Students learn pros and cons of ownership
When Katie Helke moved here last summer with her MIT grad student boyfriend, the two took one look at their monthly rent and started thinking, "Let's buy." Given the battered local real estate market and the $1,300 in monthly rent for their Somerville apartment, they worried that they were missing an important opportunity.
The benefits of homeownership are a common topic of conversation among students tied to a college for at least four years. Having watched the recent real estate boom, they tend to view each rent check as money that might otherwise be used to build equity.
As their real estate debate continued, Helke and boyfriend Greg Dokshin decided they needed help figuring out if they could make the numbers work on their annual income of $60,000 a year. So they applied for a Boston Globe Money Makeover saying, "We don't know exactly where we should be allocating our funds, especially when it comes to real estate."
The couple got high marks for their frugal lifestyle when they sat down with fee-only financial planner John Perkins in the Boston office of Compass Planning Associates. Neither Helke, 23, nor Dokshin, 22, owns a car, making use of Zipcar every few months to drive to Ikea or run other big errands. By watching their pennies, they're managing to save more than $800 a month, putting money into Helke's 401(k), her savings account, and an account Dokshin has earmarked for paying off his $26,000 in student loans.
"You are doing a really good job of living within your means," said Perkins, who is based in Compass's Northampton office. "Boston is an expensive city."
Still, were the two ready to jump into the real estate market? To come up with the answer, Perkins walked Helke and Dokshin through the numbers. Although Boston area home prices are down 9 percent in the past year alone, Perkins estimated the starting cost of a single-family home in Somerville was still about $400,000. That amount puts a single-family home well beyond the couple's reach.
An entry-level one- or two-bedroom condo, however, would cost much less. Perkins estimated the price at about $250,000. Still, to make that kind of purchase, Helke and Dokshin would have to come up with about $18,000 to cover closing costs, escrows, and the down payment. And that would wipe out every penny of the couple's savings.
Even if generous family members decided to cover these initial costs, the monthly payments would still be a stretch, Perkins told them. Add up the mortgage payment, condo fees, real estate taxes, homeowners insurance, and maintenance, Perkins said, and the estimated total monthly cost of owning such a condo was $2,131. That's well more than the $1,430 Helke and Dokshin now pay for rent, utilities, and other housing expenses.
Equally important was the question of what happens when Dokshin finishes his biology doctorate in 2013. Helke, currently working as an acquisitions assistant for MIT Press, will be starting an evening graduate school program in publishing and writing this fall. They're not sure that they'll be staying in Boston, but owning a home now might limit their options later.
"People tend to overlook transaction costs," Perkins said, noting a 6 percent commission on a $250,000 condo would be $15,000. "That's $250 a month in transaction costs to sell the condo five years later. And that doesn't include anything about whether the value of the condo goes up."
Then, too, there's the importance of flexibility. It doesn't carry a dollar value, but it can be critically important. "When younger couples are starting out, it is important to be unencumbered," he said. "What's the value of flexibility? The ability to react quickly? To take new job offers?"
So rather than saddling themselves with a condo that would consume all their resources, Perkins recommended that Helke and Dokshin focus on creating a solid financial foundation by building up their emergency funds, opening higher yielding accounts, saving for retirement, and rethinking some of their current investments.
Perkins said Helke made a good choice in her 401(k) by selecting the Fidelity Freedom 2050 Fund, which provides a diversified portfolio of mutual funds for people retiring in 2050. "It is a good way to start building up a balance," Perkins said, explaining she may want to explore other options once her account grows to $10,000 or $15,000.
Helke's other investments include a $5,500 portfolio of securities given to her by her grandparents. Currently invested in two exchange traded funds and a utilities mutual fund, the portfolio isn't a good fit for a young person with limited assets, Perkins said. He suggested converting these holdings to cash that can go toward the emergency fund. He recommended that Helke sell the investments over the next three months, using half the money to buy 12-month certificates of deposit and putting the rest into a high-yielding account.
Both Helke and Dokshin currently have their savings in regular bank accounts. To boost return, Perkins suggested that the two consider using either a high-yield Internet savings account like
The couple wasn't surprised by the recommendation to keep renting. "That's what I expected," Dokshin said. And Helke was far from disappointed. "It's actually a relief. Now we don't have to feel guilty. We are just where we should be," she said.
With a smile, she noted that given Perkins's recommendations, the timing of their makeover couldn't have been better. "We just finished painting, " she said.
