Author Topic: Rental and convert to second home  (Read 1769 times)

nic1

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Rental and convert to second home
« on: February 12, 2016, 03:52:51 PM »
Looking at homes in a beach location to buy now, rent out for 15 years and then possibly live in part of the year when we retire in around 15 years.
Running the numbers we would probably just break even as far as rents collected covering mortgage and taxes. For a single family home around 2500 sq ft looking at 450k.
Upside would be building equity while it is rented, downside is we need 10 percent down so probably around 50k to make this happen. We have a rental property with close to that on equity. Have 25k in cash but that is just emergency money so would need too seriously save to build up 50k in addition to retirement savings.  My fear is if we don't move on this now in 15 to 20 years who knows what prices will be and doubtful we can drop 500 to 600k on a second home. My husband will have a military pension and we should have around 1.5 mil by the time we retire so not worried about maintaining two homes, just trying to decide what to do now, if anything.  One option would be to sell our current rental and roll that into the beach rental. This rental has not appreciated but has always been cash flow positive so not sure about that. Any feedback is appreciated. I know I am a bit emotionally attached to the idea of buying something in this location, we have vacationed here for the last 15 years. I do not enjoy traveling so this is sort of my retirement bucket list that I want to be able to live in this location at least 3 to 4 months a year

iamlindoro

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Re: Rental and convert to second home
« Reply #1 on: February 12, 2016, 04:01:47 PM »
Too little information to discern how good or bad it objectively is.  Consider adding the information from the case study sticky to this post:

http://forum.mrmoneymustache.com/real-estate-and-landlording/how-to-real-estate-case-study-sell-or-rent/

Without that information, I would say that this sounds like a primarily emotionally-based decision rather than a financial one.  If you are not considering the many things that most first-time real estate investors tend to forget (vacancy, management fees, tenant placement fees, utilities, insurance costs, higher interest rates for investor loans, capital reserves, adequate maintenance budgets, etc.), it is probably a worse financial decision than merely break-even.

That's not to say that it's not okay to make an emotionally-based decision, just that we not delude ourselves into believing that the financial picture is better than it is.  We owe it to ourselves to acknowledge what the basis for a decision like this is.

NoNonsenseLandlord

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Re: Rental and convert to second home
« Reply #2 on: February 13, 2016, 08:08:58 AM »
Put your money in the bank instead.  You do not want to lose money for 15 years.  When you retire to the beach, pay cash with that money.

Or buy a performing rental at a location that performs, or a REIT, like ticker 'O'.

Nords

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Re: Rental and convert to second home
« Reply #3 on: February 13, 2016, 10:42:41 PM »
... when we retire in around 15 years.

My fear is if we don't move on this now in 15 to 20 years who knows what prices will be and doubtful we can drop 500 to 600k on a second home. My husband will have a military pension...
I get this question a lot.

First, your spouse is 15 years away from that pension.  It's impossible to predict what will happen during those years, and there's a >80% chance that you will decide to leave the service before vesting the pension.  It's totally unrealistic (even a fantasy) to expect to stay on active duty for over a decade and a half.  If you rewind your life 15 years back from today, would you have believed back then what you're doing now?  Yeah.

Take active duty one obligation at a time.  If you're not feeling challenged and fulfilled then leave active duty for the Reserves or Guard.  Your spouse can still reach 20 good years (for a military pension at age 60) without risking everyone's emotional, psychological, and physical health. 

Next, you're right that you can't predict prices 15 years from now.  However you can predict that most real estate will appreciate (in the long term) at about the rate of inflation, and that real estate values will oscillate in cycles around that line on the graph, and that some homes will be bargains due to neglect or local factors. 

In other words you could invest your down payment fund in equities for the next 15 years.  The statistics predict that you'll earn more than the rate of inflation (after taxes).  You can cash out anytime during the 10th-15th year to create the down payment fund.  (It's the same as building the college fund for a new baby.)  When you're ready to start searching for that second home then you can move to the area, rent there for a few months, and learn the details of the neighborhoods while you're searching for bargains.

You don't have to buy today just because all the good homes might be gone by 2030.

clarkfan1979

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Re: Rental and convert to second home
« Reply #4 on: February 14, 2016, 11:00:04 PM »
My parents were planning on buying a retirement house in Florida in 2011. As prices soared from 2002-2006 they convinced themselves that they had to buy in 2006 otherwise they wouldn't be able to afford to retire in Florida in 2011 for their scheduled retirement date. They purchased a new construction home with a pool for 556K. In 2011, they could have bought the same house for 300K. They just sold the house for 420K last month.