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.
