A lender’s table helps resolve the rent-buy dilemma

If you are one of those renters trying to decide whether it makes sense for you to buy, well, you’ll get no answers here about how long you plan to live in a new place or how much you want or need to move.

I also can’t help with which way the housing market is moving or where it will be some months from now. Economists are all over the lot (see my “Weekly Roundup” Dec. 24 or this coming Friday), though I am tending to be very cautiously optimistic about Manhattan.

But here is where you at least can obtain a perspective on whether you may be in a reasonable financial position to purchase real estate, an option I shrink from advocating for anyone.  The table below will be helpful:

(Click to expand.  Provided by David Bersak.)

According to Guaranteed Home Mortgage Co.’s David Bersak, individuals paying rent generally can keep their housing costs to the amount they are now paying if they follow the parameters in the table above and if his assumptions are more or less correct.

In an example that he and I discussed, let’s say a $2,000-a-month tenant “Carl Confused,” purchases a $368,500 apartment and otherwise falls at the high end in the table.  With only 10 percent down, a rarity except in condos, he would need an annual salary of at least $68,000 for a $335,000 mortgage and adequate reserves.

If maintenance on Carl’s co-op apartment were $800 and the deductible amount were 40 percent, that would come to $320.  In the first year, the interest portion of his $1,759 monthly mortgage payment would be approximately 90 percent, or $1,583.  Add that to the $320 deductible sum in the maintenance payment, and the total tax deduction reaches $1,903.

For the small apartment that he could purchase on the Upper West Side of Manhattan, Carl might be in the combined federal-, state- and city-tax bracket of 33 percent.  Multiply his tax deduction of $1,903 by 33 percent and he would be saving $633 monthly.  Subtract $633 from the total of $2,559 for his mortgage and maintenance payments, and his monthly cost nets out at $1,925–less than Carl is paying in rent.  Says Bersak:

It works out at every price level, and we’re just assuming there’s no appreciation now or ever.  We’re also assuming that his rent won’t go up.

How, you reasonably may be wondering, will Carl manage his cash flow since his monthly payments will be significantly higher than his $2,000 rent?

Answer: He can adjust the tax withheld from his paycheck to anticipate the refund that he would receive in the following year or, if self-employed, simply lower his estimated-tax payments.

The fact is that some of Bersak’s assumptions are optimistic.  His table pegs the interest of a 30-year fixed-rate mortgage at 4.25-4.75 percent.  He also does not include likely extra expenses of home ownership such as maintenance.

Other of his assumptions are that Carl’s housing costs will be no higher than 38 percent of his salary.  The reserve requirement in his table is three months at the two lower levels ($2,000 and $4,000), six months for the two middle levels and six and 12 months at the top level.

Nor does the lender offer justification other than financial to cease renting. (Coincidentally, today’s BrickUnderground provides three reasons to believe some tenants are being overcharged.)

Although a prospective buyer may have some doubts about the calculations, they do provide one useful way of analyzing the enduring rent vs. buy dilemma.  Doing so may well help tip the balance one way or another.

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201

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