House Rich, Cash Poor

Njeri Barrett thought she did everything right. She graduated from college, landed a job earning more than $78,000 a year, got married, and had a child–all by the age of 26. But now seven years later, the Dorchester, Massachusetts, resident finds herself swamped with debt and without a solid wealth-building plan.

“I’m an immigrant. I came here from Jamaica when I was 8 years old, and homeownership was something that was always talked about as a way to build wealth–the American dream. So I pushed myself almost to the detriment of my family to purchase multiple properties,” says the 33-year-old executive assistant for a private equity firm.

Barrett and her now ex-husband jumped into the housing market after they got married in 2006. Even though Barrett already owned a condo, the couple purchased a four-family house in which they charged monthly rent of $3,200. That same year they also bought a $400,000 town home of their own to live in.

“As a family we were making great income and we took the money and invested in properties not thinking about the possibility that both of us could get laid off,” she reflects. Barrett says when her ex-husband was laid off in 2007 and then she lost her job in 2008, the couple had a lot available in credit, but not enough cash savings at the time, with only between $1,000 to $2,000 in savings. Barrett says: “We were swimming in debt and the tenants were not paying their rent. It was a domino effect from there.”

Now the divorced mother of one is bouncing back from being laid off for nearly two years. Although she has been earning more than $80,000 a year since 2010, including bonuses and rental income, she is carrying a lot of debt. While she receives child support, she doesn’t receive alimony and during the divorce had to use most of her savings as well as withdraw $27,000 from her 401(k) to help pay the mortgages on the three properties. After the divorce, her ex-husband kept the townhouse as part of their settlement and she kept her condo and the four-family home.

“I wish I had moved back home with my parents from the minute I lost my job but I didn’t. I wanted to do it on my own. I would have saved so much money,” reflects Barrett.

Although Barrett can’t afford to live in the condo any longer, she kept it as a rental property. She uses the$1,550 monthly rent to cover the mortgage payments and condo fees. “I don’t want to sell it because one day my family and I may live there. And my credit isn’t good so I can’t purchase another place right now,” she fears of her 634 credit score.

Barrett and her 7-year-old son, London Balan, now rent the second floor of Barrett’s mother’s house, where she pays $600 for rent and has a roommate. The move saves her $950 per month. With the savings she was able to pay off a $15,000 personal loan from a bank last year that she borrowed in an effort to keep the multifamily unit from going into foreclosure. With a laundry list of constant repairs and delinquent tenants, the property became too costly for Barrett to handle. She lost the home to foreclosure in 2010 after being denied a loan modification.

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After getting over the emotional hump of depleting her savings and losing the multifamily property to foreclosure, Barrett is working to downsize her more than $230,000 debt load that includes two mortgages totaling $197,000 on her condo (which is underwater), $9,600 in credit card debt, $31,000 in student loans, and a $6,300 balance on her car loan.

Fortunately, Barrett has about $800 per month in discretionary income and is able to pull herself out of her hole but she needs clear direction. “I feel like I have enough cash where I can use the extra money to pay down the other debts. I don’t want to remain in debt more than four years. But I want to be realistic with that goal,” says Barrett, who would like to have her car and credit card paid off by the end of 2013, save $21,000 in an emergency fund by the end of 2014, and pay off her student loans by 2017.

“How do I continue to pay my bills with the big picture in mind, while keeping a comfortable lifestyle for my son and I?” asks Barrett.

The Advice
Black Enterprise and Jaime Wright, a district vice president at AXA Advisors, offer this guidance to Barrett to get her back on a path of wealth creation:

Take baby steps. Barrett should take a slow and steady approach to rebuilding as to not

bite off more than she can chew and then lose hope. “She should take a two-prong approach: pay down the revolving debt [credit card] and build up her cash reserves. She indicates in her budget that she can put $400 toward each goal,” notes Wright. If she follows this advice, in 24 months, Barrett would have $9,600 in emergency savings or four months’ expenses. She should apply the $2,000 contest winnings to her savings. That is a reasonable goal, Wright says. After she pays off the credit card, she should add that $400 to her emergency fund so she can be prepared in case of another layoff with more cash on hand, so she doesn’t end up taking out another personal loan or borrowing from her retirement savings. In the end she lost her home on top of adding $15,000 to her personal debt load and shrinking her 401(k). It doesn’t make financial sense to chase lost equity. Know when it’s time to walk away.

Pay off other debts as agreed. Barrett wants to pay off her car loan by 2014, but Wright says, “She need not pay off the car on an accelerated basis, she should simply make sure her payments are timely.” If she continues to pay $280 per month her car will be paid off by 2015. She is currently paying $205 per month on her student loan debt on time. She should continue to pay her bills in a timely manner, which will improve her credit score more than paying off all of her debt. It demonstrates she can handle making payments over a time period as well as longevity, key factors in building good credit.

Apply for mortgage modification. “Barrett’s mortgage rate is going to increase from 3% to 6.6% in two years. I would suggest she immediately seek modification of those terms from her lender,” advises Wright. Furthermore Barrett owes around $30,000 more on her condo than it’s worth, so Wright also suggests “she should maintain the property as the rental income covers the mortgage.” He suggests that she consider selling in the event that the modification doesn’t work or if she can’t cover her additional rate increase. “As the market stabilizes she can either consider refinancing or selling the property in the future.”

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Invest for the future. Barrett should include retirement planning and risk management to her portfolio. Wright suggests an immediate increase in her 401(k) contribution from 2% to at least 4% and increasing in small increments over the next three years to 10%. He also recommends a 20-year term policy to protect her son in the event of her premature death.

Financial Snapshot
Njeri Barrett
Dorchester, MA

Household Income
Gross Income    $83,600

Assets
Checking    $300
401(k)     $2,200
Savings     $2,400
Rental Home*     $162,000
2008 Nissan Rogue**    $8,939
Total    $175,839

Liabilities
First Mortgage     $189,000
Second Mortgage    $8,200
Credit Cards    $9,600
Student Loans:    $31,000
Car Loan    $6,300
Total Liabilities    $244,100
Net Worth    -$68,261

* Estimated value according to Zillow.com
** Estimated trade-in value according to Kelley Blue Book
Total Assets     $175,839
Total Liabilities     $244,100
Net Worth     -$68,261