As San Diego's real estate market has struggled the past couple of years, Antwane and Holly Rucker felt the financial implications in more ways than one.
EARNIE GRAFTON / Union-Tribune
In trying to weather the housing crisis, the Ruckers - Antwane, Holly, Jaden (left), 3, and Tyden, 6 - depleted their emergency fund. They took action and followed a monthly budget to the penny.
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The South County couple, both in their mid-30s, own three properties, including the house where they live with their sons, Tyden, 6, and Jaden, 3, and two rental homes. Just like so many other homeowners in the county, the Ruckers' property values have depreciated considerably. Most notable is their residence, which they purchased at $700,000 a few years ago and is now worth around $550,000.
The market drop has also negatively affected their livelihood.
Antwane, 33, who was accustomed to making a six-figure salary as a mortgage broker, saw business slow to a near halt. After trying to stick with it over several months – while admittedly spending more on business expenses than the income he was bringing in – he decided it was time for a career change.
In trying to weather the storm, the Ruckers depleted their emergency fund to cover their living expenses and three mortgage payments. They also used a majority of their $43,000 home equity line of credit to keep Antwane's business afloat and accumulated about $24,000 in credit card debt.
But the couple haven't been without a plan of action. They've done as much as they can, even the little things, to save money and soften the financial blow. The Ruckers reduced their electricity and water consumption to receive rebates, for example, and followed a monthly budget to the penny. Most recently, the couple applied for a property tax reduction based on their property's depreciated value.
Once Antwane got a new job as a salesman in June 2007 and Holly took on more work as an online professor in September, the couple realized they could relax a bit and began to see a positive cash flow.
Now somewhat back on track, it's the aftermath of those difficult and expensive months that has the couple concerned and in need of some advice.
“What it comes down to for us is that we overleveraged our resources and had one too many properties to worry about,” Antwane said. “We learned a valuable lesson that cost us big time. Fortunately, we have the means and the resources to tackle this now and get out of it. We just need someone to help us prioritize on what to take care of first.”
Although the rental income they receive on a monthly basis has maintained an even cash flow for the most part, the couple wondered whether it would be a good idea to sell one of their rental properties.
They also wanted to know if they should be putting their discretionary cash toward re-establishing an emergency fund or toward paying off their credit card debt.
Looking to the future, the couple wondered how and when they should begin setting money aside for their sons' college educations and wanted a reality check on their retirement savings.
To get some direction for handling their debt and their mortgages, the Ruckers volunteered for a San Diego Union-Tribune Money Makeover, sponsored by the newspaper and the San Diego chapter of the Financial Planning Association. The association chose Christopher Rand, a certified financial planner with MetLife, to work with the couple and make recommendations. In exchange for sharing their story in the newspaper, the Ruckers received a comprehensive plan at no charge.
After an initial assessment, Rand was impressed by the steps the couple have taken over the past year to keep themselves afloat. Considering their financial circumstances, he told them he wouldn't have advised them differently.
“They've done a very good job at managing their debt,” Rand said. “They used their emergency reserves first and did balance transfers on their credit cards to keep interest rates low. What they didn't have was enough assets to ride themselves through the real estate correction. Now that things are looking up, and provided their financial situation doesn't worsen, I think they're going to be OK.”
As long as the Ruckers' credit card interest rates remain below 10 percent, Rand told them that their first priority should be to rebuild their emergency fund to at least $35,000 to cover three to four months of living expenses. That way, should something as simple as a tenant moving out or the loss of a job or some other life-changing event affect their financial situation, they'll have a substantial amount to prevent them from relying on credit.
“I was very focused on paying off our credit cards first because it just went against my usual thinking to leave them to accrue interest,” said Holly, 36. “I needed a second opinion to understand how important an emergency reserve really is. We don't want to see ourselves in the same place we were a year ago.”
Antwane received a commission check recently and put $7,000 of it in the bank toward their $35,000 goal. With the positive changes that have begun to happen in their lives, the couple anticipate it won't take long before they've saved the total amount.
Next, Rand addressed the couple's property and mortgage concerns. He agreed with the couple's assessment that they had overleveraged themselves when they moved out of one of their rental properties a few years ago and decided to buy their house in South County.
“When the Ruckers chose to move up and buy a larger house for their family, they did all the right things to make it happen,” Rand said. “They refinanced both of the existing rental properties and pulled out cash for a 20 percent down payment. They also left plenty of equity in their properties by not taking it all out at the time. Unfortunately, what they didn't foresee was the major change in the real estate market, which caused them to go from a lot of equity to no equity overnight.”
Rand provided the following financial assessment of the Ruckers' properties, which reflects their refinance and recent property value adjustments, as they stand today: The couple bought their first rental property for $219,000, which is now valued at $328,000 and has a remaining $321,000 mortgage; the second rental property was purchased at $147,000, now valued at $378,000 with a $364,000 mortgage; and their primary home has depreciated from the $700,000 purchase price to $550,000. They have a remaining mortgage of $560,000.
Even though their annual $36,000 rental income provides them with a generally even cash flow, the Ruckers have considered selling one of the properties to reduce their overhead and gain a positive cash flow to help pay down their debt.
Rand advised them to hold on to their properties at least until they've been able to re-establish some equity. They should also be looking for the right opportunity to refinance to fixed interest rates for each of their properties as soon as they see some appreciation.
The Ruckers have adjustable-rate mortgages on all three of their properties that will change in another five years. They are currently paying 7 percent interest on their primary residence and 7.5 percent on their two rental properties.
“Although their mortgages are very manageable today, they may become very unmanageable when their interest rates are set to adjust,” Rand said. “We have no idea what rates will look like several years from now, so this type of adjustment could potentially have a major cash-flow effect. They need to wait until their properties have some equity, then they need to refinance before their ARMs adjust.”
To give the couple some time to pay off their debt and recoup their losses, Rand advised the Ruckers to hold off until 2010 to start saving for their sons' college educations. At that time, they should set up a 529 plan for each child and contribute $200 for Tyden and $175 for Jaden each month.
Although they made it habit to make the maximum annual contributions to their Roth IRAs in the past, their financial circumstances last year prompted the couple to hold on to their cash for more immediate needs.
“Saving for retirement has always been a priority,” Antwane said. “We stopped contributing for one year thinking we have time on our side to make it up. Getting to that decision was difficult, though. We had to decide: Should we rebuild our emergency fund with the money or allocate it to our Roth IRAs? Having cash put away was our main priority.”
Currently, the couple have about $152,000 saved for retirement. Rucker advised Antwane to set up his employer-sponsored 401(k) now and begin contributing at least 6 percent so he can get the maximum from his company match.
He also advised them to decrease the exposure of their investment portfolio, which holds 98 percent in equities, and reallocate to 60 percent equities and 40 percent fixed income. Feeling that was a bit too conservative for them, the Ruckers agreed to a 70-30 allocation.
Finally, Rand advised the Ruckers to establish their estate planning documents, including wills and durable powers of attorney. They will also need to address guardianship of their two sons with the estate planning attorney.
