In Hoboken, NJ. Is it better to buy or rent? We will sample two active listings available in this market and run the numbers. Follow along with us as we investigate. The answer we got was surprising.
All About Hoboken, NJ
Hoboken. The city of ol’ blues eyes himself, Frank Sinatra. And the first recorded baseball game. It is also known as the Square Mile City, because, well, it is very close to being just one square mile. Hoboken may be small, but it has a lot of great features that will make you want to call it home.
Hoboken is a community located right across the Hudson river from New York City, NY. Hoboken has undergone a gentrification and modernization over the past 20 years like many other urban communities. Hoboken has always been a desirable alternative to NYC living due its unique attributes including location, extensive transportation options and walkable nightlife.
If you are looking for a small city with quick access to New York City, and want all the benefits of an urban location, Hoboken is a great choice. There are a few choices in New Jersey for urban communities close to NYC and Hoboken is among them:
- Hoboken
- Morristown
- Montclair
Hoboken is a city with rich industrial history, having become its own after the U.S. Civil War. The city historically was a major ship building center and shipping lines used Hoboken as a terminal port. Major companies built factories here, including Maxwell House, Lipton Tea, and Hostess. The industrial past has been over time going away, but there are still remnants available to see such as the old P. Neumann leather factory building on Observer highway, which still exists today.
Caption: Neuman leather factory, courtesy of NJ.com.
You will find Hoboken offers some amenities that enhance its livability and quality of life. The transportation infrastructure is top notch, which is saying a lot since NYC is right across the water. Its location offers the following transportation options:
- Bus and Ferry service to NYC.
- 15 minute Path subway train service to midtown and lower Manhattan.
- Access to the North East corridor trains (Amtrak) which cover the east coast.
- 15 minute drive to Newark International airport.
- Light rail service from Bergen County to Bayonne.
- A drive within 2 hours of the ski slopes of PA and NY.
- A drive within 2 hours of the sandy beaches of the Jersey Shore.
In recent years, there has been a boom of housing construction, primarily condos constructed in town. Along with the housing boom, there are hundreds of shops, restaurants and as well clubs/bars that are right in town.
Hoboken housing isn’t inexpensive. However, for a similar cost as NYC apartments the amenities can be much better. Apartments are more spacious and newer, have laundry machines in the unit, as well as community features such as pools and game rooms.
Selecting The Condos…
We will feature two bedroom/two bath condos, one for rent and one for sale. These condos are right in the same neighborhood and offer very similar amenities.
In an urban setting, here are a few features which are very desirable, but often times hard to find. These include an outdoor space, laundry inside the apartment, and off street parking. The condos we have selected both have all of these features.
These are the links to the two condos. If these links become stale, use the attached pdf documents to view the details of each apartment at the end of this article. Also attached is the BVR spreadsheet that we use to compare the properties. Follow along with us as we discuss the numbers, the spreadsheet has the numbers already filled in.
Filling In the Numbers
The sticker price for the rental is $4,700/month, and the list price for the condo is $1.05M. We have filled in the (4) basic inputs that are used in the comparison. We have added $100 a month to the rental listing for parking. More on that later.
The purchase price, monthly rent and an estimate of expenses are shown above. Both of these apartments have similar utilities, including natural gas for cooking/heat and electric. This is shown below in the Monthly Expenses worksheet:
For an owner, they would be responsible for those expenses as well, but also a few others. We have put into some details here for owner expenses that are good estimates. The condo association fees and property taxes were copied from the sales listing itself. The homeowner’s insurance is an estimate from the listing website.
Mortgage Details
For buying, the mortgage information and configuration are available in the Mortgage Details worksheet. We recommend that you buy a conforming mortgage, which would require a 20% down payment and no mortgage insurance.
This is a standard 30 year fixed rate mortgage at a market rate (at the time of publication) of 6 3/8%. The mortgage payment works out to be $5,241 per month.
In practice though, your mortgage company will pay your property taxes and homeowner’s insurance on your behalf. Upon closing an escrow account (an account that pre-funds these expenses) will be setup by your mortgage company.
The total payment to the mortgage company would be as follows:
- Mortgage Payment: $5,241
- Property Taxes: $930
- Property Insurance: $60
- Total Payment: $6,231
Cash Flow Versus Balance Sheet
We are first and foremost investors, and we help you evaluate these financial decisions from this view point. The following section will review the numbers that will help to describe how the transactions change over time.
Building wealth is about your balance sheet as well as cash flow.
Cash flow is straight forward, this is measuring money going in and out over time. Balance sheet is an asset and liabilities point of view, which describes what you own and what you owe. Let’s start off with cash flow.
We saw that your total mortgage payment to the mortgage company is $5,241, while the rental payment was $4,700. We should also add all expenses to these numbers because this is money you are spending every month. Taken together, these numbers add up to the Monthly Payment in the above picture.
We added $100/month to cover the cost of a reserved parking space for the rental condo, bringing the rental total to $4,800. The condo purchase comes with two deeded spots in the cost. Hoboken is parking space constrained, these spaces could be rented for $100/month each. To keep the comparison fair, and to balance out the rental, we assume that you keep one owner spot and rent the other one for $100/month, resulting in investment income.
From a monthly payment point of view, renting is less costly $5,030 versus $6,971. Also, renters can invest their acquisition costs (down payment + closing costs – rental security deposit). This is estimated to be $971. This money is modeled to be invested in a risk-free money market account, at current interest rates. When accounting for this income, renting only costs $4,059 because the interest income comes in each month.
However, on the buying side, you are initially paying down your loan principal each month, starting at $778. This isn’t cash in your pocket, but a transaction that is added to your balance sheet as home equity. This money can be realized as cash either when you sell or take out a home equity loan. Taking this into account, the buyer is paying effectively $6,093 per month.
Taking in the total picture, the renter is getting ahead each month right from the start because the effective monthly payment (which takes into account investment income) is lower for the rental unit.
Defining The Investment Term
We have seen that the buyer is effectively spending more money each month. However, the buyer also has sunk closing costs when buying which cannot be recovered. Additionally, when the buyer sells, there are also closing costs which need to be spent. The BVR spreadsheet models these costs.
If the buyer sells too soon, they might not get ahead financially due to the closing costs. The buyer needs to stay in the condo for a certain period of time to recover these costs.
The Investment Term defines how long you keep the property, and then you sell at the end. The model projects out all the payments to that term and comes up with a final number. The default investment term is 5 years. The chart below shows how the payments change over time.
Over the initial 5 year term, owning loses out to renting. The cumulative effect can be summed up in the final total, which sums up everything for the investment term.
This result shows that you come out ahead by renting by about $63K. This includes the estimated closing costs and all the other assumptions we talked about previously. It’s a big number that shows Hoboken housing has really increased in price significantly in the past 10 years.
In the very long term, renters always lose because the numbers are against them. It’s not a matter of if but when. If we project out the model to a 15 year investment term, owning starts to win.
Summary
As of this writing in 2024, we have high housing costs and high mortgage rates compared to recent history. As we show in this article, the market for buying a home in Hoboken has gotten too hot.
The reason is that we generally recommend that you try to get an investment payback on owning within a 5 year investment term. Under the assumptions in this article, you wouldn’t get ahead from buying until the 12th or 13th year of ownership.
We can also state this differently. There are two possible scenarios that could make buying better after the first 5 years of ownership:
- The purchase price for the condo buyer would need to drop to about $850K.
- The mortgage rate would need to immediately drop 2%, from 6 3/8 to 4 3/8.
If I were a bettor, option two is more likely in the next 5 years.
There are a few options to consider right now. Keep looking in the market for a better priced condo to buy or offer the owner of this condo less money. If I were a buyer and the options were limited, I would continue to rent until either of the two options happened. Stay on the sidelines and perhaps lock in a 2 year rental lease to take advantage of comparatively lower rental prices.
It is impossible to predict the future, but what you can do is make decisions today based upon what you know right now.
- Rental Link, from Zillow.com:
- https://www.zillow.com/apartments/hoboken-nj/the-lexington/5XmSCK/
- Sales Listing, from Realtors.com:
- https://www.realtor.com/realestateandhomes-detail/325-Willow-Ave-Apt-2B_Hoboken_NJ_07030_M67062-01953?ex=2964791593