Every time I travel for business, one of my favorite activities is to attend a broker’s tour to get a feel for the local real estate market. The activity is free and enables me to talk with people who have intimate knowledge of the local economy. All indicators in Oahu show there’s weakness in the luxury market, defined by homes priced over $2M. The pattern is the same in SF and NYC, which makes me worry since weakness tends to start at the top and work its way down.
For kicks, I visited one property in Kahala, my favorite neighborhood in Oahu, with an asking price of $6.7M. It has 9,000 square feet of living space on a 15,000 square foot lot. Every single room felt like I was in a Las Vegas casino or on a cruise ship. It felt gaudy. When I asked where the sellers were going, the agent told me the owners finally bought a beach front property across the street for $20M!
Eleven years ago they had wanted a beach front home, but “settled” for this $6.7M house instead. Last year they finally bought their dream home and have spent the past year remodeling.
Here’s the kicker: the husband is turning 81 this year! He’s a real estate developer from the San Francisco Bay Area.
Waiting until you’re 80 to buy a dream home is perplexing. Perhaps when he was 70 he simply couldn’t afford $15 – $20M? Alternatively, maybe some time in his mid-70s he realized that he had way more money than he’ll ever need. He could die tomorrow, so why not ball up and buy the property he’s always wanted?
A RACE AGAINST TIME
I’m sure there have been many times in this seller’s life when he has thought to himself, “I can’t take it with me, so why not enjoy my money to the maximum now?” Nowadays, I think about more responsible ways to spend my money all the time. But it’s just so hard for me and many others who’ve been so frugal all our lives to open up.
“Consumption smoothing” is an important concept to address because it helps improve the quality of our lives. You don’t want to die with too much left over because that means you worked too hard and saved too much earlier on. You don’t want to die in debt either, because that means you didn’t properly manage your finances, felt constant money stress and are likely leaving surviving kin with a financial burden.
Imagine taking 30 years before becoming really rich. During this time perhaps you lived very frugally. Is your life today really better than the person who spent much more freely from ages 20 – 50? Hard to say. I’d much rather enjoy a more consistent spending pattern. We just tend to save more than we need because the future is uncertain.
At almost 40, I feel the race against time more than ever. I have this stretch goal to buy a dream home in Hawaii before the age of 50. I’ve got 11 years to come up with the money. Yet each year I try and save is one less year I’ll get to enjoy this dream home. The home has to be at least 50% nicer than my existing home or else why bother? As a result, the new home will also cost at least 50% more.
I chose age 50 because I’d like to actually enjoy my current home for at least 10 years before I die. Ten years goes by quicker the older you get. My hope is that I live until 80, but just in case I don’t, I’m hedged from an early death, unless I die at 51!
Don’t hate me for my desires. I’m content living for the rest of my life in my cozy ~1,910 square foot home. It’s got a nice master bathroom, three bedrooms, one office, parking and panoramic views of the Pacific Ocean. What more does a family of four really need? It’s just fun to have goals. They make working and saving more meaningful.
A FASTER RACE AGAINST TIME
Although I feel the time crunch, my parents at ages 68 and 70 feel it even more. I’m lucky both are still alive. I have every intention of spending as much time with them as comfortably possible and also taking care of them if that becomes necessary.
They presently live in a perfectly fine middle class house. It just hasn’t been updated in the 30 years since it was built in 1986. I’ve been coming back to this house to visit for almost my entire life. Meanwhile, both our fortunes have grown significantly since 1986. For example, I, for one as a nine year old, had a net worth of maybe three bucks in quarters. Now I’m free!
Remodeling is a PITA, so I thought of a great idea. Instead of remodeling the 30-year-old home that might take six months and a lot of stress, why not rent it out and have them move to a new dream home! Renting out a home that hasn’t been updated in 30 years feels terrific. I won’t feel as bad if the tenants bash the walls or break the appliances.
I’m not sure my parents ever expected me to do very well financially. After all, I went to a state school that was not a magnet for the highest paying jobs. But my money is in the bank and I’m happy to spend it on them now. When I talked to my father, he also has a decent amount of excess savings despite having a pension. Why not combine our finances to enjoy a fantastic property instead?
Benefits of buying a new dream home:
* Newer house should mean less things to fix. Many of the houses I’m considering have been rebuilt since 2013.
* The dream house will be on one level to make walking around easier for my parents. Since my knees are starting to hurt more, I appreciate less steps as well.
* More privacy. I’ve noticed many of these nice homes in Kahala have tall walls and huge trees surrounding the property. It feels amazing to shut your gate and go skinny dipping in your pool if desired.
* My parents can live in a much nicer place for the rest of their lives.
* A larger, single level house means it’ll be easier to cohabitate eventually and take care of my parents.
* My parents benefit from a large injection of funds from me to live a better life, while I’ll get the satisfaction knowing my money is being put to great use.
* If we can get a mortgage, we’ll be taking full advantage of record low interest rates.
* Every time I visit, I’ll be able to stay at a nicer home. My realistic scenario is to spend for 4-6 months a year in Hawaii, live in San Francisco for 3-6 months during tennis league season and travel for 2 months a year.
* The house will eventually be mine to enjoy full-time when I’m much older. Perhaps the cycle can repeat again with my own children.
* Potentially generate $40,000 – $50,000 in annual rental income from the old house.
* Maximum consumption smoothing as the money that’s just being saved and invested by me gets used to provide my parents a more comfortable life.
* Could make money on the investment. Inventory in Kahala has spiked by 50% over the past year. This means low ball offers are more likely to be accepted. I’ve got this incurable habit of trying to take advantage of opportunity.
The negatives of buying a dream house:
* More property taxes, maintenance and expenses. I could just invest money with a real estate crowdsourcing company like RealtyShares for potentially double digit profits and no hassle.
* Massive new mortgage since we can’t pay $3M+ cash. I’ve been on a mission to pay down my mortgage over the past two years and it’s felt great.
* Need to find new tenants for the old house. Will hire a property manager to make management easier.
* What if my parents don’t like the new house or the neighbors?
* Moving is stressful.
* More responsibilities.
* There’s less freedom living with your parents, although we’re looking at bigger houses with 4,000 – 5,000 square feet of living space. For example, one 5,000 square foot house we viewed has a separate 420 square foot cottage where my mother said she’d enjoy staying.
* Could lose money if I get into financial trouble and need to sell.
LIVE IT UP WHEN YOU CAN
A simple life is fantastic. It’s the reason I was strongly considering selling one of my rental properties earlier this year. But now that the new tenants have moved in, I no longer have the strong desire to sell. It’s just having to deal with an HOA that bums me out the most.
Buying a dream home is a complete 180 from my earlier thinking. But the reason for the change is mainly because I want to provide what’s best for my parents with the time they have left. They live in a tired two story house with a noisy neighbor. By leaving the logistics up to me, I can rent out their old house, free up $40,000+ a year in retirement income for them, and let them live in an amazing new house if we can combine our finances.
Ultimately, money is meant to be spent. It’s seems like a waste to have so much left over in savings after you die if you live a middle class lifestyle. If you lived a top one percenter lifestyle and then had money left over, that would be a different matter.
If my finances can help make my parents’ lives better, what’s there to lose? It just comes back around. Then again, staying in this old house in Kaimuki with newly installed local AC units and newish windows seems perfectly fine as well. After all, the beauty of Hawaii is in the outdoors. Now if I can just convince my father to upgrade to faster WiFi…….
Surgically invest in real estate: If you don’t want to constantly pay massive property taxes, don’t have the downpayment to buy property, or don’t want to tie up your liquidity in physical real estate, take a look at RealtyShares, one of the largest real estate crowdsourcing companies today. You can invest in deals around the country for as little as $5,000. It’s free to explore.
Shop around for a mortgage: Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. Interest rates have finally started to tick higher post election.