By Simon J. Lau, CFA
Updated June 2024
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Should I Buy a Home in a Good School District or Send My Kids to Private School?
For many new parents, this may be one of the most important factors when considering a home purchase. In high-cost coastal cities such as San Francisco, where home prices can differ by $300K+ between a home located in an excellent school district and one in a marginal school district, these decisions carry a significant financial burden on families. To assess this question, consider the following three key factors:
- Number of Children: The number of children you have (or plan to have) can significantly impact the total cost of education, whether through private school tuition or the premium paid for a home in a good school district.
- Cost of Private School Education: Compare the cost of private school tuition over the years your children will attend school versus the additional amount you would pay for a home in a good school district.
- Impact of Financing on Homeownership: Consider how financing a more expensive home in a good school district affects the total cost of homeownership over time, including interest paid on a mortgage.
Case Example
To provide a clearer picture, let’s look at two homes that recently sold in the East Bay, a region just east of San Francisco.
46 Olive Ave. is located in Piedmont, CA, an affluent neighborhood in East Bay adjacent to Oakland. It is a 3-bedroom, 2.5-bathroom home with 1,845 sq. ft., which sold in April 2019 for $1.7M.
Local Public Schools (ratings as of 2019)
- Beach Elementary School (9/10 rating on GreatSchools)
- Piedmont Middle School (10/10 rating on GreatSchools)
- Piedmont High School (10/10 rating on GreatSchools)
934 Apgar St. is located in the Longfellow neighborhood of Oakland, CA. It is a 3-bedroom, 2-bathroom home with 1,857 sq. ft., which sold in March 2019 for $1.26M. The Longfellow neighborhood is an up-and-coming area in Oakland.
Local Public Schools (ratings as of 2019)
- North Oakland Community Charter School, serves both elementary and junior high students (4/10 rating on GreatSchools)
- Emery Secondary School (4/10 rating on GreatSchools)
46 Olive Ave. (Home #1) and 934 Apgar St. (Home #2) are located only 1.9 miles apart and both have an average travel time of 29 minutes to San Francisco. Despite these and other similarities, they sold for a $440K difference in price, representing a 34% price variance. Some of this price variance can be attributed to differences in the quality of public schools in these two neighborhoods. With these points in mind, let’s dive into the three key factors described above.
Number of Children and Cost of Private School Education
The number of children you have (or plan to have), their current ages, and the cost of private school education should drive most of the financial analyses here. In this example, we assume a couple with one child now and plans for a second child three years from now. We also assume that these parents are deciding between 46 Olive Ave. (Home #1), where the children will attend public school, and 934 Apgar St. (Home #2), where the children will attend Bentley School, a well-regarded K-12 private school in Oakland.
Assumptions and Considerations
- Discount Rate: This rate is used to calculate the present value of future cash outflows for private school tuition. Since the decision is between buying a home in a nicer neighborhood and sending your children to public school versus buying a home in a modest neighborhood and sending your children to private school, the mortgage interest rate for your home is a reasonable discount rate. Other possible discount rates include the Federal direct unsubsidized loan rate for colleges and universities or other private lending rates. Note that the higher the interest rate, the lower the present value, making private school appear less costly and buying into an established neighborhood less worthwhile, and vice versa.
- Cost of Elementary, Middle, and High School: Private schools often have different costs based on grade level. Use these tuition bands as a current year baseline cost.
- Inflation-Adjusted Costs: Adjust future costs for inflation based on the average growth rate in tuition. These figures should be used to forecast future tuition costs.
- Average Growth in Tuition: Use this rate to project future costs, which will be used to calculate tuition in later periods.
- Current Ages of Children: This helps determine which cost buckets (elementary, middle, or high school) to use for analysis. This example includes a two-child household, but more children can be added to extend the analysis. In the Bay Area, having three or more children typically makes it more cost-efficient to buy a home in a more established neighborhood than to send them to private school.
Costs To Attend Private School
Education Costs for First Child
- Total Nominal Cost: $730K
- Total Present Value Cost: $429K
Education Costs for Second Child
- Total Nominal Cost: $821K
- Total Present Value Cost: $482K
Combined Costs for Both Children
- Total Nominal Cost: $1.55M
- Total Present Value Cost: $911K
Decision-Making Insights
In this case example, even if the parents were to have only one child, there’s nearly no difference in financial returns between either home, all else being equal. Specifically, 46 Olive Ave. (Home #1) would save the parents $429K in present value dollars on private school tuition, offset by an additional $440K in purchase price (an incremental $11K difference in real dollars).
Considering the very modest savings that could be had by paying for private school and living in a less established neighborhood, and factoring in the residual and retained value of living in a more established neighborhood (e.g., safer streets, higher resale value), it’s clear that buying 46 Olive Ave. (Home #1) is the better choice. This conclusion becomes even more apparent if the parents choose to have more than one child.
Disclaimer: The information provided is for informational purposes only and does not constitute financial, legal, medical, or professional advice. Users should consult qualified professionals for advice tailored to their specific needs. The author and publisher are not responsible for any errors, omissions, or damages arising from the use of this information. By using this content, you agree to hold the author and publisher harmless from any claims or liabilities.