost the property. I’ve seen both ends of the spectrum. I’ve seen properties that go up in value and people make a ton of money. And I’ve seen people lose their shirts, their entire livelihoods based on the purchase of property itself. Therefore, it’s not as easy as saying, “Yeah, it’s a good idea to buy a property,” or “No, it’s a really a bad idea to buy a house or condo.” It’s not black and white, and people should be aware of that when deciding whether to buy.
If you’d rather listen to the audio, it can be found here.
The below is an edited version of the transcript.
“You’re throwing money away by renting”
This is a complete misnomer. This is what everyone tells you. If you’re renting and you’re paying the landlord $3,000 a month, you’re just throwing that money away. I think that’s completely inaccurate. In fact, I don’t think it makes much sense.
Renting makes sense for a lot of individuals. Here’s why: If you rent for $3,000 a month, then your living costs are fixed. You know what your monthly nut is going to be for your housing. If something goes wrong, if the ceiling starts leaking, if the fridge breaks, if the cable doesn’t work, whatever it is, you can go to the landlord and say, “Hey, I need you to fix this.” And by law, in most circumstances, the landlord is required to fix these things, specifically, if your heat doesn’t work or your hot water doesn’t work. That’s not the case when you buy a piece of property in New York.
When you buy a house or condo in New York, your mortgage is only part of the cost of ownership that comes out of your pocket each month. Let’s say your mortgage is $3,000. In addition to your monthly mortgage payment, you’re going to pay taxes ranging from several hundred dollars a month in New York City to potentially thousands in Weschester. You’ll pay common charges if you buy a condo, or, if you live in a co-op, you’ll pay maintenance fees on a monthly basis that can add over $1,000 to your monthly payment. Let’s say you buy a house on Long Island. In addition to your monthly mortgage and your taxes (which are high), you’ll inevitably need to repair a leaky roof, a broken boiler, frozen plumbing, etc. All of these things will add thousands to your carrying costs on an annual basis.
That $3,000 monthly mortgage payment isn’t paying down any principal for the first 7-9 years of a 30-year mortgage.
Most of those initial payments are going to service the interest on the debt. You’re not paying down any debt or creating equity in the property itself-you’re just hoping that the property increases in value. Because that’s the only way you’d make money if you needed to sell the house.
Finally, let’s discuss opportunity cost. Say I’m buying a piece of property for $900,000. If I’m buying in New York I’m putting 20% down as cash and financing the rest of it. I have to come out of pocket a minimum of $180,000 in cash to be able to purchase the place. That’s not taking into account closing costs, which of tens of thousands of dollars. However, if I’m a renter, I can use the $200,000 to do whatever I want. I can invest it in the stock market and earn an average of seven percent a year. I can keep it aside as a cash cushion. I can start a new business if I want to. I can put it in my kid’s 529-fund. I can have it sit there and just stare at it and be comforted that I have cash in an emergency. I have flexibility. So yes, the $200,000 in a purchase does build equity, but it’s not liquid. You can’t touch it. If you’re having financial issues, you’re likely not going to be able to refinance right away and pull any money out because of the sheer amount of equity that you have in the property itself. It makes you stuck. Renting makes you flexible.
Here’s a great chart from the Motley Fool that lays out the difference in expenditures between buying a home and renting:
A house is an investment that will always go up in value.
This reason is total BS. We live in New York City, and New York City is an outlier. For the past 10 years, we’ve seen property values skyrocket. And yes, it’s been a great time if you’re an owner. But what happened in the past doesn’t necessarily mean the same thing is going to happen in the future. In fact, if you look at history, history tells you that investing in a house because you think it’s going to go up in value is one of the worst reasons, ever, to invest in a house. Houses sometimes don’t even keep up with inflation. So, if you’re investing in a piece of property because you think, this year it’s worth $600,000 and next year it’s going to be worth $700,000 because it happened before, is faulty logic. It doesn’t mean a year from now, or two years from now, or three years from now that the property values will go up at that clip or they’ll go up at all.
People also have a hard time computing the returns on their home as an investment. It’s just the nature of who we are. We downplay our costs and focus on a symbolic profit. If you buy a condo in New York City, you’ll be mortgage taxes, title insurance fees, attorney fees, origination fees, as well as thousands of dollars in ancillary expenses. When you sell the condo, you’ll pay 6% of the purchase price to a broker. You’ll pay to have to pay transfer taxes. You’ll pay a litany of charges that are going to come out of pocket. You have to take these things into account when discussing it. It’s not as simple as saying, “Well I bought the place for $600,000, and 10 years later I’m selling it for $900,000, I made $300,000.” No, you didn’t. During that period, you paid tens, if not hundreds of thousands of dollars on interest (yes, for which you get a tax deduction, but only 1/3. If I offered you 33 cents for every $1 you gave me, that wouldn’t be a great deal). In addition, how much did you pay in taxes? How much did you pay in upkeep? How much did you pay in repairs? How much did you pay for furniture for maybe a piece of property that’s much bigger than you actually needed? All of these things have to be taken into account when you make a financial decision as to whether or not it makes sense to buy or rent. And if you’re solely buying because you think the home will go up in value, I urge you to remember 2006 and 2007. This isn’t risk-free. In fact, it’s one of the riskiest things you could possibly do. I’m not saying it’s a bad idea, I’m just saying you must take these things into account when you consider whether or not you should buy or rent.
You’ll be in the property for less than seven years.
If you’re there for seven years or less, again, most of the payments that you’re making are going towards interest. You’re not building equity in the property. You’re not paying down the mortgage. That makes a difference because when you sell, you’re going to sell for a number and you’re going to come out way less ahead than if you would have held the property for 10 or 15 years or 20 years down the line where you paid down a considerable amount of the mortgage principal itself. In addition, as I just mentioned, you have closing costs on the way in, and you have closing costs on the way out.
Let’s say you’re one of those that buys a new construction condo in New York City. And you want to buy it for $1.1 million. In most new construction condo purchases in New York, you’re responsible for paying the sponsor’s transfer taxes. The transfer taxes will come out to close 1.5% of the purchase price, in addition to the title charges that you’ll be paying on your own end. More closing costs can be found here. You’ll also pay mortgage tax if you get a mortgage for the property, and you’ll likely pay the sponsor’s attorney’s fees in addition to your own attorney’s fees. Let’s not forget paying the mansion tax, which is 1% of the purchase price. When you combine these things, you have a huge out of pocket bill in addition to, let’s say, the $200,000 or $300,000 you’ll put down as cash into the property itself.
There are loads of NYC condo closing costs to think about. When you sell, you’ll pay close to $50,000 to $60,000 to a broker to market and sell the place. . And you’ll pay those same transfer taxes on the way out, as you did on the way in. Almost $100,000 out of pocket. If you do this over the course of five years or four years, you’re not going to make all that much when you take into account the fact that you’re paying interest, and you’re paying common charges, and you’re paying a bunch of other things on a monthly basis that you wouldn’t if you were renting.
You shouldn’t be thinking “well I’m going to hold this for less than seven years and the market’s going to go up tremendously because it has before”, because that logic, as we just discussed, is faulty. What if it doesn’t? What if you’re stuck? What if you’ve got a 7/1 mortgage and you can’t sell or refinance on year seven? Because let’s say the market took a dip, or the L train just shut down for two years, or you have to. What then?
These are things to keep in mind, and in my experience, those that have held for seven years or less in many situations have done not as well as those that have held a house as a long-term play. Again, it’s difficult to think of it as an investment because it’s not an investment. It’s not a bank. It’s a place to live. 2006, 2007, 2008 should’ve taught us that, and it’s tough to see that right now because, again, the property values have gone up so considerably, but it’s important to.
Everyone is telling you to do it.
I’m not going to spend too much time on this reason, but if you watch HGTV, or any shows about house flippers, if you talk to your neighbors, if you talk to people they’re going to tell you how amazing it is to purchase a piece of property. They’ll tell you that buying a condo is a great thing. That they have stability; a great place they love. That may be, but you’re likely also not talking to people that purchased properties and lost all their monies doing so.
You’re likely not talking to people that purchased a piece of property and had to put $100,000 into renovations when they thought they were only going to have to pay $30,000 for renovations. It’s important to keep a level head when you do this. People will tell you to do these things because they’ve had a good experience, or they think that they’ve had good experiences because they haven’t calculated all of the costs that come with it.
You have to make a decision for yourself, talk to your financial planner, talk to your accountant, talk to people who haven’t had great experiences buying and selling properties, and then make an informed decision. Just because you see people on TV making hundreds of thousands of dollars doesn’t mean they’re making hundreds of thousands of dollars, if not millions of dollars, flipping these properties. There are many TV shows about people that have lost all of their money doing this stuff, so keep that in mind.
Rates are at historic lows.
There’s an entire industry behind this. Mortgage brokers, real estate agents, even our tax code essentially pushes us to buy property. I think that’s completely and horribly wrong, but there’s nothing I can do about it. What I can tell you is, if a mortgage broker or if someone else is telling you that now is a great time to buy, realize that they’ve never said, “Now is not a great time to buy.” They always say, “It’s a great time to buy,” and the reason for this is that money is cheap now. Interest rates right now are around 4%. They were around 3.3% prior to Trump being elected as president, but that’s the wrong reason to buy a house.
If mortgage rates increase, historically, it means the prices on these properties likely decrease. So, if you’re in the situation where mortgage rates are at 5% or 5.5% what you’ll likely see is price pressure coming from the top. People won’t be able to get $800,000, $900,000, $1.5 million for their properties because borrowers won’t be able to borrow as much which means the price comes down. If you’re doing it based on the fact that you think money is cheap-don’t do that. You’re going to put yourself in debt to the tune of $600,000 or $800,000 because you think it’s a good opportunity to capture historic low rates when in fact the market doesn’t move in that way.
I’m eager to hear your comments or questions on this, and frankly I just want to put this blog post in because there’s so much noise out there about the benefits to buying a property that I think no one really does a good job and many do a disservice to people by not publishing the reasons to not buy a piece of property.