Property pitfalls: Veronica Stewart is managing her debt better to safeguard her real estate investment.

VERONICA STEWART ISN'T DREAMING of becoming a real estate mogul like Donald Trump. But she does envision owning several income-producing properties as part of an overall investment portfolio. "I want to become financially self-sufficient through real estate," she says. To achieve that goal, Stewart intends to pursue an M.B.A. to help acquire expertise in business management.

Two years ago, Stewart, who lives just outside of Chicago in Calumet City, got off to an excellent start when she purchased a four-unit residential building. She landed a sweet deal--she paid $232,000 for a property worth $289,000. Because the building had equity, Stewart didn't have to come out of pocket with the usual 10% down payment. In fact, she was able to take cash out at closing, about $11,000, to put toward cosmetic repairs. She has a $228,000 balance on her 30-year-fixed mortgage at a rate of 5.625%. The estimated current market value is $320,000.

Stewart's cash flow, however, is not what it should be due to unforeseen circumstances, mostly an increase in property taxes (averaging $4,000 annually) and a shortfall in escrow as a result. Originally, her monthly mortgage payment was $2,000. Now it's $2,396. "The money that I thought was going to be a financial cushion for me is being eaten up in taxes," she says.

On paper, her situation actually looks rosy. Her monthly take-home pay after taxes is $2,600, in addition to another $2,400 in income from the three apartment units she rents out. Even with her monthly expenses totaling $4,500, she should have at least $500 in disposable income to contribute toward her savings and investments. Yet, she exclaims, "It never feels like I have money left over."

Poor cash flow management has made it difficult for Stewart to save the money she needs. "Unexpected expenses are a challenge," says the 31-year-old professional who has spent the past five years as a customer account specialist with telephone carrier SBC Communications Inc. "I'm planning on getting into more real estate opportunities, but I have to financially grasp my current project [first]."

Another hurdle for Stewart is paying down existing revolving debt. She currently has $32,000 in student loans that she recently consolidated, getting the interest rate down to 4.25%. And while she has just under $8,000 in a company 401(k), she is ineligible to make her normal $200 monthly contributions for six months because she borrowed $3,000 from the account to make home repairs. She has $88 deducted from her salary every pay period to pay back the loan.

Stewart's greatest asset is her residential building. She has less than $1,000 in her savings and checking accounts, $700 in U.S. Savings Bonds, and $250 worth of company stock. Her plan is to build up cash reserves for personal expenses in case of an emergency. And she'll need extra funds on hand for additional building repairs. She admits to requiring greater financial discipline, adding, "I need to develop and stick to a budget."

THE ADVICE

Stewart is no different than other proactive investors who experience monetary pitfalls. The resolution is learning how to turn a financial setback into a comeback. To assist with this undertaking, BLACK ENTERPRISE matched Stewart with Gwendolyn Kirkland CFP, managing principal of Kirkland, Turnbo & Associates in Matteson, Illinois.

Here, Kirkland outlines her recommendations:

* Track monthly expenses. Because she isn't recording transactions and tracking her spending, Stewart thought she was in a perpetual cash crunch. But writing out a budget revealed she has a $500 monthly surplus. Stewart should jot down all her expenditures in a journal for three months in order to get an accurate picture of her financial situation. "When you have real numbers, you can evaluate your expenses and determine whether you will keep spending in those areas and reduce or eliminate that spending totally," Kirkland explains. Once Stewart has an assessment of her cash flow, she should save one half of the surplus, currently an estimated $250, and apply the other half--the remaining $250--toward the reduction of her outstanding credit card debt.

* Use a structured approach to reduce debts. Write down all balances starting with the smallest and progressing to the largest. Stewart has seven credit and store charge cards, plus two other school-related debts that total $2,000 in addition to the $32,000 in student loans. The smallest outstanding balance currently is Dell at $250. Stewart should make her normal $50 monthly payment and add the cash surplus to pay off that debt immediately. By continuing this practice of applying the current payment and adding the $250 surplus, she can eliminate the next smallest balance--a $600 Governors State University bill quickly. By using this approach of systematically paying off each balance and wisely using credit cards, Stewart can pay off her debts in three years.

* Apply for a lower interest rate. Stewart's cards have annual fees and double-digit interest rates averaging 21%. She should apply for a lower, single digit interest rate credit card and transfer the balances if possible. She needs to be diligent about making payments on time over the next six months so she is able to get a better rate. Kirkland says a good consideration for credit card purchases is to remember the three-month strategy. "If you can't pay off the bill in three months, re-evaluate the purchase, and perhaps delay or dismiss it as not being appropriate for you at this time."

* Exercise discipline. Stewart should continue tithing 10% of the $2,000 winnings, or $200, and then open an ING Direct money market saving account, which has a 3% annual rate of return with the $1,800 balance. This fund will serve as the basis of building her reserve fund and she can add half of her surplus to it on a monthly basis.

* Obtain a personal liability umbrella insurance policy. Because of her exposure as a landlord, Stewart needs to cover this area of risk. Kirkland says this type of policy is crucial for property owners. For about $400 a year, Stewart can get a $2 million policy that provides excess liability coverage should anyone become injured on, or in relationship to, her property.

* Enroll in her company's short-term and long-term disability program. At her age, the statistical probability is disability, not death, so Stewart should have a plan in place to provide her with income. If she does not currently qualify for the plan, then she should make the necessary adjustments to qualify within six months.

* Draft and execute a will, revocable living trust, and durable power of attorney for health care. Stewart needs to create a revocable living trust and have the building owned or re-titled in the name of the trust. By doing so, she will create an uninterrupted succession in the event of illness or death. A named trustee would then carry on the duties of the building. She also needs to make sure her company's life insurance, supplemental life, and 401(k) plans have beneficiary designations. Kirkland suggests that Stewart review all bank accounts and add a "pay on death" name onto the accounts; this way a parent or other named beneficiary would simply need to present a death certificate to lay claim to Stewards money. Otherwise, since she is single, her assets would automatically go into probate.

* Make adjustments to tax withholdings. Stewart needs to have her withholding elections reviewed by a tax professional. If she is receiving a large tax refund, that refund is money that could be rerouted to increase her cash flow. Kirkland says Stewart may be missing some deductions she is entitled to by trying to economize on her tax preparation; she needs to hire a certified public accountant.

* Postpone investing in any new areas. Don't undertake any other new expenditures, education costs, or real estate purchases until debt has been substantially reduced and cash management improved. This means postponing plans to pursue an M.B.A. in business management. She should also continue contributing and increasing her contributions to the 401(k) as cash flow improves.

* Increase rental payments. When the current tenant leases are up, Stewart should increase the rent. Kirkland suggests Stewart get figures of what the market rents are in her area and make sure that hers are comparable. Kirkland also suggests that Stewart verify that she has the Homesteader's Exemption on her property.

* Find part-time work in real estate. Another idea that Stewart should look into is investigating a part time position with a real estate office. It would be good exposure since she has an interest in this area. And as she generates income to pay down her debt, she can work among professionals who can provide her with insight regarding the purchase and maintenance of property. She'll be in an environment that will give her the knowledge and experience that will benefit her in the future.

Financial Snapshot:
Veronica Stewart

HOUSEHOLD INCOME

Gross Income       $80,700

ASSETS

Checking              $397
Savings                200
401(K)               7,674
I BONDS                700
SBC STOCK              250
IRA                     51
Value of Home      320,000
Value of Car *       6,000
Total             $335,272

LIABILITIES

Mortgage          $228,000
Student Loans       32,116
Revolving Debts      2,000
Total             $262,116

NET WORTH          $73,156

* ACCORDING TO KELLEY BLUE BOOK