Might Not Stay In Our Starter House Afterall

by Frugal Babe on January 7, 2009

I noticed that this is my 500th post on this blog.  Better make it a good one.

Frugal Babe readers are probably well aware of our plans to keep our starter house and avoid the never-ending mortgage payments that happen when people keep upgrading to more expensive homes.  But we are considering another possibility.

We have found a much less expensive community about 60 miles from where we currently live.  It’s only nine miles outside of a city that we both really like, but it’s a small town (about 5000 people) and although it’s population has grown tremendously over the last few years, it’s been overbuilt and there are a ton of houses for sale.  The houses are literally half the price that they would be in the town where we currently live.

We went there last weekend and looked around.  There is a library, a grocery store, a post office, two elementary schools, a middle school, and land purchased to build a high school.  Although it’s a small town, it’s in the school district of the big town just down the road, and it’s a very good school system.

We would have to drive further to get to Costco, but we could get an efficient chest freezer and make our trips less often.  We would have to go about ten miles to get to Whole Foods, which is about how far we go now.  I could still walk to the post office and library, just as I do now.

Most of the houses we looked at are for sale for less than we paid for our current home six years ago (some are quite a bit less).  They’re roughly the same size (or a little bigger) in terms of finished square footage, but almost all of them have full, unfinished basements instead of the partial crawl space that we have now.  A basement room for our hydroponic garden would be a huge bonus.   We could walk around the plants to tend to them and harvest produce, instead of doing the crawl/butt scoot that we currently do.

Another bonus is that the yards are much bigger than what we have now.  Our current yard is literally six feet wide and wraps around two sides of our house.  The picture of the mini-greenhouse my husband built gives a good perspective on how much space we have to grow vegetables.   The houses we looked at have enough room for a huge garden in the backyard.  We’ve proven our dedication to gardening and supplying as much of our own food as we can – imagine what we could do with a basement and a large yard.

There would be some trade-offs.  We currently live in a town of 50,000 people.  It’s a suburb of a metropolitan area that has over a million people.  Moving to a town of 5000 people would be a big change, although its proximity to a large city makes it a much different environment than a small town in a completely rural area.  We think it’s very worth it, and are currently researching all of the details involved.

We don’t want to sell our current home.  We’re looking into the possibility of renting it, and have found that average rental prices in our neighborhood are actually a little higher than our monthly mortgage payment.  We’ve talked with a mortgage broker who is running some numbers for us to determine how much of a down payment we would need in order to qualify for a loan on one of the houses in the less expensive town.  Even with a 15 year mortgage, we should be able to get a monthly payment that is lower than what we currently pay (especially considering interest rates these days).  Of course we would be just as focused on paying it off as quickly as possible as we are with our current mortgage.

So here’s our current plan (Subject to change, of course.  That’s what keeps life interesting):

  • We will make cash savings our primary focus for the next several months instead of paying additional principal on our mortgage.  We want to build up a good cash cushion before we make any changes (to cover a down payment and also have money to pay the mortgage on our current house in case it takes a while to get renters).  The amount is still to be determined – we’re waiting to hear back from the mortgage broker and then we’ll have some more concrete numbers.
  • We’ll work on some home improvement projects that need to be done.  Our house needs a new roof, the bathroom needs paint, the garage could use some new shelves… things that would make the place more appealing to renters and less likely to be a headache down the road (the roof is a good example, as it’s on its last legs).
  • We will continue to live as frugally as possible in order to build our savings as quickly as possible.
  • We will thoroughly research all of the details involved in this process: mortgage lenders, property managers, rental income, interest rates, etc.

I’ll let you know what comes of this as time goes by.  We’re excited about the possibility of lowering our housing costs and at the same time getting more space to grow our gardens.  We could become nearly self-sufficient in terms of the produce we eat (which is by far the largest part of our diet).  There are still a lot of kinks to work out, but we feel like we can make this happen.  We both work at home, our son is still a baby – we have a lot of flexibility in terms of where we live.  So why not make the most of that flexibility and move to an area with lower housing costs?

Would you ever consider moving in order to lower the cost of your house?  Or have you already done so?

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  • http://www.remodelingthislife.com Emily@remodelingthislife

    I think it sounds like a good idea. It’s refreshing to see someone in the frugal community moving to lower costs rather than buying and stretching themselves thin.

    I’ve done the move 1,000s of miles to be where we are now and live smaller and simpler, with a big yard for gardens and a home we could pay cash for to not have a mortgage. It’s worth it and I know you’ll make this work for you to further your financial goals. Good luck!

  • http://amommoneyandmore.blogspot.com SonyaAnn

    I think that you have a wonderful plan. I would really check into your renters though. My in-laws had quite a few rental homes. It was a lot of work and they did have some difficult tenants. But I think that renting is a much better idea than trying to sell in this market. I’m so happy for you and please keep us posted.I will definitely be here for your next 500 posts.

  • FrugalBabe

    Thanks Emily and SonyaAnn! If we go ahead with renting out our house, we’ll do it through a property mgmt company. We have one that’s been recommended to us by neighbors who rented out their house last year. The property mgmt company handles a lot of the headaches associated with being landlords. Their fee would be well worth it to us.

  • http://focusorganic.com Stefanie

    I agree with Sonya about checking into your renters. Also remember that you would be responsible for a lot of problems the home you are renting could have, so you might want to look into what landlords are responsible for in your state.

    We were looking into moving to lower costs. Where we are, we could buy a house now and pay less than the we are on our condo (after mortgage and condo dues). If we didn’t want to move home to CT so badly, we probably would have done it buy now.

    Can I ask what you and your husband do for home work? I badly want a work at home job because if I could find one that pays enough, we can be able to move home and not worry about finding jobs right away.

  • http://thunderfingers.blogspot.com chacha

    That sounds pretty good – then you’ll have investment income and someone else paying your mortgage. And great tax write offs with rental property! I wish we could do the same, but, alas, we are upside down.

    We moved in 2007 to reduce our commute costs, energy costs (from borderline desert area to coastal), and property taxes. So our payment is higher but overall, our living costs are reduced.

  • http://ipickuppennies.blogspot.com Abigail

    Although most people would poo-poo buyinga new house, this is obviously a special scenario. It sounds like you’ve thought everything out carefully. And it really does sound like a smart choice.

    I hope everything goes relatively smoothly.

  • FrugalBabe

    Stefanie, we have a health insurance agency that we started in 2004. For a couple years prior to that, we worked as agents for another brokerage, but decided to break out on our own about five years ago. We love what we do, and it gives us a great deal of flexibility. But it took us a while to get where we are. We were completely broke in the beginning, and actually incurred about $40,000 worth of debt in the first couple years (a combination of credit card debt to pay for things like groceries when we were earning only enough money to pay the mortgage and utilities, and the actual cost of starting our business). It took us until the summer of 2007 to get out of debt. So while I love what we do, I’d hesitate to recommend it unless you have another source of income, significant savings, or a tolerance for being very poor :)

  • Alice

    There’s a sucker born every minute. You sound like heading in that direction.

    If there are tons of empty houses available, that means that the little town’s tax revenues are down substantially. Less services, less police & fire, library hours, school benefits….the list goes on and on.

    You should start reading the foreclosure stories of people today rather than the fiction novels you drool over. Most foreclosures are people who refinanced, or bought another home while putting their original home up for rent. They got stuck with 2 mortgages and 2 homes to maintain. Another big mistake is using a management company. Obviously, you will be learning about life the hard way. Most people today don’t have the good enough credit to qualify as renters. Haven’t you heard about all the layoffs with 3 million more to come.

    Some people just don’t know how good they have their lives and it never ceases to amaze me how they go and mess it up.

    You’ve got everything under control right now. STOP! If not, here’s your future: you’ll move, waste a good sum of your cash reserves as a deposit on a new home, will live in a new area with less people and social connections (you’ll become isolated and lonely) your new tenants, if you can find one will mess up your home, or not pay or both, the management company will be worthless, and you will have exhausted all of your savings on fixing up your old home (roof, etc….which could have gone a few more years before fixing) Oh! and oh yeah, your sales will be off on your company, so you’ll be hit with a double whammy.

    Kiss your baby for me. It’s a shame parents are so stupid. The kids always suffer.

    PS: Obama will be putting into effect a federally run health insurance program. How will that affect your sales????

  • http://nopinkhere.wordpress.com Gabriel

    It sounds like you are trying to plan a lot before taking any irrevocable steps. I think that’s a good way to go about it.

    For changing where you live based on cost of living . . . my husband has consistently avoided taking jobs where the cost of living is significantly higher (San Francisco, Boston) than where we currently are. But we have not moved from one town to another nearby or another equivalent merely for cost of living benefits.

  • Gord

    You have all good reasons and intentions, I think. But the big one you didn’t mention is that when you own 2 properties in a rising market (that will come eventually) you’re way ahead of the game. Conversely, holding 2 mortgages with interest rates rising is a distinct possibility. Just be careful of the timing of the mortgage terms as I point out on my blog, frugalgrowth.blogspot.com Good luck!

  • Wilm

    Frugalbabe – it sounds like you are researching this possible move thoroughly which is great.

    In the current economic climate, I would be a little nervous about keeping your current house and renting it out in case things don’t go so well.

    Alice – I understand your concerns but I think that you could have been a lot more pleasant in how you shared them.

    Cheers, Wilma

  • FrugalBabe

    Gord, you make a good point about being stuck with rising interest rates, but we would only go ahead with this plan if it involved a fixed rate mortgage.

    Alice, you raised some good questions that deserve answers.
    I think I may have painted the wrong picture when I said “a ton of houses for sale.” The town in no way resembles depressed areas I’ve seen in the metro area where we live now (in some cases, every third house is for sale in those neighborhoods, many bank owned – that is not the case in the town we’re considering).
    The library is smaller than the one in our current town, but there’s an excellent library ten miles away (a pretty easy bike ride) in a town of 130,000 people. The schools are part of the district that encompasses the nearby city, and are highly rated.
    I agree that there is some risk involved with owning two houses. But keep in mind that our mortgage is our only debt (no car payments, no student loans, no credit card debt), and the second mortgage we’d be getting would likely be less than $1000/month.
    A lot of the foreclosures you’re describing happened because people bought houses with little or no down payments and adjustable interest rates. In addition, a lot of people refinanced when housing prices were artificially high, and then found themselves upside down. In our case, we’ve been making extra mortgage payments for nearly the whole time we’ve lived here, and have about $50K in equity in our home (based on current prices in our neighborhood). We would only buy another house after we had saved a down payment and had money in savings to cover at least six months of mortgage payments on our current house.
    We will not be lonely or isolated, regardless of where we live. I’ve lived in small towns most of my life, including two years in a village in Africa with no running water, no electricity, no phones, and very few people who spoke English. The nearest American was a four hour bike ride from my village. But I wasn’t lonely or isolated. So I know we’ll be fine in a town of 5000 people, nine miles from a city we love (we used to live there). My brother and sister live in that city, as do several of our friends. So there’s no danger of isolation.
    As for the repairs on the current house – we’ll use leftover kitchen paint for the bathroom (free) and the doors we took out of our bedrooms last year will become shelves in the garage (also free). We were already planning to replace our roof this year. The inspector gave it three years max when we bought our house six years ago – it’s definitely time for a new roof. We’ll do the work ourselves, so the only cost will be supplies.
    We donated money to Obama’s campaign, and are thrilled that he will be our next president. We hope that some form of universal health care will indeed come about under his administration (we believe that would be in the best interest of the population as a whole), and are prepared for that from a career perspective. We work with life, disability, and long term care insurance, and I doubt those will be provided by the government any time soon.
    I recognize the validity of your concerns, but I second Wilma’s point in terms of how you shared them. I’m curious as to why this subject brings up such heated feeling for you. Rest assured, my husband and I are very methodical, practical, and far from rash. We won’t get ourselves into a situation where we’re in over our heads, and we’ll research every aspect of this long before we shell out any money or make any concrete decisions.

  • Gord

    I forgot. You have fixed rate mortgages for the entire amortization, don’t you. No such thing in Canada. Amortization is typically between 20 and 35 years, and you either take a variable rate (slides with the prime rate) or you lock in for 1, 2, 3, 5, 7 or 10 years to a specific rate. The longer the term, the higher the rate. I like your way better, especially during low rates.

  • http://frugalchick2008.blogspot.com/ FrugalChick

    It sounds like you have thoroughly researched this possible move, and I wish you luck if you go ahead with this decision. If a person is frugal and has put him/herself in a good position like you an your husband have, now is an excellent time to take advantage of a life change. My husband and I are also looking to buy a home in a lower-cost area (also about 10 miles out) because we could live there for so much less.

  • Trixie

    Hello,

    I applaud your efforts to consider such a big change so carefully. Based on your past posts, its easy to see you and your husband have sound financial sense and are willing to make what ever sacrifices are nesecary to accomplish your goals. A good example of this is starting your own business, agressively saving and paying down your mortgage. Way to go!

    Trixie

  • http://towardsabettertomorrow.blogspot.com/ Kay

    Goodluck with your new idea. I think it’s a really good move.

    I’m very glad that you are doing plenty of research before you make any decisions!

  • Sherry

    FB – Wonderful! Stir things up a bit…(that wasn’t a new year’s resolution, was it?). Nothing in life is carved in stone!

  • http://www.takeawhisk.blogspot.com Lilbet

    I had a terrible experience with renters (and we used a property management company). Just check into your local laws to see just how easy it is to evict someone. In my case, our renters stayed 1 year without paying a dime, trashed the house, and we could never collect. Certain states protect people from being tossed out in the cold of winter. Not sure where you live, I’m new to your blog. But, I’m sure, like everything else, you will think hard and research all the information.

    I think if the idea of this move makes you happy, then go for it. Personally, I would sell my house, but I’m not you. And I learned the hard way with renters, you may not have the same experience!

    Keep us posted. This is a great time to buy property, wish I had some extra cash!

  • Natalie

    My husband and I moved to a very small town outside of a huge city. We are 30 mins. away and we love it. We have a much bigger house and yard and much lower property taxes. However, the one thing that is a major issue now is the schools are not as good compared to the big city and since we have a child who will enter school in a couple of years that is a concern. We also know that while the city is growing that the schools should improve. Just check into that before you are in the same boat as us…do we move back to the bigger city and get a smaller house or stay where we are and send her to private school?

  • heidi

    My husband and I rented out our “starter” home for 6 years before choosing to sell it. (Top of the market, we needed the money to finish up a flip…) Anyway, we had wonderful tenants and awful tenants. (And it was really hard to determine beforehand who would be which). Please, please check into how easy it is to evict someone in your state. Each state is different. Our state allowed us to post a five day or quit notice after the rent was late one day. After those five days we could file in small claims court. (Cost – about $300?) After paying the get the tenant served by the sheriff we could go back to small claims and show that they were served and actually get a court date… usually a month or five weeks out. In the six years we rented the house we filed for three evictions. It IS stressful and expensive… and chances are really good that you will have some cleanup on the house before it is rentable again… then you have advertising costs (although you can use Craigslist for free now), and he time wait before they will want to move in, etc. The whole process ends up costing you the equivalent of about three months rent.

    Having said all of that, I would do it again. It is frusterating and hard. Most things in life that are beneficial are.

    The main recommendations I have are:

    1) Don’t use a property management company. Do it yourself and save the money. Be involved with what is happening with your investments. Your house is an investment right??

    2) Use a month to month rental agreement. Going through a lawsuit is stressful enough, but have you ever tried to collect on a judgement? It can be done, but you will probably spend a lot of money and time and never collect any money from the former tenants. If they don’t want to live in my house anymore, I don’t want them to either. Do you know anyone who stays in a home when they want to move because of a lease? This also allows you to give them a thirty day notice if you end up not liking them.

    3) Think long and hard about whether it makes financial sense for you to rent it out versus trying to sell it. If it remains unrented for months at a time, is that going to be an issue for you financially? Will it make it a break even or loss situation?

    Either way, I wish you the best. Lowering your living expenses is the ULTIMATE way to provide security for your family in the coming hard years. Just make sure that you are not gambling the security that you and your husband have already achieved on minimal financial reward.

  • http://www.dontfeedthealligators.com/blog MITBeta @ Don’t Feed the Alligators

    “and have found that average rental prices in our neighborhood are actually a little higher than our monthly mortgage payment.”

    As a landlord myself, I would not settle for “slightly higher”. Your mortgage needs to be 60% or less than the rent you collect. You’ve still got taxes, insurance (which will go up, by the way), wear and tear, repairs, etc. to pay for as well. That all has to come out of the rent or else you’re losing money.

    I applaud your diligence, but don’t fall into the trap of sugar-coating the bad stuff and over-hyping the good.

  • FrugalBabe

    MITBeta – thanks for your input, it’s good to hear from people who are or have been landlords. Our taxes and insurance are included in our mortgage, and the total is $1140/month. Rentals in this neighborhood are currently at about $1250.
    We’re still thinking about all of this, but for the time being we wouldn’t be trying to profit by renting out the house. Instead, we’re just hoping to break even and be able to delay selling our house until the market recovers a bit. But our views might change as we start researching all of the ins and outs of being landlords in our state. We are considering the possibility of renting it directly instead of using a property mgmt company, in order to avoid the extra expense. There’s a lot to consider here, and we’re grateful for all of the input and ideas.

  • http://www.dontfeedthealligators.com/blog MITBeta @ Don’t Feed The Alligators

    I’ve heard nothing but bad news concerning management companies. Makes me wonder how they’re still in business. But clearly this would eat even further into your profits.

    In addition to the other comments about getting familiar with tenant law where you live, you’re also going to want to become familiar with tax law concerning rentals as well. There are some really great benefits for “small time” landlords. For example, you may want to delay fixing the roof until you rent the property so that you can claim the expense as a deduction, etc.

    Also, as it concerns my first point above, you have to actively participate in the management of the property (which you can still do, even if you have a management company) for it to be considered passive income rather than investment income. This will make a BIG difference come tax time.

    Nolo.com publishes a great book on the subject.

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