Are you thinking of moving to a smaller or less expensive home? Lately, as I get older, I’ve been asking myself “Is downsizing right for me?”
The benefits of downsizing are many. Maybe you want to reduce stress, lower expenses, or just have an easier lifestyle before retirement. In this post, I’ll share the process I created to help decide if downsizing was right for us, so we could make the best decision about this important lifestyle and wealth element of our lives.
The steps to determine if downsizing was right for me are listed below. I’ll go into more detail below that will help you through these same steps if you’re trying to decide if downsizing is right for you.
1. Calculate the Financial Advantages of Downsizing
See how much lower your expenses will be if you downsize by doing this.
1. Put all your current home related expenses on a spreadsheet.
2. In the next column, put the amount by which you think you could lower that expense. For example, if you pay for a lawn service and you would be happy to reduce or eliminate this factor, put the amount you’d ideally spend.
3. Be sure to estimate a property taxes change. You’ll be able to fine tune this list more as you explore new potential homes.
4. Consider all expenses that would be lower if you moved. For example, if you’re living in a 4000 square foot home and are thinking of moving to a 3000 square foot home, your power and water expenses will likely be lower, along with your property taxes. If you have a mortgage, consider this, too.
Another expense to consider is a home owner’s association fee.
2. Mortgage Cost After Downsizing
Decide whether you would finance your new home, and how much down payment you would make. The upside is that your payments would probably be less, thereby, increasing cash flow. This is very popular with some financial gurus these days, once again.
While positive cash flow allows for greater lifestyle and investment opportunities, the downside is that the longer you finance your home for, the more you pay in interest. If you’re near the end of your current mortgage, and you want to refinance for thirty years, it will cost you. The other consideration is the ability to, and advantage of locking in low interest rates if you’re entering a period of rising rates.
3. Evaluate the Market before Downsizing
Consider the overall real estate market. When prices are high, it makes sense to downsize. When prices are low, the reverse is true. This is because you’ll sell your higher priced home into a strong market and buy a less expensive home in the higher market.
If you’re buying a bigger home, it makes more sense to sell your smaller home in a weaker market and buy a bigger home in that cheap market.
4. Determine the Size Home You Want
This step really helped me get a good idea of what size house we would want to downsize into.
Create a spreadsheet or jot down the approximate square footage of each room in your home. Don’t get too caught up in the exact measurements. I am about 5’6”, so I estimate how many times I could lay across the room to get a rough estimate. Alternatively, you can step it off.
In the next column, write the size room you could be happy with. For example, Larry’s office and our bedroom are very large. We don’t need all that space for these rooms, so I reduced the sizes in my estimate.
If you don’t really need the room at all, put a zero. Total the new desired square footage. Knowing this number will help you find a new home easier that suits your needs. You may as well deduct this new square footage amount from your current square footage to get an idea about how much less space you’ll be paying to heat and cool!
5. Consider How Much Money You’ll Make on the Sale.
Determine roughly how much you can sell your house for. Realtor.com says sellers pay a whopping 6 to 10% of the sales price to sell the home!
Here are the costs I deducted from the potential sales price of our home, specifically:
- Brokerage fees
- Finance related selling fees of about 2% (These range from 1 to 3%. 1.)
- Moving costs. Deduct the amount you’re willing to spend on a new home. There is a good chance you will have a rare and beautiful tax-free capital gain.
- Concessions – You can estimate an amount for things you don’t want to fix before the sale, but you think will come up as an issue in negotiations.
Be realistic about how much money you’ll end up with after all costs are paid. This can influence whether it makes financial sense to downsize. Also, use a low estimate for the sales price you think you can get. It’s better to be pleasantly surprised than disappointed.
6. Explore the Areas Where You Could Happily Live
Make a note of the places you want to be near. For example, I want to be within half an hour of a good quality grocery store, my wonderful holistic chiropractor, and the church where I attend programs twice a week. Moving further out of the city generally lowers costs, but this list will help me narrow my focus.
Here is a very useful tool: I entered the locales I wanted to be near into the real estate app, Redfin, to get an estimate of how long it takes to get there from any specific house.
Note the things you like about your current area that you want to keep. For example, I still want to have wonderful safe hiking trails, larger lots and lots of large oak trees and nice outdoor spaces.
Streamline Your Search More
To narrow your search further, note any deal killers or deal makers. Here are ours, for example:
- Construction – We love limestone and would probably not consider anything else.
- Lot size – We like our space, so we want a nice private yard with trees. You, on the other hand, may prefer no yard maintenance.
- Style- Many homes have been redone in grey with a very modern feel. That’s not for me, but it may be just what you love.
Have Fun Exploring
Next, explore what’s for sale on online real estate sites. I like the ones that let you open the app on your phone while driving the neighborhood and show you on the map. I have found Redfin is the best for this, although there have been some properties for sale that are not on the Redfin app.
Drive through the desired areas and attend open houses. Notice how it feels when you visit the area. Are you excited? Or do you feel like you’re selling out on your dreams?
Be sure to check out high traffic times and noisy neighborhoods.
7. Explore Income Options
Consider if you might like to have an extra guest suite or a small free-standing building that you can lease on Airbnb.com or vrbo.com for extra income. This can make sense for many income stream creators.
Pros and Cons of Downsizing Your Home
First, let’s look at the pros and cons of downsizing your home since this is the starting point for any big decision.
Pros of Downsizing Your Home
The pros of downsizing you home are many as listed below.
Moving into a smaller or less expensive home usually has significant financial benefits. I love things that increase cash flow without any work. Beyond the initial move, this is certainly the case with downsizing. (Click here to ready my article with 33 Wealth Building Steps That Will Shape Your Destiny.)
Not only does your monthly cash flow improve with very little effort, but you can also experience a significant increase in wealth, as discussed more below.
If the thought of less lawn to mow, fewer rooms to keep clean, or less square footage to maintain is calling to you, consider how much more peaceful your life can be in a smaller space.
Not only this, but when there are fewer bills to pay every month, it feels better. This is true even if you can easily cover your monthly bills. There is something unsettling about larger financial commitments as we get older.
More Connection with Family
A few years ago, one of my friends downsized significantly from a million dollar plus home in a premium country club community in Austin. She said she loved that she saw her family more. Without the huge game room, her sons were forced to hang out in the one living area. (Of course, this can work either way, right?) If you want to see those people you live with more, consider this pro of downsizing.
Less to Clean
If you don’t enjoy cleaning, like me, a smaller space reduces stress and increases available time to do other things that you do enjoy. If you have a housekeeper, then you’ll have the financial benefit of reducing her hours.
Our home was built in 1985. While we tend to like older things, in general, the upkeep is an issue. Every month something needs to be repaired. This is an energy and financial drain.
A Refreshing Mindset
While the thought of being in the same home where we celebrated the holidays with family for almost two decades is wonderfully nostalgic for me, the thought of something new feels liberating.
The home choice we made when we had two early children in early grade school is quite different from the choice we would make now.
A little voice whispers in my head “why hang on to the past?” as I ask myself what do I want now?
If you’re anything like me, you have accumulated a lot of stuff. Downsizing forces you to declutter. Less clutter feels great.
Downsizing can allow you to take opportunities you may otherwise have missed. For example, by living in a smaller home, could you buy a vacation home, or a part time vacation home that you also rent? Could you buy that cruiser (or R.V.) you’ve always wanted and live in it a few months a year?
Does the extra money and lower expenses allow you to spend a month in Europe, for example, if this is a lifetime dream?
In the end, you can pay for home costs or you can use that same money for lifestyle adventures.
The Cons of Downsizing
Moving Is a Hassle
Let’s face it: Moving is a big hassle. It is right up there with one of the most stressful experiences.
What I have learned is that every experience is what I make it. If I think of the well thought out benefits of downsizing vs the hassle, moving can be a positive experience.
Parting with Furniture
Much of my furniture has sentimental value. As an antique lover, I have my huge antique French farm table, and various finds from estate sales and auctions. Plus, there are the sentimental inherited pieces.
Parting with furniture that is dear to your heart can be hard.
Room for Family and Friends
If you enjoy frequent family visits, not having the space for everyone can be a bummer. One efficient solution is to have a bunk room with two sets of bunk beds with trundles.
On the other hand, if you don’t enjoy having family visit, this con could turn out to be a pro. I love family visits, so this is a big factor for me.
When Is the Right Time to Downsize?
Only you can decide the right time for you to downsize. Hopefully some of the pros and cons of downsizing will help you plan. Having said that, here are a few timing factors.
One timing factor to consider is the best time to sell you home in the area where you live. My CPA likes to say that selling your home in Austin in April is like going fishing in a stocked pond.
Other areas in the north or mountains may have lawns that look terrible in April. Your real estate agent will know the best time for you to sell your home.
If your home is more of a family home, consider that families like to move in the summer around the school calendar. This now varies, too, based on where you live.
Then there’s the big one: it’s best to downsize near the end of a strong up trend in housing prices. This is especially true with downsizing since you are selling the larger, higher priced home for the less expensive home.
Best Age to Downsize
Consider these factors when figuring out the best age to downsize.
First, ask yourself if you think you’ll want to move again. If not, you’ll may want to avoid stairs and steps. Of course, my mother in law lives in a townhome with a simple electric, seated lift installed on her steep staircase. She is in her nineties now, and this simple adaption has allowed her t stay on her home.
One of the most obvious reasons to downsize is that your kids have moved out of your home which reduces the need for some of your square footage.
Downsizing Your Home for Retirement
Downsizing your home for retirement allows you to have more money to spend on doing the things you’ve always wanted to do but didn’t have the time to do them. (Click here to read my article “How Much Longer Until I Can Retire?)
Not only this, but the kids are usually gone. Plus, since you’re no longer tied to work locations, you can live anywhere you want.
Moving further from the city reduces the cost of housing even more.
Should I Downsize My Home and Pay Off Mortgage?
If you’re wondering if it makes sense to downsize your home and pay off the mortgage, you’ll want to consider your own financial situation. Your net worth, mortgage size, and the other benefits of downsizing mentioned here will all influence your decision.
The first home I purchased in my twenties had mortgage interest of almost 10%! It’s interesting that now that interest rates are still very near all-time lows, paying off mortgages is in vogue. While the cost of a mortgage does significantly increase the cost of your home, think about this. If you lock in a mortgage at 4.5%, and interest rates do happen to rise to 8%, you have more capital that you can invest and earn higher interest on. In other words, you’re paying 4.5% to the bank, and you’re making 8%.
This leads to the questions of whether interest rates will rise again, significantly, during your lifetime. No one knows for sure.
Not having a mortgage feels great. There’s no doubt about that.
Downsize Your House to Get Out of Debt
If you have high interest rate debt, selling your home to eliminate or reduce debt can be a very smart move. This works if you have equity in your home, meaning you owe less than you home is worth. You can pay down high interest debt with your home equity capital after the sale.
The Financial Benefits of Downsizing
As mentioned, there are two financial benefits of downsizing. (Click here if you want to ready my article on How to Build Wealth where I talk about this.)
The first benefit is that you can reduce your monthly living expenses significantly. This allows you to accumulate more wealth, or to simply live off investments easier, depending on where you are on your financial journey.
Second, if you have home equity, the profits you get from selling your home can be a real windfall without any work. This capital can be used in several ways to increase your overall wealth.
You could invest the money in income generating assets to enhance your lifestyle experience with the increased income. Alternatively, you can invest the money and allow it to grow. As you know from my eBook you can get here and other posts, I like assets that pay income while also increasing in value. Bingo!
One of the biggest factors to consider here is whether the market you are investing into with your home equity capital from the sale is overvalued or undervalued. The last thing you’d want is to put a chunk of your downsize profits into an overvalued stock market that is headed into a bear market. (Click here to ready my article on bear markets.) The same is true of any investment, including rental real estate. The older you are, the more of a factor this is. If you have decades to invest, and the swings in value don’t bother you, this won’t be much of a factor. Broadly speaking, buying assets when they are undervalued leads to more wealth, easier.
Refine Your Downsizing Numbers
After doing some research identifying the areas you like, calculate the important financial considerations again now that you’ve pulled data from Redfin or other real estate app you use, including taxes, and home owner’s association fees.
I made a spreadsheet with links to potential homes listed for sale. For each home, I put a column for taxes, maintenance, homeowner’s fees, if any, lower utility costs, and misc. expenses.
I also reduced the potential gain from the sale of our home by the fees mentioned earlier, but for this spreadsheet, I reduced the profits by mandatory fix up costs for any single home. This made it easy to compare the true cost of any single home. For example, if a fixer upper has $100,000 of required updates just to live there happily, I cannot compare it to a new home without considering these expenses.
Whether to Downsize or Not
Downsizing is a huge decision. It can affect your lifestyle and wealth plan significantly. Remember, beyond the hassle of the move, this is a “no work” way to increase your wealth, which is always a good thing! (Click here to read my article Wealth Management Tips for Everyday Investors with related content.)
We’re still not sure if we’ll downsize or not, but I’ll keep you posted here on Retire Certain.
As for you, if the numbers make sense, and you can be happy with alternative homes you see, start taking the steps above for a successful downsizing adventure.
Note: This article is not to be construed as personal financial advice.
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