When trying to decide how much to spend on an apartment purchase, listing price is a helpful starting point, but doesn’t convey the whole picture.
In fact, it’s possible for an $800,000 apartment to actually cost more than a $900,000 apartment. The consideration when buying a co-op is high maintenance, lower price vs. low maintenance, higher price. In order to really do an apples to apples cost comparison between apartments, you need to look at the whole picture and calculate “total monthly payment.”
Total monthly payment is a figure which includes mortgage and maintenance. While your mortgage will always be the same on equally priced apartments, maintenance varies (often significantly) from building to building.
Though you may be able to afford the mortgage on an $800,000 apartment, you may not be able to afford it in a building with very high maintenance. The opposite is also true, i.e. you might be able to afford a higher mortgage amount in a building with very low maintenance.
For example, if your typical apartment has a maintenance of $2,000/month and another comparable apartment has a $5,000/month maintenance, then you have another $3,000/month of mortgage service. Since you can get $100K of mortgage for less than $500/month in this market, the second apartment should be discounted by at least $600K to make up for the higher maintenance.
Of course it’s rarely this easy. You also need to consider:
- Tax deductions: Compare the deduction you’ll get from your maintenance (of which only a percent can be deducted)versus your mortgage, which is almost all deductible in the beginning.
- Why might a building’s maintenance be high to begin with? High maintenance can be because of a ground lease, a lawsuit, or improvements from years of neglect. However, sometimes it is because the building has a high mortgage which will be paid off shortly. This could actually be good news for shareholders since the apartment may increase in value due to lower monthly costs on the horizon.
- There is a stigma associated with a high maintenance building (at least for units in the under $3 million price range) and there is a small discount on top of the analytically driven discount as well.
You’ll need to evaluate each apartment on a case by case basis and look not only at price, but also at total monthly payment when deciding where to buy.