The Tuscany Decisions (Part 2)
Image sourced by Jean Carlo Emer @jeancarloemer
Good morning!
As you may recall, I got divorced in July 2007.
Tough road, you wouldn’t believe! Or maybe you would. . . But divorce was the right decision in the end.
After leaving the marital residence, abruptly I might add, I rented a house across town but on the bus route. So I could be near my three amazing children, Alice, Rita and Mike V.
The house was ‘adequate’ – with three bedrooms. One for Mike, one for Alice and Rita and one for me. And on the bus route so the children could stay over and go to school. Perfect for what we needed!
What’s more, renting gave me the opportunity to rebuild my finances and save money for Mike’s college education and a down payment on a nice two-bedroom coop apartment.
After Mike V. finished his freshman year of college, I bought the coop and moved to the other side of the county.
I downsized!
From a 1,200 square foot house to a less expensive two-bedroom coop – with 855 square feet.
Perfect for me. But right now, I live alone most of the time so I don’t need that much space.
The rent on the house was $2,160 per month plus utilities electricity and heating oil.
The #2 home heating oil to fuel the furnace cost $400 per month on average.
So, all in, the cost of renting the house was $2,560 including heating oil and excluding electricity ($2,160 plus $400).
The electricity bill for both the house and the coop was roughly the same. Although the monthly electricity bill in the coop is a $10 or $15 less every month. A little more money in my pocket.
The cost of my mortgage is $1,230 per month (fixed rate mortgage) plus the monthly maintenance or common area charges that were $1,260. So, $2,490 all in ($1,230 plus $1,260).
Since the coop monthly maintenance includes the heating oil – at $400 a month, in effect, that lowered the monthly maintenance or common area charges to $860 ($1,260 minus $400).
If we back out the $400 in heating oil and add in the mortgage and the common area charges (maintenance), the total rent equivalent cost equals $2,090 ($1,230 plus $1,260 minus $400 ).
In addition, my share of the interest expense on the Coop’s mortgage was tax-deductible and my share of the Coop’s real estate taxes was tax-deductible too, thereby reducing my after-tax cost.
With a coop (which is largely a New York State and New York City concept), the owner doesn’t own the real estate directly but purchases shares of stock in the Coop Corporation and the Coop Corporation leases the owner’s apartment (unit) to the owner under what’s called a proprietary lease.
As a result, there are two mortgages: one on the coop building and underlying land; and a second the owner takes out to purchase the coop unit. Typically, the interest on both mortgages is tax-deductible to the coop owner but tax-deductibility depends on the owner’s tax position. But be sure to consult your accountant or financial advisor.
And the interest expense on my own mortgage was tax-deductible, thereby reducing my after-tax cost of my housing.
In addition, approximately $800 in monthly mortgage payments or debt service payments was principal amortization – a reduction in the mortgage balance. So, every month I pay the debt service (mortgage payments), I reduce the outstanding loan balance and build up more equity. This is the same if you own a condominium (condo), coop or a house.
In certain circumstances, a mobile home, trailer or boat could be deemed to be a primary residence too and the interest on the mortgage could be deductible. Again, be sure to consult your accountant or financial advisor.
The principal amortization or equity buildup means that when I sell the coop, once I pay the selling costs and other transaction costs and pay off the mortgage balance, assuming the coop selling price equals my initial purchase price, I should walk away with more money than my down payment. And if my coop apartment appreciates in value over my purchase price, I walk away with more cash at closing.
Interestingly enough, the coop is a five-minute walk to the Metro North commuter rail station to New York City Grand Central Station. All in, a 50 minute commute door-to-door. Easy.
Back to the financial side of things, given the new location, I was also able to reduce my driving from approximately 12,000 miles per year to 6,500 miles per year, saving wear and tear on my car and spending on gasoline. Plus, I’m right at the edge of town, just a 0.2 mile walk to the Mexican Restaurant down the block.
I can walk pretty much anywhere in town. Trader Joe’s and McDonald’s are just one mile from my coop. Easy. And the walk helps me get my steps in. And saves gas, parking and wear and tear on the car and wear and tear on me.
My decision to downsize helped me reduce my housing costs pretax and after-tax and put more money in my pockets. And improve the quality of my housing. I like to say that I purchased ‘basic housing’ in a great town.
Which enabled me to increase my contributions to my 401(k) plan for retirement; save money on top of that; and build more wealth.
What’s more, I gained peace of mind, knowing that I had breathing room, a cash cushion and would enjoy a more comfortable retirement.
I don’t know the size of your family or the size of the house or apartment you need. Or whether you want to live in a certain school district, town or neighborhood. . . But you have choices!
Decades ago when I was staff accountant at pwc (PriceWaterhouse), one audit client had a poster of a sailboat in her cubicle. There were Christmas Lights up and down the mast. The caption read, “Christmas is where Your home Is.” I like that and clearly, I remember that poster to this day.
There’s a lot to be said for being “cash rich and house poor.”
Believe me! I’ve seen both sides of the coin. And. . .
Being cash rich is much better!
But since my children are adults and left the house, I can live more simply And live less expensively.
Even if you need a bigger house or a house in quality school district, give some thought to the obligations you take on, especially your fixed costs.
You have choices!
YES Indeed, downsizing was the Best Decision I Ever Made, #2.
How about You?
See you next week.
Arthur V.
P.S. To Save More Money Every Day – click here.
Budget and Grow Rich® – ISSN: 2992-9296
Disclaimer: OH and Please Remember, we are Not financial advisors, financial planners, attorneys or accountants and are Not providing any specific financial, tax or legal advice here. Be sure to conduct your own due diligence and consult your own professional advisors to get sound professional advice that’s specific to your financial and personal circumstances, risk tolerance, time horizon and investment goals and objectives among other key factors!
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