Downsizing, Depreciation, and Debt

Instead of just my liv­ing room, this is the equiv­a­lent of all my liv­ing space now.

When I start­ed writ­ing this blog over two years ago, I was liv­ing in a 1,500 sq ft house that fea­tured 3 bed­rooms, 1 bath­room, and tons of clos­et space. I had more space then I ever need­ed. One bed­room for me, one bed­room for my craft space, and the oth­er upstairs for storage/media room/roommate area. I also had a huge kitchen and liv­ing room to fill.

For­tu­nate­ly, I didn’t go crazy stuff­ing the place with fur­nish­ings. When I moved in the sum­mer of 2016, it was into an 1,100 sq ft 2 bed­room, 2 bath­room apart­ment. All of my stuff fit more or less neat­ly into the apart­ment. I still had big clos­ets to put my stash of emp­ty box­es in. My kitchen still had great counter space and even came with a nice­ly sized pantry! Of course, I paid through the nose for it but it was well worth it to be close to work.

Then I moved again. This time into a friend’s base­ment. It con­sists of one big room, a small bed­room, an even small­er bath­room, and one tiny clos­et under the stairs. I’ve been liv­ing with a good por­tion of my stuff in box­es the last few months. For $400/mo (all-inclu­sive!), I’ve been deal­ing with it. It hasn’t been my favorite place to live, but it’s done the job nice­ly.

And now.…. it’s time to move again!

But this time is spe­cial.

This time I’m mov­ing into my very own house and it’s going to be awe­some.

Or is it?

Since I’m buy­ing a triplex, I’m mov­ing into one unit (to be deter­mined if it’s unit 2 or 3. The util­i­ty com­pa­ny and I were not on the same page). This unit is the small­est one in the house. It’s a stu­dio. I’m talk­ing one bath­room, one medi­um-sized room, a small kitchen, and a clos­et. For­tu­nate­ly, access to the attic is in the unit, so I will be work­ing on clean­ing that up and fin­ish­ing it off to make more space. For now, it will serve as des­per­ate­ly need­ed stor­age space for the equip­ment I have for my hob­bies.

I’m not sure how I’ll man­age being in a stu­dio after hav­ing such spa­cious accom­mo­da­tions in the past. I had a stu­dio unit as an intern and dis­liked it intense­ly. A good chunk of that dis­like was aimed at the shit­ty neigh­bors who smoked out­side my only win­dow and kept their places so gross that I got bugs. I sus­pect not hav­ing to pay for hous­ing will help abate my dis­like of small liv­ing spaces.

This also has the added bonus of help­ing me pare down my stuff. Why do I have extra bot­tles of sham­poo and con­di­tion­er sit­ting around when I don’t even like how it cleans my hair? Why am I hang­ing on to so many clothes when I don’t wear them any more because they don’t fit or aren’t my style? Why do I have a box full of paper­work?

Mew sleeps well because he doesn’t wor­ry about the future.

I’ve been haul­ing this crap around for too long. It’s time to say farewell to my tow­el col­lec­tion. (cur­rent­ly at 13). I am one per­son. I need 4 tow­els, max. (Every day, beach, spare, and old tow­el for leaks and gross stuff I don’t want on my nice tow­els). I have an exces­sive num­ber of blan­kets, but I’m not ready to give those up quite yet.

My kitchen doesn’t have much space in it, so I will prob­a­bly be down­siz­ing a bunch of kitchen stuff as well. Just got­ta move it over there first!

Par­ing down my stuff isn’t the only thing on my mind late­ly. I’ve been think­ing about a lot of the “behind the scenes” stuff that goes along with rentals.

For instance.…… depre­ci­a­tion. That’s a thing I had no rea­son to care about until now. My 2016 tax­es are uncom­pli­cat­ed still, thank good­ness, but that will not be the case in 2017. I found this arti­cle from PT Mon­ey (of Fin­Con fame) that explained depre­ci­a­tion clear­ly. I will be ref­er­enc­ing it in the future when it comes time to put this all into action.

I’ve also been busy look­ing over sam­ple leas­es and research­ing my state’s land­lord and ten­ant rights. I would’ve includ­ed that in the title too, but it didn’t go with the nice allit­er­a­tion flow I had going on. If you’ve got a lease you’re will­ing to share with me, please feel free! I want this to go smooth­ly from the get go. Gwen@fierymillennials.com is my email 🙂

The oth­er thing weigh­ing on my mind is the debt I’m tak­ing on by buy­ing this house. Except for one small $2500 loan to buy my first car, I’ve nev­er had any debt. I love see­ing a big fat ZERO next to the word debt when I check Mint.

I’m not sure how I’ll han­dle hav­ing debt.

Sure, it’s “good” debt.

This mort­gage is the lever­age I need to put gaso­line on my FIRE plans and fan the flames into a bon­fire.

It’s also only — “ONLY” — $77,647. Or, eeri­ly enough, damn close to my entire salary for the year. It’s not like I’m buy­ing a $200k McMan­sion. I just rent the base­ment of those, not buy them.

I will not be mak­ing extra pay­ments on the mort­gage for the first few years. I will need every pen­ny for improve­ments and buy­ing more rentals. After I fix every­thing up all pret­ty and buy all the rental prop­er­ties, I will take a deep breath. And then prob­a­bly pay down the mort­gage. I am not pay­ing $60k extra in inter­est when this prop­er­ty only cost $85k to begin with. I don’t care if that inter­est is spread out over 30 years. That is a lot of extra mon­ey and I don’t want the bank to get it.

The main spread­sheet I use has a home equi­ty tab. It’s been fun to put in var­i­ous num­bers and see how even a $100 extra a month makes a huge impact! I did have a minor heart attack at first when I put in the num­bers and it messed up my entire spread­sheet. My pan­ick­ing only last­ed as long as it took me to zero out all the oth­er months in my spread­sheet that didn’t need home equi­ty. Still see­ing my spread­sheet go feet up was not pleas­ant and I don’t want that to hap­pen ever again.

But I am thrilled to see how the mort­gage and extra rental income will impact my finan­cial jour­ney, and I’m even more excit­ed I get to share it all with you! Wish me luck!

What did you feel like before you bought your first prop­er­ty? Did you freak out like me or were you cool as a cucum­ber?

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32 thoughts on “Downsizing, Depreciation, and Debt

  1. Just out of curios­i­ty, what city/town are you locat­ed? I am just curi­ous where in Illi­nois you can get good pric­ing on mul­ti units like the one you have found. Thanks.

    • I don’t share my exact loca­tion here on the blog. It would make it even eas­i­er to fig­ure out who I am, and I still need a lay­er of anonymi­ty between this blog and work. I can tell you I’m not in Illi­nois though 🙂

  2. do not for­get that lever­age equals risk. if you go way into debt like i did, you can end up OK. or you can go bank­rupt, and then become a talk-radio anti-debt cru­sad­er like Dave Ram­sey and end up way bet­ter than OK. nev­er­the­less, i got out of debt asap. risk times time equals fail­ure giv­en a long-enough time. you are build­ing wealth very fast b/c you have dumped your debt. think of how fast you’ll hit the gas when the three-plex is free-and-clear.

    when i was accu­mu­lat­ing real estate my game plan was to break-even on every­thing by mak­ing advance mort­gage pay­ments on the house with the high­est inter­est rate (11%) then mov­ing to the next low­er inter­est rate in snow­ball fash­ion. (you’re in a much bet­ter posi­tion inter­est-wise.) nev­er­the­less, cap­i­tal expens­es can sneak up on you and vacan­cies occur at inop­por­tune times. you’ll want enough mar­gin so that you can respond even if a black swan flies into Wall Street just before that.

    • The ten­ta­tive plan right now is to accu­mu­late and then pay­off. I want my spare monies to go into funds for cap­i­tal expen­di­tures and down pay­ments. Then I can start work­ing on pay­ing them off ear­ly!

  3. I was just glad I had final­ly got one- I was aver­ag­ing 4 prop­er­ty view­ings a week for 4 months in a boom mar­ket. Plus the Scot­tish offers sys­tem is a night­mare.
    Think­ing about try­ing out rent­ing out a room next year so I will be fol­low­ing your expe­ri­ences 🙂

    • Con­grat­u­la­tions on get­ting a place of your own! Let me know if you rent out your room next year.… I have absolute­ly no idea how the rental mar­ket in Scot­land works!

  4. Con­grats and best of luck! I have yet to pur­chase a house, so I will not be of use there, but I am inter­est­ed to fol­low along and learn from your triplex expe­ri­ence. It seems like a great way to save on hous­ing costs and add to your net worth, so I’ll def­i­nite­ly be read­ing to see how it works out in prac­tice.
    Matt @ Opti­mize Your Life recent­ly post­ed…How You Do Any­thing is How You Do Every­thingMy Profile

  5. We used lease run­ner for the back­ground check and lease. I rec­om­mend it. I don’t remem­ber how expen­sive it was. You can also pay through lease run­ner too but the ten­ant want­ed to pay old school so we didn’t use that fea­ture. Down­siz­ing is going to feel great! I LOL’d at the 14 tow­els. I’m total­ly right there with ya.
    Julie @ Mil­len­ni­al Boss recent­ly post­ed…The Evo­lu­tion of a Per­son­al Finance Blog­gerMy Profile

  6. Yay yay yayyyy! Con­grat­u­la­tions on that new rental prop­er­ty! It’s gonna be a great adven­ture. 🙂 I was so, so ready to be a home­own­er. We bought our house back in Sep­tem­ber and it was such a lib­er­at­ing feel­ing. Our hous­ing mar­ket was hot and we could bare­ly put offers on homes; it was a mir­a­cle we bought a house at all!

    I don’t want a mort­gage dur­ing FIRE, so we’re pay­ing this suck­er off ASAP.

  7. Good luck! Know­ing how ded­i­cat­ed you are, I am sure you will be suc­cess­ful no mat­ter what chal­lenges come up along the way.

    There are a few sug­ges­tions I have for you to help smooth the way and avoid pit­falls:

    1) See if your state asso­ci­a­tion of real­tors has a mod­el lease agree­ment. It should be a good start­ing point. Cal­i­for­nia does and it’s pret­ty com­pre­hen­sive.

    2) Find a local meet­up group for land­lords and prop­er­ty investors. Locals will like­ly have good infor­ma­tion about the intri­ca­cies of own­ing and man­ag­ing prop­er­ty in your area, and they may be able to tell you about oth­er oppor­tu­ni­ties com­ing up.

    3) Check the mort­gage paper­work care­ful­ly to make sure you won’t fall afoul of a pre­pay­ment penal­ty clause. Many lenders will allow you to pay off up to 20% of the mort­gage in one year, oth­ers will not. Make sure you know the max you can pay before you send a check.

    • 1) My state used to, but doesn’t any­more.
      2) Meet­ing this week! Super excit­ed to talk to every­one. Plus I can bike there!
      3) No penal­ty, but if I make more than one pay­ment they will hold it until the pay­ment is due and make one big pay­ment.

  8. I know that feel­ing for reduc­ing, and not sure if you need what you have! I’m cur­rent­ly a month away from mov­ing to a new place with my girl­friend and am plan­ning on doing some bru­tal reduc­tion. Biggest one I’ve done so far is mov­ing all my old DVDs and Blu-Rays from their own book­shelf to a cd sleeve that reduces the space they’re tak­ing up by 95%.

    The next stage is to get rid of them com­plete­ly, but hey! One step at a time! 😀

    • Oh yeah.….… my whole case col­lec­tion has GOT to go. I offi­cial­ly have zero room for them all. Same goes for my CD case col­lec­tion that’s been col­lect­ing dust for the last 7 years.

  9. I pur­chased my first home in 2011 when the mar­ket was almost at rock bot­tom. I saved up mon­ey quick­ly when I got my first job because I didn’t want to pay rent. There were good deals avail­able and I could get my own house for the price of rent­ing an apart­ment — so it was a no-brain­er! The only stress­ful part for me was sign­ing all of the paper­work — I remem­ber pre­tend­ing to actu­al­ly read through each doc­u­ment when real­ly I was “fak­ing it”… oops!

    I was extreme­ly for­tu­nate and I got a good deal — we recent­ly sold our first house for a $95k gain, but only net­ted about $78k after real estate com­mis­sions :’(

    • For­tu­nate­ly, the lawyer didn’t make me read each doc­u­ment. He gave me a brief sum­ma­ry and then let me sign. Most of them I’d already seen any­ways. Con­grats on walk­ing away from your house with mon­ey in your pock­et!

  10. When we bought our first and only house in 2012, I was as cool as a cucum­ber. But that is only because finan­cial­ly speak­ing, I was an idiot at the time. I didn’t know enough to wor­ry. I didn’t have a sin­gle finan­cial spread­sheet (crazy talk, no?).

    You are embark­ing on a won­der­ful adven­ture, and you’re doing it remark­ably well pre­pared. You are going to have a blast.

    I lived in a stu­dio for a year and a half soon after I moved to this coun­try. I loved the cozi­ness of it (in India I was in a 1bedroom apart­ment before I moved here). I put up these slid­ing blinds that I got from Ikea around by bed area, and I have nev­er before or since had a more cozy sleep­ing area.
    Mrs. BITA recent­ly post­ed…Par­ent­ing on FIREMy Profile

    • Thanks Mrs. BITA.… I don’t real­ly feel pre­pared at all. Liv­ing in a stu­dio again will take some get­ting used to. It’s a big change for me!

  11. Wel­come to debt! After the first few months it’s not as bad as you thought it was 🙂 I’ll be real­ly inter­est­ed to see how your jour­ney with debt goes. If you look at a 7% return on the share­mar­ket, a 4% SWR and an inter­est rate below that — math­e­mat­i­cal­ly mort­gage debt makes sense.

    I tell myself this with my $1.1mil in debt.… it’s a scary place when put that way, but when I have more prop­er­ty val­ue than debt I sleep well at night
    Lady­FIRE recent­ly post­ed…Rate­set­ter: Peer-to-Peer Lend­ingMy Profile

  12. At 30 years old, I still can’t imag­ine buy­ing a home. Like you, I’ve moved A LOT. Most recent­ly this week. Because I don’t see that chang­ing any time in the near future, I can’t jus­ti­fy buy­ing any­thing.

    Not to men­tion how much the idea of being a land­lord stress­es me out. Even when I’ve sub­let­ted my apart­ment, I can’t han­dle the stress. I think some of us are just meant to be renters (at least until I can afford to hire some­one to han­dle the stres­sors of home­own­er­ship for me 🙂 )
    Ste­fanie O’Connell recent­ly post­ed…How to Feel Finan­cial­ly Equal (Even When You’re Not)My Profile

  13. I bought my first prop­er­ty with my wife just before my 31st birth­day. It was 2008… I was unaware of how deep the prob­lems were in the hous­ing mar­ket at that point. We had moved to the mid­west from the coast, where the bub­ble was clear­ly an issue at the time. But, I didn’t real­ize how much of a bub­ble we were nation­wide. I was also super focused on work/career and not real­ly pay­ing atten­tion.

    I knew I’d have a steady job for the next 4–5 years, but not after that. Our loan was for ~4 times my annu­al salary. In hind­sight, we bought way way too much house at the worst pos­si­ble time. I didn’t want the debt, but I felt that my wife real­ly want­ed the place. The things we do for love. I remem­ber start­ing to believe the hap­py talk about how hous­es always go up, it was in a good neigh­bor­hood, we could always sell in a few years if I had to relo­cate for work. Still, I insist­ed on as large a down pay­ment as I could get my wife to agree to, so we only dipped slight­ly under­wa­ter after clos­ing. At the mort­gage clos­ing, I was a big mix of emo­tions: excit­ed, exhaust­ed, and skep­ti­cal at once.

    Long sto­ry short — I hat­ed that mort­gage pay­ment! After a bunch of changes, we paid it off in ear­ly 2016. Since then, its been rel­a­tive­ly easy for us to save ~60% of our take-home pay after employ­er health ins., fsa, and tax­es are tak­en out. If I ever sign on a mort­gage again, I hope its like Gwen and is for an income gen­er­at­ing prop­er­ty!

  14. Liv­ing in New Eng­land, I am for­ev­er jeal­ous of that rental price. With 3 units no less! I have looked in the past and real­ly the only rentals that didn’t require mas­sive amounts of remod­el­ing were over $300K.… No thanks. Con­grat­u­la­tions on all of this though. You’re very quick­ly build­ing your­self a nice cash flow. Makes me rethink not going into rental prop­er­ties.

    • Yikes! I know what you mean about crazy NE prices. I vis­it­ed Port­land Maine and was flab­ber­gast­ed at the high prices for cute lit­tle bun­ga­lows. Hous­es that would go for $80–120k depend­ing on the neigh­bor­hood were going for $200k+ in Port­land! Crazy!!

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