What's the right size home for you? The Rightsizing Equation

There is a significant trend toward smaller homes amongst both empty nesters and young families.    The generally used term is called downsizing--but I prefer “rightsizing.”   I’ve always been a big proponent of efficiency – sometimes to the chagrin of my wife (why cook in early December when you can make at least 7 different meals using leftover turkey?).    Our family recently moved from a 3500’ McMansion (which would be considered on the small side considering the trend of the last 20 years) to a smaller cape which we renovated  -- and  the space feels larger and better utilized. (For some great examples of this, read about architect Sarah Susanka’s concept of the “not so big house” on her website  www.notsobighouse.com.)

There are a number of hard facts that make rightsizing a compelling argument.  Empty nesters moving to a smaller home can realize the economic benefits of lower mortgage, utility, tax and maintenance expenses while at the same time not feeling enslaved to the care of feeding of a large home.    Just as importantly it improves quality of life.   Not to mention the fact that equity from the sale of the larger home can be deployed to provide incremental investment income.

For younger families, there has been a general shift in sensibilities.   Bigger is not necessarily better.    A well-appointed, efficient home that is green and consumes fewer resources are the priorities.  Just as with the older set, the young families want a home that is a component of their lives but doesn’t rule their lives.  Along with this is the renewed interest in community, common spaces and neighborhoods where people of all ages have opportunities to interact.

In this post, I wanted to explore the hard numbers around the generally accepted notion that rightsizing for empty nesters saves money.   After some consideration I decided that there are really two independent scenarios to look at:  1) the cost reduction model and 2) the investment income model.

In the cost reduction model, I looked at a comparison between the estimated costs of ownership of the 2054 sq foot “Currier” model home at our Skyview project versus a larger, 5500 sq foot home in the same area.  We see this scenario playing out each day as buyers look to move from homes within Skyview’s town of Pelham, from the Boston area, or from other affluent communities in New Hampshire.    I assumed that all other variables were consistent between the two homes and did a rough estimate of utility cost based on square footage.  The net savings by rightsizing is $33,000 per year.  

  

In the second scenario, I assumed that equity in the larger home  could be invested to produce investment income.    In this example, I assumed $400,000 of equity in the home based on the current market value less the current mortgage balance.   For capital gains tax, I assumed a 25% long term capital gains tax rate X the difference between the sales price and original purchase price.  After subtracting  sales commission and down payment for the new Currier home, more than $290,000 is left for investment.   At a 7% annual return, that equates to over $20,000 in annual investment income.   

Every situation is different.   If you’d like a copy of this spreadsheet, just send  me a quick email or connect through our Skyview website.   Regardless of your particular circumstances, rightsizing your home can make a lot sense both economically and in your quality of life.