Mansion, Apartment, Shack, or House
I loved the The Game of Life. I hate non-strategy games, but moving the little plastic car, with the little plastic peg people through the maze of life was fun. Yet, that game freaked me out: I didn’t want to go to the poor house. I wanted to buy the mansion.
What is House Poor?
Expensive house, No cash flow. That’s the pretty standard understanding; eating rice and beans on empty living room floor. Been there.
When we bought our first house at age thirty, a 1500 square foot, run down 90 year old craftsman bungalow with no heating and holes in the floor and the ceiling and the walls and the windows, we really had no money. We had just enough in savings to cover the 3% deposit,. We were living paycheck to paycheck for the first year while we also payed PMI. We were working on temporary contractors and were let go every year before being rehired.
It was stressful, but we made it work. My in-laws leant us a a few space heaters, because the floor heater in the living room was non-functioning and the wall heater in the hallway vented into a bedroom closet.We saved up enough that first year to get heating and complete some DIY projects.
For the next six years we most of our funds and sweat into fixing up that bungalow. We took woodworking classes and built an amazing garage. We banished the possums living in the walls and rebuilt the kitchen cabinets using salvaged old growth wood. We won a neighborhood beautification award and qualified for a historic preservation tax reduction. After fourteen years we brought the house back to museum quality condition, and we had $500,000 in equity.
REDFIN is a Temptress.
Then I signed up for REDFIN and the temptation started. A mansion sized bungalow in our neighborhood, a vacation house in Yosemite? Lovely listings were delivered to our inbox every day, twice a day. We found a crazy dilapidated two-story bungalow in our neighborhood ready for restoration. We got approved for a loan and then were promptly outbid. It wasn’t meant to be. But the Redfin notifications kept coming.
We didn’t buy a mansion, but did put most of our eggs into a large basket: a three bedroom, two bath ranch house on an almost unheard of acre in Southern California with a pool, 400 square foot studio apartment, three car garage, two barns, and a pickle ball court. It is half cabin, half Brady Bunch. Forty days later we sold our bungalow and loaded the moving trucks.
More House, More Money
When we decided to buy it and how much to bid I made a classic error. I drafted a spreadsheet to calculate(justify) affordability by comparing our current payment to the new monthly payment of mortgage,and taxes. I “ran the numbers” and projected the increased costs against our coming raises as teachers. It worked! Of course it did, because I did not factor in the increased cost of utilities, insurance (which keeps rising), and maintenance.
Turns out a larger home really is more than proportionately expensive. The utilities are much higher on a 2800 square foot house than a 1500 square foot house. Electricity alone has gone up significantly. Maintenance costs are crazy too. The first year there we paid almost $10k to redo the driveway and $18k to trim the trees.
Some contractors definitely have a different pricing schedule when you live in a pricy house. We recently got quotes to have the house painted and were quoted up to $60,000. Prices have gone up on materials, but $60,000. And they wanted the job: he spent two hours taking measurements and sent a very detailed proposal. (Side Note: I bought a power washer and a paint sprayer).
Promises, Promises
When we pulled the trigger on the house, I made a promise to my wife that buying the house would not prevent us from future travel and other fun. She did not want to go back to where we had started; with possums living in the closet (for real). Now we had kids, and there was not going to be time for us to do all of the work ourselves. Plus it turns out kids are also expensive, especially daycare.
At the time that I had made the promise I had not really understood the true total cost of ownership, nor had I discovered FI concepts. I discovered Mr. Money Mustache shortly after we moved in, and boy was that eye-opening. I also discovered minimalism via Marie Kondo and the Minimalists. Downsizing and decluttering were about the opposite of what we had done.
Even the movers declared: “You guys have a lot of stuff,” after they had to bring an extra semi to move our lawn furniture and all of the random stuff we had in our yard. And then I had to hire our gardener to move bricks and lumber. More stuff equals more money and more time spent maintaining the stuff.
Living Our Dream
After eight years we have avoided the poor house, and have been able to meet our goals, dreams, and schemes. Since moving we have been taken a three week long trip to Europe, cash flowed a used R.V. (Mr. Squeaks), bought a used SUV, redone our kitchen, and continuously increased our investments.
During the pandemic the new house was the perfect place to quarantine. K taught in the house, and I used the studio.. The kids had a pool and a court to play on, and we had the room to get two pandemic puppies. We can step out onto a hiking trail in about five minutes,
We also have amazing neighbors who look after each other . We have gates into each other’s yards and talk over the fence every day. Our next door neighbor has three horses, and I love watching horses. Other neighbors raise goats, chickens, turkeys, and bees. It’s like living in the country.
Funding
So how did we do it? We took a jump and it got lucky? A little bit yes. A big part though is that we got serious about budgeting, increasing salaries, and investing. YNAB played a big part in our planning and budgeting.
We started talking more about money. Now set our goals each year and revisit them regularly. We tie them to spending and saving goals and we budget them out in YNAB. We keep an emergency fund to absorb shocks like when our dog eats something toxic to the tune of $5k or my car bit the dust.
We had some help too: Our MIL has gifted us some money after our FI passed away to help with some house repairs. It was a huge help with finishing our kitchen, and now we are using the remainder to paint the house with our new sprayer.
We increased our shovels. Thankfully and as I had charted out, our salaries rose: K. finished her M.A., and we both stepped up the salary scale. Our union negotiated a small raise as well. Last year I took on an extra class and after school teaching as well. K. taught an enrichment Music class and took on a stipend caring for her school garden. We have been able to double our investments with the new income.
Real Numbers
Our house equity now makes up a whopping 70% of our assets. That’s out of line with most recommendations I have seen. But right now our PITI is just under 25% of our gross income which is OK, but when we bought it was over 30% and we felt it. I have yet calculated, but that number will rise again when our income goes down in retirement. I’m ok with that.
As we move into retirement we have no plans to pay off the mortgage. It is under 3% interest, and we are focussing on investing instead. As I model retirement plans, I include the PITI going forward.
If we happen to get a windfall, we will revisit the mortgage. We may also decide to rent out the studio ADU as either an AirBnB or a longer term rental. And one scenario may even be to sell the house and unlock the equity by moving to a smaller house closer to the ocean and investing the profits. We have about $1.5 million in equity
Opportunity Cost
Even though everything is working out, we most likely could have F.I.R.E.D in two years if we had stayed at the old house and invested the difference of increased costs. We could have easily generated an additional $500,000 through investing just the difference in PITI. That house has also gained $500,000 in equity.
Our house here has risen in value so that we have $1,000,000 in equity outside of our initial investment, but it is all locked into the house. If we had stayed in the other house we would have more liquid and lower ongoing costs as well. We would have been able to retire in two years at age 55. In our current house we will have to work until at least five years to support our spending goals.
That is assuming that we would have kept investing at the same rate or that I discovered F.I. which may have never happened in that alternative timeline.
House Rich
For now we are enjoying fixing up the house, swimming in the pool, playing soccer and pickle ball on the court. It is super quiet here, but close enough to city life and work. I am slowly decluttering. We may be house poor, but as long as we can keep zero consumer debt and our cash covering our goals and expenses we feel house rich..