Do you know how many dollars your spare room is costing you?

by Millionaire Mommy Next Door on May 12, 2010

in Million Dollar Recipes,Real Estate,Save Money (frugal ideas)

Do you have a guest room but few friends? (sorry.) A formal dining room that looks pretty because it rarely sees a crumb? A formal living room that only gets walked through on the way to your home’s hub: the kitchen and family room? Spare rooms… you dust them, vacuum them, furnish them, paint them, fuss over them… but rarely do you LIVE in them.

How many dollars does a spare room cost?

I pondered this question during our walk to our neighborhood park today. Our condo is surrounded by large suburban homes. Each home statistically has an average of 2.5 people living in it. I suppose the poor little 0.5 member is missing a few body parts. Probably from all that excess dusting. I digress. I look at these gigantic homes and wonder how many of their rooms get LIVED in on a daily basis versus how many sit pretty all day long but never see any true love.

So being the environmentally sensitive money gal that I am, I crunched some numbers today to see if I might encourage a few folks to join me in downsizing to a just-the-right-size home.

For those of you that don’t enjoy numbers as much as I do, I’ll get to the punchline pronto:

In my neighborhood, a typical 12′ x 12′ spare room (guest room, formal dining room, whatever) could cost about $350,000 EACH over the course of a 30 year mortgage!

Mommy’s Million Dollar Recipe: Dusty Room Dump-lings

Downsize your home by 432 square feet (three 12′x12′ rooms)
Which will reduce your monthly housing expenses by $530 a month
And invest your monthly savings into a diversified investment portfolio
Yield: Over one million dollars ($1,000,000) in 30 years!

For my fellow number nerds, here’s the assumptions I used for my calculations:

12′ x 12′ = 144 square foot spare room
Typical cost of housing per square foot (in my location) = $150
= $21,600 cost per spare room
@ 5.5% mortgage interest rate for 30 year fixed
= $122.64 month / room in principal and interest cost
+ $18 / month / room in property taxes (1% of value annually)
+ $9 / month / room in homeowner’s insurance (0.5% of value annually)
+ $27 / month / room in allowance for periodic maintenance, repairs, remodeling (1.5% of value annually)
= $176.64 / month / room…
…NOT including extra utility expense or furnishings
+ lost opportunity cost of $176.64 savings invested at 10% long-term compounding average annual return for 30 years (mortgage term)
= $348,692 TOTAL PER SPARE ROOM (x 3 rooms = $1,046,076)

So what do you think? Is this million dollar recipe worth dumping a spare room or three?

{ 24 comments… read them below or add one }

Chad May 13, 2010 at 12:16 pm

I do find this amusing. My friends, a couple who are both accountants, live in a very expensive city and in a nice small normal house. They have one kid (own bedroom) and probably aren’t having anymore. The one says, “I have made a New Year’s resolution to use the 2nd floor room, but it just isn’t happening.” The second floor room is the length of the small house and is a nice family room with the normal stuff.

About 2 hours later the other half of the couple says, “In a couple years we either need to add on or knock it down and rebuild. This house isn’t big enough.” Then later says, “I don’t know why my parents bought that big house.”

I was dumbfounded, as both are frugal (coupons, pay cash for a used car, etc.) and intelligent compared to most people, but they are still caught in the housing size competition and they don’t even know it.

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Deb May 14, 2010 at 2:05 am

Husband and I downsized from 1700 sq feet to 900 sq feet. One very small spare room is kept as a guest room for visiting friends & relatives (we live on nice acreage in the country, they like to come for some R&R). We are renovating a small outbuilding to be a shared office (his home business/my telecomming job = tax write offs).

We’ve already saved soooo much money by making the change. Monthly utilities are on average $85 less per month, property taxes are $400 less annually. Insurances are less, and no income tax in this state. Sales tax is irrelevant as we are nonconsumers – and a sales tax free state is a 30 minute drive.

I can’t run your calculations (MM, you run circles around me mathematically and I don’t have the right calculator handy) – but I can only imagine the amount of money this lifestyle change will mean to us over the long term! Not too mention the other rewards – limited space means devout nonconsumerism, one level home means less risk of a fall, small home means less time to clean and maintain. It’s all been good for us!

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Patrick May 14, 2010 at 10:29 am

The trouble with the $350k number is that it’s $350k in 30 years, which is not the same as $350k today.

I prefer to look at the value of a cash flow in terms of the investment required to produce that cash flow using the 4% rule (though that rule is not without its problems). Using this rule, your $176/mth comes out to $53k rather than $350k.

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Michael Harr @ TodayForward May 14, 2010 at 3:55 pm

I love these numbers! Housing is the great black hole of budgeting, and having spare rooms….ouch! Nice post.

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Cee May 16, 2010 at 12:49 pm

These kind of blanket statements are often wrong. This is good advice ONLY for people who are deliberately downsizing or for those who won’t ever need to move. Why? Ask any realtor. A 3 bedroom, 2 bath house/condo is almost always easier (yes, this too depends on the situation!) to sell than smaller or larger houses. It’s not that it’s bad idea, it’s just that you shoulder consider all factors. For example, please note that most folks in the USA move on average every five years, historically(see census records.) .

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Michael Harr @ TodayForward May 16, 2010 at 1:42 pm

@Cee – I think the point of the article is that spare rooms cost money that could potentially be put to better use. The main principle is to buy what is needed instead of more than is needed. Imagine if more people owned smaller homes. Would that be a bad thing? Wouldn’t it free up more money to put towards retirement, college, or insurance – all areas that, on average, are sorely underfunded? While ease of selling is a consideration, so too are other personal financial goals.

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Chris May 16, 2010 at 4:54 pm

While this generally makes sense if you aren’t going to need a larger home later, you should always consider the transaction costs of buying and selling real estate. I haven’t run the numbers but selling a house usually involves some money to fix up the current house, realtor fees, money to adapt the new house to your needs, closing costs on the new house, and moving costs. You may also find yourself having to balance two homes for awhile which gets very expensive. So while this is theoretically a great way to save money, you have to think of the details involved in the transactions. But certainly anyone moving for other reasons or who is in a house that is quite a bit larger than their needs should seriously consider a smaller home.

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Chad May 21, 2010 at 1:28 pm

@ Cee

“Ask any realtor. A 3 bedroom, 2 bath house/condo is almost always easier…”

Of course the realtor is going to say that, as they will make more money off of the bigger house. I’m not saying they are necessarily wrong, just saying that the phrase, “Ask any realtor”, doesn’t hold any water because they are biased.

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Personal finance May 26, 2010 at 12:32 am

Even I don’t understand people living in gigantic house with a family of around four. I have four members in my family including me and live in a nice comfortable house. Not very big, not very small. Of course today having bigger homes is a style statement but what about the costs of maintaining it?

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Jennifer May 28, 2010 at 12:39 pm

Good points here! My husband and I are currently saving for a house, so this is something to think about. I personally don’t want a large home…it doesn’t fit in our budget anyway. I just want to live in a comfortable home where the mortgage doesn’t kill us and we have some room to entertain. Other than that, I don’t need a small mansion.

God bless!
Jennifer

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Debbie June 2, 2010 at 12:00 pm

I still remember those days in the late 80′s to early 90′s where in Atlanta people were known for purchasing monster houses but having rooms with no furniture since all the money had been spent on getting the house.

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Jerry June 4, 2010 at 12:07 pm

Smaller houses are easier to clean, at least, and they don’t have to be a postage-stamp sized place that leads you to feel claustrophobic. Creativity and good design can offer some insurance that a smaller home can still feel comfortable and roomy, without wasting space – or money!
Jerry

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Adhis June 5, 2010 at 6:49 pm

We currently live in a house that is bigger than what I think we need, but my husband, for some reason, is hesitant on downsizing. We used to need the extra rooms for foster parenting and for businesses, but no longer. We still use all the rooms, but I think we could easily condense our belongings and multi-purpose rooms.

sigh…

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Feng Shui By Fishgirl January 30, 2011 at 2:17 pm

If husbands were the ones responsible for cleaning the house themselves, I’m sure they’d be the first to reconsider downsizing. :)

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Bankruptcy Ben June 8, 2010 at 12:35 am

There’s always this huge discussion in Australia about how expensive houseing is compared to our parent and grandparents generation. I keep trying to explain to people that their not comparing apples and apples. My grandparents lived in a 2 bedroom, 1 (out door) toilet house with a kitchen/lounge/dinning area. It’s not the same thing as your 5 bed 2.5 bath, granite benched house.

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Oliver August 31, 2010 at 4:00 pm

It only appears that your not comparing like with like.

It’s still the place where you hang your hat, and lay your head at night.

Just because we now have the choice of multicolored galaxy of breakfast cereals doesn’t mean that it’s not still breakfast. Only difference is that we’ve been conned into thinking that somehow life is better as now we can waste 90 minutes deciding what we’re going to eat.

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Franklin June 9, 2010 at 2:19 pm

Dave Ramsey mentioned the cost of extra rooms once. I wonder if Fox News letting Dave go for Eric Bolling will affect his popularity?

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Jesse W. July 18, 2010 at 11:59 am

This is a great article as I just moved into a townhome and the spare room is sitting empty, well, with boxes of junk I need to get rid of. I think I will do some free giveaways but it is still a room costing me money!

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Julie August 8, 2010 at 8:31 pm

I definitely get what this post is saying. I know quite a few people with too much house for what they need. I am also about to be one of those people. However, it’s a cheaper option for us. We bought low in our neighborhood before it got trendy. Our house is a duplex that we rented out for the past 6 years. We finally need a little extra space and the best way is to convert the house into a single family. It’s not cheap, but far less than moving within our neighborhood, which we LOVE. One day we will move and when we do we will make money off the house. But right now, I can’t wait to have a 2nd bathroom and guest room. Cannot wait to invite all my friends with their children and actually have a place for them all to sleep. Some things are just worth it…even if it’s not used every day.

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Oliver August 31, 2010 at 3:48 pm

Hard to quantify this…but how much is that extra-room costing ALL OF US….now that the the housing bubble has burst and their are so many people with too much house, who are so underwater, or being forclosed upon.

This is one of the reason why the suburbs suck so bad. Indeed why I agree with your point that MORE! is bankrupt as a lifestyle

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Marilyn March 21, 2011 at 12:47 pm

This is good advice for my kids, but at 46 and a serious heart defect they cant fix that they just found a year ago, Im not going to live to see my mortgage paid….. So I think I will enjoy my to big of a house for now… life short, I need to live like Im going to die tomorrow because I just might!=) But for the young healthy kids out there take heed of this advice it really will make your life easier and more fun at my age!

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Susan @ Bankaim August 5, 2011 at 2:22 pm

Wow! I really never thought of that! Most people tend to want to find the biggest house they can afford but never think once about what those extra rooms are really costing you. They mostly sit empty collecting dust. I think once my kids move out, it might be time to downsize or do something with those rooms like start a bed and breakfast!

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Elizabeth January 2, 2012 at 3:03 pm

I admit I have waaay too much space and a spare bedroom in addition to my home office. But, I belong to two organizations that help rach other out when traveling by “renting” out that spare bedroom. So I can have some interesting company AND make some extra money!

Yes, my next house will be smaller. I bought this because rentals in this area were dumps and I believe I can break even on this when I sell (the mortgage for this house including insurance and taxes is LESS than renting a 2 br garden apt in this area!). OTOH, I could turn this into a rental which,at current rates, would be a positive cash flow.

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John May 30, 2012 at 3:18 pm

You bring up such great points here. I think that every room should have a purpose and be used often. Perhaps an “office room” can be converted into a “spare bedroom” for guests. My suggestion would to be to find multiple purposes for each room!

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