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600K Inheritance: Hawaii vacation condo vs rental property

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  • 600K Inheritance: Hawaii vacation condo vs rental property

    This is my first time creating a new thread, but I have occasionally posted replies in the past. I'm embarrassed to post this, since it is only an issue for the near 1%ers of the world. However, I manage all our finances and don't have a financial planner to turn to.

    I am writing to ask this wise group what you would do in my situation: We're a fortunate 2-physician couple in our mid-50's. Our combined gross salaries are around 550K/year and we're planning to cut back to part-time in 5 years. I am told I will be receiving an inheritance in the 600K range in several years, and am wondering what I would do with such a generous gift. I know some members of this forum are avid passive income real estate aficionados, and I have thought of doing the same. However, I am not that interested in managing 1-2 rental units (renters) in retirement. We're contemplating buying a Hawaii vacation condo with the gift. We love Hawaii, go back over and over again, and see ourselves spending several months per year there in semi-retirement and full retirement.

    Here are the numbers: Current net worth around 3.2M

    -  2.4-2.5M all tax-deferred in various 403b, 457, and 401a accounts. Depending on returns, this may grow to 4.5M-5.5M by the time I fully retire at 65. No Roth accounts yet, but will contribute to 403b Roth when I cut back to 1/2 time.

    -  630K home equity (900K value with 270K left on mortgage). Mortgage will be paid off in 5-7 years.

    -  120K left in 529s. Two college tuitions already paid for, with 1 more about to enter college.

    No student, personal, or auto loans. Assets allocations follow William Bernstein's "Sheltered Sam" allocations. See attachment.

    When I fully retire at 65, I'll get a government pension of ~100K/year. With SS of over 60K/year between the two of us (starting about 67yo), I don't think we would touch the tax-deferred accounts, if not for RMDs. This condo would be a big splurge, and given the property taxes and high HOA fees, a money losing venture. We might be willing to offset some of the costs by renting the unit when we're not there (via a local management company).

    I am fairly sure we can afford it, but wanted to hear if anyone has gone thru this process and regretted it.Would you buy a local rental property, and just rent a Hawaii condo for the months that you're there? Thanks for your insights!



  • #2
    Congrats on doing well.

    Can I point out that this is kind of a falsely dichotomous and somewhat strange question? It's your first rental property ever vs a money-losing vacation property by definition far from your home.

    Because of that it's kind of hard to provide a ton of insight.

    Why not just spend some reasonable amount ($50k? $100k) on yourself/spouse/kids, throw the rest into taxable, and go to Hawaii whenever you want? You can rent your vacations extravagantly and indefinitely at your level of wealth.

    Again, strong work.


    • #3
      It sounds like you don't want to be a landlord and doing VRBO, Airbnb, etc. will likely have you come out ahead versus buying a vacation condo. If it's several years away, I probably wouldn't even worry about it and continue to do what you need to do to reach your financial goals.


      • #4
        It sounds like by the time you get this money and make the purchase, you could spend several months there every year, so I don't see why not. You could also spend several months there every year in someone else's rental, but if the first choice is more convenient/makes you happy, do it. It sounds like you already have enough saved that you will be passing all your retirement millions to children and grandchildren anyway, so you can blow this inheritance any way you see fit.


        • #5
          A lot of your choice depends upon which island and the type of condo you are looking for. What type of accommodations do you currently stay in now?
          What amenities and locations are you looking for when you switch from tourist to parttime resident?

          Since you go fairly often, try it out. Rent in the location and price range that you are actually contemplating.

          “Live like a resident “, and see how far up the price ladder you want to go. You may find the perfect spot or you may find out how expensive it is to live there part time.
          The typical local living accommodations will be harder to rent parttime. Might as well scout it out and try it a few times, you are planning on being there anyway.


          • #6
            It sounds like you’ve done incredibly well. You can take very extravagant vacations to Hawaii several times a year once you semi retire on all the money you have saved in retirement accounts and home equity.

            May I suggest the radical idea of speaking to whomever you expect the gift from to give it equally to your children as a gift instead? Obviously only if they are responsible and you don’t want to ruin them but gifting $200k to each tax free in their 20s wouldn’t mean they can never work again. But it does give them a huge lift for any loans they might take for graduate education and/or a home down payment and/or a wedding and/or a 529 for their own (eventual) kids and/or taxable account


            • #7
              You can do whatever you want as you're in a fine money position.

              If you dont want to be rental landlords dont do it. If you still want a condo in Hawaii, fine, buy it, its simply a consumptive item that it sounds like you'll use a lot. Thats fine it simply is what it is. Some dont want to always be at another place, etc...


              • #8
                So, you're in your mid 50's, gross 550k, and have 0 taxable savings? You're not kidding when you say you like to go to Hawaii alot.


                • #9
                  Oahu just passed some laws that limit the short-term vacation rentals.

                  If being able to rent it out while you're not in Hawaii is an important part of the plan I'd make sure you dig into this new law or pick a different island.

                  The Hawaii climate is very hard on properties and if you need to do renovations it can take months to get the right permits.  The light fixture in our bathroom got covered in rust after just a year.

                  It has taken two years for friends of our to renovate a home they bought with a year just for the permitting.  I have no desire to own anything here because it sounds like a huge, expensive hassle to keep it up.


                  • #10
                    I would not buy any rental or vacation property now at the peak of real estate cycle.

                    Good deal for amateurs like us is almost impossible to find.

                    You already have enough fixed incomes for retirement, thus, you do not really need to put a lot of money into bonds, cash or real estates.

                    I would keep renting during vacations, put your windfall toward stocks (no more bonds or securities).

                    By the time you retire, you will have much higher net worth, less headache and more flexibility, than getting into property now.


                    • #11
                      Sounds to me like you already know Hawaii is where you want to be in semi-retirement and retirement. Makes sense to me for you to buy a place (though I take David Glenn’s point). Do bear in mind, though, that $600k invested will throw off $24k a year. It will buy some nice vacations in Hawaii with more flexibility. Of course, you still have the pack/ unpack hassle, so your call. By the way, I’m usually supportive of direct real estate ownership of rental properties, but if you don’t already have enough interest to have bought one I wouldn’t recommend starting as a retiree.


                      • #12
                        I think that you could afford it, but I don't think that you really want to do it right now.   It would be a hassle if you owned a property out there and something went broke.  I know you can pay a property manager to handle certain things, but I do think that people who are not on site end up paying a premium for it.    You have to spend several weeks a year in a place before you begin to break even with rent vs maintenance and tax as an owner.  I would suggest continuing to rent when you go out there, and only buy when you are ready to semi-retire and live several months a year out there.   If you are interested in becoming a landlord, I would suggest using the money to purchase a local property to see if it is something that you are really interested in.   I'm not a landlord, but I couldn't imagine having to deal the hassle of an eviction from long distance, especially if it was costing me a few thousand to fly there and back for court cases.


                        • #13

                          So, you’re in your mid 50’s, gross 550k, and have 0 taxable savings? You’re not kidding when you say you like to go to Hawaii alot.
                          Click to expand...

                          I was trying to figure out a nicer way of saying that, but I guess that sums it up.

                          A lot can happen in "several" years, so I'm not sure that the head's up is too helpful.  If I were in your shoes, I'd probably put a chunk in a 50/50 fund earmarked for travel to HI, and save the rest for Roth conversions.

                          I mean, you can stay in some pretty nice serial Airbnb's for the cost of a condo that sits empty for X mo/yr...let somebody else eat that opportunity cost.  Of course, if your extended family is also using it, you can make a better case vis a vis family wealth.


                          • #14
                            MPMD, Thank you for the great question. I posed the question as a dichotomy, in part, because of stories and podcasts that I've read and listened to (including WCI podcasts), suggesting that the financial considerations for a vacation home are quite different than the financials for a rental property. Cap rate/ROI for a rental, as well as how nice the furnishings should be, what kind of upgrades or remodeling should be performed, might differ. I definitely wouldn't want a Hawaii property to function primarily as a rental. I think it would be the worst of both worlds.


                            • #15

                              So, you’re in your mid 50’s, gross 550k, and have 0 taxable savings? You’re not kidding when you say you like to go to Hawaii alot.
                              Click to expand...

                              You bring up a great point! Our primary splurge, thus far, has been private school for all the kids. It definitely put a damper on our after-tax savings. You are correct to point out that we are 401k rich, but cash poor.

                              That being said, I failed to mention a 50K emergency fund. Additionally, we didn't always gross 550K. My starting salary in the late 90's was 150K, and my wife's was even lower. For most of our careers, we've been W2 employees for non-profit hospitals or academic centers. Each of those had lots of avenues to defer taxes. For the past 15-20 years, we've been putting away 70K-120K/year in various tax deferred savings vehicles. But now that the youngest is graduating, I'll have an extra 35K/year of after-tax money starting next year. After the house is paid off in a few years, I'll have an extra 77K/year burning a hole in my pocket!