In the next 6 months we’ll (39M/41F) have enough post-tax money to either pay off our primary residence ( $1.5M, 1/3rd remaining, 15 years, Fixed 3.25%) or buying a property in a popular vacation location that we would use ourselves and possible rent out (but not necessarily).
* Option 1 – Pay off primary residence, which would drop monthly housing costs from ~$5,500 to ~2,000 (~7.0% average property appreciation annually)
* Option 2 – Buy vacation property (cash) which would increase monthly costs by ~$1,000, possibly ~1,500-2,000 in income (~5.0% average property appreciation annually)
* Option 3 – Invest the additional ~500,000 in existing REIT fund which has had 25-35% annual return in past couple years.
We’d like to retire in 10-15 years, and having a house in the second location we’re considering would be really ideal. Any of these options we’d be comfortable with the monthly costs. This new money won’t represent all of our savings, we’ll still have about 800k in liquid assets and 1M in illiquid assets.
I assume Option 3 probably makes the most sense from a purely financial perspective, but is there something I’m missing?
Housing has had a dramatic surge recently, likely unsustainable so IMHO the REIT results are suspect going forward. In fact with inflation on the horizon and the spectre of the Fed raising rates, real estate as a whole from a price appreciation standpoint may be suspect going forward in the near future, at least at the rates you’re citing.
The second house option sounds very nice, sounds like you’d put it to use immediately as an investment and as a nice vacation home. If the time is right, the property looks ideal, and is affordable, why not?
I agree with others that a vacation home would be nice and you’d probably get use and enjoyment out of it. However, you’ve described these options from a purely from a financial perspective. You haven’t said that you and your spouse have always dreamed of a vacation home or that it’s even important too you. So I’ll be the contrarian-opinion and say don’t buy the vacation home, at least not yet.
I think your annual appreciation values are unrealistic at least for a long term financial model. I was kind of surprised by them but perhaps I’m out of touch with your market. It’s hard for me to comment further on your model.
The only stated personal goal or desire was that you’d like to retire in 10-15 years. So focusing on that, with only 1.3 M in liquid assets so far, I’d have a hard time putting 38% (.5M/1.3M) of it into an illiquid asset with a questionable rate of return. To reach this goal, I’d probably stuff it into a boring ol’ S&P 500 index fund. Granted, I don’t know about any of the other metrics like your income, saving rate, or annual expenses but I’m assuming that with a $1.5M home currently, you’re going to be in the upper range of annual expenses during your early retirement and will need a sizable nest egg. Another advantage of the index fund approach is that it’ll still be fairly accessible (ignoring capital gains or a down market for a second) if and when you actually find a vacation home that you’re passionate about.
If you are set with a solid plan, you do have to live a little so a vacation home wouldnt necessarily be wrong. We are hesitant to use our friends’ vacation homes because we cant reciprocate.
I have been through a “vacation property” phase. Having owned a beach house that got destroyed by hurricane ike, having a lake house (that we never went to), and another beach house after ike (that we didnt go to enough), I personally dont want to own a vacation house. I do look at beachfront properties in california at least weekly, in that case we would live there part of the year.
Eventually we decided that the way we vacation is not aligned with owning a vacation home and we sold (almost) everything. We own 100 acres adjacent to our house and another 20 acres as a pure investment property on the other side of town.
I personally cant bring myself to pay off the mortgage because the interest rate is too low (2.5%). Im still in a period where Im trying to maximize growth.
Hey! I have been reading your blog for quite a while now but never got the chace to leave a comment.
I just wanted to say that I truly enjoy reading your blog and I appreciate all tthe effort you put into it!!
Super happy to see your blog tae offf even more.
Do you hzve any feedback for starting out bloggers?
Here is my website: porn movies