Too Much For A Toy

Jason is completely debt-free, and he's considering buying a vacation home. He's found one on the beach in Florida. However, he can't pay cash. Dave thinks this is too much toy to have.

QUESTION: Jason in Nashville is completely debt-free, and he’s considering buying a vacation home. Jason’s noticed vacation homes are basically on sale, and he’s found one on the beach in Florida. However, he can’t pay cash for it since asking price is $1.5 million. Dave thinks this is too much toy to have.

ANSWER: My theory is that’s too much to have in a toy. Asking price doesn’t establish appraisal. My point is the house is worth $1.5 million. That’s the market value of the house. Do I think that Florida is undervalued in some places? Yes.

I’ve got a lake house. It’s one of my favorite places on the planet. Of course, we were debt-free before we talked about buying that. We paid cash for it. It’s a toy. I am there in the summer. That’s it. The number of hours you will actually utilize this house—dollars per hour—in the next 10 years, if you divide that up, will make you ill. Your actual use of this thing is not something you want to be paying payments on. You’ll learn to hate it if you’re paying payments on it.

If you told me you were making $1 million a year and you had $10 million in the bank and you wanted to drop $1.5 million in this, it’s a little rich given that your personal residence is only worth $1.5 million, but I’m with you. Florida properties are undervalued, and all those other things you pointed out would make sense. Going into debt on it doesn’t make any sense at all. It’s not going to bankrupt you. It’s just are you going to learn to hate the thing?

Paying cash for this might not be a bad investment for retirement. I’m okay with a real estate investment even if you’re not renting it back out and just using it because you’re stealing it. That’s why I was trying to help you get there. I would go for a cheaper property with the numbers you’re giving me. A) I want to pay cash. B) I’d want it to be a smaller ratio of your net worth. It sounds like you’ve got about a $4 million net worth, and you’re going to have $1.5 million in a toy. That ratio bothers me. That ratio and the fact that you’re not paying cash are my problems with this. But if you want to overlook those and go on, it’s not going to bankrupt you, but it may make you regret that you did it.

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