Should we downsize our paid-off home in search of one with a basement suite?

[mamamazuma]

My husband and I own our home outright. In Aug 2017, we purchased a new home for 💲465K cash (no financing)
Before I found the FI community, we made the mistake 🤦‍♀️ of believing primary residence is an “investment.”😖 In hindsight, I wish we would have bought a home with the potential for a 💥 basement suite💥 to offset the cost of our living expenses and generate some cash flow. 💲💲💲 Our basement entrance is central in our house and not accessible from the outside (doh!!) 🤦‍♀️ Modifying the house to add an extra external door to the basement (from what I understand) is a big job (at least 15 K) and may not permitted in our city.

A basement suite in our city could easily cover half our living expenses! We only need 25K (basic expenses) or 30K (discretionary spending).
What is the best way towards freedom?? From our perspective, our options are three fold and outlined in the POLL (see above to read or respond to poll) . Every option has a con: 1️⃣ is real estate transaction fees (usually 7% on first 100K and 3% on the remainder); 2️⃣ is both real estate transaction fees AND the cost of time (having to work longer); 3️⃣ is waiting 7-9 years until FI (we save/invest 4K a month).
Currently, we have contributed about 80K in ETFs at a discount brokerage in 🇨🇦🇨🇦🇨🇦Canada🇨🇦🇨🇦🇨🇦, with our portfolio being about 90% equities and 10% bonds.
Does anyone have opinions or input on how to navigate moving forward ? Or see any obvious blind spots ?

Frankly, here are the options we do not want to pursue: 1) We do not want to pull out a loan to buy another house for rental income. I only want to be a land-lord for having a basement suite, as this consolidates the overhead of real estate. I don't envision my lives managing other properties in which I do not live and having debt. To me, it is unnecessary risk since have a paid of home.

2) We do not want to rent the basement out in "rooms." This is because we would make significantly less money and compromise our privacy. We are also starting a family in November (I am 14 weeks pregnant) and have made enough sacrifices throughout our 20s...my husband just doesn't want room mates.
 

Thanks in advance for any input you have!

[sokoloff]

I'd stay in the residence you just bought. You're going to have way more than you might think in time-suck coming in 6 months, and you presumably like the house you bought.

If you are able to add a basement suite (permits and construction), I'd consider that the maximum to do at this point. (I'm also not the most hardcore on this site, by a long shot... ;) )

I would consider [re]financing your house and investing the loan proceeds into the same ETFs you're using for savings now (which would decrease the rate of additional savings by the amount of the new mortgage payment, but would increase the balance today and compounding).

[mamamazuma]

Thank you so much for your thoughtful reply. You are correct - we do love our house! We may consider looking into contractors to have the separate entrance added...However, we've heard nightmare stories of working with contractors...so are a bit fearful. ETFs are probably the way to go. . . Thank you!

[Kwill]

I would stay put and not stress about it too much for now. If you've only just found the site now and you already have an expensive but paid-for house and 80K in investments, then you're doing unusually well. Is that 80K in taxable or retirement accounts? Do you have any retirement savings or pension?

Rather than just asking about the house, you might be better off doing a full case study that looks at the big picture. Track your expenses for a while. Write down any debt or assets. Think about how much time you spend commuting. Then you'll be able to make a better decision about the house in time.

See here for other people's case studies and instructions on how to write one: https://forum.mrmoneymustache.com/case-studies/

[waltworks]

Wait until you have your baby and have settled into your new life, then revisit this question. Having a kid really will change everything (including where you think it's desirable to live in many cases) so stick with the ETF program for now and see what develops.

-W

[mamamazuma]

Thank you very much. It is scary to think about how much children can change things and I am grateful for the wisdom from the community to just "wait and see." ! Thank you very much for taking the time to read and respond!

[SwordGuy]

Let's assume your $15K estimate to have an external entrance to your basement is accurate.

I'm envisioning a doorway with a path leading up to it.   For $15K the path for the doorway should look something like this photo.

(In case you missed it, I think $15K for a doorway and a path to be pretty darn high...)

But, again, assuming it's accurate.

You're expecting $12,500 to $15,000 a year in rent?  And you won't have any extra property oriented expense since you're already paying the taxes, insurance, mortgage, etc. on it.     Unless you have separate utility meters your utilities will go up, though.

That's an 80% to 100% return on investment in the first year.   Damn.   That's sweet.   

For that kind of money, I would proceed with a plan to get that basement rented out.

(I would also try to find a way to get the work done less expensively.   Look into doing some of it yourself.   Youtube is your friend.  So are some handy friends.  What could you trade for their assistance?)

Every year you continue to work after your initial expenses are recouped puts you that much closer to your FI date if you invest those profits.    And, of course, with half your living expenses covered most of the time, you would only need about half the stash.





Wi

[waltworks]

Let's assume your $15K estimate to have an external entrance to your basement is accurate.

I just did this a couple of years ago (had an external entrance dug and concrete steps/retaining wall poured, built handrails myself). It's not cheap. You need to:
-Cut the foundation opening and usually reinforce the header. The crew with the big concrete saw and the engineer stamp you need to get the inspector to sign off aren't super cheap. Not DIY-able, IMO, unless you are already in the concrete cutting/foundation engineering business or something.
-Dig! There is a *tremendous* amount of dirt involved in digging 4-8' of dirt out of a stairwell+retaining wall. You will need someone with an excavator, unless you have a month or so to spend with a shovel. Again, $$$.
-Pour the retaining wall. This has to be *quite* thick to deal with hydrostatic pressure. If you live somewhere where it freezes in the winter, even thicker. Requires an engineer again. $$$
-Do the stairs ($$$) and walkway (cheap). If you are very good with concrete you could DIY these steps.
-Handrails. I did mine but I'm a professional welder. Got bids in the $2500-3000 range.

Looking at the numbers (as I said, we just did this) it cost us about $18000, with me doing the handrails. We had to go down pretty far (~8' total including space to pour the landing) and as such had a long run of stairs (I think 12?)

$15k is in the ballpark.

-W

[mamamazuma]

Thank you, waltworks! Seeing you outline the facts (and considering everything that can go wrong along the way...) it seems a better option to downsize this house in the future (maybe 3-5 years or so....) and just swallow the real estate transaction costs. I would rather find a home with an existing legal suite and save myself the risk of something going wrong during this enormous process.

Thank you again everyone for your community wisdom. I am very grateful for the time you took to respond and your insights!

[waltworks]

Oh, it's all doable. If you love your house and location, I'd think about it for sure. It was a pain, but it wasn't *that* bad - and there's almost certainly no better cashflowing investment out there.

I think the biggest question is whether you *want* people living in your basement. You will be able to hear them sometimes. You'll see them in the driveway. They'll be able to hear you at least a little bit. Some people aren't comfortable with any of that.

-W

[SwordGuy]

@waltworks ,  ah, I see now.    Thanks!   

The only basements I see in my area are those that are built into the side of a hill, so there is an exterior wall at ground level in the back.   Stupid of me not to think of a fully below-ground basement.

[Dicey]

Oh, it's all doable. If you love your house and location, I'd think about it for sure. It was a pain, but it wasn't *that* bad - and there's almost certainly no better cashflowing investment out there.

I think the biggest question is whether you *want* people living in your basement. You will be able to hear them sometimes. You'll see them in the driveway. They'll be able to hear you at least a little bit. Some people aren't comfortable with any of that.

-W

It's also most certainly less expensive than buying and selling two properties. Also, buying a new home where someone else did the conversion is full of unknowns. If you oversee the work, you can make sure to soundproof/firewall etc. properly, the way Walt did. Huge value in that.