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Spread vs. Rate of Return

I often hear investors talk about the spread for a house. They'll say things like "I am looking for $30,000 spread/equity". My reply to that? I can find those all day long. There are plenty of million dollar properties that have $30,000 equity. Then they reply, "No, I was talking about $100,000 properties. You see, I want to make $30,000 off each house."

Wrong idea. Quit worrying about making a specified high profit off every house. Instead, think about the rate of return on the money you invest.

Lets say you borrow $75,000 to purchase a house that appraised for $100,000. And in addition to the $75,000, the bank loans you $5,000 for repairs and threw in some money to cover the closing costs, too. So, the total loan was $83,000.

After repairs (which should take no longer than two weeks), you've got the house in move-in condition. And because you took before and after pictures and showed your receipts to the appraiser, the house appraises for $103,000.

Now, anyone who's looking for that $30,000 spread is saying  "But why would I invest $83,000 in a $103,000 house? The Spread isn't there!"

Look at it again. How much money do you really have invested? No, not $83,000. That's how much the bank has put into this, not you. You haven't invested anything yet. And if you priced this house at $97,000 and offered a 4% commission to the selling agent along with a free home warranty, do you think you'd get offers? I think you would.

OK, so let’s say it took 60 days to close. Now how much money do you have invested? Answer: one payment. About $800. So you sell the house and net $8,000. What's your return on investment?

1000%

Most non-real estate investors would love to double their money every year. So if they invest $800 in January, they'd be very happy to get $1,600 back in December. In this example, you made ten times your investment in 60 days! So quit worrying about the spread and rejoice at your rate of return.