Money Make-Overs : Putting our...

The way Judy Miller figures, 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 rentals need routine repairs; one--an older four-unit building in Laguna Beach--will soon need a new roof. Meantime, 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: borrowing from one account to pay another.

In 1993, she borrowed more than $14,000 from her retirement fund to pay overdue credit card bills and other obligations. In April, she failed to pay her property tax bill--and she missed the December payment, too.

And now, she wants more spending money, while at the same time saving for early retirement and travel.

Miller’s problem is that she’s real estate rich but cash poor. She estimates that her home and rental properties are worth just over $1 million. But her $43,450 annual income--from her job as an executive secretary, as well as rents and interest on investments--just isn’t enough to cover the unpredictable costs that come with being a landlord.

Investment in real estate has put many Southern Californians in Miller’s position, said Linda A. Barlow, a certified financial planner who runs her own business in Santa Ana.

“Nearly 87% of her net worth is in one asset class--real estate,” Barlow said. “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--in control of her own finances. She continued the couple’s strategy of investing in real estate by buying two condominiums in 1990--just before the real estate market turned sour.

Besides her condominium home, Miller rents out a condo and a four-unit building in Laguna Beach. 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.

Miller wants most to pay her delinquent property taxes totaling almost $9,000, including the 10% late payment penalty.

Barlow recommended several strategies:

* Get the properties reappraised, she said. Their official value may have dropped; if so, the property taxes would be lower.

* Miller could use the $458 she sets aside for income taxes each month to pay her property taxes; because her properties show a loss, Miller pays no income tax.

* Miller should make her investments work harder--sell her rental property, for example, and put the proceeds to better use.

That advice left Miller worrying about paying taxes on any gains from selling her rentals. But Barlow assured her there were ways to avoid such taxes.

For example, she could place the Laguna four-plex 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.

If the Laguna apartments were sold for $475,000, for example, there would be about $150,000 left after paying off the mortgage. If those proceeds were invested at an 8% annual rate of return, Miller could receive about $12,000 a year.

Miller also has more than $40,000 tied up in tax-free municipal bonds earning about 6% interest. But as long as Miller isn’t paying any taxes anyway, Barlow said, she should be holding a diversified, taxable portfolio that could bring a 10% to 12% average annual rate of return over five years.

Finally, Barlow recommended that Miller draft a will, a living will to describe which life-saving 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.