Master the BIG Stuff – Housing

We’re about to hit you with some cold hard facts. There are THREE major categories in your life that if tweaked slightly, could save you BIG BUCKS. If you can master this post and the upcoming posts on our “Master The Big Stuff” series, your path to FI will be SO much easier. 

What do we mean by Master The Big Stuff?

The biggest three expenses for most people include housing, transportation and food. We want to emphasize that optimizing your savings in these three areas will likely save you hundreds, if not thousands, each and every month. Rather than focus on saving the pennies, focus on the areas where you can save BIG.

If you can focus on streamlining your savings in these big categories, the little things that bring you joy that come at a small cost in comparison, like catching up over a coffee with a friend every so often or going out to lunch occasionally with a coworker, doesn’t impact your FI journey as heavily.

The goal is obviously to take these additional savings each month and throw it at your debt or start propelling your investment accounts. Onward and upward.

This first part of the Master The Big Stuff Series is going to focus on housing. We won’t cover buying and flipping homes or rental properties, or being a property manager for a house you don’t occupy (although that’s definitely another way to reach FI too, get that passive income!). This is strictly about reducing the amount you currently pay to have a roof over your own head. Let’s get into it!

Financially Optimize Your Living Situation

Rather than spend over $1,000/month on rent and pay 100% for utilities in a 1/1 apartment, rent out a 2/2, get a roommate and cut your housing costs in HALF.

Rather than buy a 3,500 square foot house, that you’ll likely spend countless hours cleaning, why not buy a 1,500 square foot townhouse for HALF the price which still allows you to live comfortably and invest the difference?

OR buy that big house, but rather than let the extra rooms sit empty 90% of the time, become a landlord and rent those rooms out to roommates to COVER YOUR MORTGAGE (OR MORE)? Then downsize to a smaller place when you no longer want roommates and take the proceeds and invest it?

OR rent a room out in your home on Airbnb? Maybe you live in an area bumping with tourism and could make some decent cash during season? Or maybe your city or town holds an annual event or conference where you could rent out your place and go on vacation during that time instead to avoid the crowds (I’m looking at you Calgary Stampede).

OR convert your unused basement into a rental suite? This could be a double whammy, in that you could make extra monthly income renting it out while also likely increasing the value of your home by more than the cost of the upgrades.

There are SO many ways to house hack and easily slash your housing expense by at least $500/month. And this doesn’t have to be a 20 year play. You likely can rent out rooms for a few years to supercharge your mortgage and become mortgage free in less than 10 years (depending on where you live of course and what the housing market is there). 

An Example of House Hacking

Let’s say Jessica had a $200,000 starting mortgage loan at a 4.5% interest rate for 30 years and she still has 25 years remaining. Sound like someone you know?

If Jessica was able to contribute an additional $1,000/month to her mortgage by house hacking and getting a roommate or two to live in the extra unused rooms in her home, then used her renters hard earned pennies to contribute towards her mortgage, her mortgage would be paid off 15 years and 9 months EARLY! That sounds like freedom to me!

If she could super charge it even further and get even more than the $1,000/month of rental income, she could obviously pay the mortgage off even faster than 9 years and 3 months instead of 25! BOOM.

Our Real Life Senario

Ok ok, time for us to share our real life example. So, here’s what we did:

In 2012 I bought a 3 bedroom 1,900 square foot townhouse in Florida that cost $169,000 USD. It also had a large private den with a half bath on the first floor.  The second floor was the main living space.  And the third floor were the bedrooms.  I put 20% down (~$34,000) and had a mortgage of ~$135,000 remaining.

We rented out 2 of the 3 bedrooms and we rented out the large den/bedroom as well for 2.5 years while we were living in the master bedroom. We charged anywhere from $650-900/room/month depending on the size. On average, we were making over $2,250/month by renting out the rooms.

We were paying our monthly mortgage like normal (which was WAY less than $2,250) but then supercharging it by throwing the additional $2,250 (minus taxes) towards our mortgage each month. 

This cut our mortgage down from a 30 year payoff to a roughly 4 year payoff. 4 years!!! Would you have roommates for 4 years if it meant a paid off house afterwards?? It was a no brainer to us. 

We ended up supercharging it even more by putting additional savings of our own towards the mortgage (about $1,000/month from Court’s personal account when it was just her living there and another $650/month when Nic moved in) and paid the house off in 2.5 years.

2.5 years and we had a paid off townhouse! 

If we had stuck with paying the minimums on the original 30 year mortgage, that $135,000 remaining balance on the house would have ballooned to $196,000, by the end of that 30 year period. That’s $61,000 in interest to the bank. And that’s on a LOW interest rate of 2.7%! Instead, by supercharging our mortgage payments, we only ended up paying $5,000 in interest to the banks!  You can check out current mortgage rates being offered to see what’s available to you.

Imagine what the difference the accumulated interest would be if we were talking about a mortgage balance more than twice that amount, with an interest rate more than double ours?! We did the math and if you double our situation to a $270,000 mortgage at a 5.7% interest rate, you’d be looking at $272,000 in interest to the banks over the course of a 30 year mortgage period. That’s more than what the original mortgage amount was for!

After those 2.5 years, we were mortgage free and any money that would have gone towards mortgage payments was instead now headed to our investment accounts. And those little dollar employees were working hard for us in there.

When we moved to Canada, we kept our fully paid for house in Florida and rented it out to a family for 2 years, where we netted $900/month (after ALL expenses accounted for: taxes, home insurance, a high HOA, American Home Shield systems and appliance insurance, and repairs). So we made a total of ~$22,000 in additional profit during those two years.

We sold that Florida townhouse in 2017 for $270,000 which came out to ~$240,000 after closing costs / fees. Note that our tenants were REALLY good and they were not the reason we decided to sell. We also had a fantastic realtor who was also our property manager (don’t settle on your realtor or property manager if you decide to become a landlord – ask them tons of questions before committing!).

Ultimately it was too hard for the control freak in us to be thousands of miles away from our investment property. What if there was a major hurricane or flood or fire? It stressed us out far too much (not that being close would prevent any natural disaster from occurring). We learned that even though the passive income was so SO sweet, being a landlord from a distance was not for us.

To sum it all up: renting 3 rooms for 2.5 years ($67,500) + renting the entire place for 2 years ($22,000) + profit from the sale ($240,000) = $329,500 in proceeds from the house over a 4.5 year time frame.

Of course, we DO have to account for what we put into it though.

The purchase price of the house was $169,000 and we put $34,000 down that had been saved up for prior to purchasing so we need to account for the down payment. Over the 2.5 years we were living there, we were paying our normal mortgage amount as well as contributing $1,425/month extra (Nic’s $650/month contribution started when she moved in so this is the overall average), totaling $1,975/month, which comes out to $47,400. And we need to account for the $5,000 in interest that we paid towards the mortgage during this 2.5 year time frame. Plus I put in about $2,000 when I first bought the place to fix a few things and paint all the walls (myself of course, come on you guys!). So a total cost of $88,400 is what we shelled out on the house overall.

When all was said and done, we netted $329,500-$88,400=$241,100.

Now all of this so far has been in USD.  Converting this to CAD at a USD/CAD exchange rate of 1.30 yields $313,430 CAD.  We now are using the earnings from this house to account for our current mortgage on our Canadian house (that USD/CAD exchange rate though… love it.)  We purchased our Canadian townhouse in 2016 for $315,000 CAD and decided to hold a mortgage on it since the interest rates were low which allowed us to have the cash on hand in case of an emergency/opportunity with the plan to pay if off by 2021 once we reach our FIRE number as we plan to be debt free going into early retirement. Because of this timing, we do not include a mortgage expense in our FIRE calculations.

We had the Florida house money sitting in a high interest savings account earning 2.8% interest and our mortgage interest is 2.59%. So we’re actually MAKING money by having a mortgage and slowly paying it off vs paying for it in cash upfront. Mind blown.

We also want the extra cash on hand in case the stock market crashes in the next year or two so we can have the option to move funds out of the high interest savings account and shift it into our stock portfolio when we can buy shares of our favorite low fee index funds when they are on sale.

 

Some Things to Consider

The key to all of this is that prior to buying the townhouse, we had been living with roommates for the past 8 years (4 years in school and then 4 years after school once entering the real world while trying to keep expenses low to pay off student loan debt / save for a down payment). So the idea of living with roommates wasn’t a “step back” for us.

We didn’t let lifestyle creep impact us. We didn’t shift to feeling like we had to live on our own once we landed jobs out of school. That would have made it MUCH harder mentally to go back to living with roommates. We just figured we might as well be the landlord collecting rent from our roommates, rather than paying someone else to let us live in their place. 

We totally get that this is not ideal for everyone, depending on where you are at in your life, this is just our experience. For example, this would be MUCH more difficult to do if you have kids. But if you are in school, just starting your first job, or are generally very flexible, I would HIGHLY recommend looking into this strategy.  We also recognize the crazy foreclosure market we were dealing with when we purchased our home was a very atypical time.  That’s not to say good deals don’t exist anymore.  They just may be harder to come by.

Total side note: Up until owning our Florida townhouse we had both only lived with female roommates. When we had our own place it just so happened to be that all of our roommates were males over that 2.5 year period except for one female (and she’s now married to one of our old roomies – just call us match makers!).

And you know what?! It was great! The guys were so quiet, respectful, and clean. They didn’t know how to cook much, so they were never even IN the kitchen ha! We both worked shift work too, so we had very wonky hours and most of the time we were home when everyone else was at work and vice versa so it was a great set up for all and it felt very private.

Are you already thinking about ways to house hack? What stage of your life are you in? Do you think you can figure out a way to use housing as a way to MAKE money for you? Have you figured out a different way to house hack? 

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We believe in stacking up life hacks to keep your enjoyment levels to the max without depleting your bank account.  Here are some ways to further educate yourself and save thousands of dollars over your lifetime by making some simple adjustments:

• Investing Newbies: Check out our free Investing 101 Series.
• How much are you paying for your phone plan?  Canadians, learn more about Public Mobile, and see how we are paying $3/mo for our cell phone plan.
• How much are you paying for internet?  Canadians, learn more about the various Independent Service Providers out there to see who services your area so you can lower your monthly bills.
• How much are you paying for home insurance?  We were able to reduce our rates by 25% by switching over to Square One Insurance.  If you live in BC, AB, SK, MB, and ON, check out Square One for your home insurance, landlord insurance, and/or tenant insurance.  Use this link to receive an extra $15 off your quote.  (Note that you must use this link to start the process to get the $15 off even if you prefer to pay over the phone.)
• How much are you paying for your monthly utility bills?  See how you can likely save on this monthly expense.

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