Optimizing for House Location Over Size Can Save You Thousands $$$
When my wife and I first entered the housing market in 2018, we moved from a modest 1 bedroom apartment with about 800 square feet of space. We couldn’t imagine why we would possibly need 2500 square feet of living space in our first home, yet that is exactly what our real estate agent showed us. Did we ask for a large house? No! We actually explicitly said we preferred a smaller house. What the heck?
Only later we learned that it is fairly common for buyers in the Midwest (we were in Wisconsin at the time) to look for a larger home that they can grow into. A forever home if you will. Instead of following the proverbial herd, we placed an offer on a cute little 800 square foot 2b/1ba home within walking distance to a Big Ten football stadium. While the Covid-19 pandemic destroyed our chances of attending a football game in person, we did manage to benefit from the seller’s market that followed. Our choice to purchase a smaller home that fit our lifestyle over a forever home was a choice that ultimately helped catapult us to homeownership in the Bay Area. Here’s a few of the ways that optimizing for house location over size benefitted my family.
Home Maintenance Savings
With only 800 square feet of house and less than a 5,000 square foot lot, there was little home or yard maintenance. Since my wife and I were both young, we took it on ourselves to do most of the maintenance including climbing up on the roof to clear out the gutters and mowing/aerating/fertilizing the lawn. Doing the labor ourselves would have been more difficult and time consuming with a larger property, but with our small property we didn’t miss the time it took. By choosing a smaller home on a smaller lot, we saved time not only on indoor cleaning, but yard maintenance as well.
Repairs and upgrades were also less expensive for a smaller house. Our first of two major expenses was a new roof which we expected when we bought the house. Our home inspector made it clear that while the house was in good shape, the roof only had a few years left before it would need to be replaced. Unfortunately for us, a few years ended up only being a few months before we experienced a leak. While a new roof is never an inexpensive item, our house’s small footprint limited the replacement to a cost of about $8,000. Our second major expense was adding central a/c to the house. During our first summer we experimented living with only a single window unit and fans but found ourselves dripping in sweat on the days when the low didn’t drop below 70 degrees. If I was uncomfortable, my wife was downright miserable. So to save our marriage I quickly agreed to budget for central a/c. Thankfully our central a/c costs also benefitted from our small footprint. Since we only had an 800 square foot house, we only needed a small unit to cool such a small area. Naturally, a smaller and less powerful a/c units cost less to purchase, install, and maintain. Also, since we didn’t have much space to cool, we used less electricity as well!
Opting for a smaller house allowed us to prioritize our location and reduce the amount of time driving for both errands and work. While we would have loved to minimize both our commutes, this wasn’t possible (without a job change) given my employer’s office location a half hour drive outside of town. However, we were able to find a place in town that was only three miles from my spouse’s employer and within a short bike ride of Trader Joe’s. Hell ya!
For folks used to driving, being so close to stores or employers might seem like an expensive convenience. However, that couldn’t be further from the truth. Even before the latest gas price increases, the government rate for mileage was over $0.50/mile. Most of this cost is tied up in relatively infrequent expenses like oil changes, tires, and other maintenance that you pay for infrequently. While you don’t see these expenses at the same frequency as trips to the gas station, they become very real when you see a $1000 bill for four new tires. If a typical American driver reduced their annual mileage 40% from an average of 14,263 miles to a more moderate ~8500 miles they could save almost $4,000 annually. In a two care household like mine, these savings double to ~$7800 annually or about $650 per month. Imagine what you could do with an extra $650 each month!
Coincidentally enough I just hit 43k miles on the car I bought during a July 4th sale five years ago which puts my annual mileage at about 8600 miles. It’s crazy to think that our choice of location saved us tens of thousands of dollars over the last couple of years.
Rein in Lifestyle Inflation
If you’ve never had empty space in your home then I can forgive you for not anticipating the intense desire to fill empty space. It feels like a classic case of the hedonic treadmill where your brain wants to create some some sort of need just to give you the fleeting joy of filling it. It’s almost assured that any empty space in a house you buy will be filled within a year. In contrast, we didn’t have room to add anything to our little 800 square foot house. Our house became so crammed once we added a crib and dresser to our baby room/office that we hardly had to buy any furniture when we eventually upgraded to our current townhouse.
A few ways that buying a large house and filling it with furniture can make it more difficult to optimize for future house location over house size:
- Moving to a more desirable location while maintaining the same size house implies a more expensive house. If you move to a city where the average house is smaller than your current city then a house upgrade becomes even more expensive.
- More desirable, and therefore expensive, cities tend to have smaller houses on average than most cities in the United States. Cities like San Jose, San Francisco, Los Angeles, San Diego, and Boston rank as the five most expensive metro areas and each one has home smaller than the average large metro
- Moving to a smaller house means shedding some of the excess pieces that you now hold. Resold furniture comes at a heavy discount because furniture is not a quick moving inventory item and everyone buying knows that you likely have a hard date for moving. This gives furniture buyers leverage, so you can forget about the price tag that you paid.
- If you don’t sell your furniture then you’ll need to move it ($$$) and store it ($$$) until you sell it or upgrade to a larger house. This large holding cost is another factor that gives furniture buyers leverage
- You might grow accustomed to conveniences like a a large open kitchen, a separate play area for the kids, or a guest room. Giving these up could prove to be difficult. Why uproot and inconvenience your family if you’re unsure of the benefits of moving but know exactly what the costs are?
Historically higher price appreciation
In addition to saving more on expenses and household items, you might also earn more from a higher rate of price appreciation. From 2011-2016, homes smaller than 1200 square feet appreciated 3.7% faster than homes larger than 2400 square feet depending on the exact size of the home. Price appreciation of even 2% can really add up when you factor in how large of a purchase a house is. For a typical US home worth $450,000 , 2% extra gains over a 30 year period would add up to $815,000 which is anything but chump change. Thanks to capital gains tax exclusions for sales of a primary residence, a large portion of these gains can also be realized tax free for the typical US home seller.
Our small house happy ending
We lived in our first home for two and a half years and over that time our house protected us from a polar vortex with air temperatures plummeting to -26F, sheltered our baby girl as the pandemic swept over the country, and kept us cool as the heat index approached 100F. Our house was a f*@(# ng trooper and it had one more surprise when we sold it for 50% more than we paid for it. Our home equity from the sale served double duty as funds for a cross country move as well as the down payment for our house here in California.
Being used to such a small house, we were floored (and still are) by the size of 1800 square feet of living space in our new townhouse. With a home gym, yoga studio, office, play room, guest room, a patio, and a balcony, our new place feels like a palace. By Bay Area standards though it is a large home. At 1800 square feet it is slightly larger than the median house in the Bay Area which is between 1600-1700 square feet. Our choice to prioritize house location over size set us up for success over the last few years and hopefully our current home purchase will do the same.
With the rise of remote work, it’s possible to work from just about anywhere with an internet connection. But given sufficient income, who wouldn’t want to test out living on the best coast?