Real Estate Overload?

90% of his entire assets, she explains. "Diversification is needed in different asset classes to reduce risk."

Williams is also concerned about Springs’ cash flow. "He is forced to use money from small cash reserves in his checking account when rent payments don’t come in a timely fashion," she says. According to Williams, Springs moved a little too fast without the proper amount of liquid assets and used credit cards too much along the way. He will need to meet with a certified public accountant to determine which of his properties would be the best to sell over the next five to 10 years.

Williams suggests that Springs follow these recommendations:
Take action. Springs either has to raise rents or decrease operating expenses. His management fees are costly. He should consider working with management companies that offer the lowest rates. Raising rents 2% to 2.5% per year would help increase net operating income and cash flow over time. Furthermore, Springs could sell his Philadelphia properties, invest some of the equity, and pay off debts, says Williams.

Explore interest-only mortgages. Springs should consider changing to interest-only mortgages, allowing him to pay only the interest on a mortgage for a fixed period of time, usually five to seven years. At that point, he could sell his properties. Williams says interest-only loans work for people in a cash flow crunch whose income is likely to increase in the near future. Should he decide to refinance his mortgages to go after lower rates, Springs should look to pull out equity to eliminate his high-interest credit card debt, thereby increasing cash flow and net worth.

Hold off on buying more property. Before he buys another piece of property, Springs needs to save four to six months of mortgage payments ($14,000 to $16,000) as an emergency cushion. That money should be put in a high-interest money market fund.

Adopt new strategies. Since cash flow is an issue, Springs should purchase $500,000 of term life insurance to replace his current $150,000 fixed universal life policy, which he can get for about half the cost. At his age, he can afford to temporarily cut back on contributing to his 401(k). He could go as low as 3% until his debt is reduced and emergency funds are established. After those goals are reached, he should begin contributing at least 10% to his 401(k).

Start paying off debt. Springs has a $3,480 loan against a 401(k) he established with a previous employer. He needs to pay it off before attempting to roll it over. To help battle his debts, Springs should take the $2,000 contest winnings and use it to nearly halve the $4,800 balance he has on a credit card with 22.5% interest rate. It will be a good first step.

Financial Snapshot: Tyrone Springs