Buy own place or rent and invest?
NYC, NY · Member since 2013 · 50 posts · 22 votes
I've been struggling with this. On the one hand there is the "Rich Dad, Poor Dad" theory that your primary home is a liability, NOT an asset because it takes money out of your pocket each month instead of the other way around. However, I have come around to believing that in certain markets like NYC, where appreciation over the long term is guaranteed (think 10 year stretches), your home is absolutely a (very valuable) asset.
Yes, coming up with a down payment is tough, but if you do have say 200k liquid, the question is what's a better investment for 10 years?
Scenario 1: Buy multiple cash flowing properties in the Midwest and keep renting in NYC
- Earn 15% cash-on-cash return per year = $30k per year x 10 years = 300k profit
- Very modest appreciation (let's say 100k to be generous)
- Total profit = 300k + 100k = 400k (I'm being very generous here)
- Keep in mind if you sell the homes at the end of the 10 years all your profit is taxable since you don't live in the properties. Even if you were offsetting the profits with depreciation write-offs, there will be a depreciation recapture upon the sale by the IRS.
- Also keep in mind you will be spending at least $2.5k per month on rent to continue living in NYC while you invest out of state. This adds up to -$300k in total rent spent over 10 years, for which you get zero deductions or equity.
Scenario 2: Purchase your home in NYC
- Take your 200k and lever it up to buy a $1mm property that's going to appreciate on average 4% per year in NYC, compounded, so $1mm x 1.04^10 = $1.480mm for a profit of $480k.
- That entire gain is tax free, since it is your primary residence
- Your monthly payments will be over 4k per month, but almost half of that is going toward your own equity and the other half is a tax write-off that reduces your taxable income and possibly brings you to a lower tax bracket.
SUMMARY: I'm not quite ready to declare victory for purchasing your home in NYC, but I have to admit, I just convinced myself a tiny bit more. What do people think of my rough analysis? One last thing to consider is that this really only works if at the end of the 10 years, you are willing to cash in your chips and move somewhere cheaper. Because if you decide to "trade up" for a bigger property in NYC in 10 years, that property will have also appreciated a lot, so you'll be buying high and spending a ton, and the profit will have been on paper only.
I've been struggling with this. On the one hand there is the "Rich Dad, Poor Dad" theory that your primary home is a liability, NOT an asset because it takes money out of your pocket each month instead of the other way around. However, I have come around to believing that in certain markets like NYC, where appreciation over the long term is guaranteed (think 10 year stretches), your home is absolutely a (very valuable) asset.
Yes, coming up with a down payment is tough, but if you do have say 200k liquid, the question is what's a better investment for 10 years?
Scenario 1: Buy multiple cash flowing properties in the Midwest and keep renting in NYC
- Earn 15% cash-on-cash return per year = $30k per year x 10 years = 300k profit
- Very modest appreciation (let's say 100k to be generous)
- Total profit = 300k + 100k = 400k (I'm being very generous here)
- Keep in mind if you sell the homes at the end of the 10 years all your profit is taxable since you don't live in the properties. Even if you were offsetting the profits with depreciation write-offs, there will be a depreciation recapture upon the sale by the IRS.
- Also keep in mind you will be spending at least $2.5k per month on rent to continue living in NYC while you invest out of state. This adds up to -$300k in total rent spent over 10 years, for which you get zero deductions or equity.
Scenario 2: Purchase your home in NYC
- Take your 200k and lever it up to buy a $1mm property that's going to appreciate on average 4% per year in NYC, compounded, so $1mm x 1.04^10 = $1.480mm for a profit of $480k.
- That entire gain is tax free, since it is your primary residence
- Your monthly payments will be over 4k per month, but almost half of that is going toward your own equity and the other half is a tax write-off that reduces your taxable income and possibly brings you to a lower tax bracket.
SUMMARY: I'm not quite ready to declare victory for purchasing your home in NYC, but I have to admit, I just convinced myself a tiny bit more. What do people think of my rough analysis? One last thing to consider is that this really only works if at the end of the 10 years, you are willing to cash in your chips and move somewhere cheaper. Because if you decide to "trade up" for a bigger property in NYC in 10 years, that property will have also appreciated a lot, so you'll be buying high and spending a ton, and the profit will have been on paper only.
@Peter Assaad maybe the thing to do is to buy the condo in NYC with the 200k, then soon after, you take 10% equity out (100k) to invest in cash flowing properties elsewhere. Sure your monthly housing payments go up, but hopefully you can more than offset that with your positive cash flow in the midwest. Then you are killing the proverbial two birds with one stone.