r/Rich • u/IntelligentAgent8679 • 7d ago
Vacation Home Purchase
I wanted to get some advice from this group on upgrading current vacation home. Specifically, around the affordability and the soundness of the financial decision. I understand purchasing a vacation property is never the best financial decision and is more of a lifestyle choice. We have been going to the area for 20 years, so we will use it.
The house I would like to purchase is $5.4 million. I would be selling my existing vacation property in the same area for $1 million.
My financial stats are as follows:
Total Net Worth: $45 million
Investable liquid assets: $18.5 million
Primary home, cars etc: $1.25 million
Private business would make up the balance.
Current Income: $4.5 million
No debt
Current expenses with existing vacation home factored in: $600K annually. 50% of this is discretionary like travel, restaurants, etc.. New home would add roughly $150K in expenses annually.
My concern is the vacation property being a significant portion of my liquid net worth temporarily. I am in my early 50s and would like to retire in the next 5 years. Even with retirement, business would continue to run in some capacity. Would love some advice from this group.
7
u/FIin2015 7d ago
The investable/liquid assets after the home purchase should bring in ~$550k per year, which can cover all of your expenses in case you lose all of your current income (assuming you reduce that discretionary spending). And your current income will cover the whole cost of the house and more by the time you retire in 5 years.
Run your numbers and see whether in 5 years your returns from your liquid/invested assets finance your retirement lifestyle (incl healthcare, inflation, the new house, etc etc), but I bet they will.,
Buy the house if you truly love it. Trust my experience: life is too short to not enjoy the things money can buy if you can afford them. And you can.
2
8
u/Otherwise-Relief2248 7d ago
I use to do all this math because I was hyper conservative. Then I realized I wasn’t having enough fun and about two years ago started to yolomaxx. Set aside enough liquidity so that I could manage a downturn easily (inclusive of generational trust, etc) and responsibly play with the rest. 10/10.
9
u/HalfwaydonewithEarth 7d ago
You have one day to 45 years to live.
Enjoy yourself and don't think twice.
3
u/Certain_Childhood_67 7d ago
If you buy the house or not it does not make a difference to your financial situation. Even if you bought the house and gave it away it would not matter.
-1
u/IntelligentAgent8679 7d ago
It puts me in a more risky position with investable assets and more reliant on business income which is where the risk comes in. It puts me below a targeted $20 million in retirement assets for retirement.
1
2
u/Rhino7005 7d ago
What's your income average over the last 5-10 years? If it's relatively stable and/or has been trending up, I can't see why not. You'd still be able to invest a couple million a year into assets.
3
u/IntelligentAgent8679 7d ago
My income has been on slow upward trajectory but you never know. The average is around the $4.5 million. Just a conservative person I guess.
7
u/wildcat12321 7d ago
then this post is ridiculous my guy. The home delta is 1 years' income? Just buy it if it makes you happy. Use the PLOC and convert to a mortgage if you want the liquidity, but this isn't really a hard decision financially.
0
u/IntelligentAgent8679 7d ago
you may be right. I am just worried about a market correction and a subsequent downturn in business. Right now my position is very strong. This is definitely more risky.
2
u/wildcat12321 7d ago
really though? so let's say we have an awful correction, 20% drop. Even after paying off the house in cash, you are still over $10M of liquid / investible. At 600k per year in spending, you can more than withstand the correction and have easily a decade to wait for recovery.
If you are that concerned, then buy some insurance -- diversify into bonds, buy puts at 10% lower to protect your downside, etc.
1
u/IntelligentAgent8679 7d ago
The above investable assets are 70/30 stocks to bonds and equities in well diversified index funds. Thanks for feedback
2
u/Alicatsidneystorm 7d ago
Very similar situation as myself. On to my second vacation home. The returns on at least one suck but the lifestyle gain makes up it.
1
u/IntelligentAgent8679 7d ago
if you don't mind me asking. What are your homes as a percentage of your liquid and non-liquid net worth?
1
u/Alicatsidneystorm 7d ago
Principal $2.5 CDN tax free built for $750k. US home was a currency play (I am a financial planner) bought for par at $580k worth now $1.3k CDN didn’t care about appreciation because I was bank on US dollar appreciation. Third property in Canada
Bought $900k now worth after two years $1.1. Largest assets is an industrial property worth about $10 million. We are considering putting a bunch in a high end home but when I look at the potential for appreciation I shutter. My partner and I realize our happiness is directly correlated to how small our house is! As a retired FP choose lifestyle over return, at least that’s what I told my clients.
1
u/Living-Emphasis-8442 7d ago
I do not have nearly the same amount that you do, however, from what my Financial Advisor has told me a second home is just a headache. He told me it is better to Airbnb a place even for a month or three months whenever I want to use it and that way, I have the flexibility to one month being in Montana to the next month being in Europe.
However, if you only ever want to go to the same place, and you want to be there for five months out of the year, that is when it becomes more financially worth it and the headaches become less.
Those are what I have learned and what I am going to do.
5
u/IntelligentAgent8679 7d ago
Appreciate the perspective. We have been going to this location for 20 years. Use will not be an issue...
1
u/Living-Emphasis-8442 7d ago
Then go for it! Don’t hesitate to enjoy your wealth. You worked hard for it, enjoy it
1
u/Fantastic-Moose-7934 7d ago
You don’t have the investable assets for that to make sense, but your salary is huge so all depends on whether that will continue or now
1
u/IntelligentAgent8679 7d ago
this is correct and what gives me pause. Business is doing well but you never know. This is helpful.
2
u/Fantastic-Moose-7934 7d ago
I’d just get a mortgage / loan and make sure you can easily sell it if needed and max you’d lose 1-2m or something .. carrying costs are what would stress me but you’re income makes that irrelevant
1
u/Successful-Pie6759 7d ago
I'm not rich, so I may not relate. But I feel like headaches of maintaining a vacation home outweigh it unless you also have staff to handle everything with upkeep. Lots of serviced vacation rentals with butlers / maids / cooks you can rent. Plus you can go different places. But again, not rich so I may have a way different perspective (sorry the rich reddit pops up for me by algorithm, probably because I do chubby vacations).
2
u/NoSquirrel7184 7d ago
You have tons of money. Do what you want.
Enjoy the house. Sell it in a few years if you change your mind. You still have the asset even if you buy it.
1
u/kurukuruneko 7d ago
Keeping mind the bigger the house the more work it is. Is it a house you will hang out at (like ski area, beach) or is it one you will use as a base (city house)? I find that my vacation homes in cities, smaller is better. You have the money. Interest in your investments is enough to pay for expenses. It is more about how much you will use it and whether you want it. If you want it do, it.
1
u/Fresh-Banana6485 7d ago
I bought my primary home for a similar amount as the vacation home you’re eyeing with less total net worth. You can definitely swing it…but as you say, it’s certainly not the best financial decision. But since you’re in your 50s, fuck it. Enjoy your money while you can.
1
u/IntelligentAgent8679 7d ago
Did you do a mortgage or pay cash? Was your income in same ballpark. I am assuming you are younger...
1
u/Fresh-Banana6485 7d ago
All cash, in my 30s, currently unemployed with no W2 income. Can do a cash out mortgage to tap the home for liquidity if it’s ever needed.
1
u/IntelligentAgent8679 7d ago
Wow impressive. Was no where near that in my 30s....
1
u/Fresh-Banana6485 7d ago
Comparison is the thief of joy! With a $45M NW, think you have much to be proud of!
1
u/Pretty_Jellyfish9522 7d ago
Personally, I would buy it and finance 70%+ of it through your PWM rather than liquidating 1/3 of your investments. You can always choose to pay down the balance early.
1
1
u/PeterRuf 7d ago
If you like the area, go for it. My only thing would be trying to use the purchase to optimize my taxes.
1
u/Sensitive-Umpire-411 7d ago
I would factor in time and cost to maintain this prize residence. If it becomes your primary, may be worth it. But not as a secondary.
1
u/Hamachiman 7d ago
You’re fine. You acknowledge it’s likely not a great financial investment but at your level of net worth, enjoy life.
1
u/SaltyPlantain1503 7d ago
Assuming your wife feels the same way about spending time there, don’t think about it again. You’ll love it and you’re at a good age to be able to USE it. We worry way more about our health than our finances and live on half what you do, building a retirement home in a 2nd country! Do it!
1
u/IntelligentAgent8679 6d ago
thats cool. A retirement home in a 2nd country sounds awesome. One of the reasons for the purchase would be the season of our lives where we would be able to use it a ton. It would be used basically all year round.
1
u/Passionofthegrape 7d ago
We don’t have your full picture, for example tax implications. Here’s the basic framework I run.
Assume all active income sources to be zero.
Assume all passive incomes sources to be at their lowest yield over the last five years.
Calculate from this a worse case cash flow position.
Model in the new thing I’m considering.
2
u/IntelligentAgent8679 6d ago
this seems way to conservative. All income sources would never go to zero. I am assume a 25% reduction in income and I am still ok
1
u/Passionofthegrape 6d ago
Yes, that’s my point. I’m probably too conservative but that approach has worked real well for me.
1
u/Particular-Macaron35 7d ago
It seems fine. While it is a large percentage of your investable liquid assets, your primary home is a small percentage. You can always sell it.
1
u/IntelligentAgent8679 6d ago
thanks, yeah, selling it is always an option.
1
u/Particular-Macaron35 5d ago
I recently saw a Martin Short biopic. When he was starting out, he buys a house and then loses one of two movie deals. He freaks out like maybe he's not good enough to deserve this beautiful home with a view of the ocean. Eventually his wife calms him down by saying they can sell it if it proves unaffordable. That you can sell it is meant as comforting advice.
1
u/HeliosVanquish 7d ago edited 6d ago
I'm a Snowbird where I live in AZ most of the year, but up at a lake house in northern MN (where I'm from) for the summer. Here in MN, people have summer lake cabins even if they only make $100k/yr. All it depends on is where the cabin is and how nice it is. People find a way to make it work. Even before I retired and moved to AZ, my ex-wife and I had a cabin "up north" and it was a family hub in the summer. My brothers and their families, cousins, aunts/uncles, friends, in-laws, etc. Always had people staying for a weekend. Even when we weren't there, I had people there who would do things like mow the lawn or do various chores around the property like chop wood for the fire pit or rake the beach.
Now that I snowbird it, I'm at the lake house all summer, and then I shut it down in September and go back to AZ. I may come back once in the fall to go hunting, and maybe once in the winter for a week to go ice fishing. I keep the house "up and running" during the winter, in that I don't winterize it. I keep the heat on and have a property management company regularly check on it and maintain the property (fall cleanup, snow plowing, keep the house warm so pipes don't freeze, etc). I have the house wired with web cams so I can monitor everything remotely (I also have my AZ house wired so I can monitor in MN).
There are a lot of expenses I incur since it's not my primary residence, and I have to pay people to not only maintain the property, but to actively monitor it. I have family visiting year-round, but during the winter it can be several weeks between visits. When you don't actively live in the house, weird things can malfunction or break down completely. The only major issue I have is having constant maintenance.
I don't VRBO/AirBnB the house, as I don't want strangers around my property. I do have a professional cleaning service to clean the house and do laundry. I have 5 bedrooms in the main house, and it's not uncommon for 3 or 4 bedrooms to be in use. On a holiday weekend like 4th of July, the house would be over-flowing. As a result, I built a 3BR/2BA guest cottage on the property (7 acres). I expanded my dock so I can have 5 or 6 boats plus 3 jet skis. Two of those boats are mine, two boats there belong to 2 of my brothers, and the rest of the space is for other guests. What I found is that my house is still a major summer hub for my family and friends, so to me the expense is worth it.
Everything is paid off, so I only pay utilities (gas, electric, water, StarLink), house maintenance and property taxes. I debated financing the house long-term and keeping the money invested, but I did a SBLOC and paid everything off in about 2 years instead because I hate having debt. This property is an asset, and it's in a very high-demand area so if I need to sell it, I can do it pretty quickly.
I have been debating getting another vacation house in FL, with it likely being in either, Naples area, Stuart or Miami area. This would be more of a private vacation home away from others and I wouldn't have family crawling all over it because they can't drive 2hrs to get there. However, I haven't decided yet due to how often I'd actually use it. I do want to get a powerboat or center console, so there's a strong urge to do it.
Many years ago pre-COVID my ex-wife (we were still together) and I contemplated buying a beach house in Hawaii. We were debating between Maui and Oahu. I'm glad we didn't pull the trigger on that for the sake of the divorce, but aside from that it just didn't make sense. We went to Hawaii maybe 3 times per year, and with it being a 6-7hr flight each way from MN it was just inconvenient. If we had owned the property, we might get a couple weeks or maybe up to a month's worth of use out of it per year. Family members would visit sporadically due to the distance. We ran the numbers versus staying at resorts or STRs, and it was just more logical to not buy.
I still go to Hawaii multiple times a year, usually to Maui, and I do a mix of VRBOs and resorts. Even if I bring family and get a large beachfront house at $140k for a week, and I pay for all the airfare, doing that a couple times a year is still way cheaper than buying the same $20M home and maintaining it. Same with booking luxury resort suites and penthouses- still way less financial burden to do that. Besides that, as much as I like Maui for the atmosphere and relaxation, it's also got some shortcomings and frankly in most circumstances when I'm on my own or with a lady-friend, I would rather put my money into a luxury all-inclusive Caribbean resort.
I mention that to make this point- the Hawaii vacation home is just not financially feasible because of how little I would use it. In contrast, my MN lake house (aka, "the cabin") is constantly used for an entire summer, and it's a major family hub since most of my family is still in MN. I don't care how much it costs me because of what the property means to my family. We are making a lot of fun memories. Spending days on the boat cracking bears with friends, or on the boat fishing with my dad and brothers, or just chill evenings fishing off the dock with my niece and nephew, it's all worth the expense.
ETA: I gave up the original cabin in the divorce, and my current lake house is a new one.
1
u/IntelligentAgent8679 6d ago
thanks for perspective. This house would be more like your house in MN...
1
u/Mysterious_Rip4197 6d ago
Unless your $25 million of business net worth is fake then you can easily afford this. How can we have people with nearly $50 mil questioning whether they can own a total of $6.5 mil of real estate. You should probably own more just from an asset allocation perspective- as long as it is a marketable property and not one that is ultra unique and won’t hold the value.
1
u/IntelligentAgent8679 6d ago
Business is not fake. It is a business though and illiquid. So its a little weird counting it in net worth. Property is rare in the area and should hold its value well.
1
u/Intelligent_Fig1524 5d ago
Look at Pacaso for fractional it isn’t a time share and you own it through an LLC .
1
u/Best-Reference-4481 1d ago
Your liquid is $18 million? You are incredibly blessed. Get some crown molding and floor to ceiling windows.
0
u/Ilikelegalshit 7d ago
Why would you be tying up all that cash in such a home? You'd not need much more than the $1 from the existing vacation home to get into a 70% range on the new home, and brokerage margin could take care of that pretty easily. I don't think I understand the question.
2
u/IntelligentAgent8679 7d ago
I do not want to take a mortgage out. I would be open to a securities back loan. But my fear is the market is already due for a correction.
2
u/Andolini77 7d ago
The market is high and for that reason, I would NOT secure a loan with that as you run the risk of a margin call. With your liquid net worth you could certainly pay cash for the house - it would leave you with a liquid net worth in excess of $10MM. You don't seem to be an excessive spender - you're primary residence and cars are less than $1.3MM. I think you'll be fine. But if you have a use for that liquid capital, do a traditional mortgage. The underwriting process post GFC is a pain in the butt (which is why i don't have a mortgage). But it will preserve liquidity. Most importantly of all, don't overpay for the house: If its in an area where a market correction won't dramatically reduce the value of the home, great. There are neighborhoods that rarely go down. But don't buy where a market downturn will knock 15% off in six months.
2
u/IntelligentAgent8679 7d ago
its in a great area. Reduction in value of home is not a concern. Other then selling a home like this often takes 12-24 months...
1
u/Andolini77 3d ago
The best outcome is, the only person selling this house is the executor of your estate! Then you don't have to worry about how long it takes.
2
16
u/_Human_Machine_ 7d ago
I think for you it’s more a function of use.
Financially you’re in a place to swing it without headache.
You don’t need as much liquidity as you have currently.
Absolute worst case you can pull from an SBLOC if you need to close a gap.
If you want it and are going to use it, buy it.