So, many of you have basically intimated that you hope I keep profitability in mind, or that you hope my economics work out. I also am not able to go under in my pursuit of ecological perfection in 4-plex form. With an apartment building it is not quite as simple as monthly income being greater than monthly outgo, although this would be nice. Additional profitability arises from tax benefits (2008 taxes involved sheltering some $2000 of my job income due to excess expenses, being able to depreciate my building, and getting a zero interest $7500 loan for being a first time home buyer) and from the appreciation of the property over time. Many of my expensive improvements (efficient hot water heater, outdoor temperature control on boiler and a new energy star fridge that uses a 3rd the power of the replacement) have payback periods that make sense. It helps that my MARR is low because I am a non-risky investor. I get 3 to 4 percent interest on my CDs, I avoid 6% interest if I pay back my mortgage principal early, I avoid 7% interest if I pay back my land in Talkeetna at an accelerated pace – so my interest rate to beat is about 7% on present-worthing future cash flows.
The other complication is that this is also my home and I live there, so I’m going to spend money to spruce it up like anyone else would, and most people know they won’t recover their improvement expenses in the short term, or even completely in the long term on a home. I also consider my CO2 busting expenditures a hobby, that is not necessarily cost effective. Some people build and fly radio-controlled helicopters, I put in energy efficient fridges and buy solar panels. I don’t go in to debt doing these things if they don’t pay me back more than the cost of the loan.
Also, all the landlording books I’ve read warn that you will not be profitable in your first year. Apparently, it is very common for this to be a very expensive repair and maintenance year. Also, although many expenses are tied to inflation, the biggie of mortgage repayment on a fixed interest rate is not, while rents should rise more or less with inflation.
So what are my numbers? Looking at it on a monthly basis, and thus ignoring the down payment and all those pesky closing expenses as part of the acquisition of the capital, and ignoring federal income tax adjustments, and ignoring the upgrades that will pay for themselves eventually with energy savings, I have expenses in excess of income, so far, of an average of $1402/month. Mostly this high value is due to a costly pipe breakage in the cold of January, that shouldn’t happen again and was too small to put in an insurance claim on (below my deductible). Also included are costs of all the other little repairs and improvements I’ve done (I’ll show pictures of the bathroom repairs/upgrades I have in the works next time). Ideally, this value would be less than the $650 I would charge a tenant for the apartment we are in. Also ok, mentally, would be if this was less than the $820 I was paying for the last apartment we were in, and in normal months it is, even with high winter utilities – just not when I also do elective upgrades or have a serious expense.
In any case, I am nowhere near the poor house, the place is getting better every month, I am preventing future emergencies with my proactive maintenance, and in 30 years I’ll have a mortgage-free source of retirement income (if I don’t sell first). I will revisit my month to month net income in a year or so, to see how things are shaping up!