Property Pitfalls

Veronica Stewart isn’t dreaming of becoming a real estate mogul like Donald Trump. But she does envision owning several income-producing properties as part of an overall investment portfolio. “I want to become financially self-sufficient through real estate,” she says. To achieve that goal, Stewart intends to pursue an M.B.A. to help acquire expertise in business management.

Two years ago, Stewart, who lives just outside of Chicago in Calumet City, got off to an excellent start when she purchased a four-unit residential building. She landed a sweet deal — she paid $232,000 for a property worth $289,000. Because the building had equity, Stewart didn’t have to come out of pocket with the usual 10% down payment. In fact, she was able to take cash out at closing, about $11,000, to put toward cosmetic repairs. She has a $228,000 balance on her 30-year-fixed mortgage at a rate of 5.625%. The estimated current market value is $320,000.

Stewart’s cash flow, however, is not what it should be due to unforeseen circumstances, mostly an increase in property taxes (averaging $4,000 annually) and a shortfall in escrow as a result. Originally, her monthly mortgage payment was $2,000. Now it’s $2,396. “The money that I thought was going to be a financial cushion for me is being eaten up in taxes,” she says.

On paper, her situation actually looks rosy. Her monthly take-home pay after taxes is $2,600, in addition to another $2,400 in income from the three apartment units she rents out. Even with her monthly expenses totaling $4,500, she should have at least $500 in disposable income to contribute toward her savings and investments. Yet, she exclaims, “It never feels like I have money left over.”

Poor cash flow management has made it difficult for Stewart to save the money she needs. “Unexpected expenses are a challenge,” says the 31-year-old professional who has spent the past five years as a customer account specialist with telephone carrier SBC Communications Inc. “I’m planning on getting into more real estate opportunities, but I have to financially grasp my current project [first].”

Another hurdle for Stewart is paying down existing revolving debt. She currently has $32,000 in student loans that she recently consolidated, getting the interest rate down to 4.25%. And while she has just under $8,000 in a company 401(k), she is ineligible to make her normal $200 monthly contributions for six months because she borrowed $3,000 from the account to make home repairs. She has $88 deducted from her salary every pay period to pay back the loan.

Stewart’s greatest asset is her residential building. She has less than $1,000 in her savings and checking accounts, $700 in U.S. Savings Bonds, and $250 worth of company stock. Her plan is to build up cash reserves for personal expenses in case of an emergency. And she’ll need extra funds on hand for additional building repairs. She admits to requiring greater financial discipline, adding, “I need to develop and stick to a budget.”

The Advice
Stewart is no different than other proactive investors who experience monetary