Author Topic: Should I pay cash for my dream fire lair?  (Read 3755 times)

superd

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Should I pay cash for my dream fire lair?
« on: June 11, 2020, 12:39:29 AM »
Hi,

I downshifted about two years ago and worked about 8 of last 24 months and decided to really fire and I have a big life decision to make, was hoping could get some feedback if anyone has had to make similar calls.

I went through underwriting for a loan in March and my self employed income history counted for a Fannie/Freddy loan. Then this week I have an accepted offer on condo and got the to do list from the lender today and it had a “due to changes related to covid-19 we now have to verify current or future income...” , before I made offer I checked in with loan agent to see what else I needed to do to make underwriting solid and he didn’t say anything changed and was so confident he said “if I can’t get you a loan I’ll refund you the appraisal fee” .. ugh.

Got super excited and now I’m going to either pay cash or bail on the dream I’ve always had. Here is current situation.

I’m 46 no debt or dependents
Current assets: 1.22 m (70/30 equity/cash)
965 post tax
257 retirement accounts

Condo price $355k, 600/mo taxes insurance hoa, potential reliable rental income in resort town 800/mo. I can get the 355k with Net 0 lctg so no tax to consider . But I would need to sell winners to get cash once in it, which would affect aca subsidy calculation.

I haven’t ever spent more than 40k a year historically including housing, but I’m worried that is too big portion of my assets in real estate at a time with recession/unemployment.

Am I worrying about nothing and should go for it?

If I do, how would you set asset allocation between retirement and post tax accounts?
How would you setup firecalc or another simulator to get budget estimates?

Would you do it ?

Linea_Norway

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Re: Should I pay cash for my dream fire lair?
« Reply #1 on: June 11, 2020, 02:35:18 AM »
You have a solid stash for a single person. For rental income, please consider some non income time between tennants and during convictions. Maybe not all can afford their rent now with the pandemic.
If you are in doubt, I would not do it. If a plan is solid, one is normally not in much doubt.

blue_green_sparks

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Re: Should I pay cash for my dream fire lair?
« Reply #2 on: June 11, 2020, 06:22:36 AM »
Many lenders do consider dividends when calculating income, if that helps. Maybe move into high dividend stocks, at least temporarily. Ahh, I Just read they use your two year dividend history, is it worth a look?
« Last Edit: June 11, 2020, 06:24:54 AM by blue_green_sparks »

friedmmj

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Re: Should I pay cash for my dream fire lair?
« Reply #3 on: June 11, 2020, 06:33:52 AM »
You didn't say if this place will be your primary residence or not,  I assume it will be, but then how will you be renting it out unless you are traveling in long stretches?

I would look for a cheaper place with a lower HOA.  You should calculate an imputed rent at 4% of your cash investment.  Based on that you will be "spending" over 20K per year on housing not including utilities.  You also need to consider that your HOA can hit you with large capital improvement assessments.
« Last Edit: June 11, 2020, 06:36:10 AM by friedmmj »

JGS1980

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Re: Should I pay cash for my dream fire lair?
« Reply #4 on: June 11, 2020, 07:26:41 AM »
Why not get back to work for 3-6 months, get the mortgage, and then FIRE?

Will give you a lot more flexibility long term, and it's not like you are 66 years old, you are 46 and have plenty of FIRE time left.


superd

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Re: Should I pay cash for my dream fire lair?
« Reply #5 on: June 11, 2020, 11:46:54 AM »
Oh..sorry for not mentioning it would be primary residence and it is a three bedroom. I would live in it and rent out a room or do Airbnb . It’s a resort town and I’ve been going there for years and doing multiple month room rentals and there is a college plus seasonal workers to rent to. In my experience the listings go within a couple of days of posting and I’ve lived in Airbnb houses that the rooms were always taken on Friday /sat night so I think 800 is reliable. Granted with covid I wouldn’t do Airbnb and seasonal workers aren’t there this summer so can’t count on that until things get back to normal.  Also an option to get two roommates where I could get $1200+ from students.

Yes , that’s what I was thinking the safe bet would be to get a job and wait . The minimalist in me is thinking why would I drop that much money when I can rent a room for under $1000/mo. But.. then I’m a renter in someone else’s place and it really isn’t my home. With it , it becomes vacation place for all my friends and I’m really part of the community.

Also, I’ve been watching listings for years, a condo that is my ideal pick in this town hasn’t came up for a couple years. Yes..something else will pop up in the next year , but interest rates could rise and I’ve lost one other to cash buyer last month and it may not be what I really want.

I was hoping everyone would be: you’ve saved all your life for this moment, go for it... but it sounds like the opinion is how I’m thinking about it.

Mr. Green

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Re: Should I pay cash for my dream fire lair?
« Reply #6 on: June 11, 2020, 01:46:00 PM »
Our financial situation sound very similar. My wife and I FIRE'd a couple years back, but last year I had a small 1099 income from a consulting gig. We attempted to get a mortgage a month ago and with $1.4m in liquid assets no one would underwrite a loan due to lack of income. Was told we could have $20m and we still wouldn't qualify because you have to be 62 or older for an asset drawdown program.

We're also in a situation where we've been looking at real estate in a particular market and are pretty picky about what we want. I'm not too concerned about rates. Maybe a year or two from now they won't be the lowest they've ever been anymore but they'll still be low. I'd be more concerned about your odds of finding what you want again and being able to get it. Right now a lot of people are ticking in their wings so your competition might be less.

Also you mentioned you spend less than 40k a year. I assume that includes rent so if you buy this place how much will that reduce your yearly expenses? And you haven't really said how little you can spend if the shit hits the fan. If you buy it with cash and then the market drops 30% again can you tighten you budget and live on 20-25k a year if that makes you more comfortable with your depressed portfolio until the market comes back up?

You also mention the ability to rent the place out. Not sure what your feelings are on doing that now with COVID and all but I've found that we have had a decent number of opportunities to make money if we wanted to after FIRE. If we bought our place and felt cash insecure down the road I don't think we'd have a problem remedying that.

Edit: I forgot to mention, we were told we'd need two years of documented 1099 income before we could qualify for a loan. For us the 1099 money was just extra so I don't plan to make enough to ever qualify for a mortgage based on income alone. But if I did, I'm screwed by the pandemic this year so assuming the industry I was helping in returns, it will be at least 2023 before we could get a mortgage that way. Wouldn't be any different if I got a job either because they want two years of documented W-2 income. I don't know what your particular income situation but that's food for thought.
« Last Edit: June 11, 2020, 01:50:07 PM by Mr. Green »

JGS1980

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Re: Should I pay cash for my dream fire lair?
« Reply #7 on: June 11, 2020, 02:15:33 PM »
This is a good lesson for early retirees; buy your dream home BEFORE you FIRE, not after.

Mr. Green

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Re: Should I pay cash for my dream fire lair?
« Reply #8 on: June 11, 2020, 02:19:45 PM »
This is a good lesson for early retirees; buy your dream home BEFORE you FIRE, not after.
Absolutely! In our particular case we didn't know what we wanted back then so it wouldn't have helped us but it sure is dumb "not qualifying" for a mortgage because we don't fit inside the box, even if we can easily afford it and our "income" from investments is a more stable source than most people's jobs. :(

superd

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Re: Should I pay cash for my dream fire lair?
« Reply #9 on: June 11, 2020, 05:17:02 PM »
Hi Mr. Green, have you called chase ? They have an asset backed program . I was talking to an advisor in Oregon, about two months ago if you had 3.5x the loan amount after down payment it qualified. Then last month they changed it to (loan amount * 3.5) < (assets * .7) so about 5x.  But.. the assets have to be liquid (not in retirement accounts) in cash stocks bond funds. At 5x in taxable accounts not really that useful, but you may be able to get like a 200k loan from them today. I didn’t go through underwriting so I never got a definite pre-approval on it though.

If you move 250k into chase , you can get in the private client program which gets additional .125 loan discount and they usually have new money bonuses.

Yes, If I pay cash and rent to one roommate  I have no housing cost and can live for 20k a year easily.  I ran simulations of budget with no purchase and budget with pay cash and sell for break even after five years it was about 2000/year difference so not that big of deal if it doesn’t work out.

Thinking of it another way if I take 4% of my remaining in after tax accounts after paying cash it is $24,000 a year so I should be able to make it long enough to not have to panic sell. A friend gave me an idea I can also get heloc if I have any big issues happen and don’t want to sell stock to deal with it.

Much Fishing to Do

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Re: Should I pay cash for my dream fire lair?
« Reply #10 on: June 12, 2020, 05:35:01 AM »
I guess I'm always surprised by the lack of creativity in the mortgage world that would be less risky than the stuff they approve all the time.  I would think you could put 50% down and anyone would give a mortgage (b/c the property would never go underwater)?  Or do what I did in business when I needed a large line of credit for the occasional serious amounts of short term float between when I'd owe contractors for a job and when I'd get paid, [I think I secured a $200k line of credit with a $400k taxable investment account, allowing me to very cheaply borrow (it was something close to Prime) and pay back the money for the month or two I'd need it without having to buy and sell investments or keep a ton in cash for that purpose].

Blackbeard

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Re: Should I pay cash for my dream fire lair?
« Reply #11 on: June 12, 2020, 07:24:40 AM »
It is always amazing the different perspectives on the site and how they influence or nudge my thought process. 

@superd I'm in a similar position to you and trying to figure out how to finance a house/condo a ski resort in the Rockies.  We'd be using it as a base of operations/home.  We like smaller resorts at a much lower ownership cost than what you're thinking but we are not looking at renting at all.  The catch for us, we own a East Coast Lair that we don't want to sell, but would rent it and be +$5k/yr until we sell it in a few years when family moves out. 

I haven't really considered an all cash option until reading your post.  Our stats are a bit different than yours, we're $2.4m or so with about 10% in cash/bonds and a consulting retainer of $45,000/yr for the next five years all W2.  When we've went to finance the second house our debt to income ratio was out of whack so we wouldn't qualify.  Then we looked at asset and dividend backed mortgages.  We found two places that were willing to do them, they're all small local banks that are located at the resort.  We're planning on putting 50+% down.  For other asset and dividend backed mortgages, the calculations of "income" differ VASTLY.  Shop around. 

Chase was mentioned, we're in their private client program via a round about way through an investment company I'm a partner in.  They wouldn't touch it, they've essentially stopped what they consider investment transactions.  I think we may have screwed up originally when we talked to them about this being a second home/or potentially renting it when we were still in our initial thought phase.  With that said, I've been in their private client program for 3+ years, and I've been turned down for a mortgage before by them after they preapproved the loan.  Needless to say I'm not a big fan of theirs.  If I didn't have business relationships with them, I'd bounce. 

Now, you've got me thinking about going all cash, the cost of our condo is around $135k.  I do like the idea of a HELOC, but I need to think through the ramifications of that.  I really don't need the money siting in liquid cash, it's more of a security blanket...

Regardless, thanks for starting the thread, it's thought provoking. 

Mr. Green

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Re: Should I pay cash for my dream fire lair?
« Reply #12 on: June 12, 2020, 04:12:29 PM »
Hi Mr. Green, have you called chase ? They have an asset backed program . I was talking to an advisor in Oregon, about two months ago if you had 3.5x the loan amount after down payment it qualified. Then last month they changed it to (loan amount * 3.5) < (assets * .7) so about 5x.  But.. the assets have to be liquid (not in retirement accounts) in cash stocks bond funds. At 5x in taxable accounts not really that useful, but you may be able to get like a 200k loan from them today. I didn’t go through underwriting so I never got a definite pre-approval on it though.

If you move 250k into chase , you can get in the private client program which gets additional .125 loan discount and they usually have new money bonuses.

Yes, If I pay cash and rent to one roommate  I have no housing cost and can live for 20k a year easily.  I ran simulations of budget with no purchase and budget with pay cash and sell for break even after five years it was about 2000/year difference so not that big of deal if it doesn’t work out.

Thinking of it another way if I take 4% of my remaining in after tax accounts after paying cash it is $24,000 a year so I should be able to make it long enough to not have to panic sell. A friend gave me an idea I can also get heloc if I have any big issues happen and don’t want to sell stock to deal with it.
We got screwed by them not counting our retirement accounts, which is stupid because there is a perfectly legal way (Roth IRA rollover pipeline) to access those funds before you are 59.5 years old. And that is yearly income. At the time we were talking to lenders we had about $400k in after-tax accounts and $1m in IRAs. So the formula (loan amount * 3.5) < (assets * .7) brings our possible loan amount so low that we're flirting with whether anyone would do a loan that small. And that doesn't consider the fact that our down payment would be such a large percentage of the purchase price that it's almost a waste of our time to mess with a mortgage.

superd

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Re: Should I pay cash for my dream fire lair?
« Reply #13 on: June 12, 2020, 09:18:39 PM »
@Blackbeard  right yeah I would never tell a lender that it isn’t for primary home purchase, unless you’re an actual professional real estate investor.

Where would be a good spot for snow fire people to start a thread to talk about fire in ski town ? I’ve spent a lot of time driving around the west , have tons of ideas to check into for you. Pagosa springs near wolf creek , pack wood near white pass wa, Sandpoint idaho near Schweitzer ,  whitefish mt, driggs/victor Idaho  offer a lot of different options of price / services / snow conditions .  If what I’m working on doesn’t work out, Sandpoint is my #2 choice. If you haven’t been they usually have a spring pass for $99 for the last four weeks of the season, can check out the resort and see the town.

I can’t get it to @ mr green..  but yes Mr. Green  chase private client has provided no help on anything I need help with. I only use it for the free safety deposit box and free wire transfers. I once asked what options they had for money market accounts and the guy replied “you have a self managed account”.

Appreciate all the responses ! Long time lurker first real post asking for options and you didn’t disappoint.

I’m leaning towards paying cash once I do the inspection and get estimates on upgrades I want to do. Investment wise it’s in a spot where I don’t think I’ll have issues selling if I need to liquidate.

Blackbeard

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Re: Should I pay cash for my dream fire lair?
« Reply #14 on: June 13, 2020, 12:03:26 PM »
Agree with a new post for resort living.  But I can't resist posting anyway...

Sandpoint and Whitefish were our number 1ish place we were looking at.  That changed a bit when my DW tore her ACL.  We're much, much bigger mountain bikers so we've adjusted our viewpoint to look for great Downhill Mountain Bike Parks that happen to have okay ski resorts. 

Now, we're really leaning towards Angel Fire, NM for our base.  It checks a lot of boxes for us.  World Class bike park, condos are relatively cheap, it's a small town, remote location, it's close to a lot of the great winter mountain biking destinations, relatively close to airports for some of my consulting gigs and a few others items on our list.  We've realized over the years that snow is highly variable, so if we want to hit powder we'll go where the snow is at the time, more than likely we'll be biking though.

As a side note, about 10 years ago we almost pulled the trigger on a townhouse in Whistler, that place is now 3x what it was.  I got cold feet when I realized that there limited amounts of days US citizens could stay in Canada a year if you didn't get residency.  I kick myself regularly for not buying it.

smoghat

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Re: Should I pay cash for my dream fire lair?
« Reply #15 on: June 28, 2020, 09:21:30 AM »
Ha, we couldn’t even get a $30,000 car loan on a $55,000 car, notwithstanding that we have a perfect record for paying our credit card (everything possible goes on it) by the end of the month, own our home outright and could literally buy a fleet of a hundred of those cars outright with our investments.  (In case that seems excessive, it’s a Tesla Model Y and there is a. $5,000 rebate outright on it, so while pricey it’s the right car for our lifestyle).

kei te pai

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Re: Should I pay cash for my dream fire lair?
« Reply #16 on: June 28, 2020, 10:35:56 AM »
Dipped in to read about dream fire hair which  sounded pretty fun.  Should have gone to Specsavers!

friedmmj

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Re: Should I pay cash for my dream fire lair?
« Reply #17 on: June 29, 2020, 06:16:35 AM »
@Blackbeard  right yeah I would never tell a lender that it isn’t for primary home purchase, unless you’re an actual professional real estate investor.

Where would be a good spot for snow fire people to start a thread to talk about fire in ski town ?
I’ve spent a lot of time driving around the west , have tons of ideas to check into for you. Pagosa springs near wolf creek , pack wood near white pass wa, Sandpoint idaho near Schweitzer ,  whitefish mt, driggs/victor Idaho  offer a lot of different options of price / services / snow conditions .  If what I’m working on doesn’t work out, Sandpoint is my #2 choice. If you haven’t been they usually have a spring pass for $99 for the last four weeks of the season, can check out the resort and see the town.

I can’t get it to @ mr green..  but yes Mr. Green  chase private client has provided no help on anything I need help with. I only use it for the free safety deposit box and free wire transfers. I once asked what options they had for money market accounts and the guy replied “you have a self managed account”.

Appreciate all the responses ! Long time lurker first real post asking for options and you didn’t disappoint.

I’m leaning towards paying cash once I do the inspection and get estimates on upgrades I want to do. Investment wise it’s in a spot where I don’t think I’ll have issues selling if I need to liquidate.
Start a new one. I started this thread awhile ago (but deleted my OP for privacy reasons) and there were some good reccomendation. https://forum.mrmoneymustache.com/ask-a-mustachian/best-(and-cheapest)-mountainski-towns-to-move-to-after-fire/msg1103353/#msg1103353

For myself, I chose to pay cash but I didn't have to take it from investments since I previously owned a house I sold after FIRE so used some of that money. As a fairly low income FIREee -  and at the time really had zero income and was living off some cash - there's no way I would have qualified for a mortgage.

ETA: If you do start a new thread do it in the Ask a Mustashian forum as it gets more traffic then the post-FIRE forum. Also be specific about what you want - a place right in a ski town where you can walk or take a shuttle to the lifts and town (what I was looking for) or somewhere close by but that would require a drive. FWIW I don't live in a ski town now.

Also you might want to check out a ski lease rather than buying. Basicly you rent a fully furnished all-inclusive place for 4 -5 months during ski season. They can vary in price but can be sit amongst friends and are much cheaper then short term stays.  They're very popular in Tahoe and prices range from $1500/month to $4000/month on average for larger places. Some of course are VERY high. I rented a 3 bedroom place with 3 friends once. It was $4000/month so $1000 each. They all worked full time so could only come up on weekends and holidays. I was FIRE and living there full time so had the place to myself most of the time.

That sounds awesome Spartana!  I would sign up for that in a minute.  A balance of socialization and privacy at a great cost.

friedmmj

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Re: Should I pay cash for my dream fire lair?
« Reply #18 on: June 29, 2020, 06:19:39 AM »
I feel like it doesn't make a lot sense to be opening up a new mortgage in retirement.  It would be more logical to buy a place that can be comfortably afforded with existing assets or trading down from existing home to a new one.

infromsea

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Re: Should I pay cash for my dream fire lair?
« Reply #19 on: June 29, 2020, 07:11:56 AM »
OP you asked some GREAT questions, your last one was "would you do it" and the answers are going to be mostly useless to you since everyone is coming from their own "place" in FIRE and situations are so wildly variable they are probably not good proxies for you except for those (who have mostly chimed in) who are in somewhat similar situations.

A few points I have NOT seen mentioned...

- The economic impact of the last few months has not fully manifested. I think it's short sighted for anyone (not accusing you of this...) to assume that "today" is going to look like "six months from now".

So, I think you have to ask yourself, what does your picture look like (financially etc.) if the following conditions occur:

- Interest rates climb as the economy sours
- Returns on investments plummet
- Housing markets crater
- Rental income drops due to high supply and lack of ability to pay
- Inflation begins running rampant
etc. etc. etc.

What would you situation be in the "worst case" as described above? Could your lifestyle survive the "stress test" I've laid out? Granted, there is a possibility that NONE of those items occur, which it appears that you would be just fine if only one or two of them (or none) did occur. BUT, what would your plan be if several or all of them DID become reality?

If you can answer that, (basically, do the fear setting exercise as described by several authors) and feel confident in your answers, then you'll likely have more confidence in your decision.

As for me, I would not burn that much cash with such uncertainty in the next 18 months BUT, that's just me. I used to be a "ALL DEBT MUST BE ELIMINATED" kind of guy but have I have a military pension so I don't "play" by the same rules as some. If I didn't have that locked down income, I'd abhor home mortgages a little more but with it, am more comfortable with debt considering I don't have to leave the house to have income.

Lastly, I'll never buy/rent/lease go near anything with an HOA, that's just me, it's a personal hangup, I'd assume not DRIVE next to a home with an HOA (smile) due to my desire for other folks staying out of my business BUT, as many have said, you have to "pay to play" and if HOA payments are the price of entry and it's your dream spot, I guess you gotta do what you gotta do. I might do a calculation on the impact of that HOA though, I.E. how much cash would you need to service that HOA over your expected time spent living there?

Best of luck, it's not an easy decision BUT, it's not life ending either, I hope it works out the way you want it to. One last method of making the call, flip a coin... assign the outcomes before you flip it (heads you buy, tails you walk away or heads you buy in cash, tails you figure out a way to get a mortgage) and then flip the coin. The outcome isn't important. What matters is what you WANT the outcome to be as the coin nears the apex of the flip... That's one way to "touch base" with your deeper thought processes (though we shouldn't always follow them blindly?).
« Last Edit: July 07, 2020, 12:16:52 PM by infromsea »

goldenboy

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Re: Should I pay cash for my dream fire lair?
« Reply #20 on: July 07, 2020, 08:46:45 AM »
I realize this may be too late to be relevant, but... would it be possible to pay cash, and then if necessary get a job later and do a cash-out refinancing? I have no particular expertise in this area but I can't think of a reason why that wouldn't work. This way you wouldn't miss out on the property but would still have the assurance of being able to pull out cash if you need it (assuming you can get a job).

SwordGuy

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Re: Should I pay cash for my dream fire lair?
« Reply #21 on: July 07, 2020, 01:54:03 PM »
$355K is a lot to pay for a condo.   It's a lot to pay for anything.

You realize you can buy a perfectly good house in the $80k to $160K range in most of the country.     

$340K in my part of the country bought an AMAZING house and grounds that would be well over a $million not 60 miles from here.

Since you don't have to work anymore, why stay where real estate costs are so very high?

JohnGalt

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Re: Should I pay cash for my dream fire lair?
« Reply #22 on: July 10, 2020, 01:48:24 PM »
For whatever it's worth, I bought a house (in the same price range) using a securities backed loan through Chase private client last year (with similar assets) and it worked out exactly as I wanted it to.  Obviously things may be different with Covid going on but I couldn't be happier with my experience.