Baby-Boomer Apartment Investors
Sell Despite Trend in Rising Rents

Some baby-boomer apartment investors -- tired of the hassle of fixing leaky faucets and responding to other tenant complaints -- are starting to sell these investments as they get closer to retirement.

In a survey conducted for The Wall Street Journal, Marcus & Millichap found that its apartment-investor clients who have recently sold their assets plan to move 59% of that equity to other properties, investments and cash. The results are based on an analysis of 700 apartment transactions ranging from $1 million to $10 million in the 12 months ended May 31.

Harvey Green, chief executive officer of the Encino, Calif., real-estate investment brokerage firm, says the overwhelming majority of its private investor base is 50 and older -- mostly because investments of that size are out of reach for many young, entry-level investors.

Many of these investors bought their properties between 1990 and 2000. It took awhile to build up equity because of the real-estate downturn of 1991 to 1993 and the slow recovery in the following years. As a result, many held on to their properties longer than they originally expected, Mr. Green adds.

In recent years, however, apartment investors began to experience tremendous equity growth. The median price per unit of apartments in the U.S. rose 87% to $112,000 from 2000 to 2006. "A number of them found that they were 10 years older and had a much larger tax liability because of the tremendous amount of appreciation," Mr. Green says. "Now, they are thinking of the tax impact and coming up with exit strategies."

They are also just looking for less-intensive investments. In addition to myriad tenants' service complaints, frequent apartment turnover requires repeated and expensive painting, cleaning and carpeting. Some investors who are cashing out "are more passive in terms of management," Mr. Green says. They are seeking stable, long-term cash flow and not necessarily as much equity buildup.

But is this a case of bad timing? As the U.S. housing market cools with rising interest rates, apartment vacancies are expected to tighten to 5.3% nationally this year, while rent growth reaches 5.5%, the strongest since a prior peak in 2000. And in the past two years, apartment investors have experienced total returns of about 20% a year from income and unusually high price appreciation, up from the 12% annual average return for the previous 10 years. "Expectations for income growth are strong, so this is a good time to hold on to assets that you already own," says Sam Chandan, an economist at Reis Inc., a real-estate research firm.

Still, there are other areas of the hot commercial sector that are also attractive with less hassle, such as office and industrial properties, Mr. Green says. Some former apartment investors are redeploying their equity into single-tenant, net-lease properties, which include office buildings, warehouses or retail properties occupied by one tenant that is responsible for expenses, including taxes, insurance, maintenance and almost everything else. Their appeal: little or no management responsibility and a stable, long-term cash flow.

James Shafer, a 62-year-old apartment and condominium developer from West Bend, Wis., in February sold a 164-unit apartment complex in Menomonee Falls, Wis., that he built in 1990. The $11 million sales price was $1.5 million lower than the original asking price because the vacancy rate was 82% and had been that way for two years.

But Mr. Shafer says he was tired of the plumbing repairs, poor managers and constant turnover. He recently closed on two Eckerd drugstores -- in Wilson, N.C., and Cambridge, Md. -- and will soon close on a Rite Aid in Farmington, Maine. The stores cost him between $3 million and $5 million apiece. The benefits? "No maintenance, no repair work, no taxes to pay and a relatively nice income," Mr. Shafer says. (He says the drugstores pay the property taxes.) Even though the apartment market is now strong, "I'm still happy I did it," he adds.

Bob Morgan, 55, of San Diego, is also pleased with his most recent investment. The longtime bartender sold four San Diego apartment units in 2004 for about $816,000. He paid about $70,000 to build them in 1974. Earlier this year, he paid about $1.55 million for a preschool learning center in Kalamazoo, Mich. He pays $3,000 a year in insurance, but regularly receives $10,000 a month, "no questions asked" from the learning center.

Although he sees this purchase as less-capital intensive than apartments, Mr. Morgan acknowledges his newest investment is a risk, too. "There are no guarantees in life," he says. "This is our investment, and if it blows up ... that would put a crimp in our plans."

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