Cursed and Last : Close the Door on Losing Apartment Building, Expert Says

Just a hair over 59 1/2, downsized out of his last three copy-writing jobs, with no family and no pets, unemployed advertising professional Steve Hanna is struggling to decide what to do with the last third of his life--and his investments.

He wouldn’t mind retiring now and just giving up the battle to find work, but he’s got one problem: He’s in love with his biggest investment--a troublesome, if handsome, apartment house--and it is a loser that’s draining his savings.

Hanna is certainly in far better shape than many graying white-collar workers throughout the nation who face a similar dilemma, however. He has saved prodigiously while working, purchased property and lucked into a couple of inheritances.

But fortune is intensely personal, and nice comparisons don’t count.

As he makes repairs around the building he owns near Griffith Park, walks to nearby restaurants and takes in a weekly movie, he also wonders whether the hodgepodge of annuities, bond mutual funds and growth stocks that he’s assembled over the years from bits and scraps of professional and secondhand advice is really working for him as it should.

The answer is that it is not, according to an expert asked to sort out his situation.

Violet Woodhouse, a lawyer and certified financial planner in Orange County, says Hanna’s main failing is common: His principal investment is not paying off.

Her advice could be taken by anyone in a similar position: He should sell the building and convert the proceeds to income-producing securities and move on, she said.

To edge gracefully into retirement, Hanna should also revamp his slow-growth portfolio of annuities with a higher-octane mix of growth-oriented mutual funds and preferred stocks, she said.

And if he plays his cards right, he’ll need to earn only $500 a month in freelance income for the next three years until he can start drawing additional funds from Social Security and an individual retirement account.

“The apartment building is nothing but a negative cash flow. He just keeps throwing money down it,” Woodhouse said, after a review of Hanna’s finances.

“He’s one of those really good landlords who has kept his rents low. But if you look at his expenses, they’re horrific. He’s making, at most, a couple hundred dollars a year on the whole deal. He has to get out of it.”

Hanna said Woodhouse’s advice rings harshly in his ears even though he knows she’s right. He keeps digging into his diminishing bank account to fix the roof or renovate a few rooms, and he’s not able to raise prices as compensation because of rent-control laws. But until now he’s ignored the risks because he adores the place, a 1920s-era Spanish Colonial purchased in 1978 in a neighborhood that he has admired since he was a child.

“It gives me a stake in the community, but maybe I can’t afford it anymore now that I’m not working,” he said, wistfully.

Woodhouse said Hanna should look at the change as an opportunity rather than as a defeat. He should be able to assemble a nest egg of $275,800, which will set him up for the next 30 years of retirement so long as inflation stays on track at less than 5% a year.

He should raise cash first, then begin fresh with the new portfolio, she says.

Start with the apartment. Hanna thinks he could get $400,000 for it. Woodhouse takes away potential selling costs of $28,000, and debt of $90,678, to end up with a pretax net of $281,322. Because Hanna’s unit takes up a third of the square footage, he can use his one-time tax exclusion for the gain from a primary residence for that third of the sale.

After a variety of additional tax-related calculations, Woodhouse figures that Hanna will have $84,397 to invest in a new condominium or home somewhere, and have $155,250 left to invest.

Next, Woodhouse recommends that Hanna sell his 320 shares of Coca-Cola because she believes that the firm’s earnings growth has crested. That delivers $13,640.

He can keep his 391 shares in Chevron, some of which were inherited, because the stock is still growing nicely and pays a good 3.3% dividend.

And he can also hold on to his 300 shares of Swedish telecommunications giant Ericsson, but he should watch them carefully, because the firm faces growing competition from Motorola and others.

Third, Woodhouse recommends that he sell three annuities over the next two years to generate $79,748 net of taxes.

Fourth, Woodhouse suggests that in 1999, after the sale of the annuities and home, Hanna sell two Nuveen closed-end municipal bond funds--one earning 6.24% and the other 6.73%--over the next two years to net an additional $27,175.

One part of his financial empire that Hanna can leave alone for now, Woodhouse says, is his individual retirement account, in which he holds more annuities: a Western National Life policy of $73,620 earning 5.2% annually; an IDS Flexible Annuity worth $23,600 earning 6.15% and a $6,000 Smith Barney zero-coupon certificate of deposit earning 7.3%.

Adding it all up, Woodhouse estimated that Hanna will wind up with the $275,800 to invest by January 1999.

Now it’s time to rebuild. The financial planner recommended that Hanna put 70% of his assets in income-producing instruments and the other 30% in equities for growth. When he’s all done, she said, he’ll still need to generate $500 a month in freelance copy-writing income to maintain his current lifestyle, unless he wants to start drawing additional income from his IRA.

That’s OK with him--and, in fact, he wouldn’t even mind finding a steady job since he prefers the camaraderie of office life to the isolation of the lone freelancer.

The 70/30 asset allocation will give him about $193,000 to invest in income; with an average return of 8%, she figures he will receive $15,440 annually, or $1,286 a month before taxes. Of course, his stock portfolio ought to appreciate as well, giving him a cushion.

That may not seem like a lot, but he can live on that much because he’s a single guy with simple tastes, Woodhouse said. He’ll be particularly comfortable if he moves to a part of the state, or country, with a lower cost of living.

Specifically, Woodhouse recommended that he divide his income assets like this: 40% in Vanguard High-Yield Corporate fund; 30% in the preferred stock of money-center banks such as BankAmerica, Chase Manhattan or NationsBank; 20% in Vanguard GNMA fund and 10% in Putnam Master Income Trust, a closed-end fund that invests in high-yield government bonds that is now trading at a 12% discount.

On the growth side of his portfolio, Woodhouse recommended that he divide his $82,800 with equal investments in three mutual funds: Brandywine Fund, T. Rowe Price Equity Income and Vanguard’s Windsor II. Of course, he’ll also still have his Chevron and Ericsson stock for growth as well.

Will this financial make-over change his life?

Hanna is reluctant to move out of the neighborhood he adores, especially since a Metro Rail Red Line station scheduled to open next year a half-mile from his home would offer a quick subway ride to downtown. He enjoys teaching aerobics at the local YMCA and can’t imagine moving to the suburbs or to a rural town.

“I’m not a country person. . . . I like sidewalks around me and movies and restaurants. I like big cities, with all their problems,” he says.

But the former Navy officer and UC Berkeley graduate said he might consider following a friend to Portland, Ore., where the housing prices are much lower and he could take its excellent public transportation system to the symphony and theater and parks.

As his portfolio grows, he said, he can imagine indulging his passion for travel by getting out of town during the winter to warmer climes such as Australia.

“I’m still growing up, I guess,” he said. “Now’s a good time to decide what I want to do with the rest of my life.”