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Money Makeover

Home's not always where the growth is

A Westsider with health risks is advised to sell some property to make her assets last decades.

August 12, 2007|Ann Marsh | Special to The Times

Debra Loss is many things: a former AT&T Inc. sales executive who oversaw multimillion-dollar accounts, a young retiree who built her assets up to $2.75 million, a breast cancer survivor and a volunteer at her local animal shelter.

But she's learned that there is one thing she is not cut out to be: a landlord.

"The bottom line, really, is . . . it's not a good match for me," says Loss, 52, of Mar Vista.

Loss rents out a three-bedroom home she owns in Encino and says she is owed months of missed payments that accrued over several years.

Loss had thought the Encino home would be a good way to provide steady income, but the erratic payments she gets has only contributed to a cash-flow problem, said Eric Bruck, a fee-only financial planner in Beverly Hills.

Without a full-time work income and with her rental income unreliable, she is putting her retirement in jeopardy, Bruck said.

"She's really living on the edge."

It may seem that her future is secure given her substantial asset base. But Loss could face high out-of-pocket costs associated with her health down the line. If she lives to be 90, as she and Bruck project for planning purposes, those assets will need to last.

On top of that, most of what she owns is tied up in real estate -- an asset that can't be converted to cash quickly. Her primary residence in Mar Vista is valued at about $1 million, less its $219,000 mortgage. She owns the Encino rental outright. With no mortgage, that property is worth about $850,000.

She also has $760,000 in retirement accounts and $322,000 in nonretirement savings. A piece of raw land in Florida she inherited from her grandmother is worth about $25,000.

Those are healthy assets, but Loss no longer works full time. She took early retirement from AT&T at 43 when the company was downsizing and offering employees the chance to cash out their pensions. She left in 1998 with $390,000.

Since then, she has downshifted and started working about 20 hours a week at $20 an hour, providing office support for lawyers.

Although Loss likes to work, after 21 years in a career with 60-to-80-hour workweeks, she is equally fond of her flexible schedule and substantial free time.

"I feel like I shouldn't have to work at this point," she says.

Her part-time job brings in about $20,000 a year. Her "virtual spouse" -- Roger Lewis, the man she has lived with for 22 years -- contributes about $11,000 a year toward the mortgage. (The two keep their finances separate.)

On paper, Loss should be able to claim an income of about $60,000 a year, counting the $27,000 in rent she should be getting from the Encino home. Trouble is, she says, she hasn't been able to count on that money.

To make up the shortfall, Loss has pulled money out of her nonretirement accounts. In the last two years, she has withdrawn about 10% annually, roughly equal to their overall returns. She knows this is a strategy that can't last if her cash flow needs increase.

She's also incurred significant medical and home improvement expenses over the last two years. With a $6,000 annual deductible on her health insurance plan, Loss spent about $12,000 in 2005 and 2006 for treatment including two breast lumpectomies, radiation, chemotherapy and follow-on care.

While recovering, she paid $28,000 for long-deferred maintenance on the house in Mar Vista, where she has lived with her partner since 1985.

"The house was really neglected, horrible," Loss says of the small, cluttered three-bedroom home, which sits on a gentle rise and catches cool ocean breezes. "The walls were a typical Swiss coffee white. The carpets were 30 years old. It was just awful and filthy."

After the improvements, her spirits were lifted by the new "beach sky" blue walls in the living room and the lime green ones in the kitchen, not to mention the new carpets. In addition to the couple's three cats, last month they harbored a foster cat and two foster parakeets that had been abandoned on a movie set.

Now that she is feeling better, Loss wants to get back on track financially.

As a first step, the planner recommended that Loss evict her tenant and sell the rental home.

"Real estate is too big of a percentage of your overall net worth," Bruck said. "Because of the concentration of your assets, an earthquake or another natural disaster could wipe you out. You are taking a risk, Deb."

Loss said she hoped one day to move into the Encino house. However, that plan is drawing static from Lewis, who prefers the weather by the beach.

After capital gains taxes and transaction costs, Bruck estimated, she would realize $624,000 on the sale of the Encino home. He advised her to invest that money in a diversified portfolio.

With her health history, Loss could need access to the equity in the Encino property, Bruck said. Her income is so low that she could have trouble getting a mortgage or a home equity line of credit.

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