Author Topic: Borrow or pay cash?  (Read 4886 times)

diesel15

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Borrow or pay cash?
« on: May 30, 2014, 08:00:13 PM »
Here is my situation.  I've agreed to purchase a property from some family members of mine.  The purchase price is $80K so we are not talking a huge sum of money here but not inconsequential either.  The property is located in Wisconsin and I currently reside in Texas so I will likely only use it at most twice a year for the forseeable future.  It originally belonged to my grandparents and is where I spent every summer as a child and is the place of most of my happiest childhood memmories so sentimental value is a strong motivator.  I do not own a primary home and have no debt of any kind.  I have a stache of a little over $110K at the moment and I'm wondering two things: 1) am I crazy for buying a "vacation home" when I don't even own a primary residence? and 2) Should I pay cash for this or finance it?  I know that this will delay my early retirement by at least 2 years if I go through with it but is a sacrifice that I'm willing to make right now.  I'm fortunate to make very good money and save 60% of my income at the moment so it will not really strain my finances.  I'm leaning toward financing it since I'm earning substantially more than 4% on my money at the moment but would like to hear some other opinions on this.  I should also mention that I'm considering this becoming my primary residence once I am retired if that makes any difference.

Rube

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Re: Borrow or pay cash?
« Reply #1 on: May 30, 2014, 09:39:24 PM »
Where in WI? I assume it's on a lake.

If you finance could this be your primary residence for the tax deduction and then have one loan for a second residence later? One issue might be if you want to homestead it for property tax purposes from out of state.

Argyle

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Re: Borrow or pay cash?
« Reply #2 on: May 30, 2014, 10:34:55 PM »
I'd pay cash because I hate debt, but others will have different opinions.

I think it's great you're doing this and you're going in with your eyes open as much as possible.  I'll just say that it's not the purchase price that will be the burden, but the upkeep.  Property taxes, heating (don't let it go unheated in the winter), repairs, someone to look in on it from time to time.  You'll want to get a good sense of how much those will cost before you figure out your overall budget.  Ask the last people who owned it what they budgeted per year, and then add some.

It'll be a sweet place to hang out once you reach FIRE. :)

diesel15

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Re: Borrow or pay cash?
« Reply #3 on: May 31, 2014, 08:35:50 AM »
Where in WI? I assume it's on a lake.

If you finance could this be your primary residence for the tax deduction and then have one loan for a second residence later? One issue might be if you want to homestead it for property tax purposes from out of state.

It's in the northern part of the state near the 3 lakes area and yes this is lakefront property.  I'm not a legal resident of the state of Wisconsin so I don't see any way that this could be deemed my primary residence for tax purposes.  Vacation home loan interest is tax deductible though so this is another reason I'm leaning toward financing.

I'd pay cash because I hate debt, but others will have different opinions.

I think it's great you're doing this and you're going in with your eyes open as much as possible.  I'll just say that it's not the purchase price that will be the burden, but the upkeep.  Property taxes, heating (don't let it go unheated in the winter), repairs, someone to look in on it from time to time.  You'll want to get a good sense of how much those will cost before you figure out your overall budget.  Ask the last people who owned it what they budgeted per year, and then add some.

It'll be a sweet place to hang out once you reach FIRE. :)

It's currently and will continue to be a community use property for my immediate family.  My grandmother was quite the record keeper and I have every property tax bill and electric bill that was ever paid going all the way back to 1947.  As far as budget is concerned these records help but the roof will need to be replaced and so will the septic system so I've added a $20K contingency to cover these things.  The cabin was originally built by my grandfather and has never been updated so there will be certain things that need to be fixed and updated over time.  There is no insulation so this is buttoned up every fall and reopened every spring.  I do plan to eventually make it liveable year-round but that is more of a longer term project.  Interestingly, the property that this was built on was originally obtained by my grandfather in a trade for.....a refrigerator!

Rube

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Re: Borrow or pay cash?
« Reply #4 on: June 01, 2014, 01:59:01 PM »
Well it's the one part of WI I'm not that familiar with. It's hard to see how this wouldn't be a super deal if you decide to do it. Good luck!

Bearded Man

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Re: Borrow or pay cash?
« Reply #5 on: June 01, 2014, 02:21:03 PM »
I know I'll get flamed for this, but yes, buying a vacation property when you don't own your primary residence is a little crazy IMO. That said, if you do decide to buy, I would finance it and turn it into a full time rental. Interest rates are speactacularly low STILL. With the added tax benefits, even at 4.5% you are borrowing money for "free". Let the money you have earn you some more money and also have some in cash for an emergency fund.

Zamboni

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Re: Borrow or pay cash?
« Reply #6 on: June 01, 2014, 04:02:13 PM »
I don't know enough about the property to know if I would or would not buy it, but if I did buy it I would finance it with a 15 year mortgage.

Renting it out some is a good idea if there is a market for it.  If not, then perhaps your family members who use it can chip in periodically for utilities and taxes?  It doesn't sound like you have a big enough stash to finance the family fun homestead for everyone else as a free ride for them, although I do understand wishing to own it in your name.

wtjbatman

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Re: Borrow or pay cash?
« Reply #7 on: June 01, 2014, 04:31:44 PM »
He said it has been and will continue to be (I assume he means even if he buys it) a "community" property for him and his immediate family. I don't think he's going to rent it out.

diesel15

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Re: Borrow or pay cash?
« Reply #8 on: June 04, 2014, 08:39:21 PM »
I know I'll get flamed for this, but yes, buying a vacation property when you don't own your primary residence is a little crazy IMO. That said, if you do decide to buy, I would finance it and turn it into a full time rental. Interest rates are speactacularly low STILL. With the added tax benefits, even at 4.5% you are borrowing money for "free". Let the money you have earn you some more money and also have some in cash for an emergency fund.

I asked the question so I could hear all arguements, both positive and negative, so appreciate your input.  I don't see turning it into a rental as a viable option in my case.  The market for rentals in this area is near zero and this property has not been updated since the 1950's.  Most anit-Mustachians would not be interested.  Plus this was actually built by my grandfather so I would have some concerns with people trashing it as a weekend rental.  On top of that, it is not insulated so realistically it cannot be occupied in the winters.

I do agree that rates are very low at the moment which is pushing me towards financing vs purchasing outright. 

avongil

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Re: Borrow or pay cash?
« Reply #9 on: June 04, 2014, 09:07:33 PM »
I guess it depends on your age. Strictly speaking its not a wise economic choice since it slows down FI.  If you are young and it will only delay FI by two years, then that's a pretty fantastic way to spend your "retirement".  2 years might be a very small price to pay.

I think I'd finance it as cheaply as possible 10 - 15 year mortgage and invest your money.

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I purchased a building close to my home to have something to do when we reach FI so I feel you spending pain.

frugaliknowit

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Re: Borrow or pay cash?
« Reply #10 on: June 05, 2014, 09:23:54 AM »
I don't mean to sound mean, just being honest:  Do NOT buy it!!  You are throwing money down the toilet.  Put your money to better use (under a mattress would be better).

FLBiker

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Re: Borrow or pay cash?
« Reply #11 on: June 05, 2014, 09:32:29 AM »
Interestingly, the property that this was built on was originally obtained by my grandfather in a trade for.....a refrigerator!

Wonderful detail!  I'll give you two refrigerators for it. :)