Investing in an apartment building

Back in December of 2004, my wife and I purchased a 4-family apartment building in our neighborhood. We had been interested in acquiring an investment property for some time, and once we finally had the money saved up (sort of, I'll explain later), we started looking for properties. The one property we really wanted was actually right behind our house, right across the alley. After taking care of the building for 2+ years now, I can tell you the close proximity to our house is a real blessing.

The building cost us $287,500 - they were asking $299,000. The street where this building is located has apartment building of the exact same shape and size lining both sides of the street. And I said, it's one street over from our house. Our neighborhood was laid out by planners many years ago to include a street with brick apartment buildings, then the next street (our street) had modest houses, then the next two streets had larger houses, and so on. I guess they were attempting to bring diversity to our neighborhood even back then.

We had to come up with $60,000 or so for the down payment. We had about $10,000 or so sitting in a money market fund that my wife had earned by doing some freelance work. I sold off some mutual funds, bringing my cash total to about $30,000. We then took out a $35,000 Home Equity Line of Credit with Chase. We had our $60,000. Note that back then interest rates were VERY low - our HELOC is tied to Prime, so it had a 4.75% interest rate when we first took out the line in November 2004 - cheap money, in my opinion.

I have had friends that want to get into rental real estate, but don't do it because they think it's going to be too much work. There is some work involved, but in my case, there are a few points to remember:

1. The building is in great shape, and in a great neighborhood. It attracts good tenants.
2. We installed central air and put in new windows over the past two years. It has been very easy to rent. In fact, last year I fully rented out the four apartments and the four garage spots, without a single day of vacancy. Not sure that will ever happen again! I even had someone move out, but still was able to get someone to move in the very next day.
3. The building generates a little cash, probably to the tune of a few hundred dollars a month. The mortgage with escrow payment included is $1,800 a month, and I bring in on average about $2,150/month.
4. As many of you are probably already aware, this does not mean I had a tax profit on the building. To the contrary, it generates a sizable loss. I have to admit to forgetting about this as I set my withholdings for 2005. When I did our taxes, I found us getting back thousands. (Pleasant surprise, until I realized I had provided Uncle Sam with an interest free loan.) In 2006, for instance, I had $26,000 in income on the building, with $21,500 in cash expenses, and $12,500 in depreciation. Obviously the depreciation is the kicker - and we'll have that for the next 25 years.
5. The building is right behind us - makes it so much easier to maintain.
6. The bottom line when purchasing it was simple. Do I want to put down $60,000 now that will turn into a guaranteed $300,000 in 30 years? And frankly, that's an extremely low number. The building will be worth much more than that in the future, it generates cash, it saves on taxes, and after I own it, it will still kick off revenue to me each month. All in all, a fabulous deal for us.

The work involved includes keeping the place tidy, and finding renters when needed. A simple yard sign and a posting on Craigslist is all that we've had to do. The building really does sell itself well.

We have been tempted to buy another one in the area, but I have resisted. First, I do not have $60,000 in cash lying around. Second, I don't have enough borrowing power to borrow $60,000 for the down payment. Our HELOC is now an $85,000 line, of which we have $38,000 available to borrow. But lastly, I am extremely interested in building up our equity holdings. As of this weekend, we're at $103,000 in stocks and mutual funds. And we have almost $102,000 in equity in our apartment building and our lakehouse. During the past year, I have been meeting with great success investing in small cap stocks, and I really want to keep this going.

So there's no room in our lives for a second apartment building. But I would seriously recommend investing in one if you can find a solid building whose maintenance you can fit into your everyday lives. By the way, full disclosure - I can't fix anything on my own and always have to hire someone. I am 0.0% handy, but the building is still a good investment!