Carmela Marzano bought her first investment property in 1974, using money from her mother's estate to purchase a two-family house in the Forest Park section of Springfield. Since then, she has added five more properties to her portfolio, collecting the rents, arranging for repairs, and managing tenants by herself.
"My mother loved real estate," Marzano said, explaining that she viewed her first purchase as a kind of tribute to her mother.
Marzano had hoped to pass those assets on to her children. "I told my daughters that, if they take care of these properties and nurture them, these properties would take care of them, just as they have taken care of me," she said.
But no one in her family turned out to share her passion. Marzano, now 72 and widowed, decided to think about tapping those real estate assets -- which had grown to nearly $1.5 million, not including her home. With the real estate market unsteady right now, Marzano, a long-term investor, said she has no need to act precipitously. Still, she wanted a plan in place so that when buyers do come along, she'll be able to free some cash and have some fun. On her list: More travel, a nicer car, and a break from the rigors of property management.
The Globe paired Marzano with fee-only financial adviser Mark Briggs of Briggs Wealth Management in Glastonbury, Conn. Her big question: How to invest money from any property sales to replace the income she now earns in rent.
Based on Briggs's analysis, that wouldn't be a big challenge. The reason: Her rents were so low that she was only getting a 2 percent annual return on her real estate. Briggs told her she could probably triple the return on those funds by simply investing the same money in a conservative portfolio.
Marzano, who prided herself on her "great" tenants and well-maintained properties, was surprised by the analysis. "I'm a marshmallow," she said, noting that she was going to have to consider raising the rents at any properties she ends up keeping.
With $42,000 in the bank, Briggs said Marzano needs more liquidity. After reviewing her real estate holdings, Briggs recommended that Marzano sell as many as three of her properties, including a vacation property in Ogunquit, Maine. "That will create instant liquidity," he said, explaining that he felt the need for liquidity was more important than waiting for the best price.
He suggested that she use the proceeds of any property sales to establish a reserve account of $75,000, providing ample money for managing any remaining properties and covering her daily living expenses.
Any remaining proceeds should be invested, Briggs said. The portfolio he recommended was conservative -- just 45 percent in equities and 55 percent in fixed income. He said Marzano didn't need to take a lot of risk, particularly since she is new to this type of investing. Recognizing that market volatility like that experienced in recent weeks can be scary, he said he wanted to give Marzano time "to get used to it."
To create a diversified portfolio, Briggs recommended nine mutual funds. The suggested portfolio includes four equity index funds, three bond funds, and two funds -- the Merger Fund and the Gateway Fund -- that behave differently from the broad markets. The portfolio also includes a healthy dose of overseas exposure, with 15 percent of equities and 10 percent of fixed income allocated to international investments.
Although Marzano is interested in helping her daughters financially, Briggs said she's too cash-poor to start making gifts until she converts some of her real estate holdings to cash. Since one of her daughters, also a tenant, is interested in buying the house she lives in, Briggs said that Marzano could help there by providing seller-financing and holding the mortgage.
Because this is considered an installment sale, he said, the gain would be deferred and spread over the life of the payments. But with current favorable capital gains rates set to sunset in 2011, Marzano could get hit with increased taxes using this strategy. If an extension isn't enacted, Briggs said, Marzano should shift the debt to traditional mortgage financing, thus triggering the entire gain before the more favorable rates disappear.
As a single homeowner, Marzano can take advantage of a $250,000 capital gains tax exclusion when she decides to sell her own home, which also houses a hair salon run by her daughter. And since this exclusion can be used every two years, Briggs said she might want to simply move into a different property so she can again take advantage of this tax break in a couple of years.
The slowdown in the real estate market may make it hard to find buyers: Home prices in Massachusetts fell for the 15th straight month in July, and the turmoil in the mortgage market may further depress prices. So Briggs said it might take some time to fully implement this plan.
Marzano said she's been through lots of tough real estate cycles and knows how to ride them out. She built her portfolio slowly, often getting properties through connections she made while working with her husband in their beauty salon. When the house next to the salon came on the market, Marzano bought it; when a client's son decided to sell his Forest Park home, she bought that, too. She even became a broker after signing up for an investment class that turned out to be a real-estate licensing course.
When it comes to selling, Marzano said she's planning to wait until the right buyers come along. And since she has no mortgages on more than half her properties, she said, "I could always take a home-equity loan."