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Case Study - Five Unit Value Add Apartment Investment

At the end of September 2021 we purchased the Midvale Lofts, a 5-unit building in the heart of Wallingford. At $1,250,000 purchase price we felt very confident in our starting basis. All of the units had one bedroom and one bathroom, fireplaces, and laundry in unit. The top two units were lofted and had great views of downtown and Mt. Rainier. Our plan was to renovate the units on turnover, resolve deferred maintenance issues, and minimize vacancy with best-in-class property management. In February 2026 we sold the property for $1,655,000, a 32% increase over the original purchase price after successful execution of our value-add strategy.

Over our 4.5 years of owning the property we were able to fully renovate three units and partially renovate (new floors and paint) the other two. We increased gross rents by 51% from $7,165 per month at the time of purchase to $10,827 at the time of sale. Over the same period apartment rents in the Seattle MHA are up approximately 10% from $1,900 per month to $2,100 per month.

Ap artment Rent Growth in Seattle MHA

We spent approximately $110,000 renovating the property including new kitchen cabinets, new bathroom cabinets, new flooring, tile, water heaters, stainless steel appliances, lighting, drainage improvements, etc. Those renovations not only allowed us to achieve higher rents but result in lower ongoing maintenance, reduced vacancy, and happy residents. For example, over the 24 months prior to sale our vacancy loss was a whopping 1.1% vs. 7+% industry average according to the chart above. Crazy good! That is what you get with A+ locations, renovated units, and professional management.

The high rents and high quality tenants are what allowed us to sell the property for $594 per square foot, which is close to a record for the area. Only 4337 Phinney Ave N sold for a higher price per square foot in the last three years ($600).

Total Cash Flows

Our total pre-tax internal rate of return is 13.7% during our 4.5 year ownership period. While only slightly better than the stock market returns during the same comparable period (12.1% for the S&P 500 including dividends reinvested), we vastly outperformed the apartment market during the same period.

National Apartment Prices According to Federal Reserve

According to the Federal Reserve, apartment prices are down approximately 18% from Q4 2021 to Q2 2025 (the latest available data). Meanwhile we sold our property for a 22% increase. This is the power of a value-add strategy. Even though the market was in a huge drawdown we were able to increase the value of the property through renovations and property management.

Realized 22% Gain

All of the analysis above ignores taxes. Real estate is known as a tax advantaged asset and that is largely correct. We paid basically no federal income tax because of depreciation deductions, losses on disposals of capital assets following renovations, and bonus depreciation on appliances. In fact, in most years we reported small tax losses which real estate professionals can use to offset other sources of ordinary income (talk to your CPA, I am not your CPA and I don't give tax advice!). Furthermore, we have already identified a replacement property that we will use to perform a 1031 like-kind exchange to defer capital gains taxes (stay tuned!!). State and local taxes are a different story. We did pay a $31,000 real estate excise tax to the State of Washington and King County which comes out to approximately 7.5% of the deferred capital gain.

Overall we are extremely happy with this investment. An IRR of almost 14% is excellent over a time frame where many apartment operators are underwater. It's always bittersweet to sell a property. The buyers are new real estate investors and are going to do very well and hopefully continue to invest.

I hope this article gives you some insight into the true nuts and bolts of investing in real estate.