19 comments

The Elephant in the Room: Housing

So far, I’ve complained about the excessive spending we do on cars, driving, gifts, cable TV, electricity.. all without even mentioning housing. Why?

Housing is the biggest expense for most people, and there are some retirement/frugality/simple living blogs out there that advise you to live in an absolutely minimal house or even an RV.

It is true that there are big savings to be had there – with the ongoing housing market party, if you live in a neighborhood with healthy real estate sales right now, you could probably pick up a foreclosed house from a bank somewhere else in your town for less than half-price. Or you could buy a used RV for $20k and cut your housing costs down by 90% for life.

But I wouldn’t do it, so I can’t tell you to do it.  The Mr. Money Mustache way is not about living on the cheap. It’s about living the GOOD LIFE on the cheap. The fundamental lesson of this blog is that there is plenty of money to go around in this country, so you don’t have to eliminate your spending on everything to become financially independent. You just have to cut out your waste. And for the most part, buying yourself a home is not a waste.

I live in one of the nicer houses in my town’s nicest (to me) neighborhood*. I love the four bedrooms and four bathrooms and the nice renovations I’ve done throughout  this place over the past five years. It’s not the cheapest place to live, but to me it’s the best value of living pleasure to the dollar I could create. A house to me is the home base of your spirit, and when you’re living a frugal and natural life, you spend a lot of time at home.  As a result, when I compare the sunk cost of my housing to that of other people, I come out behind.

But by having a comfortable house, you can be happy and entertained at home without having to go out. You can have friends over and maybe even feel less of a need for vacations – enjoying Staycations instead. All of us in my family feel more confident and productive in a good house, so on an income basis, it might even be paying for itself.

The only caveat to all of this feel-good housing talk is to realize that it is still a luxury you are buying yourself. A house is not an asset (unless it is a cash-producing rental property), it’s an expense. The best you can statistically expect is for your house value to keep up with inflation: 2% per year or so. Any more than this is just luck, and it can go either direction as we’ve learned since 2005.

So before treating yourself to a house, I’d suggest you go about it the old-fashioned way: save up a 20% down payment, then make it a priority to pay the rest of the balance off much sooner than the 30-year period implied by modern mortgages.  The idea of having a house mortgage-free might shock some youngsters who have been conditioned by marketing to think that debt is normal, but seriously – give it a try. The challenge of thinking about saving larger amounts of money – a $50,000 downpayment on a house – is exactly the type of exercise you need as a new MMM reader. If I could do it as a 24-year-old bachelor fresh off the boat after arriving in America, you can too!

On the other hand, if having an upscale house is less important to you, and you get more pleasure from doing a major trip to the mountains each weekend with your friends, then by all means you should outdo Mr. Money Mustache and live at half-price compared to me! When you live in a country with plenty to go around, you DO get to splurge on the things that are important to you. You just have to choose the splurging carefully and keep the total spending down to only 25-50% of what you earn, so you can get ahead and have the opportunity for more luxury in the future.

 

* Of course, this happens to be in Longmont, Colorado, not exactly a happening metropolis.. but for living a frugal life and having a great environment for a kid to grow up, it’s hard to beat.

 

  • Kathy P. May 12, 2011, 7:00 am

    I find myself fascinated with the whole tiny house concept, although my house is about 800 SF (living area, it also has a full basement). I used to think that in order for it to live better, it had to be bigger but I now know what I have is plenty for one person. As I’ve observed the trend toward small and tiny, I’ve become convinced that how well a home lives has little to do with its size. Design is where it’s at. Sarah Susanka discusses this so well in her first book, The Not So Big House. Over time, I’ve evolved a plan – which started out with a fairly good sized addition but has since shrunk considerably – for remodeling my house in ways that will make it much more efficient. I now realize I don’t need to add on at all – I just have to move some walls and a couple windows and doors. Now to figure out how to prioritize and pay for it. Energy efficiency is part of the plan but since I have 80s era insulation already, I’m not sure how much it will save me.

    I also think that bloated housing purchases, along with the whole “my house is an ATM” mindset is the major reason so many boomers will never be able to retire. All the money that should have gone into the 401K went into trophy homes instead. I’ve certainly made my share of financial mistakes but buying too much house was, thankfully, not among them. I will be able to retire – not as early as you, Mr. M3 but earlier than most.

    What’s this? Do I detect a little fuzz on my upper lip? LOL!

    Reply
  • Mrs. Money Mustache May 12, 2011, 8:50 am

    I too am fascinated with the not so big house series! There is so much inefficient use of space in many homes — the idea of optimizing what you currently have is brilliant.

    Our current house is 866 sq ft on each of three floors (basement, main, upper). I can easily imagine us being just fine without the basement, so it looks like our family of three could easily live in about 1700 square feet.

    We used to live in a 500 sq ft house, which I loved. It was a very quaint brick house with great light on a beautiful lot. For just me, it would have been perfect. When our son was born, we did okay for 6 months, but with family visiting and our child starting to get mobile, things started to feel pretty tight. MMM did not like it much, as he’s a carpenter and just finding a spot for his tools was hard enough, much less actually being able to use them.

    Great points though about the not so big house idea. I recommend getting this book out of the library for some great ideas about your own homes.

    Reply
  • Spork October 12, 2011, 2:44 pm

    I had a totally different — though still moustacian — take on housing… I decided to buy a house in a manner similar to how cheap-ass-bastards buy a car: cash.

    Sure, they say it can’t be done… and … there are admitted hurdles to doing it. But I am here to say: it’s doable. (Okay, I am financially at 83% of expected budget… but I’m pretty confident IT CAN BE DONE.)

    The way of the Spork is probably not for everyone… but what I did was basically sell everything I had (including a mortgaged house) and buy what I could afford. And what I could afford had to be expandable to what I actually wanted. What we bought was land… out in the country… with a really nice tool shed on it. … and we moved into the tool shed. Yes, I said into the tool shed.

    A good 5 years have gone by since that day. (I might add: these were actually a REALLY GOOD 5 years. As small and tight and unappealing as this place may be… I have honestly had a great time living there.)

    Today a house stands in front of that tool shed… mostly, but not totally complete. We are expecting to have Thanksgiving dinner inside. It is by no means a cheap house. It is also (I think) not an extravagant house. We picked and chose and whittled things off. The planning an re-planning was sometimes painful… losing things we wanted, but trading them for a paid off house we would live in … possibly for the rest of our lives.

    I could ramble on forever here… but it can be done. And it can be done without blowing your entire life’s savings.

    Reply
  • Katie October 16, 2011, 8:03 pm

    I don’t think we could ever afford to buy a home in our downtown neighborhood. The housing prices here are nuts – approaching “crack shack or mansion” levels. I mean, we could get a giant mortgage like everyone else does, but I don’t want to be suffocated by house debt. People tell me we’re throwing our money away by renting, but our rent is cheap, so it’s the best way for now. But one day, I would love to have a back yard and a workshop and some actual storage space.

    We dream about moving to the west coast (Vancouver/Victoria) but the housing prices there are even more stupid.

    How did you end up in the US, Mr. Moneymustache? I can’t imagine leaving behind OHIP and moving a place where people think that public health care is “communist,” and people like Michele Bachmann roam the streets.

    Reply
  • sdp April 11, 2012, 8:11 pm

    I find it funny how many people say they are debt free and proud of it(as they should be….if they really were) all except the mortgage….. which eats up 30-45% of their income. 30 to 40 yr mortgage? c’mon!!! My first house I put 45% down, paid it off in 9 years. and now rent it out for the equivalent of the 30 yr mortgage on my newer bigger house getting ready to start a family. I expect to pay this one off in 9 or 10 years as well. And no I don’t live in a cheap place. The average 3 bed single fam home in flagstaff is 11 times the median household income. when did society decide that maxing out a home debt was a good thing? and no, I don’t accept the tax deductible thingy. I would have to work really hard all year to spend enough tax deductible-wise to match the standard deduction, incuding the mortgage interest.

    Reply
    • Everett October 28, 2013, 3:18 am

      sdp,
      I’m new to the blog and working my way through. I see lots of arguments for paying off mortgages, but none of the counter arguments. I was about to lay out the case, but discovered MMM has already done so @

      http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/

      The tax deduction for a primary residence is about the last reason to keep a mortgage, but when you convert it to a rental the tax savings are immediate and huge and you free up so much more capital that can get to work for you. Even a small interest rate spread will build up great wealth over time due to the compounding nature of the situation. Another thing not mentioned much around these parts is that a mortgage is a fantastic hedge against inflation. Borrow today’s expensive dollars and pay them down with cheap dollars thirty years from now. For those with a $1M-$1.5M net worth yet another reason to keep the mortgage is that home equity won’t qualify you as an Accredited Investor, so if you pull your money out of investments to pay for the house you may no longer qualify for the better investment opportunities available to the Accredited Investors.

      Reply
  • gooki April 20, 2012, 2:53 am

    I know it’s an old post, but I wanted to comment anyway.

    I’m a firm believer of paying down debt (mortgage included). Even if interest rates, are low, by paying above and beyond the minimum you are effectively forcing yourself to save money while restricting your disposeable income, enabling you to learn to live of less.

    My story. In our country housing is expensive (5 x average household income), interest rates are high – we locked in at 7.5% for 5 years (15 year term) and that turned out to be a good deal. Yet my wife and I managed to pay it off within 5.5 years by making simple choices. Uping monthly repayments, making bulk repayments whenever we had accumulated $10k or more in savings, and being smart with expenses (especially with recuring mothly ones).

    It takes dedication, but you don’t have to deprive yourself.We still went out with friends, travelled to europe, renovated the house, contributed to retirement savings and started a family (with the freedom of one of us not having to work – admitedly I’m a little jealpus of Mr MM, but honestly financial independance in my early 30s never occured to me).

    With all that said after being truely debt free we found ourselves saving less as we had no real plans as for what to do with the spare income (other than buy a bigger home). Thanks to Mr MM we how have a goal which is getting us back onto the right path.

    Cheers.

    Reply
  • The Perpetual Student July 14, 2012, 1:22 am

    I am still gobsmacked that you also live in Longmont, MM family. Awesome.

    My goal is eventually to live in a small small house, with an outbuilding for the Pro Musician to teach and practice out of. Or maybe a slightly bigger house with a lower level for same. But with barely any savings and a ton of student debt looming in the future…things look like they’ll have to wait some time.

    Reply
  • carolinakaren August 2, 2012, 2:28 pm

    I am re-reading this post through the “random article” button. The timing is perfect too, as I have been thinking alot about this subject lately. I agree with Kathy about the well-designed, not-so-big house. My house should be smaller than it is for me to be perfectly content. Right now I have a few extra rooms that are mostly unused. My biggest gripe is having to clean the extra space! Ditto for the yard…..love having it, but need a little less.

    Reply
  • OrangeCountyMark May 13, 2013, 3:12 pm

    Working really hard to be 100% debt free in 13 months. Think of how much extra you would need in your retirement account if you have a mortgage to meet. Can’t wait until I own it outright. My Grandfather told my Dad “get your house paid for as you can always find enough work to buy food”.

    Reply
  • Teknosmurf July 30, 2013, 10:13 am

    I am just now working my way backwards through the MMM blogs, and I find this article particularly interesting as we recently recently (last year) decided to “trim the fat” in a financial sense. We were looking to “go mustachian” before I even knew about this blog. Our approach was a bit different, but along these lines. We bought 2.5 acres of land, and the house basically came free (it was in really bad shape). We needed a way to cut the gym memberships, give us a project that would increase in value, and I needed a place to store my tools (as Mrs. MM hinted above). We ended up dumping our nice 3000 sq ft. house and living in the place we were working on. In addition the extra land gives us an unlimited amount of physical activity in the form of projects/enhancements that eliminate our need for extra “forced” excercise like free weights and workout machines. Not to mention that my tool selection and skill set has risen sharply because of this and I can now do for myself what I have traditionally had to hire out. “Going Redneck” has been one of the best things we could have done on the whole.

    Reply
  • K.I August 5, 2013, 9:52 am

    Hi Triple M!

    A Question for you that I have ben wondering about since reading your blog;

    I am a guy at 22years old and have been stashing away almost 90% of my paycheck the last three years. I am currently living with my parents and have VERY low expenses. I am in no hurry moving out since I dont feel the need for it and my parents wants me around the house. Im now planning to buy a small house or apartment to rent out while I still live at my parents. The plan is to rent it out as long as I feel I dont need the place so that I keep my hard earned money working. In a couple of years I will either move in to the place or depending on the returns and how long I have been renting it out, look for another place.

    now to my question…

    If I am able to pay more than 20% downpayment, is that something that would be a smart choice? or is it better to pay a lower downpayment if I plan to rent it out?

    Reply
    • Adam September 1, 2013, 12:48 pm

      To me, it mainly comes down to interest rates, with a few caveats. Today’s mortgage rates are low compared to expected returns in the stock market and maybe bonds, but not savings accounts. If you live in your home, you also get the mortgage interest deduction, so the effective interest rate you’re paying is the mortgage rate x your income tax rate (possibly including the state rate). That means if you got a 4% mortgage rate and are in a 25% tax bracket, your effective mortgage rate is 3% (4% x .75%). You should be able to beat 3% easily, but if mortgage rates were 6-7%, then the calculus would be different. One important caveat is that paying more than required on you mortgage is a guaranteed return (3% in this example), whereas there’s risk with stocks and bonds. Also, putting down 20% so you can invest money elsewhere is really using leverage (for better or worse), if your investments or income go down, you could be in a bad situation. I have a very low mortgage rate, so I’m paying the minimum, which allows me to invest more money elsewhere at higher interest rate and giving me much more liquidity than paying down the mortgage, and will seriously consider paying it off in full in one payment once I have the savings to do so. You can find a lot more about this online.

      Reply
  • Natalie August 7, 2013, 2:31 pm

    This post is making me feel so impatient! I’m aching to have a house, not only for the reasons you listed above, but because renting feels like such a waste of money. Unfortunately, we’re still working on a car loan and two of my student loans, so it’s going to be a while before we can start saving up for that 20% down payment. Waiting is tough, but bearable. I just wish we didn’t have to sink $1500 into rent every month while we wait! Maybe we can downsize our apartment while we save for the next few years..

    Or do I have it all backwards anyway? Should we get out from under our loans first, then invest for a while, and only then consider taking on more debt in a mortgage?

    Reply
  • Isabela January 8, 2014, 1:02 pm

    Hi, this is my first post, and I didn’t read all the blog yet – so maybe there is a similar discussion somewhere else.

    I’m amazed that nobody is mentioning viable alteratives to the housing mantra “get a mortgage, buy a house, pay the mortgage”, when this is actually the biggest expense of the average family, and there can be endless discussion about how to optimize it. Also, “buy a house” seems to be a given when you have kids, and a big house nonetheless – how much space does a kid need? Is there another way? I’ll tell you my way, maybe somebody finds some idea.

    I came to Vancouver, Canada when I was 31, with husband and 2 kids. I had only $200 my own money, plus it took almost 6 months to find a stable job in the 2001 economy, so mortgage was out of discussion. Also, at the time, we didn’t even know what a mortgage is or even the way of the money. We were financial illiterates. We rented an apartment at the beginning. However, in a year, our eyes were open on the benefits of living in a co-op – an apartment building(s) where you own a little piece while you live there, but without the outrageous expense of actually buying the apartment you live in. We had to buy shares in the co-op, which was $1400 at the time (now it’s $2000) and our co-op consists of 5 buildings of 2- and 3-bedroom apartments. We live in a 3b and we pay $750 a month, which is half of what we would pay in rent somewhere else. There are 3 kids playgrounds, ideal for us since we had one more child since moving in 11 years ago – I could let the kids go out by themselves without me going with them, because one of the playgrounds is in front of my balcony, and there are security cameras everywhere. Also, the other families have lots of kids to play with my kids. It is a good neighbourhood, and there is a good school nearby, with french immersion program, and it’s on a major bus route. We have an indoor pool, parking for our car, heat, water, hot water, minimum cable and garbage is included in the price, and we only pay electricity, phones and internet in terms of utilities. No property taxes either and we have renter’s insurance, very low price. And if your income falls under a certain threshold, you can apply for a reduced “rent”. Seeing that the cost of a house around here is at least $500k, one that will also lengthen our commutes, and that there isn’t much time left to pay down the mortgage, does it really make sense to buy a house??

    Reply
    • Señor Stubble March 8, 2014, 12:00 am

      All my life I’d imagined buying a house. And now, my wife and I could afford to pay cash for a house in the BC town I grew up, but would not even qualify for a mortgage on a house here in Vancouver proper. We make average (median) incomes and rent a small apartment. We’re also about to start a family. We are not willing to commute an hour each way to work, so we’re stuck with renting. I had never thought of a co-op. Thank you for the idea. Rents aren’t all that bad here compared with buying. Instead of housing, we have money in index funds.

      Reply
    • Carbonero June 13, 2014, 7:36 am

      Hi Isabela,

      I also live in a coop in Vancouver – all your comments resonate. I got here in 2007, and after figuring out costs, I promptly started to look for work elsewhere! The coop solved our housing “cirisis” and are very comfortable with our long term outlook. Our housing cost is $783 for a 3b / 1.5b which I think is close to what others pay in property tax, condo fees and increased insurance (over my renter`s) for an equivalent townhome. Cant beat that, not planning on moving (let alone buying!!!!)

      It took a while to get into one, and I applied to a bunch of them. Many do not accept new applications, as their turnover is so small. I always thought these were remnants of a 60`s hippy past in Canada and Vancouver. The CMHC promoted them back then, but is now dedicated to backstopping homeowners with bigass mortagages, so not sure any more copos are being built out there. I had some friends looking to start their own “private” coop as a way to share and reduce costs, but housing in general is crazy that this is a non starter in Vancouver whichever way you look at it.

      The “coop” side of living here has also been a great experience. I am on the maintenance commetee so get to interact with others while I adjust a closet door or change a gasket on a tap at their place… probaly an hour or two of work every months, which I see as an opportunity to bond with neighbors rather than a cost.

      Reply
  • Dani July 28, 2014, 5:23 am

    On the east coast, owner occupied two family homes are a great alternative. Where I live, these homes sell for around the same amount of money as a single family home. The advantage is that it is a less expensive way to get an in-town walk to everything house with a yard. We not only pay just half of our home’s mortgage – around 165,000 for our half of the house – but other expenses are less as well. For example, there’s long term maintenance savings when two homes share one roof. And we intentionally share some expenses as well, like internet. Shared walls reduce heating costs too. And then there’s the small conveniences, like watching each others kids for a few minutes here and there, letting a pet out in a pinch, borrowing ingredients, watering houseplants while on vacation, etc. We share our basement and garage with our tenants – both are split in half and we have plenty of storage/shop space and a covered parking space for our car. We share the yard as well, which has planter boxes for both units, and gardens and space for hanging out, and a grassy area for kicking a ball around.

    I suppose being a landlord – or an onsite one – isn’t for everyone – but we find the benefits to be worthwhile. In the long-run, when we feel we’ve outgrown our 3 bedrooms and need a fourth, we’ll keep this house for rental income, so it’s our early retirement plan as well.

    But note this, when you are considering how much space you need. We find our 3 bed / 1 bath in 1300 sf to be completely adequate for our family of 4. It has a large kitchen, a living room, a dining room, in-unit laundry, and two small entry rooms for coats and shoes and such. Right now the kids share a room so we can have an office/guestroom. And adding another bedroom and bathroom when the time comes shouldn’t require more than 200 sf and likely less, so that’s a 1,500 sf house total…much less than we often think we need.

    Reply
  • Jeff September 16, 2014, 4:08 pm

    MMM,
    I can’t thank you enough for your insights here. I’ve gradually developed a real-estate investment mindset over the years, but that approach has really crystallized in the last few months as I read through your archives. As a direct result, my wife and I are finally adding our pretentious and totally excessive 1900sf suburban (“drive to everything”) town house to the rental portfolio, and moving to a 40% smaller place within walking distance of our basic needs. This one single change will improve cash flow by nearly $1000, and the house actually meets our needs better!
    This one move will have done more to accelerate my dreams than anything else I’ve done in my life, and all thanks to a little kick in the ass from your writing. I plan on quitting civil service soon, being an ANG bum a few days a week, and building a part-time real estate business focused on small, affordable, energy-efficient homes for first-timers and investors. At 36, I’m still a few years from full retirement but I’m well on my way, and your work has helped cut years off the process for me. My wife just finished grad school and will probably teach for decades, but (starting soon) with the sure knowledge that it’s entirely voluntary. It’s an awesome feeling to be on the cusp of such freedom.
    Side note for any interested parties: it turns out Huntsville, AL is a great place to pursue FI. Defense money + cheap housing = FI rocket fuel! A real Badass could pay cash for a 2BR townhouse here in a year, with well-kept units near Redstone Arsenal at 60k-80k. Our comparatively extravagant 1100sf rancher will cost less than $500/mo on an 80% 5/1 ARM – and the five-figure principal balance should be easy to pay down before the rate spikes.
    Frugally,
    Jeff B.

    Reply

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