Author Topic: Second home question for high income earners  (Read 4278 times)

JonPines

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Second home question for high income earners
« on: March 04, 2019, 11:06:42 AM »
Posing as a question for other high income earners vs case study because I know I spend like a jackass and this question as a case study would yield too many face punches.

I have been blessed with a great career that provided a recent run up in compensation over the last few years and a recent promotion with significant, additional upside. In 2018 I received a salary of $210 thousand and a bonus of a similar amount. I invest all of the bonus and a decent amount of my salary. I was recently promoted and will receive a salary of $250 thousand and a meaningfully larger bonus potential. I am 34 and married with four kids (my spouse is a full time parent). Our net worth is $1.65 million, $250 thousand of which is equity in our home (valued at $700 thousand) and the balance split between tax advantaged and taxable accounts all in low fee index funds. My career in financial services is generally stable though I’ve seen how things can change quickly. We keep our fixed expenses low-ish and live well below our means.

I now have an opportunity to buy my grandparents old lake cabin that left the family after their death in 2007. I grew up spending summers there and love it. We need a second home like we need a hole in the head but it is a special place in my heart, for our family, and generally haunts my dreams in a special way. I could acquire the cabin for around 150 thousand and it needs some work, most of which I could do myself. I would rent it out lightly to defer some of the annual carry

With generally being on track to retire in my early 40s and the recent bump in compensation I’m considering whether to buy this place. My wife and I have discussed doing it for a three year trial period at which time we would re-evaluate. Worst case we sell it at a small loss, which we could afford, should we find it unmanageable, under-used, or not contributing to our happiness.

What would you do? Am I nuts for considering following my dreams and making this ‘bad’ decision?

I am trying to be rationally irrational, if that makes sense.

honeybbq

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Re: Second home question for high income earners
« Reply #1 on: March 04, 2019, 11:20:30 AM »
I don't think it's a huge issue.

Is it close? How much would you use it?

Contemplate how many vacations, air bnbs, cabins and trips you could take on 150k. Do you only want to go to this one location or do you want to go to multiple places?

I love the idea of a cabin, but I don't like the idea of only going to one place over and over.

I think it could definitely be a wonderful purchase for you and your family if you'd use it a lot. You can certainly afford it.

Finallyunderstand

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Re: Second home question for high income earners
« Reply #2 on: March 04, 2019, 02:30:11 PM »
It seems cheap compared to your income and net worth.  That being said, it's not financially smart.  This is just an emotional purchase so trying to get approval from the internet crowd won't matter.  You can't (shouldnt?) live life worrying about optimizing every financial decision.  Have fun if you can and enjoy the level of income you're at. Like you said, if you don't like it or use it much and sell a few years down the road while losing $50k it won't set you back too far if you keep your income level where it currently is.

Research-Geek

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Re: Second home question for high income earners
« Reply #3 on: March 04, 2019, 02:36:03 PM »
I can appreciate the dilemma.   How long is the travel time from your main home to this vacation spot? How many days a year would you expect to spend their while working?  Would that change greatly;y after you retire? (does it work into your longer-term plans?)

 Is there enough of a vacation/Airbnb or rental market in the area now that could help pay for it? How about someone local who could oversee maintenance?

affordablehousing

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Re: Second home question for high income earners
« Reply #4 on: March 04, 2019, 02:36:38 PM »
I think that's exceedingly cheap for a second home You're lucky to get another home in a place you'd actually want to go to for that. If you're looking for permission from other folks, I'd say, it still keeps you as seeming very frugal amongst your peers (not the most frugal by any stretch) but frugal enough within the rarified world of banking. Have fun with it!

Montecarlo

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Re: Second home question for high income earners
« Reply #5 on: March 04, 2019, 03:12:06 PM »
I think considering the price and the sentimental value, it's not a bad idea.  Obviously it's a horrible idea financially, but that shouldn't be the sole factor.

If that 150K earned 7% annually, you'd have 300K in 10 years.    You have 1.4 M in index funds, so call it 2.8M in 10 years.

Look at yourself 10 years in the future.  Would you rather have 3.1 M invested, or 2.8M invested and 10 years of memories with your family at the lake house?

As long as it doesn't imply multiple jetskis and powerboats, seems like a low-risk, high reward move to me.

Bloop Bloop

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Re: Second home question for high income earners
« Reply #6 on: March 04, 2019, 03:17:43 PM »
Of course do it. You can't wait till your in your 40s to start living. And don't feel guilty for spending on an indulgence. You can justify it because you have the money and you have the earnings.

I make less than you (approx $150k per year USD - I live in Australia though) and for my 30th b'day I got myself an expensive car to reward myself for better-than-expected financial performance. Do I regret it, no. Sometimes you need nice things and toys and if you can financially afford it quite easily, and if it won't push out your FIRE date beyond what you're aiming for, why not? You only live once.

Frugality is generally a good thing but it can be taken to the extreme. Reward yourself - you deserve it.

robartsd

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Re: Second home question for high income earners
« Reply #7 on: March 04, 2019, 04:20:14 PM »
Not a high earner, but you wouldn't get any face punches from me for buying the vacation home. You'd get the face punch for not being able to FIRE and spend your time enjoying it. (1.2M invested if you paid off your current house and had a 200k budget for purchase and renovation of the lake house.)

JonPines

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Re: Second home question for high income earners
« Reply #8 on: March 04, 2019, 04:29:11 PM »
Thanks folks for the feedback. The cabin is a three hour drive from our house. It is a rustic place - basically a semi-shabby 70 year old cabin with two bedrooms and a couple wood burning stoves. For those familiar with MN cabin culture it is the stereotypical family lake cabin before “lake homes” took over. I would certainly steer clear from toys and the purchase would actually include my grandparents big old pontoon boat which I basically grew up on.

I’m not sure exactly how much we would use it. In discussions with my wife we agree we would focus on longer (eg a week) yet less frequent stays - we want to avoid the every weekend rat race a lot of MN cabin families find hemaelves in and the resulting life complexity. Given we have young kids my guess would be 21 days a year in total? Two week-long stays and a couple nice long weekends. In retirement I could easily see staying 60+ days a year.

I’m confident I could rent it for a couple weeks a year easily and take advantage of the Masters Exemption for tax purposes. If we did any more we would need to really go at it hard in order to make the numbers work which is more than I’m interested in.

I guess it just feels kind of strange, my wife and I worked hard to get to ‘autopilot’ and the thought of a little risk and complexity, no matter how manageable, takes me back a bit even though it is kind of a dream come true (potentially).

Research-Geek

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Re: Second home question for high income earners
« Reply #9 on: March 04, 2019, 04:31:53 PM »
If 3-4 hour drive then long weekends or week long trips are perfect. If 5plus hours I would steer you away.  Go for it.

DoNorth

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Re: Second home question for high income earners
« Reply #10 on: March 06, 2019, 06:18:42 PM »
sounds like you could make some good memories there.  Last year, a similar opportunity happened for our family and we took it.  My mom's cousin had some Lake Superior (UP of michigan) beachfront property and was selling it quickly because of personal financial issues.  Wanting it to stay in the family, she offered it to family first.  We already have a home, but my brothers sisters and cousins all spent time in this area growing up and over 20 of us all own property within a mile of each other now.  My wife and I want to eventually do the same for our kids so we don't have any plans for this land, but are just happy it is ours now and we have the option of giving it to our kids.  very similar to MN cabin culture I imagine.

Gremlin

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Re: Second home question for high income earners
« Reply #11 on: March 06, 2019, 07:01:50 PM »
I'm going to put forward a different perspective from someone who thought about something similar around 10 years ago and ended up not going ahead...

There's not just the cost to hold.  There's the ongoing costs to run a second home as well as lost opportunity costs with the money.  If you are planning on renting it out a lot, then truly look at it as an investment.  How does it stack up?  Are there better places to put your money?  Are you prepared to forego access when it is rented (This was a big one for us) so it's not just yours when you want it?  How much flexibility would you have between renting it out and having use of it when you wanted it?

Is this where you envisage your holidays?  The big thing for us is that we really enjoyed the location that we were considering.  But we also wanted to holiday elsewhere.  It was a lifestyle that suited us "in the moment" but when we critically assessed it, we realised that it wasn't going to meet our family's needs for much longer, particularly as the kids grew up.  We had friends who had a place in the same location we were considering and they felt like they "had" to holiday there every time they got a chance simply because it was hard to justify going somewhere else.  This is an opportunity cost of sorts, too.  That might appeal or it might be an anathema. 

I'd weigh these things up.  If it's still floating your boat then so be it.  But I'm so glad we didn't make the same decision when we had the chance.

jodelino

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Re: Second home question for high income earners
« Reply #12 on: March 06, 2019, 10:34:33 PM »
I say go for it. We have a cabin on the water that we love dearly. We were only able to spend a few vacation weeks there every year when we were working hard, and that seemed nuts at times, but now we are retired and spend 3-6 months a year there, and it is bliss. (If ours were 3-4 hours drive from our home, we would have spent a lot of weekends there, but it is crazy far away from our primary home.)

You probably don't want to take on a major vacation rental business, but if you want, you can probably find, through word of mouth, some nice, reliable, regular renters who would like to spend a month or two there every year, and offset some of your costs without a lot of work. You could keep the price reasonable in exchange for them taking on some maintenance while they are there and not expecting anything pristine. If you make it a bit more of a business, many of your trips there will be tax-deductible because you are doing maintenance to the property.

There will be locals whom you can hire to look after it when you are not there, and who will be happy for the work and who will do a good job.

It will open up an imaginative space in your life--you're toiling away at work, and you know the cabin is there....

Abe

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Re: Second home question for high income earners
« Reply #13 on: March 06, 2019, 11:07:39 PM »
We considered a similar option but without sentimental attachment to a specific building. We ultimately decided on not buying because of the ongoing costs and the feeling of obligation to stay at the vacation house rather than going wherever we felt. Good memories can be made anywhere, and the kids may resent having to go somewhere that is not necessarily their favorite place.

The advantages of flexibility along with no responsibility for maintenance vs. chores weighing on me and the obligation to "make it worth the money" made us decide not to buy. Also, I've found that people over-estimate the amount that rentals will cover costs. It may help offset some maintenance, but that's about it unless the cabin is in a year-round vacation spot.

When you're fully retired you'll have plenty of money to buy whatever cabin you want. That's a good time to downsize and move to a lower-cost area. Then it's just where you live rather than a second house, making life much simpler.

Catbert

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Re: Second home question for high income earners
« Reply #14 on: March 07, 2019, 10:19:43 AM »
Let me bring up an issue I don't think anyone else has.  Do you have siblings/cousins who also have a sentimental attachment to the property?  You may find a lot of freeloaders who will be happy to have it back in "the family" and feel entitled to use it for free.  Or believe that they should have been given the opportunity to buy in and own part of it.

My BIL's family in MN had the biggest fight over the parent's cabin when they died.  There was some discussion of owning jointly which BIL dismissed b/c  he knew who would do the work (him) and who would demand first choice of weekends (sister).  Siblings and their grown children ended up barely speaking for a couple of years.  As I understand it this type of family squabbles isn't rare with regard to family cabins.

Dancin'Dog

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Re: Second home question for high income earners
« Reply #15 on: March 07, 2019, 05:39:26 PM »
I grew up with a lake house and always loved it.  It sure seems like an affordable place considering the price and your income.  You may not be able to use it very often in the buginning, but after you retire you'll have a lot more time to spend there.  Buying a lake place sounds like a wonderful plan for your future. 

WSUCoug1994

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Re: Second home question for high income earners
« Reply #16 on: March 07, 2019, 05:54:36 PM »
We own a lake house in Central California that is about 3 hour drive outside of peak traffic.  This is my nirvana - I would likely live there full time if my wife wouldn't leave me and the schools were any good.  Ours had no sentimental value but I grew up on a like and living in Silicon Valley makes it difficult to get quality family time on the water like I was used to growing up.  It is more expensive than I would like (naturally frugal) but it is worth every penny to our family and particularly our kids (they are obsessed with being at the lake).  It also comes with a much better social network (lake people are nicer than software engineers lol) than we have in our main home area.  I would say we are there 20-25 weekends a year (we leave on Thursday night and I work from there on Friday) and few week long stretches utilizing vacation days.  Our extended family loves it as well as our nieces and nephews have adopted the lifestyle as well.  It is the best investment I have made in my opinion.

It does create a bigger bogey for my 4% target but I can't imagine my life without it.  I am four years from retirement and I will be LIVING there during the summers when the kids are out of school.  I can't wait.

Unfortunately for us - the County where our lake house resides doesn't allow for rentals less than 30 days which kills any opportunity for Airbnb/Renting.  Not sure I would do it if I could but it is a bummer that we don't have the option because we could make a killing.
« Last Edit: March 07, 2019, 05:59:40 PM by WSUCoug1994 »

DoNorth

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Re: Second home question for high income earners
« Reply #17 on: March 07, 2019, 06:15:35 PM »
every time that dilemma comes into my head, its quickly forgotten as I enjoy a morning coffee with my wife and watch the boats go by. 

soccerluvof4

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Re: Second home question for high income earners
« Reply #18 on: March 09, 2019, 04:06:10 AM »
We had a cabin in the Northwoods of Wisconsin for 18 years and I dont think there is a day that I dont miss it. We too were on a lake and had over 300' of frontage but I like your thinking about keeping the toys down. We went from using it I'd say a minimum of 1/3 of the weekends in the year (4 hour drive) to when the kids got older to only the 4rth of July. My kids (2 in college) always talk about the things we did up there as well as how some day there going to buy it back etc...  So for me with your memories , income and thinking of use go for it. Start making your own memories. !

Linea_Norway

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Re: Second home question for high income earners
« Reply #19 on: March 09, 2019, 04:32:26 AM »
We have owned a cabin for mamybyears, maybe 10 years. It is 5,5 hours driving from home. It is onl6 doable because we don't have kids back in the car. We often try to visit for a long weekend, but have also visited for normal weekends. Now we are working 80% and have many long weekends.
I think we spend 30 days a year there, on average. Often a visit every month, and a part of the summer vacation.

I hope you can also have your cabin cheaply. Ours has electricitity, which costs a lot to just have access to. Usage costs only 10% of the initial cost to have it. If you have water, you need to keep the cabin free of frost the whole winter, and therefore warm it up, which is extra cost. We have no water and let it be cold the whole year. When we go there in the winter, we sit close to the oven, until the cabin is warm from wood firing.

We have also been so fortunate that the cabin community has put a property tax on our cabin, for very unreasonable percentages. As we live in another community we don't have the option to vote against it. And the loney will be used for all local stuff that cabin owners don't benefit from. The tax is now 20% of the yearly expenses for the cabin.

Our cabin has depreciated. The neighbouring cabin has recently be sold for the same price that we paid for our cabin many years ago. And the neighbour's is much bigger than hours. So I can guess what ours is worth. I think we list about 30% of the value.

Before we owned this cabin, we would typically hire a company cabin a couple of times a year (typically in the winterly half year) abd otherwise camp.

As you (OP) has 4 children, owning your own cabin might be pretty convenient, compared to camping. When the children grow older, they might typically want to travel elsewhere in the vacations. That you can sell it. But until that time, if you can spend some of your vacations at your own cabin that you already pay for, you can save quite a lot compared to hiring something else.

Fishindude

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Re: Second home question for high income earners
« Reply #20 on: March 09, 2019, 09:20:07 AM »
I'd be the last one to advise against this.   We have a lake home in northern Michigan, approx. 5 hour drive and really enjoy it.
Have a lot of fun up there with family and friends.

Linea_Norway

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Re: Second home question for high income earners
« Reply #21 on: March 09, 2019, 11:27:08 AM »
I forgot to tell that we don't rent out the cabin. Prices for hiring similar cabins on airbnb are very low and therefore the hassle is not worth it for us. We have an indoor dry toilet and should ideally empty it after each visit. We also need to remember leavinf the fridge open and turn electricity off. So I think that for every visit, we will have to visit both before and after. It is very far away to do that. If we need to hire a local, that would come with a cost. So far it hadn't been worth it for us to try.

But I am considering it for a "hot" week. If we can rent it out in a hunting period, we might get a higher price for it. Maybe we can try just for once. But (Norwegian) hunters will drink a lot and how will they treat the cabin then?

Dancin'Dog

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Re: Second home question for high income earners
« Reply #22 on: March 09, 2019, 12:29:16 PM »
Ideally a second home should be within a couple hours of your primary residence, so you can easily use it without a major drive. 


We're fortunate in the Charlotte area, the beach is about 3 hours drive the mountains are only 2 hours, and Lake Norman is just 25 minutes from downtown.  A lot of folks live on the lake and have mountain or beach homes too.  But, the truth is just living on the lake is like being on vacation every day, and the idea of owning a vacation home too barely makes sense.  I think you'd call this "1%'er problems".  ;) 


 

des999

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Re: Second home question for high income earners
« Reply #23 on: March 10, 2019, 04:30:44 PM »
we currently live in a private lake community where it is 50% full time and 50% summer cabins on the lake.  We love it down here, and I moved from the main city about 6 years ago due to lower cost of living and all the amenities.  We do miss some of the luxuries of the city (currently we are 1 hr away) and I still work 3 days a week in the office (2x from home).

What is interesting is we just got a huge salary increase that makes the idea of moving back to the city and keeping our lake community home a possibility.  I am kind of in a similar situation.

We have lived in both the city and the lake country, and find that there are things we love about both, having both would be ideal, but it def comes with a cost.

Our initial calculations are that we could get a cabin in our lake community for about 1500/month (with all expenses), but it's def a tough choice. 

I would be interested in what you do, and why.    I think initially we will use it a ton, but as the kid gets older, we may use it less and less.   

JonPines

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Re: Second home question for high income earners
« Reply #24 on: March 12, 2019, 03:31:33 PM »
Thanks again for all of the diverse and thoughtful perspectives. I plan to try and make a deal happen. I’ve had an on again off again dialogue with the current owner for two years  and am cautiously optimistic we can get there on a mutually agreeable price. While we aren’t there yet he wants to sell to me to avoid real estate brokerage fees and because he knows how much it would mean to me and my family.

I’m not worried about managing family expectations. My brother and his family will have well deserved free use. He has a mind for building projects (and has donated countless house to me on other projects) and will earn his stays through donated sweat equity as we work to restore the property to its potential. He declined to join me in the purchase but has committed his labor and mind to the project. For cousins - I think they could be a source of embedded rental demand. I would be happy to rent it below market to someone I trust and who makes it easy. If they expect a freebie, well, that just won’t be a fit.

I think all in I will be out of pocket about 6 thousand a year (net of tax benefit for mortgage interest) not including ‘incidentals’ which could be very high if I am undisciplined. On a per night basis that is very high out of the gate but when I factor in the warm fuzzies (as irrational as it is) and long term potential it feels like a slam dunk. No, this number does not include the market driven opportunity cost on an approximate 30 thousand down payment.

Spring is hopefully around the corner here in MN. With any luck I can get this deal moving along. As excited as I am I get kind of nervous thinking about it in the chance it doesn’t go through.

I’m not sure if I mentioned this previously but my wife is on board. She may be interested in accelerating some of the improvements we would make by hiring it out (versus my dad brother and I being weekend warriors) but other than that we are on the same page. My wife is significantly more frugal than I and I couldn’t imagine making a big decision like this without such a strong and capable partner.

Linea_Norway

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Re: Second home question for high income earners
« Reply #25 on: March 13, 2019, 01:41:52 AM »
While we aren’t there yet he wants to sell to me to avoid real estate brokerage fees and because he knows how much it would mean to me and my family.

Just make sure a lawyer or other official person does the legal documents correctly.

I’m not worried about managing family expectations. My brother and his family will have well deserved free use. He has a mind for building projects (and has donated countless house to me on other projects) and will earn his stays through donated sweat equity as we work to restore the property to its potential. He declined to join me in the purchase but has committed his labor and mind to the project. For cousins - I think they could be a source of embedded rental demand. I would be happy to rent it below market to someone I trust and who makes it easy. If they expect a freebie, well, that just won’t be a fit.

Sound like you have it under control.

danakado

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Re: Second home question for high income earners
« Reply #26 on: March 13, 2019, 11:16:18 AM »
We have one 4 hours away and honestly it's saved our marriage- having that time space away is a huge benefit for us as a family.  We do more weekend trips and our kids are champs in the car now.  One comment I would add is that having your place on the rental market can provide a tidy excuse to not loan it out all the time to friends and family. 
We've made our place basically a second home which is nice but part of me wishes we had not improved it so much as we now feel obligated to keep a higher standard of maintenance which is a huge time suck.   

Linea_Norway

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Re: Second home question for high income earners
« Reply #27 on: March 13, 2019, 12:05:03 PM »
We've made our place basically a second home which is nice but part of me wishes we had not improved it so much as we now feel obligated to keep a higher standard of maintenance which is a huge time suck.

This.
If you already own a house, there is usually enough work to do at home. When you go to the cabin, you want to do that to relax, not to do even more work.

At our cabin we had to add shingles to the roof, because the wasn't any. And we had to digg drainage around it. We have also done a bit of painting, repairing the drain from the sink and replacement of oven and fridge. Otherwise the emptying of the dry toilet.. Carrying fire wood to the cabin is enough work to perform there. We also have a local person to clear away the snow on the parking lot.

Dicey

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Re: Second home question for high income earners
« Reply #28 on: March 13, 2019, 12:30:07 PM »
Would you buy this property if you were seeing it for the first time? If the answer is yes, my vote is to go for it.

DH and I have a tiny getaway place that costs very little. We were only able to go there once last year. But in the midst of the clamor of a demanding year, just knowing it was there waiting for us was actually helpful. I'd do it again in a heartbeat, and it doesn't have any of the sentimental family historythat yours does.