We are buying a Big A$$ House and it scares the living daylights out of me. So I’m going to blog about it.
First, let’s define big.
Six bedrooms. Four for immediate family, one for guests, and one to offset the cost (more on this later) of all the rest. Four+ bathrooms. Probably north of 3000 square feet of climate controlled goodness for us humans, one dog, and our Stuff.
Next, let’s talk money. In our neck of the woods, if we buy this kind of turnkey place, it’s probably $800,000. No, that is not a typo… let me write it out to be certain you fully grasp the magnitude: Eight Hundred Thousand Dollars. My heart is racing again just thinking about it.
If we bought a fixer, we might be able to get an old and busted place for $450,000. Then, we need to put in up to $150,000 to fix it for a total of $600,000. These are just estimates of course, but I’m already seeing opportunity!
As I write this in Dec 2019, interest rates are around 4%. Let’s say we’re able to put in $160,000. (We’ve been eating a lot of peanut butter and jelly to save for this). At 4%, our monthly payments are ~$3100 for the put-your-toothbrush-in-the-bathroom-and-it’s-ready purchase and ~$2300 for the fixer, assuming full financing of the renovation. I know there are intangibles: whoever heard of a full gut-job renovation going smoothly? But I do believe the market charges a premium for no-hassle.
Next up: maintenance, taxes, bills. Let’s assume these are equivalent between the two options. A good estimate for maintenance is 1% of the house value every year. That’s $8000 per year.
Taxes in the county we’re considering are $1.014 per $100 of assessed value (1.014%). Again, let’s keep things simple and assume the assessed value is $800,000 for the ready to go. Taxes become $8,112/yr. For the reno option, we’ll assign the assessed value at the purchase price + repair value. I think that will be conservative. Reno taxes are then close to $6100/yr.
Bills (Gas, Electric, water) can be pretty significant when you’re heating/cooling such a big space. An efficient build averages $210/mo for a total of ~$2500/yr. Let’s apply that to both options.
Add that all up and our annual recurring costs for each of the two options look like this:
- Turnkey ($800,000 purchase) total: $55,300
- Mortgage Principal & Interest: $36,600
- Maintenance: $8,000
- Taxes: $8,112
- Bills: $2,500
- Reno ($450,000 purchase+ $150,000 reno) total: $42,100
- Mortgage Principal & Interest: $27,500
- Maintenance: $8,000
- Taxes: $6,100
- Bills: $2,500
Ouch. we’re basically locked in to this cost of living for the next 30 years.
Now, let’s make this a bit more exciting. We’ve planned to take on a renter in either case. As part of the deal, each property must have a 1 bedroom suite in the basement. The suite must be isolated from the main house (with a locking door), have a kitchenette, separate access, and a full bathroom (at least a shower). Rents for a 1 bedroom/1 bathroom apartment in this area range from $800-$1200 per month in this area. Let’s pick the midpoint of $1000/mo to keep the math easy.
All of a sudden we get an extra $12,000 of rental income to apply to the total recurring costs. And, we can write off a proportion of the recurring costs. For a 3000 sqft house, we would estimate 500 sqft being allocated to the rental. That means we can write off 17% of every expense associated with the property. Here’s the line item reductions:
- Turnkey ($800,000 purchase) total offsets: $15,105
- Mortgage Principal & Interest: $12,000
- Maintenance: $1333
- Taxes: $1352
- Bills: $420
- Reno($450,000 purchase+ $150,000 reno) total: $14,434
- Mortgage Principal & Interest: $12,000
- Maintenance: $1,000
- Taxes: $1,014
- Bills: $420
Remember these are deductions not credits. To accurately estimate our total expenses, we need to apply our tax bracket first. Let’s say we’re in the 24% tax bracket. Here’s the final costs of these two options once the reductions are included.
- Turnkey ($800,000 purchase) total: $40,200/yr
- Mortgage Principal & Interest: $24,700
- Maintenance: $6700
- Taxes: $6760
- Bills: $2,100
- Reno($450,000 purchase+ $150,000 reno) total: $27,700
- Mortgage Principal & Interest: $15,500
- Maintenance: $5,000
- Taxes: $5070
- Bills: $2,100
This still is no yurt, but it’s a whole lot better than just paying out of pocket.
If you are in to frugal living, the entire concept of a house like this is probably just silly. But, if you live in a high cost area, are trying to get your kids into good schools, or simply have the ability to hack your residence, it can be a very worthwhile endeavor. Some other house hacks to consider:
- Rent part of your house
- Buy a small multi-family and rent most of it
- Set up a home office
- Subdivide your lot
- Build a carriage house and rent it out
- Buy an RV; live in the RV and rent your entire house
Readers, have you house hacked your way into a bigger home? What tricks have you used to make your current living situation more affordable?