Talk some sense into me, please

[TBH]

We bought our first rental property last year, because it had been a long-time dream of mine. I wanted it to serve two purposes:
1. Provide a small amount of steady income now (DH's income is not large and my income is extremely volatile)
2. Provide a more significant amount of income once DH retires

The rental property has been performing well. The rent is about twice the mortgage payment, and after I pay for upkeep and utilities and keep a bit back for possible vacancies, I estimate that we're clearing a conservative $300 a month.

Now, I'd like to save up and buy another one in about a year, but we are significantly behind on DH's retirement savings. Part of me feels like we can't really catch up unless we invest in more real estate. But he has no interest in being a landlord. This is all my dream. And I don't think we can afford to put enough toward his retirement AND save up to buy another investment property.

I should really be fully funding his Roth and boosting his 401k contributions and not fiddling around with real estate, right?

Here are some numbers:

DH is 51
DH's income: About $40K salary
DH's retirement account balance: $139K (about 3.5 times income)
Current contributions: 10% to his 401k, and we fund his Roth somewhat randomly with windfalls but don't usually max it out. Putting in about $3,000 a year.

I'm 38
My income: $85K salary, $5K freelance, $2K part time job
My retirement account balances: $147K (about 1.6 times income)
Current contributions: 15% across the board to 401k at my full time job, 401k at my part time job, and SEP IRA for my freelance income

Additional income:
Rental property net income: $3600

I'm embarrassed to even admit we're only putting 10% in DH's 401k. We had lowered it a while back because I was out of work for a little while, and then we never adjusted it. He also doesn't need the tax deduction of the 401k, so I almost think funding his Roth is a bigger priority. We like to keep a lot in cash because my income fluctuates, I have health issues that get pretty expensive, and we own two old houses and an old car.

We have one child, age 11, currently going to public school but looking at private school in a year or two because we live in an iffy school district and don't want to move. So we are also trying to stockpile cash for that expense.

So, what do you think, wise people? Is it crazy to buy another rental property? That seems like a way that I could maybe work a little less, and also that we could prepare for my DH to retire on time. As it is, I'm worried that he'll have to work past 70.

Thanks.

[97guns]

i like RE for retirement, thats how i got there.

just a thought but if your retirement accounts were totally liquid and you dumped it all to RE what would your monthly income be from it?

[TBH]

Whoa, 97 guns, that's a crazy thought.

Well, if we assumed the same formula for the house we've got now…

Down payment + closing costs + renovation + necessary licenses and other start-up costs = $40K per house

So with our current retirement assets we could buy 7 houses
Of course we couldn't really find 7 identically priced houses with identical renovation needs, and we couldn't really get 7 more mortgages. If we were investing that whole lump sum in real estate I'd probably look at buying a couple of quads or something like that. BUT assuming we could buy 7 houses that were roughly similar to the one we already bought, this is what it would look like.

Net rental income: $300 a month per house (very conservative estimate) = $25,000 a year in net income. That's enough to replace my DH's net income but not mine.

The other thing is that if we bought that much real estate it would probably make more sense to hire someone to manage it all. I couldn't manage that many houses with my current workload (full time job + part time job + freelance work) and my DH would much rather keep working at his day job than become a landlord at this scale.

So you think it's not crazy to think of buying another rental property rather than beefing up DH's retirement accounts significantly?

[97guns]

So you think it's not crazy to think of buying another rental property rather than beefing up DH's retirement accounts significantly?

it might not be in your best interest but i am all for RE in the right area, i love the income it produces and the tax advantages that come with it. my entire thought process with planning for retirement was to keep my "retirement" funds liquid and that was keeping them out of retirement accounts. if my funds were locked up in IRA's or a 401K i would still be working another 15 years

[disneysteve]

my entire thought process with planning for retirement was to keep my "retirement" funds liquid

But isn't much of your wealth tied up in real estate? That's far from liquid. You can get to the money in a 401k or IRA a lot easier than you can get to the money in a rental property.

[97guns]

But isn't much of your wealth tied up in real estate? That's far from liquid. You can get to the money in a 401k or IRA a lot easier than you can get to the money in a rental property.

IT WAS liquid, that is what enabled me to enter real estate. i have no need to be liquid now, monthly cash flow is more important to me IN retirement

[disneysteve]

IT WAS liquid, that is what enabled me to enter real estate. i have no need to be liquid now, monthly cash flow is more important to me IN retirement

Understood. I thought you were calling your real estate holdings liquid which didn't make sense to me.

[scfr]

Now, I'd like to save up and buy another one in about a year, but we are significantly behind on DH's retirement savings. Part of me feels like we can't really catch up unless we invest in more real estate. But he has no interest in being a landlord. This is all my dream. And I don't think we can afford to put enough toward his retirement AND save up to buy another investment property.

In the interest of working as a team, what about focusing on ramping up his retirement savings for awhile, and then in 2-3 years revisiting the idea of purchasing another rental property?

What does he want to do?

DH is 51

Assuming you're in the USA, are you aware that as a member of the 50-plus crowd he's eligible to make "catch up contributions" on top of regular contributions?

[TBH]

scfr, thanks for this. DH would prefer not to think about money ever, frankly, but we do make financial decisions together. I think he'd prefer not to own rental properties. but like me he thinks it's a good way to generate income now while also building up equity for retirement, especially because the possibility of my income going down is so high.

I think I would be most comfortable if we focused on building his retirement accounts up a little more before we buy another property. In fact, I think this conversation is making me feel like I should take $3,000 from my little second-rental-house fund and use it to finish maxing out his Roth for 2014. (Yes, I'm aware of the catch-up contributions because he's over 50.)

[greenskeeper]

once our primary mortgage is paid off in about 7 years, we will be looking very hard at RE income properties to purchase.

[phantom]

Have you considered buying real estate in an IRA? Do you have enough funds in an IRA to do so? If so, I'd look into doing that. Then you could invest in real estate as long as you like and still be able to move back to holding stocks and bonds in a retirement fund if you tired of landlording. It wouldn't help directly with cash flow, but it might reduce your need to aggressively save more for retirement.

[feh]

I should really be fully funding his Roth and boosting his 401k contributions and not fiddling around with real estate, right?

Right.

I could write more, but it sounds like you know what the prudent choice is.

[bigdaddybus]

If I am doing my math right. You are getting a 9% rate of return on your money (plus or minus the rentals appreciation or depriciation). (40000×.09=3600)

That's not bad if you have the time/patience, etc to be a landlord.

[TBH]

Update: I just moved money out of savings to finish maxing out his Roth for 2014. He is going to increase his 401k contributions to 15%. I am going to start making regular monthly contributions to his Roth so we'll be on track to max it going forward, at least as long as my current job situation lasts and we have the money. Any and all saving for real estate investments will have to happen more slowly, and be in addition to not instead of funding his 401k and Roth.

I'm still worried about the immediate income thing--not for right now, but in case I lose my job. But I think I need to just make sure our emergency fund is nice and healthy and also try to play catch-up on DH's retirement savings while I can. If the job goes away we'll readjust.

Thanks, all.

[scfr]

I'll bet you feel relieved to have made a solid decision that you both can be happy with. Nice!