For One Homeowner, it’s Time to Cash in on Florida Real Estate
As she watches the Florida real estate market soften around her, Susie Hurst is getting nervous. The 59-year-old former teacher thought that rental income from several properties she accumulated would fund her retirement.
But higher insurance costs (the result of hurricanes), taxes and upkeep expenses have turned her cash flow to negative of late.
She recently took out a home equity line of credit to cover the shortfall and is considering going back to work.
She also is thinking about selling off some of her $1.5 million real estate empire, which consists of a four-unit apartment building, a duplex and a small home adjacent to her own Orlando residence.
The higher costs have reached the point that her net proceeds from the properties this year is projected to amount to just $25,000, while her personal expenses are almost $54,000.
In addition to those factors, a couple of personal ones also are driving her to consider putting up the “for sale” sign.
She is in the process of moving to Tennessee to be close to her children, and is worried about how much longer she will be able to care for her Florida properties, both for geographic and health reasons.
“In the past, I’ve done much of the work myself, but am now seeing that I will no longer be able to handle this work by myself,” Hurst said.
Still, like a lot of people heavily invested in real estate in the current downturn, Hurst is concerned about selling now. She fears her profit won’t result in a portfolio large enough to sustain a lengthy retirement.
But a team of veteran financial planners crunched the numbers on Hurst’s current cash-flow problem and long-range retirement needs and crafted a plan to get her to Tennessee in style.
The plan involves liquidating the Florida real estate portfolio, investing in stocks and bonds and maximizing her future Social Security payments, said Michael Kitces of Pinnacle Advisory Group Inc. of Columbia, Md.
“Our objective was to find a way out of a situation that appeared to have no easy answers,” said John Hill, Pinnacle’s chief executive. “Once we dug in, we found that the news is actually very good for Susie.”
Hill figures that even if Hurst took a 10 percent price reduction off the value of her properties to account for the soft Central Florida housing market, closing costs and some other expenses, she could generate about $1 million in net proceeds by selling the properties.
She’d give up future income from the rental market, but Pinnacle calculated that Hurst’s current average return on her real estate assets is 2.4 percent, half of what she could earn in a money market account.
“To some extent, the return on your properties has decreased as appreciation on them has been so substantial,” Kitces said. “Although this has helped you build your net worth, it is no longer very effective in providing income to maintain your standard of living.”
And while she doesn’t have to race to sell all the units at once, waiting too long could work against her, Hill said.
“We may not be at the bottom of the real estate cycle,” he said. “There could be another decline. There’s no guarantee.”
The team gave Hurst guidance on using a popular tax treatment structure, known as a 1031 exchange, if she decides to reinvest in more real estate in Tennessee.
But Hurst, who has no Florida mortgage payments, thinks she instead will invest in a low-fee portfolio of broadly diversified stocks and fixed-income products to build her nest egg for the years ahead.
Implementing the planners’ recommendations for her real estate portfolio, Hurst should have enough cash flow to easily fund her retirement, even if Florida home loan rates stay low and spur the market back to health.
Running her assets through a Monte Carlo analysis - a computer simulation of thousands of market scenarios - shows Hurst has a 95 percent chance of making it to age 90 (her life expectancy) with at least $100,000 left in her estate, according to the planners.
When she divorced in the late 1980s in New York, the couple split their home equity, then worth $75,000 each. After spending time with family in Tennessee, she moved to Florida and caught the real estate bug.
“After teaching for a while, I knew I was never going to make enough to have things on my own, so I got this idea to take the equity I had earned in New York and buy an income-producing property,” she said.
Rather than buying the priciest home she could find, she took a portion of her settlement and bought a dilapidated apartment building.
After substantial renovation and huge price appreciation in Orlando since the ’80s, the market value on the building is about $700,000.
SOURCE: Orlando Sentinel
