As those of you who have been here before know, my landlord tossed a lemon at me and I need to move. In case you’re wondering, I’m a big personal responsibility guy, so my use of the phrase “my landlord tossed a lemon at me” was not as a crutch (i.e. “life is happening to me”). We understood when we signed our lease that we had only one year to stay in the place guaranteed. So the “lemon toss” was only unexpected because we have been paying our rent early for the last year and a half and have a good relationship with our landlord. So in this weak real estate market, we weren’t “expecting” the place to be sold. But having to move was not completely unpredictable.
A lot has happened in the last few days. The big three are: (1) kicking up our search for another place to rent; (2) kicking up our search for a place to buy; and (3) expanding and contracting our geographical parameters to see whether there are better places for us. And we’ve discovered some signs that we were about to pay too much for a place that seemed wise at first. As it turns out, the big variable (and unknown) is risk.
We (well, “I,” because I’m the numbers geek and my wife lets me “play” with the numbers and report back…) run before and after numbers to determine how each option looks (both pre- and post-tax) compared to what we have now and where we want to go. This analysis is key. It has saved us from buying a few places throughout the years, which has saved us thousands of dollars in diminished real estate value. I preached “the numbers don’t make sense” from a logic perspective when looking at places in NYC for years and have rented all along. I figured that the places I rented were net cheaper than owning even considering tax savings and the portion of the payment going to principal. And that wasn’t even considering the home value loss that happened.
Over the last five years (and more so in the last five days) I’ve discovered that I’ve become very conservative when it comes to home purchases since earlier in this decade. Perhaps it’s a result of the real estate market going south over the last few years. Perhaps it’s because of the job market going south over the last few years. Perhaps it’s because I’ve been hurt before…
But the bottom line is that it looks like I’m not willing to make a long-term commitment to a place unless it does not get in the way of other goals.
We came up with a few guidelines to make sure we don’t end up paying too much for a house (if we buy) or paying too much in rent (if we rent). Hopefully can help those of you looking to buy and rent in the near future. If I missed anything, let me know. While tax savings are good to know, they are not “guaranteed” (i.e. can change even if the likelihood is low) so sacrificing cash flow for an anticipated tax refund is not wise – at least not a wise fit for us. Here are my current thoughts. I’ll compile these into a master list once we’re done with our search.
- When buying consider the rental market for your home in case you lose your job or want or need to move for some other reason. For example, compare these two apartments (these are real places we came across, with a little rounding of the numbers). The numbers assume a 20% down payment and 5% interest rate, which may seem “high” now, but remember these are condos/coops, not single family homes and one of them is a “jumbo”).
- a 2bed/1.5 bath apartment in New York City, near my office, for $979,000 that has $1,211 in monthly maintenance and $875 in monthly real estate taxes with a rental value of about $3,500-$4,000. Your monthly costs would be about $6,300 assuming a 5% rate and 20% down. So, best case scenario is you’re operating at a $2,300 monthly deficit if you “need” to rent and can’t sell the property fairly quickly (always a possibility).
- a 2bed/2bath apartment in Jersey, about a 35 minute commute to my office, for $414,000 that has $850 in condo fees and taxes (combined) that could rent for $2,300 is closer. Your monthly costs would be about $2,600 per month. So it’s not cash flow positive unless and until you take into account tax savings. Too risky for my blood these days.
- As you can see – it looks like we’re going to be renting for another year or so.
That’s it for now. I’ll update you more as my search continues. The bottom line is that it looks like we’re going to end up renting again for a year, but are still looking for the right deal. Because we’re somewhat “rushed,” we’re going to err on the side of a rental.
Until next time, put your credit card down and slowly step away from the mall!