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. 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.

  5. 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.

  6. 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.

  7. 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!

  8. 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!

  9. 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

  10. 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

  11. 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!

  12. 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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