Upgrading housing, bad choice... or mustachian in disguise?

[bluecollarmusician]

Hello All-
Always enjoying reading the thoughtful insight from the many readers here. 

I have an issue I am wrestling with, and thought I would seek insight from other like minded folks.

We will be moving from middle GA back to Virginia (Hampton Roads area.) in June.  My first investment property was purchased in 2001 in Hampton- a 1 BR condo.  It has been rented since purchased and has been paid off for a couple of years.  It is small, not in a great area, but not horrible, and is pretty convenient to the area.  Big plus is it is biking distance to work there, and I would be able to commute that way 4-5 days a week depending.  As of now it generates 3-4K year after everything, depending on costs for the year. 

It seems like a mustachian no brainer for my wife and myself to move in there.  It is just the 2 of us and our 2 cats, and we have lived in small spaces before, so it wouldn't be that hard- although we have spread out into our 1300SQFT house and big shed in the back yard.   Total cost to live there would be approx. 280$ including utilities and condo fees.  And I would bike to work every day, cutting fuel and depreciation costs on the single car.

HOWEVER-  we have an option to purchase a beach condo at 30-40% off what I expect is the real market value.  It is direct bay front, with private beach access.  It is a larger 2 bedroom condo with nice interior and needs only minor upgrades.  We have bought several foreclosures and fixed/resold so this is definitely and investment as well as a bit of a dream house.  This house will cost significantly more to own- monthly cost will be more like $600 for fees/taxes/utilities.  The big downside to this option, is that I will have to drive as there is a tunnel which does not allow bikes- it is approx 15 miles to work as opposed to 5 in the condo.  I checked into the bus, but there is no reasonable way from the house to use it.  Fuel for driving will cost in the neighborhood of 750-800/ year.

So, in my head I have justified this because:

1. the rent from the condo will cover the difference in cost of housing, i.e. profit from the rental will pay the 400/month in additional costs, so out of pocket is the same.
2.  because we are buying the home below value, it is direct beach front, and we are capable of increasing it's value, I am confident that we can increase it's resale, and that this is a an excellent investment.

But am I really just fooling myself because I want to live in a nicer house on the beach?  I know there is nothing wrong with this- certainly we can live anywhere we want to and don't have to justify it to anybody- I love the water... my wife loves the water, and I believe that it will be a lifestyle unobtainable elsewhere. But what I am asking is do my justifications sound jive, or do I need to face up to the fact that I want to pay a premium to live on the beach. 

Curious to hear thought...
thanks for reading....

[bluecollarmusician]

Sorry- forgot to add reason 3 for justification-
3.  Because I anticipate that within 5 years we could sell the house for 100-150k more we need to live in it so we can get the home owners tax deduction.  If we turn it in to a rental property, we would not be eligible for this generous deduction.

[Another Reader]

If it is an "excellent investment" and you can add value, then in your shoes I would buy and commute.  This would be my choice only if my job was stable and I planned to live in the condo long enough to do the fix up and not lose money because of a forced resale.  It sounds like you intend to pay cash for this condo because you don't list a mortgage as part of the costs.  In other words, you can "afford" to make this investment.

However, the "real market value" is what it would sell for today, exposed to the open market.  Anticipated appreciation is not the same.  And you are only recovering appx $300 per month of the additional costs at $3-4k net income from the original condo.  You would be making an investment and paying a current premium for the beach front life.  If you end up with appreciation when you sell, then you can say you lived there at no additional cost.

[rejones]

Can you buy the beach front place, rent it out, and live in the old rental?

[bluecollarmusician]

Thanks for your comments....

Another Reader, your comments basically echo my sentiments.  It is a cash purchase.  Agreed appreciation is only a bonus.  The only 3 comps in the last 2 years all sold for 75- 85K more and are all 600 SQFT smaller.  So my conservative estimate is that this is worth 50-75K in an unrestricted market.  Maybe more... but that would be icing. 

@rejones, we could rent it out at positive cash flow, however we would then lose the opportunity to cash out in a couple of years.  My interest in this property is not as a rental.  If we were looking for immediate cash flow there are other more interesting properties- perhaps less desirable for living in which would provide better cash return, but that would be purchased closer to market price.


I think the bottom line is we "want" to live in this condo.  I don't want the commute, although it is mild by most non-mustachians pov.  For me, if I can't bike it, it seems crazy.  It is all about compromise.  I have been trying to justify our "want" to live there with investment prospects, but I think that the reality is that this may be generally not the best financial decision if we are trying to get to FIRE ASAP, but still might be a lifestyle.  We could live in a smaller, cheaper place... we could live in a tent, a shed, etc but want something more comfortable.  A beach front condo is certainly a lot more than we NEED. 

I will be curious to see if this leads to any greater "happiness" as we are already pretty crazy happy...  Currently living in a house in Middle GA purchased for 25K cash... after spending some money and a lot of work it is a sort of dream house... for me at least.  Total housing costs per month including required utilities and property taxes amount to about 200 bucks/month for 1300 SQFT, and a 800 SQFT wired shed on a quiet street within walking distance to everything we need.  People talk about moving to other countries to live a good life cheap... I have to laugh at that and say move to middle ga!  So either way, moving to VA is going to be a gigantic increase in cost of living.

[smedleyb]

Thanks for your comments....

Another Reader, your comments basically echo my sentiments.  It is a cash purchase.  Agreed appreciation is only a bonus.  The only 3 comps in the last 2 years all sold for 75- 85K more and are all 600 SQFT smaller.  So my conservative estimate is that this is worth 50-75K in an unrestricted market.  Maybe more... but that would be icing. 

@rejones, we could rent it out at positive cash flow, however we would then lose the opportunity to cash out in a couple of years.  My interest in this property is not as a rental.  If we were looking for immediate cash flow there are other more interesting properties- perhaps less desirable for living in which would provide better cash return, but that would be purchased closer to market price.


I think the bottom line is we "want" to live in this condo.  I don't want the commute, although it is mild by most non-mustachians pov.  For me, if I can't bike it, it seems crazy.  It is all about compromise.  I have been trying to justify our "want" to live there with investment prospects, but I think that the reality is that this may be generally not the best financial decision if we are trying to get to FIRE ASAP, but still might be a lifestyle.  We could live in a smaller, cheaper place... we could live in a tent, a shed, etc but want something more comfortable.  A beach front condo is certainly a lot more than we NEED. 

What an excellent dilemma to have.

Question: why are you able to buy the beach condo at such an incredible discount to the market rate?   

Bottom line: if FI is your goal, and the beach condo is truly the deal you say it is, buy the condo, live in it two years, and then sell if for a tax free capital gain.  Seems like easy money.   

[bluecollarmusician]

I agree- it is an excellent dilemma- just trying to get unbiased feedback from like minded people.

I always enjoy hearing other folks opinions- even if I don't agree, it keeps me honest :)

re: how to buy at a discount.... arbitrage happens in all markets at various times.  Coupon folks often walk out of the grocery store with stuff for free, stock dealers and currency traders often make money on inefficiencies in markets, etc.  Even MMM's most recent article is basically about arbitrage- by having time freedom and saving through living off-peak.  Right now with the foreclosure markets being overwhelmed, there are many banks, HOA's, and all kinds of folks who are stuck with property they don't want to own.  The first house my wife and I bought here together in the US was purchased at auction for 35k.  It had sold previously for 105K.  It was cute as a button, and though it had a couple of big fixes needed, it was in a very desirable vacation location.  It was marketed by a realtor that was over 2 hours away, who had no idea what they had- they just wanted it sold.  because it needed several fixes, and had a couple of minor code violations it was marketed with big red x's and cash only, etc- keep in mind the people selling it had never actually laid eyes on the property.  We bought it for 35, put about 10 into it, and turned it into a vacation rental that grossed 30K (net 20) in it's first year of operation.  This is happening all over the place in the real estate market right now.  They are overwhelmed with the material they have and are having a tough time getting it all marketed and sold correctly.  Additionally , with HUD, Fannie Mae, Freddie Mac policies many things get fixed, etc. saving money- you just have to watch closely, and act aggressively when you see the opportunity. 

We are still kicking ourselves over a missed chance in a nearby city.  There was a house in a mid-grade area of town- not the worst part (which is very undesirable) but definitely a mid-level area- house prices run 30-50K there in good shape.  There was a HUD home that had been vandalized and steadily dropping in price, until it was 4500 dollars.  No joke, the kicker is, after it was vandalized HUD had a contractor go in and fix the house- it was in rental ready condition (sans appliances) and could be bought for $4500, it would have rented over  night for 600/month.  Needless to say we missed it by seconds, and it probably went to an insider... but there are deals like that out there- it boggles my mind! 

So this condo is basically one that was foreclosed, improperly winterized and had some water damage.  Everything is fixed and it is gorgeous now.  But it got caught between being an open listing and going to auction, and we managed to get our offer accepted and pulled out of the auction pool.  I think that it is an amazing deal on a wonderful house- if it was not for the tunnel, I would be happy to ride my bike the 15 miles each way to work!! 

[sheepstache]

Is there a place on the other side of the tunnel where you could park your car during the day and your bike at night?  Beach living sounds pretty sweet to me.

[bluecollarmusician]

Great idea! Will have to look and see when we get there.  We have loved being a one car couple.  I hope we can maintain it when I need the car every day. 

[SunshineGirl]

You didn't post anything about your finances/savings rate in either scenario, but to me, living by the beach would be an excellent decision at the numbers you mention, for quality of life purposes. It sounds like you're moving there to take a new job -- eventually, maybe try to get a job closer to home -- but go for the condo!

The place you already own there is an income-producing asset, so there's no harm keeping it as such.