I recently shared my experience of reducing my possessions, a journey I started in 2008. I’m working toward living an ultra-lite life. I’m not there yet, but I’ve made a lot of progress. Over 2 years ago, after I’d made significant progress on getting my possessions down to just what I used, it became painfully obvious that I had too much house. I was living in a three floor condo. At that time it had two bedrooms, two full baths and laundry closet (top floor); living room, kitchen, dining (middle floor) with French doors to the deck; and a basement with an unfinished storage room, half bath and finished living room with fireplace which led out to concrete patio in back (below the deck) .
I’d already emptied and shut off one upstairs bedroom and bath and was no longer heating/cooling them. The basement storage was almost completely empty (except for paint cans and Christmas decorations). As a single woman, I didn’t really need the second living room downstairs, so I closed off the basement too. I separately closed off the fireplace once I realized all the heat it leaked in the winter. The utility savings was substantial.
Could I do more?
I’d reduced what I owned and I’d stopped wasting money on rooms I wasn’t using. That’s all fine. But the real issue was that I didn’t need this much house. It was time to downsize.
In a strong economy I would have sold the condo. But the economic downturn, starting in the fall of 2008, changed everything. Real estate simply wasn’t selling. My condo association, like every place in the US, had its share of foreclosures, so property values dropped substantially. Even though I’d put down 20% when I purchased the home and paid my mortgage faithfully and better-than-agreed, I was under water. The value of my home had dropped to about a third of what I paid for it. If I’d needed to move out of the area (and if I lived in a non-recourse state) I would have walked away and claimed a strategic default. Despite concerns of stability, I still had a job, so I still needed a place to live in the ATL.
I’d have to wait it out.
Could my house pay for itself?
I had an empty bedroom and bath. I had an underutilized basement. If I wasn’t using the space, could I get someone else to pay me for it?
The most obvious answer is getting a roommate. This is a particularly good idea if you can room with trusted family members or friends you’ve known all your life. I am an import to Atlanta and have no family here. I’d tried a roommate before but with the increased utility costs, I didn’t make much money and I spent a lot of time cleaning up after another person. Still, I advertised and asked around. After vetting several people—each more unsuitable (read that: scary!) than the last—I gave up on the roommate idea. I considered taking in other people’s items to store, for a price. This is a great way to make cash off a garage, for instance, since people with fancy cars need a place to keep them. But I didn’t find the right opportunity.
I went with a radical plan
First, I refinanced my mortgage at a lower rate and shorter term. It was a terrible hassle and took over 4 months, despite excellent credit, but it paid off. For minor closing costs, the new mortgage took 8 years, 2% points off the interest, and $50 a month off my payments! And the new, lower interest meant that with each payment I took a more substantial bite out of the principle.
Next, I transformed my three floor condo into two separate living spaces. With the help of a trusted neighbor (who was out of work due to layoffs), I converted the walk out basement with a half bath into a studio apartment with kitchenette, Murphy bed and shower. I could have put a college student in the studio and earned a few hundred a month, but the real payback was to move into the basement myself and rent out the top two floors.
Renter pays mortgage
It took a few months to find the right renter, so I had my doubts about this investment initially. But it did pay off. Even after paying a realtor to manage the rental (he got the first month’s rent and a portion of each monthly rent) someone else now pays my mortgage!
With my new rental income, I initially made two payments a month on my mortgage to get ahead—giving myself some financial breathing room in the event I lost my job (which didn’t happen). With the economic recovery moving so slowly, I felt I needed more of a safety net, since I wasn’t sure of the stability of my job. After that, I added the rental income to the regular mortgage payment to pay down the principle even more. (In addition, the income from a side business I ran for three years also went toward the house payment.) With the new, lower bank mortgage, the extra really pay down the principle quickly.
My taxes were pretty impressive, though messier than ever. This living situation is a duplex and 2/3 of all fees associated with the house can be written off federal and state income taxes (Monthly HOA fees, building maintenance, property taxes, homeowner’s assessments and interest on the mortgage loan). I take a deduction for the value of the property plus the cost to convert it to separate spaces. And I deduct 100% of costs associated with the rental itself (my realtor’s fees, for instance). (That H&R Block tax course I took a few years ago really paid for itself!)
I could have made out better financially if I had been able to do the construction/conversion work myself. I could have chosen to find and handle the renter directly instead of hiring a real estate agent. But I know my skills. I’m simply not a handywoman and I’m a terrible landlord. Though a meticulous bookkeeper, I hired someone else to do my taxes, too, which helps me sleep better at night. Never mess with the IRS!
And now, my efforts are paying off! Though I can’t be sure until I sell the property—houses are only worth what someone will pay for them—I believe I am no longer under water with my mortgage.
Was it worth it?
I realize all this may seem like a sacrifice, but it was worth it to me. Reducing my possessions, living in a small studio were changes I was willing to make to get myself out of mortgage debt. Was it easy? No. And this renter has been….difficult. But I had a goal (more on that in the future), a brain and was willing to make an effort. It’s the American way to try to improve your situation. This didn’t happen overnight. I’ve worked since 2008 toward this goal. But now the real estate market is coming back, the economy is (slowly) improving, and I’m in a better place financially.
The renter’s lease is up at the end of July and I’ve notified her that it won’t be renewed. I hope she’s not trashed the place and I have extensive repairs to do.
Can I sell? That’s my hope. It will be a good place for the right person. I’ve kept up the house, mortgage rates are still low, home prices are rising (roughly 16% in the last year), and the downstairs additions should make the condo more appealing than ever. If not, I’ve petitioned the condo association to let me rent out the entire house, but that’s a long shot.
Keep those fingers crossed!