Ep #103: Should I Buy or Rent My Fun?
Is it better to continue renting a vacation home or should I consider buying a property at my favorite location? Everyone’s situation is different and Ben and Adam talk about the different things to think about when considering purchasing a second property. A few factors include upfront costs, ongoing expenses, taxes, and even a succession plan for the property. Ultimately, the decision to rent or buy depends on the individual's situation and goals and we’re here to walk through the potential tradeoffs to any decision.
- 1:59 - What do we mean by buying or renting fun?
- 5:54 -The factors to consider when the idea is to buy
- 11:25 - Remaining flexible with your plan and considering dominos
- 15:41 - Test drive the idea of "buying" first
- 18:15 - If you're going to buy, consider your exit strategy
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Benjamin Haas 00:03
Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!
Adam Werner 00:26
Welcome back to another podcast.
Benjamin Haas 00:34
Thanks for having me. We were just talking about this. It's been a little bit; we took a little hiatus after talking about investments a couple weeks ago. So, love to get back into financial planning here.
Adam Werner 00:46
Yeah, it has been some time and maybe for those listening at home, it hasn't felt that way if they've seen, a podcast or two come out in the meantime. But yeah, it's been some time since we got on here and had our little fun talking to whoever's on the other side of this.
Benjamin Haas 01:01
Yeah, and to me, the best content to share is the real life conversations that we're having with clients. So the topic today, should I rent or buy my fun, certainly has come out of some recent conversations that we had and to kind of tee that up for those of you that work with us or follow what financial planning and goal we're into planning is supposed to be. It's common to have the big picture stuff in mind like retirement or educating kids but it's not uncommon for things that are more lifestyle or you know, this is what's important to us in life to pop into that conversation. Should we buy the second home, vacation home, this RV, this boat, whatever it is for them? Then it kind of puts us in that position of talking them through not only their own thought process but the factors to consider. What better podcast than to just openly share some of these conversations that we're having with clients?
Adam Werner 01:59
I think there's clearly two sides to that equation on should I rent or should I buy my fun? As you put it and part of that is, as you kind of alluded to some of that as the background or the research that the person has put into, well, I want to buy this house because insert any number of reasons that fit in there. But then that's also kind of put up against from our side of things or what are the potential tradeoffs from the from the financial side? How would I pay for this property? If it's a second property, vacation, home, whatever that is. I think it'll be interesting to kind of go through those different factors as you put them and kind of see, again, so planning, we've talked about this at nauseam for us, a lot of it just comes down to tradeoffs. I think this is another example of kind of where that comes into play. There's no right or wrong answer to any of this which I guess is that gray area of planning? It really is situational but I think it'll be interesting to kind of go through it. Right? Because I think it starts the origins of this are probably in two different spaces. One,
Benjamin Haas 03:17
We've said this as well, we kind of operate on this belief that money is just the tool to live the life you want to live. So, while long term planning is really important, getting an understanding of oh, well, me and my family loved going to the beach, that's how we love to spend time together. So, we'll use it, why don't we buy something? Right, there's usually that lifestyle component of it. The second component of it is you're asking the question probably because you feel like you've got a little excess, right, we've got money set aside or invested in the bank. It doesn't feel like it would be a stress to cashflow. You're definitely in a more positive position in your planning and maybe some others to even be asking those questions. So, I think when we start the conversation on their thought process, those are usually two of the things that, you know, kind of level set us.
Adam Werner 04:10
So, I'll add on to that because I think, not only that is absolutely the case, I think there's also a very human tendency to start to build the narrative as to why it's a good idea. Right? And I mean, I'm sure I do this, I know I do this, I can convince myself that it's a good idea by rationalizing, okay, so we're going to buy a second property.
Benjamin Haas 04:35
It's expensive, but
Adam Werner 04:37
There are these platforms, I can rent it out someone else, I'll say someone else can essentially help me pay for this property. It's not just a complete, you know, cash flow drain or I'm not having to liquidate all of my assets to make this happen. Well, we'll rent it out, we'll get some of that recouped and it'll work itself out. That's certainly one factor or one of the pieces of the thought process I think that we've experienced before to that I'm not on the hook for a mortgage right off the bat, you know, sell a lump sum necessarily to now fund this, I'm going to pay for it along the way and have some other people who are going to rent it from me, you know, helped me acquire this property for my family. The other side? The other side of that is, sometimes the thought process is, well, I've been renting a place in this location for many years, family has gone there, use your scenario of going to the beach. So, if we're going to continue to do that, why am I continuing to throw money away and buying someone else's property for them? Right? Why don't I just do that for myself? Over a long period of time, that may be able to make more economical sense because now I'm paying for something but I'm going to have an asset at the end of the day, too.
Benjamin Haas 05:54
Yeah, so I'm really glad you started there because as we transition into, okay, what are the factors then that we're going to want to help them consider? This is a good depiction of how we feel about our role in somebody's financial plan. Like, when they come to us and it's long-term retirement, maybe we need to be a thought leader with that, hey, here are the things that we know you need to do to get there. This is one of these situations where I feel like we're a thought partner, right? Where they're already doing some of the thinking, like you said, they may be justifying or mental accounting or crunching some numbers and they're usually coming to us going, what do you think like, what am I missing or what do I need or what am I not considering? So yeah, that's kind of the mindset I have going into. Okay, well, then let's flip the conversation a little bit here to our side of it. I'll maybe let you start. What are those financial factors that may weigh into us saying, yeah, renting seems like it's still a good idea or go ahead, buying it seems to be the better idea.
Adam Werner 06:59
Yeah, I think it certainly depends on I'll say, the size of the asset, what does it actually cost to purchase, whatever that is, you threw out the idea of a vacation home or a cabin, we've heard that before, buying an RV and traveling the country, it could be something as I don't say as simple as a boat because I've heard the horror stories of boat ownership. You know the joke; the best and worst day of a boat owners' life is the day you acquire it and the day you sell it. But, you know, a boat, it's not necessarily as big of a purchase, as hundreds of 1,000’s of dollars in a vacation home but it can still be a large chunk of money to outlay up front. I think that's number one is what does it cost? Where is that and where's that money going to come from? Obviously, if the cash flow is there to support it, then it's just a decision of am I okay, maybe diverting from savings or pulling from, my cash reserve that I already have and kind of buying it outright? Or I think a lot of times where we see it, it's, I have these investments that I could tap into to help me buy this but does that make sense? Then you can go through the laundry list of all the different variables involved? Right, depending on where it's invested? Are there going to be tax consequences to pulling that out? What are the longer-term impacts just from a growth standpoint, right? It's our analogy of the goose that's laying your golden egg, right? So, if you say sell some of your investments now to buy this asset that more often than not, is going to be an illiquid asset, right? It's not necessarily producing income and it's not something you could quickly turn around within a couple of days and get your cash back. What future growth might you be giving up? Right, your investments to now acquire this property? And, again, that's where there's no right or wrong answer. It's really situational and then what is that tradeoff? If by acquiring whatever that piece of property is, whatever that asset is? Is that in their minds worth giving up what that investment may continue to grow to and what flexibility that may provide further future to?
Benjamin Haas 09:18
Yeah, I think that's really well said and to get just a little bit more granular. That may be a situation where if you have investments that aren't in a retirement account, maybe the taxability of that is not a deterrent or not something you need to really add to the acquisition cost. But more often than not, we see people really developing their wealth in retirement accounts. So, if you're having to pull from a retirement account, then you know your acquisition cost and if you're going to buy it and not have loans, that acquisition cost may be much higher if you're paying ordinary income taxes on making that withdrawal.
Adam Werner 09:57
Just run the scenario where someone's going to buy, I'll say vacation home, say it's a few $100,000. Right? $400,000 for beach property is probably a heck of a deal a lot of places but if you're essentially pulling that all from a retirement account, as you put it, if it's an IRA or 401k, and you were going to pull out $400,000. That's now all taxable, to your point, at ordinary income tax rates in that given year. That's going to put you in a 30% bracket. Yeah, where the IRS is going to get their share of that, too. So yeah, that's definitely a huge one on the front end of how it's going to be financed. One of those other options too, that we've discussed, I think it's a similar question to, should I pay off my mortgage or not? Or if I'm buying a new car, should I lease it or should I just buy it outright? Right, the whole thought process of taking out a loan, there's going to be interest owed on that and I think for a lot of people just debt is not a thing that people enjoy. Paying interest to a bank is not high on people's list of things they like to do in life. But sometimes that may, depending on the environment, that may be more beneficial in the short term, then I'll say go back to our analogy of the goose and the golden eggs, you know, then killing some geese that may lay those eggs in the future, you now will forego some of those future eggs, if you end up, I'll say killing some of those geese to acquire whatever that piece of property is.
Benjamin Haas 11:25
And one of our core principles and planning is to have flexibility, right. That's where maybe having investable assets that aren't in a retirement account, we really appreciate that as people move into retirement because now you can control your tax bracket a little bit and maybe not having to pull from retirement accounts. You know, if there is a big event or a health event or something that is going to take a little bit more cash flow, you've got some flexibility there. So, it is going to be totally situational, there isn't a black and white, always rent or always buy. Right. But yeah, I'm really glad when you brought up, you know, the golden goose laying the golden eggs analogy, but you include taxes in that and flexibility and accessibility to other accounts.
Adam Werner 12:12
What else is there besides, I'll say the upfront cost?
Benjamin Haas 12:16
I think it's probably human nature to, if this is something you want to do to, maybe not think about all the dominoes that occur. This is where if you're going to do something big, don't just talk to us, talk to somebody else that's done it. I haven't bought a vacation home but carrying costs come to mind to me. You know, sometimes we just focus on what is it going to cost to buy this and not the ongoing expenses? If it's a house, then it's maybe furniture, its maintenance? Its utilities? Right? It's something? HOA fees. There's a component to what is this now going to cost me moving forward that maybe you're ignoring on the front end? At least having that conversation or starting to think about that, I would say is a really important variable in your decision here because you're renting something that's not on you. Right? More often than not, if you're renting, it's a known quantity, right? If you're going to rent it for the week or rent it for the month, whatever that time period is to kind of know what your cost is going into that, there shouldn't be any surprises.
Adam Werner 13:25
I want to throw this out there and I'm not sure. So, it's more in the vein of like the vacation home idea but I've heard all the headlines and I've heard some of the horror stories coming out of Florida, right? If someone's buying a vacation home and they want it on the coast, right on the beach, insurance being a huge component to that, that's somewhat out of your control. You know, again, going back to Florida right now, I've heard the stories of certain insurers pulling out the homeowner insurance in Florida because of the risks associated in Florida hurricanes, but I'm assuming that's not necessarily just specific to Florida. I'm guessing there will be some of that expanding to other areas of the US, when you're on a coastline, there's just more potential, you know, for weather related issues and the idea of what if you're purchasing a property and you kind of know what your insurance is at that time. That doesn't necessarily mean it's going to continue to be that way for forever. Just another thing to kind of factor in, have buffers built in. We like to do that from a planning perspective regardless of the situation you know, build in some wiggle room to the budget side of things, knowing that there's always going to be something that pops up and there's the human side of it too.
Benjamin Haas 14:52
I think if you are going to own a second property now, I realized that we seem to be now focused on like, the cabin or the beach house. I feel like we've said it before, you almost have to have a certain personality or preference for that because not everyone's going to want as the owner to get that phone call at midnight because something's not working. It's not just the tragic weather event that you're talking. You either have to be able to handle that stuff, maybe you're into maintenance or you have to pay a company to do that. They all can fall under the dominoes of any one decision? What are those smaller things that could add up to you to make it less attractive? Or, you know, hey, this isn't a big deal if, again, something you enjoy?
Adam Werner 15:41
Yeah, so maybe this is going back to one of the earlier thoughts like from the client side of things. If you haven't already, it's probably a good idea. I'll say to test drive, whatever that thing is, right? If it's a boat, if you're going on vacation for a week or two, you can rent a boat for a period of time. Again, test drive said boat and get an idea of what that may feel like, is it something that you kind of scratch that itch once or twice over the course of the year? Then at that point, maybe it just makes sense to just rent it as you need it, rather than now it's your asset, you're in charge of it, you're responsible for it, and everything that comes along with that. Same thing with the house idea, right? If we've heard many times that the Snowbird lifestyle, right, I'm going to go down to Florida, and I'm going to stay there for a couple of months, they're still those long-term rentals to kind of test it out before you were to commit to anything if it feels like you're kind of on the fence. It's okay to kind of test things out and rent them.
Benjamin Haas 16:51
As you say that Adam, like one of the things that's now popping into my head, I think we're going to get this question from a client and they kind of said, hey, I've done some research, I think this makes financial sense. As long as we're helping them make sure they're not doing something really foolish. You don't have to maximize your financial situation here. If it would cost you a little bit more to do those rental things but you're going to have way less headaches or potential things that could go wrong, then that's okay. It's okay to do something out of a little bit of abundance, even if it's not on paper or mathematically or with our fancy calculators. Right, the most advantageous financial decision, that's okay and I feel like I don't know this to be true but I feel like the accessibility to things like you said, toy rentals on vacation or Airbnb, VRBO, it's a little bit easier to do these days, if you really just don't want the headaches.
Adam Werner 18:08
So are there any other factors that we would consider from our side of things?
Benjamin Haas 18:15
I think we already said it, it's important for us to at least try to think down the road a little bit and there is very much a difference when flexibility with liquid versus illiquid assets. I think and weigh in on this, we certainly have seen some situations recently where, having that second property may have been a good thing. But at some point, within the estate plan, it didn't end up being a good thing, right? Because you've got multiple kids, maybe it makes things a little bit more complicated. A split on the back end or owning a property in a different state meant you had to settle things a little bit differently. It is important to kind of think about what the exit plan is or the succession plan from that matter.
Adam Werner 19:03
I'm laughing because I'm thinking in my head, it's like the last thing somebody wants to do when they're thinking about doing something exciting. If I'm going to want to buy this thing that's going to be fun. Let me think about when I'm not here and what's going to happen to this fun thing that I'm purchasing. But that's part of our role, as you said, right? It's let's get beyond the immediate and let's think long term, what are those other ramifications? And yes, when it comes to illiquid property at someone's passing, and as you noted, if there are multiple kids involved, we've helped people through this enough times. It's rare that everybody's going to be on the same page at the same time with something like that and even if they are, that's all well and good. It just adds another layer of potential complexity to that process, you know, at the end of life.
Benjamin Haas 19:56
So, yeah, on the front end, too. I mean, we didn't position it this way, but okay, so everybody is on board, it doesn't make sense for the ownership of that property to not be the individual then, but some sort of LLC or some sort of family partnership. Right. It does make things on the back end a little bit easier. That's it's a good conversation to have depending on the size. So, no shortage of factors, didn't mean to make this like a super heavy conversation there at the end. But if you want us to be a thought partner, that's what we're going to be. So should I rent or buy my fund?
Adam Werner 20:41
The answer is always maybe.
Benjamin Haas 20:45
But let's have that conversation. Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!
Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.