Reader Case Study: Cash Out Taxable Brokerage To...

[nexus]

Life Situation: 34M, 38F, Married, no kids, TN.

Gross Salary/Wages: Spouse's Business: $70k, My Job: $140k.

Individual amounts of each Pre-tax deductions 401k, HSA, FSA, IRA, insurance, etc. - whatever you have Not relevant for this case study

Other Ordinary Income: Side hustle: net $25k (more on this later!)

Qualified Dividends & Long Term Capital Gains:  Approx $8k this year, 100% reinvested

Adjusted Gross Income: This should equal the additions and subtractions above.

Current expenses: Mortgage $2k, Spending $4k. Total monthly expenses average $6k MoM, or $72k annually

Expected ER expenses: $50k annually (mortgage free)

Assets:
Taxable brokerage $395k
Rollover IRA: $257k
Roth: $18k
Spouse's investments: $34k
HSA: $23k
Total invested: $727k

Cash: $212k --> expected to be $230k-$250k by EOY 2025

Real Estate
Current home: $700k - $322k owed = $378k
5 acres: $357k (owned free and clear, no mortgage)

NW: $1.6MM

Liabilities: Just the $322k owed on Current Home, sub 3% interest rate

Specific Question(s): I'm currently getting bids to build House 2 on the 5 acres. My budget is $500k max, and I'm 80% certain I'll stay within budget. The plan is to build House 2, juggle the construction loan & mortgage on House 1, then move into House 2 and sell house 1. The $200k cash + net proceeds from the sale of House 1 should make us mortgage free. Our incomes can easily cover the construction loan interest for the 9-12 months it'll take to be built, plus the 3-6 months it'll take to sell House 1. We have been saving at least $6k per month into a high yield savings that's giving another $650+/mo in interest. So, Goal 1 is to be mortgage free in House 2. This reduces our monthly expenses and takes some stress off of needing to work full time or have high paying job(s).

I think the math checks out on all of this. We'd still be putting cash away while having the 2nd mortgage, just at a lower rate -- maybe $2-3k/mo instead of $6k+.

The thing I really need help with is this bigger dream or rich life scenario: I finally have the space and resources to build my own indoor tennis court. Is it batshit crazy to cash out almost all of my taxable brokerage account to build this??

Due to my expertise, I can use it to grow my side hustle which is tennis lessons. I can also rent the space out when not using it to generate some passive income or at least cover the overhead/utilities & insurance. This is where I need a sanity check. This could cost me in the ballpark of $300k. I'm coming to the conclusion that I'd be willing to cash out a large portion of my taxable brokerage account to cover the construction of it.

To level set, my coast FIRE plan is essentially to just do my tennis lessons/clinics while letting the rest of the stash compound, or until traditional retirement age. My spouse has no plans of ceasing work, so we can assume her income will stay consistent. I'm fairly confident that I could net $50k annually from this $300k expense, given I'm only doing it part-time now and making $25k. $50k is a very conservative estimate, but this will require hours of my work, whereas the investment income/appreciation from the taxable brokerage account is entirely passive.

Unless I continue to work full-time for another 5-6 years after moving into House 2, there's no way I'll ever re-build the taxable brokerage account quickly, and I'm not sure I need to. I think I'm psychologically with missing out on those gains and compounding given there will still be $400k+ invested with at least 25 years of compounding until we hit traditional retirement. $400k for 25 years at 7% would be $2.1MM without me adding anything else to it. I can't imagine not continuing to invest even during coast FIRE.

So is there anything I'm not factoring in or missing? I definitely don't want this to be my version of MMM's BFM*

Other call outs:
No point in selling House 1 sooner and temporarily renting. It is costing us less than $1k per month to live in it given half the mortgage payment goes into equity. We could not find another rental for $1k per month that would work for any amount of time -- plus we'd have to pay for storage. Moving in temporarily with family is not an option either

I also think the increased life satisfaction from having my own tennis court and not having to drive anywhere to play or teach has a lot of value in terms of quality of life, too.

*Big F*'in Mistake

Edits/Additions/Answers to Questions:
If I built an outdoor sport court, it would cost less than $100k, but I'd still be at the mercy of the elements. Can't play if its too cold or wet. Would still need lights for nighttime. Eventually making it indoors would be costly in terms of retrofitting and end up costing more than if I just made it "indoors" in the first place.
If I gave up this dream and just started investing again once we had $200k specifically in the high yield savings account... oh man, I'd be adding $50k+ annually to investments again

**edit to add**: There are no indoor courts in my area so I'd have a monopoly on being able to rent it out and could automate the booking system. Anyone in my area has to drive 45+ minutes each way for indoor court access, if they can even secure a reservation. So I have zero doubt based on my existing client base that it would generate revenue from day 1.

Changed <sport> to tennis.

[Laura33]

What is your backup plan if your spouse's business goes away?  Your numbers work if everything goes as you hope they do -- you keep your expenses low, your spouse remains employed for another 25+ years, you bring in $50K/yr from your side business for as long as you want.  But things like private lessons are often the first thing to go in a recession.  I don't know about your spouse's business, but depending on what that is, it could also be vulnerable in a recession.  Oh, and selling a house is also vulnerable to a recession (AMHIK).  So you could find yourself carrying two mortgages, unable to sell the old house, and with one or both of you out of work -- and basically all of your accessible money has been literally poured into the ground at the new house (which you could then also theoretically lose if you can't afford the payments because everything went to hell).

I'm not going to tell you to give up on this dream.  I am going to tell you to postpone it.  Any time you own two houses, you are far too vulnerable to economic forces beyond your control to add additional risk to the equation.  Hell, at this point you don't even know how much the house is actually going to cost and what you may need to take out of the brokerage to cover overages!  Do the house first, including whatever designing/utilities/etc. you need for a future sport court.  Then once the original house has sold, use those proceeds to finish off the sport court. 

Oh, and get some more quotes.  $300K sounds like a metric shit-ton of money for a shell of a building (or a tall basement) with some flooring and hoops or nets or whatever. 

[sonofsven]

I'm calling batshit crazy on the sportcourt.
Can you lease one for your business?
How many sf is House 2? $500k "ain't what it used to be" in construction costs.

[nexus]

@Laura33
Thank you for taking the time to read my post! This is some great insight/info to digest and consider. :)

Spouse is a mental health therapist, all virtual. In the last 6 months she started accepting insurance and went from 10-12 hours per week at $100+/hr to 20 hours weekly at the same rate. She ended up pausing her "accepting new clients" button as she gets used to the higher workload. I think 20 hours a week is doable long term for her. I think she could consistently schedule 25 hours each week knowing there will be cancellations and reschedules. In a dire situation, she could ramp up to 30 hours, but it wouldn't be sustainable long term.

There are quite a few costs going into the court. The structure is 73x120 and costs $76k before tax. End walls are another $6k-8k each depending on the options I choose. Shipping is another $7k. Install was quoted at $60k. There were some phantom costs of another $5k for finishing details. That's before I even prep the ground, or lay asphalt, or install the court surface, lighting, etc.

Now, if I can't just buy the 'off the shelf version' due to local building regulations, I'd have to have the structure engineered which costs more. Essentially the gables are 20' apart in the 'off the shelf version,' and the engineered version would have to be 15' apart, which increases materials and installation costs. There is some gray area there for two reasons: (1) TN is about as lax as it comes with building, especially given I'm not going to be in a residential area and (2) the structure is categorized as a 'temporary' building based on what it's made of -- even if it stands there for 20+ years.

I spoke with my in-laws last night because they had careers in architecture and real estate. They suggested we basically do a master plan for the 5 acres and designate phases for construction. In that sense, I think it makes sense to get all the permitting and approvals like you mentioned. Phase 1 is building House 2. Phase 2 would be sport court after House 1 is sold/House 2 is paid off.

I also plan on making an edit to my original above regarding the cash in the high yield savings account. Essentially we will not touch or draw from that $200k+ until the construction loan converts to a traditional mortgage. At that point I'd probably take at least half of it and pay down the mortgage to reduce interest costs and keep at least $50k as our emergency fund.

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@sonofsven Negative, there are no indoor courts in my area to lease. They don't exist, which is why I'm so gung-ho to monopolize. And if I booked indoor time somewhere, they wouldn't let me teach/earn money on it unless I was an employee. The math doesn't make sense either given it would cost me $25+/hr, plus a 90 minute round trip. If there was a club within 15-20 minutes of me that had indoors, I'd be working there part-time on nights and weekends. I currently already do that at my own local club, but it's all outdoors so things die down Nov - Feb most years. Double whammy is the place is being sold at the end of this year, so my fate is uncertain. They may bring new pros in, or want to renegotiate the terms / my split to the club.

House 1 is 3k sq ft. We are aiming for 2.5-2.8k sq ft in an attempt to downsize & create a more efficient footprint. General quote for our level 1 finishes is about $180/sq ft -- cheaper than buying a house on the market because the builder isn't selling us the land, if that makes sense. 2,500 sq  ft * $180 = $450k. 2,800 * 180 = $504k. If it increased to $190/sq ft the costs would be $475k and $532k respectively. Our $200k cash + net equity from sale of House 1 currently covers that worst case scenario of $532k. In the coming months before breaking ground, another $6k - $10k will be added to the war chest. If the quote comes back above that, then plan is to simply postpone construction until the numbers make sense (we save more). We're in the late stages of finalizing a floor plan. After that, the builders said 2-3 weeks to get a detailed quote together.

[father time]

You reference "permitting and approvals" above but I would make DAMN sure your zoning is going to allow you to rent the court out and generate money off it.  I'm not a TN zoning expert but if it's not zoned commercial or covered by some special use permit, all it takes is one bitchy neighbor to mess up your plan.  Also, get a nice insurance policy if you are going to charge people to use it and factor that premium into your math.  I'm not taking a dump on your dream either, just saying proceed with caution.

[nexus]

You reference "permitting and approvals" above but I would make DAMN sure your zoning is going to allow you to rent the court out and generate money off it.  I'm not a TN zoning expert but if it's not zoned commercial or covered by some special use permit, all it takes is one bitchy neighbor to mess up your plan.  Also, get a nice insurance policy if you are going to charge people to use it and factor that premium into your math.  I'm not taking a dump on your dream either, just saying proceed with caution.

@father time , 100%! No dumps perceived from my end. I'm definitely insuring both structure and for liability, even if I never rent it out or earn a dime from it. My own professional certification also has a $6M policy for added coverage. Even if I don't make money, the sheer value of the convenience of having it within walking distance, or ever having to pay for a membership somewhere is huge! If I invite friend(s) over to play with me, I definitely want insurance in case they roll an ankle, get hurt, trip, etc. I also plan to have a couple cameras in it so that if an issue ever did come up, I'd have footage of what happened -- like tripping on a ball they neglected to pick up, or damage to my stuff, etc.

I have a call with my home builders tomorrow about including the structure in the plans/permitting paperwork with the house. That way I don't have to go through the process multiple times. I'm sure they will offer some good guidance on how to proceed, and what I can or cannot do.

As for bitchy neighbors -- I'll be on 5 acres without any HOA, so I have the luxury of no neighbors nearby, and the opportunity to place it somewhere it won't be a nuisance to them. I also need to double check, but I may have lucked out and be outside of city limits, too! Looking this up now; results uncertain but the property is R1 zoned, and in my municipality it means the lots must be at least 40k sq ft and have 50' of road frontage in order to build. Looking at my neighbor's lots on either side, there's pretty much no way to subdivide their land in the future. When we were land shopping, we learned a lot. Essentially the rule is that one driveway can't go to multiple properties. So you won't see a cluster of mailboxes in front of one driveway. The reason is due to the confusion it causes for emergency services. In "olden" times an ambulance/police would pull up to a driveway and then not know which house to go to. Obviously if there was a fire that was easier to see. So yeah, that still exists and those situations are grandfathered in, BUT that scenario will not occur in the future on the neighboring properties. Sorry for the tangent!

Your mention of bitchy neighbors is still a very good point. One of the reasons we started looking to move was that we do not enjoy being under the watchful eye of a HOA. The only issue we ever had was when we first moved in -- got a warning letter saying our trash can can't be visible from the street. That pissed me off, but now it stays in the garage and in the summer it stinks. A friend bought a home in the neighborhood and the house had a dead shrub near the street-facing garage. He hadn't been there a week and the HOA was up his ass about removing/fixing it (because one of his neighbors is a board member). Anyway, F that nonsense!

I think it's also important to make the distinction that because this will be my home, I wholly do no expect to have strangers over or using it. It would basically just be friends, teammates, trusted students -- not the general public, rando's, or degenerate pickleballers.

[Laura33]

Looking this up now; results uncertain but the property is R1 zoned, and in my municipality it means the lots must be at least 40k sq ft and have 50' of road frontage in order to build.

FWIW, R1 zoning usually means "residential," which means no commercial use.  Obviously there are a lot of fine lines here, and I don't know what your area would mean.  For ex., I know some areas that expressly authorize what they call "cottage industries," where you're basically making something yourself to sell; OTOH, businesses that entail significant traffic don't qualify. 

IOW, even if your builder includes the court in the plans, they likely need to ensure that they identify that as a place you will give lessons and rent out if you want to ensure you have the necessary approvals. 

Or, you know, you can just include it, let everyone assume it's for private use, and cross your fingers that you don't end up with an unreasonable neighbor to complain about you 5 years down the road, when you're attempting to make back the $$ you invested in it.

[zolotiyeruki]

I have a relative who recently started a business not that different from what you're proposing.  In his case, it's indoor pickleball and sand volleyball courts in the Pacific Northwest.  He rented some warehouse space and built the courts inside.  Could something similar be an option for you? That way, you potentially avoid some of the permitting issues and save a lot of the upfront capital costs, not to mention the long-term/permanent financial commitment.

Here's another way to think about it:  Let's say the opportunity cost of that $300k indoor court is $21k/year (foregone market returns).  Could you rent warehouse space for less?

Another way to think about it:  You're not getting a $50k/year return on that $300k investment, because you still have to work.  You'd be making $50k - $21k = $29k/year on all the hours you spend teaching tennis lessons.

A third way to think about it:  As a business.  Establish two LLCs:  one ("A") owns and maintains the building, the other ("B") rents the building from A and offers tennis lessons.  In order for this whole thing to work, both businesses need to be profitable--B has to at least break even after paying the coach (you) and the rent, and A has to be profitable after paying the mortgage and receiving the rental income.

Now, it's hard to correctly interpret intents through text on an internet forum, but as someone who has similar-scale impractical dreams, I feel like "having a private tennis court" is the dream, and  "It makes sense because I'll teach tennis lessons" is an attempt to make the dream seem rational.  There's nothing wrong with pursuing one's impractical dreams, but I think it's critical to recognize them for what they are (frivolous, probably, but that's what dreams are), rather than try to twist them into something they're not (a rational investment that will pay for itself).

[reeshau]

A third way to think about it:  As a business.  Establish two LLCs:  one ("A") owns and maintains the building, the other ("B") rents the building from A and offers tennis lessons.  In order for this whole thing to work, both businesses need to be profitable--B has to at least break even after paying the coach (you) and the rent, and A has to be profitable after paying the mortgage and receiving the rental income.

This is the direction I was thinking, as I read the OP.  Further, if the opportunity is truly hat good, you should be able to get a business loan for it, and not have to put up the full amount out of your investments.   Doing the upfront work for a loan and LLC's, to have a proper business plan and marketing research done, could help to confirm the opportunity, or identify the business plans as rationalizing the dream.

[nexus]

Hi All,
Thank you all for the insightful comments. The idea of the two LLC's was not something I'd have even thought of. I did some more digging and this project is not something I'm going to be able to do in any business sense without getting in trouble due to the zoning and red tape. Even parceling it off has restrictions due to road frontage requirements.

I'm just going to own/admit that this would just be a huge spendypants purchase with no tangible ROI aside from convenience and quality of life.

Dumb as it may sound, I don't want to have to drive anywhere for exercise, or for a job. The thought of finding a warehouse and managing a full blown business sounds daunting at this stage in life - and darn near impossible while still holding down a day job. I'd either have to be onsite or hire staff to run the front desk. I mean, I could theoretically just work my remote day job from a the business (and during those hours just rent the courts out), but I don't like the idea of commuting or being there from open to close. It's an interesting thought, but I'm still very hesitant of the overhead. All of the indoor facilities in a 50 mile radius are all owned/operated by the parks and rec departments -- it's not like they have to turn a profit.

I'm going to take a beat and mull this over. There are still too may unknowns, including the more important cost of the home build. I need to get all of that squared away before jumping head first into phase 2. So, I'm going to put this on hold for at least six months while continuing to explore my options.

[zolotiyeruki]

I'm just going to own/admit that this would just be a huge spendypants purchase with no tangible ROI aside from convenience and quality of life.

That's a very important step to take.  It's ok to spend money on things that are of value to you.  But recognizing "fun" spending for what it is...is really critical.