Looking for advice, criticism, and guidance

[FIREdToBeExpat]

My wife (34) and I (38) are both engineers. We have always put our family first, therefore we have made some career choices accordingly such as leaving the corporate world and establishing our own home-based business in New York so we can be with the kids and travel overseas. We live below our means but live comfortably and don’t like debt, therefore we paid off our NY single family house in 2013, within 5 years. We also have two children ages 9 and 7-months. We have about $250k in SEP IRA and about $400k in home equity. We would make about $200k for 2013 and it should be $120k-$180k/yr range going forward. We intend to contribute to $20k-$30k/yr into our SEP IRA every year.

After much planning and economical preparation, we moved from New York to Istanbul, Turkey in August 2013. We chose Istanbul because we have family here, also my kids and I are dual citizens (US & TR). My wife is only an US citizen, for now.
Our initial plan was to stay for a few years so the kids are comfortable with their Turkish, be closer to the family etc. It seems that we may stay here for many more years since we are very happy being here.

We have just rented our NY home for $2300/month and it is in a desirable school district on Long Island, NY. We are currently renting in Istanbul and the rent is about $800/month. There is government provided universal health insurance in Turkey and the cost is very minimal, $200/month or so. (We used to pay thousands of dollars per month for our health insurance back in the States!) Our biggest added cost is my older child’s International School which costs about $15,000/year. All things considered, living in Istanbul is cheaper by about 20% or more.

My questions are;

1) Should we buy an apartment in Istanbul within the next 2-3 years? (Minimal cost of an apartment would be about $175k cash since the rates are higher and we may not qualify for a loan since neither of us have any work history in here.) We may have to lower our annual SEP IRA contributions in order to save this amount.

2) We intend to send our older child to International School up until college but we may force to send the younger one to public school in Istanbul. Would this be a bad idea?

3) If we do end up staying here, does it make sense to contribute to our NYS 529 fund?

4) Should we sell our house in New York? If so when? If not, why?

 

[jIMOh]

I'll suggest the 529 account is a rip off, you can probably do better with tax efficient investing in a taxable account.

The main pros of a 529 account are a state tax deduction on contribution. 8.5% NYS tax bracket means you "save" $85 in taxes for every $1000 you put in. Check your tax bracket, I did for my parents when they looked into NYS 529 for my kids. The second pro of a 529 is tax free compounding, the third pro is qualified withdraws are tax free.

The con of a 529 is it MUST be used for "college or higher education" and it prevents a person from taking the college tax credits (such as the american opportunities credit).

If you live out of the country, do you still file a US federal income tax (1040)? If you do, would you qualify for American Opportunities (based on INCOME) today? There is a ceiling, and I think you are close to it.

The American Opportunities credit is something like spend $4000 get $2500 back. It would be tough to get same return on the tax deduction for the 529.

My suggestion is strongly consider a taxable account which is invested efficiently for tax reasons for college and you gain some flexibility (what you use money for) and lose the ability to make tax free withdraws.

 

[DJRR]

My questions are;

1) Should we buy an apartment in Istanbul within the next 2-3 years? (Minimal cost of an apartment would be about $175k cash since the rates are higher and we may not qualify for a loan since neither of us have any work history in here.) We may have to lower our annual SEP IRA contributions in order to save this amount.

2) We intend to send our older child to International School up until college but we may force to send the younger one to public school in Istanbul. Would this be a bad idea?

3) If we do end up staying here, does it make sense to contribute to our NYS 529 fund?

4) Should we sell our house in New York? If so when? If not, why?

Sounds like you are doing great Some of my thoughts:

1. All real estate is local, so it is hard to offer advice. In the US there are significant transaction costs that would not be recovered unless you stayed in the house for 5 -10 years. Is that the same in Turkey? Is it cheaper to rent or buy? I would probably not buy a place unless the rental cost was significantly higher than buying. I assume that property laws are well established and that as a citizen you have no restrictions on purchasing so those type of concerns are not relevant.

2. What are the local schools like? Do they have the equivalent of US charter/private schools that are between the public and international schools? Assuming they get the basics right I would think there are significant advantages to being fluent in a Turkic language and a US citizen in business and government service. I don't think I would shell out $30k per year for 2 kids unless there was an inferior school system. My guess is that there is something in between that would suit your needs. The reality is that k-12 education in the US is not necessarily great vs. other parts of the world.

3. I would contribute to a 529 if that is your kids path. College, especially graduate education, is superior in the US than most of the world. I would rather put the money there than private elementary school.

4. I don't like being a long distance land lord, so would probably sell and invest the money in a diversified portfolio. The only reason I would keep it is if you want to come back to that specific location and don't think you would be able to purchase a house there again. Some markets are so expensive that it is hard to get back in after you leave. Don't think that would apply to you with your income level, but something to consider. Need to evaluate what your real return in with paying someone to do all the property management since you are not able to.

 

[FIREdToBeExpat]

If you live out of the country, do you still file a US federal income tax (1040)? If you do, would you qualify for American Opportunities (based on INCOME) today? There is a ceiling, and I think you are close to it.

...

My suggestion is strongly consider a taxable account which is invested efficiently for tax reasons for college and you gain some flexibility (what you use money for) and lose the ability to make tax free withdraws.

Our business is a New York based LLC so we have to file for not only FED but also NYS as well. We do have a taxable account and I think we will use it more.

 

[FIREdToBeExpat]

DJRR-

1) There are costs associated with buying, especially if you are using a RE agent. I think there is 2-4% taxes plus RE agent fees involved. If we do buy, we would buy for the long run. The laws have changed lately and non-citizens can also buy property in Turkey. For me, there is no issues at all.

2) Honestly, I don’t think we will spend THAT much for k-12 education either. I need to search more but I think we could get by with the public school.


3) We are considering either the UK or the US for college, but time will tell.


4) We have yet to decide what to do with this house. It’s a nice one in a nice school district, etc. The good think is that our Management Company is good and it is rented so time will tell as well.

 

[someguy]

Make sure you understand all the costs of a rental. Most new landlords drastically overestimate their true net on a rental. I think it's very unlikely keeping $400K locked up for top line rent of $2,300 makes sense economically. General rule of them with a paid off property is to consider 40-50% of gross rent (920-1150/mo) versus the return the $400K tied up would otherwise generate. If you use 5% for investment return, that is $20K/year to sell and invest the equity vs. $11-$14K/year to rent it.

 

[FIREdToBeExpat]

Make sure you understand all the costs of a rental. Most new landlords drastically overestimate their true net on a rental. I think it's very unlikely keeping $400K locked up for top line rent of $2,300 makes sense economically. General rule of them with a paid off property is to consider 40-50% of gross rent (920-1150/mo) versus the return the $400K tied up would otherwise generate. If you use 5% for investment return, that is $20K/year to sell and invest the equity vs. $11-$14K/year to rent it.

I expect to net around $12k to $14k depending on the vacancy rate. I am hoping that the house will appreciate in the next few years since we had bought it at the height of the market in 2006. I understand that there is no guarantee it will go up though. If we do decide to stay here long term (7+ years), I would most likely sell it.

 

[someguy]

I expect to net around $12k to $14k depending on the vacancy rate. I am hoping that the house will appreciate in the next few years since we had bought it at the height of the market in 2006. I understand that there is no guarantee it will go up though. If we do decide to stay here long term (7+ years), I would most likely sell it.

Glad to see you've got a realistic view on net rent. Keep in mind if the nominal house value stays flat, your real rate of return on that $400K is negative, probably -2 to -3%/year. That said, I understand the value of having "the" place to come back to, though.

DW and I are considering a similar thing/situation, although for us splitting time between two locations is probably the ideal option. And we have intentionally kept our mortgage since our real interest rate is pretty close to zero.

 

[HFWR]

No advice or guidance, but I'm pretty good at criticism...

 

[FIREdToBeExpat]

No advice or guidance, but I'm pretty good at criticism...

That's also welcomed