How much does purchasing Real Estate in NYC Cost?

A deep dive into the TCO (true cost of ownership) for a common NYC real estate purchase over a 10 year period.

With the recent rate hike by the Fed (and with the promise of 6 more rate hikes in 2022) - it’s important to consider the true cost of a transaction especially when financing is involved. 

Taking a common scenario in NYC - we will break down the cost of the investment at the point of transaction and then long-term costs of holding the property for the lifetime of the ownership (in this case 10 years). The goal is to derive approximate percentages that then can be used to calculate the true cost of ownership for any specific property in the NYC area. 

Example of a common purchase: 

A NYC co-op priced at $1,250,000 (approx. median price for a 2 BR coop apartment today). 20% Down. Financing - $1,000,000.

One-time purchase closing costs: 

Mansion tax 1% - $12,500

Flip Tax 1% (on average) - $12,500

Attorney fees - $3,000

Other closing costs (coop purchase application, move in/ move out fees, etc.) - $2,000

Mortgage recording tax - $0 (N/A for Coops)

Fees & Points (0.8%) - $8,000

Bank Attorney - $1,000 

Total closing costs: $39,000 (~3.1%)

**If condo: add 1% (~4.1%), new development condo / sponsor sale add another 2% (~6.1%)

Long-term Carrying Costs: 

Insurance - $1,200 per year

Maintenance - $28,800 per year ($2,400 / month)

Total long-term carrying cost for 10 years: $300,000

Long-term financing cost for 10 year hold: 

Conforming 30 year fixed at 4% Interest

Interest: $360,738 (63% of total payments)

Principal: $212,160

Total Payments: $572,898

Total Cost (closing, interest, maintenance, taxes, insurance) at end of year 10: $699,738

Possible savings from income tax deductions: $10,000 per year property tax, mortgage interest deduction ($750,000 for married, $375,000 for single/married filing separately). 

Backing out tax deduction savings: 

$100,000 property tax + $360,738 interest payments = $460,738 

$460,738 * 40% (approx effective tax rate fully loaded) = $184,295

Total net costs at year 10 = $515,443 

Sale price required to breakeven at year 10 = $1,900,000.

**Note: a loan amount greater than approx. $2M maximizes on the interest deduction cap at the end of 10 years. 

Key takeaways: 

  • A real estate purchase with $1,000,000 loan will result in a total cost of approx. 50% of the loan amount at end of year 10. 

  • A 4.25% appreciation rate per year on the property is required to breakeven when selling at the end of year 10. 

  • A 1% increase in interest rate results in:

  1. an additional $100,000 in interest payment to the bank or 10% of the loan amount at the end of year 10.

  2. 7-10% more towards interest payment and less towards the principal amount (built-in equity) at the end of year 10 from the total mortgage payments. 

  3. Approx. $600 more per month in mortgage payment (when the interest rate hovers between 4-6%)

  4. A requirement of an additional 0.5% in appreciation rate per year to breakeven at the end of year 10

Does this mean that we should only be purchasing real estate when we can breakeven or better? Not necessarily. There are a few key points to take into consideration: 

  1. What would renting an identical property cost over the same 10 year period? 
    It would cost about the same if not more of the total net cost amount of the transaction ($640,000). So if there’s any appreciation from the purchase at all then we’re already ahead. 

  2. A rental equivalent (especially for bigger apartments) does not really exist in most neighborhoods in NYC.

  3. Locking in at a moderately low rate is a great way to hedge against inflation.

3 Quick Tips - Lease Assignments and Subletting

Everyone knows someone who's had to break a lease, you know, LIFE happens..

If you or someone you know needs to either asssign their lease or do a sublet, follow these three tips to keep the stress in check and get it done:

Know the Process - Notify your landlord and find out EXACTLY what is required to carry out the process

Price Aggressively - you will be directly competing with your landlord and the general market - your pricing and incentives will have to beat the competition

Market Right - people looking for short-term rentals are not on the major platforms (streeteasy, trulia, zillow etc.), they are looking on facebook groups, leasebreak and word of mouth. So make sure to hit up the right platforms

While some are capable of handling this process themselves and may find success quickly, many have trouble. Please feel free to reach out to me to get this done ASAP.