How expensive a FIRE home?

[FLSUnFIRE]

I currently hope to reach FIRE in mid 2020 (earning enough to fund the year and max out my retirement accounts one more time). I am currently renting but want to own to have a bit more control over my expenses prior to quitting. I keep going back and forth in my mind over two themes as I look at properties. I will be paying cash; and will have to liquidate investments from my taxable account (cost basis is about 50% of value to cover purchase costs over $170K.



COA1: Purchase a more modest condo further out from the city (where I do most of my socializing) and have to drive anytime I want to do anything. This would also likely not have a garage/storage for toys. Cost would probably be $125-160K for something that I would like the living space. If I take this option, I should be in good shape to live off 3% or so of my assets. (I'm 45 now so 3% is my threshold)



COA2: Purchase a condo or town home closer in with a garage for my toys. While properties in downtown proper are out of my range (if I ever want to attain FIRE). There are some just on the outskirts that are still biking distance/walking to many places I would go. Buying a property I am excited about from a lifestyle perspective would cost $300K minimum... I would not likely spend more than $350K as that would delay my retirement too much.


My question is more philosophical as I can run the numbers and figure out how much the cost difference will delay my goals. Do any of you regret splurging or regret being too cheap? Any tips on how to help me frame my decision-making in my own head? I view this as an asset allocation but with some of the returns being "enjoyment" which is hard to quantify!


My job is soul sucking so I don't want to regret being stuck longer but then once I am retired and have time, I will have so much more enjoyment going with option 2 (and would be able to enjoy living there before quitting).

Thanks!


FLSUnFIRE

 

[freedomatlast]

I vote for COA2. You'll be spending more time than ever playing with your toys in retirement, so you'll want/need garage space for them. I'd do this even if it meant I had to work a little longer.

Think about how much time you will be spending there. Financially, there's probably nothing more important than being in a house that suits your needs and that you will enjoy spending time in every day.

 

[Aerides]

afaic, if you aren't happy with your home, FIRE is a lot less enjoyable. Once RE'd, you'll spend a lot more time there.

If we're not travelling, a typical day at home probably clocks more time than it did when working. Because back then we had to pack errands and night's out into the weekend. Now we can spend whole days without ever leaving if nothing is planned.

Get the place that excites you, not the place that will just do.

 

[Golden sunsets]

I know this doesn't answer your question, but if the funds to purchase said Fire home are currently invested in the market, I would liquidate that amount now, rather than risk a downturn between now and when you intend to purchase. Funds to be used in the near term should not be invested in assets that can depreciate.

I vote for COA2

 

[Rianne]

I'd examine appreciation and historical sales in the COA1 option. If you could easily sell the modest condo, once retired and make a tax free appreciation on it, I'd do that. If the condo sales are stale and very little movement, definitely the COA2 option.

Hire a realtor to get all the history, tax history and look at past list price and sold price, this tells a lot. You'll be paying HOA at the condo, weigh that with upkeep on the COA2 home option.

Also, what does condo upkeep look like? Are they in good shape. Talk to a few people who live there, complaints? Condos can be an "iffy" purchase. You could lose money when time to sell easier than a house. It all depends on location and reputation.

 

[euro]

I know this doesn't answer your question, but if the funds to purchase said Fire home are currently invested in the market, I would liquidate that amount now, rather than risk a downturn between now and when you intend to purchase. Funds to be used in the near term should not be invested in assets that can depreciate.

I vote for COA2

Agreed on pulling the funds now.
Also, without a doubt: option 2

 

[FLSUnFIRE]

I just got back from looking at the unit (COA 2) I was interested in. It is cheap for downtown overall but expensive for what it is. It's advertised as a 2/2 but really is a 1 BR 2 BA. A bit peculiar but perfect for a FIRE'd bachelor. The area is booming and there is an 85 acre plot that will be redeveloped in the next decade so the dirt under it should hold value as the surrounding area explodes. I'll probably make an offer this week after I have time to look at comps and review the condo docs. It's definitely overpriced for the condition (contractor grade stuff and rented for the last decade) and a bit stale on the market so hopefully a cash offer will motivate them to make a deal.


I'll probably wait to sell securities till I have a contract.... it's a risk I'm willing to take. Either way I am timing the market and if I sell then walk away I just incurred a tax hit for no reason. I may do a signature loan or borrow against my TSP balance to avoid the tax hit since I could pay it off fairly quickly after I buy with no mortgage or rent sucking my cash flow.


I am excited about this property... definitely something that fits how I live (and even better when FIREd). If I'm wrong, it shouldn't be too difficult to rent out.

 

[FLSUnFIRE]

Oh, and thanks for all saying COA2. I know I'm excited and don't want to have emotions overrun prudence.... makes me feel a bit better about spending some of my funds! So hard to go from saving to spending (but pretty awesome to be a cash buyer)!

 

[albundyz]

We retired 12 yrs ago, at 56. Sold our large empty house and downsized. With our equity, we bought a foreclosed house outright, no mortgage. We stayed in the smaller house for 9 years until our unhappiness outweighed the very positive cash flow. The source of the unhappiness was the small house itself and, all our neighbors were age 30-32 with 2 kids and both parents worked. Zero in common. Two years ago, we moved into a larger, more luxurious house in a restricted 55+ age community. Yes, our cash flow took a hit, but we couldn't be happier.

 

[Midpack]

I’d let the adage “location, location, location” be the primary factor in my decision making. And we’re actively looking for our forever home too, spent all last week house hunting. The house itself is important and there are some home wish list items we won’t compromise on, but location and neighborhood are the most important considerations to us. Our next home will cost quite a bit more than our current house.

Best of luck.

 

[W2R]

Do any of you regret splurging or regret being too cheap?

No regrets here! I still call my home my "Dream Home" because it is everything I always wanted in a home. One thing to keep in mind is that the older we get, the more most of us appreciate having an easy to care for, smaller home. I am 70 and my 1500 sf home is as big as I would want to deal with at this age.

I did splurge a little (OK, total expenses for everything including cost of house minus what I got for my old house, plus closing costs, moving, repairs & upgrades, etc was $92,603). But housing prices soared shortly after I bought so that kept me from feeling too bad about it. The increase in what my house is worth is all on paper but I'll take comfort where I find it.

Also some of the splurge was in re-doing the landscaping and a few repairs and upgrades for the house to make it what I wanted it to be right from the start. I had all of these done at my own pace during the first few months after moving in and always knew I could stop if necessary. That softened the blow a bit.

Most of all, buying and living in my Dream Home was really a lifelong dream, and it has meant the world to me, even more than I expected. This is the one thing that I wanted to do before I die - - just like some want to go to Antarctica or climb a mountain or whatever. The fact that this home happened to be located right next door to F's house has made living here simply over-the-top wonderful. Sort of like a child must feel the first time they are taken to Disneyland or similar - - every day of living here is almost indescribably terrific for me. Had I known, I would not have had the slightest concern about the cost.

Any tips on how to help me frame my decision-making in my own head? I view this as an asset allocation but with some of the returns being "enjoyment" which is hard to quantify!

I thought of it as a permanent reduction to my portfolio size, and reframed my retirement finances that way, ran FIRECalc again, and so on. I guess it's just a mind trick, but it worked for me.

Instead of a retirement portfolio of "$X", it is now "($X-$92,603)". So, the same withdrawals from my investment accounts would be a higher WR. Everything is fine, though.

Something unrelated that occurred to me, is that it might be a good idea to retire first, wait a couple of years, and then buy the house. At that point you would have a better idea of what retired life is like for you and what your needs in a house will be on into the future.

 

[MarieIG]

We retired 12 yrs ago, at 56. Sold our large empty house and downsized. With our equity, we bought a foreclosed house outright, no mortgage. We stayed in the smaller house for 9 years until our unhappiness outweighed the very positive cash flow. The source of the unhappiness was the small house itself and, all our neighbors were age 30-32 with 2 kids and both parents worked. Zero in common. Two years ago, we moved into a larger, more luxurious house in a restricted 55+ age community. Yes, our cash flow took a hit, but we couldn't be happier.

We will need to move, but I really don't want to downsize. (Our current house is not large, and any smaller would make me uncomfortable.)

 

[brucethebroker]

DW and I downsized into a small town/suburb of a large Midwest city. We have many options to walk and ride bikes-that was an important consideration. (The move encouraged us to sell one car.=$$ saved).

Have you considered taking on a small ($50-$100k) mortgage? Principal and Interest part of the payment is not that great and if you keep the payment low enough, it will not eat into your nest egg. It's really just psychological compared to living mortgage free. With current mortgage rates still near all time lows, it may be worth a look.

 

[Offgrid Organic Farmer]

We wanted to live rural, to garden and raise some animals.

So I bought 150 acres of forest in a rural [less than 10 people per-square-mile] area. We built a house and we have been here 14 years.

Total cost for land and construction was about $150k.

 

[Teacher Terry]

We downsized to a 1400 sq fr ranch in town. We love it. We can walk some places and have low maintenance.

 

[Jerry1]

I'm in the TBD stage. The house is nice and the location is great for us because we're close to grandkids. We also like that the house is easy to clean. At 1700 sqft, it's not small, but the bedrooms are small and there's no master bath. I'm always looking on Realtor.com to see what's available, but the equation hasn't changed. Anything I would want more, is too far away from the grandkids. We're right on the edge of the blue collar 3br brick ranch neighborhoods that DD lives in. At 10 min away, DD and kids will actually drop in. Much further and that doesn't happen. We moved from being about 30 minutes away and it never happened there. Frankly, it's a tug of war. I love the grandkids (so that's winning), but I'd like a bit nicer house. Making matters worse is that MIL is starting on a path to live with us (Alzheimer's). That makes the house a lot smaller and we did not expect that when we moved here. Though we probably should have foreseen it and bought an extra bedroom.

My recommendation is only that you give due consideration to all of the things that a home brings you. Not everyone can find their dream house like W2R did. Just like not many people find a job that is their passion. Blessed are those who do. The rest of us have to find balance. Sometimes the best you can do is not screw up real bad. I certainly do not think I screwed up - one look at 3yr old grand daughters face confirms that. Hopefully I'll get one more chance while I still have time left to try for a home run.

 

[FLSUnFIRE]

Fire in the hole... I have an offer outstanding. It's quite a bit lower than the unrealistic asking price (but very reasonable considering a recent comparable) so I expect a counter and that it should be reasonable. Feeling good about the decision... Pricey but with low association fees (and reserves fully funded) the out of pocket per month will make up for it. I'll probably borrow $50K from my TSP account to reduce the tax hit and pay it down/off in the most tax efficient manner I can over the next two years. I'll then only eat taxes on $35-$55K of realized LTCG depending on how the dust settles on negotiations and up front costs (insurance, etc). I'm excited and am sure I'll love living there -and pretty sure it won't delay FIRE by more than a few months...

 

[W2R]

Fire in the hole... I have an offer outstanding. It's quite a bit lower than the unrealistic asking price (but very reasonable considering a recent comparable) so I expect a counter and that it should be reasonable. Feeling good about the decision... Pricey but with low association fees (and reserves fully funded) the out of pocket per month will make up for it. I'll probably borrow $50K from my TSP account to reduce the tax hit and pay it down/off in the most tax efficient manner I can over the next two years. I'll then only eat taxes on $35-$55K of realized LTCG depending on how the dust settles on negotiations and up front costs (insurance, etc). I'm excited and am sure I'll love living there -and pretty sure it won't delay FIRE by more than a few months...

Congratulations, and good luck!

 

[FLSUnFIRE]

Ugh, as I mentioned, the seller listed well above any reasonable market valuation and countered me still way too high. Slept on it overnight. I'm willing to slightly overpay as the excess amortized over 30 years or so I intend to be there (plus in an area that is improving) wouldn't be much.


Still, not even sure how I want to respond. I'm thinking of giving two counters for him to choose, one somewhere in the middle, slightly above market that I could live with and also one accepting the sale price if he'll do a 10 year 1% note for the amount I don't have in cash. If so, the amount of my taxable portfolio that I would have to set aside for an annuity to make the payment would actually make my cost cheaper than my original offer. If he's hung up on the sales price and bad at math (he's the developer so I'd think he'd be able to do some investment analysis though) perhaps he will be happy and I'll be happy... laughing to the bank $30K richer. -Not optimistic and don't relish an ongoing relationship with the seller but the numbers are good. I'll talk to my agent later after she talks to theirs (was all electronic communication yesterday).

 

[38Chevy454]

I assume your comps are accurate, so emphasize that and stick to the market value you feel is fair. I would think you can find alternative properties if this deal falls through. Maybe not on market today, but wait and see what comes up. Don't allow yourself to be caught up in a contest to get this property and lose sight of the fact that real estate market has many other properties. You are the one with control as the buyer.

 

[copyright1997reloaded]

OP, is there a reason (or did I miss it) as to why you aren't just going to do a mortgage on the property? Think of it as an option in terms of when you pay off/down the loan instead of taking a big immediate hit on which you have to pay capital gains.

ETA - once you FIRE, and no longer have that traditional income flow, it will be much harder to get a loan. So now's the time.

 

[albireo13]

We are in the process of looking at homes right now too. To get the location we want, and decent quality house, it will require a significant mortgage. Something we can handle and I've planned for.


I plan to retire in 2020 so, that gives us a year to find a house and get the loan before I retire.

 

[FLSUnFIRE]

So, I think I have a contract... Have a verbal agreement with signatures to follow. The seller finally came in with a counter at terms I was going to offer as my highest and best as I walked away. Kind of a unique property so not one I'd find another comparable (unless another opened up in that small community -and only 8 units have the same floorplan). More than I wanted to spend (just because I want to FIRE) but RELATIVELY cheap for the location and it has everything on my wish list in a property (small living space, oversized garage, low maintenance, and walking/biking distance to almost all of my leisure activities).


Will probably borrow a portion against my TSP in order to reduce my capital gains tax hit... I can sell assets to pay it off right before I FIRE myself as my CG tax rate should be zero if I play my cards right.

 

[imoldernu]

Best wishes for happiness in your new home.

For others still looking for their own shangri-la....

About $170,000 in our community. Very similar to our home.

https://simplythefinest.net/villas.php

 

[FLSUnFIRE]

OP, is there a reason (or did I miss it) as to why you aren't just going to do a mortgage on the property? Think of it as an option in terms of when you pay off/down the loan instead of taking a big immediate hit on which you have to pay capital gains.

ETA - once you FIRE, and no longer have that traditional income flow, it will be much harder to get a loan. So now's the time.

I missed this reply. I did try to get 1% seller financing for a higher price, they balked at that but my agent thinks it boosted their ego a bit and got us to a cash agreement. That said, my reasoning for paying cash....


I'm planning to FIRE myself before age 50 and hope to have a ~3% WDR. $100K would only spit off $3K of income before taxes while a $100K mortgage would cost more than $3K a year to maintain (granted it would eventually end). I'm more concerned about cash flow than maximizing asset value and earning after tax returns that are above current mortgage rates is not guaranteed or as risk free as a paid off home. A good chunk of my assets are in my TSP and IRA so my withdrawal options are limited so a mortgage payment obligation could cause me cash flow issues. The home is in a location likely to see above average appreciation for the area (and has features that are already not economical to offer in new construction due to land prices) so it should appreciate nicely so even though not leveraged should be a good investment of my funds. -I'm not buying it for the investment but knowing that makes me feel better about tying up my money!