It’s no secret that I’m a real estate junkie. Simply put, I love houses. I love looking at them, decorating them, and buying them. After purchasing a rental property back in 2007 and our current home in 2010, I’ve come to realize just how much houses can cost over the long haul. After shelling out an exorbitant amount of money to acquire the property, you also need to maintain it. And guess what, the bigger the house, the bigger the ongoing maintenance costs. Turns out, rightsizing your house from the start can serve to exponentially increase your wealth over time.
Growing up poor made me love big, impressive houses. As a child and young adult, I truly coveted my friends’ houses and would’ve done almost anything to live in a big house. After all, I grew up in a 400 sf trailer with my parents and three siblings. My humble beginning has contributed to my desire to upsize our current home. So far, we have not moved forward with such a purchase.
A Wise Friend Once Said…
I have many friends but some friends I consider wise beyond their years. Some of my friends I consult for counsel whenever I have a big life decision to make. I do this because the more insight I can gather from people I admire, the better armed I am to make a decision for my own life.
I’ll never forget one such friend saying about 10 years ago when she was still in her 20s…
At the time, she was single and had just purchased a relatively inexpensive semi-detached home in a very nice, mature neighborhood. I was impressed with her viewpoint and have since tried to incorporate it into my own life with varying success.
Over the years, I have purchased 2 houses and have endured the dreaded closing costs that have gone along with each transaction.
Transaction Fees Can Eat You Alive
Okay, okay, I’m being a bit dramatic but I’m also trying to get a point across. The transaction fees alone to buy or sell a property can easily run into the tens of thousands of dollars.
When you purchase a home with a mortgage there are certain expenses you’re going to incur that won’t do anything to reduce the mortgage or amount you’re paying for the house. Aside from the down payment money that does directly go toward reducing the purchase price of the home, you’ll also likely need to account for expenses such as:
- Application
- Loan origination fees
- Appraisal fees
- Title searches and insurance
- Home inspection
- Property tax
- Transfer taxes
- Underwriting fee
- …and more
Until everything is said and done, Zillow estimates the average cost of closing is going to run anywhere between 2% and 5% of the purchase price of the home. That means that a $200,000 home is going to cost another $4,000 – $8,000 on top of the down payment in transaction fees alone. That’s money you’ll never see again and does nothing for your future wealth.
Conversely, when you sell a house you’re looking at 6% in realtor fees – 3% goes to the buyer’s agent and 3% goes to your agent (aka the listing agent). So, instead of buying a house for $200,000, let’s say you’re selling one at that price. Six percent of that price is going to go directly to the agents for the transaction. That’s $12,000 for a $200,000 purchase price. On top of that, oftentimes buyers will ask for help with closing costs. It’s not unusual for the seller to agree to pay an additional few thousand dollars or more toward the buyer’s closing costs, eating up even more profits.
So, let’s use some crude numbers and say to buy and sell a house, you stand to lose about $20,000 in transaction fees. Over a 30-year period, $20,000 invested in the market (assuming an 8% return) would yield you $201,253. Wow!
Related:
- Growing Up Poor Was My Single Biggest Financial Motivator
- The ORIGINAL Tiny House
- Resisting The Temptation To Buy A Bigger House: The Struggle Is Real
Starter Homes, Family Homes, And Downsizing
As you can see from the examples listed above, jumping in and out of houses over the course of a lifetime can easily add up costing a half a million dollars or more in transaction fees.
The changing landscape of the American economy and home-building trends over the past few decades no doubt added to the concept of purchasing a starter home, upsizing to a larger home, and then downsizing to a smaller one. This sequence of events doesn’t even take into consideration moving to different areas due to job changes or promotions. Add those moves into the mix and someone could end up buying and selling houses more than 5 times over their lifetime.
Even though it’s clear to see how financially beneficial it is to purchase one house and stay put for the long haul, it’s still tough to go against the grain and not do what your peers are doing.
Our Current House Situation
Since I don’t foresee my family moving out of the area in which we live, the only thing we continue to struggle with is the temptation to upsize our home. The house we live in is small compared to the national average for new homes. Last I checked, the US Census Bureau pegged new homes in 2017 to be more than 2,400 sf with an average sales price of more than $384,000.
Our house is a whopping 1,280 sf on the main floor with an additional 800 sf in the basement. That brings our home to roughly 2,100 sf of living space. It sits on 0.4 acres, boasts a vaulted ceiling over the kitchen, dining, and living areas, has a master suite with 2 additional bedrooms and full bathroom. The basement includes a bonus room that we use for an office as well as a massive family room with modern gas fireplace. We’ve installed porcelain tile throughout the entire main floor and have dual-zone HVAC for the main floor and basement, respectively.
All that to say that our house is small but pretty freakin’ awesome and completely customized to our tastes. Despite that, though, it’s difficult to not want more. And when I say more, I mean that we want a certain style of home – either a cedar contemporary or a midcentury modern – both of which are difficult to come by in our neck of the woods. In addition to the style of home, Mr. MMM and I both prefer a wooded lot, yet another tall order for our area.
We often scan Realtor or Zillow to see the newest listings but have yet to find something that we’re willing to go after. Getting excited over a new listing is easy when it ticks most of the boxes, but it’s just as easy to come down off the high when you run the cost of acquisition and continued maintenance.
Related:
- Starter Home: Killer Reasons To Keep Yours
- We Made Our Dream Home A Reality
- DIY Hacks For Creating Personalized Artwork At Home
- Tiny House Living: 7 Things You Need To Consider Today
The Sometimes Hidden Expenses Of A Large Home
Despite the media rumblings about a buying trend favoring smaller homes, plenty of Americans are still going after a big house with tons of bedrooms, bathrooms, and square footage. Unfortunately, we’re no strangers to this reality and fall into the category of wanting a larger home despite loving ours.
The one thing that holds us back is the continued expense of ownership of larger homes. We’re fortunate to live in a great part of the country with reasonably-priced real estate, but, unfortunately, the taxes are started to get out of control. In order to purchase a home between 2,500 and 3,000 sf, we can expect to pay an additional $6,000 to $10,000/year in property taxes.
On top of the purchase price, larger homes are going to require continued expenses like property taxes, utility costs, maintenance fees, landscaping, etc.
Whenever the urge strikes and I want to move forward with upsizing our digs, I remember what my wise friend (who is actually a few years younger than me) said a decade ago…”I enjoy living in an appropriately-sized house.” What I realize when I think of this quote is that I also enjoy living in an appropriately-sized house. And, in fact, we do. Although I sometimes think it would be nice to have more space to host holiday dinners and get-togethers, it’s certainly not necessary.
Our house is just the right size for the 3 of us and we enjoy it. The purchase price wasn’t exorbitant, the taxes are reasonable, it doesn’t cost a lot to heat and cool, and we can afford to decorate every square inch the way we like it. In summary, we rightsized our house and it’s helping us plow toward our goal of financial independence.
Related Podcast Episode:
Rightsize Your Home To Build Wealth
After taking transaction fees and the cost of home ownership, particularly with a large home, into consideration, it can be enormously important to rightsize your house if you’re striving to build wealth. Obviously, the more money you spend on buying, selling, and maintaining your house(s), the less money you’re going to have leftover to invest.
I’m certainly not saying there’s anything wrong with wanting to upsize or downsize to an appropriately-sized home to best meet your current living situation, just beware the hidden costs associated with each transaction and scenario since they can have huge ramifications for your long-term wealth-building capacity.
6 Comments
You make a lot of great points. LIke you, I grow up poor and always wanted a larger house. I equated it with security and comfort. We upsized significantly in 2011, while we were still inflating our lifestyle. As we became more financially aware, we realized the drag it was. You’re also right that the bigger the house, the more chance you have for unexpected expenses. We’ve been (mostly) lucky, but we now look around and see several things that have the potential to go wrong in a costly way – including the big beautiful trees surrounding our big beautiful house.
All that to say – we’re in the process of downsizing now. Thanks to appreciation, the larger house wasn’t a catastrophe, but we will certainly be losing quite a bit to transaction costs. Much better to resist on the front end and stay in an appropriately sized house!
Thanks for sharing your story! I still struggle with not upsizing almost every day. I still see big, beautiful houses as wealth and prestige – even though I know that’s usually not the case in reality. So far, we’re sitting quite nicely in our modest home and are able to save a sizable portion of our income because of it. 🙂
Great post. In my area, just outside DC, houses are ridiculous. It’s to the point where in a nice community next to us, people are buying smaller, older houses as tear downs and putting mega houses on the tiny lots. It’s crazy.
And in the driveways is a brand new Teslas or other luxury cars(s). It seems our area is the textbook keep up with the Joneses area.
We’re seriously considering selling our townhouse, and downsizing to a rental for a few years. Why? Upkeep, maintenance, and property taxes. When my wife retires, we’re outa here to a less expensive area.
Your young friend is wise. Appropriately sized houses make sens.
I am looking for a house currently. It is hard not to get carried away by some of the beautiful houses I see!
Btw, your pup is adorable.
We bought an expensive “forever home.” It has been a bear to maintain in our first two years in some ways. We look at real estate in our expensive coastal city and, to your point, when we look at the transaction costs of buying and selling it is tough to motivate ourselves to sell and leave our “forever home.” Plus, we know that there are unknown home projects waiting for us in any new home. At least in our current home, we know what needs updating. It is tough right now because we just had a son and it’d be great for my wife (or me) to have the option to stay home (actually, we could do it just not save much outside of our 401(k)s for a bit). I think it is best to stay put though given the costs involved in moving. Over the long term, staying put will be a better than putting transaction costs and taxes in other peoples’ pockets.
Believe me, I am often drawn to the idea of upsizing our house. I really do have to fight the temptation almost every single day. Typically, as I mentioned though, the expense of the transaction costs alone is enough to make me cringe and back down. It also doesn’t hurt that our only child doesn’t want to move and often proclaims, “bigger doesn’t always mean better”. Ha! It’s something I said to her many years ago when she wanted a bigger house and we weren’t ready. It’s funny to hear my words tossed back at me. Thankfully, it does help me fight the temptation though!