Real State Investment after FIRE

[doneat54]

Ok, here we go. I will try not to make this too long at risk of losing you, but I would truly value your expertise here.

Short version: My wife and I want to buy a condo outside of the country and are looking for advice where to pull funds from.

Status: I FIRE'ed last Jan, wife will work for 3-4 more years. Wife salary is covering 80% of expenses, a severance I got is/will make up the rest for at least 3 more years. Condo is outside the US, at a place we have been to 6 times in the last 16 years. We have looked at units in this condo in 2014, and last week when we were there. We told the broker that if a ground floor unit came up, to call us.

He just did.

So here is a snapshot of our portfolio, with all in terms of percentages:

Joint WROS (Brokerage) 5.1%
Rollover IRA 0.4%
Roth IRA 1.7%
Fidelity Roth IRA 2.0%
Fidelity Rollover IRA 0.4%
Vanguard 401(K) PLAN (Mine) 43.6%
Vanguard 401(K) PLAN (DWs) 18.3%
DWs Pension plan () 1.6%
DWs "State" Plan (??) 0.4%
Cash in Bank 5.1%

Pension Lump sum going into FIDO IRA 21.6%


Total Portfolio 100.0%


Expected condo purchase price 19.0%

And here is the wildcard. We own a large parcel of undeveloped land that has never been on the portfolio radar. Years ago, it was thought that we might be able to sell it and buy a condo with the proceeds. I listed it last year pretty optimistically at about 13.0% of the portfolio. Now I am more encouraged to get more aggressive to sell it. I *think* it would sell pretty quickly around 8% of portfolio. We owe nothing on it.

Lastly: The condo is currently rented and we expect to keep it in longterm rental for 2 years which will generate around 1% of portfolio annually. After that. we'd expect to rent it weekly to friends and family enough to pay the management fees. There are no RE taxes of any kind in this country.

So, there you go. I think the best solution is probably taking a little from a few different places. I am hesitant to drain all my cash, and I know that I can borrow from tax sheltered accounts to some degree. Brokerage account is healthy and shouldn't be too much tax load to dump it all. If I were to "borrow" from anywhere, I would prefer to pay that back first with proceeds from the land sale.

I'll leave it at that.... Thoughts

 

[Luck_Club]

My initial thought using your percentages the real estate doesn't make sense if the return as a rental is 5% of the purchase price. (1 divided by 19)

That means you could rent similar condo for almost 20 years while someone else gets stuck with the management fees.

A few more concerns:
Overall percentage of portfolio is high
Overall portfolio is in tax deferred accounts, which leads me to believe an accelerated withdrawal of these funds.
the renting it weekly to offset management fees indicates they are high and you need the rents to help make the numbers work.

My mindset would change in favor if:
You had 100% of the funds available outside taxable accounts
Weekly rental income wasn't needed to cover heavy management costs
the rent to price ration was 1 to 10 (or lower)

 

[doneat54]

Ok, of course I left some pertinent information out: WHY we want to buy this property.

It is not as an income source, but a place for use to go when DW retires to escape the New England winters Jan-Mar, and some weeks outside of that. The fact that I said it was long term rented just so that while we weren't using it initially, it would generate some income that would easily pay the mgmnt fees and allow us to stash some reno money away, and/or repay any borrowed money used for the purchase. Beyond a 2-3 year horizon, we do not expect it to generate any income. We hope to be able to rent it to friends and family just enough to fay for the management fees which will be about 0.5% of portfolio annually and thus own it for $0. Relatively speaking, the fees are not high and include insurance (all units in the complex must have the same policy per govt regulations. It was hit hard by a hurricane a while back).

 

[pb4uski]

Can you finance the purchase with a mortgage in the country where the condo is so your initial investment would be a 20-30% down payment?

Do you own your current home? If so, could you do a cash-out refinance and use the proceeds to buy the condo abroad?

If not, then if you buy the condo you'll probably be paying a lot in taxes and draining down taxable accounts. Your taxable and tax free accounts are 13.9% and the condo is 19%.. so if you are paying cash you'll need to totally drain those taxable and tax-free accounts and draw the extra 5.1% from tax-deferred accounts, which will likely result in a high tax cost since your DW is still working.

To be honest, I don't think it is wise to spend almost 20% of your retirement funds and pay a lot of taxes on a condo that will only be used part time unless you will have other sources of retirement income like a good pension. We bought a winter condo last year, but it was only 7% of our nestegg so it was much more comfortable. At 20%, I would not have done it.

 

[kcowan]

What taxes would you owe in the country where you are renting out the condo? In the country where we own, taxes are 40% per dollar of rental. This might be offset if there is a tax treaty by taxes we pay at home. But we do not rent it.

We would not have bought if it amounted to 19% of our portfolio. We had a spending spreadsheet and bought only after 5 years of being retired. At that point we considered it a lifestyle expense. But the COL was so low that we could have bought sooner. Family obligations prevented us from doing it because we would not have used it enough.

 

[doneat54]

Zero taxes in the country that the condo is in, except for a one time tax to the govt, rolled into the purchase price. We have about 60% equity in our home here. I do not want to take out another mortgage anywhere. I have a zero'ed out Home Equity line of credit that can provide $100k if needed, but again, I am wary of creating new monthly loads.

The portfolio less the 19% BTW should easily fund us through retirement, and I am not even considering DWs continuing 401K contributions. For us, with 2 solid mega corp history's, SS is substantial. When we get it (67/71) we could live on it alone if we had to. So yes, there are some high spending years after DW retires, including the first 4 when we will have to pay for medical 100% out of pocket.

And again, the idea is that the land when sold could return 8-10% of that 19% minimizing the size of the dent that the condo purchase makes on the overall portfolio.

Continuing to think outside of the box...... thanks for the insight... others??

 

[Sunset]

You will be taxed on it here in the USA.
Since you want to rent it out, you will need/have to depreciate it for the IRS.
Since you will have a bank account in a foreign country, you will need to file with FinCen, and IRS to report your foreign holdings depending upon values (or risk losing big time).

 

[FIREmenow]

You will be taxed on it here in the USA.
Since you want to rent it out, you will need/have to depreciate it for the IRS.
Since you will have a bank account in a foreign country, you will need to file with FinCen, and IRS to report your foreign holdings depending upon values (or risk losing big time).

Sounds waaaaay to complicated for my taste (but that's just me).

Even after the 2-3 years, how much could it really cost to rent a condo for 3 months per year - $6K max?

Even after 15 years of renting (at which point you'll likely be "done" with it anyway), that's only $90K. Still worth the purchase and headaches?

You also wouldn't be tied to the same place every year.....

 

[rayvt]

It is not as an income source, but a place for use to go when DW retires to escape the New England winters Jan-Mar, and some weeks outside of that. ...We hope to be able to rent it to friends and family just enough to pay for the management fees

You need to ask who you will be renting it to, and how that fits with when you want to use it.
So you will want to use it in the prime season, and rent it out in the off season. But prime season is exactly when renters are going to pay top dollar, and they won't pay top dollar in the off season.

Will your renters be people who rent for several months at a time? Or people looking to rent for 1 or 2 weeks. If the latter, then you'll have high maintenance & turnover costs. If the former, then they will be using it at the time when YOU want to use it.

...We hope to be able to rent it to friends and family just enough to pay for the management fees

You won't. Friends and family won't rent it from you. Maybe once or twice, but not regularly. And, frankly, won't "family" expect to stay there gratis?

How will you protect yourself against a RE management agent who tells you, "Sorry nobody wants to rent it." -- while he rents it out and pockets the rent money?

You'd probably be better off by putting yourself on the other side of this deal. YOU be the renter and let some other gringo have the headaches. And then you don't have to go to the SAME DAMN PLACE every year. Six times in 16 years is one thing. Going for 2-3 months every single year, year after year is something else. You'll get sick of it, and bored with it.