It's easy to get in over your head when buying a home. You think you'll be okay stretching your budget to afford a slightly higher mortgage payment, only to find that that extra hundred dollars or so a month really makes a difference. And while the logical part of you knows that it costs more money to heat, cool, and maintain a larger space, it's hard to pass up that extra square footage and the comfortable lifestyle it buys you.
But what happens when reality sets in and you realize you truly can't afford the home you've chosen? At that point, you might consider downsizing to a smaller living space, and it's not a bad idea if you still want to own a home, but pay less for it. But before you rush to downsize your property, here's another option to consider: hanging onto it and using it as an extra income stream.
The upside of having more space
Owning a larger home could allow you to monetize that property, making it more affordable for yourself.
Imagine you're sitting on 3,000 square feet of living space spread across three floors. If you decide to keep that home and rent out two floors within it, you might very well generate enough income to more than cover your mortgage and maintenance costs. This especially holds true if your home is located in a popular neighborhood where the demand for rental space is high.
Of course, you'll probably need to invest some money into making those two floors standalone apartments, as each will, at the very least, need its own kitchen and full bathroom. But it's an investment that could pay off in the long run.
The same holds true if you own a larger home with a finished basement. If you were to move to a smaller, one-level home, renting it out while living in it would become next to impossible. But if you keep your original home and add a kitchen and bathroom to your basement (assuming these rooms aren't already part of that space, and assuming local zoning or HOA laws don’t prohibit you from doing so), you'll get the benefit of not having to move, enjoying a larger home, and taking in rental income on an ongoing basis.
Should you keep that larger home?
Whether it pays to downsize to a smaller space versus keep a larger home you're struggling with boils down to a number of factors. First, is there even the option to downsize but live in the same neighborhood? If not, and you want to stay put because your kids are already enrolled in the school system, or you're just plain used to the town, then keeping that home but renting out part of it could make sense.
Another question to ask yourself is whether that home is likely to appreciate in value over time. If home prices in your area have been climbing steadily, and you're able to make adjustments that allow you to rent part of it out, you can collect income that allows you to retain that home longer, and then sell it at a time when you're likely to make a killing.
Remember, too, that while downsizing can help you shave money off of your housing expenses, it can also come at a cost. For one thing, you might have to pay to store some of your belongings if you're not willing to part with them but your new home can't accommodate them. And if downsizing puts you farther away from your job, that's extra commuting expenses to contend with.
In some cases, downsizing is a good solution when your larger home becomes difficult to afford. But you should know that if you're struggling to keep up with a larger space, downsizing isn't your only option. If you're willing to make some adjustments so you're able to rent out part of that property, you could wind up with the best of both worlds -- the option to stay in the home you love, and the rental income that allows you to do so.
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