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Personal Finance FAQ

Why You Should Buy LESS House Than You Can Afford

tumbleweed tiny house, sebastopol, california
Maybe not this small

“The mansion should not be graced by its master, the master should grace the mansion.”
–Marcus Tullius Cicero

“I think maybe ten years from now, I’m hopefully going to be, in like, Tahiti or something. Kicking back like in my huge mansion, if everything goes right, it’s all up to me.”
–Corey Haim

When my wife and I were looking to make our first house purchase, we consistently heard one refrain: “Buy more house than you need.” The advice-givers provided us with many reasons, including “when you have kids, you’ll be glad you had the room” (umm…we aren’t having kids), and “real estate always goes up.”

Here’s what happens when you think that real estate only goes up.

We found a very large house which, fortunately, was being sold by a builder going into bankruptcy, so we got it at a fire sale price. As a couple with no children, we did not need five bedrooms. There were rooms which we didn’t see for months. Colonies of moles could have sprouted up there and we would have never known.

In hindsight, we were lucky. We got out at the top of the market and moved into a two bedroom condo, slashing the living space in half. At that point, our outcome was a result of about 25% smart planning and 75% luck, and I might be overestimating the smart planning, at least on my part.

While, I don’t espouse the 100 square foot lifestyle, there is something to be said for buying less house than you think that you need.

lulu, on her shipping container tiny house
Would you want to be this cramped?
  • Empty rooms attract furniture. You usually have to buy that furniture. Having no empty rooms means you don’t buy furniture to fill the empty rooms.
  • You become less attached to stuff. When you don’t have very much room to put stuff, you tend to either get rid of it, or you don’t accumulate it in the first place. People tend to value experiences over things anyway.
  • Kids aren’t entitled to their own rooms. It forces them to live together, to share, to work harmoniously, and to learn how to co-exist.
  • It could encourage you to go out more. I don’t mean to go out to restaurants, but to get out from your tight living space. Be outdoors. Explore. See the world. Get out from in front of the TV. With a small enough space, you might not even have room for the TV.
  • You spend less on utilities and maintenance. Those empty rooms will also get heated and cooled like the rest of the place. Things break. Smaller houses cost less to keep up compared to bigger houses. Yes, I know…some huge revelation there!
  • Fewer of your financial assets are tied up in housing. If you have a smaller place, chances are pretty good that it’s cheaper too. That’s more of your assets which can be used for investing. You can also trade off size for location and not get bitten as badly. See “Why Do You Think Your Wealth is in Your Home?” for more.

When we downsized, we auctioned off two moving trucks full of stuff. We’d been married for less than five years, three of which I was in graduate school; yet, we’d accumulated a museum full of things. When we sold everything, I felt like a burden had gone away from us. By forcing ourselves to stay small, we’ve kept that burden from settling back down on our shoulders.

So, when it’s time to move, ask yourself if you can live in a place with a few hundred less square feet than you thought. It’ll be tight, but it will loosen up your house’s hold on your purse strings.

What do you think? Is your house too big or too small? Tell us about it in the comments below!

By Jason Hull, CFP®

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively.

8 replies on “Why You Should Buy LESS House Than You Can Afford”

Jason,

Good article. My wife and I used a simple financial formula to have no more than 25% of our take home to go to the mortgage expenses including taxes & insurance.

Even with that, we have a house that’s plenty big for our needs for entertaining and having family visit. But you bring up some good points on the other benefits of right-sizing your purchase. Good stuff!

25% is a reasonable rule of thumb (better than higher ones, for certain!) to use. I found that we WAY overanticipated how many people would come visit us and stay with us at each of the places we lived (ahem…Virginia and DC friends, I’m calling you out!). By having the extra bedroom “just in case,” we wound up buying roughly 25% (there’s that number again!) more house than we needed. Granted, I’d not want to have a 2/2 house because it’d probably be much more difficult to resell, but the reality is that the 3rd bedroom (we use the 2nd one as an office) is a staging area for pictures to be hung and a place to hide presents before they’re wrapped. It serves no true functional purpose. We could take the money we would have saved, put it into a basic index fund, and then withdrawn to pay for hotels for visitors if the need arose, and probably been financially better off. I think we create contingencies for scenarios which rarely happen and wind up making pound foolish decisions to account for those contingencies. In parallel, a growing family could also be the classic case for renting rather than owning, as you simply change houses as you add family until you’re done adding family. Robert Shiller (of the Case-Shiller index fame) had a recent interesting take on housing which I’ll be covering in an upcoming article.

The furniture part is extremely true. When we bought our house last year we bought a house that is definitely bigger than we needed, but at the same time we were not sure if we would have more children, so we decided to buy more than we needed now to avoid having to move again in the future. Perhaps that was smart, I don’t know, but I think its better to buy more than you should while you are still at a point in life where you can pay extra each month to your mortgage. We are lucky to be able to pay 30% extra on our mortgage each month in hopes of paying off this house in under 15 years. That would not be the case if we had more kids, so we are paying it off as fast as we can while we only have one.

However, 10 months after moving in, I am STILL paying the credit card bills for the 3 rooms of furniture I had to buy. Its frustrating, but I should be out of that debt in the next few months, and will have a lot more to put into my mortgage each month.

While I love sitting at my fancy new desk, it will be much more enjoyable once its paid for!

I think my 2 bedroom/2 bath (plus a sunroom that I use as my office and separate storage for my bike, etc.) condo is perfect for me. It has enough room without being too big. I had all the furniture I needed upon moving in though I did swap out/upgrade a few things (a new desk was needed, a chaise lounge for the sunroom that I scored for $100 off Craigslist, etc.). I am VERY happy with my condo and I think the size and location is perfect. I wanted something big enough I could comfortably live in it for at least 5 years and I think I got it. I’m 2 years in and am very happy with it! =)

If we didn’t both work from home a 2/2 would have been plenty for us too. Since both my wife and I work from home, we decided a third bedroom/office would be better, lest we crawl over each other. I also think that a lot of people overestimate how often they’ll need that spare bedroom. We could have been fine with a 2/2 using one bedroom as an office, but it would be hairy when people do (like some people are going to…yay!) come visit us.

Excellent article. My wife and I bought a 2 bed 1 bath with a 10 year mortgage. It has a decent sized loft as well. We are expecting our first child this summer and we’ve already heard a few times ‘So are you going to sell and get a bigger house’? Definately not. We have 7 years until its paid off and how much space does a 7 year old really take up? In the short time we’ve had the house we’ve done work to every major area in the house without breaking the bank. I hate the thought of having to fix up and furnish 5 bedrooms (dollar signs!!). Even though our small bathroom isn’t ideal, we’ve worked out a routine so that we aren’t crawling all over each other. The small mortgage payment seems to make every other aspect of life less stressful. And I really look forward to 7 years from now when that payment can go toward things like college funds and traveling!

I can tell you from personal experience that having no mortgage payment is a wonderful feeling. Don’t give in to your friends and others who are pressuring you to do something that you don’t want to do. I have a classmate who has five kids in a 3BR 2BA house and they make it work. He’d rather have a paid for house than a large mortgage payment for a large house. The kids will move out eventually, right? 🙂

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