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Another "Can We Afford It?!" Post

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  • Another "Can We Afford It?!" Post

    Hey gang,

    We're very tempted to purchase a second home in a coastal hot spot, just 2.5 hours driving distance from our home. We visit this beach town frequently, both on and off season. Annually, we spend about 6k renting AirBnBs to stay there, and it keeps going up every year. We have several friends who own property there as well, who have given us valuable insight into the rental market...which is reliably hot. Our friend's property valued at 800k rents for over 6k/week in this location. (Real Estate in this hot market sells for anywhere between $600-1,200/ square foot)

    We dream of some day purchasing a second home here, but considering the property as an income generating investment (at least for the first few years to accelerate paying down the mortgage) has tempted us to consider purchasing sooner rather than later. Here's our background info:

    Ages 33 & 35, married, no kids...and not planning on it.
    Annual Household Income ~400k
    3 years out of residency
    I own a small business, spouse is a primary care physician, with lucrative consulting side hustle.
    Current net worth is +430k, This figure takes into account the following:
    • 350k outstanding mortgage on our primary home (Refinanced in 2020 to 15-year fixed at 2.9%)
    • 73k Equity in primary home - (This is a conservative calculation, the current high sell value in this market would add another ~50k to this figure)
    • 204k between the two of us in employer 401ks & individual 401ks
    • 51k combined Roth IRAs
    • 42k Taxable brokerage account just started this past year,
    • 50k in Emergency Fund + short term savings accounts.
    We max out 401k & Roth and plan to continue to do so.
    No other debt besides mortgage on our primary home, two cars paid off.

    We keep our monthly expenses low, and live a relatively minimalist lifestyle, with a select few luxuries. We value fitness and traveling. We're proud of the financial milestones that we worked hard to hit together, and we are both cautious to not rush this purchase and de-rail our steady progress to financial independance.

    We are thinking of buying in the 800k price range, and renting out for 6-10 weeks of the year. Are we crazy for thinking this could work? Worst case scenario is we aren't able to rent it, and we have to cover the mortgage/expenses, which we could easily swing if we didn't put as much as we are currently putting monthly into the taxable brokerage account.

    So... talk us into it or talk us out of it? After typing all of this I think we should wait, lol.
    Last edited by FIREman; 01-25-2021, 11:30 AM.

  • #2
    There is a big difference in renting for 6k a year and a 800K mortgage payment. Not to mention the other upkeep and taxes and insurance and whatnot. If you plan to rent it out and it is 2.5 hours away would you have to hire someone to clean and maintain between renters? Might be hard to turn a profit.

    I would look at it like a luxury. Is the benefit of having the same place every year outweigh the benefits of renting?

    Looks like you can afford it but should you is the real question.


    • #3
      Thanks, Lordosis. Yea, the 800k mortgage is intimidating. We are very debt averse, we're A-ok with our less than 1x annual income mortgage on our primary home. But it's enticing to think we could visit this location, and stay at our own property, on a monthly basis or more. Definitely a luxury. Owning a place here is certainly a status symbol as well. So, trying to not let that cloud our decision making.
      Thanks for your input!


      • #4
        I think you can afford it. I'm not sure it's the best use of your money. It doesn't sound like it will generate a profit, so I think it comes down more to lifestyle. This isn't my cup of tea as I wouldn't want to worry about the house or pay for the upkeep. But if you get a lot of use out of it (probably need to be there multiple weeks/weekends per year or rent it out a lot), then it might make sense to you. This ventures more into the "personal" aspects of personal finance, i.e. what do you want to spend your money on?. If you want to amass wealth and retire early, this probably isn't it. If you want to work a little longer and own a beach home, then that's fine too.


        • #5
          Don't look at this as an investment, look at it as a lifestyle choice. A likely poor lifestyle choice.


          • #6
            You don’t have much money, you really don’t even have a down payment.

            How many weeks a year does it easily rent for 6k? How long is the peak vs off season.

            People can be hard on rental beach houses. How upset will you be to show up at your house and find things not as anticipated? Are you ready to spend your vacation doing home maintenance chores.

            Even if you had more money I would think long and hard before doing this. Maybe in 5-10 years when you have more if you are still enamored with this location it may be time for a lifestyle splurge. I wouldn’t do it with where you are with your finances right now.


            • #7
              Separate the rental investment idea from the vacation rental.
              Rental $6k pretty clear and easy.

              Rental property in vacation location? Is this going to be cash at least break even? Don't think the "status" is worth the risk you described. Shoot, up your rental to the top of the line, $10k-$12k for you.r ego. Might be a better alternative. You don't use it that much. Status symbol to be blunt.


              • #8
                Here in Socal, I know of 6 doctor acquaintances that each have a second home:
                One has a place in the Grand Tetons. She loves it, does not rent it out.
                Another has a place in Portland. She loves it, does not rent it out.
                Another has a place in Montana. He loved it till he died prematurely. Did not rent it out.
                Another has a condo in the gaslight district in San Diego. They are a dual doc income. They like it ok and use it sparingly. Don't rent it out.
                Another dual doc income had a condo in both Big Bear and Mammoth. Too much of a hassle and they sold both.
                Finally another has a super nice split condo in Park City Utah. They use it and rent it out. From what I've heard, their rental income they collect covers property management and HOA, and that's it. PIT is on their dime.


                • #9
                  Appreciate everyone's input!

                  "Peak" season is 14 weeks... Memorial Day through Labor Day. Based on conversations with our friends who own there, it would be easy to rent out for 10 weeks, which considering the rental rates would cover mortgage, taxes, management & utilities for 10 out of 12 months of the year..

                  This is definitely a luxury, lifestyle decision. I guess we are just considering the rental income as a way to off-set the majority of the expenses.

                  We wouldn't pull the trigger until we had at least 10% down + closing costs + cash to furnish, which we could save up in the next year or so if went full speed ahead.

                  Either way, its helpful to have the sounding board and hear your voices of reason... Thank you


                  • #10
                    You realize that your vacation travel will always be to this place. Are you sure you want to lock yourself into this at such a young age.


                    • #11
                      You can afford it, but you will have tied your future wealth to real estate. Not easy to get in and out and I agree this seems like a luxury not a financial decision. With your discussion about friends having RE in this location, I sense a bit of keeping up with the Joneses and that is not great for building financial independence.


                      • #12
                        Well, looking at your numbers, I would argue against it. Your vacation home is going to have a larger mortgage then your primary home plus at a higher interest rate. I don't know if you've looked at taxes and the cost of maintenance (eg cleaning crew) out there but if it is in a coastal HCOL area, I would imagine that those prices will be high as well. Plus you will be doing the long distance land lord thing. I would probably wait until you had a sizable down payment so you can avoid PMI and get your rates low and you guys will be further along financially. I think that if you waited a few years and had a sizable down payment and a larger nest egg and wanted to get into real estate, it would be a more reasonable investment.


                        • #13
                          if peak rental season is also the peak vacation season (aka- northeast/northwest) then it will either be a rental or your summer home, not both. When I was younger, pre med school, my friends and I rented summer houses. We paid a lot (35-60k per summer) but split it among all our friends so packed those houses in- full shares for all 15? weeks, half shares, quarter shares and random one night guests all chipped in. All aged 23-30. The wear and tear on the house from us was definitely not what the landlords expected. Houses were easy to rent out for the whole summer, but none of us wanted a house for just 8-10 weeks of the summer with the owners intermittently using it other times.

                          If you had kids I would say sure for the kids to have a easy vacation spot, but being young, married with no kids do you really want to tie yourself down to just one vacation house for the rest of your lives? Its a personal decision. For me , when I'm retired I'd love a beach house. But no way in a non covid world would I want to spend all my vacations in the same place, or feel obligated to, before I'm 60.

                          Can you afford it? I think you can, but just like buying a 100,000 dollar car or a boat consider it a luxury item. You can afford one, you cant afford many.


                          • #14
                            This is not a good idea is every way especially “status symbol.”

                            it’s about unnecessary luxury item.


                            • #15
                              I think you've all helped us avoid making a bad decision. We knew deep down it was probably not the best idea.
                              Fullhouse11 - you're right this is us starting to feel the keeping up with the Joneses. We have decided to wait.

                              It's exciting now that we are at the point where we are debt free (besides mortgage) and the money is starting to accumulate. Our savings rate in 2020 was 56% of net earnings. It's helpful to be reminded of the end goal in sight - financial independence. We've worked too hard over the last 8 years (Residency and post-residency) to not accumulate debt, paid off all student loans, paid off cars, and just keep shoveling into savings. Would be a shame to stunt our growth now by making an unnecessary luxury purchase.