Vacation Rental - to Buy or Not to Buy - that is the question

[nadnerb]

I am 59 1/2 and within a year or two of retiring. Looking at having a place at the beach that we can rent and go to when we want (6-hour drive) and to build equity in a beach property that we may eventually sell (as well as our primary residence) and move there permanently. Question is, do we "borrow" from my 401K to get the down payment to the 20% equity needed to save the mortgage insurance premium?

 

[VanWinkle]

If you have to borrow from your 401K to make this happen, you're not in a fiscal position to buy this property in my opinion. If you can power save the cash for the down payment in a couple years, then it may make sense although you will likely want a cash cushion for you spending before allocating to a down payment.

Best to you,

VW

 

[ivinsfan]

Have you run any numbers at all on this?

The answer to your question is no...

 

[nadnerb]

If you can power save the cash for the down payment in a couple years, then it may make sense

One other option may be to refi our primary residence (which I was planning on doing anyway) and pulling some equity our of there. Thoughts?

 

[ivinsfan]

One other option may be to refi our primary residence (which I was planning on doing anyway) and pulling some equity our of there. Thoughts?

Do you want a general answer or an answer that works for you personally? If it's the latter more specific numbers would be helpful.

 

[marko]

AFAIK, if you borrow from your 401K any future cap gains tax on the sale of that property are paid as ordinary income.

Reading between the lines here, it sounds like you're stretching yourself.

 

[Dash man]

Bad idea in my opinion. If you don’t have the cash for a down payment, you can’t afford it. If you took a loan on your 401k and retired soon, you’d either have to pay back the loan or pay taxes on the withdrawal when you leave your employer.

 

[pjigar]

I am 59 1/2 and within a year or two of retiring. Looking at having a place at the beach that we can rent and go to when we want (6-hour drive) and to build equity in a beach property that we may eventually sell (as well as our primary residence) and move there permanently. Question is, do we "borrow" from my 401K to get the down payment to the 20% equity needed to save the mortgage insurance premium?

I wouldn't withdraw from 401K for ANYTHING this close to retirement. Just rent until you are sure. You can sell your primary home while you live in an extended rental. Lot less risk in case you change your mind and you don't have to come up with the extra cash.

 

[calmloki]

To be clear: you are talking about renting a beach house out to others AirB&B style and having it for vacations when you wish, then moving into it or selling it and moving to the beach after retirement?

Pulling equity from your current home is smart, as the interest would be very low, and in many investment rental cases I'd say go for it. Judging by what you say however I'd say no. This from someone who has had 54rentals (now 27). Your call though.

 

[RunningBum]

AFAIK, if you borrow from your 401K any future cap gains tax on the sale of that property are paid as ordinary income.

Why would this be?

 

[HarveyS]

From what you have said, I don't think you can afford to buy. Be a happy renter when you go to the beach.

 

[Bamaman]

We have many, many friends that have Gulf Coast condos and houses in the area. Most are rented through the internet much of the Summer.

And none of the rental units pay for themselves.

Our friends are all retired, and they come and go from down there. Most time spent is in the off season, as staying there in the Summer reduces their income off rentals.

What's funny is that they're all decorated with cheap furniture. Those that furnish them with luxury furniture says the people renting condos just don't take care of their personal belongings.

In reality, we would want larger and nicer surroundings in retirement than most of the condos and many homes along the Gulf Coast. My best friend has a first home in Seaside, and it's worth $2,000,000.

 

[oiseux]

I agree, without more details, it doesn't seem you are in the position to buy. Property is pretty inflated in many vacation-oriented towns, due to people rethinking priorities in COVID and buying 2nd homes.

I have made profit on vacation rentals, but in year round markets. And those streams took a huge hit during COVID. I went into the last with the same objective (buy early, rent it out before retiring) but always with the perspective that I would be prepared to pay for the full property, if necessary, and that any income was gravy. When we rent, we equip the place out with relatively decent furniture/decor that enables us to market at a premium with a longer minimum stay, that discourages partiers and those that pay less respective care to the rental.

 

[Flyfish1]

Many years ago I turned down a real estate opportunity that my colleagues were going into, many of then taking a HELOC to do so. They even had a broker come to the meeting.
A few days later I spoke to a respected gentleman in the community who agreed with me and said , "Never leverage a core asset for an investment , 401K, IRA , home equity".
To me it was sound advice , I have not wavered since then.

 

[ncbill]

We have many, many friends that have Gulf Coast condos and houses in the area. Most are rented through the internet much of the Summer.

And none of the rental units pay for themselves.

Our friends are all retired, and they come and go from down there. Most time spent is in the off season, as staying there in the Summer reduces their income off rentals.

What's funny is that they're all decorated with cheap furniture. Those that furnish them with luxury furniture says the people renting condos just don't take care of their personal belongings.

In reality, we would want larger and nicer surroundings in retirement than most of the condos and many homes along the Gulf Coast. My best friend has a first home in Seaside, and it's worth $2,000,000.

Yep, don't forget the wear and tear for any rental...it is significant.

 

[2018]

Voice of Experience

I kept waiting form someone else with actual experience to reply .... as you are looking for validation of making this dream happen.

Background: I retired in 2018 after many years in Corp America. I have also been an active RE investor since 2003, surviving the great recession. We flipped properties and own long term rentals, even today as part of our retirement portfolio. This was always my 2nd business on top of a FT career.

Dreamed of owning a place at the beach for years, but never could make the numbers work to drive cash flow. Finally found a steal (4 bedroom 2 blocks from beach) on Hilton Head and had this in our portfolio 2014-2019. We paid cash and completely remodeled the villa. I managed my own rentals using a local island company to coordinate onsite support. We only rented for 7 months a year and maintained a 5 star rating. I was the only person I knew to make a consistent positive cash flow every year. Realtors tell you that VRBO's at best break even, most are money pits.

The stress nearly killed me and almost caused a divorce. Trying to coordinate rentals, property mgt, and contractors during the season consumed a ton of time. I spent every off-season doing maintenance and repairs. Tax time sucked as expense tracking was significantly higher than any long-term rental we own. Oh yeah, don't forget all the taxes; everyone has their hand out.

Do I regret the decision ? No, I was chasing a dream and I found a way to not lose money every year.


Would I borrow from retirement funds ? Absolutely not. Would I give up $12k a year (operating expense) from retirement funding ? Nope.

 

[Aerides]

Going into debt to start a rental, as your first landlording-RE experience (assuming, since you've not mentioned in prior threads), when also planning to retire? Nope.

Even without the debt aspect, still, nope.

And since it's 6 hours away you'll of course need a management company, no you can't just airbnb your way to profit on a single property you can't see every day.

If you really want to eventually get a beach house, just budget for a nice trip down there every year and scope our specific locations, and move when you are ready, if you still want to.

 

[Dash man]

We bought a Jersey Shore home in 2017. Our plan has been to only rent it for a few weeks each summer to pay the property taxes and insurance. We paid cash for the 4 bedroom 2 bath home two blocks from the beach. We’ve easily paid the property taxes and insurance each year from the rent and haven’t made enough to pay any income tax. We use a realtor and AirBnB to find tenants. We allow our kid’s families to use it when it’s not rented. It’s just over a two hour drive for us, so it’s easy to get to for us whenever we want to go. We’ve made some good memories there.
We don’t need the rental income and will eventually stop renting it out. But $4,150/week for three or four weeks is hard to stop. Most tenants take good care of the place, but we have had a couple that we’ve blacklisted for future rentals.
It will soon need new siding and a new roof, but otherwise was updated before we bought it. We got a pretty good deal because the sellers didn’t replace the concrete driveway or sidewalks that were in disrepair, making the curb appeal pretty poor. Concrete is pretty cheap, and would have brought more interest if they had fixed it.

 

[nadnerb]

Judging by what you say however I'd say no. This from someone who has had 54rentals (now 27). Your call though.

What was it I said that makes you change your opinion?

 

[nadnerb]

Going into debt to start a rental, as your first landlording-RE experience (assuming, since you've not mentioned in prior threads), when also planning to retire? Nope.

Even without the debt aspect, still, nope.

And since it's 6 hours away you'll of course need a management company, no you can't just airbnb your way to profit on a single property you can't see every day.

If you really want to eventually get a beach house, just budget for a nice trip down there every year and scope our specific locations, and move when you are ready, if you still want to.

Thanks - from my initial (albeit back of a napkin) calculation, it would be a neutral cash-flow endeavor. If I took money out of my primary residence to finance the down payment, I would trade the 2% interest for the possible capital gain on the beach house which seems like a good deal. If I waited, the value of the beach property would grow much faster in my opinion. SO the capital gain on the beach house and capital gain on primary residence would fund a permanent retirement beach house.

 

[ivinsfan]

Thanks - from my initial (albeit back of a napkin) calculation, it would be a neutral cash-flow endeavor. If I took money out of my primary residence to finance the down payment, I would trade the 2% interest for the possible capital gain on the beach house which seems like a good deal. If I waited, the value of the beach property would grow much faster in my opinion. SO the capital gain on the beach house and capital gain on primary residence would fund a permanent retirement beach house.

That napkin is very powerful. however since you share no numbers here I think that napkin might be biased toward buying. I don't think you are asking for input and such, I think you are looking for affirmation..

 

[Finance Dave]

I am from the Dave Ramsey camp...so I would not borrow from anywhere to buy such a property.

We own 5 rentals, all free and clear. We bought the first with saved cash, and then waited until we saved enough to buy the 2nd, etc. It takes awhile to get started, but once you have 2-3 and no bills, you can save really fast for the rest of them. Cash flow is great for ours and we sleep well with no mortgages. If you have a mortgage and you can't get it rented (due to COVID, or typhoon, or whatever), then you don't have to take a borderline tenant just to get money coming in.

I am the property manager as well, so no fees there and I can do most repairs so we have very few labor repair bills. If you're going to be paying people to manage it, paying association fees, and paying for licensed professionals to repair...you'll be shocked at how all the costs add up.

Another consideration in regards to anything near water is potential appreciation, which is hard to predict. My dad bought a beachfront condo on Siesta Key in the late '80s for $220k, and sold it for $925k about 8 years ago. It was in a premier location and professionally run by an association, so he did well. But there is no guarantee on that type of appreciation.

 

[calmloki]

I voted no because there is no mention of experience with rentals. The place mentioned is 6 hours away. Someone has to manage and repair and deal with stuff - our rentals were all within a 15 mile radius - about the second or third time you realize you are burning 40 minutes of windshield time to visit a rental it starts getting old. 12 hours RT? Yeah, you are paying someone to do everything and you are lucky if you are breaking even.

Re-read poster 2018: "Dreamed of owning a place at the beach for years, but never could make the numbers work to drive cash flow. Finally found a steal (4 bedroom 2 blocks from beach) on Hilton Head and had this in our portfolio 2014-2019. We paid cash and completely remodeled the villa. I managed my own rentals using a local island company to coordinate onsite support. We only rented for 7 months a year and maintained a 5 star rating. I was the only person I knew to make a consistent positive cash flow every year. Realtors tell you that VRBO's at best break even, most are money pits.

The stress nearly killed me and almost caused a divorce. Trying to coordinate rentals, property mgt, and contractors during the season consumed a ton of time. I spent every off-season doing maintenance and repairs. Tax time sucked as expense tracking was significantly higher than any long-term rental we own. Oh yeah, don't forget all the taxes; everyone has their hand out". My bold. That sounds like a landlord. Not the association you want to have with your vacation home.

 

[nadnerb]

I voted no because there is no mention of experience with rentals. The place mentioned is 6 hours away. Someone has to manage and repair and deal with stuff - our rentals were all within a 15 mile radius - about the second or third time you realize you are burning 40 minutes of windshield time to visit a rental it starts getting old. 12 hours RT? Yeah, you are paying someone to do everything and you are lucky if you are breaking even.

The plan was/is to pay a management company to do the repairs, answer calls from renters etc. Also, the goal was not for income, but for capital appreciation - so breakeven from a cash flow standpoint is fine. Get into the market, leverage my current home to get a foothold at the beach. When the time comes, sell our house and the condo, and and buy a house.

 

[calmloki]

So is the potential rental a condo or a house? if condo you need to be sure that using it as an AirB&B isn't verboten. Nothing I'm familiar with. Betting on capital appreciation is gambling, not something I do, but many do and some win. Good luck? It's your retirement.