Author Topic: Beach House financing  (Read 1374 times)

Must Stache

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Beach House financing
« on: October 27, 2020, 11:40:44 AM »
After spending a lot of money renting beach houses this summer, I'm now considering building a beach house of my own, which I would use with my family a few weeks a year and then rent out for the remainder of the year.  I'm trying to find the best way to finance the purchase/construction while keeping as much of my hard-earned savings in the bank as possible.  The scenario I'm considering would be to buy a very old beach-front house, tear it down, and build a brand new home.  Here are the rough numbers:

Old house: $1M
New house construction: $1.4M

My cash available: $800K
My home equity: $500K

Because of the location/demand, I need to purchase the old house quickly to make sure I secure the land and I'm trying to figure out the best way to do so.  Ideally, I'd like to put my home equity to use (at least temporarily) rather than tapping into to my cash.

I would appreciate any input and/or suggestions.  Thanks!

Fishindude

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Re: Beach House financing
« Reply #1 on: October 27, 2020, 11:50:31 AM »
We have a lake house and look at is like an "expensive toy", much like a boat, motorhome or any other un-needed thing you want to have just for fun.
I don't like the idea of being in debt for toys, so we paid cash.

If you are confident you have a solid rental market and clearly understand the cost of ownership, upkeep, how many weeks you can rent it, housekeeping costs between rentals, etc. and the numbers work out, then maybe a partial mortgage wouldn't be too risky at todays rates.

cool7hand

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Re: Beach House financing
« Reply #2 on: October 27, 2020, 12:02:37 PM »
I think that we need a lot more information to help you figure out if this makes sense, including income, any other assets, prior rental costs, etc.

bbqbonelesswing

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Re: Beach House financing
« Reply #3 on: October 27, 2020, 12:07:00 PM »
You're going to spend $2.4 million so that you can have a beach house a few weeks a year? Why not just continue renting every summer? Far cheaper, less work, and more flexible.

Must Stache

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Re: Beach House financing
« Reply #4 on: October 27, 2020, 12:17:45 PM »
You're going to spend $2.4 million so that you can have a beach house a few weeks a year? Why not just continue renting every summer? Far cheaper, less work, and more flexible.

It will be an income generating property.  Similar houses in the area bring ~$200K-$250K in annual rental income. 

I should have been more clear in my initial post.  My concern is not with managing the rental property after it is all finished.  I am more interested in figuring out the most strategic way to finance the purchase of the land and the cost of construction.  There are various ways to do it, and I was wondering if anyone here has first hand experience.

waltworks

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Re: Beach House financing
« Reply #5 on: October 27, 2020, 08:05:45 PM »
It will be an income generating property.  Similar houses in the area bring ~$200K-$250K in annual rental income. 

I'd bet dollars to donuts that's not true if we're talking about *net* income (speaking as someone who has rented beach houses and also owned a rental at a resort). Find someone who does this and ask to see their books.

If I had $2.4 million burning a hole in my pocket and didn't need the money for anything, maybe. If you're actively trying to use a mere $500k of home equity to avoid using your $800k of cash, you are probably making a bad decision here, since you're much too cash strapped to consider this.

-W
« Last Edit: October 27, 2020, 08:12:17 PM by waltworks »

uniwelder

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Re: Beach House financing
« Reply #6 on: October 28, 2020, 04:29:41 AM »
What ever happened to face punches?  If there's ever a topic that pisses me off, its people wanting to build beach houses.  Do you think your house will still exist when you're older?  Maybe the 1.4 million $ construction estimate includes making it hurricane proof and built on stilts---- then what about the fact that you won't have any other houses or roads around you? 

At some point, the government of the US is bound to stop subsidizing flood insurance for stupid construction like this, and when that finally happens, building new beachfront houses will finally come to and end.  In your first forum posting, you talked about how MMM changed your life after reading through all his blogs in a few weeks.  I would suggest you try reading back through again and pay more attention to the environmentally and socially related articles.

cool7hand

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Re: Beach House financing
« Reply #7 on: October 28, 2020, 05:10:32 AM »
Face punches are for the dogmatic. No one needs another dogma. There's more than one way to FIRE, and we should support those ways that don't hurt anyone else. Arguing that a beach house hurts others is a slippery slope that will sweep all of us into the sea.

uniwelder

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Re: Beach House financing
« Reply #8 on: October 28, 2020, 05:18:49 AM »
Arguing that a beach house hurts others is a slippery slope that will sweep all of us into the sea.

Collectively, it does hurt others.  Relying on government subsidies to make economic decisions hurts all taxpayers.  Why would anyone condone this behavior?

Something to add---- This is the MMM forums, not just as it relates to FIRE financial concerns, but as a whole.  Criticism shouldn't be laid upon those who advocate for general common sense and good stewardship.
« Last Edit: October 28, 2020, 06:12:38 AM by uniwelder »

norajean

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Re: Beach House financing
« Reply #9 on: October 28, 2020, 05:25:27 AM »
You can finance it via a mortgage lender just like any other house.  20% down.

If you want more advice on the risks/benefits of what many consider a bad move (vacation home) you need to provide details on what how much you are paying to rent each year, what property taxes look like, and how much you earn and have invested.

Must Stache

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Re: Beach House financing
« Reply #10 on: October 28, 2020, 07:11:16 AM »
It will be an income generating property.  Similar houses in the area bring ~$200K-$250K in annual rental income. 

I'd bet dollars to donuts that's not true if we're talking about *net* income (speaking as someone who has rented beach houses and also owned a rental at a resort). Find someone who does this and ask to see their books.

-W
Thanks for your constructive feedback. I've done my due diligence and reviewed the financials of similar properties, all of which produce net income for the owners.  I would not even be considering a project like this were that not the case. 


ericrugiero

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Re: Beach House financing
« Reply #11 on: October 28, 2020, 07:34:21 AM »
It will be an income generating property.  Similar houses in the area bring ~$200K-$250K in annual rental income. 

I'd bet dollars to donuts that's not true if we're talking about *net* income (speaking as someone who has rented beach houses and also owned a rental at a resort). Find someone who does this and ask to see their books.

-W
Thanks for your constructive feedback. I've done my due diligence and reviewed the financials of similar properties, all of which produce net income for the owners.  I would not even be considering a project like this were that not the case.

I would be concerned about tying that much of my money into one asset that has risks such as hurricanes, market changes, pandemic, etc.  But, I'm pretty risk averse and per your quoted numbers the return on investment is pretty good.  Just be darn sure you know everything about the costs and the income.  What happens if something goes wrong with the rental?  Can you afford to make the mortgage payments without the rental income? 

waltworks

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Re: Beach House financing
« Reply #12 on: October 28, 2020, 07:39:17 AM »
It will be an income generating property.  Similar houses in the area bring ~$200K-$250K in annual rental income. 

I'd bet dollars to donuts that's not true if we're talking about *net* income (speaking as someone who has rented beach houses and also owned a rental at a resort). Find someone who does this and ask to see their books.

-W
Thanks for your constructive feedback. I've done my due diligence and reviewed the financials of similar properties, all of which produce net income for the owners.  I would not even be considering a project like this were that not the case.

Interesting, my FIL owns pretty much the house you're talking about (approximate same value, on the beach, though he does not rent it). His carrying costs are >$100k/year I believe (not including the mortgage, which I'm not sure if he has on the place) Sometimes considerably so, salt water just WRECKS things and you basically have to have a full time maintenance person or two, repaint/stain everything almost every year, etc.

If you've truly done your homework and you're going to make money, then just walk into your bank and explain the situation and they'll tell you what they can and can't do for you. If you have the income to swing a $2 million purchase/construction loan, it should be easy peasy and they'll be happy to help walk you through all the potential options.

-W
« Last Edit: October 28, 2020, 07:41:48 AM by waltworks »

iris lily

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Re: Beach House financing
« Reply #13 on: October 28, 2020, 08:03:20 AM »
Arguing that a beach house hurts others is a slippery slope that will sweep all of us into the sea.

Collectively, it does hurt others.  Relying on government subsidies to make economic decisions hurts all taxpayers.  Why would anyone condone this behavior?

Something to add---- This is the MMM forums, not just as it relates to FIRE financial concerns, but as a whole.  Criticism shouldn't be laid upon those who advocate for general common sense and good stewardship.

Letís see, relying on gubmnt subsidies for ACA policies, wrong?

Having net worth or upwards of $2 million and taking Medicaid insurance, wrong?

Plenty here doing these things and I could think of many more comparable actions if
I had another cup of coffee.

I think it is reasonable, if not the absolute moral high road, to take what the gubmnt offers. It may be, snd IS often, stupid actions by the feds but whatever.

uniwelder

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Re: Beach House financing
« Reply #14 on: October 28, 2020, 08:48:40 AM »
Arguing that a beach house hurts others is a slippery slope that will sweep all of us into the sea.

Collectively, it does hurt others.  Relying on government subsidies to make economic decisions hurts all taxpayers.  Why would anyone condone this behavior?

Something to add---- This is the MMM forums, not just as it relates to FIRE financial concerns, but as a whole.  Criticism shouldn't be laid upon those who advocate for general common sense and good stewardship.

Letís see, relying on gubmnt subsidies for ACA policies, wrong?

Having net worth or upwards of $2 million and taking Medicaid insurance, wrong?

Plenty here doing these things and I could think of many more comparable actions if
I had another cup of coffee.

I think it is reasonable, if not the absolute moral high road, to take what the gubmnt offers. It may be, snd IS often, stupid actions by the feds but whatever.

Is there a need to go into 'what about-isms' for this topic? There is definitely a distinction between government support for health care (something not particularly controversial in other countries) and building luxury waterfront homes, and you're definitely aware enough to know the difference.  Exploiting government subsidies, as seen by many on this forum, probably accounts for less than 1% of those signing up for ACA plans, but what good choices do they have otherwise?  What percentage might that be for people building beachfront homes?

Regarding whether its reasonable to take what the government offers, what happens when you're basing a million dollar decision on something that may no longer be supported by the government in the future?  Its not unreasonable to expect this investment to lose a significant amount of money 10-30 years from now, and that should definitely be factored in.

oldmannickels

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Re: Beach House financing
« Reply #15 on: October 28, 2020, 09:08:39 AM »
So $2.4M all in. Probably need 30-35% down, so around $720k. Hard to say how much HELOC you could take because you might run into DTI issues with the bank.

I agree with other people that you should rethink the numbers.

$250k annual max income - $20k for the weeks you want to use it = $230k income

50% rule puts you at 125k in non-mortgage expenses

Mortgage prob somewhere like $1.7M is $7,634 monthly or $92k annually.

So $230k - 125k - $92k = $13k net income before depreciation. OK so at least conceivable that you could make a net income on the property while having some weeks to your family, if you rent it out yourself. Most beach property managers charge a 12% commission and that would but you in the red.

The opportunity cost of the $720k DP is somewhere around $30k depending on your normal rate of return, so it comes out pretty even.

Also agree that the cost of maintenance is generally higher for ocean front properties, but I don't have any actual numbers to use here.






Dee18

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Re: Beach House financing
« Reply #16 on: October 28, 2020, 09:48:51 AM »
A friend and I were discussing pet peeves the other day and my first thought was how ridiculous I think it is that our government subsidizes insurance for second homes on beaches.  Surely that policy will end soon given climate change!

Car Jack

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Re: Beach House financing
« Reply #17 on: October 28, 2020, 09:59:44 AM »
I have several friends with homes like this.  Some inherited, some bought along with other members of family and some just bought themselves.  I get common comments from all of them:

1: They all say they spend lots of their free time driving to the rental house to fix things, clean things or do other chores they'd rather not be doing between rental weeks.

2: Their successes have made the home a rental and not a vacation home.  Why?  Because the weeks that are during good weather, high rental season are rented.  To leave a week open is too expensive.  In essence, those who used to go to the area to rent are priced out of their own house.

3: People are hard on rentals and things are broken that should normally not be broken.  Do people really hang on and swing on refrigerator doors enough to bend the hinges?  Uh, yah.

One coworker goes to his house in the off season every weekend.  His son is a young adult and the coworker goes there to hike and mountain bike with his son.  His son, having a family of his own usually has to cancel coming.  So my co-worker tends to come back on Monday with stories of great recreational things.  Oh wait.....is putting up sheet rock the relaxing recreation you'd dream of doing in 100 degree heat?  Sounds fun to me to just watch on TV from my living room.

Have you done the math?  Sure, rentals are expensive, but if you want to save money one year, you can simply not go if you're renting.  If you have a mortgage, you have to pay every month, even if a big rent cancels and you're left holding their $200 deposit for a $4000 rental.

Obviously, I don't own a rental (or a time share).  When I go on vacation, I rent and I get to do it anywhere in the world I want to.

Archipelago

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Re: Beach House financing
« Reply #18 on: October 29, 2020, 09:41:20 PM »
I know investors who do short term/vacation rentals. The property managers do not charge a mere 10%. It's more in the area of 25-40%. Have you factored this into your numbers? If self-managing and paying yourself that fee, do you have the time or systems in place to make it happen? Let's say the folks check out at 11:00 AM, the next group checks in at 4:00 PM, and your cleaning staff bails on you. Do you have a plan for these situations?

Also something to consider - we are amidst a global pandemic. Back in March and April, NO ONE was traveling, let alone renting luxury vacation homes. How sure are you that this rental property is going to be grossing $5k/week, 50 weeks out of the year? With 2 months vacant you're looking at a $40k hit.

uniwelder

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Re: Beach House financing
« Reply #19 on: February 22, 2021, 06:14:25 AM »
Here's an article I just read this morning on NPR--- https://www.npr.org/2021/02/22/966428165/a-looming-disaster-new-data-reveal-where-flood-damage-is-an-existential-threat

FEMA plans to begin raising flood insurance rates in October to finally match the cost of structure replacement and limit its $36 billion debt.  The new program is called Risk Rating 2.0.  Increases would be as much as 18% per year until they reflect the actual risk adjusted cost.  It was said that some areas currently pay only 4% of the fair amount, so it looks like some wealthy people may be charged up to 25x more.  The highest increases would be paid by the wealthy because the current system disproportionately discounts their expensive homes.

Seems relevant to the current discussion when factoring in annual costs to a vacation home.
« Last Edit: February 22, 2021, 11:25:52 AM by uniwelder »

Sibley

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Re: Beach House financing
« Reply #20 on: February 22, 2021, 08:51:09 AM »
OP, just because the money is burning through your pocket doesn't mean you have to spend it. You're being a spendypants. Back to reading the blog, start from the very beginning because you clearly need to.

PMJL34

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Re: Beach House financing
« Reply #21 on: February 22, 2021, 12:23:04 PM »
OP,

You are taking a lot of heat because you are posting on the wrong forum for questions like this. Don't take it personally. Boglehead would be a better place (but I doubt even there you will get favorable responses).

If you would have framed this questions as: I realllly want a beach front house, it won't make money, but I want the bragging rights/prestige, and I will spend x amount of cash without going into debt...then you would get very different responses.

(This is based on my knowledge of the LA beach communities in terms of dollars and cents)

No way will this home make you any money. You will lose money every year (a lot). We all know the re-construction will go over budget. We all know that P&I is only part of the equation and T&I will be equally high. Fancy beach houses need to be updated VERY FREQUENTLY if you want top dollars. Forget the annual re-painting, new furniture, and general upkeep that is already expensive, you will need brand new kitchen and bathrooms every 5 years to stay relevant/competitive with your neighbors in these communities. As someone else mentioned, property management is no where near 10%, it's likely over 25+%. You can't even vacation during peak times as will be rented out. That alone should be a deal breaker to you.

Best of luck!

Telecaster

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Re: Beach House financing
« Reply #22 on: February 22, 2021, 01:42:09 PM »
So $2.4M all in. Probably need 30-35% down, so around $720k. Hard to say how much HELOC you could take because you might run into DTI issues with the bank.

I agree with other people that you should rethink the numbers.

$250k annual max income - $20k for the weeks you want to use it = $230k income

50% rule puts you at 125k in non-mortgage expenses

Mortgage prob somewhere like $1.7M is $7,634 monthly or $92k annually.

So $230k - 125k - $92k = $13k net income before depreciation. OK so at least conceivable that you could make a net income on the property while having some weeks to your family, if you rent it out yourself. Most beach property managers charge a 12% commission and that would but you in the red.

The opportunity cost of the $720k DP is somewhere around $30k depending on your normal rate of return, so it comes out pretty even.

Also agree that the cost of maintenance is generally higher for ocean front properties, but I don't have any actual numbers to use here.

I think the expenses are too high.   $125K is a lot, no matter how you slice it.  This would be new construction as well, so most big ticket maintenance items (roof, etc.) will be in the future.  That number can be safely lowered. 

However, I think management is going to be more like 25%. 

PMJL34

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Re: Beach House financing
« Reply #23 on: February 22, 2021, 04:17:46 PM »
property tax and insurance isn't even in the numbers you two are talking about.

Mr. Green

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Re: Beach House financing
« Reply #24 on: February 23, 2021, 05:20:51 PM »
Do you have no choice but to buy an old home, tear it down, and build a new one? There's no way that's cheaper than simply buying a house that's nice enough not to be torn down.

reeshau

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Re: Beach House financing
« Reply #25 on: February 24, 2021, 06:30:18 AM »
My cash available: $800K
My home equity: $500K

I can certainly understand the negative reactions here.  Given the very sparse detail, this is what I imagine most people are actually reading the request as:

"I'd like to take enough money for most people here to immediate retire early, and instead dig a money pit on the ocean, and throw it all in there.  Then I'll keep working my job until I pay off a seven-figure debt I'm going to pile on top of that."

If you also told us you make $500k per year, already have $10M in investments in addition to your cash, and are just working for the joy of it, then the interpretation becomes:

"I want a big 'ol toy.  I might break even on it.  It might even cost me something, because I'm going to take the prime weekends in my beach palace, f*ck the renters.  But I'm already set for life, so why not?"

In that case, you would be approved, and maybe envied.  But, yeah, wrong place to ask about such an extravagance, much less look for others who have also done so.  They are probably in hiding, if they exist.