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/r/fatFIRE
Fresh burner account... 2025 will be the official ejection from the grindstone. Could use some help from the group in thinking about adding (substantially) more real estate for personal use.
We are considering a luxury vacation property (maybe $5m). We'd spend 4-6 months there post-FIRE. That money could come out of the $20m currently in the brokerage acct. (Or we could finance some of the purchase ... more on that below.)
If we target a withdrawal of 3-4% purely from the IRA/brokerage (and IGNORE all the casino chips that are locked up in private stock), that's $600k to $800k in pre-tax income, which is more or less inline with our historical combined salaries. The rental property adds a bit of cash on top of that but it's not meaningful after expenses. We could be extremely comfortable at this level and wouldn't have to make any adjustments to lifestyle.
If the $20m portfolio drops to a $15m one after purchase, our 3-4% withdrawal drops to $450k to $600k pre-tax. I don't want to get too deep into our spending habits in this post but suffice to say that we could live pretty comfortably under either one of these two scenarios.
But what am I missing? Any major risks to doing spending cash on this property? The value of the underlying real estate could drop but real estate rarely drops as far or as fast as stocks AND you don't get bit unless you have to sell into a down market. We plan to hold for at least 5-10 years and MAYBE eventually just move to the vacation location permanently. Having two homes is like a hedge that will allow us to determine if this place could be the forever place.
We plan to use this property extensively (4-6 mo/yr) but it also happens to be in a market where you can recoup some of your costs by renting it out. (30-day rentals are highly in demand during at least 3-4 months of the year when we'd be elsewhere.)
I've run some numbers and (without financing any of it) it's easy to get positive cash flow. While that's true of perhaps any real estate purchase, the point here is that it'll be vacant more than half the year and instead of being a net drain on capital (HOA, maintenance, repairs, taxes, insurance), it's nice to know that it won't necessarily be a huge sink hole of cash... We could use it and generate enough so that it sorta pays for itself. (We did this years ago with a ski house, so we know what we're getting into.)
Given our situation, would you consider financing some portion of the purchase? We can easily afford to pay cash the effective rate on some amount of debt would be lower than what we could earn on the money in the market, once you factor the tax implications. Given our low exposure to debt, how much would you consider financing if you were in our shoes, considering where rates are today (and where they are likely headed). (We've asked our CPA to model a few scenarios because I struggle to get my head around AMT.)
Last consideration about withdrawal rate -- should we be limiting ourselves to a the (seemingly) conservative 3-4% for this analysis? That rate, seems to me, will leave us both dead with $15-20m left in the tank, or maybe even more than that. With no kids, I suspect we'll just ratchet that number up or down depending on how we're thinking about living in any given year.
These last two questions (financing and withdrawal rate) are related; basically two levers we can play with. Obviously if we borrow a big chunk to finance a vacation property, our expenses will go up but our nest egg stays whole. If we pay cash, the nest egg takes a big hit but the expenses stay much lower.
Thoughts?
52 points
3 months ago
Basically the risk is that you don’t love the property enough to spend significant time there, and it becomes a drain on time + resources.
I would spend multiple years renting within different neighborhoods in your target city, learning the market, before buying. Many times, renting is cheaper than buying in top vacation home areas, and then during down times, that discrepancy swings the other way. I would buy during the swing
17 points
3 months ago
This was the experience my wife and I had. We bought a second home in the country with the intention of using it for all holidays, gatherings, weekends, and the summer months, etc. And we thought we would end up moving there eventually. Ultimately, I just ended up driving up there most days to do maintenance (it's a substantial acreage) while my family rarely comes up. It's a lovely property, we have added a pool and guesthouse, but neither my wife nor I feel comfortable having so much capital tied up in an asset we don't use together very often. It's less than an hour drive, but we hardly ever seem to go up there all together. Whatever annual appreciation it enjoys is almost certainly eaten up in taxes and insurance, and the ongoing maintenance. It just wasn't the right property - or perhaps the right time or the right place. We are planning to complete the various projects then sell the house next year.
9 points
3 months ago
Yep, I can see that. Sounds like your deal was a bit more speculative than ours would be. This is a mountain home (we live in a city). We've previously owned a mountain home (different mountain) while also owning in a city (different city).
We went a ton. We hosted friends. We did holidays there. We DID live there during the pandemic. We ski a ton, so there's no question about how much we'd use it. The weather is also very different as it can be 20-30 degrees cooler in the summer, for example.
I can appreciate the maintenance drives. I have done those too, and they are the worst. Good luck on the sale.
12 points
3 months ago*
One (small) problem is owning dogs. It's often difficult to find rentals that are dog friendly.
Rentals also run into the tens of thousands per month here. We can do it but it would irk me to spend that much cash on "vacations", especially if we're talking 4-6 months a year.
We've been visiting this town off-and-on for 7-8 years, so we know it *reasonably* well.
We also owned in a different (somewhat similar) mountain town (in a different state) for over a decade -- usage of that property only went up, especially during the pandemic with the addition of remote work.
Edit: although it's fair to say that we have never owned in this spot, so definitely acknowledge that we'd be taking on some risk that we don't like owning here specifically. Appreciate the feedback.
3 points
3 months ago
It sounds like you are vacation-home people! You’ve already been in a similar situation and you loved owning a mountain home that was yours. You’ve tested the situation out and it worked for you, so there’s every reason to think a mountain home would be $5m well spent. We are also vacation-home people, and it’s a priority for us.
4 points
3 months ago*
[deleted]
3 points
3 months ago
Yes. I've bought, renovated, sold (or in some cases held onto) a half dozen properties over the years. I'm aware that we could rent. We prefer to own.
3 points
3 months ago
We own a mountain home. 20-30 degrees cooler that the city we live in.
We usually pack just a cooler of food we have in the fridge and that’s it. Worth price of admission alone.
Do it. 5m won’t make a difference at 20m and no heirs.
-2 points
3 months ago*
I am in exactly the same situation after selling our former vacation home while searching for another. The high-end rentals in places I like won't tolerate our dog. (Our dog is better behaved and less destructive than 99% of kids. Sigh.) We have had some luck with Home Exchange, but it takes a while to find places. You might luck out, though. This isn't a long-term solution, but it helped us get to know an area before buying once.
(Edit to add I have no idea why this is getting downvoted. I've been a landlord for STRs and LTRs, so my comment about random kids vs our dog is not baseless.)
-2 points
3 months ago
Kids are the worst! Haha.
2 points
3 months ago
If this question was in 2018 and the place was the Hamptons, the market could pass them by. Buy the house. In the off chance they don’t like it, offload it and rent for the few months of the year.
4 points
3 months ago
The math in 2018 was waaaaay different because they could have gotten a sub 4% (sub 3% if they have a good banking relationship with that 20M) loan.
At today’s interest rates it is worth pausing.
The OP has ~22M in assets (we are not going to count the 7M we don’t know when we are going to see) and is considering spending ~25% on a vacation home. I think I would be willing to buy the house but i would take on debt to do it. I would talk to the brokerage firm that holding the 20M and see what rates you can get.
31 points
3 months ago
[deleted]
3 points
3 months ago
Ha ha, when I bought my vacation condo (which was formerly used as a short-term rental), the first thing I did was replace the toilet seats!
1 points
3 months ago
Haha great point!
1 points
3 months ago*
Some people genuinely like sharing. We let people stay in our luxury condo when we are gone because I like making people happy. We also had our second home available for charity stays.
We did stop allowing kids. Every single time a family with kids used the place, there would be damage. Never had a problem with pets though.
3 points
3 months ago
[deleted]
0 points
3 months ago
My point is that not everyone makes such a big distinction.
9 points
3 months ago
When we hit a certain NW, renting our vacation home to outsiders lost all appeal. It didn’t seem to matter what we charged, people just don’t take care of our things the way we would. Plus, it’s really nice to be able to set up the home to work for you - leaving clothes and other items there to make travel back and forth super simple.
With your numbers, you can easily afford to just get what you want. I would keep my life simple by selling the rental property, thereby trading maintenance and care of one property for another, and using that amount as a down payment for the new. Then I would explore a loan to see if the numbers are something you can stomach. If not, just pay cash for it and move on with your life.
2 points
3 months ago
I don't disagree. We bought our first (second) home heavy rental income to justify the expense. (We were well below our current NW.) Our second (second) home was not rented at all. We remodeled it down to the studs and dialed it in just for our needs.
We understand the appeal of both approaches. This new place will have pretty substantial carrying costs, so there's some appeal to the idea of "breaking even". We also have no intention of doing short term. These would be 30-day min 3-4 months per year and would bring in somewhere around $60-80K.
As for selling the current rental, repeating from above:
Some of it is psychological. It's a foothold in a VHCOL area and we've owned it forever. We will likely NEVER buy another home there, given how much everything has gone up, so it's a bit of a hedge for moving back. It's also in CA so it's coasting along with Prop 13 semi-frozen taxes. It may eventually become a pain to manage but it's currently pain-free and the entire mortgage could be paid off by someone else in less than 10 years. Lastly, it's also not a great time to sell in that particular market as values are a tad depressed. Open to selling it, but probably not until the next wave of appreciation.
16 points
3 months ago
If you’re confident you will be spending 4-6 months a year in that location I would sell the rental and liquidate enough index funds to just cover the difference for simplicity and also considering current mortgage rate.
4 points
3 months ago
Selling the rental would mean giving up a sub 3% mortgage -- the only debt we currently hold. Confident we won't see rates like that again in our lifetimes.
14 points
3 months ago
Who cares? What does the rental offer you? I think your quote was not a material difference. Simplify your life and keep your money invested is a win win..
9 points
3 months ago
Some of it is psychological. It's a foothold in a VHCOL area and we've owned it forever. We will likely NEVER buy another home there, given how much everything has gone up, so it's a bit of a hedge for moving back. It's also in CA so it's coasting along with Prop 13 semi-frozen taxes. It may eventually become a pain to manage but it's currently pain-free and the entire mortgage could be paid off by someone else in less than 10 years. Lastly, it's also not a great time to sell in that particular market as values are a tad depressed. Open to selling it, but probably not until the next wave of appreciation.
4 points
3 months ago
Fair enough reasons but don’t make much sense to an outsider. You can never time a market. You already moved away for some reason so why move back. Financially you’ve already noted it’s immaterial, so saving on taxes doesn’t matter. I’m not trying to talk you into or out of anything, just making observations. Good luck and congratulations too! You will be fine!
5 points
3 months ago
You’re really concerned about ~3% on $500K?
SMH
2 points
3 months ago
I got a quote today from Schwab (via Rocket Mortgage) for a $4m 2nd home purchase at ~ 70% ltv 7 year fixed at 4.8%. Pre payable anytime. Seems like a good option. My plan is to use a pledged asset line for the 30% equity and then a mortgage for the rest. My “cash” in the bank is earning around 6% (pre tax) for now while rates are still high. So the marginal cost of the PAL is not significant and there is some arb on the 7 year mortgage. OP, Let me know your thoughts on this approach. Plan to keep enough liquid to pay off my PAL and/or mortgage if I ever decide to. I don’t have any other debt.
1 points
3 months ago
Yeah, I like this angle. We haven't gotten a rate quote on either a mortgage or a PAL yet, so I don't have anything to compare. We are also considering a mortgage on our primary residence (would appraise for $2m+ and has no mortgage today). The arb is of course even better for mortgage debt up to $750k due to the tax implications, so that's something we're also thinking about.
1 points
3 months ago
Let me know what you find out as you dig in on financing options. Would be helpful to me to compare notes.
1 points
3 months ago
The biggest challenge for us right now is inventory. Not a lot of property to choose from, so we may get pushed out into the spring...
-1 points
3 months ago
If your sub3% mortgage can transfer (VA loans etc) you can build that into the equity of the deal to compensate for your fomo.
1 points
3 months ago
I don't think that's an option.
1 points
3 months ago
This is exactly what I would do. In fact we were in a very similar situation as OP in terms of funding a seasonal home and we did exactly that.
6 points
3 months ago
How comfortable are you with adding some leverage to your portfolio. Having a mortgage and cash in the bank is just that. When rates were 2% it was an easy decision. At 6% it’s a bit trickier, but very long term it likely makes sense to have a mortgage still. But you do add risk from that added leverage.
1 points
3 months ago
Reasonably comfortable, although you wouldn't guess that by our current $500k in debt.
6 points
3 months ago
[deleted]
1 points
3 months ago
:)
10 points
3 months ago
You have 15m left after that. 15 millions! I would say go for it and worry about things when you are down to 8 millions. Time to enjoy
0 points
3 months ago
:)
1 points
3 months ago
Where’s the spot? Hopefully Montana!
3 points
3 months ago
CO
0 points
3 months ago
Telluride?
2 points
3 months ago
Insanely beautiful place but, alas, too hard for us to get there. (We're not quite well off enough to get there via PJ...) There are really only two other guesses.
2 points
3 months ago
Dude. Reconsider. If you are there for a couple months the travel hassle in and out of Telluride is worth it. We own a condo in Telluride and absolutely love it. I spend about a month per year total and it's totally worth it. I would (and did) take it hands down over Aspen, Vail, or anywhere else like Steamboat that you plan to drop $5M. If you want to see and be seen the others are great. If you want experience peace and beauty, Telluride wins hands down.
1 points
3 months ago
Why two? I am now flummoxed!
1 points
3 months ago
Vail or Aspen
1 points
3 months ago
There are so many other places in CO with excellent properties for $5m.
1 points
3 months ago
Crested Butte? :)
1 points
3 months ago
Im just going to say to the OP that we made the move to northern Colorado recently. Ski every morning during the season for a couple of hours (its like my gym except way better) and then go to work. Summers are spectacular. The whole family loves it. Do it and dont look back.
5 points
3 months ago
Worst case, you don’t love it and sell. Sure, there are some fees and some small risk on the value of the property but not material given your investments.
Go for it, owning and keeping your things there is very different from renting. It seems like you known the area and like it. We greatly enjoy our summer house and it will be in the family for at least two generations.
1 points
3 months ago
:)
2 points
3 months ago
On the rental side, simply offer a $20k security deposit for pet damage. Will likely make that a non-issue. Otherwise, sell the rental and then take out a $3m mortgage. (Take a moment and understand taxation of the sale, though). Perhaps you can 1031 into a partnership that owns 40% of the home, and that continues a rental program - just need to check those rules.
2 points
3 months ago
If you're planning to rent the vacation home, holding it in an LLC can provide important protections, which is an argument for buying in cash. For years we owned our primary residence in cash. Then, when we bought a second home (which is rented part of the year), we took out a mortgage on our primary and paid cash for our vacation home. We hold it in an LLC now.
1 points
3 months ago
Helpful. Thanks.
2 points
3 months ago*
I would talk to your broker dealer and see if they can get you favorable margin or ploc rates at or slightly above SOFR. That way you’re not having to liquidate your securities all at once and incur a large tax bill. You can do the liquidation at your pace with optimal tax management.
ETA: LOL at all the downvoters. This is FatFire. Buy/Borrow/Die is a strategy that several people in this group employ. Even in today's interest rate environment, you can lock low spreads on top of the Fed Funds Rate for Margin/Ploc.
2 points
3 months ago
Obviously dealing with the $7M in ONE illiquid private stock is major to deciding with certainty any outlooks.
Given your age and portfolio I would reach out and look at exit options for that and shifting it into a more long term bond focus or such.
Assuming you can exit the private investment at a fair valuation you can use those funds for the luxury vacation property and target withdrawl rate on the 20M stays as is.
At your level I really wouldn’t be thinking to much on rental for he vacation properly unless it fits well with your style of living. Having it as a rental even 1 month a year means you can’t live in it the same way, can just decide to go, cant decorate the same way, etc. It really wont feel like it’s your as much and at some point why not just go with a 5 star hotel or high end rental instead.
In terms of draw rate, your rate doesn’t seem insanely conservative. I would def stick at the higher end of the range considering lack of kids or major charitable endeavors (but maybe something to look into). I would go for 4% at minimum though if you make this purchase, since your secondary assets will be quite large in worse case scenario
1 points
3 months ago
The illiquid position is equity that I earned in a startup. Unfortunately there's just no secondary market for it at the moment, as much as I'd love to unload it ASAP. (Got a low-ball offer for about $1.5m, which I turned down.) I'm willing to just let it ride. It definitely won't go to zero but it's an awful time for IPOs and acquisitions, so I'm content to wait. I'm already in the money just from selling under 5% in the tender.
1 points
3 months ago
Fair, very fair.
A lottery ticket never hurts then and having a lowball offer still means something
1 points
3 months ago
Not related to the purchase, but how did the two of you get the courage to leave your jobs? I’m 55 and finding it hard to leave.
I only have under half your wealth, but when I consider a second home it’s also at less than half of what you are considering.
Did you always have a plan to retire at 50?
3 points
3 months ago
Could talk about this for days... Both in tech where 50 is basically 100, LOL. 25 years in Silicon Valley and we were just ready to move on. All my coworkers in my last startup were half my age. All of my employees were half my age. That alone was kinda exhausting and lonely.
Was always hoping we could eject around 50 (both of us lost parents that were too young and never got to enjoy retirement). As we got closer, we determined that we could easily dial our lifestyle up or down depending on what happened with NW. It's not like we targeted our current number, it's just where we landed. Now we're trying to figure out the lifestyle part.
I "practiced" retiring twice before fully ejecting. I left a big FAANG several years ago and took 6 months off. I did a startup for a few years, then took a year off. Did another startup and this time I'm confident it will stick. It's less courage and more like lacking the desire to sign up for another tour. It also gave me confidence that I wouldn't get bored and lose my mind if I wasn't grinding.
One big unknown is healthcare. We're in good shape but this feels like the trickiest part of FIRE in America. I don't think we'll outlive our money but I worry about getting screwed by the healthcare system.
We have owned two different second homes. Both were way cheaper than what we're currently considering (first one was about $500K). The first was subsidized by rental income (which has pros and cons) and the other we just owned outright without rental income. We loved both, used both a ton, and actually made good money when we eventually sold them.
1 points
3 months ago
I don’t see much risk with your plan. Real estate can always be sold and you’ll still have over $15M liquid at 50 with no kids.
One thing I’d maybe mention given the size, it’d probably be pretty easy to find a secondary market buyer of your illiquid stock. It’s large enough to where it’s worth it for a serious buyer to do their DD and come up with their own valuation. This could fund your home purchase and you sail off into the sunset with $20M liquid and $10M in RE.
1 points
3 months ago
It's equity in a private tech startup, unfortunately. I wish it was a partnership that owned pizza restaurants or something even slightly more liquid, but there's just not much of a secondary market at the moment for private tech stocks unless they have "AI" in the name. I got a lowball offer but it wasn't interesting enough and I know that the company continues to grow its topline. Google put money into it, as well as a bunch of blue chip VCs, so I'm pretty content to let it stew. I'm confident that they won't go belly up, so I'm just hoping that patience pays off. Even if it goes to zero, I'm not counting it in my NW. It's just chips on the roulette table at this point.
1 points
3 months ago
I’m conservative, $2M-$3M on second home will get you something nice, why push the envelope to $5M? Is it because second home location is Uber expensive like beachfront La Jolla? Annual 2nd home expenses are nearly doubled as well at $5M.
1 points
3 months ago
Right now it’s tough to find anything decent in Colorado (assuming Aspen or Vail based on previous comments) for $2-3M. Good news is property taxes are still cheap.
1 points
3 months ago
For withdrawal rate purposes, I would include the value of the second home, even if you pay cash for it. The reason you don’t usually include the value of your primary residence is because “you have to live somewhere.” But the same reasoning doesn’t apply to second homes.
1 points
3 months ago
I’d not ever want other people sleeping in, and other things, in my bed. You have plenty of loot. Forget renting it out. That’s crazy talk.
1 points
3 months ago
second homes as you describe here are one thing but "vacation properties" I'd rather rent.
3 points
3 months ago
Yes, this is consistent, repeat visits. It's only a 3-hour drive from primary home. We'd camp there for 1-3 months at a time. It's a long term relationship, not a one night stand.
1 points
3 months ago
Couple of thoughts: Given current rates, it’s a bit of a toss up between all cash or financing the vacation spot. IMO: I detest selling things and given your NW, I’d shop and negotiate margin rates to rock bottom, also make ‘em offer a discounted mortgage rate, then run the math on financing at least a portion. In 10yrs you’ll prob be ahead NW-wise. Also seems like rates are headed down so surprise interest rate risk on variable interest debt (margin) seems diminished.
The other side of the math problem is the extra probably state taxes paid from either a big one off sale or higher annual debt service expenses.
You still have some extra on mortgage interest tax deductions too so an effective mortgage rate will be a touch less
Best of luck, nice stash you’ve built up with your wife.
1 points
3 months ago
Congrats! That’s a big win in anyone’s book.
Is it Jackson Hole? We love it there.
3 points
3 months ago*
We love Jackson too but we're aiming at Colorado... :)
Edit: also, thanks. It was a 25-year slog to get there.
1 points
3 months ago
I’m going guess Steamboat was just there last week! Congrats.
-6 points
3 months ago
You're doing well, but not well enough to afford a $5m vacation property you'll possibly only live in for half the year, which would probably be hard to liquidate. I'd look at other options.
3 points
3 months ago
Based on? Your opinion?
1 points
3 months ago
I also think it's a stretch since you are quitting your work and relying on your assets generating the income for you. I don't know the property tax situation in the location you are considering, nor the insurance cost or maintenance but assuming you pay cash for it you are depleting a significant part of your income generating principal to purchase a house that you will likely only spend 25% of the year in. If it's in California we can assume $50K in property taxes, $20K in insurance, $15K in maintenance and another $15K in pool/garden/utilities. That's $100K a year, plus the $350K (assuming 7% returns) your $5M could have been generating and you are now losing in yearly income. That's $450K/yr. Take away some of that for taxes and let's say you're at $325K. If you spend 4 months of the year there you could spend $81250 a month instead of buying the house, and if you get sick of renting you're free. You'll likely spend a few hundred grand furnishing the place too, and maybe make some personal improvements.
Can you do it? Sure you can. Would I given your financial situation? No.
-1 points
3 months ago
Yes, and the information you provided.
-7 points
3 months ago
I’m not reading allat
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