Potential RE purchase approaching RET

[ATby55]

Hi everyone,

Long time reader of this forum who greatly appreciates all of the information and advice shared. Kids are soon to all be in college and we are thinking more about our next phase.

DW and I are in our early 50s and both work for big corp. We are potentially ~ 5+ years out and are considering a significant real estate purchase in our future landing spot. We would like to keep both properties for likely the next 10+ years.

Our NW (excl existing home & 529s) is ~$6.25M. The potential (no mortgage) RE purchase would exhaust most current available non-retirement after tax savings/assets, leaving ~$4.5M of mostly 401ks/IRAs. New property is located in a prime vaca area and would be used as a ST rental in the near term, conservatively covering its expenses.

I’ve run #s through firecalc with assets excl the RE purchase post (~4.5m) retiring in 5 yrs (assuming continued employment) and we seem to get to desired +$200k/yr spending (incl health care spending). We generally live below our means and increase savings each year.

What is concerning is losing all of our (post tax) equity index funds/Indic stocks. Also, Is this much RE exposure just too crazy? The potential RE purchase market has held/increased value in the long run, but is definitively not immune to ups/down periods historically.

It feels a bit of a stretch, but will we get a better opportunity down the line? We would keep emergency funds in cash and have some remaining post tax equities to sell, if necessary. Future savings in our remaining working years would be tilted toward after-tax investing. Besides using in our retirement years, the thinking is the RE would remain in the family for the future generation.

Recognize this is a first world problem, but appreciate any comments/thoughts folks have.

Thank you!
AT

 

[DrRoy]

Having 1/4 of my NW tied up in RE would be a lot for me. There is a thread and poll on this from the last month or so. Mine is only 8%. Still, this may be how you want to use your $.

 

[grasshopper]

Having a large bucket of non retirement funds, made ER at 54 and 50 easier.

 

[militaryman]

If you have "enough" (firecalc) with the 4.5 mil that is in 401k/IRA to sustain retirement what does it matter if the RE market fluctuates hugely? As you've indicated these RE assets are for living in and enjoying and then passing on to heirs. They are really not retirement investments in the traditional sense.
If your intention is to pass the properties on then their increasing in value is at most going to have the benefit of allowing for better rental returns but on the other hand you'll pay more in prop tax and homeowners ins. so unless you have prop tax caps in your state then perhaps (since you're not anticipating getting rid of the properties) you don't really want to see the value of the RE skyrocket along with your prop. tax and insurance.

 

[pb4uski]

First, you say you are early 50s and plan to retire in 5 years, so that would be what? 57? If so you may penalty-free access to tax deferred money through the rule of 55 and/or enough a taxable account money due to savings from here to tide you over to 59-1/2.

Second, if this is a rental and you don't want to drain your taxable accounts or have too much in real estate, consider a mortgage for the rental. You'll perhaps pay a little more than what you earn on taxable investments but the interest may be deductible on Schedule E.

Finally, in 5 years your life might change so you pine for a different part of the country... grandchildren perhaps?... so that might support holding off or at least waiting until the next downturn in real estate prices to buy on the cheap.

 

[ATby55]

Having 1/4 of my NW tied up in RE would be a lot for me. There is a thread and poll on this from the last month or so. Mine is only 8%. Still, this may be how you want to use your $.

Yep, I hear ya! It would be high. Will check out the thread-thx!

 

[ATby55]

Having a large bucket of non retirement funds, made ER at 54 and 50 easier.

Thx. ER was considered, but we have a higher comfort level with delaying to mid-later 50s. Also, the addtl working years arguably enables the RE purchase.

 

[street]

I don't see much of a problem with the purchase. If shove come to push you can sell one or both and be fine. Even if markets are down, you will survive the event because you had to sell.

A 1/4 in RE isn't a bad thing and you will have a lot of room to adjust if need be.

 

[Katiek]

I think you can do it, but just a few lifestyle considerations to make sure you think about. How certain are you that this is where you want to retire? A lot can change in 5 years. Also, dealing with short term rentals can be time consuming, even if you hire someone to manage the rentals and the house. Make sure that's something you really want to do.



But if this is a location you know well and has long been your intended retirement location, I think you are well prepared financially.

 

[COcheesehead]

Vacation areas are getting fickle with short term rentals. Two communities by us have capped or outright banned them.

 

[pacergal]

It looks like your financials are Ok, (did you include taxes in firecalc?).

Will the future retirement spot be where you and your spouse will live no matter what happens with kids during/after college (move for a job, marriage, babies/grandkids?)

Having the second home as a short term rental, will you hire a property manager? Have you considered all of the expenses of a second home upkeep?
Will you want to remodel the house before you move in at retirement ?

A lot can happen in 5-10 years, but as street mentioned, you could always sell if needed.

 

[ATby55]

First, you say you are early 50s and plan to retire in 5 years, so that would be what? 57? If so you may penalty-free access to tax deferred money through the rule of 55 and/or enough a taxable account money due to savings from here to tide you over to 59-1/2.

Second, if this is a rental and you don't want to drain your taxable or have too much in real estate, consider a mortgage for the rental. You'll perhaps pay a little more than what you earn on taxable investments but the interest may be deductible on Schedule E.

Finally, in 5 years your life might change so you pine for a different part of the country... grandchildren perhaps... so that might support holding off or at least waiting until the next downturn in real estate prices to buy on the cheap.

Thx! Good point. Penalties will likely not apply when accessing funds.

Not keen on having debt, but will look into interest deduction.

Yep. Life and market prices (certainly) could change and indicate this may not be the right decision/timing. I’ve never been good at timing the markets, so am trying to think of it for long term/generation-wise it should be ok.

 

[Ian S]

What is the status of your current home - mortgage, equity, etc. - which you appear to be holding onto until you move to the "future landing spot?"

 

[OldShooter]

How do you view this real estate? Is it a lifestyle decision that you expect your heirs will see in your estate or is it an investment decision?

If lifestyle and you can afford it dropping significantly in market value, then go for it.

If investment, professional fiduciaries would consider it to be an imprudent concentration in a single asset. Lights would turn from amber to red for me if it is in an economically dangerous area like Chicago, California, Illinois, etc. where government(s) have major financial problems, outmigration of the best and the brightest, etc. Another factor would be future availability of insurance. Hurricane and wildfire areas, for example, where insurors are already pulling out. Another would be the potential for water wars; LA and Phoenix, ... Absent all these factors and if I believed the land had exceptional potential for appreciation, I would maybe look harder. But probably not.

 

[ATby55]

I don't see much of a problem with the purchase. If shove come to push you can sell one or both and be fine. Even if markets are down, you will survive the event because you had to sell.

A 1/4 in RE isn't a bad thing and you will have a lot of room to adjust if need be.

Thx! Worst case scenarios are being thought through including selling @ loss.

 

[ATby55]

I think you can do it, but just a few lifestyle considerations to make sure you think about. How certain are you that this is where you want to retire? A lot can change in 5 years. Also, dealing with short term rentals can be time consuming, even if you hire someone to manage the rentals and the house. Make sure that's something you really want to do.



But if this is a location you know well and has long been your intended retirement location, I think you are well prepared financially.

Thx! Good point- We do love it there! Although I may have been quick to absolutely call it definitively our landing spot. Experiencing it there longer term, and splitting time will determine for sure. My thinking is we should have the flexibility either way.

We will use a property manager, but recognize there is still a real time commitment.

 

[LateToFIRE]

We bought our "retirement" home at about same age and NW as you and I have continued to work another few years (case of OMY syndrome). It's in a popular vacation area, made even more popular during and sense the pandemic. Glad we bought when we did, as prices have just about doubled since. We did not rent it out though we could have done so easily on a seasonal MD-LD basis (wanted to use it for ourselves and decide if this was really the place). We did mortgage it, though we could have used investment funds - just made sense from a tax perspective.

IMO, I wouldn't so much be concerned about the % real estate relative to NW. Your NW is high enough to absorb that risk. But, what I would want to be very certain of is the cost of maintaining the new home - sounds like you'll spend $1.75M - and that implies maybe a large home, large property, big tax bill, etc. That is what could pose a drain on your retirement plan. In my case, feels like we need an army to take care of our retirement/vacation house (housekeeping, grounds, landscaping, gardening, pool, etc.). And stuff breaks and needs repair/updating all the time.

There is only so much of it we can or would be willing to do ourselves. During your working years, you probably won't have time for DIY. And in your retirement years you might not have the willingness or ability. Something to think about.

 

[ATby55]

Vacation areas are getting fickle with short term rentals. Two communities by us have capped or outright banned them.

Thx! Anything can happen, but the area is pretty established with rentals being a big part of the place.

 

[COcheesehead]

Thx! Anything can happen, but the area is pretty established with rentals being a big part of the place.

I mentioned it because places near us like Telluride, were the same and then they clamped down for many reasons. Just a heads up. Local laws may change and the income stream for rentals may go away.

 

[skyking1]

I mentioned it because places near us like Telluride, were the same and then they clamped down for many reasons. Just a heads up. Local laws may change and the income stream for rentals may go away.

That is a good point. I designed the new home so that it would host my family well, but the city does not allow short term rentals. It was not my primary goal but I remember reading about homeowners who were left without planned income there.

 

[ATby55]

It looks like your financials are Ok, (did you include taxes in firecalc?).

Will the future retirement spot be where you and your spouse will live no matter what happens with kids during/after college (move for a job, marriage, babies/grandkids?)

Having the second home as a short term rental, will you hire a property manager? Have you considered all of the expenses of a second home upkeep?
Will you want to remodel the house before you move in at retirement ?

A lot can happen in 5-10 years, but as street mentioned, you could always sell if needed.

Thx! Yes, taxes are considered.

I think we may live there, at least, part of the year.
We’ll need to assess after spending time.

We will definitely use a property manager. Expenses are being considered. Specific house is still up in the , but work would likely need to be done.

 

[ATby55]

What is the status of your current home - mortgage, equity, etc. - which you appear to be holding onto until you move to the "future landing spot?"

No mortgage. Home is paid off…thx

 

[ATby55]

How do you view this real estate? Is it a lifestyle decision that you expect your heirs will see in your estate or is it an investment decision?

If lifestyle and you can afford it dropping significantly in market value, then go for it.

If investment, professional fiduciaries would consider it to be an imprudent concentration in a single asset. Lights would turn from amber to red for me if it is in an economically dangerous area like Chicago, California, Illinois, etc. where government(s) have major financial problems, outmigration of the best and the brightest, etc. Another factor would be future availability of insurance. Hurricane and wildfire areas, for example, where insurors are already pulling out. Another would be the potential for water wars; LA and Phoenix, ... Absent all these factors and if I believed the land had exceptional potential for appreciation, I would maybe look harder. But probably not.

Thx! We see this as a lifestyle decision.

I can’t say we’d be immune to significant market loss, but the intention would be to ride it out and for the kids to keep for the long term. FBOW the kids have been a part of the process.

 

[ATby55]

We bought our "retirement" home at about same age and NW as you and I have continued to work another few years (case of OMY syndrome). It's in a popular vacation area, made even more popular during and sense the pandemic. Glad we bought when we did, as prices have just about doubled since. We did not rent it out though we could have done so easily on a seasonal MD-LD basis (wanted to use it for ourselves and decide if this was really the place). We did mortgage it, though we could have used investment funds - just made sense from a tax perspective.

IMO, I wouldn't so much be concerned about the % real estate relative to NW. Your NW is high enough to absorb that risk. But, what I would want to be very certain of is the cost of maintaining the new home - sounds like you'll spend $1.75M - and that implies maybe a large home, large property, big tax bill, etc. That is what could pose a drain on your retirement plan. In my case, feels like we need an army to take care of our retirement/vacation house (housekeeping, grounds, landscaping, gardening, pool, etc.). And stuff breaks and needs repair/updating all the time.

There is only so much of it we can or would be willing to do ourselves. During your working years, you probably won't have time for DIY. And in your retirement years you might not have the willingness or ability. Something to think about.

Thx for sharing your personal experience and perspective! Taxes are definitely high. I think we are accounting for all expenses, including a heavy reliance on property mgmt.

While we are working, we expect to have rent cover maintenance. In retirement we would likely split time and have most of the expenses covered. If rental experience materially differs from expectations, we would be fine while working, but may reassess keeping…