Live Like a New Yorker in Your Own Home Town

Here's a guest post from Susannah who blogs at How to Live Well on Nothing a Year.

Any New Yorkers here?  Then you know about that Holy Grail of urban housing, the rent-controlled apartment.  From World War II until the 1970s, rent-controlled apartments were considered a way for cities to maintain lower-cost housing for poorer residents.  It's estimated that in 1997, 1.1 million of the 1.7 million apartments in NYC were rent-controlled.  The median rent for those apartments was $545, according to the 1990 census, compared to $1350 a month for non-rent-controlled apartments.  (Yes, nearly 20 years ago.)

Imagine renting a two-bedroom apartment in Manhattan for $545 a month.  (Imagine renting a broom closet in Manhattan for $545 a month!)  There are a couple of wrinkles, though: your rent is set the day you move in.  If you moved in in 1974, your rent may still be $545 a month.  But if you move out, the next tenant's rent readjusts to market rate--which may be $2450 a month.  If you have a rent controlled apartment, you guard it with your life: in 1997, 88% of tenants living in rent controlled apartments had been there for more than 25 years.

Stories like these make me envious.  Yes, I too could live in Manhattan, if I had the foresight to get an apartment there at the age of 6 months.  As an aspiring novelist, I've thought about moving to New York City.  I've gone as far as apartment hunting.  And that was the end of that.  Due to my lack of planning as an infant, an apartment in NYC is priced out of my reach.

And then, about a year ago, I discovered a cute two-story semidetached with wooden floors and big windows--in my hometown.  The best news of all?  It was rent-controlled.

You too can discover rent-controlled housing in your area.  We call it "home ownership."

The new rent control

Of the many advantages of home ownership, a stable monthly payment is the one most often overlooked by prospective buyers.  And that makes sense--when you buy, your monthly outlay is equivalent to or greater than the monthly rent of a comparable property (more about that later.)  It doesn't seem like a deal to shell out that huge hunk of cash every month for the next thirty years. 

I'm going to speculate that in 1975, paying $545 a month for that Midtown apartment was a nasty shock, when there were bigger places going for $75 a month in Podunk, USA.  But after a decade or two, your payment starts to look much better.  The same force that has made that $545 apartment more desirable than dinner with Tom Cruise will make your mortgage into a laughable sum in thirty years.  (No, I meant inflation, not Scientology.)

"Not the same," you say.  "You have to pay up front for the home."  So you do.  On the other hand, after 30 years, you stop paying rent altogether.  Is it worth the initial outlay?  Well, how many landlords give you back a percentage of your rent when you move out?

"But you have to do your own maintenance when you buy!"  Sadly, the same is true for many rent-controlled apartments.  Rent control is a frustration for landlords because they are making so little and are often unable to sell very valuable property out from under their tenants.  Many try to chase out their stubborn tenants by ignoring all repairs and improvements.  Is that illegal?  Of course.  But it's still a big problem.  A smart rent-control tenant has a wrench and knows how to use it.

"Your insurance and taxes may go up!"  This is true.  One assumes you have renter's insurance in your NYC pad, so that cost may be even, but property taxes are an issue.  On the other hand, those property taxes are deductible, and increases are often capped for as long as you own the home.  (In my area, they're capped at a 3% per year increase.)  And, as a renter, you're indirectly paying your landlord's property tax, but you don't get the tax break.

If you own your own home with a fixed-rate mortgage, your payments stay essentially the same.  This is a big benefit for anyone trying to live on commission or freelance work.  As inflation eats away at the cost of your housing, you will find yourself progressively better off.  Stability isn't just for the people who pay off their mortgages early.  It's built into the homebuying experience.

Make it a frugal hack

I see someone in the crowd gearing up to address the other benefits of home ownership.  But we're skipping them.  To treat your home like a rent-controlled apartment is a valuable frugality hack.  And let me tell you why:

• The average American thinks of home equity as wealth.  But it is only accessible through consumer debt in the form of a HELOC loan.  And, until the home is sold and the profits locked in, the market can turn and leave a homeowner stranded, without the income to continue to live above his means, and with debts that may threaten the home itself.

• The idea of "resale value" has been used to justify 10,000 granite countertops and 100,000 new showers.  Do you really need them?  What was wrong with the old ones?  Could you pay in cash?  No one asks these questions because of the delusional concept of "investing in the home."  I hate to break it to you, but that new deck is an expense, not an investment.

• The myth of can't-lose real estate investing has been exploded, along with the credit and housing markets.  You can lose money on a house.  It can become worth less than it was when you purchased it, and you can find yourself in the hole with no way out but foreclosure.  It's happening every day.

• You won't necessarily grow into your mortgage--perhaps you'll want to change careers or stay home with kids.  What you can't afford today is something you shouldn't buy. 

How does this relate to rent control?  If you think of your home and your mortgage primarily as a housing expense, you are less likely to succumb to living outside your budget, buying a home you can't afford, or overpaying in a high-priced market because everyone else is doing it.

Go house-shopping and apartment shopping at the same time.  Knowing the rental market is the single best way to evaluate the true value of a home.  Figure out the initial premium you'll have to pay in order to lock in a cheaper "rent" for fifteen or thirty years.  Remember that it's a waste of money unless you intend to stay for a few years, and figure out how many years it has to be.  In some markets, rent is so much cheaper than buying housing that I'd advise you sit down and decide: do you want to stay where you are and rent?  Or do you want to move in order to own a home?

Naysayers will tell you that it's always going to be much more expensive to buy than to rent, and your costs will have to be made up for by counting on appreciation.  They're wrong.  My home payment is almost exactly the same as the rental of a comparable home down the street, and I bought only a year ago.  By thinking of my mortgage payment as paying for housing instead of as OMG!!! THE BEST INVESTMENT EVER!!!!, I steered clear of the little house I fell in love with and bought a bigger, nicer, and only slightly less-cute house at a much better price.

I thought buying was good.

I'm a big advocate of buying a home.  But home ownership should be about finding a long-term place to live, and settling there.

• Your home shouldn't substitute for financial management and investment. 
• It shouldn't be a cash cow. 
• It shouldn't be an emergency fund. 
• It shouldn't be a status symbol. 

By focusing on the actual monthly financial benefit of your house payment (the stabilized price for shelter), you can avoid being caught up in the phantom financial benefits.  If your neighbor down the street sold his place for $20k more than you paid to buy, no one has put money in your checking account.  When you write a mortgage check for only 75% of what rent would cost you, that other 25% is a real savings, in your hands today.

Remember: renting isn't throwing money down the drain.  It's paying for a roof over your head.  Your mortgage has the same primary purpose.  Ignore the investment aspect of home ownership and look at it as a way to stabilize your housing costs.  Your home's equity will probably grow whether you're thinking about it or not.  But don't gamble on it.  Count on your guaranteed benefit: the joy of paying a 2008 price in 2028 dollars.

Comments

[Minimum Wage]

Don't forget the nonhomestead tax which makes property taxes a lot higher on rentals than on owner-occupied homes. Oh, and rental properties are sold on average more often than owner-occ homes, so they are reassessed to market more often and on average have much higher taxable value numbers than owner-occ. (Look it up or ask your twp assessor.)

Advocates of tax breaks for homeownership often claim that homeownership produces more stable neighborhoods of long-term residents.

But as NYC has shown, rent control can produce even greater neighborhood stability and long-term residency.

[Alexandria]

I thought this was an excellent article.

It could also depend largely where you live and makes more sense in areas where rent control apartments are so coveted.

But I have been totally lost on the "renting is better" debate in the expensive region that I am from. (My grandma rents a "closet" for $30k/year and my parents own a decent sized home for less than $10k/year - all costs included. Plus my parents have a million dollar asset!). & why we bought so young was precisely the reasons stated in your article. It was actually a little cheaper on a monthly basis to own than to rent, so we bought as soon as possible. Likewise, rents and house prices were rising out of control, so we really looked at it as a way to control costs.

Of course, it was easier to settle on something we could afford, coming from such an expensive area. We just didn't see the point of working so hard for a huge mortgage, and we ended up moving somewhere cheaper. Of course the whole point of the move was to make life easier, so we didn't get caught up in all the extras. We really did look at it as an exercise to control our costs. To gain some control in an area that was so out of control... & it has boded very well for us.

We have a pretty nice house for being so young, and I know people are eyeing us like if we are going to go belly up in this mess. I laugh. We have about 40% equity even after all this turmoil and never dreamed of borrowing MORE money against our house. So if they are waiting for us to go belly up, they have a long wait. (A lot of the same people don't realize our mortgage is cheaper than their rents!!! That is the thing. Most of the people I know bought in the last few years and have giant mortgages, or rents far more than our housing expenses. We've only owned a decade, but it makes a huge difference. We have far more house and lower payments to boot).

[Ryan S]

One thing that always gets lost in the rent vs. buy debate is that people compare the costs of owning a 4 bedroom/2.5 bath/2000SF+ house on a 1/4 to 1/2 acre lot versus renting a one or two bedroom apartment. For most families, the 1 or 2 bedroom apartment does not meet the same needs.

[Melissa]

What a great article! That's something that I've been considering that's pushing me to save for a house. Thanks for the great insight.

[Sarah]

Er...there are effectively few to no rent-controlled apartments left in New York City. There are rent-stabilized apartments, which are significantly different. This is the sort of thing one might expect a person writing an article on this topic to know before beginning.

[Funny about Money]

Thank you. What a good insight, articulately explained.

The issue is that if you have a fixed-rate loan its real cost goes down over the years as inflation increases and as your income grows....assuming you stay put and don't move every few years. The comparison with a rent-controlled apartment (whether NYC still has them or not) makes this concept very clear.