Johanna’s Take:
Applicant has a mortgage balance of 42% of primary home value and hopes to buy a shore home for $750k, paying 20% down. Goal is rated as a 9 out of 10 on the happiness factor scale.
The positives:
* No college funding needed. This tells me you were very disciplined about planning ahead or you have other funding planned.
* No student loans.
* High savings rate
* Strong balance sheet at age 40 (close to $1.5M net worth)
* Relatively high earnings
* You don’t plan to retire early
The negatives:
* Ownership of a second home frequently does not work out as expected.
o They can be a time and money drain and the owners feel a strong need to use it frequently so limit other travel opportunities.
o Non-nuclear family members and friends may suddenly feel the need to become much closer – as long as it’s at your vacation home. Not necessarily bad, just need to have guidelines in place in advance.
* Under the new tax law, you can no longer deduct mortgage interest on combined mortgages for first and 2nd homes of greater than $750k.
* Angel investments may become worthless. I view having a 2nd home as a risk factor and an additional $200k in this investment class as highly risky.
* Hurricane factor if you’re in that particular area.
Assumptions (I will use conservative estimates wherever there is an uncertainty.)
* 6% average long-term returns on savings (Assuming no emotional mistakes in upcoming bear markets and corrections)
o Savings of $135k/yr for next 20 yrs
o By my calculations, you will have ~$8.2M in your portfolio (not including angel investing) at retirement
* Average inflation
* You retire in 20 yrs and have very good job security at this pay level
* You have plenty of appropriate life and LTDI in place.
* No divorces
* No significant financial assistance for other family members
* Reasonably good health
* No long-term value to angel investing (i.e. not included in projection)
I have reservations and would recommend these steps:
* Liquidate angel investments and increase downpayment to $350k.
* Put together a realistic and conservative (i.e. estimate high) budget for the additional annual costs of a 2nd home and determine if you can maintain your 30% annual savings rate.
* Be sure you can obtain appropriate flood insurance and include the premiums in your budget.
Side note:
I chose this scenario for a personal reason – my grandparents built a beach house on the Gulf Coast (paying cash) when I was 14.
We created many happy memories there and the house is still in our family.
Because my sisters and I inherited the house upon their deaths, I’m also aware of the huge hassle factor of being a distant landlord and that the property is in high demand with relatives and acquaintances.
Overall, I am very happy they built this property and we have been able to enjoy it for so many years.
Verdict:
This is a close call but, with the above adjustments, I give this a thumb’s up.
Xrayvsn’s Take:
First off kudos for putting yourself in great financial shape at the age of 40, especially with no student loans remaining.
You are far ahead of where I was at that point in my life.
I am curious to find out the rationale of keeping a car loan on the books when you have the means to wipe it out completely in one fell swoop.
As Johanna correctly pointed out a lot of expenses do crop up with owning a vacation home that goes beyond the mortgage payment.
It is unfortunate that you can no longer claim mortgage interest deduction also astutely pointed out by Johanna.
You did not mention in your submission if you plan to have this as an income-producing property when not in use by your family.
If that were the case it easily swings to APPROVED status for me.
Assuming the worst case scenario that you did not want to use this as a rental property in its downtime I took the following into consideration:
- With a 20% downpayment, your mortgage for the second home is $600k and brings your total debt to $965k.
- This gives a income:debt ratio of 46.6%
- Paying the downpayment with your liquid assets leaves you with $150k.
Jim Dahle in his post dealing with Maximum Student Loan Debt To Income Ratio mentions in passing that:
“My general debt recommendation is to not exceed a 1X level [household income] for your student loans and a 2X level for your mortgage.”
Granted you have no student loan, which is great, and your total debt is < 2x your income and would therefore appear to have Jim’s blessing based on the above statement.
However this advice, I believe, was directed towards a newly minted doctor and not a 40 year old mid-career doctor, who would likely be expected to have now improved on these initially acceptable ratios.
In the end, I infer that in the past you have made great financial decisions to already get you to this point.
You also strike me as the type of person that will continue to make sound financial decisions in the future and not be at risk of “beach lifestyle inflation” to keep up with your presumably affluent neighbors.
The fact that you do not desire to retire early as well as your high savings rate strengthens your case that you can indeed have a beachfront property without too much a hit to your overall financial health.
Verdict:
Approved
Agree or disagree? Please go back to the original post and voice your opinion in the comment section.
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