May 11, 2011 42 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.

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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!

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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.

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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.

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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.

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- Andrew April 17, 2015, 10:41 am
  
  Don’t listen to people who say that when you rent you’re throwing you money away. They’re living in a bygone era.
  
  What people forget is that when you buy a house you pay taxes, upkeep, mortgage interest (and _lots_ of it), heat, electricity, and water and maybe condo fees and maybe mortgage insurance. Guess how much of that you’re getting back? None of it. As an accountant would say “You’re moving money from an asset column to an expense column.” Same as when you rent.
  
  “Ahhh,” they say, “But a house appreciates in value!”
  1) Usually. But so does every other house in the area, so you’re not necessarily ahead.
  2) The markets, long term, out perform housing. So, if you rent long-term, be sure to invest.
  
  So, yes, you’re throwing your money away when you rent. But you’re throwing even more away when you own. If you rent and live paycheque to paycheque then you’ll be screwed, and you need this blog more than ever. If you rent (usually cheaper per month than owning), and invest, you can come out ahead.
  
  Your decision should be based on how you want to live, using money as a limiting factor.
  
  Reply
  - Spork April 18, 2015, 11:58 am
    
    Maybe this varies geographically… and certainly does in places where there are rent controls… but: where I live rent per month is more expensive than owning (for comparable properties). And if you think about it, that makes sense. As you mention, renters are paying taxes, upkeep, principle, interest, etc for the landlord — just like a home owner is doing. And yes, housing isn’t the same as investing in the stock market. But in the end, you (or the land lord) have a piece of property that can be exchanged for something.
    
    Reply
  - Chad June 26, 2015, 3:00 am
    
    What Spork said. The thing people have to realize, is that, if you’re renting, you’re covering the expense of a house AND covering someone else’s real estate investment returns.
    
    Everything an owner has to pay for? You better believe the renter is paying for it too. Then whatever return on investment they can get in the area (6-7% around here).
    
    So, no, by renting you are always paying at least as much as it would cost to own, and often 6-7% more, adjusted annually to inflation. Wait, wasn’t that about how the market performs? Hmm…
    
    The main difference between owning and renting is simple. When you own, you end up with something of value afterwards. When you rent, you’re paying someone else a premium for THEM to own something afterwards.
    
    Reply
    - Mr. Money Mustache June 26, 2015, 7:20 am
      
      Chad – you’re right in theory, and that is a perfect economic explanation of how the home rental should work.
      
      However, since single family rentals are often handled by less-than-sophisticated homeowners, plus incoming buyers can display an economically inefficient preference for owning, the numbers often don’t come out that way when you analyze a market.
      
      For example, my next door neighbor had a house that she bought for $170k 20 years back. She had a mortgage of around 100k on it, and monthly payments of well under $700. She was thrilled when she could rent it out for $1200 per month, making a $500 “cashflow”. Little did she know that the place was really worth closer to $300k in the current market and the market rents in the area, while still low, were over $1600.
      
      My theory is that there are many people like that in any given market, which tend to distort the rental prices downward. It’s especially prominent in California’s bay area, where according to home prices the rent on a small house should be over $10,000 per month, but is often closer to half that amount.
      
      Reply
    - Eric June 26, 2015, 9:39 am
      
      The other difference is rentals don’t charge you a 6% transaction fee every time you move, and you don’t have to find your next tenants before you stop paying rent. The consensus of most of the calculators I looked at with pretty moderate assumptions show 4-5 years as the point at which buying becomes the better option. If you buy a $300k house and pay 5% in realtor/other fees, that’s $15k gone. If you only stay for 3 years that’s an extra $400/month you paid to live there that isn’t shown in the mortgage or other bills. Add in a few months of waiting for a buyer to close on the property, and your savings vs renting can disappear quickly. Of course, the longer you stay in your home, the more these costs are spread out and the less effect they have.
      
      For those of us still in the corporate career world who don’t know where/what they’ll be doing in 3-4 years, buying is often not the best choice.
      
      Reply
      - Jonathan July 18, 2017, 7:53 am
        
        Typically, the realtor costs are borne by the seller. I was able to purchase a home and only pay a $100 realtor fee. Sure there were closing costs, but they were minimal. Also, Redfin has realtors, and they only charge 1% in realtor fees.
        
        Reply
      - James January 4, 2018, 8:40 am
        
        Or, you could buy a new place every time you move and then rent instead of sell. That way you accumulate property and you can get the lower mortgage rates of a primary dwelling, but avoid the fees and hassle associated with selling a house every few years.
        
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        Vi July 6, 2018, 2:54 pm
        
        Oh, but the hassle of renting it out, finding someone to keep an eye on it or manage it, and if you’re talking about multiple properties, you’d better have some time to keep track of all that’s going. Plus keep tracking of the mortgage payments, the tax accounting at the year-end, receipts, etc. That doesn’t seem terribly mustachian – it sounds like an ulcer waiting to happen.
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.

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- 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.
  
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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.

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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.

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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.

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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”.

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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.

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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?

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- 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.
  
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  - Kurt November 19, 2014, 2:02 pm
    
    I think a common misconception is that people will ever actually get to deduct mortgage interest from their taxes.
    
    When I add up itemize deductions I never reach enough to surpass the standard deduction ($12,400 for 2014 – married) hurdle. So, I don’t get the “advantage” of the deduction anyway.
    
    That being said, my mortgage interest rate is locked in at measly 3.375% for another 28 years.
    
    Reply
- AshleyD August 6, 2015, 12:19 pm
  
  I know this is an older post but thought I should comment on it. My spouse and I looked into doing something similar last year.
  If you are buying a property that will be an investment property and not your primary residence there are a few different rules in regards to getting a mortgage. It is important to go see someone at a bank/mortgage broker/etc. to see if its feasible.
  When we spoke to our bank, we found out that because of mortgage rules we would be required to put a minimum of 20-30% down payment. Plus there were a few other considerations to take as well.
  
  We have been looking recently into buying a house for our primary residence. We do not have the full 20% but do have 5-15% (depending on purchase price and timing). Based on online calculators it does not make a large difference in mortgage payments if we put down 5% compared to 10 or 15%. Either way we would still have to pay the CMHC Insurance. We would plan on putting the 5% down and using the extra savings for the first year for any unexpected costs.
  However we could have the mortgage paid off well ahead of the amortization schedule. (Currently not a lot of savings but a large cash flow availability even with the extra costs of owning vs renting)
  
  *Note: This information could change depending on country and location.
  
  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?

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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??

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- 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.
  
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- 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.
  
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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.

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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
RetiredAt38 November 23, 2015, 9:42 pm

Oh Mustache…oh how much I’ve enjoyed this blog. After reading several of the latest posts, I started to read from the beginning. I share the mustachi-ness, though I prefer to wear it in a beard that hits my belly-button. Enough about good looks though.

Up until now, there has been very little that I would take umbrage with in your writings – and when I read the title of ‘The elephant in the room – Housing’, I admit I got a little excited. Unfortunately, I would have liked to have read an equally swift an aggressive approach taken with houses…as with cars and cell phones.

Background – My wife and I have owned two personal houses. AND, we have gotten lucky. One purchase in ’02 that went up 40% in value by ’03, and then another we built ourselves from ’05-’15. Aside from that, a few 2 and 3 family homes, as well as 1 single family rental.

Even with the above, I must say that there is few greater shackles in life than owning (and especially owing on a mortgage) a home. I don’t believe the metal cuffs are put on by marriage or children, but certainly can rub the ankles of adventures in home ownership for one’s own dwelling..

Now I understand so many of the emotional entanglements we have with home ownership…maybe those ideals are too hard to lose. Maybe it takes a some major life occurrence to kick one in the pants…I don’t know. I do know that home ownership is looked at as ‘stable’ or having ‘made it’ or some other wordy-pants that shows we are mature.

The cost of a home goes so far beyond the monthly check to the bank. It’s the taxes, upkeep, improvements (even if you plan to keep the house for 20+ years, you will likely need to update to sell competitively), all the interest (do your math!),but above all of that – TIME. So rarely will I hear someone talk about how much time will be lost in home care-taking when considering an upcoming purchase – but so often I hear the complaint once into it. Why do you want to retire early -TIME. You wan that time that you aren’t under someone else’s thumb. A home can be little different.

Building our home was a great experience, and one that teaches a pile of problem solving skills…but it was a massive time suck. If we were to do it again, we’d build small, much smaller….but that is not completely mustachian, in my opinion.///go sans house –

People – fast track your way to early retirement :
– consider living out of an RV or with roommates or your car.
– consider telecommuting from cheap rent but beautiful places like Mexico/Eastern Europe/Asia if you are tech literate.

There are few bigger debts that you can create for yourself than a house. It is not an investment, unless you actually get lucky. Often, people won’t grab onto the same opportunities if you have a home….the travel, the change of scenery, the change of jobs. …and additionally, the big savings that could be getting them to retirement sooner.

By the way – we finished swinging the hammer, and laying the tile on our personal house, and rented it out.

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RasmusJ April 4, 2016, 6:09 am

Reading this post, and some of the comments, I would like to mention my current stand on the subject.
Now I live in Denmark, and here there is not a lof of rental houses, and the ones that exists are either very far away from the regular work places, or really expensive.
Rental appartments is a lot easier to come by, also at some acceptable prices. Both my girlfriend and I have lived in rental apartment for the most of our adult lives (we are 34 and 38).

So ½ a year ago we moved into our newly build house (we payed 20% ourselves, and the rest is 2.5% mortgage).
Looking at the finances for our house vs. the rental appartments, we might loose a bit of money each month, when we included taxes, and other expenses that we didn’t have when living in the appartment. Howver we have 500sf more space, we have a large garden, and we can park outsite our door.

Now one thing is for sure. We did not buy the house, as an investment, we have bought it to live in it, and to be able to call it ours. I know, we got a mortgage, so it isn’t ours, but compared to living in the rental appartments it is ours.

And here comes the important part of it, it is OUR HOUSE in the sense that we can change it the way we want to, and we can make improvements, that will make us happy, and maybe raise the value. We also have a garden now, and we can use the garden just the way we want to.
I don’t know how it is in the US, but here if you live in a rental it won’t make sense to spend money on improvements, and you can’t be sure when, if ever, that the owner will make improvements while you live there.

Surely if you see home improvements and gardening as a time consuming chore, then the spend on the this is badly spend, but for us at least for now, it is just all part of the enjoyment of owning our own house :)

And if you buy a house for investment purposes, then I think one just have to remember that it isn’t a passive investment in any way.

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Be September 25, 2016, 7:39 am

My household income is about half of MMM’s target audience (2 teachers on 60k each example from an earlier post) and I come from a family where my parents never bought houses (father lives in his partner’s house and mother remarried someone with enough money to build them a house). Perhaps that’s why I never expected to be able to afford a house and the idea of a mortgage terrified me.
I have a plan to have a 25% downpayment in about 6 years but we’ll see if A. I can still afford a place near my work at that time and B. We can find a place that’s the right size (small!). I like the idea of buying a slightly bigger place then cutting it up into a duplex to rent but I don’t have any renovation experience save for by proxy (father is a house painter/handy man and I have a “figure it out as I go” mentality). We’ll see but at least I can imagine it now!

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FMaz January 9, 2017, 3:41 pm

Hello from Canada,

Given the current rate of mortgages, is it really the best thing to pay off a mortgage at 2.89% when you could expect investing that money at 8% ?

Reply
- Mr. Money Mustache January 10, 2017, 10:43 am
  
  Hi FMaz,
  
  This is an older article, and with current stock market valuations, you might expect closer to 6% rather than 8. But you’re right – paying off a mortgage is usually a conservative backup maneuver, similar to including bonds in your portfolio alongside some stocks. My answer is usually: for aggressive investors, invest first. Eventually, you’ll have enough money to do BOTH without thinking it over too much.
  
  Reply
BeDiff August 17, 2017, 11:35 am

Hi, I just started reading your blogs since I was introduced to them when I was watching a video on mikeandlauren.com, this is really encouraging to me. I’m turning 25 this year and still living with my parents and already saving 57% percent of my income. No car payment, no school debt (thanks to my parents) and saving for a downpayment for a house in 3 years and trying to pay for more things cash. I truly believe debt is a slave and trying to encourage others to save more and live free. Keep doing what you’re doing. :)

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The Californian April 29, 2018, 8:49 am

Hello MMM,
I’m a new reader, and I’m working my way more or less systematically through your blog.
I enjoy your insight, but my guess is that buying vs. renting is largely dependent on the market. A small house in Sweet Home, Oregon may cost $50,000, a similar one in Waco, Texas $150,000, in Los Angeles $600,000, and in Silicon Valley $4,500,000.
Sure a carpenter can move from one place of the country to another, but a stockbroker may have to stay close to NYC and a computer wizard may need to stay where the tech industry is located.
I’m in a similar situation.
My wife and I live in a very nice part of California. I initially rented a cute 950 sq ft midtown home for first $1,400, eventually $1,500 from the owners, who promised to NEVER sell it. We made it our own and expected to NEVER have to move. It took a long 13-1/2 years ’til we learned that NEVER is somewhat of a misnomer, so we had to find a new place to live within 2 months. In this area, it’s not easy, with 10 applicants standing in line for every available house, but since we are presumably desirable tenants with credit scores in the 800s and no debt at all, we lucked out a few miles outside town, and rented a 1,400 sq ft. home for . . . gasp (!) $2,200.

Luckily, the retired owners promised to NEVER sell that rental property, so we made it our own. You may guess where this story is going. 2-1/2 years later, the owners moved to Central California, rented out their primary residence, bought something nice up there, and decided to sell!

We were uneasy since we had to move the first time, and somewhat got ourselves in the position to buy. Homes here start really at $500,000 (unless it’s a complete dump) and go up from here. We bought a fabulous 1958 ranch house right on the river with views to die for for $555,000. It appraised before we moved in at $591,000. Our mortgage including taxes is $2,900. If were were to rent this home, we’d probably pay $2,800, so we’d save $100 per month.

Now we can do what we want, and we smartly improve this home with lots of sweat equity. It will be a $650,000 home in 10 years when we plan to retire. At that time, we’ll sell it and move to a cheaper part of the country, most likely Asheville, NC, and buy a small home outright for . . . $150K or so.

Given our situation, Mr. MM,, should we (1) have rented a house instead and save $100 to $250 per month, (2) euthanized our pets and moved into a dumpy apartment in the ghetto 30 miles away for less rent, or have bought a used RV and try to park it somewhere where the cops don’t wake you up in the middle of the night and tell you to get lost?

Cheers, and keep up the good work.

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- Kathryn September 12, 2018, 9:04 am
  
  I’m in a somewhat similar situation. I’m 33 years old, single, and have lived in NYC (Manhattan and Brooklyn) for the last 10 years – 14 if you include college. I pay $1750 a month in rent for a studio apartment, which in Manhattan is actually an amazing deal. Oh and I also have a dog, so that greatly restricts where I can rent. I’m fine staying here for another few years but it’s hard to swallow putting away 34% of my monthly take-home pay towards rent (and that’s not including utilities + internet). How on earth do I sack away 20% for a down payment on an apartment that could easily cost close to 1 mil?
  
  I love NY and can’t imagine moving elsewhere but maybe I’m kidding myself. Maybe it’s worth it to pick up and go someplace where the cost of living is cheap and perhaps the quality of life more relaxed. As a newly minted mustachian, I think I have a lot more to learn about the value of anti-materialism and living life to the fullest without slugging away at a job simply to exist in a city that is patently unaffordable. All of my friends ask themselves the same thing and year after year we decide we’re not “ready yet” to leave. Someone convince me otherwise please!
  
  Reply
  - Mr. Money Mustache September 13, 2018, 6:23 pm
    
    Yes Kathryn, I think you are wise in your questioning there. First of all, that IS a great deal for living in Manhattan – and I would never consider buying a $1 million apartment if I can rent somewhere to live for only $1750 (the crossover point for that decision is somewhere higher than $5000 per month)
    
    The other consideration is your income – there are many jobs in Manhattan that pay much more than $60k after taxes. If money is an important consideration in your life, I’d either prioritize working up to higher incomes (which may mean switching fields), or moving to somewhere that $60k goes much further, like Omaha. Perhaps even working remotely for an NYC firm as many of my neighbours do here in Colorado!
    
    Reply
    - Tim September 14, 2018, 1:32 pm
      
      I currently live in the Dallas area, but the first 20 years or so of my life were spent in Omaha. It has grown greatly since I left, but I would like to second MMM’s choice. I know he was just using Omaha as an example – he could have substituted any number of places – but I would like to point out that Omaha is a great place. It has lots of things to do, friendly people, and a lot of good companies at which to work. And the cost of living is still very affordable. I don’t know the population right off but I would guess Omaha and the surrounding area has to be in the 1/2 million range. It’s big enough to be bustling when you are itching for some activity, but still small enough that things like traffic aren’t overly bothersome. I know I am biased – Omaha will always be home to me – but if you ever do get tired of the Big Apple, give Omaha a look. You will be surprised, I promise.
      
      Reply
- Cathleen Hutchins September 14, 2018, 2:46 pm
  
  The Californian,
  I’m in the same boat (except for the renting and believing that the owner will “never sell” part)- I live in Hawaii, and home prices here are similarly ridiculously astronomical. The strange part is that rent prices are not. For a studio (shout out to Kathryn) is only $1000 maybe if you are in down town. A 3 bed 1 bath home will be (if you aren’t in Manoa valley or Hawaii Kai or the Hollywood of Hawaii: Kahala) $2000-2200. But the prices for purchase now…oy vey! Average is $720k as of this month. And that’s for a dumpy old run down place, if its in town. Less so outside of town, but if its got a sizable yard (more than 5500 sq foot lot), then it’s probably up around there too. Do I have a good solution? No. But I’ve been running the numbers- I have about $300k in equity in my home (been paying off the mortgage very agressively), and if I sell it, and instead of using all that money for a large downpayment on another property, I get a regular loan (so if its $750k property, the loan amount is maybe $3700/mo if I put down 10% on a VA or FHA loan) and use my own savings for the down payment—then use the tax free gains (if its below the $500k or whatever gains are allowed for a married couple by the IRS) to invest. Even if its in low cost dividend paying index funds, figuring a very conservative 4% gain per year (and thats INCLUDING dividends of say 1%), you’d “make” $1000/mo, off of that $300k. Which you could by magic of mental accounting say that would reduce your mortgage by that much. So now i’d be looking at a mortgage of $2700/mo (not accounting for gains taxes), which is about $700/mo more expensive than my old mortgage- plus a lengthened amoritization schedule. But if i took that and was able to find, say 2 apartment units at $150k each, that can rent out for may be $1000/mo cash, minus out maintenance and management fees of $450 each and 10% of rental income (respectively), I’d be getting $950/mo, and you have some considerations for tax deductions from the property (business expenses, capitol depreciation, etc.). However, if you are in an area that you can get a $150k place that will rent out for $1500/mo each, with similar expenses…then you are talking! Thats an automatic increase per month of $900 on top of the $900 you’d be already clearing (so basically doubling the amount). Now your mortgage, when accounting for rental income, is $1800 (if I did the math right). That’s not taking into account costs like repair, vacancy, and insurance, though, so the numbers might be a bit higher or lower. Lastly, if you consider renting out a part of the house….you may be able to, since you are in a high cost area, rent out a room for $800. Now you are looking at an effective mortgage of $1000. WOW! That being said, its not something I’ve done yet. Just running numbers.
  
  Reply
juthegreat October 6, 2022, 9:00 am

Hi MMM,

I’ve been a longtime reader of your blog (back when I was still in college I found you and opened up a Roth to put all my internship $$ into this), anyways now I’m a 24 year old living in Denver and just bought my first home in Jan 2022. I currently have an interest rate of 2.625% and have roommates sharing the 4 bed 2 bath house with me. My math tells me it doesn’t make sense to make extra payments on this property EVER, since the rate is so low, especially if I continue using it as a house hacking device. Any thoughts on if my thinking is incorrect here? Thanks for all the good stuff and motivating me to the FI life.

Reply
- Mr. Money Mustache October 6, 2022, 12:26 pm
  
  Wow, nice work and you are SO right! You’ve locked in what will hopefully be a live-in goldmine with both a Denver house and a loan that is far beyond the rate of inflation (even in normal times).
  
  I’d pay it off as slowly as possible, take good care of the house and make improvements as appropriate, and harvest the resulting cashflow for additional investments, whatever works for you.
  
  Reply

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The most useful comments are those written with the goal of learning from or helping out other readers – after reading the whole article and all the earlier comments. Complaints and insults generally won’t make the cut here, but by all means write them on your own blog!

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