Money Make-Overs : Rich in Assets, Short on Cash
Putting personal finances in order is a common New Year’s resolution. To help our readers stand by their plans in 1994, the Times Orange County Edition sought volunteers to meet with financial experts, also volunteers, who drew up plans to help the individuals or couples set budget goals. Today: Autumn and Mike Wilson, who had a combined credit card debt of $24,000 when they met, are now beginning to set aside a cushion in savings. And Judy Miller’s monthly income is only $44 more than her expenses. She invested in real estate when the market was hot, now the rents on her properties have fallen. With 87% of her assets tied up in rentals, she’s cash poor, real estate rich. First in a series.
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The way Judy Miller figures it, she makes exactly $44 more than she spends each month. That’s if life doesn’t interfere--and life almost always interferes, especially when you own rental property.
Miller’s rental properties need routine repairs; and one of them, an older four-unit building in Laguna Beach, will soon need a new roof. Meanwhile, the rents she charges, like the values of her properties, have been dropping.
“I’m becoming the best floater in the world, and it really scares me,” said Miller, describing her survival method of borrowing from one account to pay another.
This year, she has borrowed more than $14,000 from her retirement fund to resolve overdue credit card bills and other obligations. In April, she failed to pay her property tax bill, and she missed the December payment too.
Now she needs more spending money while at the same time saving for early retirement and travel. She knows that $44 a month won’t do much for her and that it’s difficult being thrifty.
Trouble is, she’s real estate rich but cash poor. She estimates her home and her rental properties to be worth just over $1 million, still more than enough to cover debts of about $590,000.
But her $35,000 annual salary as an executive secretary just isn’t enough to pay her monthly bills, even though rents and interest on investments boost her annual income to $43,452.
“The problem with her assets is you can walk on them,” said Linda A. Barlow, a certified financial planner who runs her own business in Santa Ana. Investment in real estate has put many Southern Californians in Miller’s position, Barlow said.
“I see this a lot,” she said. “Nearly 87% of her net worth is in one asset class: real estate. I like to diversify into five or six areas, so if one or two are going down, the other three or four are, hopefully, going up.”
Barlow recommended converting some of Miller’s assets into growth stocks. The planner said that Miller, 53, then should be able to achieve her dream of retiring within five years.
After her husband died in the mid-1980s, Miller found herself in a position that was both tough and frightening: controlling her own finances. She relied on rental income to supplement her own and later continued the couple’s old strategy of investing in real estate by buying two condominiums in 1990.
Miller bought her home--a condominium in Dana Point--along with a condominium to rent in Newport Beach in 1990, just before the real estate market turned sour. She also owns a four-unit building in Laguna Beach, which she and her husband purchased in 1978. She also has put nearly $62,400 in longer term investments: money market, municipal bonds and retirement funds.
Meantime, she pays $4,266 a month toward mortgages totaling $573,522. In addition, her credit card balance is $2,948, and she has borrowed $14,822 from her retirement account this year to pay credit card and other bills, leaving a balance of less than $7,500.
Miller wants most to pay her delinquent property taxes totaling almost $9,000, including the 10% late payment penalty.
Barlow recommended two strategies. One, get the property reappraised. Its official value may have dropped, she said, and if it has, the property taxes would be lower.
Secondly, Miller could use the $458 she sets aside for income taxes each month to pay her property taxes. Since she pays no income tax--her properties are claimed as a loss on paper--she does not need to have the $458 taken out of her paycheck, Barlow said.
Miller said she liked the “forced savings” that the deduction brings her. But Barlow said it is possible that her company’s payroll department could set up a mortgage savings account and remove the money each month from the paycheck in the same manner.
Barlow also recommended that Miller make her investments work harder, selling her rental property, for example, and putting the proceeds to better use. Miller, though, isn’t ready to pay the taxes on any gains from rental sales and does not want to buy more property.
The financial planner assured her that there are other ways of holding onto money that normally would be paid in such taxes. For example, she could place the building in a charitable trust. The trust then would sell the property and reinvest the proceeds, keeping control over the principal but giving Miller the interest earned on any new investments. Were the Laguna apartments to be sold for $475,000, for example, and the proceeds reinvested at an 8% annual rate of return, Miller could receive $38,000 a year.
Miller also has more than $40,000 tied up in tax-free municipal bonds, which earn about 6% interest. But as long as Miller isn’t paying any taxes anyway, Barlow said, the portfolio should be changed over to a diversified, taxable one that could bring a 10% to 12% average annual rate of return over five years.
Finally, Barlow recommended that Miller draft a living will to describe which lifesaving measures Miller would want and a document giving power of attorney to a trusted relative or friend should Miller be incapacitated.
Miller said she planned to follow many of Barlow’s recommendations. However, she was wary about diversifying her portfolio. Previously, she said, a broker engaged in unnecessary trading in her stock portfolio merely to pump up his fees.
“The bottom line didn’t increase much,” Miller said.
PROFILE Single income of $43,000; debt-ridden THE SUBJECT Name: Judy Miller, 53 Occupation: Executive secretary Assets: Condominium, her home, valued at $275,000; rental condominium valued at $260,000; four-unit rental valued at $475,000; savings and money-market accounts valued at $15,023; municipal bonds valued at $40,804; annuities and retirement account valued at $22,287; annual rental income of $7,032; antiques valued at $1,000. Total: $1,096,146. Liabilities: $190,178 owed on home mortgage; $59,480 owed on rental condominium; $323,864 owed on four-unit rental; $2,948 owed on credit card accounts; $14,822 borrowed from 401K plan. Total: $591,292. Financial goals: Pay overdue property tax bills, curtail spending, create a positive cash flow without risking retirement savings and retire by age 58.
The Experts
ADVISER TO MILLER
* Name: Linda A. Barlow, 49
* Title: Certified financial planner
* Company: Linda A. Barlow, Santa Ana
* Background: Bachelor of science degree in accounting and business administration from Southern States University, New Orleans; master’s degree in financial planning from La Salle University in Chicago; member of the International Assn. for Financial Planning Registry; federal- and state-registered investment adviser; board member and current president of the Orange County Society of the Institute of Certified Financial Planners; financial planner for 20 years, practicing comprehensive personal financial planning since 1982
