Tuesday, October 19, 1999

The Best Bad Investment I Ever Made


Back in the early 1980s, fresh from a 100% profit on our former residence after only six years, I discovered the leverage made possible by investing in rental real estate. I found four homes in our new city with assumable mortgages and owners willing to carry second mortgages with small down payments. I paid about $20,000 down and carried a negative cash flow of about $2500 per month.

After depleting my savings I started to amass credit card debt, convinced that appreciation of the homes would more than pay for all of them. But the market was terrible and after values actually declined for two years running, I bailed out, deeding each of the houses back to the original owners in exchange for forgiveness of the second mortgages. I was lucky not to have to declare bankruptcy.

So where is the "best" part? I was left with payments on credit cards and other loans of about $1200 per month and no savings. The year was 1987 and my first child was due to start college in two years. It looked like an in-state college was all we would be able to afford. The "best" part was that $1200 per month that wasn't going for living expenses. If I hadn't accumulated all those loans and credit card debts, we would have been buying a bigger house or a more expensive car, having $1200 more per month to budget with. OK, I could have been saving that $1200 per month, but I probably wouldn't have.

So how much could we afford to pay for college? I got out the calculator and figured out that by increasing our payments on the debts to $1500 per month (requiring a bit of belt tightening at the time), and putting all of the extra toward the highest interest loan until it was paid off, we could pay off all of the loans in a little over 18 months. Then continuing the $1500 per month as a college fund, we could afford to pay about $16,000 annually for college. And we'd have the first semester's payment saved just in time for our son to start college. We put the plan in action.

Suddenly possibilities opened up. Our son picked and was accepted to an Ivy League school, deciding to work summers and Christmas vacations to pay the additional cost. Three years later, our daughter chose a small, rural, in-state college and the lower cost freed up money for a car that she put to good use throughout her college years. Now, with both kids through college and no loans to pay, that $1500 per month is augmenting our retirement funds in Foolish long-term stocks.

I wasn't happy losing all that money in real estate years ago, but I'm convinced that we'd never have been able to support our kids' college choices and/or gotten a good start on retirement funding if we hadn't been forced into budgeting by that previous fiasco. It was the best bad investment I ever made.

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