I bought my first investment property in 1995. Or did I? It’s not that I’m suffering from some form of investor’s amnesia. I did indeed buy my first property(other than my home) in 1995. I was able to re-sell it within 30 days, closed the sale in 60, and even made a profit. I bought the house with absolutely none of my own money. Not bad, eh?Yet over the last few years, I have come to question whether it was an investment at all. The property was a small, single-family home. It was bank-owned, and in terrible condition. The house had a kitchen that was falling apart, thread-bare carpet complete with the ubiquitous pet stains, and a trash pile in the basement that touched the rafters.I bought the house with the intention of fixing it up and reselling it–what was (and sometimes still is) called “rehabbing” but now more often referred to as “flipping.” The purchase price was $49,000. I spent $7,500 to rehab it. I sold it quickly, closing 60 days after I completed the purchase. The sale price was $69,900. I used a realtor to sell the property and paid fairly typical closing costs. All told, the costs of sale were about 8% of the sale price or about $5,600. I ended up with a profit after the sale of $6,900. It wasn’t huge but better than a sharp stick in the eye.
So what was my return on my investment? Well let’s see, dividing my profit of $6,900 by my investment of zero. . .calculating. . .calculating–ah, infinity. Wait, I forgot that was in 60 days, so I have to annualize–infinity times 6 equals, well, infinity. (You can check my math). And if I compound that over years, assuming an equal or greater than infinite return, I should have an infinite amount on which to retire, and if my calculations are correct, I think I can retire the day before yesterday. I can really go on like this virtually infinitely, but more to the point.
When I set out to buy my first flip, I looked at about 30 houses. I found this one and made an offer. The bank countered. I re-countered. And I was in contract about 30 days after starting my search. I then arranged for financing. I went to the bank and obtained a short-term loan secured by the property. Within the 30 days after I purchased the house, I hired a painter, a roofing contractor, and a carpenter/generalist. I picked out new kitchen cabinets, carpet, paint, and other sundry finish materials. I went to the property several times a week to check the progress, during which I fired the painter and hired a new painter.
So did I make an infinite return on the property? I would say no. To a large degree, the profits I made were income from my work. In other words, I gave myself a second job. Perhaps more importantly, I sold an asset that could have produced income from that work forever–or infinitely. When Rob and I set out to purchase property two years ago, our goal was to develop income, income that would eventually allow us to achieve financial independence. Indeed, part of the equity in each property represents our work. But that portion, along with the investment of money, is invested for the longer term. Consider this–if I had held and rented that modest little property that I bought back in 1995, it would be only three more years to fully pay off the mortgage. At that time, given that there would be no further mortgage payment, rents would generate a net income of about $650 per month. Now consider if I had bought 10 homes.
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