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My wife and I are very happy with our neighborhood – we like where we live, we like our neighbors, and the schools are good.
But I recently had a thought… the only thing holding me back from reaching FI (financial independence) is the dollars owed on my mortgage. Granted, I’ll reach FI before the mortgage is completely paid off, but for my plan to work, those extra payments for a couple of years will make things a little tight. So, here was my thought…
What if I downsize my home?
Look, a lot of the average Joes out there would look at me in absolute horror for even thinking such a thing. They would probably say “you’re too young to consider downsizing!”
But guess what? We’re not average Joes – we’re on a mission to quit working much earlier than the average Joe! I’m sick of working, so why not consider all angles to see if there are some options to help me leave my job sooner rather than later?
I’ve had the downsize thought before, but like I said, we’re very happy with where we’re at so I usually just dismiss the idea. Today though, I had a new twist on the idea pop into my head…
What if we were to downsize to another home in our development?
We live in a big development – over 1,000 homes!! Most of the homes are pretty similar as they were built by the same builder within a few years of each other. It’s not unusual for a neighbor to stop by and say “hey, our house is the same as yours, just with the opposite layout.”
In other words, we could find a house not too unusually different from ours in the same development, with the exception of looking for one slightly smaller.
Right now, we have a mortgage balance on our residence of about $157,000. Excluding taxes and insurance, I pay a little extra on our payment – $1,500/mo. (just for principal and interest) – and Quicken is telling me that it will be paid off in January of 2027… that seems like an eternity!!
So let’s do a little bit of “what if”…
Based on Zillow‘s estimate (even though that’s usually off by a little), our house is worth around $271,000. That leaves us with about $114,000 in equity to play with. For simplicity’s sake, let’s factor in Zillow being off a little and the cost of an agent and just say we’d have around $100,00 if we sold the house right now. Might not be spot on, but you can’t get much more of a round number to work with than that! 🙂
Now, let’s say that we were to downsize from our 4-bedroom house to a 3-bedroom house in our neighborhood. I just did a quick search and found one a stone’s throw away going for $195,000. I like simple, so let’s pretend we low-ball them or find a cheaper one that we like – with the fees and what not, what are the chances that our imaginary number became exactly $200,000?!! Boy, I sure like simple math!
That means we need a $100,000 loan. At 3% for a 15-year loan, our payment would be $690.58 (stupid non-round number!).
Onto the important part of the equation. If we continued to make our $1,500/mo. payment, we would pay it off in just over 6 years. In other words, we would have it paid off in 2022… 5 years sooner!!
I still want to buy a couple more rental properties so I’ll need my W2 income to get the loans for those, but regardless…
I could probably quit my job 3 years sooner!
You might be thinking that a few years isn’t that much of a difference, but when you dread going to work every day and all you think about is how to get out sooner, that’s over 1,000 days less I could quit my job!
That sounds amazing to me, but is three years worth the downsize? There are obviously some good and bad reasons to even consider doing this.
Let’s dig in a little bit…
Cons to a Downsize
Less space
This really is both a pro and a con, but let’s play devil’s advocate here and talk about the downside to it. Right now, my daughter is 6 years old. She doesn’t need a lot of room and, to be perfectly honest, she’s happy to be right by our side most of the time – which I’m Ok with!! 🙂 But the time will come when more space could be beneficial… such as when she needs a little bit of space to hang out with her friends.
More space is also better when guests stay with us (like when my brother and sister-in-law come visit us from Texas). Obviously we could always make do with a smaller house, but it might feel a little cramped after a couple of days with company.
New neighbors
The example house I mentioned earlier is literally around the corner – I could probably hit it with a golf ball (except that I suck at golf and probably couldn’t really even get close to it!). But even being so close, that moves us away from our next door neighbors who we’ve become good friends with. Yes, we won’t be far, but that convenience of running into them when we’re coming or going disappears.
Customizing
Whenever you move into a new house, there’s going to be changes that you need to do to make it feel like home. We’re not big re-modelers so I’m not talking about anything too major, but we would still need to make adjustments and repairs to fit our lifestyle. I don’t think it would be that involved, but it’s still something we need to be aware of that would cost money and time.
It’s still a move
Sure, it wouldn’t be a far move, but it’s still a move. That would mean we would still need a truck to move everything and go through the whole pain-in-the-$% process of moving. And, as we’re getting a little older, it’s getting a little harder to con friends and family into helping for the fine reward of pizza and beer.
Re-address everything
A move also means that we would have to update everything that has our old address. Is that hard to do? No, but it’s still very time-consuming.
Pros to a Downsize
Trims the fat
Do we really need this big house we’re in? Probably not. It’s probably a little too big for us as a family of three. And, if you follow the Mustachian way – what’s the point of a big house… to keep up with the Joneses? I think a lot of us were taught to buy as much house as you could afford because your house is your biggest asset.
Well, I actually happen to agree with Robert Kiyosaki who wrote Rich Dad Poor Dad and said that your house is not an asset because it doesn’t put money in your pocket. And yes, we can get into the argument that you could sell it later for a profit, blah, blah, blah, but let’s save that for another day.
Lucky for me, we didn’t buy as much house as we could afford. We were looking at houses and this one was more than we needed at a good price, so we went with it. But just because we got a good price on it, doesn’t mean we need it.
Less to clean
We have a lot of room at our house – 4 bedrooms, 2½ baths. It’s nice, but it’s a lot of space for just the three of us. We’re not a materialistic family either so it’s not like we have a ton of garbage filling it all either. Yes, a 3-bedroom house would be less space, but less square footage also means less to clean and keep up with.
Lower property taxes and insurance
The lower mortgage payment is obviously a gimme, but with the smaller house comes less owed in property taxes. That example house I looked at was about $1,700 less in property taxes per year than our current house. Hoofa! I like that!
I would assume (I didn’t dig into it) that the cost of insurance would also go down a fair amount as well.
That just means that all that extra savings could also go toward paving the way to financial independence even sooner.
FINANCIAL INDEPENDENCE!!!
The biggest pro of them all – I could quit my job sooner. Looking at the money we’d save on some of the other things (like the lower property taxes and insurance) we could put toward paying off the house even sooner or just investing it elsewhere.
That means I could likely quit my job even sooner than the few years I stated at the beginning of this.
I’ll be honest, that little counter that you see on the sidebar of my site bugs me. It irritates the hell out of me that I have YEARS to go instead of months. I keep it on there as a motivator just for me more than anything else.
Boy, I sure would love to up the end date on that counter by a number of years!
Other random thoughts on the idea
Will it be harder to resell a smaller house in the future if we want to? I actually don’t think so – a 3-bedroom house is generally the sweet spot for families, so I think we should be Ok with this.
Maybe we don’t necessarily look at downsizing at all. Maybe we keep an eye on foreclosures and get a house very similar to ours and still lower our mortgage tremendously.
Maybe we go a whole different route and look at grabbing a foreclosure and flipping it. We could then just use the money from that to pay down our current mortgage instead of even considering moving. That scares the crap out of me though. I really love the whole avenue of buy and hold with rental properties, but flipping involves timing the market just right and it looks like we’re close to the top of the real estate cycle right now. So this would definitely have the potential to backfire.
The most important thing if we wanted to do this would be to make sure my wife and even my daughter (to certain degree) were on the same page. The last thing I need is for Mrs. R2R to be miserable with a different or smaller house. The good news is that I ran it by her and she actually thought it was worth looking into as well. She was at the zoo with my daughter the other day and said that it hit her that I was stuck at work instead of being with her and my daughter and knows that I’m envious of that freedom and being with them.
So, a downsize may or may not be the path we go down, but we’re definitely going to consider it and take a look at what’s out there. Why not?! It doesn’t cost anything to look and maybe it’ll give us an opportunity to reach the world of financial independence sooner rather than later.
Have you ever done a home downsize? If so, was cost the reason, too big of a house, or something else?
Thanks for reading!!
— Jim
Is the point that you want to end up with a paid off home? This seems like a lot of work to potentially decrease your mortgage by $57,000, not to mention the lost transaction costs associated with switching homes that you already mentioned (realtor fees, moving expenses, remodeling/customizing the new home). I’d stay put if the only motivation for the move is to trim $57,000 from the mortgage. I’d think you could invest the energy into growing $57,000 of extra income between now and 2027. That’s only $5,700 a year!
Hi Biglaw – $57k is actually a lot of money for us. Right now, I’m basically it for the income in our family. Mrs. R2R works part-time at a non-profit and, after taxes… well, let’s just say that she doesn’t work there for the money! 🙂
To pull in an extra $5,700 per year right now would be pretty tough for us. You’re absolutely right that we’d see a lot of costs from selling/buying, but after all was said and done, we’d still come out much further ahead then we could otherwise.
Right now I’m just looking at some different ideas on how to cut expenses or bring in more income to pull retirement plan in sooner. Cutting out or back on small expenses obviously doesn’t make too much difference, but a mortgage payment is a pretty hefty bill worth examining. Not to say we’ll do it, but definitely worth discussing.
Cheers!
— Jim
He has a point though – the transaction costs (realtor fees, etc) are a killer. That 6% is nothing to laugh at (or forget to calculate).
You’ve got the right idea though — housing is definitely a big place to save money!
Thanks, Mr, Tako – if we did decide to go down this path, those costs would definitely be something I would be checking over. But, if the costs make sense and put us well ahead (similar to a refi), maybe it’s worth digging into more.
— Jim
Good point, by Biglaw above. Another thought I had was finding an entirely new, lower cost of living place to live. I’ve thought about this for myself a number of times, not that Charlotte is expensive for me to live, but I know the value of my home could stretch a lot further in other places. I know moving entirely brings in a whole new set of pros and cons to consider, but didn’t know how set you folks were to retire where you live today or would consider a new “retirement” location.
Hi GS! Funny enough we’ve actually been discussing moving to a retirement location out of the country – Panama… so much so that we’re in the process of booking a scouting mission there for next year. If all goes well, that might be a whole new ball game as the cost of living for the city we want to investigate is about half of where we currently live. That would make my FI number a lot lower and shave off a fair amount of time in reaching it.
— Jim
I have thought about this as well – our mortgage will be the only thing hanging over our heads in about 18 months. We love our home though and will probably stay for at least 4-5 more years (now that we have a crazy low interest rate)
I always joke with my wife – if we lived in a tiny house we could quit working a lot sooner. Would you rather live in a tiny house or go to work? She’s not buying it – and I don’t think I could go that small either.
Haha – that’s the same conversation I always joke about with my wife… I tell her not to leave or die because me and our daughter will live in a shed somewhere! That should keep her around for a while! 🙂
Moving is definitely not something we want to do, but like you said, if it’s the only thing hanging over your heads, the conversation should at least be had. A nice house is great, but so is not working and enjoying life while you can. It’s always good to discuss and weigh options.
— Jim
Hi Jim,
We are getting ready to make a final decision on downsizing next summer. Both kids will be off to college and we when we sell we want to either put down all the money on one of our bigger rental properties mortgages. We are planning to downsize into a rental property I bought 23 years ago. It is definitely small (about 1000 sf) but with kids 18 and 21 who are only there in the summer and on a few breaks – getting all the money sitting in our house out and putting it to work for us is key to our retirement plans. You make good points above though!
Hi Vicki! 1000 sf house does sound small, but when you don’t have kids there, it’s really all you need.
Sounds like you have a solid plan in place – good luck to you!! 🙂
— Jim
Our “snowbird” condo in Florida has another 950 s.f. – so altogether it’s a little bigger 🙂 Just 1500 miles apart!
Haha – THAT’S the way to do it! 🙂
— Jim
Great thought experiment. Really important to explore things from all angles like this. And 3 years is nothing to sneeze at. You can do a lot with three years.
Sounds like Panama is on the table? I’ve heard good things about Panana from a podcast I like to listen to from time to time, “the voluntary life”.
One last random thought. I wonder how weird it would be and for how long living just a few doors down from your own house. Kind of like an out of body experience, maybe.
Fun read!
Hi Adam – haha, I guess that might be a little weird being right by your old house… but then I could walk by it all the time and realize how much $$$$ I saved by moving out of it! 🙂
Panama is definitely still on the table. We’re working on planning the big vacation/recon mission right now. I’ll lay out the details in a post in the near future once it’s lined up.
— Jim
We’ve considered downsizing to save on effort of cleaning and expense of heating/cooling as well as insurance, but we finally (fingers crossed) got the leaks to stop in this house and we love our neighbors and our yard, so we’ll stay put for now.
The temptation is real, though, and if it were to burn down we’d probably rebuild at half the size.
That’s a great point about the utilities – I didn’t even consider that part!
It’s definitely a temptation when you’re on the quest for financial freedom. Glad you found a way to save some money and stay put for the time being!
— Jim
Oh gosh, I absolutely love taking about real estate. Interestingly, we decided to not upsize in the first place. We almost bought the big suburban family home with all the space for rare guests two years ago. Thankfully, the contract fell through and we decided to stay in our starter home and make it what we wanted. We did a custom finish in the basement to being the total square footage to 2100 – which is more than our family of 3 needs.
My two cents, don’t keep an expensive house because your occasional overnight guests might feel cramped. It sounds like you have a good idea brewing. Just make certain the expense of selling/moving/decorating another house is worth the financial and emotional hassle. We also have a young daughter. She’s 7. And I don’t feel bad at all that she’ll have a small room for her childhood/teenage years. As long as her parents are financially independent and she has money for college, I consider her to be VERY LUCKY. After all, I grew up sharing a bedroom in an 8 x 50′ trailer. Her custom home, albeit small, is luxury. :).
Good luck with your decision and let us know what you decide to do!
I love your two cents!!
So, since that post, I think we’re leaning toward this thought… we’re going to hold tight for now. We have a trip to Panama in a few months. If we decide to retire early there, we’ll just sell and go (probably in a couple years). But if we decide Panama’s not the place for us, we’re most likely going to sell the house and downsize.
It’s time for me to wrap up and get out of this rat race, so I’m now in a whatever-it-takes kind of mindset. I agree wholeheartedly that my daughter would be lucky to have parents that are FI and can focus on her more… until she’s a teenager and doesn’t want to have anything to do with us anymore! 😉
— Jim
Hey Jim,
We are actually planning to downsize and move into one of our rental properties, so we can split and rent out our current house. That’s a double win, next we will take out a mortgage again (rental property is now mortgage free) and reinvest that into a real estate loan, which covers the mortgage payments and gives us an extra 2-4% on this otherwise fixed capital (and a tax break). Win all around!
Now THAT’S the way to do it! What a creative strategy! I love it – congrats!!
— Jim
I know some people who have downsized their house so that they can quit their jobs earlier. They have been able to use all the extra time to do things that they love for much.
Love hearing that – it’s all about deciding which is more important. We ended up selling our house in early 2018 and I was able to quit my job at the end of the year. We’re now retired and living in an apartment in Panama that’s about half the cost of what we were paying for the house. We gained our freedom by making intentional decisions like this.