House Poor and Loving Life
We stretched to buy a home we could barely afford, and we wouldn’t change a thing.
My wife and I were married in the spring of 2015. After the wedding, I moved into the 3BR basement suite that she shared with her two boys at the time. We were insanely happy to start building this new chapter of life together, consumed by love, hopes, and dreams.
It was an interesting housing arrangement. The two floors over our heads were occupied by another family of four and my wife’s cousin. Vehicles numbered six, adults numbered five, children four. Because the five adults represented four different cultures, we affectionately called the place UN House. It was a fun experience, and our families shared some great memories together during the five months I lived there.
Almost immediately, however, my wife and I could see that this living situation would be challenging for our new family. Call it a first world problem, but sharing one bathroom between four people is frustrating even on the best of days. The suite was tight, the ceiling was low, rooms were dark, there were no views, and parts of the carpet smelled like cat urine. This wasn’t the dream, to put it bluntly.
Fresh out of our wedding, neither my wife or I had much in the way of savings. In fact, we had the opposite of savings — over $20,000 in debt on credit cards and an unsecured line of credit, plus $13,000 owing on one of our cars. What we did have was my old house in another city across the country. Already showing the signs of over a century of age, seven years of long-distance landlording had taken their toll on the place: my former home was in rough shape.
So it was that soon after getting married, I took a week away to clean up my old house as best I could and get it listed. With my parents pitching in to help, we repainted walls, set mouse traps, and installed new carpets. The house sold in mid-April for a disappointing figure, but at least it sold quickly. Minus the realtor’s commission and other associated costs, we pocketed around $60,000.
After paying off credit cards and my unsecured line of credit, we were left with about $40,000 in cash. For that sum, we were incredibly grateful. We were both acutely aware — and remain mindful — that many couples and singles our age are unable to set aside such an amount. Yet, when we looked at our Pacific Northwest housing market, our $40,000 looked pathetic.
So what were our options, exactly? We started having the housing discussion that so many couples have had, are having, or will have: to rent, how much to rent, to buy, or what to buy. It is primarily for couples and individuals in the throes of this same decision-making process that I want to share our experience.
Four Housing Options
Weeks of research in the spring of 2015 eventually produced the following cost estimates for four housing options:
- Scenario 1: RENT for $1000/month — stay in our basement suite indefinitely ($950 rent + $50 utilities)
- Scenario 2: RENT for $2150/month — start renting a small home or a larger portion of a home ($2000 rent + $150 utilities)
- Scenario 3: BUY for $2750/month — a townhome of about 1,800 square feet, price tag around $450,000 ($2100 mortgage + $250 strata/HOA fees + $150 property taxes + $150 utilities + $100 home insurance)
- Scenario 4: BUY for $2850/month — a large detached home with a basement suite, price tag of $700,000 ($3,100 mortgage + $300 property taxes + $250 utilities + $200 home insurance - $1000 rental income from basement suite)
- The ‘buy’ options in scenarios 3 and 4 assumed 5% down payment with a fixed rate of 2.7% and 25-year amortization.
- Down payment minimums have increased since we purchased in 2015. At the time, buyers could acquire financing with just 5% down, regardless of the total purchase price. As of 2018, borrowing laws now require buyers to put down 5% on the first $500,000 + 10% for everything above that. So as an example, a property purchased for $700,000 would require a down payment of $45,000.
- Some critics in the real estate or lending spaces might balk at my math in scenario 4, saying that rental income is no guarantee and should not be factored into the calculation of monthly housing costs. Three years into ownership, it’s been 100% reliable. I think it’s fair to factor it in.
- *Exchange rate note: at the time of writing, $700,000 CAD =$535,668 USD.
Only One Way Made Sense
We gave each of these four housing scenarios a serious look. But one by one, they failed the common sense test. Scenario 1 just wasn’t going to cut it long term in terms of space. The idea of staying in the suite as long as possible to save up a larger down payment made no sense with the local housing market exploding rapidly around us. Prices would continue to rise faster than we could possibly save. Even more concerning, I couldn’t help but wonder if we would be tempted to spend some of what we should be saving in this scenario. It would definitely be tempting to live a little larger, yet that would be disastrous in the long term.
Scenario 2 just looked like burning $25,000+/year with nothing to show for it, while again missing out on the rapid ascent of the local real estate market. No savings and no appreciation. Double trouble.
For some time we were certain that Scenario 3 was the right path. It just seemed like the wisest and most sensible route to go with a townhome purchase. We even got excited enough about one particular unit that we visited it three times and sent pictures to friends and family.
But in the end, after some wise counsel from said family members, we took another look at the cash flow math detailed above. After factoring in the rental income from a basement suite, we realized that a large home would cost us virtually the same as a townhome while giving us twice the square footage, a piece of actual land, better appreciation, and a permanent source of passive income. Once we accepted that logic, there was no turning back. Buying a detached home with a suite — Scenario 4 — would be the path for us.
Stretched to the Limit
Enter our buying limits. Remember, we had about $40,000 cash. Borrowing laws at the time required homeowners to put down a minimum of 5% of the total purchase price on a principal residence. That meant that our absolute ceiling for purchase price would be under $800,000. In addition, there were a couple of other major costs levied at purchase:
- $26,000 for nationally legislated mortgage insurance (commonly known as CMHC in Canada, PMI in the United States) for high-ratio buyers like us (anyone putting less than 20% down on a purchase). Fortunately, this cost is amortized across the entire term of the mortgage, which meant there was no need to try to cough up an additional $26,000 at the time of purchase.
- $12,000 for a local land transfer tax. Buyers in British Columbia are required to pay a percentage-based surcharge on every purchase of property. It’s an awful policy.
With these bleak numbers in hand, the house hunt was on. As it turned out, the search was shorter, sweeter, and more enjoyable than we thought it would be. By mid-August of 2015, after about two months of semi-serious looking, we found a beautiful 9-year-old home. It measured a whopping 3,600 square feet, contained a good 2BR basement suite, and was listed at $729,000. Working without realtor representation, we offered $703,000. Our offer was accepted without negotiation, and we moved in about ten days later.
An Ugly Equity Position
Here’s the scary part, and part of my purpose for writing this article. We had almost no equity in the home at all. I mean, our equity position was obscene. Here’s what it looked like:
- $703,000 purchase price
- $693,000 mortgage principal (purchase price - $35,150 down payment + $26,000 mortgage insurance)
- = 1.4% equity
That’s a nauseating percentage, but in reality the picture was actually even worse. Remember the land transfer tax of about $12,000? We still had to pay that — plus some associated costs — out of an unsecured line of credit.
Adding this unsecured LOC to our house purchase calculation, our balance sheet (excluding cars) looked something like this:
- Assets: $703,000 (market value of house)
- Liabilities: $708,000 ($693,000 on mortgage principal + $15,000 on the unsecured LOC)
We actually owed more on our house than it was worth.
Did such buyers even exist? Before we bought, I wouldn’t have thought such ratios were even possible. But like it or not, we were now proof that they did.
Going forward, we were faced with a monstrous mortgage payment of $3,100/month (that’s before property taxes, home insurance, utilities, and maintenance). I still have to chuckle as I write that number. Nine years earlier, I had bought my first home (remember, in a different real estate market) for $120,000. At the time, my mortgage payment was just under $600/month, yet that was enough to warrant a letter from my father gravely warning me of the dangers of borrowing so much money. Neither of us could imagine that just nine years later, I would borrow more than seven hundred thousand dollars and take on a payment five times larger. The magnitude of our debt is still hard to fully grasp.
Evaluating the Decision to Become House Poor
So, was the decision to become house poor the right move for us? 30 months after purchasing, a thoughtful analysis shows that it’s not even close.
First, the Cons.
Home ownership hasn’t been all roses.
Housing costs equalling approximately $4,000/month (minus $1,000/month in rental income, as we projected) hasn’t been easy. At times, it’s been downright stressful. Our two middle class salaries plus rental income have allowed us to occasionally break even or even manage the occasional slim surplus against our budgeted spending for the month. But there have been many other months where unforeseen spending put us above and beyond our means, and our account balances moved in the wrong direction. Practically speaking, we’re not saving any cash at all (although thankfully, my wife and I are both enrolled in healthy pension plans through our employers). In terms of cash in the chequing account, it’s not a great picture.
This situation also means that lots of delayed gratification is in order. We have to say no to out-of-state vacations, with the exception of visiting my family every three years for Christmas. We can’t justify an upgrade to the awful couches in the family room that my wife received as free donations a decade ago. We can’t afford to buy new bicycles for the family or put up nice art pieces on our walls. We can’t fix the small dent in my trunk that I planted by backing into a tree three years ago. And so on.
A frank admission. The examples I just listed are classic examples of first world problems, and I’m definitely not crying about them. What I am trying to describe are some of the realities of the house-poor life. Translation: we can’t have our house and spend it too.
The Pros: Why We’re Glad We Stretched to the Max
Despite these sacrifices — and the continual burden of a jaw-dropping mortgage — our house has been an enormous blessing, and choosing to become house poor was absolutely the right decision for us. Here are the main reasons why.
- Market Appreciation. Since I’ve framed this essay largely as a financial analysis, I’ll start with the numbers. In the 2.5 years since purchase, our home has appreciated by about $350,000. I don’t mind sharing this figure because we’re far from alone in this phenomenon — virtually every single homeowner in the Greater Vancouver area has enjoyed gains of similar or far greater proportions over the same time period, and property assessments are all accessible online. But steady appreciation of more than $10,000/month over 30 consecutive months serves as indisputable confirmation that we were right to get out of renting as soon as possible. No, not every market will behave like this during every window of time, and our local market can’t sustain this pace indefinitely. But in general, most real estate markets in Canada and the United States head in only one direction over sustained periods: up.
- Forced Savings. Our mountainous mortgage payment contains another silver lining: our principal shrinks by $1,800/month. That steady progress on our debt (amounting to $21,600/year) represents real dollars that will be fully realized at point of sale. Even if we were still renting our old basement suite at $1,000/month (see scenario 1), I doubt that we would be investing $1,800/month without fail, month after month. Thanks to our unrelenting mortgage payments, we now have no choice but to save. So even if point 1 was nonexistent and this market had flatlined for the last three years, we’d still be in a good spot.
- A Passive Income Stream. Any passive revenue stream is something to be thankful for, but those that offer built-in tax benefits are even better. Thanks to fantastic renters, we’ve been able to rely on this additional income from our basement suite for every month since purchase. Realistically, there may be some bumps in the road in the years ahead: temporary vacancies, needed repairs, etc. But additional revenue streams are not easy to come by — just try building a side hustle that consistently produces $1,000/month of passive income. Having one in your basement that you don’t need to think about often is a huge asset.
- Providing Housing for Others. As a by-product to the previous point, there’s a certain satisfaction in providing safe, clean, reliable shelter for renters. I don’t want to overly romanticize this point, but there’s something special in knowing that we are providing other human beings with a staple of life.
- Having a Forever Home. Financials aside, my wife and I are grateful for a beautiful home that is large enough to consistently host family and friends. This, after all, is what house and home is all about. At the outset of our house hunt three years ago, my wife and I prayed for a place that would not only build memories for our family but offer a warm space of hospitality for our community of friends and relatives. Just two and a half years in, it’s done that countless times over. We love the spaces of our home, the light, the neighbourhood, and nearby amenities. We’re settled in for the long term.
Is House Poor Right for You?
Choosing the right housing scenario is a tough process for any individual, couple, or family. Deciding to stretch into negative equity in order to make a daunting house purchase and then remain house poor indefinitely isn’t the wisest or healthiest choice for everyone. But for this family, it’s working.
The new vehicles and Hawaii vacations will have to keep waiting. But we wouldn’t change a thing.