
Just because you’re approved doesn’t mean you should buy it
photo source
Why We Bought A Cheap House For $130,000
1. When it comes to areas with a high cost of living it’s incredibly risky (idiotic) to buy a house when it can just as easily be rented for less money.
Late last year we bought a house south of Seattle for $130,000 with a 15 year fixed mortgage at 2.875% interest, 5% down and our monthly payments are now $1,150. Now depending on where you live and how much money you make that figure may sound like a lot of money or veryyyyy little. In our case because of both the income from my business and the average house price where we were living in Seattle was $400,000+ it’s actually really cheap.
2015 Update: Decided to pay this house off. Not having a mortgage is nice but now that we have kids I am feeling a little itch to get something bigger.
We lived in West Seattle for about 4 years but it’s always been too expensive to buy when we could just rent instead. In fact, the house we moved out of would have cost us $550,000 to buy (they put it up for sale while we were renting). The 30 year mortgage on a $550,000 house would have run us roughly $3,000 per month and yet we rented the house that was being offered for $550,000 for only $1,500 per month for nearly two years. Why then would we buy a house that would cost us $3,000 per month in mortgage costs when we could rent it for half that? And yet, millions of idiots (people) continue to do just that.
I could continue making these arguments but I think Patrick.net does a better job than I and with more data points:
Why It’s A Terrible Time To Buy An Expensive House
Defend Yourself From Bogus Arguments
Calculate House Value Via Rents (My Favorite Tool)
We did make offers on a few less expensive houses in West Seattle that could have rented for close to the monthly mortgage but with one house we offered on there were 14 other offers on the house. When there is that much competition it’s idiotic to bid more just to get the house. So because I can live and work from anywhere we decided to cut our costs and buy a cheap house instead.
I will miss my back yard view though
2. The less I have to spend on personal expenses the more I can invest in my business or spend time simply not working at all.
Most Americans have it wrong. You don’t go out and buy the massive house, two new cars and a boat all on credit with an income level that can barely meet those monthly bills. Just because you’re approved for the loan doesn’t mean you should do it. That is complete idiocy, especially if you’d like to retire before you’re 65.
I had it wrong when I bought a brand new 2008 Subaru WRX for $25,000+ after getting my first “real job” as a sales rep back in 2008 with a base salary of $31,250 per year – a laughably idiotic mistake. It was especially stupid because when I bought the car it was just before the economic meltdown so my interest rate was also 5.9%. Later that year my friend bought a new 2008 Subaru WRX STI (a better / faster version of my car) for what we figured out would be only $3,000 more because he got 0% interest and extra money knocked off the car because car companies were desperate for sales (typically it should have cost nearly $10k more to get that car – not saying he was right either but just further illustrating my failure).
Since that mistake in my mid twenties we paid that car off last year ahead of schedule and have since paid off most of my wife’s student loans after having a change of heart about my $26,000 mistake. But the real point of reducing my personal expenses was so that I could invest more money into my business. Now with less debt and less monthly expenses I’m able to take more risks with projects that may or may not take off. Am I frustrated that a project I spent $10,000+ on last year looks like it’s going to be a waste? Of course. But because I’m always taking risks I also had another project last year do $300k+ in gross sales with my net on that being over $60,000+ in profit.
I’d use a Wayne Gretzky quote about missing 100% of the shots you don’t take, but I prefer Mark Cuban’s advice on failure and luck instead:
“It doesn�t matter how many times you fail. It doesn�t matter how many times you almost get it right. No one is going to know or care about your failures, and neither should you. All you have to do is learn from them and those around you because� All that matters in business is that you get it right once. Then everyone can tell you how lucky you are.”
Mark Cuban
When I ultimately exit from a business with f&^! you money I’ll have plenty of critics saying how lucky I was or whatever, but they also won’t know how many times I failed or how earlier in life I was willing to drastically reduce my personal expenses by buying a cheap investment house so I could try and grow my business faster.
3. If I can work from anywhere I may as well work from someplace cheap to live.
There is a massive consumption problem here in America. Certainly no matter what I say will stop it – heck – I’ve even profited handsomely from it, but hopefully some of you that read this will take this advice to heart. The point is that if you truly want to build and grow an online business the last thing you want to do is to overextend yourself financially to large monthly payments on a massive house, two new cars you can’t afford because you’re unwilling to use alternative modes of transportation like a bus or train perhaps?
Our personal monthly fixed expenses are now lower than they’ve ever been in the past 3 years and yet my income is dramatically higher than what it was when I first lost my job. After I finish work on fixing up this house and meet the 1 year HUD requirement of living we could turn it over as a rental and just as easily buy another house to fix up and turn into an eventual rental as well.
This has turned into somewhat of a rant, but all I’d like to say is this:
Bottom Line: Don’t be a typical American idiot and over commit yourself financially to bills you can hardly afford. If you ever want to break free and build your own dream lifestyle then try to cut your fixed monthly expenses while at the same time finding ways to increase your income.
I totally agree! We have made some big money mistakes in the past but our house wasn’t one of them. We were able to get a nice, modest home, just the right size for our family for a very good price. I know we will make more money in the future but we are content with our home and our mortgage. It feels very right to us and we don’t feel like we are paying too much on it each month.
Hey Julie, thanks for commenting. Yah we’ve made our fair share as well (my wife now says she shouldn’t have went back to school for her masters because of the student loan debt) but ultimately my motivation behind minimizing monthly expenses is so that no only can I save up more money faster / grow my business more but also so that I have extra money to spend on experiences.
Great post Chris. Ya, a lot of entrepreneurs and aspiring entrepreneurs have it ingrained in them that they MUST invest in a house or in the stock market. However, the returns they could get investing in themselves/their own businesses are so ridiculously higher that no matter how the RE/stock markets do it’s -EV for them to do so if they don’t have a certain amount already set aside for that.
Hey Billy, yah completely agree. We even thought about not buying this place but figured we could live here several years if we had to but ultimately turn it into a rental.
Around the area where we bought this house there were single family homes with 3 bedrooms (like ours) renting for $1,200 – $1,400 per month with 3 br apartments at around $1,100 per month.
So once we finish redoing the bathrooms and the kitchen – some of which we are going to do ourselves – it should be a nice rental property. It’s also nice to just get away from the computer and use my hands to build something “real” instead of virtually hah hah.
Dude, such an awesome post and something I’ve been trying to tell my GF for a long time. You are a smart man coming to this realization and doing what it takes to cut costs and take more risks.
Hey Nate thanks! I don’t have myself alone to coming to this realization. My wife was a strong driving force as well because in 2011 she was working full time and yet at the end of the year despite both her added income and my increased income over the previous year we had very little to show for it in terms of savings etc. So she started listening to Dave Ramsey etc. and although I don’t agree with his entire philosophy the idea of paying down debt so that you don’t have any monthly payments is very liberating.
After that you can sorta spend your money on other things, be more charitable etc.
Great stuff Chris. Already in the house and the family is settled but I can still reduce expenses and working on that. The flip side is getting that side income up and moving. It’s trending up, just never fast enough.
Hey Mike – yah being able to work towards reducing your expenses while finding ways to increase your income is one of the fastest ways towards reaching financial independence that’s for sure.
I have found real estate to be the best investment period, just not the house I live in. The property we occupy should never be considered an investment: only shelter. Over many years I have always owned rental properties, but I myself have rented for a time and owned for a time. Renting is way undervalued, especially in the U.S.A where we are becoming increasingly more mobile.
Hey Artur,
I’m not entirely bullish on real estate because after all, look what happened in 2008. I am however bullish on looking at the value of a property based on the cost of the mortgage vs how much it can be rented for. As long as it can be rented for more than the mortgage that’s a big plus in my book.
Chris
Love the advice and experience you have shared here, Chris. Especially the “work from someplace cheap” advice.
I did you even one better. I moved to the Philippines and just kept on earning online from the US … nothing changed work-wise except my IP address and time zone. But not only is the cost of living at least 40% cheaper here than in the “Land of the American Dream (or Nightmare)”, but there are tremendous tax advantages for folks who live here and earn from outside the country … with the same income my net spendable income is up more than 40% thanks to the rules on foreign earned income and such.
I’m an older, already retired guy. A lot of my online friends sigh wistfully and say, “Oh someday I would like to do what you did.’. Sad part is, they could save a lot more in their younger years when they need the income more if they just realized you don’t have to live where you earn.
This is some of the best advice I have ever seen online, from anyone of any age:
Hey Dave,
Yes you did one up me there by going to the Philippines. I have about a half dozen friends that live in Thailand with the same idea – be able to earn money from the US but spend hardly anything on cost of living.
I think we’d like to do that eventually but as it is now we enjoy being closer to family etc.
Chris
You guys are freaking smart.
Now imagine that you bought a property for cash and fixed it up? Then you would owe no one nothing.
However it might take you 10 years to get it fixed up the way you want it.
Like I say you guys are freaking smart.
Problem everyone can’t get those rates.
Hey Darnell, but having a house that I own outright when I run a business that relies on creative uses of my own capital would require me to lock a chunk of my money into something I can’t get any business value out of.
When I spend $10,000 (for example) to buy a website and in less than a year can make that back – that is a pretty awesome return. So if I could find websites like this worth buying I want to be buying them all day but if I tie up all my money in home equity I can’t do anything with it. Also – a home equity line of credit would also likely be a higher interest rate if I ever thought I needed the money for my business.
RE: Fixing it up – I plan to redo both bathrooms and the kitchen all in 2013 so I don’t expect it to be that long… Like I was saying earlier I’d like to get it all done in under a year from the time we buy so that we can either move onto the next house or enjoy the nicer stuff.
RE: Interest rate – Well a 15 yr fixed is already going to be like 1% point below a 30 yr fixed but you have to have enough money for the higher payments. In this case the difference was like $800 vs $1,150 so it’s not a big difference. All I’ve done to have good credit is always pay my bills on time, and always pay my credit cards off every month (although the later doesn’t effect credit unless you just don’t make payments).
If I had only learned this at 20 instead of 40! But, it is never too little or too late! We’re attacking this now with real enthusiasm to make up for lost ground!
I’d have thought you would have had enough by now to pay cash for that house.
2.875% interest – there’s likely never to be a time in our lifetimes we’ll see that rate again unless we continue to sputter along or our economy collapses or something.
The $125k I didn’t have to put down I can use on business on the assumption that whatever I do with my business I should be able to get a better than 2.875% annual rate of return.
Sure I understand the value of having no monthly payments at all, but right now I prefer cash on hand so I can buy a sweet website if I come across one etc.
(I am paying cash for the repairs and remodels though as I didn’t want to deal with getting a construction loan on the house which then gets a bank involved telling me what I can and can’t do etc)
I’ll add that what’s funny is with a 15yr fixed mortgage at 2.875% I am only paying $30k in interest on this loan compared to if the rate was higher, most people generally spend as much or more of the entire value of their house in interest during the life of the loan.
Great post!
I live below my means and I tend to do so until I have enough stacked away that I don’t have to worry about it.
I don’t need a big house and fancy cars to feel good. I left work and started to work for myself, because I didn’t like the feeling of being trapped. With a huge mortgage and overhead I would still feel trapped.
The feeling of not worrying about money is priceless.
Great post Chris- wise advice. Although I will say that Mercedes Benz commercial last night with William Dafoe pretty much sold me on their new model. That was a great ad.
Great post. Thanks for sharing what you’ve learned. I live in LA, so as you might guess, I can barely afford rent in a nice area–and let’s not get started on buying a house out here. It’s almost an impossibility. So renting become truly affordable when you factor in what it would cost to own. This is a good post — it’s important not to buy into the hype of home ownership and the trappings of success. I want to be financially independent for the rest of my life and be able to live the life I want where I want. This is why I work in the Internet space.
I don’t want to be one of these people with an $80,000 late model Mercedes parked in front of an apartment (how can this make sense?! — I see it all the time!). Wow, this turned into a bit of a rant too 🙂
I completely agree with your post. Most people are not money savvy and they want to live the rockstar life but if an emergency rises up they are left with nothing. People need to be smart with their money as it run out quick.
Your backyard view is beautiful indeed.
I agree in your idea and I have learned something in that experience of yours.
It’s nice to be practical in our life and living because the economy is not stable.
I agree with your plan Chris. My wife & I have bought a couple of houses over the last 2 years. The revenue from renting is a nice extra in our portfolio. That with some of our other earnings takes the pressure off a little so I can hopefully build our online presence. Good luck Chris
Dave
Hey Chris!
Love the attitude mate. I think it’s wired in a lot of men’s DNA to go out and get a sweet car as soon as we get a job. I know I did, MANY times and hurt my finances as a result. Live and learn though.
Good stuff paying well below your means! Looks like you are crushing it online. Helps keep me motivated too as I’ve been slacking on monetizing my site.
I actually regret buying only about 60% of what I could afford back in 2003 for my first real place since things have appreciated. Never know. Nice to be underlevered.
Cheers, Sam
Yah actually the area in West Seattle that we decided not to buy in has seen a huge price surge. Now I know it’s impossible to see the future but had we bought in West Seattle at $400k to $500k we’d probably already have gains of $40k – $80k (basically more than we’ll be able to get from our smaller house). Ah well, paying $1100 per month on a 15 yr mortgage allows me to invest in buying more websites, hiring software developers, paying more writers for kindle books etc etc.
Thanks for stopping by to comment though 🙂
Hey Chris! Great post. You’re certainly part of the minority who have this type of discipline, but it does pay off. My wife and I took a similar path and now we have several multi-family places rented out and paying us monthly. Everyone thought we were crazy to do this kind of sacrifice during most of our 20s, but saw the results coming in every month and kept going. Now that we’ve reached a certain level of passive income, people are blown away at the freedom we now have at such a young age. Thanks for writing and sharing your ideas, I haven’t found a lot of others who think this way.
Hey Paul, yah that’s really the attitude I’m trying to approach to my business and family finances. Ideally I’ll keep on generating ever increasing amounts of money from my online business but if I can combine that with keeping our personal expenses low as well then I can quit working sooner if I want to (or really cutting back on how much I work perhaps).
Hey, I really liked what you wrote here. I didn’t read all the comments though. I live in western Washington too; however, I’m leaving soon. I have always been poor, and never had an income that exceeded 10k a year, some years I earned 3k or less. You see, I have been disabled since birth. I have a couple of different things wrong with me mentally, and have never been able to maintain employment.
Let me tell you, I’ve never lived in a nice house, a big house, I’m lucky if I live in a house at all. I have always driven cheap cars, except when i won some money and bought a 1999 vw. It looked nice, but it still did the same thing as my 1983 tercel I currently drive. I sold to volkswagen to pay some debts, and also because the parts cost me 3x as much. You see, I have to do all my own work on my vehicles. And the different of $60 for a starter, and $180 for a starter makes a huge difference when you have at best 800 dollars a month to live on. Sure the state will give you a hundred bucks in food stamps, but it costs 500 dollars to rent a room in a house with a bunch of people that you really wouldn’t even want to talk to, let alone live with.
I really don’t see the point in driving a car that costs more than 50k, even if I had money. Money is a tool, and I try to save it for when I need it, or have enough to get a good amount of leverage. A 31 year old car that gets me from a to b cost me 1500 or so cash, and the prices of the parts when things break + oil belts hoses plugs tires and that crap. Ad to that the cost of nsurnance and gas, at 32 mpg, and I drive for the cost of about $160 dollars a month ( I don’t drive all that much. )
If I were to suddenly get rich, or even slowly gain an income writing, even a small income would make a huge difference in how much I can save to achieve sustainable decent living. I figure if I can save enough to buy a house, one for thirty thousand in a “Bad area” of a much much cheaper state than WA, and continue to drive old cars that dont cost as much as that house, then maybe I could always have a roof that can keep me dry for the rest of my life. This is a dream of mine.
I have few talents, but many skills that compliment the talents I do have. And the skills that I’ve chosen to develop are writing, and fixing/maintaining all manner of things. I don’t know if I will ever be able to maintain employment for longer than my record 8 month part time job at a grocery store in the deli. A deli that said to me when I left “good luck finding someone else to put up with your crap. Harsh words at 16 hours a week. They were right. I had struggled through machining school to find that i couldn’t cut it anywhere. Over two dozen jobs are under my belt, and I failed at all of them.
A horrible history of abuse and neglect, and a horrible history of poverty and isolation have followed me for years. Still I smile, and here in washington: I’m lucky if I get one back. I don’t need a house that has twenty bedrooms and remote control carpet heaters. I wasn’t happy with a 1968 Winnebago RV through two winters because it was cold, wet, and lonely. With aspergers, I’ll probably always be lonely. And with complex ptsd, I’ll probably always be unsure of my income. But with never buying a car for more than that Volkswagen ($3150 !!!) I would be really grateful if that meant I never had to sleep in my car, or live in a fifty year old rv, or rent a room in a house where the few thing I own and appreciate are stolen from me, or live in a house where people pull guns on me, or sleep in a cot that has bed bugs (yes they are real,) then I am happy to drive a car that everyone else thinks is crap. I’m just glad to have one at all.
I’d love to own a house, but if my house is worth a half million, then the taxes would exceed my income for the best of my years. I want something sustainable. Renting a trailer in someone’s back yard right now, and they let me in the house sometimes too, for $400 dollars a month. I have a gym membership for $35 dollars so i can take a shower. Believe it or not, this is me doing good for myself. While some people live by themselves in a house that was build for the brandy bunch to have 2 rooms for each person. The sad thing is, the odds are pretty good that that person will end up in the same boat as me, or at least not be able to sustain that lifestyle.
The trick is finding that zone of comfort and sustainability. I Want to have enough money to accomplish some of the big things I dream of, but first I would like to be able to be secure in a comfortable way of living. I want to have a house, and it doesn’t mater much to me if it’s only 400 square feet. What matters to me is if I can afford to buy the materials for a new roof when this one is goes bad. Can I afford to buy a new engine when this one goes bad, and can I afford to pay my electric bill are questions that I as myself when I look at a new pair of shoes at the store, shoes I wouldn’t dare buy until I can say yes to all those questions, and be confident that I will always be able to say yes. I would rather have shelter than a pair of shoes that will only get stolen or worn out anyways. A nice car costs more to maintain and repair, a nice house is the same.
If I ever have enough money to buy a half million dollar home, then I would live in a 30k home and drive a 1-2k car, while I figure out how to use that money to make more, or accomplish my ultimate goals. My hope is that when I have published a fantasy fiction series, it will make some money that I can use to buy a house. I sure as hell can’t rent one in a sustainable way.
The reality is that you never know what is going to happen, and it is better to prepare for that unknown than live in a giant house that has a toilet that wipes for you. If I win the publishers clearing house thing, or somehow make it big with my books, or some sot of windfall comes my way: Please come shoot me and take it for yourself if I do something as foolish as buying a brand new car when mine still gets me from a to b without giving me the worry of “what if someone opens their door into it?”
Purlease people, realize that tomorrow you could have no income and not even be able to walk. It could take years for you to get any help besides $200 dollars from the state. Your friends and family might turn away from you so they can drive their new car while you try to fit your family in a studio that you can’t afford. It just doesn’t make any sense at all to me. Yeah, let us all live in mansions, so we can spend our whole lives trying to keep them clean and maintained. Lets all drive brand new cars and crush every other one, so we can all look cool and impress the ladies. I’m pretty sure now that people don’t think, the react. That is what animals do.
So people react to the advertised image of the rich guy always having fun and having sexy with hot women, and they sacrifice everything that should matter for a lie. Lies we never thought to questions, and advertising that creates a society based on debt. So you can think you’re cool, and feel like you’re superior to me and other who would rather do something more important than working for an image? Everyone has the potential to do something great, I’ll never understand why anyone would give that up for a house on the beach when they don’t even like to swim. My mom’s boss is like that. He lives on a lake in a multi-million dollar house, but the trucks his employees drive are pieces of crud. One of them turned on by itself and crashed into the building last week. What’s more important, living in a huge house or making sure your employees are safe? Well duh, I’d like to live on the lake in a house big enough for 20 so I can feel better about the fact that the only people who care about me are people who want what I have. Why do they want it? because they think that money will make them happy. Meditations, and finding people who really matter to you is what makes you happy. Giving someone advice that changes their lives makes you happy. Helping someone else be happy makes you happy.
Buying crap you don’t need gives you a rush, but once it’s gone all your left with is a feeling of loss. I’ll tell you what you lost, you lost out on a chance to be happy because someone lied and said money will make you happy. Money is a tool, and like all tools, it can be dangerous in the hands of people who don’t know how to use it. I hope someday that I will have the skill to use money to make others happy, and by extension myself. I don’t hope I will have a mansions with servants and a garage filled with cars that cost more than a house, but I hope that I will have the strength to resist foolishly wasting a tool that I need if I want to help make starvation, violence, disease, and housing indigence a forgotten chapter of our history books. It’s ok to want enough to live without those four things for yourself, but anything beyond that is just stupid, because of everything you said, and everything I’ve said. I just wanted to let you know that I agree. Sorry about my grammar and stuff, I’m too lazy to want to edit this.
Hey Paul, thanks for taking the time to comment – you win the longest comment I’ve ever received (and I read the whole thing). Lots of good points in there. I specifically try to keep my personal expenses as low as possible for a lot of the reasons you mentioned here. The main thing for me is that I need capital to be able to run my business and the less cash on hand I have to do it the more stressed out I am lol so if I pay myself less that leaves more for the business.
In any case – I wish you the best with your writing efforts and thanks again for sharing.
No, thank you Chris. I’m a reader first and foremost, and you have some good content. I hope your business does as well as I’m going to do with my writing. 😉
Awesome Paul – to your success in 2014
Stumbled on your site earlier and was reading about you flipping a site which linked to this article and the similar approach to buying a cheap house clicked with how we bought a house.
I dabble in affiliate marketing, but never do exceptionally well, SEO is my thing and make a good living from it. Not read much of your site (yet), but sounds like you are much more of a risk taker than I am, most I’ve paid for a site is around $100, (I tend to build my sites from scratch though) and since getting into online marketing I’ve never lost a penny on anything, either come out flat or in profit.
Anyway that’s not important for this comment.
In 2006 we bought our first house (yes top of the housing market in the UK pretty much) and like you had decided to err on the side of caution rather than spend as much as possible on the mortgage, just in case something went wrong. I have long term health issues, so had to take that into account. At the time in the UK self employed people could self certify a mortgage and the mortgage companies didn’t check the financial details, so we could have gone for a �1,000,000 property which would have been dumb based on what’s happened both to the world economy and my health!
We went with a modest priced house �136,000 (~$225,000) with a �36K deposit and 25yr mortgage at 3% fixed for 2 yrs (went to 4.9% variable after the fixed period) with a plan to pay it off in under 5 years. This was easily affordable and we paid off the mortgage a few years ago.
We were right to be prudent, the property (4 storey ex-guesthouse, so lots of rooms) needed renovation work which we planned to do most of over several years. I used to enjoy DIY (not as enjoyable when you have a house with over a dozen rooms and four bathrooms!), once you get started on a house the jobs you didn’t plan for start to really build up: a case of lets remove some wallpaper that’s an easy job, oh bugger the entire room needs re-plastering! A year or so in I’d messed up my back and to cut a long story short had two discs fused about 4 years ago (had spent a year stuck in bed in pain prior to the operation!).
Despite everything that went wrong I’d built up a network of sites (had about 100 then, 130+ now), so even out of action (I barely worked for 3 years) I made money from advertising etc… In a slightly different scenario of maxing out what we could afford on a mortgage (a �500,000 house for example) things could have gone horribly wrong (plenty of people made that mistake before the credit crunch), due to less advertising revenue and old SEO clients having no money (had a lot of SEO clients in the travel industry that were hit hard and completely stopped SEO services) I took a temporary dip in revenue whilst not being able to work for long periods due to my health. Paying a �500K mortgage might have been an issue, but we only had a �100K mortgage which even at 4.9% was less than �600 (~$1,000) a month.
Because we didn’t take a risk on a large mortgage we have a property with no mortgage (admittedly most of the rooms are uninhabitable), plenty of savings and a network of sites that give us a good level of living.
Like you we live well within our means, I’m a little older than you (43, wife is 39) and we don’t like the rampant consumerism in our society, don’t get why people need so much stuff or why things need replacing so quickly: fan on my laptop is playing up, I could easily buy the latest new laptop, but I’ll pull out some tools and fix it myself for free or at most the cost of a new fan.
Anyway, nice to read a similar prudent approach. All because you can, doesn’t mean you should.
David
Hey David, thanks for the comment. Yah I mean I look at money as a tool with the primary purpose of the ability to buy freedom.
The more money you generate above and beyond your living expenses the more free you can become. That being said I don’t hate on the guys and gals that want to buy Ferrari’s – more power to them. It’s just not for me at this time hah.