Menu

Buying real estate for retirement EARLY??

Home Real Estate Investing Buying real estate for retirement EARLY??

  • Avatar Bonez 
    Participant
    Status: Physician
    Posts: 113
    Joined: 04/02/2016

    I read through the threads in the real estate forum and couldn’t find anything about this. I know several people that have purchased real estate in “vacation” areas and rent them out the majority of the year and use them for a couple weeks here and there. Some of them manage the property themselves and rent them to a single renter for multiple months at a time. Some of them employ property management companies to deal with all of the renting since the nature of the market is short-term (i.e. weekly) rentals. In either case none of them are making a killing on their investment now (although they all say they’re able to cover the costs of mortgage, taxes, insurance, etc with the rental income), but they all have the plan to retire at these properties years from now. Obviously if you’re young, you have a long time to think about where you’re going to retire and things will change.. But if you have a place you like to vacation a couple times per year and find a property you like at the right price (maybe even one that has a history of consistent rental income), this seems like a pretty decent way to pay off a mortgage on a vacation home that might become your retirement home. Does anyone here have experience with this??

    #19996 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
    Moderator
    Status: Physician
    Posts: 1516
    Joined: 01/08/2016

    The idea sounds great and I had ideas like this 10 to 12 years ago.

    Both WCI and I have been accidental landlords on homes where we once lived. Of course, we finished residency in 2006, just before the real estate market went south. Having been through that experience, I wouldn’t recommend buying vacation property with the idea that you might retire there. Not yet, anyway.

    Renters, particularly short-term renters, will cause a lot of wear and tear on a property. There will be headaches to deal with, plumbers and handymen needed, etc… You could pay a property manager to take care of these things for a premium, but for my money, I wouldn’t bother with any of it.

    If you were close to retiring, say 5 years, and you (and perhaps a spouse) have spent enough time vacationing in a place you love and you know you want to retire there, that might be the time to consider buying property there, and doing some short-term rentals to cover your carrying costs.

    It could work out great if you pull the trigger when you’re young, but there are a lot of what-ifs and scenarios where things don’t work out so well.

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #20006 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7530
    Joined: 01/09/2016

    I read through the threads in the real estate forum and couldn’t find anything about this. I know several people that have purchased real estate in “vacation” areas and rent them out the majority of the year and use them for a couple weeks here and there. Some of them manage the property themselves and rent them to a single renter for multiple months at a time. Some of them employ property management companies to deal with all of the renting since the nature of the market is short-term (i.e. weekly) rentals. In either case none of them are making a killing on their investment now (although they all say they’re able to cover the costs of mortgage, taxes, insurance, etc with the rental income), but they all have the plan to retire at these properties years from now. Obviously if you’re young, you have a long time to think about where you’re going to retire and things will change.. But if you have a place you like to vacation a couple times per year and find a property you like at the right price (maybe even one that has a history of consistent rental income), this seems like a pretty decent way to pay off a mortgage on a vacation home that might become your retirement home. Does anyone here have experience with this??

    Click to expand…

    imho, better to invest the money in a well-diversified equity mutual/etf portfolio and buy a vacation property when you are ready to retire. You have a much better chance over 30 years or so to beat the returns this way than by happening to get lucky and pick the one property that 1) appreciates more than your portfolio and 2) you actually still want to occupy by the time you retire after having rented it out for a long span of time.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #20015 Reply
    Liked by Josh0731
    Avatar Bonez 
    Participant
    Status: Physician
    Posts: 113
    Joined: 04/02/2016

    I thought about being a landlord on my current property since I could easily rent it for well above what my mortgage/taxes/insurance are, but I bought my house at the trough of property values in my area in 2011 and they’re peaking again right now so I’d rather sell and not have to deal with it – plus I don’t live in a “vacation area.” However some regions in the US have vacation rental demand that is not affected much by the overall economy. I’m not talking about buying a property that I pay all of the monthly expenses out of my income and hope that it appreciates more than an an alternative portfolio of ETFs, etc. I’m talking about purchasing a property in which rental income will cover the costs long-term such that my down payment is really the only investment that is required. If it’s a 15 year mortgage and you own it outright by the time you retire, then you could choose to move there or sell it at a profit assuming it hasn’t depreciated below what your down payment was. I imagine the latter scenario would be pretty rare, and the ROI on a down payment of $20k for example could be much higher than if you invested elsewhere.

    #20025 Reply
    Avatar jz 
    Participant
    Status: Physician
    Posts: 649
    Joined: 01/09/2016

    Your friends are most likely _NOT_ making a killing. Challenge them to the arithmetic of adding mortgage, interest, property taxes, property insurance, umbrella insurance, maintenance, repairs, utilities, and  depreciation.  If they rent out short term, they are also paying hotel taxes, management fees, cleaning fees.  Meanwhile their home is incurring wine stains, hot chocolate stains on the sofa, and  an occasional broken chair.

    My husband and I have a vacation home X 21 years.  We do not rent it out. Like any consumable item, it costs us money.

    #20035 Reply
    Avatar Bonez 
    Participant
    Status: Physician
    Posts: 113
    Joined: 04/02/2016

    I agree that they are not making a killing. One of my friends is a DEA agent who is based in another country currently and doesn’t have the ability to manage her property in the smokey mountains. She has a property management company take care of all of it and has them set aside a couple weeks per year for when her and other family members want to use it. Another friend is a small business owner who owns a very nice ($1 million) cabin on a popular lake in a vacation community in northern Minnesota. He manages the rental of the property himself because people generally rent it out for several months at a time. In both cases, the income they received exceeds the costs of their mortgage/interest, taxes, insurance, maintenance, repairs, etc, etc. Neither of them have any significant positive cash flows after all expenses, but assuming similar rental prospects in the future they will both have these properties paid off by the time they will retire. While I agree that there will be wear-and-tear that occurs even when they’re not the ones living there primarily, when/if they do decide to move there they won’t have to worry about a mortgage payment, and as of now they have only invested what they have in their down payment. Obviously one would have to be okay with the prospect of having other people staying in their vacation house during that time.

    #20036 Reply
    Avatar AlexxT 
    Participant
    Status: Physician
    Posts: 897
    Joined: 01/13/2016

    Real estate usually appreciates at a lower average rate than the S&P 500.  Even when you include rents and dividends, the stock market usually comes out ahead.  Even real estate in the hottest markets ( eg Manhattan and Silicon Valley ) under-performs the stock market.  Add the hassle factor, plus liability, expenses, depreciation, repairs, etc and you’ll find that index funds are usually a better way to go.  If you want to invest in real estate, consider REITs

    If your goal is a retirement vacation home, invest in index funds now and then buy a vacation home, if you must, when you’re ready to retire.  That way, you’ll have more money, and you’ll be buying the home in the area you’re interested in at that time.

    Don’t try to re-invent the wheel.  You’re not the first person to come up with this idea.  The people who make money on vacation homes are the real estate agents who sell them.

    #20039 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 5758
    Joined: 01/12/2016

    I usually think of RE and stock market as different aspects of investing. For the same up front cost (down payment or buy price) you have two different scenarios. In RE, (if its set up well) you have good cash flow now or in the near future with little likelihood of significant inflation adjusted appreciation. With stocks the immediate cash flow is awful, but long term appreciation is significant. Just very different things. Both are assets and RE can be leveraged well and rolled tax free as a big bonus, but definitely a hassle factor in there.

    Every now and then I want to start an apartment or rental empire, but then I remember how easy it is to transfer funds to my brokerage account and get similar returns without any hassle at all, and I just add it there instead.

    #20043 Reply
    Liked by RocDoc, AlexxT, hatton1
    Avatar Shamwow 
    Participant
    Status: Physician
    Posts: 30
    Joined: 01/25/2016

    I’m early in my career and we have a vacation home in a vacation area that we rent out (my wife manages the short term rentals).

    We use it whenever we want (at least 10 weekends a year), and have it available for rent the rest of the time.  Our kids are on a ski team in the community where its located.

    We did not buy this as an investment, we bought it as a consumption item.  We considered the short term rental income to be “bonus” and did not expect/need to rely on it.

    So far (1 year in), our rentals have almost exactly covered all of the costs.  Yes the renters are adding wear and tear, but in exchange for a net no operating cost vacation home we will take it any day!

    We went in “eyes open”, this is not a way to get rich and likely not the best way to invest our money, but we saw value in having a vacation property that our family could grow up making memories in.  We plan to have it paid off prior to retirement, and it will be a small portion of our nest egg.  We are very unlikely to move there.

    No regrets yet!

    #20050 Reply
    Liked by Zaphod
    Avatar PenguinMD 
    Participant
    Status: Other Professional, Spouse
    Posts: 90
    Joined: 01/27/2016

    Forgetting about leverage.

    The appreciation maybe lower than stock but remember with real estate you’re using leverage so the appreciation can be lower and still be ahead.

    For instance if you have $200k to invest, you can stick it in a S&P500 index and have it grow or you can take the same amount and with that $200k get a $1M property (assuming 20% down).

    S&P500 Scenario:
    Let’s say we do a generous 15% annualized return. So you’ll double your money in 5 years. At year five you would have earned $200k.

    Real Estate Scenario:
    For you to get to $200k appreciation in 5 years you only need a much more modest 4% annualized return (vs 15% needed above) since your base is much higher at $1M (power of compounding). This assumes that your rent is covering everything plus I’m not including any additional mortgage deduction you may also gain since it’ll be your second home.

    Some would argue you could replicate the leverage and just borrow on margin in the S&P scenario. True, but you wouldn’t have a renter to cover your margin costs which would eat into your returns.

    From a diversification stand point you do want exposure to real estate as it’s an inflation hedge (the asset actually grows with inflation) and it’s non-correlated to the market so you spread your risk. As much as REIT managers will argue otherwise, REITs actually do correlate with the market so not that great if you want something to be less tied to the market.

    For myself. I actually don’t like being a landlord but want exposure to real estate. I do some REIT (VNQ) but majority is my primary and several real estate syndicates I participate as a passive limited partner.

    As the saying goes — many roads to get to Babylon. You want to run the numbers and also do what you’re most comfortable with. Some people love playing monopoly and that’s more power to them!

    Good luck!

    #20207 Reply
    Avatar YYjames 
    Participant
    Status: Physician
    Posts: 133
    Joined: 01/26/2016

    Agreed. Real estate got leverage to boost returns and thus so many flock to it. Nothing like that in stocks.

    Great way to make money? Leverage.

    Takes Cojones though.

    #20231 Reply
    Avatar YYjames 
    Participant
    Status: Physician
    Posts: 133
    Joined: 01/26/2016

    Of course do the due diligence. I’m not selling or advocating anything.

    I personally despise low market returns. And to me personally (yes yes yes I get the arguments for this from the other side) “investing” in an index fund is NOT investing. A monkey can do that.

    You’re right, not easy to sniff out negatives etc, but in my book, investing is about calculated risks where you KNOW you have high degree of success in the end. Also no risk no reward. Real estate provides, if one is patient and thoughtful and does research, uncorrelated leveraged opportunity to grow wealth. Also its not always about renter. You can flip, extract wealth (capital restructuring), lever, do preferred equity deal etc etc in real estate. Not  just wait for a renter.

    also see cojones comment above.

     

    #20235 Reply
    Avatar YYjames 
    Participant
    Status: Physician
    Posts: 133
    Joined: 01/26/2016

    Thanks

    I’ve already succeeded in couple of deals. Then its all about repeating. Ofcourse I run the risk of bad deals, but successful venture returns are so good that a small % of risk is worth the risk. I think i’ll be successful more than not because I risk control well (I think). And experience.

    Mostly my reasons for posting on the boards isn’t to push any specific asset class. Each has their own strengths and weaknesses. TBH real estate in the media (read biggerpocket forum) is cheerleading. Its not easy. Just like index investing gets hyped away on boglehead or here (it is a lazy and easy way no doubt and apt for us busy physicians; but returns completely suck)

    My point mostly is to have an open mind. I mean it doesn’t have to be real estate. Do blogging and be as successful as WCI  😀

     

     

     

    #20243 Reply
    Avatar erictait 
    Participant
    Status: Physician, Other Professional
    Posts: 57
    Joined: 01/20/2016

    Yes, I have done that. I am 40, and I have moved to working one day a week in Medicine. The only way that this was possible was by having real estate supplement my income.

    If you want to retire early you have to have passive income, so before you invest your dollars, make sure that you ask the person selling you those stock and bond portfolios if these will allow you to retire before age 59 1/2.

     

    Eric S. Tait M.D., MBA
    President
    Vernonville Asset Management
    http://www.vernonville.com
    1-877-668-3311

    #26966 Reply
    Avatar FutureDoc 
    Participant
    Status: Resident, Physician
    Posts: 112
    Joined: 04/24/2016

    Dr Tait, care to elaborate on what you mean by supplement your income, and talk a bit about how many deals it took you to get there and what kind of returns you have achieved?  I saw your earlier post on the site and was intrigued about getting into real estate eventually.

    #27032 Reply

Reply To: Buying real estate for retirement EARLY??

In case of a glitch or error, please save your text elsewhere, clear browser cache, close browser, open browser and refresh the page.

Notifications Mark all as read  |  Clear