A lot of this real estate speculation nonsense seems to be foreigners getting caught up in the "American dream"?
Money makeover
Rentals with negative cash flow make pair feel they're drowning
By Ann Perry
PERSONAL FINANCE COLUMNIST
October 5, 2003
Just three years ago, Jill Ghianni, Tony Malekadeli and their young daughter Jillianna were struggling to make ends meet.
With an annual income of $41,000 at the time, the married couple – he worked as a mechanical technician, she as a part-time letter carrier – qualified for a mortgage program designed to help families with modest incomes purchase a home.
They were delighted when they could buy a two-bedroom condominium in Rancho Peñasquitos for $126,000.
A few months later, when Ghianni was considering having new windows installed in the condo, the couple were surprised to learn that the value of their home had increased enough to allow them to draw money out.
Rather than spruce up their condominium, they used $16,000 of the equity for a down payment to purchase a larger, three-bedroom condo down the street for $160,000 and rented it out.
But they weren't done.
In June 2002 they purchased a five-bedroom home in Murrieta for $267,000 and, months later, a three-story, eight-bedroom, five-bath home near the first Murrieta home for $425,000.
Thanks to easy mortgage credit and the rapidly appreciating Southern California real estate market, Ghianni and Malekadeli now own $1.4 million worth of real estate. In just three years, they have amassed equity of $400,000.
For Ghianni, the daughter of a Buffalo, N.Y., letter carrier, and Malekadeli, who immigrated here from Iran in 1977, their venture into real estate investing has seemed like an American dream come true.
They volunteered for a San Diego Union-Tribune Money Makeover to help them get a better handle on their rapidly changing finances. "We knew we were getting prosperous," says Ghianni, "but we knew we needed help."
The Money Makeovers are sponsored by the Union-Tribune and the San Diego chapter of the Financial Planning Association. The association chose certified financial planner David R. Bretz, with Financial Network Investment Corp. in Mission Valley, to review their finances and make recommendations.
When Bretz first met with Ghianni and Malekadeli several months ago, they were both working full time as letter carriers at the Rancho Bernardo post office and commuting 78 miles round trip from one of their homes in Murrieta, north of the San Diego County line, managing their rental properties and struggling to find time to care for their daughter.
"They were really stressed," recalls Bretz. "They needed some direction." The couple told him they were tired of not having any money and any savings.
When Bretz looked more closely at their finances, he found out why.
Even when tax write-offs were taken into consideration, he discovered, the cash flow on the rental properties was negative by about $500 per month.
Even more troublesome, Ghianni and Malekadeli had recently refinanced the properties to take advantage of falling interest rates, but they were unaware that the new loans did not include property taxes and insurance in the monthly mortgage payments as the old loans had.
That meant the couple were facing property tax bills of $10,000 this December – with no way to pay them.
In addition, Bretz pointed out, if one of their rentals should go vacant for a few months, they probably would be unable to make the mortgage payments.
In such a case, he advised them, they could lose the property and harm their credit. He warned of "an impending financial train wreck."
To avoid this, Bretz suggested they sell the Rancho Peñasquitos condo they lived in for two years to create some cash reserves. By selling their former primary residence (it qualified for this favored treatment under the IRS code because they had lived there for two of the past five years), there would be no taxes on the expected $100,000 gain.
Ghianni and Malekadeli agreed and now have the condo on the market.
Bretz recommended that the proceeds go toward the couple's following goals: $10,000 for real estate taxes, $25,000 for cash reserves, $2,000 for estate planning/revocable trust, $20,000 for Jillianna's college funding, $12,000 for Jillianna's wedding fund, and $31,000 for dental work, cars and miscellaneous.
After this one-time $10,000 cash infusion for taxes, however, Ghianni and Malekadeli will need to set aside $1,500 a month to cover insurance and property taxes in the future, a tall order on their $80,000 annual income.
In the midst of their consultations with Bretz, the couple decided they could no longer tolerate commuting from Murrieta.
They had bought their first home there with the intention of creating a nicer life for themselves, with a bigger home and nice neighborhood, but felt that the nicer home di't matter if they didn't have the time to spend with their 7-year-old daughter.
Although Bretz has recommended they move back into one of their existing properties, such as the other Rancho Peñasquitos condo, Ghianni and Malekadeli are currently renting an apartment in Rancho Bernardo.
And they are in escrow to buy a $447,000 Rancho Bernardo home with no money down and a monthly mortgage payment of $3,200.
Bretz is strongly urging them not to buy the property unless they have a significant down payment, to lower the monthly mortgage.
He recommends they sell the large house in Murrieta and use the proceeds as a down payment.
He chose the large property because it has the largest negative cash flow, a high rent of $2,500 that would make it difficult to cover if there were no renters, a variable-rate loan that could go up dramatically, and the potential to be the most difficult of their properties to sell in a weak real estate market.
But Ghianni is fond of the Murrieta house. "She just doesn't want to let that one go," says Malekadeli, "and I have to respect her."
Bretz is worried: "They're going to end up in a hugely negative cash flow situation. There's no way they're going to make ends meet. They've created a lot of stress."
Ghianni and Malekadeli are moving forward on the Rancho Bernardo purchase. Ghianni says she doesn't want to part with the Murrieta house despite Bretz's vivid warning about an impending train wreck. "The train would have to get closer," she says.
When considering how they would finance their retirement, Bretz recommended that Ghianni and Malekadeli utilize both stock mutual funds and their real estate investments.
He encouraged them to begin contributing to their employer's retirement plan, which matches contributions up to 5 percent of wages.
He recommended that they begin setting aside at least 5 percent of wages and allocating their contributions in this way: 60 percent to a common stock index fund, 20 percent to a small capitalization stock index fund and 20 percent to an international stock index fund.
They have both started contributing 5 percent and plan to increase that to 10 percent, says Malekadeli.
In his forecasts for their retirement, Bretz assumed that they would keep at least two of their current properties, their second condo in Rancho Penasquitos and their smaller home in Murrieta, then sell them upon retirement.
He estimated that by their mid-60s the properties would give them $1.4 million and be a key part of their retirement income.
Bretz says he is not opposed to the real estate investments the couple made per se. "They turned out to be excellent investments," he says. "Now they need to unravel a couple of those. It really works out perfectly. They only need to keep two."
Although they might not take all his advice, Ghianni and Malekadeli say they are grateful for how much time and patience Bretz has shown them.
Malekadeli says he learned a lot about college and retirement planning. "I would recommend it in a second. He helps you with your whole life, which way to go."
But nothing has yet shaken the couple's faith in the real estate. Malekadeli says that in his years in San Diego he has learned this: "One thing about property, if you can hold on through the rough times, it always goes up." He describes their investments of the last three yeas as "like catching the right wave."
Ghianni admits that she knows little about Wall Street. "All we know about stocks is we should be in them." But real estate is something she understands. "It is all we know. If it works, do it again." |
