Renting an Apartment versus a Cooperative Condominium
An Apartment or a Condominium? How do they Compare Cost Wise?
It can be a struggle at an older age making a decision to what is the best solution for what likely is your final residence. Part of the struggle is determining the financial consequences of it. Here is an attempt to provide a method of evaluation.
When choosing to downsize from a Single-Family Home to a Condominium or Apartment there are several financial considerations. Among them are:
- What do you plan to do with the equity from the sale of your home?
- What will the impact of inflation be on rent or fees?
- What expense items are included as part of the rent or fee?
- What degree of control do you have over your home expenses?
- Will you need funds for assisted living in the event of health changes?
- How important is it to leave Heirs some inheritance?
In most of the considerations, it is impossible to predict exactly what may happen. Nevertheless, it is wise to consider where housing expenses might be headed and what might be possible. Comparing annual rental costs to an annual cooperative maintenance fee is the first place to begin.
For purposes of this exercise, it is assumed the only utility cost for the Renter, or the Cooperative Shareholder is electricity. The monthly rent or fee includes the costs of:
- Internet Service,
- Subscription Television,
- Water/Sewer,
- Heating,
- Garbage Collection,
- Pest Control,
- Lawn Care,
- and Snow Removal.
It is also assumed that each option offers:
- Property Management,
- Maintenance Repairs or Replacement,
- Restricted Building Access and,
- Amenities for Hobbies, Fitness and Socialization.
Comparison Assumptions
For comparison purposes, the following assumptions are that the annual inflation rate will be .02 per cent annually, the rate of interest or dividend return on the home equity saved will average 0.035 percent annually, and a cooperative share will grow 0. 011 percent annually.
Rent and Equity Growth Comparison
Keep in mind that purchase of a Share is a requirement of the Cooperative.[1] Cooperative homes and apartments vary in square footage and costs per square foot, so the chart below is an attempt at an apple-to-apple comparison with a premium independent living, age 55+ facility in Ankeny Iowa. The monthly amounts for rent or fee is based on the Ankeny Iowa rates beginning in 2024 and are from information found on websites[2]. The chart is intended to help you in estimating the long-term trend in housing expenses for rent or fees.
Disclaimer: The actual amounts could be greater or less than the projected amounts.
Why is this chart helpful?
It provides a method to objectively evaluate if purchasing a cooperative share is preferable to renting an apartment.
Q. Will investing all your home equity into a low-risk interest bearing account of 3.5% be better than using part of it to buy a cooperative share to pay less per month than renting?
When someone decides to downsize from a single-family home to a condominium or an apartment, they generally come away from the sale of their home with a significant amount of money that can be invested or placed in low risks savings instruments. In the case where someone elects to purchase a condominium a portion of the home equity can be used to pay for a cooperative share. For illustration purposes two home sellers comes away from the sale of their homes with $300,000 each.
Look at the chart to see what happens to $300,000 when it is invested at 3.5% for 10 years and what happens when $170,000 of the $300,000 is used to purchase a cooperative share and the remaining equity.
It is obvious that the individual that elected to rent rather than buy a cooperative share ended up with more equity growth ($123,180) than the individual that elected to be a cooperative shareholder ($53,378). In the exercise the Renter’s equity at 3.5% annual rate grew to ($423,180). The Shareholder’s equity grew to ($183,378). A difference of ($239,802). The exercise does not end here, however.
Consider the difference between Long Term Rent and Fees Paid?
What must be remembered is the shareholder has a share that grew from ($170,000) in value to ($189,653). The sum of the shareholder’s equity growth and the share’s growth is ($373,031). The difference between the Renter’s Equity Growth ($423,180) and the shareholder’s assets ($373,031) narrows to ($50,149).
Now go back to see how much money the renter would pay for rent above what the shareholder would pay in cooperative fees over a 10-year period.
- The Apartment Renter paid rent of ($341,352) over ten years compared to the shareholder fees of ($258,240) or a difference of ($83,112). For this exercise it was assumed that both the renter and shareholder had monthly income to cover the rent or fee every month without having to draw from the home equity.
- If you subtract the Difference Between Rent & Fee; ($83,112) from the value of the Renter’s Equity Growth; ($423,180), the shareholder ends up substantially better in terms of personal assets; the shareholder’s assets of ($373,031) are greater the Renter’s decreased equity growth of ($340,068).
- Another approach is to add the Difference Between Rent & Fee; ($83,112) to the shareholder’s Equity Growth + Share Growth – Rent Difference ($373,031). If the shareholder saved the Difference Between Rent & Fee ($83,112) it would produce assets greater for the cooperative shareholder ($456,143) versus ($340,068) for the Renter.
Conclusion
It is a personal decision about what is the appropriate choice when downsizing to an apartment or a condominium. There are advantages to being a Renter over being a Cooperative Shareholder when it comes to the ease of mobility and having a lot of choices in finding a monthly rental rate that is affordable. The biggest advantage for a cooperative shareholder is that a cooperative is a not-for-profit organization. As such, it can offer less expensive premium housing with a high degree of amenities and safety.
Finally, if you are approaching retirement or are retired do you know what per cent of your gross income is needed for housing? You may want to visit this Web Page: https://www.cnbc.com/2021/07/14/how-much-of-your-income-you-should-spend-on-housing.html .
According to the article “The most common rule of thumb to determine how much you can afford to spend on housing is that it should be no more than 30% of your gross monthly income, which is your total income before taxes or other deductions are taken out.” As rents and fees rise due to inflation you must be careful to try to plan accordingly.