Jennifer Boskin and Kevin Boskin want to build two vacation homes on a property they recently purchased.

The couple, who live in Baltimore, paid $50,000 for land in Garrett County, Md. The property is zoned for two units and they would like to build one house as a second home and another as a rental property.

They estimate the cost of building both homes is between $450,000 and $500,000. They are considering taking out a construction loan or using a cash-out refinancing from their primary residence. Another option is to wait until they have a bigger nest egg.

Mr. Boskin, 35, is a finance manager at a food company and Ms. Boskin, 34, works in quality assurance at a medical-device company. They plan on starting a family in the next few years. Their combined income is $260,000.

The Boskins have $163,000 in two 401(k) plans and their employers match contributions. They also have two Roth IRAs with about $27,000. In addition, Mr. Boskin has a health savings account valued at $17,000 and Ms. Boskin has a pension valued at $15,000 through her current employer. They have a $40,000 emergency fund and $23,000 in a stock trading account.

The Boskins’ only debt is their $350,000 mortgage; they have a little over eight years left on the loan. They say the home is valued at $750,000.

Monthly expenses include: $3,838 for mortgage payments, excluding property taxes; $225 for homeowners association fees; $200 for utilities; $500 for groceries; $200 for dining out; $200 for cable/internet; $200 for phone; $100 for gas; $80 for car insurance; $100 for home insurance and $300 a year for a high-deductible health plan. The Boskins have minimal life insurance through their employers and say they save about $4,000 a month.

Advice from a pro

Jon Luskin, a certified financial planner at Luskin Financial Planning in San Diego, says he is not “super excited” about the couple’s plan to build on the property.

“I want them to understand that their real-estate play is high risk, especially because the numbers [cost of building] are so large relative to their other assets,” he says. The risk is compounded by the fact that the couple has a sizable mortgage, Mr. Luskin adds, and a lot of the value of their nest egg is already heavily tied to real estate.

But there are ways the Boskins can put themselves on better financial footing now so they can build on the property down the road, he says.

The Boskins’ plot of land in Garrett County, Md.

Photo:

Kevin Boskin

First, Mr. Luskin suggests buying a term life-insurance policy where the payout is enough to help either spouse pay the primary mortgage should one of them die. The couple should also look into disability insurance that would pay if either of them was unable to work in their current occupation.

He recommends, before taking on any more debt, paying off the mortgage, perhaps by accelerating payments.

Putting more money in their investment accounts would offset the risk of building on the property, he says. Mr. Luskin says the couple should ideally continue to save until the value of their investment accounts roughly equals the value of their real-estate holdings.

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Since their income likely prevents them from fully funding their Roth IRAs directly, they could each make a backdoor contribution where they take $6,000 in after-tax money from an IRA and transfer it into a Roth IRA. The couple may also want to ask their employers if they can make after tax contributions to their 401(k) once they hit the limit of investing $19,500 pretax. This would allow both Mr. and Ms. Boskin to invest $58,000 each in their 401(k)s, including their employer’s match, in 2021.

It might also be possible to do a mega-backdoor Roth contribution where after-tax money invested in their 401(k) accounts is then converted into a Roth IRA account or a Roth 401(k). With Roth accounts, after-tax contributions grow completely tax-free; with 401(k) accounts, growth on after-tax contributions is tax-deferred until the money is withdrawn in retirement.

The couple also should try to fully fund their health savings account each year; the annual limit for 2021 is $7,200 per family. Unused money in the HSA can be rolled over to the following year, invested in the market and used for qualifying medical expenses tax-free. For calendar year 2022, the annual limit for an individual with family coverage under a high deductible health plan is $7,300.

The Boskins’ emergency fund should equal six months to a year of expenses. And when they eventually build they will need more savings to cover basic maintenance and other unexpected costs, including construction costs, which often go over budget, he says.

“It’s a big bet,” Mr. Luskin says, adding that because building on the land could impact their future finances, the couple should try to reduce risk as much as possible beforehand.

Ms. Ward is a writer in Vermont. Email her at [email protected].

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