Personality Profiles

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.

Illustrations by James Taylor.

The Expecters
A couple with a 3-year-old child—he’s in marketing, she’s a lawyer—has a small two-bedroom co-op in midtown worth about $750,000. But the wife is pregnant and they need more space. She plans to go back to work two years after the baby is born. They have about $200,000 in equity in their apartment and have saved up another $100,000.

Peters: They should plan to spend at least $500,000 for that third bedroom. But they shouldn’t rush. Getting past a co-op board with one income is going to be more complicated, and the baby does okay in the dining area for a few years.

Vessa: Even if prices come down, this isn’t the best time to be adding extra costs. Kids are expensive! They should budget for such items as private schools, camp, college savings, and child care. They may think they can afford the bigger apartment given their current expense level. But if they can’t afford it down the road without breathing room, they should consider staying where they are and making do.

Orman: They might be a good candidate for trading up. Sell the apartment, take the equity and the gain, and buy the most reasonable three-bedroom apartment you can find. Then take an option mortgage, which lets you change payments as your situation changes. For the next few years, they might go for the interest-only payment and switch to an interest-plus-principal or refinance when the second income kicks back in.

The Deeply Rooted
The last of the three kids just split for college, and the couple has a fabulous townhouse in Harlem all to themselves. They’ve lived there since the early eighties, have little debt on the house, and have no desire to move. But their home represents 95 percent of their net worth, and they’re worried that if it collapses in value, they’ll lose everything. Plus, with two kids in college and the third in graduate school, they’re strapped for cash. Peters: They might not need the space anymore. But attachment matters, too. Harlem is a great investment. And if they sell, they’re going to pay a kick-ass capital gain. They should refinance and use some of the money from the mortgage to pay some college costs. Then use some to turn the ground floor into a rental apartment.

Vessa: The most reasonable course of action: Sell the townhouse, and downsize to a less fabulous place, perhaps in the same neighborhood. If they’re adamant about staying, they can still free up some capital by refinancing or taking a second mortgage.

Orman: They shouldn’t worry that their home represents 95 percent of their net worth, because it also represents 100 percent of where they go to every single night. Who cares what happens to the value of the home as long as it is paid for in full? Pay off whatever remains of the mortgage, since they’re not getting a tax break. Then they should tell their kids to take out student loans—rates are very low, and the payments can be tax-deductible—and redirect cash they’d spend on the kids’ education into diversifying.

The Discontented Renter
A single woman can barely afford the $4,000 a month she pays for a prime West Village one-bedroom. It’s where she’s been dreaming of living since she was a teenager in Dix Hills. She has about $100,000 in cash that she wants to use as a down payment. Brooklyn is out of the question. She’s been waiting for several years for the market to take a breather so she can jump in.

Peters: There’s always a problem with waiting around for prices to get better. We’re not always smart enough to know when it’s happening. People who wait for prices to improve often end up waiting for them to get even lower—and then they miss the bottom. So buy the best apartment you can comfortably afford now. Neighborhood snobs are getting more rare. We’ve seen people who would have been happy to live by Columbia wind up on 65th Street and First Avenue, and vice versa.

Vessa: The calculation isn’t just looking at the difference between monthly rent and a mortgage payment—there are closing costs and the carrying costs of ownership. If she really wants to own a piece of the rock, the rock may need to be either smaller, or outside Manhattan.

Orman: She should buy now. Find a place for $700,000 and put the $100,000 down—even if she thinks the market might fall further. As it is, she’s throwing away close to $50,000 a year in rent. That’s about 6 percent of the value of the home she can afford. So the worst she can do in the short term by owning is break even. And the housing market won’t drop 6 percent a year for several years in a row.

Personality Profiles