AC3 – Housing You Can Afford

Continuing to transfer from my davidhuang.org website, with updated notes, my old financial management articles written for the art business magazine, Art Calendar, here is the third one looking at housing. Getting housing costs under control is probably one of the biggest things I’ve ever done to better not just my finances, but my life in general. My homestead has become a place providing me a deep sense of security with money, food, and energy. So without further ado, here is the old article with my updating comments sprinkled within.

Housing You Can Afford

I thought that this month I’d write about what is likely a major monthly expense for most of you, housing. I know it used to be the most significant bill I had to pay every single month. You may note the use of the past tense in the preceding sentence. I’m quite ecstatic about recently paying off my home. No more mortgage payments for me! I’m not trying to brag about this, but rather to emphasis the point that if I can do it, you probably can too. Why do I say this? Because I’m still a fairly young guy (pushing the mid thirties) and when I look at the adjusted gross income on my tax returns (which I don’t cheat on) I’ve never exceeded $20,000 in any year of my working life. In fact, many of those years never got past $10,000. I think it’s fair to say I’m not in an upper income bracket, yet I now own my own home and have thus substantially reduced my cost of living while improving my quality of life. This should be possible for you as well. In this article I’ll discuss how I got to this point with my housing situation in the hope that you will find information adaptable to your situation.

As you may have gleaned from my other articles, I’m all about eliminating or reducing wasteful spending that brings me little fulfillment. In my mind rent, at least in terms of housing, is all wasted money. I hate it. At the end of the month the only thing I have to show for all I spent is the next month’s bill. I could rent an apartment for 40 years and still all I get is a bill for the next month. On top of that the costs will likely keep rising with each new lease period. So unless you know you’re only going to be in a region for a short period of time, renting your housing seems like a poor choice.

When I moved out of the parents home I knew I didn’t want to rent an apartment, but I didn’t think I could get a bank loan to buy a home. In retrospect I probably should have at least investigated this option. What I did was reduce what I rented to the land, and bought my dwelling. What this translates into is moving into a mobile home park. I could buy the mobile home and have a tangible asset. Then I would just have to rent the lot it was on each month.

However, I didn’t just go out and buy any old mobile home. You can lose a ton of money that way. I knew from a friend’s experience that mobile homes can depreciate quite dramatically, and having your assets depreciate is not how you squeeze the most from your funds. By continually watching the trailers that went up for sale I was able to see that there is a point where the depreciation stops, which varies based on your local I’m sure. As long as the place is livable the value doesn’t go any lower. This is the point at which I wanted to buy my mobile home. I also noticed that the smaller the mobile home the lower the price. No real surprise.

I hadn’t honestly thought I’d be ready to buy a place when I did. I expected to spend a few more months living in the parents home and saving my earnings, but then one day there in the classified ads was a small 10’ x 50’ trailer for $1500. It seemed crazy cheap and I figured surely the place must be a real dump, but I decided to call the seller up and take a look. Here’s the secret I learned that day. No one seems to want the mobile homes that small, in fact, most parks in the area wouldn’t even allow them in anymore. This one was there due to a grandfather clause. The trailer itself was in excellent condition. It was just small. Being single it worked just fine for me. I bought it for cash the next day.

These days I like to add this extra little anecdote lest you think I’m some shrewd negotiator. When I met with the fellow selling the trailer he told me his father who recently passed away had lived there. Since he had no use for it he was selling it off. Then seeing that I was a pretty young guy, I think I was about 20 years old then, he offered that he could probably lower the price a bit to help someone just starting out. Do I say, “Wow, that would be fantastic! That certainly would help me out.” No. No I don’t. Instead, without even thinking about it I tell him, “Oh no, $1500 would be just fine. I shouldn’t have any trouble doing that.” I suspect used car salesmen like seeing me too…

Where I lived there was a bit of a stigma about mobile home parks. I imagine this exists elsewhere around the country too so let me present my home as I experienced it. I had some good neighbors, some great neighbors, and some bad ones just like anywhere else. Everyone was packed in pretty tight as the lots were rather small, but if I were living in an apartment my neighbors would have been much closer. Basically, for $1500 down I got a 500 square foot home with my own yard and two parking spots for roughly $200 a month. At the time, in my area, I could easily have been paying double that to live in an apartment of the same size. I was still wasting money every month in rent, but I was wasting less.

From the start I knew this little trailer was just a stepping-stone. I didn’t want to rent anything. You never pay off rent. It’s always there, and my lot rent was increasing in cost every year. However, by starting with this very cheap little place I was eventually able to save up enough for a down payment on my current home.

Do you think you couldn’t possibly afford to buy a home? Maybe you think you could never get a bank to lend you the money? My question to you is have you looked into it? It wasn’t easy for me mind you, but I, with the meager income of a food service worker and a trickle from my art business, was able to get a loan. It also took me two years to find and close the deal on property that suited my needs and was affordable for me. There are programs out there to help first time homebuyers. Talk to a real estate agent or banker. Just remember to carefully evaluate what they offer you. They are trying to sell a home or home loan after all.

I feel like I should also note this was back before banks went hog wild offering loans to anybody and everybody. I actually did have to prove income and meet their requirements.

As with my first mobile home, I was continuously watching what was on the market and not buying for prestige or status, but strictly for function. Here is the key thing; I didn’t buy the grand home I really want to retire in. To do that I’d need a significant loan, which would equate into a large monthly mortgage payment. This would mean two things. One, I’d have to be bringing in a substantial income each month, which didn’t seem likely when building an art career. So to pay such a mortgage I would need a regular, full-time job, taking time and energy away from my artistic dreams. The second repercussion from buying a home beyond my means is that I would likely have to run the mortgage out for the full term because I’d never have much extra to pay directly on the principal. This means I waste huge amounts of money paying interest, and I mean huge! Interest is like rent; it’s wasted money that provides little fulfillment.

Let me take a moment to drive home this point with some figures. (I apologize to the math phobic souls out there.) The formula I have for figuring interest is that it is equal to the principal amount times the interest rate times the duration of the loan. For a real world example I have a good friend who just bought a home for $174,000. His down payment was $30,000 so he is borrowing $144,000 from the bank at an interest rate of 6.25%. It’s a standard 30-year loan. So to figure out the interest he’ll pay we take his principal, 144,000, and multiply by the yearly interest rate, .0625, multiplied by the duration, 30. 144,000 x .0625 x 30 = 270,000. So if he only pays his monthly mortgage amount and never pays extra on his principal, by the time his home is paid off he’ll have spent $270,000 on interest. This is on top of the principal cost in the home loan, $144,000, and the down payment, $30,000. The total cost for his home would be $444,000! If this is scaring you out of buying a home, remember that with rent EVERYTHING is wasted each month. The point I’m making is that the farther below your means you buy, the more money you should have each month to pay on your home’s principal and reduce the money wasted paying interest.

Thanks to Julie for pointing out in the comments that how I was calculating the interest on the mortgage in the above example was wrong. I was just calculating it as though one would be paying 6.25% on the entire loan amount of $144,000 for the entire 30 years. These days you can just do a search for a mortgage calculator and the amount comes out to a bit more than $175,000 in interest and a total cost of just over $319,000. I imagining the difference is that the principle amount does slowly reduce over time so the amount of interest charged each year slowly reduces as well. So it’s not as bad as my initial numbers looked, but that’s still a big load of wasted money to my eyes!

Let me return to my particular story. I wanted to quit renting a lot, which is endlessly draining my precious income. I wanted to finally buy a home, but I was looking for the least expensive home that was still functional for my needs. Eventually, for just under $30,000 I found the place. Now I have to admit that at the time this was the most I could borrow, but I knew I could afford it easily. It was still a mobile home (which I’m not ecstatic about) though it’s just that little bit larger at 12’ x 55’, to be comfortable for me. However, it comes with 1.5 acres of land in a quiet, spacious country setting, with six outbuildings. I’ve fixed up two of the outbuildings to function as studio spaces, with the others being storage. The two-bedroom mobile home is my living quarters and office space. Here’s the great part, when I had a mortgage it was only $262 a month. That’s just a little bit more than the lot rent in the trailer park and still way less than I would be paying to rent an apartment! There are other costs with owning a home, which I’ll discuss more later, but buying my home was still cheaper than the average apartment rent.

You won’t see my dwelling in any magazines showcasing beautiful homes or architectural wonders. However, it is a fantastic estate for achieving my dreams and living a fulfilling life as an artist. It’s a beautiful, rural setting, with only a half hour drive to the nearest major city. Heck, when I lived in that city it took me a half hour to get anywhere with all the traffic and congestion. Most importantly, I was never over burdened with the mortgage payment. This allowed me to work part-time jobs and focus more effort on developing my art career. It also allowed me to quit those extra jobs and become a full-time artist sooner, because my income needs were so low. Devoting my full attention to my art has developed my business further with a corresponding increase in art sales. What I’ve been doing is pouring this extra income into my home loan, paying down that principal amount. Now it is paid off. I no longer have any monthly payment for housing and I saved thousands upon thousands of dollars I would have paid in interest. My job as an artist has become much more secure as a result.

As I’ve alluded, though my home is livable, it’s not everything I’d like it to be. What I can do now is much more quickly build up money in savings and then buy my next home with cash avoiding interest payments all together. In the mean time I’ve not been burdened by housing costs forcing me to work a higher paying, regular job I’d dread every day. I’ve been exulting in the freedom to create art on a daily basis. That’s what living is about!

This is the part of the old article that shocks me the most. I was actually considering the idea of buying a different place and moving once I’d saved up enough money! It’s a sound idea, don’t get me wrong. However, these days I can’t imagine ever selling my homestead. Though in the intervening years what I ended up doing was investing a lot of time, labor, and money improving my place to make it more of what I wanted. That said I still wish I had a bit more land, and that my house was something with a real foundation instead of a mobile home. These issues have become minor ones though in the overall scheme of things. I have zero regrets for my past choice in buying this place!

As I mentioned earlier owning a home has costs other than just the mortgage. Though many think you don’t have to pay these when renting a place, you, of course, do. It’s just incorporated into your monthly rent. These costs include such things as property tax, homeowners insurance, repairs, and maintenance. My tip for saving money long term is to keep your home smaller.

Smaller homes usually cost less to begin with, and will likely result in lower tax and insurance rates. It also means there is less to repair and maintain. If you need a new roof there’s much less square footage to cover. If you want to better insulate you home there’s less wall space to fill, fewer replacement windows to buy, etc. Heating and cooling costs should be much less as well. You also need less to furnish a smaller home. In fact, a smaller space can serve as a restraint from buying and collecting “stuff”.

I’ll also note that it seems small homes are far less desired in the marketplace, or perhaps it’s the fact that my home is a small mobile home. For whatever reason 24 years later the assessed value of my home used for property tax purposes is almost exactly the same as it was when I bought it!!! Some people might be upset at the idea that their property never appreciated in value. Since I have zero plans of ever selling I think this is awesome since the result is that my taxes have also stayed pretty much the same through the decades.

Do you own a home now? Are there rooms in it you rarely go into or hardly use? Here’s an interesting place to apply that real hourly wage figure I wrote about last time. Figure out the cost of those underused rooms like you would for the “business use of home” section in your taxes. Then divide that number by your real hourly wage. Is it worth that many hours of your life to have that room? Could you reduce your cost of living and improve you quality of life by selling your current home and getting something smaller?

Since housing costs vary so drastically from one region to another you should also consider how attached you are to a region. Would you be willing to move to another town or state if it meant you could afford to be an artist there? The nice thing about an art career is that you don’t necessarily have to live where you sell your work. I love the Western Michigan region where I live. My roots feel firmly planted here. However, by moving out just beyond the higher prices of Grand Rapids and its suburbs I’ve found a comfortable, affordable place to live. I can still visit all my friends or attend cultural events and the savings more than offsets the extra transportation costs.

Our homes are a major expense in our lives. When trying to reduce living costs all major expenses need to be carefully scrutinized. Is your home enabling you to live your life to the fullest or is it imposing a burden on you?

As a final addendum to this article on housing I feel like I should bring up the notion of “house hacking”. This is a term often used in the Financial Independence Retire Early (FIRE) community. Getting your housing right is one of the pillars of FIRE since it can be a huge expense or a huge opportunity. With house hacking what some people do is buy a place that is bigger than they need, often much bigger, perhaps even a duplex or 4-plex. Then they will live in a small portion of the home and rent out the rest, using that income stream to pay most, if not all of their housing expenses while also building equity in the property as the mortgage gets paid off. This might be done by getting roommates to rent out rooms, or it might be done by renting out apartments. Others have found that things like Airbnb are another route to turn extra space into an income stream which pays for all or part of a mortgage.

Studio Snippet

In preparation for my upcoming vessel chasing workshops I’ve started making more of my sets of chasing tools. I haven’t gotten into the heavy grinding and shaping just yet. I’m just cutting the blanks from the lengths of drill rod at this point.

For this task I’ve found that my old Parker vise mounted on a worktable out in the old metals studio seems to be at a good height. For the actual cutting I’m preferring to use the humble hack saw. With a decent blade it actually cuts quite fast. It also cuts a pretty thin kerf which is important to me. The drill rod I’m buying to make these is 3 feet long. I like to make my tools about 4 inches long. If I were cutting these with a cutoff wheel on a grinder the kerf would be much wider than the hacksaw blade. So much metal would get lost in the cuts that I’d only be able to get 8 pieces from a 3 foot length of rod. With a hacksaw though I can make the tools just a tiny smidge less than 4 inches (a hacksaw blade width less to be more precise) and I can get 9 pieces from a length of rod. That’s saving me money while reducing waste and resource use. If I really get into doing a lot of these I might consider investing in a metal bandsaw. I like hand tools though and I’m running out of space to store more big power tools. This probably means I need to go through and clear out some accumulated crap!

Since all my chasing tools are the same basic length I’ve made up a little jig out of some scrap materials to allow me to quickly measure off a section just a whisker shy of 4 inches. You can see it in the photo above. The piece of copper hanging down on the right side of the tool sits on the end of the rod and then I make a mark of where to cut at the other end. It’s a simple low tech way to measure off equal lengths on a rod as I go.

I’m happy to have a site where I can again allow comments. (I had to shut them off on my main website because the spam was simply uncontrollable!) So please I encourage you to share thoughts of your own. My general rule about comments though is just to play nice. Differing views are fine, but I’m not interested in engaging in or moderating verbal fights. If I feel things get out of hand, by whatever criteria I decide, I’ll just start blocking or deleting things.