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NEW YORK (MONEY Magazine) -
To shore up the finances of Richard and Day Newburg as they work to rebuild their dream house, here is what financial planner Bob Ryan of Resolute Financial in Newburyport, Mass. suggests.
Pay down debt
One potential saving grace: Richard expects to net about $300,000 this summer from the sale of nine condo units he owns with his brother.
If the deals happen as expected, Ryan suggests using half the money to pay down the primary mortgage and another $45,000 to pay off the second mortgage.
"Pay down the mortgages?" Richard says. "I never thought of that."
"I did!" cries Day, rolling her eyes.
Diversify, diversify, diversify
Put the remaining $105,000 in safe, short-term investments, like money-market funds and CDs that the family can tap as needed to help with cash flow.
For longer-term goals, the family should invest 80 percent of any money they're able to save in stock funds, 20 percent in short-term bond funds.
Look for additional savings
Richard could net another $175,000 by selling the office building he owns and works in and setting up a home office instead. In addition to generating more cash, the move would eliminate the $25,000 a year he now pays to his business in office rent.
But the couple nixed the idea of having Day go back to work. Although she could earn $55,000 or so a year, they'd have to pay for child care and there would be nobody to run the B&B.
Don't neglect insurance
Ryan gives the Newburgs a temporary pass on saving for retirement and college -- they simply can't afford it right now. But he urges them to buy a $250,000 term life insurance policy on Day to cover day-care bills for Maia if something happens to her mom.
They should also amend their homeowners policy to add the risks associated with the B&B and get disability coverage for Richard. If he were unable to work because of an accident or illness, the family would be in big financial trouble.
Have a backup
The Newburgs' ace in the hole is the house itself, which Richard estimates has nearly doubled in value, to about $2 million, after his renovation -- even if the real estate market drops sharply.
If they sell the house next January (any sooner would trigger capital-gains taxes on their entire profit), they could pay off the mortgage and still have about $1 million in cash left. The family would then put their anticipated $300,000 windfall from the sale of the investment property toward a more ordinary house with a low monthly mortgage payment.
"That's what allows me to sleep at night," Richard says.
"They've done something wonderful with that house," says Ryan. "But I don't think they have cash flow to make it long term. They'll have to sell at some point. The question is when to pull the plug."
Set a timetable for success
Richard Newburg, though, is not the kind of guy who takes the easy money and runs, who imagines living in an ordinary house, who wants to admit that his beautiful scheme has failed.
So for now he and Day have decided that they will work the B&B for at least 12 to 24 months to see how much income they can generate. After this year's slow start, their hope is that they will make $25,000 to $35,000 in 2006 based on 30 percent occupancy.
But even if they fail and ultimately have to sell -- giving up their fantasy of handing down the house and its spectacular views to Maia someday -- they will at least have taught their daughter how to dream.
"We've come this far," says Richard. "We're not about to stop now."
The bottom line
The Newburgs are house-rich but cash-poor. Getting their B&B up and running, along with the sale of Richard's investment property, should help ease the family's financial strain over the next few months.
Renovating? Read our tips on adding value to your home through renovation.
For more of MONEY's Your Home 2005, click here.
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