Alaska Investor Turns Home Into a Profitable Rental

By Jane Hodges

The investor: Jim Nelson, 53, a former special-education instructor, lives outside Homer, Alaska, where he moved in his early twenties. At the age of 24, he purchased approximately two acres located 12 miles north of the city for $10,000 and later built a home there. He moved out of the residence in 2001 and is now selling the property.

The property: The cedar triplex has 3,100 square feet. From the property, residents have views of Cook Inlet, four volcanic mountains and Mt. Iliamna. Each unit has one bedroom and one bath, but the largest apartment (1,300 square feet) features a geodesic dome with 26-foot ceilings and triangular windows. The second unit has 1,000 square feet and the third has 800 square feet. Homer's main industry is fishing or service and tourist businesses, but nonetheless, Mr. Nelson has kept the home at full occupancy by renting it to young people in their twenties who have year-round jobs locally or run small businesses in the area.

Purchase price: $10,000 for the land, plus $150,000 to build the home, including renovations to expand the house. Mr. Nelson bought the land in 1976 and had a home built on it in 1977.

Additional investment: $4,000 to install a new septic system. The house was originally constructed as a single-family home, but Mr. Nelson expanded it to a duplex in 1982 and to a triplex in 1994.

The strategy: Mr. Nelson and his wife, Lu Anne, a teacher, have enjoyed the property because they were able to make money from it while occupying it, Mr. Nelson says. Living on-site made handling repairs and tenant issues easy, he says. The couple would keep the property, he says, but need to sell it to generate retirement funds. They earned between $200 and $400 a month in rental profit from the home, he says. He and his wife are now running and residing at a bed and breakfast, Knob Hill Guest House, which they purchased in 2001. Located less than 30 miles away from his investment property, the inn is in a region that has an active tourist trade and is a natural next step in his career, he says.

The pitfalls: The house is on a dirt road, which has discouraged some buyers, Mr. Nelson says. "People who come down this road for the first time sometimes say, 'Oh, I don't know,'" he says. But the asking price, along with the views from the property, he says, may sway a buyer eventually. "At $225,000, you're only paying $75,000 per unit," he says.

The potential payoff: $123,850. If he gets his $225,000 asking price, the math works this way: $225,000 - $160,000 (land and construction costs) minus a new septic tank ($4,000) is $61,000. He expects to pay a buyer's agent commission of about 3%, but won't pay a listing agent fee, since he is marketing the property as a for-sale-by-owner property. Paying the buyer's agent would reduce the figure by 3% ($6,750) to $54,250. Adding his profit of $69,600 from rental income (after paying mortgage, taxes and insurance) brings his total to $123,850. He doesn't anticipate paying capital-gains tax, he says.

- Ms. Hodges is a free-lance writer in Seattle.

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