Total annual return on investment after sale of a building

[Kenneth LaVoie]

I'm verifying that my "accounting" is sound. I recently sold two buildings that we held for exactly 7 years. I'm doing the old "Did I do better than if I'd left the money in the bank" calculation and I want to run my calculation by a few of you to be sure I'm good.

Building 1: 11 unit, held 7 years

Purchase price: $180,000

CAPEX $75,000 (mostly first year, but some throughout. We actually borrowed $40,000 of this 74,814 with the building)

TOTAL $255,000

So...Now we need to know what WE put in for money. This is the amount that we would've put in the bank had we not bought this building. In this case, down payment + closing costs was $61,240. THIS is the figure we need to know the performance on. 

So...moving on...

Our cash flow over 7 years was $214,000 or $30,571 per year but we self managed. So to keep things "honest" I'll deduct 8% per year for a phantom management fee which reduces our cash flow to $171,000 over 7 years or $24,428 per year. So roughly $6,000 mgt. fee is what we got paid to do a "job" while the $24,428 was part of our total return, a "dividend" if you will. 

Now, we sell the building .... 

I'm not going to go into what we walked out of closing with because that's a product of what we owed, etc. But we sold the building for $380,000 and after our closing costs our profit was $125,000. (380,000 - 255,000~). There were very little closing costs for my part (sale by owner, few hundred in lawyer's fees, etc.) 

Going further, adding our cash flow to our profit gives us ending number of $296,000 over 7 years. Running it through an online ROI calc, it yields 25.5% per year for 7 years. Better than most hedge funds and certainly better than I could've done other than getting lucky with Bitcoin or putting it all on Amazon at the end of the financial crisis. Worst case, I'm a little off with closing costs, but even if I'm 2-3K off, my return is still over 23%.

(In the same deal we also sold a 2 unit for more than double our purchase price + rehab but because it was an all cash deal, we only made 16% on our money year in and year out for 7 years. It's amazing what leverage does when everything goes right. We made FAR less on the 25% ROI deal but because it was financed our percentage return was far greater.)

Any thoughts or guidance on a simpler or more accurate way to guage, please opine!

And Happy Thanksgiving everyone!!!

[Kenneth LaVoie]

@Steve vaughan

Yes, I do have a partner, who is also my wife!

I Ididnot reinvest the proceeds in another building or do a 1081 exchange, i instead paid off the mortgages on most of our  other buildings to offset the loss and cash flow from selling my most profitable building. It's almost a wash, and the additional cash flow from paying off the mortgages is exact and unwavering, whereas the cash flow from my building was not, so that kind of stabilizes my income a little bit as I go into  retirement. 

As it turns out, my tax bill on this particular deal will be nil. I don't want to divulge all the details for the world to see, but basically my father left me an asset when he passed away and a couple of moves with that asset allowed us to book a huge Capital loss carryforward, which I finally got to use with this sale. We've been carrying that lost forward since 2007 and I'm quite happy that we didn't use it all up in the interim! I like that you mention about REITs. I was actually thinking about moving any future sales proceeds into Direct Equity Investments like Realty shares, patch of land, Etc. I'm not sure if I could do a 1081 or 1018 exchange with these assets or not. I have not gotten that far in my research.

Thanks so much for your thoughts.