34-year old Dr. “P.Noir” has a dream.
He would like to retire at age 50 to live life as a gentleman viticulturalist and winemaker, living off passive income, pruning the vines, and enjoying huge bowls of homemade pasta made by Mrs. Noir using her secret recipes from the old country.
At least, that’s how my imagination plays it.
As I’ve learned, the popular term for this is called “passion investing.”
His plan appears to me to be well thought-out, as follows:
* Invest $100k – $120k/yr in commercial real estate for the next 10 years
* Buy a vineyard costing $3M – $3.5M at age 44 with:
o SBA loan of $2M – $2.5M
o 1031 exchange of initial rental property $500k
o Cash savings to make up the difference (assume $500k)
* Allow 6 yrs for vines to mature
* Retire at age 50 and live off rental income along with withdrawals from taxable account
* If necessary, continue working longer until property can pay the mortgage
* High annual income and savings rate
* Fairly frugal lifestyle
* Good savings history (millionaire at age 34)
* Sensible backup plan (keep working as a physician)
* A vineyard is a risky venture unless you are wealthy and/or can devote a lot of time to it. Even then, it is iffy.
* Will need to work 2 full-time jobs for at least 6 years: as a physician and as a farmer.
* Vines can take 10+ years to mature.
* No plan to pay the mortgage in the years between purchase and wine production.
* No prior experience with investment real estate. Will you be successful? Will you enjoy it?
* Real estate is concentrated and illiquid. If the vineyard doesn’t work out, will weddings and vacation guests cover the mortgage?
* If you plan to live on the property and rent it out, you will be responsible for the upkeep of 2 homes.
Assumptions (I will use conservative estimates wherever there is an uncertainty):
* 6% average long-term returns on savings (Assuming no emotional mistakes in upcoming bear markets and corrections)
o By my calculations, you will have between $8M and $9M at retirement
* Average inflation
* You retire in 16 yrs
* No more children
* College savings included in budgeted living expenses of 20%
* Plenty of appropriate life and LTDI in place.
* No divorces
* Saving/investing 41% of gross income annually for next 16 yrs.
* No significant financial assistance for other family members
* Reasonably good health
On paper, this plan sounds like it might work.
Dr. Noir is assuming a 10% IRR (Internal Rate of Return) on his real estate.
I’m assuming only 6% and, for simplicity, not separating out cash flow from growth in value, similar to equity returns.
However, farming of any kind is a risky venture.
A big concern I have is how Dr. N will make payments on a $2M loan in the 6 – 10 years before the property begins to cash flow.
A second concern is the labor a vineyard requires.
From what I’ve read, working a vineyard is a full-time job and Dr. N doesn’t plan to quit his “day job” for at least the first 6 years of ownership.
That’s going to require quite a bit of stamina as he enters middle age.
At Dr. N’s savings rate, he could afford to retire at 50 and live a very comfortable, easy lifestyle [without the vineyard purchase].
But his passion is grapes and he wants to farm.
Fortunately, he will have the other investment real estate to fall back on.
Using an effective tax rate of 39% (state and federal) and living expenses of 20%, I used a lower savings rate of 41%, still quite admirable.
Here’s how I envision this playing out:
Dr. N invests at 41% of gross for the next 14 years and saves for the down payment over the final 2 years before retirement.
That would give him ~$8.7M in value in combined real estate and equities at age 50.
~$500k of the real estate is used for a LKE (Like-Kind Exchange) for the vineyard, leaving an $8.2M war chest.
Should the vineyard prove to be unsuccessful and Dr. N is forced to liquidate at a 50% discount, he’ll still have ~$7M in savings.
I keep coming back to 3 questions:
* How will you pay the mortgage until the vineyard breaks even?
* How will you work the vineyard in the 6 years before you retire?
* How long of a sabbatical can you take and still be able to come back if this doesn’t work out and you’ve spent down your savings?
I think what it gets down to is – how much is “enough” at the end of your life?
Oftentimes, I’ll meet with a couple who is on track to leave behind mid 8-figure estates.
To most, that’s more than enough.
But how much more than enough is it?
In other words, if you could build up to a mid- 8-figure net worth and you decide to risk lowering your end of life net worth to a fraction of that (10% – 20%) in order to dedicate the middle 1/3 of your life to your passion, would you willingly take that risk?
I think that is what Dr. N has to decide.
In my last analysis, I gave a thumbs down to Dr. NA (New Attending) who actually could afford his wish.
Again this week, I don’t necessarily believe that Dr. and Mrs. Noir should follow their dream, but I do believe that, by following their plan, they can afford to take this giant leap.
The difference in this situation is that they have 16 years to plan and change course if it doesn’t appear viable – and he has a backup plan.
When this submission came in my eyes lit up.
I absolutely love when docs explore things that are out of the box and running a vineyard certainly qualifies.
Johanna mentions the term, “passion investing,” which this potential venture may very well be.
The problem with passion investing however is that it essentially means you are leading with you heart and not your head and that can lead to many unwise financial decisions.
The interesting take from Dr. Noir’s submission is that he really does not mind if this venture does not produce a single dime for retirement purposes and only wants it to break even.
So essentially the question is can he take $3.5 million off the retirement table AND still retire early at the age of 50.
Current price $3-3.5 M Vineyard
Dr. N said he would contribute 10-20% downpayment (300-350k/600-700k) primarily through a commercial real estate exchange and borrow the rest.
I used the 39% effective tax and on a $700k income gave him $427k/yr net
After the stated $140k living expenses we are left with $287k.
Using submission details, this balance will be partially used to fund $65k/year towards retirement investments and $120k/year to build up commercial real estate holdings.
This leaves a $102k buffer/year for miscellaneous.
His stated current liquid savings of $150k is really $50k after the $100k renovation planned.
I then excluded all retirement accounts in my assessment because they won’t be accessible till many years after his early retirement at 50.
I also did not include the equity in the home ($650k) as I assumed this would remain their primary home.
This left me with the following assets to support Dr. N in early retirement at the desired age of 50:
$50k liquid savings (at 16 years will be worth $68k @2%)
$100k brokerage (at 16 yrs will be worth at $254k @6%)
The real estate investments were a bit of a challenge to assess as a portion of the equity growth should be canceled out by a similar equity growth in the vineyard (an increase in price of the vineyard in 10 years should be factored).
I followed Johanna’s example and gave a 6% net global appreciation of real estate holdings for the first 10 years.
Thus at 10 years (assuming $120k/yr investment starting year 0 with $0), the 10 year value (time of vineyard purchase) of the real estate holdings would be $1.68M.
Subtract $1 million for a 20% downpayment for the expected appreciated vineyard at 10 years (3.5% appreciation/yr) will leave $680k in remaining real estate holdings.
If Dr. N continues to add $120k/yr for real estate at 6% growth, it would increase in value to $1.85M at age 50.
Thus at age 50, these are the non-retirement assets that would be available for consumption:
$1.85M real estate
This totals $2.17M which a Safe Withdrawal Rate of 4% would be expected to provide almost $87k/yr income.
Not enough to support the $140k/yr current lifestyle.
But what about that $102k/yr buffer?
Throwing that completely into the market would provide an additional $2.775M (projected 6% annual return) at age 50.
This would boost the safe withdrawal rate to $198k/yr.
However this would require an extremely unlikely scenario of completely using this buffer for investments every year for 16 years.
As Dr. N aptly pointed out there is a good possibility that the vineyard will have a negative cashflow for the first 5 years and that money has to come from somewhere.
Other things I’m concerned with are likely increasing property taxes on the vineyard as well typical expected annual increases for maintenance costs of the vineyard/business operating expenses.
Too many variables for my liking to feel like there is a good safety margin/buffer, especially when annual wine production is never a given with various diseases and environmental conditions to also consider.
A family event such as the addition of one or more kids can even further help to topple this delicate financial balancing act and stomp out more than just grapes.
Johanna: Thumbs UP
Xrayvsn: Hate to be sour grapes but Thumbs DOWN
Team Johanna or Team Xrayvsn?
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