To downsize or not to downsize?

[A_Dawson_87]

5/13/18 NOTE: Thank you all for so many amazing insights!  My hubby and I feel so grateful for advice from like-minded folks!  It seems the general consensus here lines up with our gut feeling, and we have decided to stay put unless the perfect smaller house comes available! 

Hi All!

My husband and I are weighing the decision to downsize to a smaller home and we are curious what our fellow mustachians would do.  Here are the [big picture] details:

Our current house:
-3 bedrooms and 2 bathrooms - 1750 sq. ft.
-.25 acre lot
-Mostly remodeled, but we do intend to do some more projects - the biggest being our master bathroom, which needs to be almost totally redone.
-House was built in 1951 and still has original windows, so heating/cooling is very inefficient
-No irrigation available (boo!), sprinklers are on city water
-Beautiful historic area of town
-Exteremly close to downtown
-Ideal location in terms of proximity to our community and proximity to the things we love doing
-Within our financial means, but at the top of what we would like to be spending on housing
-Equity in home: approx. $65k

The downsized home we're looking at:
-2 bedrooms and 1 bathroom - 1,100 sq. ft.
-.15 acre lot
-Not a great location, close to (but not on) a very busy/commercial street
-Neighborhood is showing signs of gentrification, but its not there yet
-Nicest home in the neighborhood
-House was built in 1915, but has been totally remodeled and restored
-No projects needed!  Move in ready.
-Well within our financial means, esp. as our mortgage would be about $100k less and utilities, etc. would all be less, too.
-Irrigation available!

Pros of Moving (from our perspective)
-Lower COL overall
-Move from 30 year mortgage to 15 year mortgage
-Reach FIRE more quickly

Cons of Moving (from our perspective):
-Smaller house means less ability to have larger groups of people over
-If required, resale will be harder with 2 bedrooms and 1 bathroom
-Worse location in terms of proximity to community and things we love (closer to hubby's work, though - maybe 10 minutes closer)
-Neighborhood may take longer than anticipated to gentrify

Life Goals:
-We have one child, but anticiapte having another in 1-2 years
-We plan to go down to one income this summer
-Cash-flow starting a business
-FIRE by 45, we are both 31 now

What would you all do if you were in our shoes?  Is the financial gain worth giving up our fantastic location?  Is the increased financial security worth a big downsize and a less desireable neighborhood?

Thanks all!  Cant wait to hear your thoughts.

[lizzzi]

My gut feeling, without analyzing it too closely, is that you should stay where you are. Your house isn't that big, location is sooooo important, and you're planning another child. If you do move into the other place, you're going to be tight if your two children aren't the same sex. Also, you're going to want another toilet somewhere, if only something minimal in the basement or whatever. If you can keep your present house on one income and with the vagaries of starting a business, I would keep it.

[elliha]

Would you if you like be able to divide one of the bedrooms in a good way for two kids? Are the bedrooms both reasonably big? If so, can you when the kids are older use the smaller one for you and let them share the master bedroom? If you like, could you squeeze in a second bathroom/half bathroom? These questions could help you decide if the smaller house is flexible enough to work for you in the longer run. I do not think it is unthinkable to have a house that size for a family but it depends on what the house is like and how well it uses its space.

[crispy]

My gut feeling, without analyzing it too closely, is that you should stay where you are. Your house isn't that big, location is sooooo important, and you're planning another child. If you do move into the other place, you're going to be tight if your two children aren't the same sex. Also, you're going to want another toilet somewhere, if only something minimal in the basement or whatever. If you can keep your present house on one income and with the vagaries of starting a business, I would keep it.

I agree with this. We downsized and are very happy with our situation, but it took us two years to find the right house (right price, location, and features). I definitely understand why you want to do it, but the house you are thinking about has way more downsides than upsides. I think you need to keep looking.

[former player]

I'm from the UK, so 1,100 sq ft seems a very decently sized house to me, although it's arrangement is not ideal for two adults with more than one kid and the fact that it's been done up already means there is probably little financial value in adjusting it to any future needs.  The things that would give me pause would be the busy street (especially with small kids) and the loss of proximity to community and things you love.

The only downsides you mention to the current house are the insulation, which can be remedied over time, and the cost.

I think you need to be clear about your priorities: you have several that might compete with each other: the single income, the second kid, the new business, FIRE in 14 years.  I'm not sure even downsizing your house is going to be the answer to all those competing interests.

[ysette9]

There is a reason they say the three most important things in real estate are location, location, and location. Almost everything else can be fixed with time, money, or a combo of the two. I think your downsize idea may be good but that particular house is not. We have bought the right house in the wrong location and after a couple of years it became clear that it was the wrong house. We are now in a gentrifying neighborhood also, so it isn’t that aspect that makes me pause, but the part you say about being further away from everything else important. Your time matters a lot and will matter still more with kids in the picture. When we finally moved closer to work and other amenities it was SUCH a big improvement.

[martyconlonontherun]

What are the taxes like? If you can stay in the large house at the same property tax range, you might want to wait out your mortgage as there is a less of a benefit of downsizing. Where my in laws live, taxes are super cheap and they have a 4500 SQ ft house paying 3 grand in taxes. I have a house half the size and a third of the value and pay 5k a year. A mcmansion is an impossible dream for me where I live since the taxes are more than the mortgage.

[nessness]

I wouldn't, for the reasons that have already been mentioned - location and lack of a third bedroom. I wouldn't necessarily discard the idea of downsizing; it just doesn't sound like this other house is a great fit for you guys.

[AMandM]

I would think about the things you are close to now that make your current location so much better. Will they remain important as you add another kid and as the kids get older, or are your needs and pastimes likely to change in a way that makes the small house's location just as good?

[Imma]

Selling, buying and moving is a very costly process. I don't think it normally pays off if you're planning on staying somewhere for less than 5-10 years (assuming a reasonably stable housing market, you can afford your current house and you're not living in a huge McMansion). This is something to keep in mind when you're buying a property and you're planning to grow your family. It's why we bought a modest 3 - bedroom house as a young couple instead of a more fancy, but smaller apartment for the same price.

1100 square foot sounds ok for a family home (in my country, that would be about average) but the two-bedroom setup doesn't sound ideal. In here, you would normally find 3/4 bedrooms in a house of that size. Unless you can very easily split one of the bedrooms in two, without having to destroy any of the recent renovations, or can add an annexe when your family grows (depending on local regulations and the lay-out of your home) I don't think the smaller home would be ideal for a family, especially when your kids get older. With young children, I'd also prefer the home on the larger lot and the nicer neighbourhood. That way they can safely play outside with their neighbourhood friends on your property. We took a risk buying a property in an area that used to be quite rough, but we don't have kids yet. I'm not sure if I would have taken that risk with kids. What if the area doesn't improve as much as you hoped it would? What are the schools there like?

Our house is from the 1940s and there are also some projects left to do, but we've been able to insulate it quite well. We live in a colder climate and we took down some trees that blocked the sun, which really increased the temperature at home. My neighbours installed very large windows on the south side to get the heat in. If you're in a warmer climate, you could maybe do the opposite to make your home naturally cooler.

Of course it's hard to say anything for certain without knowing the exact numbers you're working with. If the difference between the two is HUGE in financial terms (and it's up to you what 'huge' is) it might be worth the inconvience of a smaller home or possibly moving again in a few years. 

[Laura33]

The way you make money buying a home is to buy the worst home in the best neighborhood and fix it up.  You are talking about buying the best house in a worse neighborhood, and crossing your fingers that it meets your needs and the neighborhood catches up. 

If you were currently renting and weren’t good at DIY, the “new” house might be a reasonable choice.  But if you already love your neighborhood and are only changing for the money, you won’t save nearly as much as you think you will given sales commissions, closing costs, and moving costs, and you will likely end up resenting the loss of your neighborhood and third bedroom to boot, because now you have grown accustomed to having those things.  If you are really looking to save/make money by moving, go look for that “worst house” and dedicate your efforts to fixing it up over time.

[skibum]

I would also really be worried about a 1915 house in a tired neighbourhood having been 'completely restored', ie probably a flip. A friend of mine is a contractor who has started to specialize in fixing flipper's terrible cheap renovations. You have no idea what corners they cut to make a solid profit on your house. Things that look terrific when you are just walking through in the 10 mins it takes to see a property can become more obvious flaws when you move in. It could end up being much more expensive than you anticipate.