The decision to retire early is a relatively easy one to make. Most people, given the means, will choose to work less and live life more fully. After you embrace the idea you can start sorting out the variables, such as what needs to be spent, invested, and saved without throwing off your Fat FIRE plans.
With buying a second house, you have to consider more than just the money. Affordability should slot in as concern number one, but use of your time comes in as a close second. Whether you plan to rent the property or spend your summers there, you have to decide how much effort you’re going to put into making the house what you want it.
Retirement plans and lifestyle choices vary, so the savings goal you identify for a second home could be crazy high or way too low for another person. There’s isn’t an exact cost or wealth-to-debt ratio that answers every question when it comes to a second home, which is why we’re going to dive into the details to figure out if, when, and where home #2 makes sense.
Because the concept of owning two houses has inherent appeal, I’m going to play up the cons more than the pros. If you feel even more certain about the purchase by the end of this, then you’ll know it was meant to be.
The money math isn’t going to answer all your questions, but it’s a good place to start sorting out the basics. The cost of an additional property can’t jeopardize the rate at which you’re saving, or else you put yourself off the early retirement goal. For those with an existing mortgage thinking about taking on another, you can’t get overconfident. If a second mortgage drives your debt over 10 or 15% of your gross income, you’re starting to play with the wrong type of FIRE.
You also want to be careful with your timelines. A 20-year fixed mortgage might seem great when you sign the contract, but if your hope is to retire 12 years later and start to cut back on your spending, the loan takes on a different feel.
Assuming you’ve crunched the numbers and know you can pay for the house while still maxing out retirement and investment accounts, there are a couple ways to dull the pain of the second mortgage. For starters, you might be able to combine mortgage payments through a refinance. With rates being as low as they are right now, I’ve got clients buying properties left and right because it feels like that’s what lenders are begging them to do.
A general rule of thumb is to only refinance if you can get the rate lowered by 2%. If payments have been manageable with the first mortgage and you haven’t considered reworking the terms, buying your second house might provide the perfect opportunity to do so. As long as you aren’t pushing your debt-to-asset ratio too far, the second mortgage might be a savvy move in the long run.
The last consideration with taking on a mortgage--or second mortgage--that might cramp your FIRE lifestyle is the economic guessing game that can make real estate a wild ride. If you’re 35 and plan on staying in your current home until you retire to the county at 55, it might not feel like the right time to buy that country house. At the same time, rates are incredibly low right now and we don’t know where they’ll be in 20 years. Nothing’s guaranteed, but it’s safe to assume home prices will go up on average as the years go by.
So, if you’re on the fence because of your retirement timeline but can otherwise comfortably make the purchase, it might be worth it. That’s especially true if you plan to make use of the second home as a vacation spot or a rental between now and when you retire.
To simplify a complex issue, it’s either the right time to buy a house or it’s not. If dealing with a realtor and taking on a second mortgage sounds overwhelming, don’t add that stress to your life. If the math works in your favor, with a combined refi or exceptional borrowing terms, this might be the best opportunity to make the investment.
The oft-overlooked part of buying that second home: filling it with stuff.
My biggest piece of advice when it comes to either a vacation house or a rental is to overestimate what it will cost to furnish the place. If you try to lowball and guess that you’ll only spend $15K on beds, couches and appliances for a 3-bedroom house, I’d bet good money your final bill will come out closer to $30K.
In the grand scheme of things, you might be able to spend $50,000 without completely sabotaging your retirement plans, but it’s a big headache to have to recalculate everything when thousands of dollars in savings have suddenly fled the coop. If this house is up in the snow or down by the beach, that also means you have to consider the furnishing and gear you’ll need to make the most of your vacation time.
What’s the plan for the house? A rustic cabin in the mountains that doubles as a weekend getaway and a casual real estate investment might not need as much in the way of decor. Conversely, a second house in the suburbs that you use sporadically or rent on Airbnb will need to be thoroughly furnished. Besides the cost of mattresses, linens, lazy boys, dishes, rugs and dressers, there’s also the time spent selecting, picking up, and staging those items.
After looking at the asking price and pondering mortgage rates, consider your time and money as it relates to turning the house into what you want it to be. It might mean waiting a couple years to get some extra financial cushioning, or it might mean you just wait a few months until the kids are back in school and you have the time to really focus on interior design. In either case, your availability for making the place inhabitable is almost as important as the asking price.
A second house for weekend getaways is a lovely thing to have, but you can’t ignore how much money and effort goes into turning an empty property into a comfortable home. After you go to an open house and start thinking about making a bid, hop on your computer and do some rough calculating for how much you’ll spend on home furnishings. Add that to your total and then you can take the next step much more confidently.
The moment you decide you’re going to retire ahead of the curve, you commit to a lot of work and preparation in order to make that dream come true. In some cases, the extra income generated by a rental property can help with your goals. Other times it just gets in the way.
I’m a huge advocate of investing in rentals. Tenants help mitigate the mortgage and insurance costs, and the income and equity make it that much easier to invest in future properties. If you buy a rental at the right time, you can take your net worth from under a million to over two million in a fraction of the time it would take if you just earned, saved, and funded your IRA.
That being said, it doesn’t happen without a little effort. If you’re working 80 hours a week in hopes of socking away $5 million for retirement at 50, adding “become a landlord” to your to-do list might just break you. On top of the furnishing and fixing, there’s the vetting and the instant upheaval when one tenant decides to leave and you have to find a replacement.
Can’t decide if you’re ready to take the plunge? Ask yourself if you’re in a position to do one of the following:
● Take on extra responsibilities
● Pay someone to do it for you
The answer to this question lies in the intention you have for the property. If the long game is to rent a property that you’ll eventually use in retirement, then paying a property manager to handle the day-to-day might make sense. Tenants will reduce your financial strain, but it’s not a big deal if you don’t come out ahead on the deal.
If you’re buying the property now so you can expedite your retirement, then you need to be more judicious when considering how much you can pay a manager and still bring in sufficient revenue. On top of that, it’s worth putting a little extra thought into location, price, and all the other factors that influence how quickly you can get a renter.
At a certain point, the renting process becomes routine enough that you enjoy the equity, revenue, and prospect of owning a future property. Until you reach that comfy equilibrium, planning for retirement while operating a second house can leave you feeling overworked. Even if you’re focused on long-term goals, you don’t want to sacrifice too much of your present happiness for your later years.
“Turns out, my kids hate the place.”
That’s what a friend told me after he finally closed on a second house in the country, where he thought he and his family would escape for fun weekends away from the hustle and bustle. Turns out, you have to consider the current needs of others even while plotting out the fruits of your retirement.
With so many joining the FIRE movement in their thirties, the interests of your children play a big role in this. While the final decision ultimately rests with the parents, no one wants to retire early in hopes of freeing up time for family outings and then have that time soured by spending it in a remote cabin half the family hates.
The long and short of it is to not get caught up in the concept of wealth and retirement. Retiring early doesn’t speed up the process of living life and raising a family, it only truncates your professional outlook. If your child is 11 when you clock in for the last time, you don’t get to pretend the kid is suddenly off to college and you’re free to reclaim your youth.
My hope is that your second home offers a fun retreat for the whole crew, so you’re not just aiding your retirement plans but providing an experience for the entire family. Make sure to check in with everyone before making a big decision.
A vacation rental might be a long-standing dream of yours. Maybe you’ve even got a picture of a beach house taped up inside your closet, motivating you every morning when you get dressed for work. If you’ve had the same plan for years, it’s always worth thinking about other options.
I won’t ever advise against the real estate investments, but if you have a financial target set before you can retire and the purpose of the house is just weekend getaways until the kids graduate, think about the trips you can take and places you can stay without the burden of ownership. It’s especially important if your children are younger, as you don’t want to feel compelled to spend all your free time at the second house as little boys and girls transition into teenagers and start picking up new interests and commitments.
A family friend recently did a big 180, changing plans from a beach house to a boat. It wasn’t a cheap purchase, but the docking fee and insurance don’t come close to what he’d have spent on the closing costs, mortgage and house insurance. He’s rented the boat as an Airbnb a few times to bring in a little extra pocket change, and the family can head off to check out different sights together. Might not be the solution for everyone, but it sure is working for him.
Once you’re paying for and utilizing a second home, extra travel can make it feel like you’re not getting your money’s worth. If you have any concern about feeling trapped by your purchase, it might not be the right time to buy. Again, the eagerness to retire comes from a desire to spend more time enjoying and less time working. Don’t muddy the waters with a second house you aren’t ready to buy if there are other experiences you might regret missing out on.
This decision presents an interesting paradox; you need to think about every detail and then stop yourself from overthinking. In my experience, overthinking is one of the great strengths of those who embrace the FIRE movement. Thoughtful analysis and cold calculating got so many of you to the point where you can retire young and make the most of your wealth. To be asked to ease up on the analytics runs counterintuitive to how a lot of you roll.
Nevertheless, I need you to step away from the APRs and the 4% rule and the combo refi and all the puzzle pieces that make the left side of your brain so happy. Instead, think about why you want that second home. If it’s to get another asset and make money off the rental, figure out if you have the time. If it’s for family vacations and a future retirement home, decide whether it’s the right time for the family. If it’s because you have a compulsion to invest, take a breath and make sure you’re not getting too caught up in the financial part of your FIRE.
Clarify your goal, then get back into the numbers. You’re smart and responsible, so just make sure you’re ready to answer why you want a second house, not just how you can afford it. As soon as you have that sorted out, you’re bound to make the right decision.