Our family has been planning to become location independent and move for a while, now. Our dream is to double our net worth by the time I’m 40, and find jobs that will allow us to travel more, split our time between two continents, or live in a foreign country for a few years. Because… we only have one life, right? And the kids will be little for like ten more seconds and then they’ll be grown… but making the decision to sell our house? It’s not easy.
One of the reasons we travel so much is to remind ourselves that there is another way to live than the way we currently do. We are a family of habit, and it’s easy to become so immersed in the routine of our daily lives that we never question our decisions or habits.
But one question that Mr. ThreeYear and I have had nagging at the back of our minds for a while now is… should we sell our house and find a smaller place to rent?As I wrote about in The Best Way to Avoid Lifestyle Creep, keeping your housing costs low is key to financial independence. And we’ve had the unsettling suspicion that our house is a little too big for us for awhile.
After we got back from Chile last week, that suspicion was confirmed. We spent most of our time in Santiago staying in a less-than-600-square-foot (52 sq. meter) apartment. It was small, and with three bedrooms and two bathrooms, was extremely space efficient. Yes, it was a little tight sometimes, and cooking was a bit difficult. But there were definite benefits, as well. One benefit was the shared space. We were able to go downstairs and use the common areas for the Junior ThreeYears to ride their scooter, or swim in the pool. There were tons of other kids playing, too, and while there wasn’t a lot of interaction, because of the language barrier, that would definitely change if the kids had spoken the same language.
While we were in the apartment itself, we didn’t get in each other’s way, surprisingly. The boys each had their own bedrooms, and they’d take their few toys we had packed and go play or read in their rooms. We did homework each morning on the small round breakfast table, then would move the school books to another part of the apartment when it was time for lunch. I even lost Junior ThreeYear in that tiny space at one point! (He was on the balcony, reading, and I didn’t see him because of the curtains).
The thing that was so nice about the small space was that we were together, we were cozy, and we were able to enjoy each other’s presence. Our current house is so big that we can’t see or hear each other when we’re in our rooms, and it can feel lonely. Most of our time is spent in the common area, our dining and living rooms, which are basically one big space (and are larger than the entire apartment in Chile, by the way).
Little ThreeYear has grabbed my hand at several points since we’ve been back and asked me to come with him to some remote part of the house, “because I’m scared to go to the basement alone, Mama.” Our basement, by the way, is not a dark, bare-boned forgotten space in the bottom of the house. It is finished, carpeted, and filled with Little ThreeYear’s toys, as well as a comfy couch and chairs. But after all that togetherness in Chile, Little ThreeYear feels lonely in the vast swath of basement without another person.
But does it make sense to sell our beautiful home, which we bought in a short sale at a very good price, with its spacious backyard, forest hiding-spots, and ample space for visitors, to move to a condo with no garage (a huge negative during New Hampshire winters), much less space, and community fees?
First, let’s consider the idea from a purely financial perspective. Let’s consider the cost of selling our current house and renting a condo in a nearby planned community.
|Total Cost of Mortgage/Rent Per Year||-$21,300||-$19,200|
|Increase in Net Worth OR Investment gains (assuming $150K invested at 5%)||$15,000||$11,700|
|Tax Benefits (for 2017 only)||$2296||$0|
|Total Yearly Cost:||$14,438||$7,500|
Here we see that the cost of owning a home is almost double the cost of renting, without considering the associated costs of utilities and housekeeping that would also probably go down. The first number shows what our total mortgage insurance and its cost is per year (we have 9 years of a 15-year mortgage left to pay). As you can see, the condo rental costs would not be much less than our current mortgage, although I’ve assumed $1600 per month rent for the condo, which is on the higher end (aren’t rents crazy expensive here??!).
The second number is what we currently add to our net worth in terms of principal pay-down on our mortgage. The number on the right represents what we’d probably earn in investment gains each year if we sold our house and invested the profits (again, I’m estimating our probable profit after fees are taken out, and I’m estimating low).
The maintenance costs represent what we spend on our house when we don’t have a large project, like a roof, to tackle. Our maintenance costs in 2017 were a bit higher–$17,130, to be exact.
Ok, but let’s not forget the mortgage interest deduction on our taxes–oh wait, that goes away next year with the new tax bill and the higher standard deduction of $24,000 for a couple! Well, anyway, for this year, it will be approximately $2296, so let’s figure it in for the sake of fairness.
Even with these conservative estimates, it’s clear that owning a home is more expensive than renting a condo. But these cold, hard numbers don’t represent the benefits of living in a house. So what are the benefits of a larger space, as we see them?
Benefits of Our Home
- large backyard for planting a garden, digging holes, hiding in the forest, riding bikes, having large parties
- attached garage so that we can park our cars and walk inside without getting wet/ cold/ snowy
- plenty of space to have our entire extended family to visit
- room for all of our furniture
- impressive/beautiful home
- lovely gardens
We have a nice home, and it’s a great space for entertaining and having friends come visit. But how often do we do that? We entertain on a large scale maybe 6 times a year, and friends and family might come visit once to twice a year. During the rest of the year, we’re constantly spending our weekends cleaning up a house that gets messy at the drop of a hat, or thinking about the repairs we need to do because there’s always something to repair in a house this large.
What would be the benefits of a condo, for heaven’s sake, if any? Well, there are a few. If we moved to a condo in the shared community in our town, we’d have the following:
Benefits of a Condo
- Our backyard would include walking trails around a lake, a covered bridge, and bike paths
- We would have access to a gym, heated pool, and community center at no additional charge
- In the summers, we’d have access to the lake and playgrounds and could meet up with friends every day to swim and play
- Less house to clean/maintain
- No outside area/garden to maintain
- Snow removal/ trash removal/ parking lot maintenance provided
- No house to sell when we eventually move!
We would benefit from a shared space that is maintained by the community association. There wouldn’t be any flower beds to constantly weed and take care of. But we’d have ample gardens to enjoy. We’d have walking paths, cleared all year round, right outside our door. And no less than four lake shores to enjoy in the summer with friends (because many of our friends live in the community).
So as you can see, living in a condo does have its perks.
What if, however, we didn’t sell our house and rent? What if we sold our house and bought a condo? Let’s look at the numbers there:
|Total Cost of Mortgage Per Year||-$21,300||$0|
|Increase in Net Worth OR Investment gains (assuming $20K invested at 5%)||$15,000||$1,000|
|Total Yearly Cost:||$16,734||$5,970|
Here are our assumptions. We’re assuming we’ll net $150,000 with the sale of our house. We’re also assuming we will spend no more than $130,000 in the sale and fixing up of a condo (foreclosed condos with 3 bedrooms and 2 baths have sold for as little as $66,000, but that’s rare. It’s probably more likely that we’d be able to buy a condo for around $100,000 and spend $30,000 in fixing it up).
So that would leave $20,000 to invest. We won’t have any yearly mortgage fees, but we will have property taxes and association fees. Because the property is much smaller, taxes look like they’ll be about a third of what we currently pay. But association fees will keep going up, year in and year out, and we will have no control over what we pay.
Renting it Out
So why would we buy a condo if we’re preparing to become location independent? It seems like it would tie us down even further. Well, it turns out, a condo might be a good real estate investment.
If we use the 1% real estate investing rule, which states that a rental should give us at least 1% in rent per month of the total cost of the investment, then a condo would fit the bill. We would need to spend no more than $130,000 altogether on the property, including real estate fees, buy-in costs (currently a whopping $5,000!), and costs of repairs or upgrades to the condo. Currently, condos of this size are renting for $1,300 (with unfinished basement) to $1,600 per month. Larger condos are renting for up to $2,400 per month.
So a quick, back-of-the-napkin analysis says this option might be worth looking into. A condo, if occupied all year, could provide us with an income stream that could help fund our location independence.
Ok, now you’ve seen three possible scenarios for the ThreeYears:
- We stay in our current house and change nothing.
- We sell our current house and rent a condo.
- We sell our current house and buy an investment condo to live in for a few years and then rent out.
Of course these aren’t the only scenarios, but they are the ones we’re considering right now.
What to do, what to do? What would YOU do if the decision were yours?