# Reinvestment Strategy



## FrankSmith (Feb 21, 2013)

How do you invest or reinvest in your business and why?

Do you invest with the hopes of having bigger years in the future and when you retire you will sell the equipment and property associated with the business?

Or 

Do you invest in the business with the intention to continue owning it after retirement?

Or

Will you pass it on to your offspring?

Or 

Do you invest in your business with the plan to sell it one day?

I started my business four year ago and don’t have a firm grasp on an end plan. I am interested what the rest of you are doing and why you have chosen that path. I am also interested if it has been the plan all along or if it changes as you get closer. Thanks.


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## bdog1234 (Feb 25, 2008)

I reinvest into my business for several reasons. 

1) Tax reasons. With the 179 deduction I can offset up to 500k a year of income by buying things for the business. 

2) Increased efficiency. Nearly every time I have bought new things for my business it has helped us be more efficient and thus more profitable. 

3) Increased capabilities. I have bought things for my business that enables us to take on other work that we wouldn't otherwise be able to do. This helps us diversify and stay busy even in slow times.

4) I really don't know of anywhere else to invest money other than in myself where I can get such a great return. Sure there are stocks, real estate, etc but I view that as a lot riskier than investing in my own business which I know inside and and out. 


Selling the items I buy at a later date, or increasing the value of my business, or passing it on or anything like really do not even factor into my thought process. They may very well be a benefit at some point but for now I only focus on buying things for the business that will yield a quick return on the investment.


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## thehockeydman (Dec 19, 2012)

I think a lot of contractors get off track by hearing common business cliches and thinking it applies to their business. The reason you "invest" in anything is to build an asset. While construction businesses (at least small residential operations) are great businesses, they aren't particularly great assets. Most of the value is in the people, not the business itself.

In short, the extent of "investing" that needs to be done is determined by your goals for the business. Are you satisfied with the size of your business? If your margins are healthy, you have good cash-flow, and sizeable reserves in the bank, why "invest?" If you're looking to grow your business, your reasons for "investing" should be obvious.

You're running a construction business. You're not trying to take the next Silicon Valley startup to an IPO. Drop buzzwords like "invest in the business" and call the savings what they really are (retirement fund, personal emergency reserve, business emergency reserve, allocation for bringing on new employees, etc).

This alone should eliminate a lot of the confusion instead of vaguely labelling it "investing" in the business.


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## FrankSmith (Feb 21, 2013)

thehockeydman said:


> If your margins are healthy, you have good cash-flow, and sizeable reserves in the bank, why "invest?" .




Your mind set on this topic strikes me as strange. My approach is this simple. My wife and I attempt to put aside 25% of what she earns as well as what I earn. After we have our established emergency funds that money needs to go somewhere to help us earn more in future years. We have typically invested some of the money in stocks and some of it in rental properties. As I consider whether to put that money into the business I must consider how I plan to use the business to make money in the long term. It is something I think about a lot and am hoping to get some good feedback. 

Its less about the needs of the business and more about the ability to use my savings to earn money.


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## brettminer (Dec 20, 2014)

At the end of every year I take a substantial junk of profit and reinvest the money back into the company. This year for example I plan to buy my crew all new tools and a replacement work truck. 

Right now I see myself working until I drop since this has been my dream my entire life. Some day I'll hand the reins over to my boys, so whatever I invest in the company now will only help them in the future.


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## Stephen H (Feb 18, 2011)

the way I see it is--------
as a practical matter you are not going to "sell" the business.
sure---we all know a rare individual or two who has sold---- but statistically speaking--- you aren't going to be that guy.......

Investments are things which you own----which make money weather you work or not. you can also sell them readily...........

my business, on the other hand----has expenses. I spend money for additional pipe staging, or a wet saw or marketing----- because I re-coup that money almost immediately----certainly within a year.

NOT because that worn out saw or truck might be worth something 20 years down the road. The truck is my exception to the one year rule---- it takes me 3-4 years to recoup that.........

to me---- the business is something I/we do---to generate $$$$ which we invest elsewhere. primarily mutual funds. I invest in real estate via REIT's---- because I have zero interest in being a landlord............

I will give you an example of spending, vs. an investment.

I have 2 sons involved in the business.
recently I sat them down to discuss our plans for the upcoming year----part of that was to discuss our marketing.

we use direct mail---and have increased the $$$$$ we spend on direct mail every year for 5 years now. It's quite a chunk of money---- but we also have our historical data pointing to our return from that marketing.---- I know the ratio for every post card mailed in 2010/sales volume, and the same for 2011,2012,2013,2014

so---- I know that for every postcard mailed out--statistically I am going to have a return of "X".

but that money spent on marketing---- isn't really an investment.--- I can't sell that marketing to anyone else---- it's a cost--- not an asset.

however----- some of that money coming back in as a result of that marketing---DOES become investments--- when I buy stocks,bonds,REIT's etc.

A lot of people at our level of business--- confuse spending---with investing.---IE: they buy toys(tools) and tell their wives they are investments, LOL
stephen


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## Spencer (Jul 6, 2005)

Stephen H said:


> A lot of people at our level of business--- confuse spending---with investing.---IE: they buy toys(tools) and tell their wives they are investments, LOL
> stephen


Sshhhh! She might here that blasphemy... :thumbup: :whistling Tools always make me more money....most of the time.... :whistling

On a serious note. You have great thoughts. I really enjoy reading what you have to say on business and investing. :thumbsup:


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## Spencer (Jul 6, 2005)

FrankSmith said:


> How do you invest or reinvest in your business and why?
> 
> Do you invest with the hopes of having bigger years in the future and when you retire you will sell the equipment and property associated with the business?
> 
> ...


As long as I feel I have more profit potential and a higher rate of return by putting money back into the business I will continue to do so.

I would consider myself an opportunity investor. If I saw a good opportunity elsewhere, (stock market, mutual funds, rentals, precious metals, etc) I would jump on but at this time nothing is screaming at me.

I'm fairly new in business so its a pretty easy decision to continue to invest in my business. Until I feel I have reached the point that I no longer want to grow the business any larger I will continue to mainly invest in it.


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## thehockeydman (Dec 19, 2012)

FrankSmith said:


> Your mind set on this topic strikes me as strange. My approach is this simple. My wife and I attempt to put aside 25% of what she earns as well as what I earn. After we have our established emergency funds that money needs to go somewhere to help us earn more in future years. We have typically invested some of the money in stocks and some of it in rental properties. As I consider whether to put that money into the business I must consider how I plan to use the business to make money in the long term. It is something I think about a lot and am hoping to get some good feedback.
> 
> Its less about the needs of the business and more about the ability to use my savings to earn money.


It sounds like you don't have dramatic growth goals for your business. You'd be better off using your money to invest in personal assets, as you've already been doing. Like I said. The reason you invest in anything is to build an asset. Some assets are better than others. The stock market (you'd better know what you're doing…) and rental properties have both proven to be better assets than construction companies. 

Most construction companies lose almost all their value the second their owner wants to retire. If you were to die tomorrow, your stocks and properties would hold as much value as they would if you were alive. If you're not looking to grow the company, why would you "invest" in something that will lose virtually all of it's value as soon as you want to stop working (ironically, the time when you need your assets to be worth the most)?


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## Spencer (Jul 6, 2005)

I just finished "rich dad poor dad." It completely changed my view on "assets". 

Most people think of assets as anything that is worth something. He defines assets as things that make you money. If an asset isn't generating cash it is actually probably a liability because even though it may be worth something, it is actually probably just sitting there costing you money. 

In the book he points out the the middle class but assets that are actually liabilities while the rich buy assets that generate cash. 

It's thought provoking and making me rethink some business purchases I was planning on making.


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## hdavis (Feb 14, 2012)

Spencer said:


> Most people think of assets as anything that is worth something. He defines assets as things that make you money.


So he's focused on investment assets. There are plenty of depreciating assets with carrying / maintenance costs. IMO, opportunity investment is a very good strategy if you have the knowledge to evaluate investments somewhat accurately. 

Present value of future cash flow from a business (or other investment) is tough to get right - pay back period is shorter term, so the numbers are more certain.


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## Calidecks (Nov 19, 2011)

Spencer said:


> I just finished "rich dad poor dad." It completely changed my view on "assets".
> 
> Most people think of assets as anything that is worth something. He defines assets as things that make you money. If an asset isn't generating cash it is actually probably a liability because even though it may be worth something, it is actually probably just sitting there costing you money.
> 
> ...


That is a great series. I really enjoyed listening to that.


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## Calidecks (Nov 19, 2011)

He also made it clear your home you live in is not an asset it's a liability. It cost you money.


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## Spencer (Jul 6, 2005)

Californiadecks said:


> That is a great series. I really enjoyed listening to that.



I will have to look into the other books too. This book blew my mind. I started it yesterday afternoon and pretty well finished it by the time I went to bed last night.


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## Calidecks (Nov 19, 2011)

Spencer said:


> I will have to look into the other books too. This book blew my mind. I started it yesterday afternoon and pretty well finished it by the time I went to bed last night.


I got the tapes. Listened to them during my commute. I strongly recommend them to anyone. it changed the way I thought of money.


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## Calidecks (Nov 19, 2011)

Here's how your house is not an asset. 

http://www.entrepreneurmag.co.za/ad...sonal-finance/why-your-house-is-not-an-asset/


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## Spencer (Jul 6, 2005)

Californiadecks said:


> He also made it clear your home you live in is not an asset it's a liability. It cost you money.



His definition of wealth was very thought-provoking to me in regards to paying off a home.

If you define wealth by how long you can live on your assets then it makes a lot of sense to have a mortgage paid off. My thought is that rather than putting the money into investments and still having a mortgage payment, I could pay off the house with that money and in theory be more wealthy. Now of course you would have to factor in that you are not making a return on that money other than saving your interest but it is still very thought-provoking and I am thinking about it. I have a very low standard of living besides our mortgage and could live on very little if we did not have our mortgage payment and thus by his definition be wealthy. The kicker that will keep me from doing that is the fact that I have to pay a huge chunk of that cash to the taxman in order to have that cash available to put towards the mortgage.


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## Gary H (Dec 10, 2008)

I read those books years ago. Good seris. It's impotant to remember that even though the house is a liability , everyone needs a place to live. And unless u live off of the government , it will cost hard cash to provide shelter for yourself and family. 

I got hooked pretty deep into his books and I went deep into debt because of wanting assets that made money. In the end lost it all and I am happier to live with a payed off house and no worries about assets that could either Make money in a good year or lose it in a bad one.


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## Calidecks (Nov 19, 2011)

Gary H said:


> I read those books years ago. Good seris. It's impotant to remember that even though the house is a liability , everyone needs a place to live. And unless u live off of the government , it will cost hard cash to provide shelter for yourself and family.
> 
> I got hooked pretty deep into his books and I went deep into debt because of wanting assets that made money. In the end lost it all and I am happier to live with a payed off house and no worries about assets that could either Make money in a good year or lose it in a bad one.


You didn't go deep into debt because of him. It was because of your investment decisions.


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## thehockeydman (Dec 19, 2012)

I take Rich Dad with a grain of salt... A bunch of advice in that book is bogus (not to mention illegal).

There is some good advice in the book. Then again, one thing that drives me nuts is these "gurus" who try to teach others how to get rich/run a business/rule the universe without actually having done any of that themselves.

The sole source of the author's wealth is from his educational series, not his investment decisions. A few of his companies have gone bankrupt. The guy isn't exactly Warren Buffet :no:


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## Gary H (Dec 10, 2008)

I can agree to that, but reading his books took me on another path that I was not ready to be and it didn't work out for me. The path that was working for me was great, but when i took his classes , they showed me that what I was doing was wrong and to go though thier system. Live and learn. I know now that , I am the only one that truly knows what works in my area and what dosnt. 

I think the millonare next door was better and has proved to be a more in line with my lifestyle and afea


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## EricBrancard (Jun 8, 2012)

Gary H said:


> I can agree to that, but reading his books took me on another path that I was not ready to be and it didn't work out for me. The path that was working for me was great, but when i took his classes , they showed me that what I was doing was wrong and to go though system. Live and learn. I know now that , I am the only one that truly knows what works in my area and what dosnt.
> 
> I think the millonare next door was better and has proved to be a more in line with my lifestyle and afea


The Millionaire Next Door is a book that has been recommended to me by actual millionaires. Rich Dad, Poor Dad stuff, not so much.


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## Calidecks (Nov 19, 2011)

Running a business is something entirely different then what's in that book. His book mainly explains the differences in investments. Not the details of individual investments. Most books written are to make money. That's not a secret.


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## thehockeydman (Dec 19, 2012)

I agree with the posts on Millionaire Next Door. Much better book. I've also heard of many bankrupt "Rich Dads"


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## Spencer (Jul 6, 2005)

EricBrancard said:


> The Millionaire Next Door is a book that has been recommended to me by actual millionaires. Rich Dad, Poor Dad stuff, not so much.



Good deal. It's on my reading list.


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## Calidecks (Nov 19, 2011)

I read for enjoyment not for investment decisions. That's like taking the advice to buy low and sell high, then when it doesn't work out you blame the advisor. We all know it depends on what you buy. :laughing:


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## hdavis (Feb 14, 2012)

I think that how you run your business is a different question from how you invest. Pay back period would be a typical way to look at business purchases. Investment decisions can generally be looked at from a present value viewpoint.

I view assets in the traditional accounting terms. Sure, some may depreciate and some may appreciate and there may be carrying costs / maintenance / storage costs with some. They're still assets.

In investment terms, focusing on maximizing cash flow is a mistake, IMO. The present value of total after tax returns can be much better on investments with significant appreciation, since taxes are deferred and may be tax favored compared to many cash flow investments. In a business, you actually want to maximize free cash flow to finance growth and be able to weather down turns.

Two very different things...


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## Spencer (Jul 6, 2005)

hdavis said:


> In investment terms, focusing on maximizing cash flow is a mistake, IMO. The present value of total after tax returns can be much better on investments with significant appreciation, since taxes are deferred and may be tax favored compared to many cash flow investments. In a business, you actually want to maximize free cash flow to finance growth and be able to weather down turns.
> 
> Two very different things...


I'm not sure I'm following. I'm learning financial terminology so forgive me. 

I think that what you are saying is that rather than buying assets that generate taxable income (example: rentals) it can be more beneficial to purchase assets that are more tax friendly/tax deductable (example: skid loader) as they can have a payback period and don't directly create taxable income??? Help me out here....I'm very interested.


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## hdavis (Feb 14, 2012)

Californiadecks said:


> Here's how your house is not an asset.
> 
> http://www.entrepreneurmag.co.za/ad...sonal-finance/why-your-house-is-not-an-asset/


I don't buy the argument. Assets are assets, no matter how much someone argues they aren't, and buying a personal home may be an investment.


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## Calidecks (Nov 19, 2011)

hdavis said:


> I don't buy the argument. Assets are assets, no matter how much someone argues they aren't, and buying a personal home may be an investment.


Ok. It's not my claim. But it is a claim non the less.


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## hdavis (Feb 14, 2012)

Spencer said:


> I'm not sure I'm following. I'm learning financial terminology so forgive me.
> 
> I think that what you are saying is that rather than buying assets that generate taxable income (example: rentals) it can be more beneficial to purchase assets that are more tax friendly/tax deductable (example: skid loader) as they can have a payback period and don't directly create taxable income??? Help me out here....I'm very interested.


Suppose you have a chance to buy something and resell it today. Or you could buy another thing, collect some cash flow, and sell it in 10 years. Which is the better deal? You know what the present value of the resell deal is, its the resell price minus the selling costs. On longer term investments, you have to take into account the fact that inflation has asignificant impact on the value of the cash flow from future years and the value of the net sale proceeds.

The most common way is to discount it to what it's worth in today's dollars - the present value of the deal.


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## Calidecks (Nov 19, 2011)

If you have a mortgage your home is an asset. It's just not your asset it's the banks asset.


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## Jaws (Dec 20, 2010)

Californiadecks said:


> If you have a mortgage your home is an asset. It's just not your asset it's the banks asset.


My brother is about to build a house this coming year with the intention of selling it in two years and pocketing the capital gains tax free. While it is technically a liability it is also an investment. An investment of capital, time and resources on the speculation of its return.


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## Calidecks (Nov 19, 2011)

Jaws said:


> My brother is about to build a house this coming year with the intention of selling it in two years and pocketing the capital gains tax free. While it is technically a liability it is also an investment. An investment of capital, time and resources on the speculation of its return.


I believe an investment and an asset are two different things entirely. I agree your home can be an investment.


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## Calidecks (Nov 19, 2011)

Until you own your home outright or sell it for more then you paid it's not yet an asset. You could consider it an investment though.


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## Jaws (Dec 20, 2010)

Californiadecks said:


> Until you own your home outright or sell it for more then you paid it's not yet an asset. You could consider it an investment though.


Brancard made a good statement one day about your house being shelter, and shouldn't be considered as an investment over shelter. I agree with that primarily. You should want your home to suit you. The house I live in now has now become an investment, it will be a rental property when it is paid for. 

Matt is planning to build and sell three times and the fourth will be his outright. Hope it works for him. 

Our next house I am building to be our last. She just wants a simple house anyway, and she doesn't want to move a bunch of times or live in town. Looks like it will only be about a mile away from where we live now :laughing:


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## Jaws (Dec 20, 2010)

@ OP:

It is important to us to pay off the stuff we want in our business. Hopefully in 10 years the shop and office will be paid for and our company is paying us rent on it. We took the same outlook on operating capital right away. 

Otherwise, I agree with Stephen, moat of this stuff is not an investment, its a business cost. Computers, tools, trucks ect... are going to need replacing often.


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## Metro M & L (Jun 3, 2009)

Finally a thread about the forest.


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## BamBamm5144 (Jul 12, 2008)

I consider things that make me money to be an asset. I invested my money into it to get a return on it.

While technically trucks are considered assets to a company, I look at them as only expenses since you'll never profit from them.


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## Spencer (Jul 6, 2005)

BamBamm5144 said:


> I consider things that make me money to be an asset. I invested my money into it to get a return on it.
> 
> While technically trucks are considered assets to a company, I look at them as only expenses since you'll never profit from them.


Vehicles are a grey area for me. I almost didn't start my business because I could not afford to buy a work vehicle with my crappy paying job.

I ended up taking out a loan and bought my 2008 E-350 for around $7k. Without that van I would not have been efficient and would not be gross profiting over $100k/yr (first year) and would have instead been looking at a scraping by on $15/hr.

I think if a vehicle is used in a way that adds efficiency and opens the door to other profiting opportunities it can be a great investment. Again, it goes back to the whole "time to payoff or recoup the cash" idea. 

If a company is ready to put a guy on the road and needs a vehicle to do it I would consider that vehicle a money generating investment...assuming a reasonable amount is paid for it given the task required of it.


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## Calidecks (Nov 19, 2011)

Spencer said:


> Vehicles are a grey area for me. I almost didn't start my business because I could not afford to buy a work vehicle with my crappy paying job.
> 
> I ended up taking out a loan and bought my 2008 E-350 for around $7k. Without that van I would not have been efficient and would not be gross profiting over $100k/yr (first year) and would have instead been looking at a scraping by on $15/hr.
> 
> ...


Your truck makes you money


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## Jaws (Dec 20, 2010)

Californiadecks said:


> Your truck makes you money


Not really. If I drove an '80 crew cab duelly that was in good shape instead of a '12 Super Duty crew cab I would make an extra 500 a month....


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## EricBrancard (Jun 8, 2012)

The vehicles are depreciating assets.


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## BamBamm5144 (Jul 12, 2008)

Californiadecks said:


> Your truck makes you money


That's why trucks are a gray area like Spencer said. You need them to make money. I have three trucks and a box truck. Every time I decided to purchase one, I needed to understand I need it to make money.

I was losing money without them because I wasn't able to send guys where they needed to go.

My best purchase by far has been my dump trailer. That is something that makes me money. On the other hand, I also had to buy a larger truck to pull it so all in for that set me back a good amount. Then I ran numbers and realized it would only take me 50 jobs for that to pay for itself, after that, its an asset making me money.


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## Calidecks (Nov 19, 2011)

Jaws said:


> Not really. If I drove an '80 crew cab duelly that was in good shape instead of a '12 Super Duty crew cab I would make an extra 500 a month....


Some trucks make more then others. That I agree with. Just like tools. The resale value depreciates but the use value is different.


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## overanalyze (Dec 28, 2010)

This has been a very good topic. I enjoy the different views on the matter. 

I view my shop and rentals as assets. They generate income for me above their costs. 

Similar with trucks and tools but much harder to put a true value vs. cosy on those items.

Here is the way we went with "extra" money this year after a good discussion with our accountant. 

We owe approx 7 grand on a truck. The interest rate is 4%. We took a 179 deduction on it when we bought it so no depreciation on it. The payment doesn't impact cash flow enough to worry about. We asked if we should pay it off. 

Her answer surprised me a bit, she said no. Her advice was to keep making the payments even pay more towards the principal if we wanted to save some interest. Then take the amount of money it would have taken to pay it off and invest in our retirement funds. There we earn +/- 10%. It means we net 6% more than the 4% we would have saved by paying off the debt.

Hopefully that makes sense or I explained it right..lol!


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## Warren (Feb 19, 2005)

overanalyze said:


> This has been a very good topic. I enjoy the different views on the matter.
> 
> I view my shop and rentals as assets. They generate income for me above their costs.
> 
> ...


That is not a slam dunk strategy though. No guarantee that your account will net a 10% increase, in fact it could lose money. Paying off the truck is a guaranteed 4% yield. The strategy is historically sound, and one that I have used also, but there is risk involved.


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## overanalyze (Dec 28, 2010)

Warren said:


> That is not a slam dunk strategy though. No guarantee that your account will net a 10% increase, in fact it could lose money. Paying off the truck is a guaranteed 4% yield. The strategy is historically sound, and one that I have used also, but there is risk involved.


I know and that is a very valid thing to consider. The reality is the 4% loan was only a few hundred dollars a year in interest so either way not a bunch of money. Just a different way to view debt and investing. I certainly am not saying go out and accrue a bunch of debt and not pay it off asap. We have been fortunate this year and could have done both. We chose to keep the savings a little thicker and add to our retirement.


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## overanalyze (Dec 28, 2010)

For those of you with shops separate from your personal property, how many have your construction company own them/pay the mortgage?


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## Jaws (Dec 20, 2010)

overanalyze said:


> For those of you with shops separate from your personal property, how many have your construction company own them/pay the mortgage?


Our holdings company pays the payment. I dont want an investment that big as an asset Of our construction company. its owner finance, not a conventional loan through a bank. Was a good deal for my dad and it keeps our credit freed up for other opportunities.


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## overanalyze (Dec 28, 2010)

Jaws said:


> My brother and Is holdings company pays the payment. I dont want an investment that big as an asset Of our construction company


Same here. We have an llc company for our shop and our other rental property. That is why I view the shop as an asset. If the construction company went belly up, our shop is in a great location and could be rented out to someone else and still generate income for us.


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## Jaws (Dec 20, 2010)

overanalyze said:


> Same here. We have an llc company for our shop and our other rental property. That is why I view the shop as an asset. If the construction company went belly up, our shop is in a great location and could be rented out to someone else and still generate income for us.


yep, same here.


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## overanalyze (Dec 28, 2010)

I don't have the business mind/desire to build my company huge or worth something to someone else. I just am trying to be debt free way before I retire and have invested enough money in various things to afford to live a quiet retirement. I don't have a real strategy.


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## Jaws (Dec 20, 2010)

overanalyze said:


> I don't have the business mind/desire to build my company huge or worth something to someone else. I just am trying to be debt free way before I retire and have invested enough money in various things to afford to live a quiet retirement. I don't have a real strategy.


That is a real strategy, imo. Same here, not so much for retirement as just being debt free as early as possible and have "mailbox"money coming in. It affords true freedom, true independence imo when you decide who, what and if you work. Thats been my plan since day 1. Work my ass off until its paid for and then use the profits to buy property that will pay us money every month independent of what we build.


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## Spencer (Jul 6, 2005)

Jaws said:


> Our holdings company pays the payment. I dont want an investment that big as an asset Of our construction company. its owner finance, not a conventional loan through a bank. Was a good deal for my dad and it keeps our credit freed up for other opportunities.


What do you mean by "holding company?" I'm curious because I hope to build a shop in a few years...


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## Jaws (Dec 20, 2010)

Spencer said:


> What do you mean by "holding company?" I'm curious because I hope to build a shop in a few years...


Seperate company to keep investment property in. Your "holdings". I folded my rent trailer (which is paid for) and my dad folded his rentals in it. The shop is owned by it. 

My buddy from high school that I refer work to and he to me, he is a second generation builder. His dad was the one who explained it best to me. My grandpa just owns his in his own name. 

My buddys dad has a seperate company that holds his rentals and his office. Now he is retired from building, just runs his rental company. He draws a salary, his vehicle and maintenance, fuel is paid for. He pockets the net after taxs. He asked me what investment would pay pay you more than 10% of its value and your investment in it every year? Cheap houses that have been redone with good MEPs. The tenant also helps pay for the investment. 

Commercial looks better to me though. You dont have to do repairs, its on the tenant. Bigger cash outlay though, so more risk when it isnt rented. 

He doesn't even do repairs, he uses a handyman. Looked like a pretty good deal to me.


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## overanalyze (Dec 28, 2010)

Spencer said:


> What do you mean by "holding company?" I'm curious because I hope to build a shop in a few years...


Jaws explained it very well. My construction company is an S-corp. My holdings company is an LLC. The S-corp signed a triple net lease with the LLC for the building. That type of lease states the tenant is responsible for all maintenance, utilities, and property taxes. At least that is how ours is written. The LLC charges rent above the mortgage cost. It is a other way to gain un-earned income. 

Definitely talk with your attorney and accountant when you get close to that point.

One thing to think about and discuss with them is location of the shop. I don't think it could be part of your personal property.


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## Spencer (Jul 6, 2005)

overanalyze said:


> Jaws explained it very well. My construction company is an S-corp. My holdings company is an LLC. The S-corp signed a triple net lease with the LLC for the building. That type of lease states the tenant is responsible for all maintenance, utilities, and property taxes. At least that is how ours is written. The LLC charges rent above the mortgage cost. It is a other way to gain un-earned income.
> 
> Definitely talk with your attorney and accountant when you get close to that point.


Very cool. Thanks for explaining.

What is the biggest advantage money wise? Are you avoiding the tax man through the rent payment?


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## overanalyze (Dec 28, 2010)

Spencer said:


> Very cool. Thanks for explaining.
> 
> What is the biggest advantage money wise? Are you avoiding the tax man through the rent payment?


Your not avoiding the tax man, just allocating funds differently to minimize your tax liability.

It also helps protect the "shop" from being included as an asset should you get sued. It's not the company's shop...they just rent.


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## Jaws (Dec 20, 2010)

Spencer said:


> Very cool. Thanks for explaining.
> 
> What is the biggest advantage money wise? Are you avoiding the tax man through the rent payment?


Not really a tax advantage that I know of from being in your construction company. But if a vacuum falls off a pick up and causes a wreck it isnt getting taken in a law suit.


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## Spencer (Jul 6, 2005)

Jaws said:


> Not really a tax advantage that I know of from being in your construction company. But if a vacuum falls off a pick up and causes a wreck it isnt getting taken in a law suit.


That makes sense. I think I have read on here before about putting rentals under individual LLC's.

I would be building my shop on the same property that my house sits on. I'm not sure how that will all work. Obviously I couldn't build a shop owned by my LLC on land owned by me personally. I guess I would have to purchase the land under the LLC.


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## Jaws (Dec 20, 2010)

Spencer said:


> That makes sense. I think I have read on here before about putting rentals under individual LLC's.
> 
> I would be building my shop on the same property that my house sits on. I'm not sure how that will all work. Obviously I couldn't build a shop owned by my LLC on land owned by me personally. I guess I would have to purchase the land under the LLC.


Its different state to state im sure, but my contract attorney only does property and construction law, he says that in Texas having an inc for each rent house is redundant. The key is to have good property and renters insurance.


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## overanalyze (Dec 28, 2010)

I would still check...you might be able to form an LLC and transfer your entire property to the LLC....members have to sign personal guarantees anyway for loans.


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## pcplumber (Oct 12, 2008)

I never thought in terms of reinvesting in my company. In fact, I never heard a contractor say he was reinvesting money into his contracting business. When I purchased my office building I considered it an expense, or the cost of doing business and not a reinvestment of my profit because it is either pay rent to someone, or purchase. In a sense it is an investment, but not a reinvestment of cash. Purchasing a building is a matter of what is the better. If I purchased all new office equipment I would not consider the cost a reinvestment. 

The only type of investments I put into my company is I try to put 10% to 15% of our gross income into advertising and I purchase equipment only when I see that it is necessary and will make me money.

For investing the personal income I receive from my business about 98% of the money goes into real estate and the other 2% goes into physical silver, gold and green cash just in case the banking system goes down for a short period.

My website is down and should be running in 24 to 72 hours (so they say).


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## FrankSmith (Feb 21, 2013)

A lot of good stuff hear. As I have read it all it has stuck me that very intelligent people can have differing view on some of these fundamental philosophies so long as they are skilled at making money. 

I have refused to spend money on big ticket items for my business unless I can't get by with out them. It does restrict growth but I have chosen to do so after seeing what happened to so many people in the last downturn. I had been using the extra money to invest in stocks until a few years ago. Although I still own stock I have recently began to purchase rental properties instead. I feel better about that than investing in another persons business. I do still wounder if I would get farther faster if I kept more of the money in the business. I likely will continue as I am as I hesitant to have a large amount of monthly expenses that could not be turned off if the economy fell apart again.


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## Stephen H (Feb 18, 2011)

this has been a good discussion. we haven't had one of those around here in a long time.

1) regarding trucks ----- this may be quibbling over semantics---- but I view a truck as primarily an expense. I think the most expensive truck I have bought so far---- was 24K.--- If we spent 48K on it---it wouldn't be earning TWICE as much------and frankly if we spent less than 24K---- it would cost us money because the truck less than 24k buys wouldn't do what we need it to do.

I don't view a truck as an investment--- because it doesn't make money on its own. stocks, bonds, REITs etc.--- I can mentally put those in a drawer and they earn whether I do anything else or not----- but if I park that truck---- it's just losing value in the driveway. It is an asset of sorts--- just not a particularly good one---and not really an earner.--- It's just a tool you gotta have.

2) Real estate/shop space.--- that will vary by locale. I just leased some shop space. Try as hard as I might--- I just couldn't justify BUYING in this area. For us leasing was a better deal. Plenty of available space for lease at favorable rates. I could lease or current space for the next 20 years and only have paid a fraction of what buying or building would cost us. 
I just don't see real estate as a big appreciating asset in this area---- it may well be different where you are.

3) rentals--- see number 2 above. I just don't see it as a smart move in this area----and inherently much riskier than stocks/bonds etc.

look at the last downturn------- stocks bounced back way quicker--- real estate still hasn't come all the way back----a lot of equity GONE there. 
ALSO--- if you own your own home---and you work in residential construction/remodeling/repair---AND you have a lot of your money tied up in rentals----- you are pretty UN-balanced portfolio wise---and in a pretty precarious position

4) Books:

Regaurding the "rich Dad" series--- I did enjoy the discusion in one of the books regaurding "which side of the table do you want to be on, employment wise ?"--- but for the most part I think the author is a bit of a con man.

Millionaire next door- EXCELLENT.
Spencer:--- Millionare will also help you with sorting out items 1-4, and help you determine wether you are investing for business reasons--- or buying for ego reasons.

I also suggest a book written by Steven Silberger called " the Jewish Phenomenon: 7 keys to the enduring wealth of a people"

rest assured--- it has NOTHING to do with religon- but more about how different people/cultures view money---and determinig how best to spend/invest yours.

For example--- do you buy things??? or do you buy experiences? ( do you spring for a new gun cabinet--- or a trip?--- do you buy your kids ATV's--- or do you spend on the best education you can arrange?

As great as "millionare" was---- Silbergers book was MUCH more helpfull to me.

Best wishes,
stephen


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## pcplumber (Oct 12, 2008)

Stephen H said:


> this has been a good discussion. we haven't had one of those around here in a long time.
> 
> 1) regarding trucks ----- this may be quibbling over semantics---- but I view a truck as primarily an expense. I think the most expensive truck I have bought so far---- was 24K.--- If we spent 48K on it---it wouldn't be earning TWICE as much------and frankly if we spent less than 24K---- it would cost us money because the truck less than 24k buys wouldn't do what we need it to do.
> 
> ...


There is no better investment in this world than real estate.This is some simple math and reasons why real estate is the best investment in the world and these are the methods and goals you want to achieve.

There is no other investment in this world where you can earn a steady profit of 50% to 100% every year and that is the goal you need a plan and mindset for. The way you earn 50% to 100% every year is by purchasing properties at the right price. It takes a lot of hard work to find a property at the right price and I often look at more that 100 properties, but before I actually drive to look at a property I crunch the numbers, first, and if the numbers don't make sense then don't waste your time.

This is my goal. Suppose, I have $40,000 to put down on a house. To make 100% on my money in 1 year I need to find a house that is worth $40,000 more than I pay for it, or I have to know that either the market is on the upswing, or I need to know that I can put a small amount of money into the house and it will appreciate by $40,000. I don't sell my homes, but I know many people who will sell their investment homes, take the $40,000 (or 100% profit) and buy more homes. This is a great way to get cash flow, but I don't like to sell a home in one year for a 100% profit and then the buyer makes another 50% to 100% profit over the next year, or in the near future.

Supposing, I put $40,000 down on a house and within 12 months the house is worth $40,000 more than I paid. Then, I earned 100% on my money plus any rental income profits. If the house takes two years to increase by $40,000 then I earned 50% per year on my money.

Another thing you need to calculate is your appreciation plus rental income profit. Your appreciation over a 1 or 2 years period may be 35% (based on your cash investment and not the total house value). If you invested $40,000 in a house and the profit from your rent is $4,000 then your annual return is 10% on your investment just for the rent. That is much better than stocks, but suppose you buy at the right price, you put $40,000 down and your house is worth $20,000 more than you paid for it. Now, you have a 50% profit on the down payment plus 10% for the rent and your total profit the first year is 60%. Even if you string out your math for 5 years I am taking a wild guess that the annual return on your investment will be 15% and nobody can beat that in the stock market over a 5 or 10 year period.

I virtually never sell a property. Everything I purchase is long term. Even if my properties don't appreciate in value I always earn no less then 8% on my money. Many books say that the average return in the stock market is something like 10.1% over a 100 year average and that is B.S.. and I am guessing that less than 1/2% of this people in this world can earn an average of 6% in the stock market. The worse thing about investing in stocks is you can lose 100% of your money if you don't play right and losing all your money with real estate is virtually impossible when you know what you are doing.

Don't always look at how much a rental property is currently earning as much as you should look at what the return are over a 5 to 10 year period. Rents increase an average of 3% to 4% annually and you need to look into the future to see what your ROI is.

Never trust a real estate agent because neither the seller's agent nor buyer's agent represents you. I never listen to an agent when they tell me something is a good deal because everything they have to sell is a good deal for them. 

The problem with stocks is other people are controlling your money. With real estate you have 100% control of your money. 

Do you want to make hundreds of millions in real estate? Earn a good profit on a few homes and go to real estate club meetings. A high percent of the people going to these clubs literally have hundreds of millions of dollars and they either don't know how to invest in real estate or they don't have the time. I personally know people who did a few good real estate deals and they have so many people from all over the world throwing money at them and they literally beg them to invest their money and they share the profits. My point is; you really don't need money to invest in real estate. Several years ago, 

I wrote some posts on CT a few years ago about a 20-year old girl I knew who ran away from home in Japan and came to the United States without one penny. This girl was gorgeous and I hate to admit that I was suckered into doing a lot of free work for her. After being in this country for seven years this girl never worked one day, never had normal job and never got a driver's license. She did only casual babysitting. After being here 7 years she owned 18 high-priced homes (mortgaged). Most of the homes were in the $600k range. Meeting with this girl (I mean working for) was very inspiring and it proves that you do not need money to invest in real estate. All you need is to be either gorgeous or do some good deals, make people believe in you and they will throw so much money at you that it will be impossible to do that much investing. And...she was not a hooker.


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## cargin2 (Aug 2, 2011)

Frank
How do you invest or reinvest in your business and why?

Do you invest with the hopes of having bigger years in the future and when you retire you will sell the equipment and property associated with the business?

If you ever go to a auction for a construction company you will see that the tools are worth pennies on the dollar. Most are worn out and out of date.

Most customers are buying you, so when you are gone so is the business. I like what Stephen (Slate& Tile) had to say. I would listen to him.

If I was young I would set up a Vanguard Roth IRA or SEP IRA or both and religiously put money into it every month. Your business is a means of providing for your family and for giving you money you can invest into companies like WalMart, Apple, Johnson& Johnson just to name a few. Become an owner (stock holder) of those companies and let them work for you.
Over the long term the stock market has had average annual return somewhere n the 11% range. Save your money and put it to work for you.
Sure buy scaffolding and saws, but those items are like trucks. The going to serve you and help you work faster but they will also lose value. 

Money invested at 7% will double in 10 years. At 10% it will double in 7 years. That is no big deal when you have $2,000 invested. It starts to be a big deal when you have $50,000 invested. Just keep putting money away and some day you will make more on your investments than you do with your hammer.

Just my 2 cents


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## Jaws (Dec 20, 2010)

@ Stephen : Thanks for the tip on Jewish Phenomenon. 

I have read Millionaire Next Door, very good. Not a big fan of Rich Dad, personally. Couldn't get into it.


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## pcplumber (Oct 12, 2008)

I don't make things up as I write. If you go way back into my posts you will find that I spent an entire year with some of the best stock and options investors in the world. I worked with these people, developed a software program and wrote a 120 page book that taught every stock and options trade strategy. While I am not an expert I am very familiar with the math and risks involved with the stocks, options and mutual funds (same thing) because my software is only about trades, math and risk assessment.

In a few days, I will most a copy of my trading software with a video. After following these gurus around the country for a year this company did not want to use my software because after using my software for only a few minutes you will see the risks involved for trading strictly stocks and for trading stock and options combinations. You will realize there are no secrets, no holy grail and there is no trade where you are guaranteed to earn a profit. In fact, there is no trade where you cannot lose money. Nobody can ever tell you that they know the answers and they cannot tell you that investing in one company or another is the right choice because every stock choice is based on opinions and assumptions. There is no better nor correct company to invest your money in because there are millions of reasons why a stock's will, does and can fall. The only way you can tell which stock is good is with hindsight.

The stock and options experts sold stock and options training courses for $18,000. Obviously, they told everyone that investing in stock and options was the best investment. During the seminars with thousands of students, I only met one student who read between the lines and he heard where the instructors invested their money. They invested their money in rental units. I worked with these instructors and I can tell you that they had only a few thousand dollars invested in the markets and they only invested in the markets to sharpen their skills for duping their students. When they lost money they would tell the students that they did the trade in the manner in which they made money. For example, when they lost money by purchasing stock they told the students they shorted the stock (selling rather than buying).

Look at what happened to people's IRA's a few years ago. Retired people lost their entire life's savings and had to go back to work. 

I was cautious and invested only $24,000 into an IRA. Just last year, I decided I had enough and after having that money invested through Dean Witter (they changed their name and I can't remember right now) my IRA was worth only $18,000. Where did my 6% annual gain go?

IRA's are invested in the stock market. Theoretically, the risk is you can lose 100% of your money and history proves that this has occurred recently where people lost their entire life's savings in the stock market. Do you these people who lost money got tips from experts?

The saying for the stock investing is:

"If you can't afford to lose the money then don't invest in stocks"

Suppose, I offer someone a choice between two gifts. I am offering either a stock investment of $50,000, or I am going to put $50,000 down on a rental house. In less than one minute that stock investment could be work $45,000, $40,000, $35,000, or less and it could take 50 years to get back to its original value. When I met my wife (my 3rd), she had $25,000 in cash. I recommended that she invest the money in mutual funds. About two weeks later her mutual finds dropped to $18,000. Five years later, her funds were still worth $18,000. Since I gave her the recommendation I had her close her account and I gave her the $7,000 she lost. I invested in stocks heavily throughout my life and have hundreds of stories to tell. In fact, I don't want my name on CT, but some of my past posts were about a $750 million dollar class action for stock fraud. I was the lead plaintiff and we won the case, but the company we sued had an insurance policy for only $50 million. 

The rental house is more-sure to retain its value. The house may decline if value to $1.00, but it doesn't matter because the rent still pays for the house and there is still a profit after repairs, vacancies, etc. In essence, the house will always have its original value and will never be worth less when you don't look at a rental property you want to trade. 

Suppose, you pay $600k for the house and the value drops to $200k. The decrease in value is not important because you have to consider owning the house the same as owning many other businesses like a liquor store, laundromat, or gas station. The sale, or resale value of any business can change on a daily basis, but what is important is that the business earns the ROI you want. If you have a liquor store netting you $40,000 per month then the sale value of that business is based on the net income. The more net income a business earns the more the business is worth. The same is true for multiple units. The more net income the more valuable the real estate.

The difference between investing in an IRA (stock or mutual funds) is you put $50,000 in and you draw interest only at 8% per year, That is $4,000 per year and the same as a good rental property with $50,000 down, So, both investments are paying you $4,000 annually. Then, your stock drops in value to $30,000 and now your 8% draw is only $2,400 per year for many years, or maybe worse. Your draw from real estate increases to more than $4,000 because you increase your rents every year by only 2%.

I love real estate and it is not for everyone. Most landlords seem to hate tenants with a passion. Personally, I love dealing with tenants and maybe that is because tenants are like dealing with angels compared to dealing with plumbing customers. When tenants make try to make me upset I laugh and ask the tenants when they are going to move. They always ask me why and I tell them that when they move I will make an immediate $43,200. They ask me how and I tell them:

$200 X 12 x 18 = $43,200. 

This means that when the tenant moves I will increase the rent for the amount of $200 for the new tenant. Rental properties in my area sell for 13 to 18 times the gross multiplier and the 13 to 18 depends on how desirable the area is. So, when I increase the rent for only one apartment by $200 I can sell my building for $43,200 more. 

Multiply $43,200 times 30 units and you just increase the value of your building and you made $1,296,000 just for sending out a few Rent Increase letters. 

Real estate is where the money is when you know how the math works and you can bank more money than your construction can net in a lifetime with less risk. A construction business is only a stepping stone where you get cash to invest in real estate and very few contractors get rich by owning their construction business.


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## hdavis (Feb 14, 2012)

That was a long one.


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## Stephen H (Feb 18, 2011)

PCPLUMBER.

those are interesting ideas--- they may even be right
however

I note that you are in LA

that's a very different real estate market--- than buying properties in a rust belt city with a shrinking population base, crumbling schools etc.

Also--- look at your 2nd paragraph in post # 67

I came to the conclusion a long time ago--- that rather than do THAT--- I would rather spend my time working in my own established trade/business--- doing things I am already good at and already like.

what you are describing is really a second business---and it involves tenants.---- no thanks!

I grant you--- it might be a great opportunity for many people---- but I don't have the interest or the personality.

Stephen


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## Spencer (Jul 6, 2005)

pcplumber said:


> Real estate is where the money is when you know how the math works and you can bank more money than your construction can net in a lifetime with less risk. A construction business is only a stepping stone where you get cash to invest in real estate and very few contractors get rich by owning their construction business.


I appreciate the perspective. The wealthiest "self made millionairs" I know have fleets of rentals. But with that comes what Stephan pointed out, you are spending a great deal on time on the units themselves through upkeep, maintenance, paperwork, delinquent tenants, etc, and you are in a sense married to the properties. I think you are right, but its not for everyone.

The other wealthiest millionairs I know are farmers who bought ground a generation, or even two generations ago. There are many people around here who have financial security because the bought real estate, aka farm land, for $1000/acre and now it is worth 10x that.

I have thought of following the lead of other successful small business owners in my area buy purchasing rentals. But at this point point I ask myself if it is really worth the time involved. Still a question in my mind at this point...I think right now I can get a better return by investing my time in growing my business.

I have played the stock market and traded commodities, I've seen epic gains and equally epic losses. It is a deadly game if you don't have the head for it. However, if you are level headed and know an opportunity/bargain when you see it, it can be a great investment. I trade now, but only with money I can afford to lose like you said. My purpose is to practice. 

I have 93 year old neighbor lady who is a self maid multi millionaire. She got it by picking her own stocks and being active in her investments. She is still picking stocks today. Point being. It can be done, and you don't have to dedicate your life to the markets to make money at it. We get ourselves in trouble when we get greedy.

All that being said. We have to take into account our location. LA is a lot different market than rural Indiana.

I do appreciate you explaining yourself through the lengthy post. It does make sense. :thumbup:


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## WarnerConstInc. (Jan 30, 2008)

Rentals suck. Talk about a sure fire way to slowly destroy a property.


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## hdavis (Feb 14, 2012)

WarnerConstInc. said:


> Rentals suck. Talk about a sure fire way to slowly destroy a property.


Depends. It's a difficult thing to do well. IMO it can be a good way to defer gains off of a conversion of use.
Most of the time rentals are fairly priced, so there aren't that many screaming deals. Flips can be a diffeeent story.


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## pcplumber (Oct 12, 2008)

Stephen H said:


> PCPLUMBER.
> 
> those are interesting ideas--- they may even be right
> however
> ...


The hottest market for real estate is Memphis Tennessee. Just a few months ago, I was looking at real estate where I could purchase 40 units with 100% occupancy for $15,000 per unit. In California the average price for one unit is $160,000. When you crunch the numbers the Tennessee properties are 10 times better. I don't have all the numbers handy, but you can make more than 50% on your money every year in Tennessee. 

The only downside to the Tennessee properties is Tennessee is the Eviction Capital Of The World, but most small time real estate people don't have a clue regarding how to handle tenants to reduce evictions. When you have several units that you own at the right price a few evictions is only a part of doing business and you don't get emotional. Tenants stiff you and when that happens I don't even think about it for one second. I pay an attorney to evict the tenant and I don't get emotional.

All you need to do is put up the down payment and hire a management company. California is probably the toughest market and the best three are Tennessee, Olkahoma and Texas. The Forth Worth, Texas area has been hot for about 10 years and is still hot (last time I checked).

I won't tell how many homes and units I have on CT because telling causes problems, but I have a lot of real estate in California, Idaho and Las Vegas. Idaho has been my worse market for more than 10 years.

My wife and I manage all our properties and I don't spend more than two hours a month. My wife's part takes about two hours per day with the exception of when we collect rents and it takes her about 12 hours to make bank deposits and manage all the book keeping. We get more net income from our profits in one month than people in the top 2% earning bracket earn in a year. We could (but would not) travel around the world and we don't need to worry about selling to customers nor any of the things related to the construction business. We have only two employees who take care of the day-to-day maintenance, painting, etc. and they work only 2 to 3 hours per day and sometimes they will work 40-hour weeks when we are doing remodeling.

The question in this thread is; do you reinvest your money into your company and then it turned into, "where is the best place to invest". Whether you like working the business, or not, real estate is the best place to reinvest your money.

I have the real estate business down to a science to make the business fun and stress free. I have a lot of philosophies, policies and systems that simplify managing the properties and managing the tenants and evictions. If anyone needs help you can contact me and I will explain my policies. Maybe, in a few days I will make a video that shows our systems, philosophies and policies.

The big money is in multi-unit buildings where you can increase the rent. I purchased a 28-unit building in Torrance California, doubled the rents within one year and my building appreciated by $3 million plus my net income is $20,000 per month ($240,000 per year). You can't do that with stocks, or a construction business unless get in on the ground floor of a startup company like Microsoft and you would have a better chance of winning the Power Ball.

I never had a partner in the real estate business, but by listening and learning from people who know what they are doing you could start with one rental unit, make a little profit, go to real estate clubs and you will find people who will throw money at you when you tell them you know what you are doing. Tell them my philosophies, let them put up the cash, take half the profit and you will be a happy camper.

Maybe you don't personally love the real estate business, but maybe your wife of a child would love the business. My wife gets ecstatic every month when she collects the rents and coins from the washing machines. I think the best thing in the world that every parent could do for their children is teach their children the real estate business. The way I got inspired with real estate was when I was 14-years old I was doing property maintenance for a few Jewish people in Massachusetts. These people were filthy rich and they treated me like their son and I picked up on their philosophies and systems.


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## WarnerConstInc. (Jan 30, 2008)

hdavis said:


> Depends. It's a difficult thing to do well. IMO it can be a good way to defer gains off of a conversion of use.
> Most of the time rentals are fairly priced, so there aren't that many screaming deals. Flips can be a diffeeent story.


9 out of 10 around here (50 mile radius) slowly decay from being rentals.

I used to work on 75+ property's that were rentals. All slowly rotting.


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## hdavis (Feb 14, 2012)

WarnerConstInc. said:


> 9 out of 10 around here (50 mile radius) slowly decay from being rentals.
> 
> I used to work on 75+ property's that were rentals. All slowly rotting.


That proves the point that real estate and especially rentals are no good investments every where. There are cities in my area I wouldn' buy in no matter what.


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## sailfish27 (Jan 25, 2014)

Real estate is all about location. Close to Boston apartments do extremely well. The house I grew up in is now on the market for 1.2 million. It's a 2 family style house. My folks paid 30k for it back in the day and sold it 7 years ago for 750,000. The new owners will undoubtedly make some money. 

Apartments in this particular city rent for over 2000/mo. for a 2 bed 1 bath unit. If converted into a condo they typically sell for 450,000 + for 1000sq ft. 

Many of the families I grew up with are now millionaires just by holding onto a couple of buildings.


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## EricBrancard (Jun 8, 2012)

pcplumber said:


> I virtually never sell a property. Everything I purchase is long term. Even if my properties don't appreciate in value I always earn no less then 8% on my money. Many books say that the average return in the stock market is something like 10.1% over a 100 year average and that is B.S.. and I am guessing that less than 1/2% of this people in this world can earn an average of 6% in the stock market. The worse thing about investing in stocks is you can lose 100% of your money if you don't play right and losing all your money with real estate is virtually impossible when you know what you are doing.


I really would like to get involved in rentals but this sort of troubles me. You say that those who know what they are doing will earn no less than 8% on real estate. The problem is that those who know what they are doing earn far more than 10% in the market. So how do I convince an investor who averages 28% in the market to go into a real estate investment that yields less than a third of that?


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## Stephen H (Feb 18, 2011)

Spencer said:


> There are a lot of successful old school traders who have been in the market for 30+ years day trading that say the market has become completely broken.
> 
> Most US monetary policy/FED decisions are priced in days before the announcements are made. It has become a game of hook, line, and sinker for the fishes who are ignorant of what the market really is.
> 
> ...


 spencer---- based on what you have been writing----- you aren't really an investor.

what you are describing--- is specualting.

read over what you have written---and everywhere you wrote "trade"---- mentally substitute the word "speculate"

speculators--- have ALWAYS been sheep to be shorn by the big boys.

read a little history--- for example Bios of Jay Gould or Commodore Vanderbilt--- read about the South Sea Bubble.--- you will see what I mean.

then you might want to read about ACTUAL investors---and you would be hard pressed to find a better one than Warren Buffet. what investors do---and what you have been describing, complaining about----are light years apart.

If you think the market is actually rigged against the little investor---- you couldn't be more wrong.

there was nothing to prevent the little guy from thinking 30 years ago" you know what---people LIKE buying cheap tube socks----Walmart is on to something there"---and investing accordingly.

or how about this " you mean there is going to be this magical box that sits on every desk in the WORLD---and gives you free, unlimmited access to ****ography 24-7 ? I think those boys at Apple computers are on to something !!!!! "

Me personally???? I know we are in the 4th or 5th longest running bull market since 1929. I can reasonably conclude that it will end sometime. It doesn't matter to me either way. If the bull market continues indefinitely--- I win.

if a bear market emerges---I buy even more----and i STILL win because Bear markets ALSO end. what I don't do is complain that the system is stacked against me---- because it absolutely isn't.

Stephen


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## Spencer (Jul 6, 2005)

Stephen H said:


> If you think the market is actually rigged against the little investor---- you couldn't be more wrong.
> 
> Stephen


Maybe it would be better to rephrase and say "the market is rigged against the little speculator." 

My opinion is and has been that the only way to make money consistently in the market is through long term trades/investments. But I think it can be done in the "speculation" arena of commodities also if someone buys on price in conjunction with fundamentals. Same concept of buying an index on the dow in 08 when it was cheap. Focus is on the price of a broader market rather than putting the risk on one specific company.

Thanks for the perspective. You are right. I need to think some more about investing vs speculating. I am very much still in limbo in trying to develop a plan on where I want to put my investment money...

By the way, I just started reading "The Jewish Phenomenon" this morning. I'm looking forward to it. :thumbup: Appreciate your thoughts.


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## hdavis (Feb 14, 2012)

Spencer said:


> I'm looking to go long on crude as a buy and hold for this year. Still waiting for a bottom. You don't get buying opportunities with so little potential downside in the crude market very often. Fingers are crossed for $40.


I meant to get back to this one earlier. You don't happen to remember back in 2001 or 2002 when the Saudi Prince said he thought $60 a barrel was what they were looking for, do you? And you did catch their recent statements about speculators being the ones driving the price of oil up...

So they decided to pump a lot more oil and hammer speculators and competitors. They can easily do it for a year or more, if they choose.

If you have some insight into what the Saudis are going to do in the future, by all means trade on it, but I wouldn't consider this a momentum play or a swing trade.


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## Spencer (Jul 6, 2005)

hdavis said:


> I meant to get back to this one earlier. You don't happen to remember back in 2001 or 2002 when the Saudi Prince said he thought $60 a barrel was what they were looking for, do you? And you did catch their recent statements about speculators being the ones driving the price of oil up...
> 
> 
> 
> ...



There is no doubt that there is a geopolitical battle being wages by means of the crude market. 

There is serious chart damage from the waterfall over the last few months. IMO it won't bounce back hard without some type if catalyst. 

More than likely it will bottom somewhere between 30 and 40 and develop a range between the low and 60 for at least a year. 

The Saudis are punishing Russia and Iran. I'm not sure if the US is on board but the Saudis are also destroying our fracking market in the process. 

I haven't decided what I'm going to do with the trade yet. I wouldn't have a problem on sitting on the long position but I buy via ETF and the decay can destroy your gains if you hold long term. I'm not trading any sizable amount of money. Like I said earlier, at this point in my life it is more to gain investment experience. 

It really appreciate the perspectives of you guys who have been around the block. You mentioned what the Saudis said back on 2001...no I don't remember what he said...I was 12 years old...


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## hdavis (Feb 14, 2012)

Spencer said:


> You mentioned what the Saudis said back on 2001...no I don't remember what he said...I was 12 years old...


Fair enough:laughing:


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## Spencer (Jul 6, 2005)

hdavis said:


> Fair enough:laughing:



My theory is that being able to identify opportunities in any market is a talent developed by many years of experience and observation. My experience bucket is pretty empty at this point. Thus lots of questions.


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## hdavis (Feb 14, 2012)

Spencer said:


> My theory is that being able to identify opportunities in any market is a talent developed by many years of experience and observation. My experience bucket is pretty empty at this point. Thus lots of questions.


IMO, understanding the risk, and therefore what you need for the upside potential is where people miss a lot. They wind up being under compensated for the risks they take, and it bites them in the end.

Personally, I think that everyone should fully understand the implications of the "gambler's ruin" problem before doing any trading or investing. It points out that even with a winning strategy you can go broke. The simple explanation of it I've seen is a graph in "The Eudaemonic Pie". I think it's page 42.


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## Spencer (Jul 6, 2005)

hdavis said:


> IMO, understanding the risk, and therefore what you need for the upside potential is where people miss a lot. They wind up being under compensated for the risks they take, and it bites them in the end.
> 
> Personally, I think that everyone should fully understand the implications of the "gambler's ruin" problem before doing any trading or investing. It points out that even with a winning strategy you can go broke. The simple explanation of it I've seen is a graph in "The Eudaemonic Pie". I think it's page 42.


I learned a fair amount that from the school of hard knocks. 

Started trading the silver bull a few years ago. Started investing in silver etf when it was around 20/oz. Was making good money so I started to trade the 2x leveraged etf. Mind you it was a raging bull then and you would have had to be pretty dumb not to make good money going long. 

Long story short, the more I made the more I leveraged up. I was making crazy percentages and doubled up my leverage (margin + daytrading acount). The charts had been vertical for quite a while but I didn't have the sense to get out. Greed had taken over. 

May 1st. The night we shot Bin Laden. The metals market went into full meltdown. We had just hit $50/oz. It was sunday night and I couldn't touch my money until open. As soon as the world market opened sunday night something like $6 got shaved of in the first 15 minutes and it kept falling. Commodity traders who had traded their whole lives said they had never seen anything like what happened that day. 

I held on for like a week. In 6 months I had doubled my money and because of having leveraged up I lost those gains in pretty much 1 week. I'm thankful for the lesson. You learn a lot about yourself and the markets in times like those. 

Greed and fear is all the market is really about. Master those two emotions and I think a person can do alright in any kind of market whether stocks or real estate.

I don't think I'll ever forget pulling out my phone to look at the chart sunday night and seeing this...


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## hdavis (Feb 14, 2012)

Spencer said:


> Started trading the silver bull a few years ago. Started investing in silver etf when it was around 20/oz. Was making good money so I started to trade the 2x leveraged etf. Mind you it was a raging bull then and you would have had to be pretty dumb not to make good money going long.
> 
> Long story short, the more I made the more I leveraged up. I was making crazy percentages and doubled up my leverage (margin + daytrading acount). The charts had been vertical for quite a while but I didn't have the sense to get out. Greed had taken over.


Funny thing is I bought physical silver in the $14-17 range. For speculative stuff like this, my target is generally double in 3 or less years, so sell point was set at 34. Then I just let it sit and didn't worry about it. I sold out in 3 chunks on the way from $35-50. It could just as easily have gone down significantly- the intrinsic value and marginal cost of production is way lower than the $20 you hear thrown around, but once it hitches to gold's coattails, it will ride up for a time.

Leverage increases costs and risks. Leverage is best saved for very low downside situations. Real estate is the absolute classic use of leverage. There is no such thing as a margin call on real estate.


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## Spencer (Jul 6, 2005)

hdavis said:


> Funny thing is I bought physical silver in the $14-17 range. For speculative stuff like this, my target is generally double in 3 or less years, so sell point was set at 34. Then I just let it sit and didn't worry about it. I sold out in 3 chunks on the way from $35-50. It could just as easily have gone down significantly- the intrinsic value and marginal cost of production is way lower than the $20 you hear thrown around, but once it hitches to gold's coattails, it will ride up for a time.
> 
> Leverage increases costs and risks. Leverage is best saved for very low downside situations. Real estate is the absolute classic use of leverage. There is no such thing as a margin call on real estate.


Silvers day will come again. But it will take time... Silver is an extremely small market. Then with no limit up or down it can make for some great fun. Next time it truly comes into style again and the speculative money rolls in it is hard telling where it could go. I'm sure in my lifetime we'll see another epic run.

I used to frequent a metals trading forum. There were guys we called "stackers." They were men with an obsession. The were stacking all they could back when it was under $6. Problem is most of them have a conviction with the metals that doesn't allow them to sell and take profits.

If we see sub $10 I'll start stacking. :thumbup:


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## sailfish27 (Jan 25, 2014)

Nice discussion here. When I break down the fundamentals this is what I see.

Real estate is obviously more hands on then stocks, but it has inherent advantages. First and foremost is the ability to leverage. If I buy a 3family for 500k with 20% down my investment is 100k. We know inflation is averaging around 2%, therefore I can expect my asset ,to at least, increase by that rate in the long term. If my rents equal my expenses the math is simple. 500x2% =10k=10% of my investment. ROI=10%

Real estate also has an advantage over stocks in the way they are taxed. Uncle Sam wants people to become homeowner's so they legislate laws in order to motivate people to own. Unlike stocks there are no capital gains for a primary residence after two years. Interest on your note for a primary or investment property is tax deductible. So isn't depreciation, which really doesn't exist. 

Third advantage, you can borrow the equity from a real estate asset. It's not that hard even in this environment to get an equity line of credit on your property. An equity line allows you to pay interest only when use the money without selling your position or incurring penalties, as is the case for stocks. 

Without claiming to be an expert on stocks. If I take the macro view, it seems pretty simple. If diversification is the answer, you are in effect investing in the U.S. economy. We know the U.S. economy is growing by about 3% a year and inflation by 2% add dividend and you end up around 6-7% per year. The only people who can do better are either lucky or in the business and well informed. IMHO


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## PCI (Jun 8, 2012)

Let me be the first to say real estate investing is not for everybody. 

I have single family rental properties. Here are some of the upsides for me. I bought the properties for $200k, I put 5% down ($10k) because I put so little down I only break even after all of the expenses each year. "But" I do get depreciation of about $8k per year which for my tax bracket saves me about $2k per year in taxes. So I have a 20% ROI ($2k/$10k). Not huge, but not bad.

The biggest thing for me is the long play. In a total of 20yrs I will own this home free and clear and my renters have made all of the payments. Now I'm speculating the in MN the average appreciation is around 3%/yr. So in 20yrs the house should be worth $300k conservatively. That is huge.

At that point I can; start taking the rents as income, I can sell it and pay the taxes and have a very nice ROI, I can sell it and buy a vacation home (other real estate) via a 1031 exchange and rent it out for two years and then live in it as my primary home and pay no taxes on it if I live there for 2 of 5 years. Or they can be willed to my heirs and all of the taxes disappear for them when I die.

I have only 4 of these properties and couldn't buy any more because of the real estate collapse. So I have $40k invested and in a 20 yr period will have turned it into $1.2mil. 

Very simplistic I admit. A ton of time over 20 yrs to keep up the properties and deal with my tenants. There is also the "lost opportunity cost" which is very hard to calculate. But for me it works. I have a simple sheet somewhere that I used when I bought these homes that I will see if I can dig up that breaks down the return on your investment that may interest some of you.


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## Metro M & L (Jun 3, 2009)

Id like to see it Pci.


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## Jaws (Dec 20, 2010)

PCI said:


> Let me be the first to say real estate investing is not for everybody.
> 
> I have single family rental properties. Here are some of the upsides for me. I bought the properties for $200k, I put 5% down ($10k) because I put so little down I only break even after all of the expenses each year. "But" I do get depreciation of about $8k per year which for my tax bracket saves me about $2k per year in taxes. So I have a 20% ROI ($2k/$10k). Not huge, but not bad.
> 
> ...


Exactly. :thumbsup:


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## river rider (Dec 31, 2012)

PCI said:


> Let me be the first to say real estate investing is not for everybody.
> 
> I have single family rental properties. Here are some of the upsides for me. I bought the properties for $200k, I put 5% down ($10k) because I put so little down I only break even after all of the expenses each year. "But" I do get depreciation of about $8k per year which for my tax bracket saves me about $2k per year in taxes. So I have a 20% ROI ($2k/$10k). Not huge, but not bad.
> 
> ...



Good discussion. Thanks for sharing your insights guys.

I spoke with my CPA couple years ago about this scenario of moving into my rental for 2 years before I sell to get the primary residence tax break. There was a big snag with it. Unfortunately I can't remember exactly what it was. I think tax law had recently changed and it significantly affected this. I think it may have been a depreciation recapture thing. Damn it, I just can't remember what it was. Anyways, I'd recommend touching base with your tax guy to be sure that your understanding of this tactic fully fits your situation, and is fully correct with current tax code. I'm not saying you aren't correct, but it never hurts to verify. I know I am going to inquire about it again with my accountant. These tax issues can be staggeringly HUGE. And planning & timing, and the nitty gritty can all be so critical.

Also, I thought there was a clear bold line separating 1031 branded properties from using the personal residence exemption, except as prorated for the actual amount of time when you used it for primary residence. Is the "vacation home" a viable loophole to break through that barrier? 

Not to be negative, but I definitely have some concern that the gov. may eliminate or reduce the primary residence exemption before too long. I have read rumblings of a push for it. This exemption went into effect in the late 90's/early 2000's I think, and none of it is written in stone into perpetuity. It's good to keep somewhere in the back of your mind that items of tax code change all the time, sometimes very dramatically for those affected. .....And lets face it, our govt. is not exactly living in the black.


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## hdavis (Feb 14, 2012)

PCI said:


> I can sell it and buy a vacation home (other real estate) via a 1031 exchange and rent it out for two years and then live in it as my primary home and pay no taxes on it if I live there for 2 of 5 years. Or they can be willed to my heirs and all of the taxes disappear for them when I die.


The provision that allowed 1031 followed by personal use to avoid depreciation recapture was put in place in the 1980s, and has recently (2 years ago?) been taken out of the tax code, so there is once again depreciation recapture. Not a big deal, but it's still money.


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## Spencer (Jul 6, 2005)

In "The Millionaire Next Door" it talks about leveraging your knowledge...specifically trade knowledge, in your investments.

That is one of compelling things that draws me to rental properties. I know houses. I can look at house and see what is going to need updated, fixed, etc., and am capable of doing the work myself.

It makes sense for someone in the construction trades to invest in a similar area where they already have experience, knowledge, and expertise.


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## hdavis (Feb 14, 2012)

river rider said:


> Also, I thought there was a clear bold line separating 1031 branded properties from using the personal residence exemption, except as prorated for the actual amount of time when you used it for primary residence. Is the "vacation home" a viable loophole to break through that barrier?


Current tax code always needs to be checked, but here's the historical. There are some restrictions on 1031 exchanges - it has to be like kind and at least equal value to fully qualify. Commercial investment property, for example, wouldn't generally fall into a 1031 with a single family. There has been some snags with multifamily going 1031 exchange for single family as well, but that's a rule you always have to look at going into the exchange to see what the latest is.

Single family rental held as an investment has always been able to be 1031 exchange for another single family rental. You used to be able to just start using the rental property as your residence, and that was that - no further implications. I believe they put in a new rule that does depreciation recapture when you convert it to personal use, but I only casually read it when it came out. Even so, it's still a valuable tax deferment strategy.

Like I said, I know there is depreciation recapture, but I'm not clear when it occurs - when it's converted to personal use, or when it's eventually sold, but I think it's the former.


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## hdavis (Feb 14, 2012)

Spencer said:


> In "The Millionaire Next Door" it talks about leveraging your knowledge...specifically trade knowledge, in your investments.
> 
> That is one of compelling things that draws me to rental properties. I know houses. I can look at house and see what is going to need updated, fixed, etc., and am capable of doing the work myself.
> 
> It makes sense for someone in the construction trades to invest in a similar area where they already have experience, knowledge, and expertise.


I'd agree with this, but only half way. The other half is knowing what to buy, where, what to pay, and getting the money.

I'm somewhat interested in real estate at the moment. I'm actually going to pitch my sister to get back into it - it's something she could do part time, and a lot can be done on the internet.


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## PCI (Jun 8, 2012)

Now that you mention the 1031 tax code change, I do remember this. Tax law is always changing and must be checked. I will hope that perhaps it changes back.


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