Buying isn't always the smartest option…Believe it or not Renting Works
Posted by on July 1st, 2010Real estate was the last thing on Barbara Pennucci’s mind this September as she prepared to leave for China to adopt her second daughter.
Just one week before her departure, however, Pennucci’s landlady had an interesting proposition: if she decided to sell, the landlady asked, might Pennucci be interested in buying the two-bedroom Medford town house she has been renting since April?
A few years ago, the ever-rising real estate market might have pushed the 49-year-old single mother to act quickly to buy.
Back then, the popular wisdom was that buying trumped renting, providing a way to benefit from any appreciation in the housing market. but in today’s world of foreclosures and falling property values, the argument for home ownership is far less compelling.
Overwhelmed with the logistics of an overseas adoption, Pennucci told her landlady that she couldn’t address the issue until she returned from China.
Before boarding the plane, however, Pennucci sent an e-mail, applying for a Boston Globe Money Makeover.
Saying she had no idea how to start researching the home ownership question, Pennucci asked for someone with an “unbiased eye” to help her figure out if there was any way to make the numbers work.
The Tufts University Web designer wasn’t new to home ownership. In fact, she had purchased a condo in Malden back in 2001, buying the apartment she was renting when that owner put the unit on the market. “I did it once, and I felt like I did everything wrong,” she said, explaining she’d felt pressured to buy by the red-hot real estate market. She ended up selling the condo to help pay the bills after she lost her high-tech job when the technology sector tanked.
Having learned from that experience, Pennucci wanted a detailed analysis when she met with Newton-based financial adviser Michael Broad to review the numbers.
“Most people just think about how much money they can afford to spend or how big a mortgage they can get,” the fee-only adviser told her. but potential homebuyers should also be looking at the comparative costs of renting versus buying, calculating the impact of tax savings, and considering long-term family needs.
To address these issues, Broad walked Pennucci through a series of calculations, starting with the cost of home ownership.
Since the landlady neither set a price nor provided information about condo association fees, cost of purchase calculations had to be based on estimates. although the assessed value was $300,000, the online real estate service Zillow set the town house’s value at $240,000. Broad chose the lower number, checked out current mortgage rates, and looked at Pennucci’s tax return to calculate potential tax savings. The result: with a 6.25 percent fixed-rate 30-year mortgage, with no money down, monthly costs would come to $1,892. Given Pennucci’s 15 percent marginal tax rate, tax savings would drop the monthly expense to $1,738.
But when Broad moved on to Pennucci’s current living expenses, the benefits of home ownership began waning. Given the current $1,200 monthly rent, which Pennucci said accurately reflected the Medford rental market, ownership would increase monthly housing expenses 45 percent, costing an additional $538 a month.
“No matter how wonderful owning the place might be, right now renting is the better deal,” Broad said. The case for renting became even more compelling when Broad reviewed Pennucci’s cash flow and retirement savings.
Although Tufts is now contributing $5,500 a year to Pennucci’s retirement plan, the Web designer has no other retirement savings, since she cashed in her other retirement plans to support the family while she was between jobs. nor has Pennucci tucked away any money for her daughters’ college education.
“If we had reviewed this a year ago, I might have said you can adopt two kids or you can buy a condo,” Broad said, noting that Pennucci’s $55,000 annual salary might have been sufficient to cover the costs. but with two children needing clothes, food, and afterschool care, that extra $538 a month to buy the home simply wasn’t in the budget.
As part of the review, Broad recommended that Pennucci find a good renter’s insurance policy. While he didn’t rule out home ownership in the future, he also said Pennucci should keep retirement in mind and resume funding her retirement plan when money becomes available.
The adviser’s recommendations didn’t come as a surprise to Pennucci. Having just adopted, the Medford mom said she “would have been surprised if the numbers had worked out differently.”
But the “clarity” of Broad’s analysis eliminated all of those what-if questions that might have lingered. at the end of her life, Pennucci said, she won’t care at all that she couldn’t buy the town house. “But I will be glad that I’ve got the kids.”
To be considered for a Money Makeover, fill out the application at the “Your Money” section of boston.com/business, or call 617-929-2916.
Buying isn't always the smartest option…Believe it or not Renting Works
Published: 28 Jan 2010 22:02:53 PST
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