Certain beliefs about real estate, like paying all cash—or putting down as much as possible for a down payment—are often held up to be the goals that everyone should have. But that one-size-fits-all approach is not always a good fit, especially in New York City.
It’s true that an all-cash offer can make you a more competitive buyer in New York City’s intense real estate market, and for high-income earners, it’s a status symbol—also a no-brainer that they wouldn’t even deal with the mortgage process. And for many New Yorkers, just breaking out of the rent cycle is seductive, especially when rents appear equivalent to monthly mortgage payments.
But if you put your ego aside and consider that by paying all cash, or even putting a sizable chunk of money down over the minimum required, you can be missing out on the ability to invest that money over time while interest rates are still favorable, or in the worst-case scenario, walling off access to your own money when you need it the most.
In fact, a majority of millennials regret buying their own home, says financial planner Simon Brady, founder and principal of Anglia Advisors in New York, pointing to a July report from Bank of the West, which found that 68 percent expressed buyer’s remorse, and 41 percent said they had stretched themselves too thin when they bought.
“They overspent on the down payment, in many cases they borrowed from their 401k, so people are overcommitting themselves to get into the property,” Brady says, a situation that he calls potentially financially “catastrophic.”
“This is a real problem, because even though property values go up, owners are facing liquidity problems caused by layoffs, stagnant salaries, or aging parents to take care of. Younger people usually have significant life events coming up, such as marriage, kids, or even divorce,” he says. And that’s a problem because “you can’t pay a hospital bill by selling your kitchen.”
These days, you’re likely to find people in their mid-20s to mid-30s working and saving up to own an apartment or a house. But even after a decade, that’s all many can afford; they’re unable to put aside money for retirement.
The question buyers should be asking is, “what can you do with your money if you don’t have to put so much down to get an accepted offer?” says Mark Maimon, a vice president at Freedom Mortgage.
Even though most people are comfortable planning only about 10 to 15 years out, many don’t even stay in an apartment that long.
Maimon recommends weighing the return on your investment—seeing how much you benefit from putting a larger amount as a down payment versus how much you would expect to make by investing those funds according to a comprehensive financial plan, and stresses the importance of meeting with a financial advisor, something few people in their mid-20s to mid-30s tend to do, perhaps because they might be told to put their real estate dreams on hold.
Of course dreams are often based on long-held desires—and these can blind you to current realities.
“We’ve been blessed with low interest rates for over a decade, but they won’t always be low,” Maimon points out. Mortgage rates just hit their highest levels in two months, and their rise is one of the factors hurting the Manhattan residential market.
Brady offers the following scenario to illustrate the choice buyers should consider:
Let’s say you want to buy a $1.5 million apartment and you can get a loan for half, or $750,000, with a 4.5 percent interest rate. On a 30-year term, you can expect to pay $3,800 per month toward the interest and principal. So after 10 years, you would have paid $456,000 in principal and interest.
But if you invested $750,000 at a 6 percent average rate of return, after 10 years, you would have $1,340,000 on your hands, increasing your net worth by $590,000.
The numbers are far more dramatic, thanks to compound interest, when you go 20 and 30 years out. At 30 years, your choice is either $1,368,000 in interest and principle payments, versus a $3,550,000 increase in net worth.
There are some caveats here: These figures don’t take into account any mortgage interest tax benefits, closing costs, capital gains taxes, investment fees, increased value in the property, or future changes in tax policy.
“A 6 percent rate of return is conservative if you look over the long term, and some of the tax and cost friction is covered by that lower estimate,” Brady says, “but even if these numbers are somewhat off because of elements that we cannot predict, it’s still very compelling.”
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