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Cost of Second Home
Old 01-18-2011, 10:53 AM   #1
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Cost of Second Home

One of the few things -- perhaps the only thing -- that keeps me w*orking now that I'm "FI" is the cost of maintaining a second home in perpetuity. I certainly don't "need" a second home. If I did, I wouldn't be FI yet. But I do "want" a second home in the south, probably in Florida, and have begun to scout out locations, neighborhoods, even particular properties.

Here is how I estimate the costs:

$400K acquisition cost, all-included: Obviously a person could spend more or less than this amount. I will probably spend less. But this is a safe assumption, based on my other real estate experience and market insight. So I need to save an additional $400K, after current taxes, in order to pay for this second house.

One percent of the acquisition cost is my estimate of on-going maintenance per year. That's $4K.

Two percent of the acquisition cost is my estimate of real estate taxes, insurance and HOA dues per year. That's $8K.

The sum of $4K and $8K is $12K. The pre-tax income required to produce $12K is something like $15K. The principal amount required to produce $15K per year is 40 times that amount, assuming a 2.5% withdrawal rate, or $600K.

Therefore, by my estimate, the total amount required to acquire a second residence in Florida is something like $1 million. Accordingly, I believe that I need to save something like $1 million more than would otherwise be the case in order to buy and maintain in perpetuity a second residence in Florida.

I have ignored the costs of utilities and such on the ground that I will mostly save in the north what I will spend seasonally in the south.

Any comments or suggestions on my analysis and conclusion?
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Old 01-18-2011, 11:05 AM   #2
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You call the Florida home your second home, so I assume that you will continue to be an IL tax resident when you retire. If you considered meeting the qualifications to become a FL tax resident you can knock off the state level income tax cost from your FI plan - which could be significant given the recent increase in IL individual income tax rates. Just food for thought. Otherwise your calculations look reasonable to me.
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Old 01-18-2011, 02:03 PM   #3
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A second home is like deciding to have kids there is no way to financially justify the decision. We could not justify the decisions financially but decided to have kids and buy a second home anyway and so far it has brought a lot of joy. We will definitely not carry both houses indefinitely however as the plan was always to move to the second home and sell or rent the first home at some point.
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Old 01-19-2011, 04:29 PM   #4
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I didn't take the 2.5 pct withdrawal rate into consideration. I consider a second home's purchase price an Investment that's part of a diversified portfolio. I don't plan on keeping it forever - I can't see living in 2 homes in my mid 80's. At that point, one of the 2 will be sold and the proceeds rolled into my retirement portfolio. I consider my yearly 2nd home carrying expenses as part of my current living expenses that will be reduced when I sell it.
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Old 01-19-2011, 04:43 PM   #5
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Maybe travel costs back and forth? We spend $10-15k per year getting back and forth.
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Old 01-20-2011, 08:13 AM   #6
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We have two homes: one in chicago (seasonal) and the other in florida (permanent residence). Your cost estimate seems low, but it is difficult to narrow because the range of options is so great. A $400K second home in S Forida would be a gold coast townhome or SFH in a gated community with an HOA. Property tax is $8K (2%), insurance another $4K (depending on age of home). HOA or upkeep another $4K. You will have some full year utilities cost, at least electricity, but you have mold risk so some year round air conditioning is needed.

A vacation condo in Central Fl used 1-2 months per year has much lower upkeep costs.

One important distinction that drives a lot of cost (and demands on personal time) is second home vs vacation home. A condo that is shut down 10 months of the year is much easier and less expensive compared with a home where you plan to live of the year. Likewise, the costs of maintaining your permanent residence in Chicago do not go away while you do.

One final point is that many fixtures in a home deteriorate when not used regularly, so general maintenance is more demanding.
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Old 01-20-2011, 10:00 AM   #7
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Perhaps a second or third car for the second home due to distance.
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Old 01-20-2011, 12:18 PM   #8
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Originally Posted by Loop Lawyer View Post
One of the few things -- perhaps the only thing -- that keeps me w*orking now that I'm "FI" is the cost of maintaining a second home in perpetuity. I certainly don't "need" a second home. If I did, I wouldn't be FI yet. But I do "want" a second home in the south, probably in Florida, and have begun to scout out locations, neighborhoods, even particular properties.

Here is how I estimate the costs:

$400K acquisition cost, all-included: Obviously a person could spend more or less than this amount. I will probably spend less. But this is a safe assumption, based on my other real estate experience and market insight. So I need to save an additional $400K, after current taxes, in order to pay for this second house.

One percent of the acquisition cost is my estimate of on-going maintenance per year. That's $4K.

Two percent of the acquisition cost is my estimate of real estate taxes, insurance and HOA dues per year. That's $8K.

The sum of $4K and $8K is $12K. The pre-tax income required to produce $12K is something like $15K. The principal amount required to produce $15K per year is 40 times that amount, assuming a 2.5% withdrawal rate, or $600K.

Therefore, by my estimate, the total amount required to acquire a second residence in Florida is something like $1 million. Accordingly, I believe that I need to save something like $1 million more than would otherwise be the case in order to buy and maintain in perpetuity a second residence in Florida.

I have ignored the costs of utilities and such on the ground that I will mostly save in the north what I will spend seasonally in the south.

Any comments or suggestions on my analysis and conclusion?
I agree with Ronstar - you're being more conservative than I would be. I'd assume that at some point we'll decide that one house is plenty. When that happens the selling price of the house comes back into my invested assets and the annual costs disappear.

I might use 20x the annual costs instead of 40x. I'd also increase my percentage withdrawals from other assets knowing that I'll eventually have the house proceeds to handle the very long term need. But the impact of both of those depends a lot on your age at retirement.

OTOH, $12k per year for taxes, utilities, maintenance, insurance, and repairs sounds light for a $400k house. Maybe the issue is HOA and utilities that can't be turned off when you aren't using the house.
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Old 01-20-2011, 12:43 PM   #9
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There is a lot of wisdom in your replies to my inquiry, and I thank you all.

I hear you about the additional costs of the Florida house. There also are "hassles" as noted elsewhere on this board.

Maybe a Florida condo, rather than a house, is the way to go. Minimal maintenance. Lock it and leave it! We rather like apartment living in Chicago and preliminarily believe that a condo unit of 2,000 square feet or so would be "plenty of room" for a "permanent" (i.e., six-month-plus) Florida residence for a couple. Any thoughts about that?
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Old 01-20-2011, 12:49 PM   #10
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Maybe a Florida condo, rather than a house, is the way to go. Minimal maintenance. Lock it and leave it! We rather like apartment living in Chicago and preliminarily believe that a condo unit of 2,000 square feet or so would be "plenty of room" for a "permanent" (i.e., six-month-plus) Florida residence for a couple. Any thoughts about that?
We bought a condo in Mexico for our retirement and it is right at 2,100 sq ft. We figure that is plenty of space for the two of us. Smaller is easier to clean and maintain. And DW says if I get on her nerves she can always send me to another room.
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Old 01-20-2011, 12:57 PM   #11
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Maybe a Florida condo, rather than a house, is the way to go. Minimal maintenance. Lock it and leave it! We rather like apartment living in Chicago and preliminarily believe that a condo unit of 2,000 square feet or so would be "plenty of room" for a "permanent" (i.e., six-month-plus) Florida residence for a couple. Any thoughts about that?
We give that lots of thought, as we consider downsizing here. Main hangups are sometimes rabid HOAs and unexpected fee hikes or assessments, but overall it remains a good option -- high rises, too, if you like urban living.

Insurance is high here but well-offset by the lack of state income tax.
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Old 01-20-2011, 01:17 PM   #12
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Loop Lawyer, have you considered whether you would put the FL place up for short-term rentals, to produce some income during the time you spend in Chicago?

I'm not advocating this, nor suggesting that "yes" should factor heavily into your pro-forma financial calculations. Just pointing out one of the high-level strategic questions I would consider.

Even if the answer is no, you may want to consider the possibility of changing your mind in the future as you scout locations, plan for furnishings, dream about how you will spend your days in paradise, etc.

I'll also repeat advice given by many posters on "moving" and "retire to a new town" threads - consider renting before you buy in a state or city where you previously have spent limited time.
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Old 01-20-2011, 02:37 PM   #13
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More solid advice from B, Rich, and Harry. Thanks.

B, we spent Thanksgiving week in Puerto Vallarta and fell in love with it. Regarding a Mexican condo, how do you assess the risk of expropriation? the risk of violent crime?

Rich, one of our Florida dreams is a condo or townhouse on Harbour Island. Coincidentally, my firm has an office three blocks north of the gate. I could conceivably take the bar exam, become admitted, and "snowbird" my law practice as well as "my life." Let's just say I've been pondering the possibility. Is Harbour Island as attractive in reality as it seems from afar?

Harry, I don't think I want the hassles associated with part-year leasing (as lessor) although I do realize there is a revenue stream to be had. Will keep my mind open about this. Very likely we will rent for a duration at least once before buying. With cash in the bank from the sale of a house, with the contents of that house in storage, and with prices trending lower still in Florida, it's hard to sit on my hands. Still, I've done it and will do it.
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Old 01-20-2011, 03:07 PM   #14
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Loop Lawyer, a condo is much easier than a house for part year living. HOA's are a PITA but for the part year resident a well managed HOA helps a lot with security and outside maintenance. Some communities have many part year owners - HOA fees are high but they are well managed and less of a concern when you are away.

Regarding residency, neither state has an explicit policy. Illinois will let you stay up to 9 months per year without residency as long as you are not earning. Florida, you just show up and declare yourself a resident - DMV, domicile financial accounts, voter registration and you're there. You may need to stay in Fl more than 6 months per year for the first couple of years just to break the Illinois residency bond.

Edit: Go Bears!
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Old 01-20-2011, 03:29 PM   #15
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Regarding residency, neither state has an explicit policy. Illinois will let you stay up to 9 months per year without residency as long as you are not earning. Florida, you just show up and declare yourself a resident - DMV, domicile financial accounts, voter registration and you're there. You may need to stay in Fl more than 6 months per year for the first couple of years just to break the Illinois residency bond.
I will add that there are several layers of complexity here for tax purposes. For example, IL has nonresident and part-time resident tax status. The key is to manage IL allocable income to avoid attribution to IL. As Michael mentioned only a few states have bright line rules (NY is the only one I know offhand), so you want advice from someone who understands how the facts and circumstances tests are applied as a matter of local Dept. of Revenue policy. The Federal government has really only preemptively acted in the area of retirement income, so there is a strong chance of residency in two separate states and possible overlap of tax base.

Hopefully there is a state and local tax attorney at your firm from whom you can get specific guidance. If not, you can always press the firm that preps the partnership returns to provide this advice as part of their service to the partnership. Of course there is always paying a third-party for advice, but who wants to pay if you don't have to.

Probably way more detail than you care about, but I'm trying to shrink government one taxpayer at a time.
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Old 01-20-2011, 05:09 PM   #16
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Rich, one of our Florida dreams is a condo or townhouse on Harbour Island. Coincidentally, my firm has an office three blocks north of the gate. I could conceivably take the bar exam, become admitted, and "snowbird" my law practice as well as "my life." Let's just say I've been pondering the possibility. Is Harbour Island as attractive in reality as it seems from afar?
Know Harbour Island well, almost bought there and have numerous friends who live there. I think it is a very secure, high-end development with much to offer. Fees are a bit high as you may imagine. Once downtown Tampa takes off, the prices will probably soar.

Check your private messages for more details.
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Old 01-20-2011, 05:36 PM   #17
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we spent Thanksgiving week in Puerto Vallarta and fell in love with it. Regarding a Mexican condo, how do you assess the risk of expropriation? the risk of violent crime?
kcowan will be along shortly; he lives part time in an owned condo in PV.
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Old 01-20-2011, 06:31 PM   #18
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More solid advice from B, Rich, and Harry. Thanks.

B, we spent Thanksgiving week in Puerto Vallarta and fell in love with it. Regarding a Mexican condo, how do you assess the risk of expropriation? the risk of violent crime?
We discussed that at length and while there is no real way to hedge that risk, we agreed that we were comfortable enough with the political situation there to go ahead with the deal. Also, foreigners cannot buy waterfront property in Mexico outright but are basically given a 50 year lease through a bank trust called a fideicomiso. It is automatically renewable for subsequent 50 year terms.

As for the violence, we've been going to Cozumel for over 10 years and have never had the slightest problem. Crime rates on the island are very low and are mainly property thefts, not violent crimes.
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Old 01-20-2011, 06:50 PM   #19
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"foreigners cannot buy waterfront property in Mexico outright but are basically given a 50 year lease through a bank trust called a fideicomiso. It is automatically renewable for subsequent 50 year terms."

. . . unless the Mexican government changes the law. I'm not saying they will do so, and it would be offensive if it happened, but third-world countries have been known to do such things. . . . Something to think about, although not necessarily a determining factor.
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Old 01-20-2011, 07:01 PM   #20
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"foreigners cannot buy waterfront property in Mexico outright but are basically given a 50 year lease through a bank trust called a fideicomiso. It is automatically renewable for subsequent 50 year terms."

. . . unless the Mexican government changes the law. I'm not saying they will do so, and it would be offensive if it happened, but third-world countries have been known to do such things. . . . Something to think about, although not necessarily a determining factor.
I know and several people have told us we're crazy and maybe so but we were willing to take the gamble in Mexico. Wouldn't do the same in Venezuela or Ecuador though!
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