Does it Make More Sense to Rent or Buy in Brooklyn?
With interest rates still at record lows and a seemingly endless supply of gleaming new condos available to buy in Brooklyn, you might be surprised to know that many high-earning New Yorkers still seem to prefer to rent rather than buy. Even more surprising is that many renters are prepared to pay $4,000-$5,000 a month in rent, which equates to $50K-$60K a year that goes to their landlords rather than towards the mortgage on a property they own.
A search on apartments.com reveals that there are, at the time of writing, just over 200 apartments available throughout Brooklyn, priced between $4,000 and $4,500. Most of them are in North Brooklyn between Park Slope and Greenpoint. Not surprisingly, those in the pricier neighborhoods such as Dumbo and Williamsburg only tend to have one bedroom, whereas in less expensive neighborhoods like Crown Heights a $4,000-$4,500 rental could get you as many as 3-5 bedrooms.
According to bankrate.com, at today’s interest rates with stellar credit, for a $4,000 and $4,500 a month payment (and having access to a 20% downpayment), you’d be looking at purchasing a condo for around $700,000. This factors in around $2,000 for taxes, insurance, and maintenance. There are many condos for sale where the taxes have been abated because of the 421a tax breaks that were offered to developers. In those cases, your money would go further.
Living Room at 5M, 111 Montgomery Street. Picture: Courtesy of Compass
Staying with Crown Heights, according to StreetEasy at a price-point between $700K and $800K you could purchase unit #5M at 111 Montgomery Street, a brand new condo at just over 700 square feet. Your estimated payment would be $4,002/month. If you wanted to get something older, your money would go further and it would be possible to get a two-bedroom condo with more square feet.
By inputting the amount you want to pay in rent, how much you can afford as a downpayment (FHA loans allow as little as 3.5% in down payments), you can work out what trading rent for a mortgage buys you. The more you are prepared to pay each month the more you can afford in a mortgage payment which opens you up to greater square footage and different neighborhoods.
Based on this model renters might strengthen their claims to keep renting. “Why would I pay $4000 a month for a mortgage in Crown Heights for a 1-2 bedroom condo, when the same amount would get me a 3-5 bedroom rental apartment and there would be no downpayment?” Valid point. However, Brooklyn is one of those confounding markets where purchase prices have risen faster than rents in recent years. That’s why, in the long run, buying a property is a good move. Let’s dig deeper.
Reasons why buying makes more sense than renting in Brooklyn:
Brooklyn residential real estate is rising dramatically. Locking in a low-interest rate and accruing equity buys you a peace of mind with a fixed payment and not having to worry about rent hikes.
Buying allows you the freedom to rent out your Brooklyn condo and live almost anywhere else in the country with the tenants paying your mortgage/rent elsewhere plus earning you a profit on top.
As an investment strategy, buying and living in a rapidly appreciating market allows you to get a break of $250K (if single) or $500K (if married) on capital gains tax if you live in the property for 2 out of 5 years.
Over time you will pay down your mortgage. If you increase your income, you can pay down larger chunks of your mortgage or even eliminate it completely. You will never be able to eliminate your rent. It will always rise.