It sounds completely counterintuitive but if you know anything about New York real estate, it may not be as crazy as it sounds.
In my experience living in New York, people can live with the noise, the congested train, the long winters and any other annoyances that chafe on our daily existence. There is one single thing that I find makes people leave the city though more than anything else: the real estate prices.
People put up with all the other roadblocks that the city throws in their way because these are offset by the positives: amazing job opportunities in a range of different industries, a world class artistic scene, being the media center of the US and world renown eating options to suit your palette.
When it comes to real estate though, the prices are astoundingly prohibitive for most people. In fact due to this, New York has one of the lowest home ownership rates of any city in the United States.
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As you can see above from a (large bank) report based on data up to 2014, home ownership varies considerably by boro but across New York as a whole, home ownership languishes at 31% while that of the US as a whole was more than double that at 63%.
Meanwhile the median home price in the metro area was around $400,000, which saw a dramatic run up in prices from the late 90’s.
Source: JP’s Real Estate Charts
That run up in prices did not see a subsequent run up in incomes, so the result is that owning a home became significantly more expensive for the majority of New Yorkers.
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These prices are just median prices and likely include much more studios and one bedrooms compared to other cities. If you want to buy a home in New York to raise a family, like in a home with 2 bedrooms or more, the median price could easily move into the high hundreds of thousands or the millions.
A Back Door to Ownership
There is another option for people who want to buy though which I have been advocating in other posts for a long time: The Housing Development Finance Corporation (HDFC) Co-op.
I have owned an HDFC Co-op for a decade and they are neither difficult to obtain nor hard to find as some articles, like this one from Brick Underground, would have you believe.
The HDFC Co-ops are usually income restricted, which is the reason the prices are usually lower. The income restrictions are based on what’s called the Area Median Income (AMI) which is determined by the local census tract. I have noticed that AMI varies throughout the city but to give you an idea of what it is for the whole city, take a look at the table below.
Source: nyc.gov
The above table is just for one person. There are adjustments for family size which increase the thresholds but just using this as an easy example. Based on the above, the city thinks the affordable rent for a studio should be the following.
Source: nyc.gov
What you will find is that most co-ops restrict the income to 120% of the AMI for purchase. For a single person that would mean you cannot make more than $87,720 currently. This may sound good in other parts of the country but is more attune to the earnings of a professional admin assistant in New York.
The reason these apartments are income restricted is because they receive a tax subsidy as part of a state program which provided tax subsidies to new co-ops that the state deemed had neglectful landlords. Many of these buildings were taken over by the city and sold to the residents for a few hundred dollars per apartment. In my case, the original buyer paid about $500 for where I now live. Much of these “conversions” happened in the 80’s and 90’s when prices were much lower and in areas that were not sought after at the time.
The taxes the buildings pay end up being about a third of what a market rate building would pay so the residents benefit from the lower monthly maintenance fees. For the reasons I mentioned above, many of the residents are long time owners, older in age and on fixed incomes.
I have noticed a number of articles claim that co-ops are cash strapped so they ask for cash only offers. This is only in the most sought after neighborhoods and really just an excuse to get their money faster. If a co-op is that cash hungry that they need the money a few weeks sooner you should think very hard about whether you want to buy into a place that will be managing your monthly maintenance payments.
The point is, there are still many steals to be had in terms of buying an HDFC co-op if you:
1) Have a lot of cash on hand and have a low income (a retiree, or someone in a lower paying job, who just inherited a lot of money)
2) Have a lower paying job and are willing to purchase a place outside of the “hot” neighborhoods in New York where demand is yet to catch up.
To illustrate my point I went into Zillow and found a few HDFC co-ops for sale in trendy neighborhoods.
Source: Zillow
For the neighborhoods they are in, these prices are pretty reasonable. The apartment at the top in midtown could easily be worth $1.5 million if priced at market rates with no restrictions. The other two are in Harlem and the Lower East Side. Both areas once tougher but now sought after.
However this is why I keep telling people that the real steals left in New York are to be found in the Bronx. When we look at HDFC co-ops there, you can immediately see the price difference.
Source: Zillow
That co-op on Anderson avenue by Yankee Stadium is already following the lead of the trendy neighborhoods and asking for all cash offers. It’s only a matter of time before this price increase starts to spread north to other buildings in the Bronx
Back to Quitting
So to get back to the title of this post, all this has me thinking that maybe the best move for me to move up from my studio is to quit and do odd jobs for a few years, maybe even go back to school.
The reason is because the state rules specify that they have to look at your last 2 years of tax returns to see that you qualify income wise. After you purchase the home, you can make any income you like, they will never check it again.
If I were to keep working, a 3 bedroom apartment would be many years out of reach anyway based on my salary, so why not do the opposite and just go low by qualifying for an HDFC co-op with a lower income? I would plan it all out of course, saving enough for a purchase in entirety of a one or two bedroom, save living expenses for a year or so and then pursue a freelance career to see where it takes me in the next few years. Maybe the freelance career will blow up in the meantime and I can go upmarket again, who knows? The point is that I will have options and be in control of my destiny with a plan.
The Potential Pitfalls
There are a few potential (big) drawbacks to attempting something like this. Prices could rise out of my reach, 2 years is a long time and the money I saved could suddenly not be enough, this would leave me in a worse off position and I will have thrown away the potential income I could have earned, assuming my freelancing just breaks even.
The future board may reject my application based on what is going on job wise when I apply. If I am freelancing at the time I apply, they may look at this as too unstable. It would be difficult to time a new job to exactly when I apply.
I may lose momentum in my career and may find it hard to get back in. This one may hurt me the most in the long run. If companies figure I have been out of the game too long and my skills are rusty, they will be less willing to take a chance on hiring me.
The Alternatives
There are some alternatives though that don’t involve me quitting my job.
I already live in a co-op with 1 and 2 bedrooms, I may be able to get around the rules since I am already an owner in the co-op. I’m sure the board (which I used to sit on) would be much more amenable to a known current owner switching apartments, and I’m sure they would be happy to collect a flip tax fee, which in my building is 25% of the sale price if you sell your shares.
Or I can negotiate temporary lower pay at my job, take the excess pay and have it ring fenced with a payout in 2 years to keep my income artificially low. This assumes that my company would be willing and flexible enough to allow me to do this, a big question mark but not out of the realm of possibilities.
Conclusion
After weighing the options, the best may be to explore a larger place at my current co-op but things change and having a plan is a powerful thing. If I were to be laid off in a big downturn and can’t find work, this may be a reasonable goal to shoot for that will motivate me to change my approach. For now though, I will be keeping my job.
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