Tame your housing costs to ensure a safe pretirement

How do you bring housing costs under control?

tame-housing-costsI realize looking back on my more than 5o posts so far that many of them are about or related to real estate. That shouldn’t be a surprise, I suppose, since housing costs will be what drags you back into the working world if you’re not careful.

Whether you rent or own your place, housing is likely eating up a good chunk of your monthly budget. The traditional rule of thumb for a mortgage, for example, is around a third of your income. They used to say 25% for renters, but I doubt that’s very realistic these days.

Even worse, as you head into a lower-income, but much happier, pretirement lifestyle, a surprise increase in your housing costs could crush your newly-found freedom.

I talked about this issue a bit in the old Pretired.org classic “Pop your own housing bubble“, but that was mainly about bringing your housing costs down in general, not as much about ensuring you keep control over expensive surprises.

There are a few common ways your housing costs could explode on you:

  • Rent increase
  • Interest rate increase if you have an adjustable rate mortgage
  • Property tax increase
  • Assessment or increase in HOA fees if you’re in a condo
  • Sudden need to upgrade
  • Remodeling or repairs
  • Spike in utility costs

Obviously your housing costs are going to rise over the years if for no other reason than inflation and maintenance. The trick is to bring them under control so they’re not a worry. And that can mean some tough decisions as you prepare to leave the working world. (Or in my case, after.)

Let’s run through a few approaches to keeping your housing costs under control. If you have some additional thoughts to share, be sure to add them in the comments.

Buy a home

There are a lot of advantages to renting. Particularly if you’re young and working in an expensive area of the country, buying can be a big waste of money. However, if you’re beginning to look toward pretirement and are still renting, it can be worth considering a purchase.

For young people working in expensive cities, one idea is to buy a home where you think you eventually want to settle down. Keep that place rented while you’re working. When you’re ready to leave the corporate world, boot your renters and move into a hopefully paid-off house! It’s a great alternative to buying in an overpriced city. If you think you’d like to pretire to a vacation-oriented community, that’s an even better reason to buy-in early if you can.

In general, however, and especially for older folks, deciding to buy and reaching mortgage-freedom as soon as possible will lower your monthly costs, dramatically bringing pretirement that much closer. And more importantly you’ll remove the risks of rent increases and evictions so you don’t need to worry about suddenly finding more income.

One other advantage to buying is that an owned home can be rented if needed. That could take the form of renting a spare room or simply living in an apartment or with family while someone else pays you to live in your house. You may not ever want to make that move, but it’s nice to know it’s there if you need it. In our case, we have considered living overseas for awhile at some point. The rent from our home here would easily cover our rent nearly anywhere else in the world and in some areas would cover our entire living expenses.

Control rent increases

If you’ve decided to remain a renter, there are still some ways to keep rent increases somewhat at bay. Now the first thing flashing through everyone’s mind is to sign a long-term lease. That can protect you to some extent, but it has some obvious downsides (although I burned two landlords back in my renting days so being locked into a lease isn’t as scary as you might think — it’s mostly there to protect the renter).

But there are some other options available to you. If possible, it can be worth finding a city with some rent controls in place. That will at least put you in a situation of gradual rent increases, vs. steep, sudden increases.

Additionally, I’d recommend looking for a landlord that isn’t part of a big rental management firm. These firms are incented to increase rents year after year and to keep up with the market. If someone moves out due to a rental increase, they actually are fine with it as they can go in and fix all the stuff you’ve been complaining about and then rent it for more money. In contrast, individuals who are renting out a spare home independently are often terrified of losing a good, reliable renter. It’s not unusual to find people who have been renting from the same people for decades with no rent increases. In addition, an independent landlord is very unlikely to pursue legal remedies if you walk away from your lease.

But all of that said, generally speaking I find renting a greater risk for a safe pretirement than buying.

Pay off your mortgage

Now obviously if you have a passive income source that covers your mortgage payment, you could say your housing costs are already under control. For example, if you’re one of those investing ninjas who keeps your home leveraged at a low interest rate so you can make a little extra margin in the market, you could argue you’re under control already. Unless, of course, your income source takes a hit. Say you’re a growth investor who has been averaging 6% in the market and have your house on a 30-year mortgage at 3%. Good for you! But, say we hit a big market downturn. Say it happens after your working career has ended. In effect your housing costs just shot upward. This is why I advocate paying off a mortgage, especially for anyone over 40. Getting rid of your mortgage just takes that risk off the table. Should you wish to remain leveraged to keep your pretirement fund growing as quickly as possible, I still recommend paying your mortgage down to a controlled amount, say $100,000 or so. This will help limit disaster if we hit an economic rough patch.

For some thoughts on how to pay off your mortgage quickly, see my old post on How to get rid of your mortgage.

Condo owners – watch out

I’ve never owned a condo so I don’t consider myself an expert in this area. That said, I have heard many (many!) horror stories over the years. Enough to where I think I have to add a few thoughts about condos here.

A quick note, first, however. Despite these unique risks of condos, they in some ways pale compared to the risks of owning a single family home — particularly in repairs and improvements. For every sudden $30,000 assessment there are 10 stories of surprise roof replacements. In return the smaller size and limited things to remodel have a natural built-in cost control component.

So as we all know, the two biggest surprises (if there are any others, let me know) to come along related to condos are increases in monthly dues and surprise assessments. I don’t know of any magical ways to avoid these once they occur, but by doing your homework before you buy, you can avoid some of these. I don’t think it makes a lot of sense to buy into one condo over another because the HOA fees are a bit lower. Low fees could mean the condo isn’t keeping up with maintenance which could in turn trigger an assessment. Look for reasonable, mid-range fees and a very well-maintained building. Most condo buyers only have their own unit inspected, but I’d see if I could get my home inspector to walk around the property a bit and look for potential big problems. Failing siding, decks or windows or just a general look of disrepair.

Remember that with real estate, what seems cheap can be very expensive! Buy quality, do your homework and you’ll be fine. Oh, and you may want to maintain a slightly larger emergency fund just in case.

Property taxes – ugh

Here in Washington state, we have an odd taxing structure. It’s a super screwed-up approach to taxation that keeps placing us on top of lists of most regressively taxed states, despite our being one of the most liberal states. This is because we stupidly have no income tax. Since our blissful liberal population wants to take care of its people and infrastructure, it forces governments to lean heavily on the only tax mechanisms available to them: sales taxes and property taxes (and fees such as car licensing and tolls, but that’s a minor issue). Anyway, the point of this is that not only are our property taxes super high, they are also continually going up. My half of our monthly property taxes is $220 — that is by far my largest monthly expense!

As long as I stay living here, my options for controlling this expense are fairly limited — thank goodness I don’t have a mortgage payment to make every month on top of that! I could challenge my assessed property value but that would have a tiny impact even if I won. No, unfortunately my best bet is to move. To a cheaper property and potentially to a place without such a high property tax. If we decide not to move, then I need to do some rough math on how much this expense is likely to grow (apply historical percentage increases forward, for example) and make sure my pretirement plan accounts for that.

Buy the right house for your needs

In Pop your own housing bubble, I wrote about how important it is to think about what you NEED vs. what you can afford. But beyond simply lowering your housing costs, it’s important to think about what life changes you might experience so you buy something that fits those needs. There are a few things that can happen in life that could drive a surprise expense. The most obvious, of course, is children. If you’re a pretirement over-achiever and put off having kids until you were financially independent, my hat is off to you. But you could end up rushing back to the warm embrace of a corporate job if you forgot to buy a home that was kid-ready. Even though your career was “ended” you might find yourself in need of a house that costs $100,000 more than what you’ve got today. Another, not as happy, example is thinking about aging. My inadvertent house flip had a major flaw: 20+ steps to the front door from where you park. Living pretired in a house like that could leave you in major trouble should age or an accident leave you unable to get to your own front door without help. Or the issue could simply be one of distance from work or the grocery store. Think about these issues early so you don’t get caught.

Remodeling, repairs and other risks

Fixing up houses is an addiction. It’s an addiction I have struggled with most of my adult life. I wish I could say I’m a recovering remodeler, but unfortunately my basement tells a different story. So I know very well that houses are often nothing more than rickety boxes you fill with your life savings. So what can you do?

First of all, try to buy something that doesn’t need a lot of work — especially if you’re 40 or older. Save the big mistakes for the young people!

Next, do fix things that need fixing — and fix them early and do it right. The clearest example I can think of is your roof. Before you quit your job for good, maybe you go ahead and spend the money on the roof replacement you’ve been putting off. Spring for a little higher quality and you might not ever need to touch it again.

Similarly with “nice-to-haves” — an updated kitchen, say — take care of these projects before you move into pretirement. You’ll want to live for a long time without an expensive project, so get it done early and do it right so you don’t have to come back to it later.

Bottom line: make a list of these potential timebombs early and attack them one-by-one before you pretire so you’re not caught scrambling later on.

Spend money to get utility costs under control early

I hate telling you to spend money, but utility costs are another area that can bite you if you’re not careful. If you lived through the 1970s like I did, you know what an energy shock feels like. We North Americans tend to get pretty complacent about energy when it’s cheap, like it is today. But regardless of when you think the next big surprise will happen, I think we can all agree on one thing: it will happen rapidly.

The thing about energy is that it’s such a commodity that when a ripple goes through the system, the speculators inevitably rush in to snag their share of the profit. So you see sudden, shocking spikes in cost. Should we have a sudden water crisis, the impact could be even more devastating. Those of you living areas of the country that are susceptible to drought or communities that live near where they’re poisoning the water sources by fracking really need to watch out for this.

If you’re still working, this is an issue, but not necessarily a life-altering one. If you’re pretired and need to keep expenses under tight control, this could be devastating. Your approach to controlling your utility costs will vary a lot by area of the country and type of house. But here are a few ideas to think about:

  • Drop your electricity use to the bare minimum. Swap out all light bulbs for LEDs, use a clothesline instead of a dryer, be very careful about leaving anything turned on unnecessarily. You can use a Kill-a-Watt device to measure the electrical usage of individual appliances and pinpoint where you can save. You might even find that upgrading your refrigerator or other appliance could make financial sense.
  • Consider home power generation. I’m dying to do this, but since we may not be staying here long-term, I’m holding off for now. The price of solar panels has been dropping rapidly and it makes a lot of sense to install your own panels now. If you wait a couple years longer, it may be idiotic to not do this (assuming your house gets some sun). Small wind is another great way to generate power at home. The two approaches together work quite well as wind tends to kick up when the sun isn’t shining.
  • Manage your heating and cooling costs tightly. We upgraded our furnace to natural gas (over the original 50-year old oil furnace) a couple years ago. I estimated it’d take around three years to break even, but more importantly to me was that the ongoing cost was lower and the added efficiency would help us avoid sudden expenses. We also have portable electric heaters that can be placed in bedrooms for an added boost or as a substitute should natural gas skyrocket.
  • Manage your water smartly. Very similar to electricity, managing your water usage tightly so you can get by on the bare minimum could be essential if water rates skyrocket. Showers and toilets are probably the first places to look.
    I also like the idea of storing water on-site. You condo people are kinda screwed, but you should at least have some emergency storage containers available. For those of you living in single family homes, though, installing some cisterns on-site can be pretty smart. I’ll only do this if I decide we’re definitely staying here, but it can make some smart sense, especially if you garden. I really like the idea of having enough water to get us through the summer, say 300 gallons or so. It’d be perfect for watering your garden or for emergencies. But in times of water rate spikes, you could even use this water for flushing toilets and cleaning if needed.

Well, that’s a pretty long list of things to think about already. I’m sure there are many other ways to control housing  costs that I didn’t mention here. Just remember, housing is typically the largest expense in your life — bring it under control to ensure that once you’ve pretired you can stay pretired.

Let me know what you think are the most important ways to bring your housing costs under control in the comments!

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32 Thoughts on “Tame your housing costs to ensure a safe pretirement

  1. I’m still renting and rent has been increasing every year…the only way I can keep it down is to try and ask for a reduction…I get a few dollars off maybe. I’m looking into buying a co-op (similar to a condo) because houses are very expensive here and I think I might be staying put for a while so buying might make more sense than renting. As for your property taxes, here in NY, there is a process to grieve your taxes to get a property tax reduction…do they have that in Washington?
    Andrew@LivingRichCheaply recently posted…The Pros and Cons of Working in the Public SectorMy Profile

    • Pretired Nick on August 26, 2013 at 6:29 am said:

      Yeah, we do have a process for challenging your property taxes, but it’s pretty unlikely you’ll beat them and typically they’ll come back and raise them again the following year. I would definitely challenge it if it takes a sudden jump, but typically it’s relatively gradual.

  2. Property taxes man! They kill me every year.

    A/C in the summer makes my electric bill nightmare inducing.

    I think your most powerful suggestion, though, is to not buy too much house. Every other expense spins off of that, so the smaller the house, the smaller everything else is.
    No Waste recently posted…Waste Of The WeekMy Profile

    • Pretired Nick on August 26, 2013 at 6:58 am said:

      Great point, No Waste! The size and initial expense of the house drives so many other costs that it can really sneak up on you! Just square footage alone carries some additional cost in heating and cooling!
      If your AC bill is crushing you, solar might make even more sense for you as the need rises with the output. Even just a small solar deployment could cover the cost of your energy spikes leaving you in great shape over the years.

  3. We definitely want our next house to be affordable so that we can pay it off before we are 30. I hate expenses and want them to be gone!
    Michelle recently posted…Is A House Right For You?My Profile

    • Pretired Nick on August 26, 2013 at 8:02 am said:

      That’s great, Michelle! Just make sure you don’t go too cheap to where you’ll need an upgrade later when you can least afford it!

  4. Great post. We still owe money on our primary home, but we’re paying it down.
    Is your property tax that high? It’s not much more than our.
    Our home is a bit small right now, but we don’t want to move anymore. If Mrs. RB40 quits her job, then we’ll probably reevaluate again, but we’re pretty happy right now.
    retirebyforty recently posted…Is Retirement Saving a Sprint or a Marathon?My Profile

    • Pretired Nick on August 26, 2013 at 8:50 am said:

      Thanks, Joe! Yeah, our property taxes in Washington are insane. Of course we have no income tax so working class people end up paying much more than their fair share here.
      I think you have a pretty good set-up right now. I almost think your place SHOULD feel a little bit small, otherwise you probably would have too much house, like us!

  5. Own, don’t move and don’t buy more than what you actually need. Almost everything else is gravy and a want rather than a need.
    Free Money Minute recently posted…What is a 529 Plan?My Profile

    • Pretired Nick on August 26, 2013 at 12:12 pm said:

      Very true! But it does take some planning and forethought to ensure you don’t shift course mid-stream and cause an unexpected surprise.

  6. Great points Nick! While I still plan to rent for a while (we have no idea where we will end up), it is important to make sure rent prices don’t increase to a crazy amount. We currently don’t have a lease, and we didn’t want one as we weren’t planning on staying here for a year anyway. It is something to consider when we move, though. We have been trying to practice managing the electric usage in the meantime – unplugging appliances, turning lights off, etc. Property taxes are absurdly high here as well – very much part of the reason my parents moved. I don’t see us being able to afford a house here.
    E.M. recently posted…Two Sides: Car Accident EditionMy Profile

    • Pretired Nick on August 26, 2013 at 6:53 pm said:

      EM, it’s an awesome luxury that you can choose where to live. Hopefully you can find a place that will help you keep the costs down permanently!

  7. I love the idea of purchasing a house you’ll want to live in, in the future, and renting it out. What a great way to control your out-of-pocket costs and still be working toward your end goals.
    Average Joe recently posted…Winning the Money Management War – Stacking Benjamins #18My Profile

    • Pretired Nick on August 26, 2013 at 7:01 pm said:

      Yeah, or at least lock in to the “right” place before you leave full-time work. But the earlier you can lock in to the right place, the farther ahead you’ll be!

  8. I think a big one is just being aware of all the things you use that require electricity. I’m always that person to turn off lights when I’m not in the room, unplug appliances when I’m not using them, and trying not to turn the heat on until it’s absolutely necessary.
    Mo’ Money Mo’ Houses recently posted…It’s a New Start for Mo’ Money Mo’ Houses!My Profile

    • Pretired Nick on August 26, 2013 at 7:37 pm said:

      So true, but also, working early-on actively to lower your home’s consumption overall (updating various appliances, investing in LEDs, etc) is great to do while your career is still ongoing.

  9. PTNick!!! This a super thorough and valuable post. We live in a townhouse. We have never had surprise assessments. Thank goodness! But the maintenance fees are getting on my nerves. They go up by $10/yr. We have lived here for 10 years, so have seen our fees go up by $100. That may not sound like much, but it feels like it. On the other hand, those fees cover quite a bit including trash, water, landscaping, the exterior of the home and more.

    Paying off our home will be one of the greatest financial events of our lives. Then perhaps the monthly fees will not seem so irritating. Have a delicious Tuesday!!!
    cj recently posted…Who’s Afraid of the Urgent Doc?My Profile

    • Pretired Nick on August 26, 2013 at 7:43 pm said:

      Believe me, you are better off with gradually increasing maintenance fees than getting a big surprise some day.
      Can’t wait to hear when you have that thing paid off! It used to be unimaginable to ever have a house paid for. Now, it’s within reach for nearly anyone!

  10. I find it interesting that you dislike your tax structure. It sounds similar to what we have in FL, and I find it jives very well with the lifestyle of a high saver. I think of it as “choose your own adventure” taxation. If we want to pay more in taxes, we would buy a bigger house, more cars, perhaps a boat. If we want to pay less, we simply consume less.
    Mrs PoP recently posted…He Said She Said – The Banana Thief!My Profile

    • Pretired Nick on August 27, 2013 at 6:49 am said:

      People often have that misperception, but in reality, I’d have been paying less in real dollars if I were working (because my share of the state’s tax needs would be much less if based on an income, ie, if the wealthy paid their share). And I’d be pay much, much less now while I have a very low income so it’s a terrible tax structure for the home-owning pretired.
      But my main reason for hating it is that it’s unfair. People making $50,000 and less have no choice but to pay high sales taxes and if they own a home it’s even worse. The very wealthy who live off investments buy their boats, etc. out of state (usually in Oregon where they have no sales tax) and actually pay hardly any tax at all to support our people.

  11. I’d very much prefer to be a home owner, but we currently rent and will be doing so for the foreseeable future (darn you crazy California home prices!). I just want to say you bring up an excellent point on avoiding corporate rental management firms. You’re pretty much a $ sign to them. You can actually develop a relationship with independent landlords and, while it’s no guarantee of stable rent terms, you do stand a much better chance. We are pretty fortunate at the moment in that we live at a well kept apartment complex that’s owned by an individual. He doesn’t manage it himself, but it definitely is not bound by corporate rules. We’re on our 3rd yearly lease thus far and there’s been no increases (although I’m not sure we’ll be so fortunate this coming renewal).
    Mr. Utopia @ Personal Finance Utopia recently posted…Are Paid Vacations Really a Job Benefit?My Profile

    • Pretired Nick on August 27, 2013 at 8:53 am said:

      You might be a good candidate for what I was mentioning in the post, Mr. Utopia: You could look at buying elsewhere while you remain working and renting in California. When the time comes, you can move right into your owned home.
      That’s pretty good to go three cycles with no rental increase. Hopefully you can get lucky one more time!

  12. We’re still renting, though we’d absolutely like to own once we feel like we can settle in a particular location. The long-term benefits of owning a home can be huge, though the financial hit if you need to move soon after purchasing should make you wary if you aren’t really settled.

    I’m going to slightly disagree with your point about a potential market downturn being a reason to pay off your mortgage early. If you’re serious about pretirement, your withdrawal rate should already have factored in the reality of market downturns, and especially the possibility of a big downturn early on. If that’s the case, it shouldn’t affect your ability to pay off your mortgage, and the long-term return on your investments should still outpace the return on your mortgage. If on the other hand you haven’t factored those downturns into your withdrawal rate, then you have different issues altogether and maybe pretirement isn’t for you.

    • Pretired Nick on August 28, 2013 at 6:49 am said:

      Hi Matt!
      Yeah, it’s a great point and for sure people need to factor in a big downturn before they make the jump. Mathematically it’s almost the same in some ways: You either “invested” in getting rid of your mortgage or you invested elsewhere to pay for that mortgage. On the other hand, what age you are when the downturn occurred and how much you had left to pay is very relevant to the planning. I’d hate to see people survive (yay!) a big downturn by controlling their withdrawal rate but still have 15 years left to pay on their mortgage. Even though they’d theoretically be fine, yikes! Both ways can work, but lowering your overhead is the more conservative path and I think will keep more people out of trouble.

  13. Great write up. I was lucky so far. Well, besides being still under water with my condo value vs. mortgage, our dues have been same for 5 years (should I expect increase soon?) But other than that I think our home is OK. Yet the mortgage is eating up a lot of our monthly money. I am looking for ways how to solve this problem – either a government program (since it is an FHA loan I might be eligible or any other solution how to lower my monthly payments, refinancing won’t work anymore since I have done that and currently my rate is 3.5% and I doubt I will be able to get it lower.).
    Dividend investing Martin recently posted…New trade – Realty Income (O) – covered call #2My Profile

    • Pretired Nick on August 28, 2013 at 6:59 pm said:

      Yeah, you’re in a tough spot. Only thing is if you’re “underwater”, it’s essentially meaningless unless you want to move. Pretty much all you can do is wait…

  14. What a thorough post, Nick. We have drastically decreased our electricity bill. We have central A/C (must-have in Houston!), but we keep it on 82 during the day and use a fan downstairs. It stays very comfortable. If you go upstairs after noon, you may pass out. In the winter we use space heaters downstairs while we work and only turn on the heat at night. We have reduced our most expensive months (Nov – Feb and June – Aug) from bills that sometimes exceeded $200 to about $70. Oh, we also got rid of our TV which saves us money. CJ used to have it on and muted all day while he practiced guitar, so we do think this helped.

    As far as home renovations, we are allergic to them for financial reasons. We have lived here 10 years and the walls are still beige. We just want to travel more than we want hardwood floors. Hopefully our mortgage will be paid off before we’re 50 and then we can do the bare-bones and rent this baby. Then we’re Hoombahs Around the World. Thanks so much for getting me all stoked up about it!

    • Pretired Nick on August 28, 2013 at 7:08 pm said:

      Hi Tammy!
      For sure in hot climates, AC is one of the biggest costs! Nice job getting rid of the TV!
      I like how you put that: travel over remodeling! I feel the same way but seems like I’m always remodeling!

  15. Hi Nick,
    This is a really comprehensive post. My brain knows that renting or keeping the mortgage around may be a better move financially, but our risk tolerance nudged us towards paying off the mortgage early. I am more comfortable with the prospect of saving at a high enough clip now to overcome the potential opportunity costs involved with paying off the mortgage, than with the prospect of higher reward/higher risk of investing all that money instead, and hopefully paying off the mortgage later.
    Done by Forty recently posted…Why We Negotiate, Part IMy Profile

    • Pretired Nick on August 29, 2013 at 8:21 am said:

      Hi DBF! That’s exactly how I feel about it. Having that mortgage off your back gives you options, keeping it has its benefits, but it can be limiting. If I was 30 I might feel differently, but in my mid-40s now, I don’t want that mortgage dragging me down.

  16. We bought the biggest house on the block that was the most expensive. The reason for that is that it is large enough to rent the entire downstairs out as a separate unit. It is actually cheaper to live in this house due to the rental income as opposed to a free standing home.
    Charles recently posted…Fighting The Urge To Waste Money By Tying My Money Up In InvestmentsMy Profile

    • Pretired Nick on August 29, 2013 at 5:46 pm said:

      That’s a great strategy, Charles! I was planning to do that in my first house but when it came down to it, I couldn’t give up my privacy. Essentially it’s the same as buying a multiplex and living in one unit. Super smart!

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