A Young Couple Wants to Know: Should We Invest in More Real Estate?

The couple’s mortgage, at 4.8%, costs them $3,758 a month, including insurance and taxes. Their cars are paid off, and they each have 30-year term life insurance policies: $500,000 for him and $250,000 for her. They hope to have children within the next few years. They spend about $800 a month on food including restaurants. They’d like to travel more and dream of retiring early.

To get there, the couple is considering investing funds—perhaps $30,000 to $50,000—from their cash and brokerage account in more real estate. Ideally, they’d like to avoid taking on new debt, so they might join a group of investors their real-estate agent put together to purchase a few apartments or a multifamily home.

Mr. Laue says he likes the idea of “dependable income that I can mentally file away as ‘extra’ to help me accelerate savings over time and also splurge a bit more in the present.” He says he understands there are risks, but believes it’s an important step in reaching financial goals.

Advice from a pro

The Laues have a pretty good balance sheet, says

Cynthia Meyer,

a certified financial planner and founder of Real Life Planning, Gladstone, N.J., which specializes in financial planning for real-estate investors. But she wants them to maximize workplace savings options, such as his 401(k) and her 403(b), each of which has a contribution limit of $22,500 in 2023.

A real-estate portfolio will help them diversify their income and protect against inflation, as long as they systematically raise their rents over time, she says. She estimates they have nearly $4,000 a month in current income beyond their own household needs to service a mortgage on an investment property. But building a portfolio of rental properties without taking on debt can be difficult, she says. Since real-estate investing typically involves taking a mortgage of some kind, investors who are very debt-averse may find that their risk tolerance doesn’t line up with growing a real-estate portfolio, Mrs. Meyer says. “It would take a long time to build a portfolio using only cash to buy properties.”

Buying with cash can actually be riskier than using leverage, she says. For instance, you could buy one $100,000 property outright for cash or you could make $25,000 down payments on four properties. With the latter, the risk of vacancies or of a tenant not paying rent promptly is reduced, she says.

Another question is how hands-on the couple wants to be as landlords, she says. Do they want to screen tenants and hire contractors themselves or will they be happier with a property manager?

When it comes to investing as a group, Mrs. Meyer is wary. She says many questions would need to be addressed, such as what type of partnership would it be, who borrows the money, who has the checkbook and what happens if someone wants to sell.

She says the couple will make progress faster if they borrow and invest in properties without a partnership. To start, she recommends a multifamily property with two to four units to reduce the impact of possible unit vacancies. First, though, they should have enough in cash reserves to pay three months’ of the costs, to cover any lag in renovations or finding renters. Within the first year, she recommends that their cash reserve grow to six months’ of expenses.

Ms. Gallegos is a news editor for The Wall Street Journal in New York. She can be reached at demetria.gallegos@wsj.com.