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600K Inheritance: Hawaii vacation condo vs rental property

Home Personal Finance and Budgeting 600K Inheritance: Hawaii vacation condo vs rental property

  • Avatar Kamban 
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    Bad idea.

    At age 65 you should be wanting to travel and see the world and not be long distance landlords, even with local management.

    Simplify your life. Just put it in an index fund and make periodic withdrawal or use the distributions to travel to Hawaii or wherever. You will come out far ahead with hotel / AirBnB or VRBO than a condo in Hawaii.

    #245187 Reply
    Avatar OldSoul 
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    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

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    JBME, The estate plan already calls for each of the grandkids to get 50K, but I could definitely supplement that. Thank you for the very thoughtful suggestion! I am already helping our oldest while he is engineering grad school. The 529 fully paid for his undergrad . In addition, I do an annual Roth IRA match for all the kids when they work. Thanks again.

    #245189 Reply
    Liked by SLC OB
    Avatar Dont_know_mind 
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    …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.

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    I would assess a vacation home on the same criteria as an investment property.

    In terms of metrics, most vacation homes are a terrible investment.

    I saw a “vacation property” I thought was a good investment a few months ago:

    $70,000: 20 meters from beachfront, undeveloped area, population 300 people within 20KM radius. Vacant land currently. Zone residential so potentially a house could be built on it. I think it would make a good 20 year investment. Only vacation use would be if you put a shipping container on the land and used that, but it would be stinking hot. Maybe you could do some camping too, but you’d have to ask the neighbors for electricity, water.

    I also saw another one that was what I thought was a bad investment:

    $1.1M, beachfront, population 5000 within 20km, 3 BR house.

    It all comes down to price and estimated rental and capital return.

    #245207 Reply
    White.Beard.Doc White.Beard.Doc 
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    Looking ahead, I think you could potentially be in good shape to retire, if you pay off your mortgage, and if you are able to finish paying tuition for your kids.  Those things still sound a bit off in the future for you.

    Until then, given your net worth at your age and income level, in your shoes I would attempt to avoid any major financial mistakes.  Adding a vacation home far away to your current personal and financial responsibilities could be a modest financial hit, or a big financial hit.  And it could be a big hassle.  Would the positives of ownership of that far away vacation home that sometimes sits empty, compensate for the pain of a leaking water heater that is discovered several weeks later and leads to a house filled with mold? (A retired family member that maintains 2 homes just went through 8 months of mold remediation, renovations, and insurance company negotiations at one home, fortunately just in time to go back to their winter home.  Ouch!)

    And this inheritance that you plan to receive in the future, do you even know when that will be coming?  Sounds a bit morbid thinking about it.

    #245210 Reply
    Liked by OldSoul
    Avatar Eye3md 
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    My wife and I spend a fair amount of time in Hawaii each year, and also dream of owning a condo there. This past year, while staying in a condo, I noticed a few were for sale So I decided to look into a few. One thing a lot of people do not realize is the expense of the HOA fees. They vary a lot but most of the nice places were $1200-$2000 per month. In retirement, that’s an extra $14,400-$24,000 per year to account for, just for HOA fees

    #245212 Reply
    Liked by OldSoul, Zaphod
    Avatar fasteddie911 
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    I have family that lives there.  Another food for thought, there’s growing discontent amongst locals in regards to housing availability and affordability, many are pointing fingers at vacation homes, investment properties, etc. especially those owned by non-residents.  I wouldn’t be at all surprised if there is something done about this sometime down the road.

    #245216 Reply
    Liked by OldSoul
    Avatar Kamban 
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    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.

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    I am glad that you have realized it early enough. Managing one or two properties is a pain. After taking into account HOA, Taxes, insurance, repairs and other expenses you would be lucky to make any income. And even if you did, it is mainly as an insurance against withdrawing too much from equities in a market downturn. But you have $100K pension and $60K in social security every year and can easily tighten the belt in retirement should you need to and live easily on $160-200K per year.

     

    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.

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    Everyone has this idea but after a few years it becomes boring or the hassles of travel get to you. $600K invested well should produce $25K income at a minimum. You can use this for travel. What you propose to do is something like a timeshare purchase without the initial investment. The annual expenses will be horrendous and you will have a tough time getting rid of it while breaking even.

    #245225 Reply
    Liked by OldSoul
    Avatar Tim 
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    @oldsoul,
    Just a silly thought.
    •I’m sure you know that the key to real estate investments panning out is getting a good purchase price.
    •I’m sure you are familiar with the concept of a lease/purchase analysis too.
    •I’m sure you have chewed on the possibilities of timeshares located in desirable vacation destinations.
    I’d look to pickup a timeshare someone is trying to unload. Lowball your bid (some folks will be glad to just get out of the annual assessments).

    Purchase/Lease/Timeshare? Option 3 seems to be the best of terrible options! Two tickets to paradise!
    The goal is to minimize the mistakes. At least when you unload it, you can be priced attractively.

    #245236 Reply
    Liked by OldSoul
    Avatar StarTrekDoc 
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    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.

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    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!

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    Kids sure are expensive aren’t they!?!  Assuming pvt college for the last one, that’s about where the 35/yr x4 commit is.  So no further support in grad school and weddings?   Those are our last unknowns for our budget.

    I would keep both scenarios separately and not link them unless you plan to use that property personally and it doesn’t appear to be in Hawaii itself.  So treat it like passive income property and decide if its worth the investment/return hassle or not.  Since a few years away, getting the financials of that property isn’t worth it.  Just wait.  It maybe throwing off $60,000 cash flow and you just don’t know it.

    Then you treat your Hawaii time on its own.  We have family that travels there yearly for 2 weeks at a time.  They use timeshare points.  They don’t own cause they don’t plan being there more the a few weeks.   I have patients who stay 3 months and 6months there –they own.   The 3 months person rents out long term rentals to corporate.  the 6 month simply owns and doesn’t rent out.   Both have nice furnishings — aka no AirBNB rental ikea stuff.

     

    BTW, double check if that 401a is eligible for megaback door Roth.  Your HR may not know the answer, but the custodian of the account probably does.

    #245257 Reply
    Avatar OldSoul 
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    Looking ahead, I think you could potentially be in good shape to retire, if you pay off your mortgage, and if you are able to finish paying tuition for your kids.  Those things still sound a bit off in the future for you.

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    Tuition for the older two is taken care of. We just have one more kiddo at home to account for. I plan to use a combination of existing 529 funds and cash flow. Thanks for the warnings about minor disasters in faraway properties. All these replies have been very helpful to tamp down my enthusiasm. With regard to the morbid nature of the discussion, I agree. However, my parents derive significant pleasure in talking about inheritance, and what we should do with the money.

    #245265 Reply
    Zzyzx Zzyzx 
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    600K may not be enough depending on your desired location with current property valuations and expenses over the long run –  many many unexpected costs as you are on an island with harsh conditions: mold, bugs, flooding, typhoons, taxes, north korea…

    Recommendation if you go through with it – consider newer and tall high rise condos typically in metro areas for easier maintenance and lower utility costs: less bugs, less issues with flooding, concrete instead of wood, amenities like gym and pool and bbq, HOA more beneficial but still price gouging, better appreciation and resale value

    It’s psychosomatic. You need a lobotomy. I’ll get a saw.

    #245278 Reply
    Liked by OldSoul
    Avatar Tim 
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    “However, my parents derive significant pleasure in talking about inheritance, and what we should do with the money.”

    Think how pleased they would be buying the condo. It is an opportunity to show how appreciative you are for the suggestions.

    #245286 Reply
    Avatar ajm184 
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    Joined: 07/14/2017
    expense of the HOA fees.

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    A couple of points:

    a. This is a good discussion IMO, because it focuses upon use of money versus the savings, low cost funds, IPS, etc.

    b. Living by the Ocean with the salt air in a multi unit building; those HOA costs have to be accurate because every 15 to 20 years the exterior and mechanicals of these buildings need to be totally redone due to salt corrosion.  Was in Florida this year, and the building we were in was in the midst of a redo.  The owners were being charged a 50K special assessment for the work.  That type of special assessment directly impacts valuation and ability to sell.  Imagine being retired and 70 or 75 yo and being asked to come up with that kind of money.

    c.  Seen a couple of those House Hunter shows with folks in Hawaii.  Though 600K is alot of money, it doesn’t seem to go very far in Hawaii relative to a ‘house on a beach’.

    #245290 Reply
    Liked by Eye3md, OldSoul
    Avatar ZZZ 
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    “However, my parents derive significant pleasure in talking about inheritance, and what we should do with the money”

    So, why not just give it to you now? Bet they’d really enjoy seeing you make good use of it. Or have the money directed to your children, their grandchildren: 200k a piece on their late teens/early 20s could be very beneficial head start on their prudent financial lives…paid for house/car from the get go.

    #245378 Reply
    Avatar Tim 
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    Joined: 09/18/2018

    “So, why not just give it to you now?”

    A lot of unknowns. I personally haven’t figured out how to pick a termination date for myself. Struggling how to ask my spouse when she is planning to depart. Once that gets hammered out, I will definitely let my kids know.
    Any suggestions? Sounds like the kids would prefer sooner than later. Thanks for the encouraging word.

    #245388 Reply

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