Assuming someone wants to stay in Manhattan in the intermediate term, I just did a very quick analysis if buying a condo or similar real estate in Manhattan is a good investment.
Of course qualitative factors ultimately govern such a decision, I was wondering what people's thoughts are on the attached analysis. This was done in less than 10 mins and I'm sure contains some errors etc - just wanted a get a basic view on how the numbers look. This basically assumes the money you'd put upfront to buy a house would be invested at 8.5% (my personal portfolio return which is FI only so it is sustainable over the near term)
Would appreciate thoughts.
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Lol at 8.5% FI returns being long-run sustainable. Bonds appreciate as rates go down, where can they go from here?
You need to stay in an NYC apartment for 5+ years to be even close to breaking even. And that's assuming you can find somewhere where the fees aren't a third of what you would have paid in rent. Otherwise, its a bet on price appreciation.
I'm just betting India doesn't default as a country. FX risk is not a high concern as I plan to invest that country long term. US rates going up will actually benefit as my duration is less than 1 year and I'm holding to maturity and I can reinvest at a higher rate.
5% annual property value appreciation seems pretty optimistic to me. Closing costs of 10% seem too high to me. You pay the real estate commission on the way out, but someone else pays it on the way in. Other than that, the costs are lawyers (if you hire one) and home inspection (on the way in) and points on your mortgage (if you pay them).
The amount of interest you pay varies by year even though your payments are steady. Some portion is interest and some portion is principal and it looks like you haven't taken that into account anywhere. The principal repayment as a percentage of total payment increases over time. Admittedly, for 5 years it won't make much of a difference, but you might as well take it into account. An easier way to do it is to just assume an interest only mortgage.
Personally, I would make all of the costs and appreciation equal to one another. Meaning, if rent goes up by x%, then the value of the home should go up by the same percentage, as should things like maintenance, property taxes, insurance and the like. Also, I would have everything be in terms of percentage. You currently have the 'yearly increase in rent' as a fixed dollar amount. It should increase at an increasing rate in dollar terms and be a fixed percentage each year.
I assume the rent and home value numbers are just imaginary at this point?
Your allocation to the costs of maintaining your property seem very low. Stuff breaks and you have to pay for it if you own it. Also, you have to pay maintenance fees if you own a condo and you have to pay for insurance and property taxes no matter where you live. These can be huge expenses. You don't seem to be adjusting them upwards either. I would just increase everything by the same amount for simplicity.
Yeah, everything is imaginary and hypothetical at this point. I'm just keeping it very simple though I'm aware little stuff can add up over time. I'm assuming VERY ROUGHLY that the cost of upkeep of the house is the same as the cost you'd pay a broker if you end up moving every year. Again all hypothetical.
Interest payments assume LIBOR flat - 5% is interest, rest goes to principal. It ends up to about $25k (6% on a 30yr mortgage) over the 5 years for principal repayment, so it's not out of whack.
The property taxes and maintenance charges are roughly baked into the taxes and CAM section. Around 700 a month seemed reasonable to me for condos in the FiDi. Could be wrong though.
Wrt the 8.5% yield - that's what I'm getting on a CD in India (BBB credit risk + FX risk). I know I'm taking on FX risk in case I want to convert it back to USD, but I plan on investing that amount in India long term (or convert when the FX environment is favourable). I have family and assets there so it's all good.
My question really was, ignoring some bells and whistles does this rough analysis give some kind of an answer to a potential buyer? AKA, does that 'terminal wealth' field make any sense? Given that 5% property appreciation is too high, and my cost of funds pretty high, the answer seems to be renting it out.
basically DONT BUY!!
Given the transaction costs and the flexibility of renting, it's a no-brainer to rent if you won't be staying long. Also, you should assume that you are investing and borrowing in the same currencies, otherwise it's not an apple to apple comparison.
Yeah, the break even seems to be 10+ years - which is partly what I was trying to figure out with this. Another thing I'm trying to build into this is what if one rents out a 1BR living room to a roomate to cover a part of the monthly payments. But then would you really wanna share a 1BR with someone when you're making bank as an associate or higher.
xoxo
Use this as the quick and dirty assessment:
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
Can someone explain why people still use "+" after the "=" sign in Excel formulas? Lotus was ages ago. Serious question.
I do it just for speed's sake. The big fat + on the far right of the keyboard is impossible to miss compared to the regular sized = in the middle.
If you just type "+" (which I do because it's easier) then Excel will recognize it as a formula and add the "=" automatically, thus making it "=+" when you're looking at the formula after the fact.
So where should one invest if they have excess cash to take advantage of low interest rates? Let's assume their job involves the stock market and they want to diversify.
Article relevant to OPs post...
http://therealdeal.com/blog/2013/05/17/rent-or-buy-it-takes-6-years-to-…
if you gotta ask this you probably will never be able to afford it so don't worry
Makes as much sense as a platypus trying to compete in the paralympics.
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