Architect and Wife Have Assets to Build Toward Home Ownership

Patrick Marr, 41, is a Santa Barbara architect whose passion is designing environmentally friendly homes insulated with bales of straw.

The houses are cutting-edge, energy-efficient--and too expensive for Marr and his wife, Michelle Rainville, 38. In fact, that’s how they feel about real estate in general: Even with a booming practice, no kids to save for and a net worth of around $146,000, this builder is a renter.

“Land prices are so high in Santa Barbara I’d have to spend $500,000 just to buy a lot before I even got started,” said Marr, who lives in a small, two-bedroom house--rent: $1,300 a month--that doubles as his office.

But Marr and Rainville needn’t be, and probably shouldn’t be, renting, said Judith Martindale, a certified financial planner in San Luis Obispo.

If the couple would lower their sights somewhat--there are less-expensive areas of Santa Barbara, after all--buying a house could become a reality sooner rather than later.

“You could convert a dumpy tract house into an environmentally sound house and show your clients the before-and-after pictures,” the planner said. “You need to get into the real estate market any way you can so that rising house prices benefit you. Then later you can build your dream house.”

In fact, aside from the cost of entry, nothing much stands in the way of Marr and his goal of home ownership. Married two years, Marr and Rainville have no debt and have decided not to have children. Rainville makes $47,000 as a high school art teacher, and her generous benefits package covers Marr, who makes about $72,000 working for himself.

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Their income level provides another incentive to home ownership: It would lower their tax bill considerably.

“If your income is $72,000 and your business expenses are only $12,000, that’s good news in terms of profitability but bad news in terms of taxes,” said the planner. Marr’s overhead is so low because he has no employees and works out of his house.

Marr’s enviable work arrangement is a recent development. Just a few months ago he was grateful to be working half-time as an architect for his uncle’s firm in Corona del Mar while he established his own practice in Santa Barbara.

“When Michelle and I moved here for her job two years ago, I assumed I’d be unemployed half the time, and I was planning on getting my substitute teacher certificate,” said Marr. Instead, benefactors of the rollicking economy beat a path to his door in search of deluxe renovations and soon he was making more money than ever.

Now, with projects lined up for the next four to six months, Marr could comfortably put $100,000 down on a $500,000 house without tying up too much of the couple’s financial assets.

Here’s how Martindale figures it: The first $40,000 would come from the couple’s $41,600 in savings. Another $60,000 is available from a loan program available to teachers such as Rainville through the California Public Employees’ Retirement System.

An 8.5% mortgage on the remaining $400,000 would cost Marr and Rainville roughly $2,500 a month after taxes, which the planner thinks they can manage on their combined income of $119,000.

Martindale suggests the couple house-hunt for as long as a year. The delay would give them a chance to save more cash so the $40,000 downpayment doesn’t exhaust their savings. Moreover, Marr could see how the slowing economy will affect his business in 2001.

With house buying on hold for a year, Marr and Rainville could address insurance and retirement planning. They have no life insurance or disability policies, primarily because each makes enough to pay the rent alone. But once the couple gets into a house, some insurance is in order.

“I don’t like surviving spouses to have to make any changes the first few years, like move out of the house,” said Martindale.

The planner suggested $250,000 worth of 20-year term life insurance for Marr, which would cost about $350 a year. A $100,000 policy on Rainville would cost $175--less if she can get a policy through her public school district. And disability insurance on Marr that would pay $3,000 a month costs about $2,000 a year.

Marr hasn’t paid much more attention to his retirement portfolio than to his insurance portfolio.

“Lately I’ve been putting $2,000 a year into my Roth IRA and that’s about it,” said Marr. “I don’t want to sacrifice completely today for something I might not live to see.”

Marr’s father was pushed out of his position as a sales representative for a foundry and never recovered professionally. He died before retirement. Marr doesn’t even dream of retiring per se.

“Work is one aspect of my life I enjoy,” he said. “It’s not like I have to grin and bear it until I cross the finish line.”

Martindale thought that Marr’s attitudes about retiring might actually free him from having to assemble an enormous retirement war chest. “If Patrick scales back on work he could work well beyond retirement age and focus on enhancing his life now rather than on retirement,” she said.

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Saving just $10,000 a year should add up to a retirement fund of more than $900,000 by the time Marr is 62. Including Social Security, this would generate an income of at least $63,000 in today’s dollars--not counting whatever money Marr might make from part-time work.

To get there, Martindale suggested Marr stop contributing to his Roth IRAs and open a SEP-IRA to further reduce his tax bill.

Even more important, he should restructure his current investment portfolio. Two-thirds of the portfolio is invested in one asset class--blue-chip stocks--through fee-heavy load mutual funds from companies such as American Express.

The planner advised Marr to split his savings among a series of Vanguard stock and bond funds that track broad market indexes. For long-term investors, the ongoing argument for index funds is that they beat most actively managed funds over time, charge the lowest fees, and provide broad diversification of assets.

Martindale said the couple could put 30% of their investment money into Vanguard’s Total Stock Market Index fund, which tracks the entire U.S. market. Another 30% could go into Vanguard’s Total Bond Market Index fund, for bond diversification. Vanguard’s Small-Cap Index fund and European Equity Index fund could get 20% of the portfolio apiece, for further equity diversification.

If Marr reaches the maximum annual SEP-IRA contribution of 15% of earned income, Rainville should start a 403(b) account--a retirement plan for teachers akin to a 401(k). Any additional retirement savings should go into the 403(b).

From the list of mutual funds offered by the school district, Martindale selected the T. Rowe Price Equity Index fund.

For investments outside retirement accounts, Marr asked about socially responsible funds. “I’d like to shift things so my financial goals could align with my personal goals of making the world a better place,” Marr said.

Martindale recommended Domini Social Equity, a selective index fund with a five-year average annual return of 21.35%.

The only recommendation that Marr took issue with was selling his American Express mutual funds in favor of index funds. He likes the salesman from whom he bought the AmEx funds, and wants to avoid a confrontation.

Martindale thought Marr should worry more about his portfolio’s growth than about the salesman’s feelings.

“He’s already earned his commission and you’re paying ongoing fees,” said Martindale. “We can do better.”

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Stephanie Losee is a regular contributor to The Times.

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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

* Investors: Patrick Marr, 41, self-employed architect; and Michelle Rainville, 38, high school art teacher

* Gross annual income: Marr, $72,000; Rainville, $47,000

* Goals: To build a sustainable-design house and structure investments to enhance current lifestyle while saving for retirement

Current Portfolio

* Cash: $41,600 in savings accounts

* Roth IRA: $15,800 in three American Express mutual funds; $15,700 in two American Century funds; $29,000 in three Fidelity funds

* Teacher pension account: $12,500

* Mutual funds: $23,100 in three American Express funds

* Other assets: $800 invested in individual stocks; 1988 Nissan Pathfinder; 1989 Volvo 240DL

* Debt: None

Recommendations

* Direct all savings to down payment fund for up to a year before buying a home.

* Buy disability and life insurance.

* Stop contributing to Marr’s Roth IRA and open SEP-IRA account.

* Invest SEP-IRA money in Vanguard’s Total Stock Market Index Fund, Total Bond Market Index Fund, Small Cap Index Fund and European Equity Index Fund.

* Put any new retirement money for Rainville in T. Rowe Price Equity Index fund.

Meet the Planner

Judith Martindale is a fee-only certified financial planner in San Luis Obispo. She is coauthor of “No More Baglady Fears: A Woman’s Guide to Financial Planning” and “52 Simple Ways to Manage Your Money.”