Illustrations by James Taylor

The Imminent Retirees
After losing a big chunk of their 401(k) money in the tech bust, this couple on the early edge of the baby boom invested in rental properties, buying a studio and a two-bedroom in the building where they already owned a three-bedroom worth about $1.8 million. That apartment is free and clear; the other two have mortgages. They’re counting on rental income to support their lifestyle in retirement.

Peters: Sell the bigger apartment and hold on to the studio. It’s judicious to have a little liquidity. And I think the rental market is going to remain robust, even if the market for sales cools off. If you can get $2,000 a month for the studio, that can be a nice piece of supplementary income.

Vessa: They were overly concentrated in tech stocks, and now they’re dangerously overconcentrated in real estate. If they’re reliant on rental income, an extended vacancy would cause a strain. So I’d advise reducing their real-estate holdings. How about selling the three-bedroom and moving into the two-bedroom to free up capital that can be invested to diversify their cash flow?

Orman: I don’t think they can really afford to own three pieces of property. They should move into the two-bedroom. They can either rent out the $1.8 million three-bedroom or sell it. They’ll get $500,000 of the profits free of capital gains, and pay 15 percent on the rest. They can pay off the mortgage on the two-bedroom—if their income is going to decline in retirement, the home-mortgage deduction becomes much less useful—and still have close to $1 million in the bank, but with no home-related expenses, save co-op fees.

The Splurger
A Wall Street kid bought a Tribeca loft for $3 million. He borrowed from family to scrape up the down payment, leveraged himself, and uses a significant chunk of his bonus to make payments throughout the year. His very low mortgage rate is fixed—but only for the next two years. If it rises by more than a couple percentage points and he doesn’t start making a lot more money, the monthly nut becomes unaffordable.

Peters: As a short-term investment, I’m not sure about a big Tribeca loft. I’d do a two-bedroom apartment, maximum. The current boom has been driven from the bottom. But there’s been a lot less construction of smaller apartments and a lot more construction of larger apartments. Once you get above $2 million, there’s more supply, especially downtown. If he wants to try to hold on to the property, he should convert to a fixed mortgage—the old-fashioned kind.

Vessa: This kid is really rolling the dice! He works in a high-risk industry in which bonuses fluctuate significantly. I’d encourage him to sell the loft and buy an apartment whose mortgage payments are more in line with his recurring salary plus a smaller chunk of his annual bonus.

Orman: He should sell—even if it means taking a loss. If the stock market turns sour, too, he could really be up the creek. These interest-only loans with teaser rates can be dangerous. If you’re paying 2.5 to 3 percent when going rates are 6, the difference is put on the back end. After a few years, not only will the interest rate rise, but he’ll start having to pay back principal. In a stagnant market, he’s got no upside and every risk coming at him.