Lazy Man and Money

Why FI in RI?

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The question of where to retire once you reach financial independence has come up several times in the last month. It started about a month ago when my big sister in spirit sent me an email. I’ll call her Buffy in keeping with a longstanding tradition of naming anonymous people after Buffy the Vampire Slayer characters. Her family’s location in Silicon Valley is high cost of living… perhaps the highest in the country. If you aren’t working for Big Tech, it probably doesn’t make sense to live there. We saw the writing on the wall around 2011 and realized that I can blog from anywhere and my wife’s military pay won’t adjust for geography when she’s retired.

Trying to find the best place to retire is an interesting exercise. It’s so interesting that Money and Kiplinger’s magazines seem to put together new “Best Places to Retire” every 4 months. Maybe it just seems that way to me. Anyway, Buffy is an A+ planner and she had already sent a list of things they’d be looking for in a new place. I like that it started with a list they wouldn’t be looking for:

Things NOT to look for retirement

  • Jobs – No need for a job if you are financial independent
  • Perfect weather – They reasoned that they could travel during bad seasons. In New England we call the winter relocation to Florida second homes, snowbirding.
  • Schools – Their kids will be out of school, so this isn’t a consideration. I pointed out that there might value in a nearby university for things to do.
  • Profitable housing prices – Buffy has experience in real estate investment. I think she wanted to point out that this was not really a concern. This makes sense if you are just looking for a primary residence to spend your days

Things REQUIRED for early retirement

  • Nice, low maintenance house – Not everyone can put this on their list, but moving from Silicon Valley opens up a lot of options. When the average house there is probably going for $2 million, you start to think what $400-500K buys you some place like Texas… or Rhode Island.
  • Decent medical facilities – Seems like a reasonable request as one hits retirement age
  • Nature, but no wildfires – Clearly the wildfires last month in Northern California is a factor here.
  • Low disaster risk – The hope is to avoid earthquakes, hurricanes, tornadoes, floods, etc. I think Buffy is concerned that climate change will only get worse.

Obviously everyone will have different lists of what they want in retirement. I would say that the first list is about avoiding paying a premium for things you don’t intend to use. The second list puts a premium for safety and security. There’s also a touch of scaling back and enjoying simple things like a nice evening stroll or maybe a day of hiking.

So Buffy’s husband was thinking about New Hampshire or Vermont, while Buffy was thinking about Oregon or Colorado. Then Buffy’s husband brought up Rhode Island… where we live.

Before I got to the last part of the email, I was already thinking about Rhode Island. It’s natural to think of your state and see whether it is a fit, right?

Here’s Why to FI in RI

Beach Dog
This is Jake. You’ll be seeing more beach pictures of him on the blog.

It’s very easy to check off most of the first list.

Rhode Island is the 50th best state for business. The schools need $2.2 billion in urgently needed repairs. That kind of shortfall could be negative, because property taxes might need to be raised. That’s one of the things Buffy wants to avoid. However, overall jobs and schools are not great here.

Rhode Island doesn’t have perfect weather with a few months of snow, but it’s not bad. My area, Newport, RI gets less snowfall as it’s closer to the coast. The rest of the year the weather is pretty good, including the recent fall foliage. I never know where housing prices are going to go, but usually jobs and schools are an indicator. However, since this isn’t a big consideration we can just move on.

Moving onto the list of positives for Rhode Island, it looks like a good fit for Buffy. Housing prices are higher than much of the country, but still a fraction of what they are Silicon Valley. It’s a relatively short drive to Boston’s medical facilities which has some of the top hospitals in the world. Rhode Island is aptly named The Ocean State for a reason. Our nature is miles and miles of coastline and beaches, but that qualifies as nature, right?

The disaster risks in New England are largely related to snow storms. Disasters like earthquakes and tornadoes are black swan events and generally very tiny even then. We do get hurricanes, but they are usually fairly weak by the time they’ve traveled up the Atlantic coastline. I don’t want to minimize the snow, but we still have plenty of homes built in the 1600, 1700, and 1800’s, so that’s an indicator that they may be around for another hundred years.

That’s not to say that New Hampshire, Vermont, Colorado, Oregon are bad options either. I can certainly see why some people would consider them. There’s no right answer and it’s highly dependent on the individual. For example, the popular financial independence blog Frugalwoods wrote about Vermont. Similarly, Tanja from Our Next Life wrote about why California is right for them.

I’m not really convinced that Rhode Island is our final destination either. With two kids 5 and under, we’ve got another 12 years to gather more information. Twelve years ago I would have told you that the Boston suburbs would be my forever home. We’ve been to California for 5-6 and to Rhode Island for almost that long. Rhode Island certainly checks off a few boxes for us or we wouldn’t be here now.

What’s your best state for early retirement? Let me know in the comments.

Vacation Homes vs. Investment Properties: Where Mortgage Lenders Get it Wrong

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I learned a lot when my wife and I recently decided to buy a vacation/retirement home. I learned that in a really old house bedrooms don’t necessary have to closets to be considered bedrooms – since the clothes hanger wasn’t in common use until after 1900. I learned that you need to really aim for a good basement in Newport County, in RI – they are few and far between and flooding is common. I also learned that KJ’s Pub near first beach in Newport has a terrific wing special ($0.30 cents a wing and it’s a good size wing).

Finally, I learned that mortgage lenders really, really confuse me. Well, to be accurate, they’ve always confused me. You don’t have to go too much further than the sub-prime crisis to have that point drilled home. However, one interaction with a mortgage lender in particular left me more confused than that mess.

The lender asked what our intentions were with the house. Unfortunately, that’s been a very murky question for us. Understandably mortgage lenders don’t like to deal with uncertain situations. It’s simply not worth the risk. We told them that we’d love to move into the home immediately at closing, but due to my wife’s military status (and various accompanying AWOL laws) it might not be possible to get a timely transfer. So then the lender asked if it would be a vacation home or if we intended to rent it out. That’s a fair question. I tend to think a fair answer would have “yes” as it isn’t necessarily an either/or case – especially in a well-known vacation area. However, I needed to give a more firm answer.

The lender then offered an explanation. If it is a 2nd home or a vacation home, he can provide me with a lower interest rate. If we intend to rent it out, it would be classified as an investment property and the interest rate would be higher. Huh?

Maybe it’s just me, but I think that best interest rates should go those situations with the least chance of defaulting. That would seem to make sense, right? So if someone were to carry a second mortgage burden, that gets a favorable rate. However, if the same person were to rent out the property and brings in income to offset the cost of the mortgage, that raises a red flag and triggers a higher rate. If it were me lending my money, I’d be much more worried about the person without income from the property defaulting on the loan.

Perhaps a reader can help me understand this logic in the comments, because I can’t make sense of it.

In the meantime, I’m going to bask in the fact that I can get free credit scores from Credit Sesame. It’s one less thing to worry about.

We Bought a House!

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Okay, that title is a little misleading. We have a signed purchase and sale agreement on a home. I wrote at far too much length in a multi-part series at: Buying a Vacation/Retirement Home (Part 1 of ?).

The process for looking in a home in a historic place like Newport, RI (and surrounding towns) brought us to look at probably over three dozen homes. It was a polarizing experience for us. My analytical side was looking for value in terms of objectively measurable numbers like price per square foot. My wife was looking for the, “Can I see myself waking up and having a cup of coffee each morning?” value. I think we both recognized that each side has its merits. In fact, I’d lean towards her side being more important, but I wanted to stand my ground on getting a good value. After all, with an unlimited budget there are many great places to wake up and have a cup of coffee.

On this trip, we found a three places that fit both of our objectives. This is a big change from the one that stood out last time. (I’m not going to count another house that stretched our budget too far, but still a good “value” in terms of price per square foot and aesthetics). We felt like we were on an episode of House Hunters.

  • One was really close to the beach, 5-10 walk, but the floor plan wasn’t what we were hoping for. It wasn’t in “show” condition as the current renters were there in the midst of the chaos of dealing with 3 small children. It would have needed a little work including some new kitchen appliances. In addition it stretched our budget quite a bit.
  • Another was a 15 minute drive to the beach. It also was in a bit of chaos at the time of the showing. The kitchen as new, but other parts of the house needed some work. The price was favorable – due in part to the condition and the location of course.
  • The last place was about a 5 minute drive to the beach. It was a little smaller (300 square feet) than the above two. However, it needed the least amount of work. In fact, we really couldn’t see doing much to it at all. We would prefer a bathroom to have a different color vanity and a larger deck. It would be nice if there was already a fence in place for our dog. Everything else looked like it had been done in the last 3-4 years. It’s asking price was a little higher than the average of the previous two.

I’m betting from that description you can guess which one we went for. It was the third one. While the first one seemed to have the best location, we believed the third place was really the best. It would have been great to walk to the best, but when we looked at other factors like distances to shopping and schools and the neighborhood itself, it passed the first in terms of location.

We eliminated the second house due to the distance from the beach. My wife brought up the scenario of dropping hypothetical kids (since we have no real kids) off and picking them at the beach. That would be a half hour trip there and back… and then another half hour trip. It would be an hour out of your day. That might not be the most common scenario, but it was a good the point in my mind. With the third house, such a scenario is 20 minutes (4 trips of 5 minutes each). Plus hypothetical kids could bike to the beach when they are old enough.

Finally the third house, the one we agreed to had the most amount of land. My wife was on the deck while I walked out and she said, “You are getting too small, I can’t see you.” It was clearly exaggeration on her part, her point was again quite valid. This was a huge selling point.

The last obstacle was to agree on a price. The asking price was already pretty good and it hadn’t been on the market long. When considering the condition of the home, we didn’t feel like we comfortable going too low. We went the lowest we thought we could, while trying to make a strong offer with the other terms of the agreement. It turned out it worked. Their counter was lower than we anticipated. This put in position to try to recounter with our dream price, but we decided to go a little up from there and hope they take it. At that point, the difference was only going to be about 1% of the house’s price anyway. They accepted our counter offer.

Now it’s time to get a home inspection and a mortgage. I don’t anticipate either to be as much fun as the house hunting was (though the inspection should go well.)

Buying a Vacation/Retirement Home (Part 4)

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[The following is the fourth part in a series about my adventures to buying a vacation/retirement home. It may make more sense to read it after Buying a Vacation/Retirement Home and Buying a Vacation/Retirement Home (Part 2) and Buying a Vacation/Retirement Home (Part 3). There’s also a prequel at Time to Buy that Vacation/Retirement Place?.]

I feel like this journey is getting a little long, especially for those you who aren’t in a house-buying state of mind. With that in mind, I’m going to condense the story quite a bit. When we last left, there we had 6 places that we liked. In dollar per square foot terms, two represented very poor values, but my wife liked them. By the same measure, two other properties were great values, but one is a slightly questionable part of town, and the other was a slightly creepy, unfinished mansion.

We limit ourselves to the final two

The two leftover properties in the middle of the value, hit exactly what we were looking for. They were both recently renovated. One was average size, with a small year, but near the beach. The other my wife described as the Barbie Dream home, bigger and better, with more land… but it was further from the beach and really stretched our budget to the limit… maybe even going a little beyond it.

Time to feel out the sellers

We decided it was time to start placing bids. Our agent did a good job of calling up the seller’s agent and fishing out what would be an appropriate starting point. He did this by crafting a story and saying, “My clients don’t want to embarrass themselves with a poor bid, but how about something in [this range].” The value for this range seemed to be around 18% off the asking price to about 10% off the asking price. For example, if the place was 300K he’d say, “They were thinking of something around the mid 200s, how do you think your client would feel about that?” The typical response was that a mid-200 would likely be rejected, but that a high-200 bid would be taken into consideration.

There was a lot more information given up by the sellers such as the couple’s desire to move more quickly or wait until the summer market. It was hard to trust whether the seller was really looking to wait, but a sign that they want to move quickly definitely adds to our negotiating leverage.

Time to make the bids

With the information from our “feeling out”, we learned that the while the people at the Barbie Dream House seem to be in a hurry to move, they’ve already rejected some offers around the 8% off their asking price. We would need them to come to at least 12% off to begin to entertain it and 15% off to really consider moving forward. This didn’t seem likely.

The other house (the one near the beach) implied that a bid at 20% off the asking price would be asking for too much, and that around 15% wouldn’t be a bad start. We decided to float a formal Purchase and Sale agreement at 16% off their asking price. They countered by reducing their asking price by 2.3%. We decided to offer a number at 13% off the original asking price – a sizable sign of goodwill on our side. They countered by offering a price that was 4.7% off the original asking price – not much of a move from before. Despite their poor counter, we decided to try another sign of goodwill… we suggested we split the difference at 8.8% of the original asking price. That was painful, because we had given up significant negotiating ground already. They countered by suggesting 5.9% off the original asking price – their lowest concession yet.

If we were to accept that, we’d have come up in price twice as much from the reasonable starting point (that their agent suggested) than they would have come down. I think the goal of a negotiating is that each person should have a good feeling about the result. I was certainly uneasy about even offering to split the difference after already giving up the biggest concession. Anything less than agreeing was “walk away” time for us.

That’s just want we did. We didn’t even respond to the final counter. Their negotiating tactics have left us quite bitter. At this point, I wouldn’t take it if they came back accepted our offer to split the difference. They would have to work their way back to giving us 10% off of the original asking price. I’m penalizing them for being greedy.

In the meantime, we are turning our attention back to the Barbie Dream House. With a couple of weeks passing by and their original desire to be in a hurry to make a sale, perhaps we can swing a deal.

Buying a Vacation/Retirement Home (Part 3)

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[The following is the third part in a series about my adventures to buying a vacation/retirement home. It may make more sense to read it after Buying a Vacation/Retirement Home and Buying a Vacation/Retirement Home (Part 2). There’s also a prequel at Time to Buy that Vacation/Retirement Place?.]

For those who elected not to read the earlier two parts, I’ll give a brief recap. I feel the time is right to buy a home. There’s a dip in home prices, good mortgage rates, and the slow winter market, which usually has fewer home buyers. In part one, I looked at how the majority of the homes in Newport, Rhode Island were old, making it very difficult to manage as a rental property from San Francisco. In part two, I explained how we saw a couple dozen places over two days and narrowed down the options to two.

With only two homes on the short list, we decided to start day three with a search for more potential homes. Our agent sat down with us as we attacked MLS. I am ruthless with a decent search engine. I found that you could add some criteria in an advanced-type search. I found 2 criteria that really helped cut through the clutter. I looked for homes built after 1980 and with a listing price to square foot ratio below $140. This gave us about a half dozen places, but only one was enticing. I gradually raised the square foot ratio until we had about 6 more places that looked promising. We had a couple of left-over places from the previous day scheduled. It was time to hit the road and check out the 8 places.

We liked both of the places from yesterday. They were nicely updated and had almost everything we were looking for. The problem was that they were asking $260/sq foot. We’d have to talk them down 30% to get them competitive with other places we were looking at. My wife really liked them, but I couldn’t see the value in them. I don’t believe in signs, but one of the two was on lot 666, had a cemetery behind it, and the owner died young. Nonetheless, my wife coerced me to add them to the short list.

From my bargain sort, we found two more places that looked promising. One was a 5 bedroom behemoth. My wife described it as the Barbie Dream house. I was equally smitten by it. At a price just under $200/sq. feet it was one of the best bargains we’ve found too. The search would be over and we’d go after that house, but it is priced little out of our price range. We could try a low-ball bid in our range, but it wouldn’t stand a chance. We thought it better to put it on the list to review when we got back to California and checked our finances.

The other house that made the list is probably the most interesting of all the houses we’ve seen. It was the biggest house we saw. At an asking price of under $130/sq. foot it is one of the best bargains on the market. We expected it to be a mess on the inside, but having been built ten years ago, the inside was quality. So what’s the problem? It is very much like the Winchester Mystery House. That’s a house in San Jose that was built by the widow of the man who invented the Winchester rifle. She lost her husband and her daughter. Depressed, she went to a psychic, who told her that the spirits of those who were killed by the rifle caused the deaths. The only way she could avoiding being next on their list, was to build a house for them. With 20 million in 1860 dollars, that’s exactly what she did until her death. She built stairs that went nowhere, doorways on the second floor that went outside – a nice 40 foot drop. The house was never “finished”. And that’s kind of what this Newport house is – the couple divorced before the house could be finished. The wife won it in the settlement, moved to California and has been renting it out since. This house has the same door to nowhere in the master bedroom. I imagine it would go to a balcony… if one built a balcony. It has an in-law apartment – kind of. One side of the house has a bedroom, living room, on the bottom floor and a kitchen and dining area on the floor above. For some reason they never connected them with a staircase. There’s a place where a staircase could be, but it simply isn’t there. Then there’s the deck with a railing on one half of it – clearly unfinished.

I see great value in this Winchester Mystery House. It is in a great location and at the end of a dead end street (great for kids). It has a solid rental history, probably due to it’s large size. The rent would come extremely close to paying the mortgage, taxes, and insurance. If we actually spent a few thousand to finish it, I could see a scenario where it could be flipped for quite a bit. My wife doesn’t have the same view of this Winchester Mystery House. She has something that she calls the “cup of coffee” test. She tries to imagine herself in the home, drinking a cup of coffee (picture a Maxwell House commercial with the sniff and everything). This house fails that test. I can’t imagine living in such a big place myself. With just the two of us, what would we do with an in-law apartment?

When my wife mentioned the coffee test, I realized that this house search wasn’t going to be as easy as I thought. The house has to be a good value for rental purposes… and we have to like it enough to live in it some day. Finding a place that satisfies both requirements is tough.

However, we did find a place that was worth putting an offer. More on that tomorrow.