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:
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Mansion tax 1% - $12,500
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Flip Tax 1% (on average) - $12,500
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Attorney fees - $3,000
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Other closing costs (coop purchase application, move in/ move out fees, etc.) - $2,000
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Mortgage recording tax - $0 (N/A for Coops)
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Fees & Points (0.8%) - $8,000
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Bank Attorney - $1,000
Total closing costs: $39,000 (~3.1%)
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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
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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).
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Backing out tax deduction savings:
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$100,000 property tax + $360,738 interest payments = $460,738
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$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.
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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:
- an additional $100,000 in interest payment to the bank or 10% of the loan amount at the end of year 10.
- 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.
- Approx. $600 more per month in mortgage payment (when the interest rate hovers between 4-6%)
- A requirement of an additional 0.5% in appreciation rate per year to breakeven at the end of year 10
- 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. - A rental equivalent (especially for bigger apartments) does not really exist in most neighborhoods in NYC.
- Locking in at a moderately low rate is a great way to hedge against inflation.