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A friend whom I've known for about 8 years recently asked me for advice and I wasn't sure how to respond. I became curious and decided to see if others could weigh in.

Background: He and his wife share 3 mortgages. M1 has about $40K left, and the property is used to house a relative, rent-free (they are OK with this). M2 has about $350K left, and the property is rented out with rental income matching the mortgage. M3 is for about $260K, for a recently purchased primary residence.

Both have jobs, which, after the montly M1+M3 payments, provide a combined total disposable income of about $2500. They have mostly typical middle-class expenses: car and college loan payments ("a few hundred a month"), utilities, cell phones, typical household maintenance. As far as I know they participate in employer retirement plans. He said they also have about $10K set aside for 'rainy day.'

His basic strategy is to build wealth by gradually acquiring real estate.

However, he is concerned about taking on too much debt, and unsure of how to continue with investing in RE while controlling the risk of overexposure to debt.

Questions:

  1. Is the mortgage debt too high? The rental property is in a hot RE market, so could be easily sold with significant equity. However, they would prefer to keep it.

  2. Can they afford another mortgage, and in what amount? (e.g. they are considering $50K for a small cabin, which could be rented out).

  3. How much cash should they ideally try to put aside per month? (provide a target and justify)

  4. Other than setting cash aside, what would be some good uses of funds to make sure the money would appreciate and outpace inflation and add a nice bonus to retirement?

  5. They are currently in mid-30's. If there is ONE key strategy or decision they could make today that would help them retire "early" (say, mid-50's), what should it be?

Personal advice, as well as any resources for reading/self-education would be appreciated. Thank you.

  • You're asking for opinions with a limited amount of information, which can be difficult at best and dangerous at worst. My suggestion would be to talk to a certified financial planner, who will be better at understanding the person's current financial picture and objectives and then help formulate a plan that makes sense for them. – Daniel Anderson Oct 25 '16 at 17:18
  • @DanielAnderson, thank you for the feedback. You have a point - I guess I am asking for suggestions on things to consider when trying to answer these questions: what factors are at play that should be taken into account? What other questions does my friend need answers to before he can get good answers to the questions he stated? Although CFP or tax accountants could address many of the questions on these forums, this doesn't necessarily invalidate the questions. However, your point that the most complete answer would probably come from a CFP is well taken. – A.S Oct 25 '16 at 17:35
  • Funny, this was flagged to closed as "opinion based." In my opinion, the question is quite legit, it's just lacking the information to answer. – JoeTaxpayer Oct 25 '16 at 18:50
  • @JoeTaxpayer - great, so what information would that be? – A.S Oct 25 '16 at 18:58
  • 1) Children. A mid-30 couple with no children either have no intention on having them or are already browsing Stork-based delivery providers. Either way children have a huge impact on financial planning – Mindwin Oct 26 '16 at 12:14
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Is the mortgage debt too high? The rental property is in a hot RE market, so could be easily sold with significant equity. However, they would prefer to keep it.

Given the current income, there is no stress. However in absence of any other liquid [cash/near cash] assets, having everything locked into Mortgage is quite high. Even if real estate builds assets, these are highly illiquid investments. Have debt on such investments is risky; if there are no other investments. Essentially everything looks fine now, but if there is an crisis, unwinding mortgage debt is time consuming and if it forces distress sale, it would wipe out any gains.

Can they afford another mortgage, and in what amount? (e.g. they are considering $50K for a small cabin, which could be rented out).

I guess they can. But should they? Or diversify into other assets like stocks etc.

Other than setting cash aside, what would be some good uses of funds to make sure the money would appreciate and outpace inflation and add a nice bonus to retirement?

Mutual Funds / Stocks / bullions / 401K or other such retirement plans.

They are currently in mid-30's. If there is ONE key strategy or decision they could make today that would help them retire "early" (say, mid-50's), what should it be?

This opinion based ... it depends on "what their lifestyle is" and what would they want their "lifestyle" to be when they retire. They should look at saving enough corpus that would give an year on year yield equivalent to the retirement expenses.

  • thank you for the information, this is a good start. I wonder if you could suggest any books or online resources that you have personally found useful for retirement planning? My friend keeps talking about all these real estate and other investment ideas, but knowing his personality I think what he is really after is not working past age of 55 or so. Everything else is just the means to get there financially. Once the cash equivalent of all the equity begins to approach the total sum that will provide a reasonable annual return, I have no doubt he will liquidate and live off the int/divds. – A.S Oct 26 '16 at 15:49
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To invest relatively small amounts in the real estate market, you could buy shares in a Real Estate Investment Trust (REIT), a type of mutual fund. Admittedly that's a very different proposition from trying to become a landlord; lower risk but lower return.

  • This is an interesting advice and I will pass it on, thank you. However, I wonder if it's possible to invest in a more tangible way, i.e. in actual structures that you can knock on the door and say "yep that's mine" -- or at least "fractionally" mine -- while still protecting yourself rom personal debt liability and risk associated with individual mortgage. I am starting to wonder if there are any structures that allow small groups to co-invest, thus share ownership but also spread the debt burden? – A.S Oct 25 '16 at 21:19
  • Rare special case, maybe. Maybe. – keshlam Oct 25 '16 at 23:22

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