The buying versus renting argument has been thrown back into the spotlight in light of the recent rising interest rates.
It’s worth remembering that the current rates were considered extremely low a decade or so ago, and had post people purchased a home in NYC back then they would be sitting on a pile of equity now. The trajectory of NYC real estate has always been up despite there being a few bumps along the way.
What’s fascinating about New York City is that no two neighborhoods are alike. While one neighborhood might be established and be rising uniformly, another might be going through explosive change and being championed as “the next hot place,” as has happened to many Brooklyn neighborhoods over the last two decades. It’s still a hot topic of discussion.
In the following blog, we’ll examine how, where and what to buy when it comes to residential real estate in NYC
Ways to buy a home in NYC
The most obvious way to buy a home in New York City is conventional, with a mortgage, putting a 20% down payment, and financing 80%. Expect to pay 4-6% of the purchase price in closing costs too. The number will be closer to 6% if you have to pay Mansion Tax.
Buying with cash
One way to circumvent rising interest rates is to buy a home with cash, that is, without a financing requirement. If you receive a big bonus or commission or have sold another property or received an inheritance or cashed out a retirement plan, a cash purchase with a fast closing often puts you at the front of the line in a competitive market. It also gives you the option to refinance when interest rates fall.
If you are selling an investment property, you can defer paying the interest on it by purchasing another investment with the proceeds. However, if that unit is a multi-family home such as a townhouse, you can also live in one unit (you’ll have to pay taxes for the percentage you live in) while renting out the others.
Buy with a spouse or investor
The advantage of buying with another person means that you can leverage one another’s strengths when getting approved for a mortgage or even avoiding having to get a mortgage. For example, if one person has good credit and the other, the downpayment you can qualify combine to get approved for a loan. Alternatively, one buyer can act as a hard money lender, buying a home in cash and going on the title to be refinanced out at a later date, presumably with a cash payment for their troubles.
Get an FHA or low downpayment loan
FHA loans allow home buyers to put 3.5% down with patchy credit on a home they intend to live in themselves. There are limits to these loans in each state, so buying a multi-million dollar mansion won’t qualify, but many buyers of more moderately priced homes have got their foot on the real estate ladder this way. FHA financing can also be used for 2-4 multi-unit financing as long as the owning occupant lives in one of the units.
Home buying programs for teachers and essential workers
An expensive, expansive city such as New York cannot function without its essential workers and teachers, so there are buying programs such as The Homeownership Advantage Program(HAP) and the Good Neighbor Next Door for these workers as well as programs such as the Home First Down Payment Assistance Program for lower-income applicants, where qualified buyers can receive downpayment assistance of up to $100,000.
Why NYC real estate always rises
The trajectory of NYC real estate has always been up despite the odd downturn and there’s no reason to expect anything is likely to change. Real estate in Manhattan is a finite commodity. The island of is only so big as it’s an island.
Also, unlike other areas of the country that might suffer when its main industry and source of employment leaves, there is so much going on in New York and it’s such a center of commerce and business that a massive decline is extremely unlikely to happen. It’s worth noting that 2021 was the best ever year for Manhattan real estate.
Dramatically increasing rental prices
If you’re worried about buying a home amid rising interest rates, and thinking of sitting it out until they drop, do a quick calculation and work out how much you’ll spend on a mortgage versus rent. Of course, you’ll have a downpayment and closing costs to think about if you buy but you’ll have to pay those regardless, whenever you choose to buy and the downpayment is likely to increase the longer you leave it as home prices will increase. You have no control over the rent, though. In fact, rents rose a starling 33% between Jan 2021 and Jan 2022, far greater than the rise in interest rates. The good thing about a mortgage, when rates drop, you can always refinance. Try asking your landlord for a rent reduction and they might not be so willing to negotiate.
High-quality new homes coming to the market
Inventory might be low in NYC but 1,108 new condo units in about a dozen buildings will list in Manhattan by the end of 2022, according to the NY Post. Factor in Brooklyn, Bronx, and Queens and that number shoots up many times. If you’re interested in buying you won’t be short of options.
Choosing a neighborhood
The expansion of the 7 train subway line to Hudson Yards and the Second Avenue line has expanded the transportation options in the city, an important factor when deciding on a neighborhood to live in NYC. It’s also important to consider bus lines and parking options. There is construction going on practically everywhere in NYC and if you’re looking outside of Manhattan you might want to consider neighborhoods on the rise such as Greenpoint, Prospect Lefferts Gardens, Flatbush, Bushwick, Bed-Suy, Crown Heights, Greenwood Heights (all Brooklyn), Washington Heights, MidtownEast (Manhattan), and Ridgewood Heights (Queens.
Staying in NYC Longterm
If you plan to stay in NYC on a long-term basis, buying and locking in a fixed-rate mortgage makes sense. If you start riding the renting roller coaster you might find yourself priced out of the city as rents continue to rise.
Tax benefits of homeownership
There are numerous tax benefits to owning a home that don’t apply to renting:
You can write off the interest paid on your mortgage each year in your taxes
- All repairs and updates can be written off when you sell the home
- You can write off the interest paid on your mortgage each year in your taxes
- Married couples do not have to pay capital gains tax on the first $500,000 of profit when they sell a home and single people don’t have to pay on the first $250,000 of profit.
- If you own a multi-unit property and live on one floor, you can write off depreciation in your taxes on the rental units for the first 27 years of ownership.
Unless you plan to live in New York for a short period, or, you cannot qualify for a mortgage or buy with someone who can, buying a home beats renting, especially now. The escalation in interest rates has been matched by an even higher escalation in rents, with bidding wars for some rental apartments breaking out in some areas. Although the inventory of available homes has dropped recently, the next year will see an influx of condos hitting the market, so locking in your piece of NYC would be a prudent move.