For Les and Deborah Granow it was the $100,000 question. Should their family buy the small three-bedroom home in Manhattan Beach or stay in a larger, prettier and newer home in Playa del Rey--just a few miles away. They chose the smaller house that was more expensive. Why?
"Schools," says Les. "If we stayed in Playa del Rey we would be sending our kids to private schools. So I paid $100,000 more for a smaller house. And I would do it again tomorrow."
Les, a Los Angeles tax accountant, calculated what it would cost him in after-tax dollars to send two children to private schools for 12 years. The result was stunning--more than $200,000. So the extra $100,000 he spent on a home in the lauded Manhattan Beach school district, where he plans to send his children to public schools, seems like a bargain.
And the Granows are by no means alone. All over the country, parents who are forced to send their children to private schools because of poor conditions or inferior education at some local public schools find that the cost of private schooling can be crippling. Often, instead of paying tuition ranging between $2,000 and $10,000 a year, they opt to buy in top school districts even when that means they must pay more for a less desirable home.
Houses in top school districts often sell for tens of thousands--even hundreds of thousands--more than houses near less desirable schools, adds Marvin Smith, president of the San Marino-South Pasadena Board of Realtors. Houses on the border of San Marino and South Pasadena underscore the point, he notes.
The two Los Angeles-area towns are similar in many ways, but San Marino's schools are consistently ranked among the best in the state, Smith notes. The result is houses on the San Marino side of Garfield Blvd.--the dividing line between the two towns--can sell for as much as 25% more than houses on the South Pasadena side, he says. And South Pasadena schools aren't bad. They're just not as highly rated as San Marino schools, he says.
While the school-based disparity in housing prices may be difficult to fathom for those who are not parents, for parents it's a simple dollars-and-cents issue.
If you are forced to choose between paying private school tuition or moving to a better school district--even if that means paying tens of thousands more for the house--you're usually better off making the move, financial pundits say.
That's because property taxes and mortgage interest expenses are tax deductible. Private school tuition is not, says Steven Friedman, regional director of the real estate advisory group at Ernst & Young, a national accounting firm. In the end, most people are no worse off paying $10,000 in additional mortgage interest expenses each year than they would be if they were paying $5,000 annually in tuition, he says.
Just ask Nancy Blume, a Miami-area mother of three, who says she didn't pay quite enough attention to the quality of schools when they moved to Florida from Denver. They bought a house in a second-tier school district because houses near the top elementary school cost more and were less attractive, she says. Six years and $50,000 in private school tuition later, Blume says she would think twice if faced with the same decision again even though her children are now in public "magnet" schools.
But at what point does paying more for real estate in a top school district get out of hand? There's a fairly simple calculation to find out. However, there are some caveats.
For instance, the calculation assumes that everything stays constant, including the cost of tuition, tax rates and the comparative values of real estate. That's frequently not the case. Over the past several years, the cost of private schools and tax rates both have risen. That would argue for buying a home in a good school district. You'd avoid the rising private tuition and get a comparatively larger mortgage interest deduction on your presumably bigger mortgage.
Realtors maintain that the value of homes in good school districts also tends to rise faster than in less desirable districts. However, if the school district suddenly loses quality, homeowners could lose, too.
Additionally, if you base your purchase on just one measurement of the schools efficacy, you could also be hurt. A recent Times analysis of the new California school scoring system, for example, cast doubt on the state's newly released school scores that had sent California parents rushing to find either private schools or realtors.
The Times analysis found that the state didn't score enough tests in some districts to accurately gauge effectiveness of certain schools. Indeed, in some cases, school scores were based on a single student's test answers--clearly a poor depiction of a school's value. And, a troubling fact for anyone who bought real estate with those scores in mind. After all, if that student drops out or graduates, the school's rating could plunge--or soar--overnight.
Finally, you generally only pay for private schools for a dozen years, while a bigger home mortgage may be financed over three decades. The calculation compensates for that somewhat by assuming higher-than-market interest rates. But, consumers who try to figure it out for themselves ought to be conservative.
That said, how do you figure the break-even point? You need two things to start: The approximate cost of private school tuition and your marginal tax rate.
Private school tuition rates currently range from $2,000 to $10,000 annually, according to the "Handbook of Private Schools" published by Porter Sargent Publishers in Boston. Since that's too wide a range to get a reasonable estimate, you should call any private school you're interested in and check the tuition and fees. Also ask if the tuition is fairly steady or if it changes regularly. And, if you have more than one child, check whether the school offers family discounts. Many do.
Divide the annual tuition number by the inverse of your marginal tax rate. In other words, if you pay 30% of your income in state and federal taxes, divide the tuition by 70%, or .70. The result is how much you have to earn to pay the tuition. For example, if you're in the 30% tax bracket, to pay $4,000 in tuition you have to earn $5,714.
Take that result and, again, divide it by the inverse of your tax rate. In this example, the result would be $8,163, or $680 a month. You could pay that amount in deductible mortgage interest expenses and be on an even footing with someone in your same tax bracket who paid just $4,000--$333 a month--in private school tuition.
How much more mortgage does that translate into? The answer depends on the length of the mortgage and the interest rate, but there's an old rule of thumb that says it costs $9 a month to service each $1,000 in debt.
So to find out how much debt you can handle with that $680 a month, you divide $680 by nine and multiply the result by $1,000. This individual could pay an extra $75,000 for a house and end up roughly even with the person who paid $4,000 annually for private schools.