[The difference between a city accountant and a country one explained…]
Clients of mine, first time home-buyers Katie and John (not their real names), are not on a path like others. No, they want to buy a home that pays them rather than one they pay for.
What’s that you say? A home that pays you instead of the other way round?
It’s all a matter of perspective–understanding that even your primary residence should be an asset not a liability, which, in Rich-Dad-Poor-Dad terms, means something that puts cash in your jeans even if you lose your JOB.
What they found was a farmhouse on 50-acres of land with many doors to the outside. In more pecuniary times, farmers had bedrooms and other domestic spaces that had doors to the outside meaning workers/kids didn’t track mud through the home and corridors/hallways were reduced or even eliminated. They created more “virtual” space without needing to expand their homes.
Girls’ rooms were accessed from the outside through boys’ bedrooms’ doors to the outside so girls could walk though the boys’ bedrooms, but not the other way round.
What Katie and John planned was a number of animations–developing added revenue streams for this property including:
This resulted in an amazing fount of monthly revenues that looked like this:
And costs that looked like this:
Which resulted in a cap rate that is truly astounding:
If you can get a 6% pa cap rate from a residential rental, that is quite good; 16.8% is exceptional.
They also found that by becoming distributors for their yurt, tiny house and bunkie suppliers, they could further boost their revenues and cap rate to an extraordinary 24.4%, viz:
They could purchase this property for $440,000. What was it worth after all these animations? Well, that’s simple. You take their NOI (net operating income) and divide it by a FMV (fair market value) cap rate…
If the FMV cap rate for rural property like this is 11.5%, this means it is now worth nearly $1.6 million. Wowza.
But John surprised me. He’s a handy guy and decided to buy a mini-sawmill to exploit their 10-acre, 5,000, 40-year old spruce and white pine woodlot.
He wanted to do it on a sustainable basis, which means taking out no more than 4% of his trees in any given year; that is, 200-trees per annum.
These are 14-inch diameter trees that produce about 130 board-feet per tree, which lumber he can sell for around $3.50 per board-foot.
All this to say, he can generate another $7,583 monthly bringing his total revenues to an incredible $23,454 per month and driving their cap rate to 32.4%.
This is like buying a $500,000 home and being able to rent it for $162,000 per year net, that is, after paying for insurance, property taxes, repairs, maintenance, and vacancy allowance.
I’d like a few (dozen) places like that, thank you very much.
Which brings me to my last point: I was visiting recently with a wealthy American friend who asked me, “Bruce, do you know the difference between a city accountant and a country one?”
I did not.
“Well,” he said, “I make about $300,000 a year from sustainable logging on my 5,000-acre property. My city accountant informed me I’d have to pay income taxes on that, which would take away about half. In other words, I’d be left with $150k to call my own. My country accountant, however, told me that was nonsense. He said to simply reduce the adjusted cost base of the land–it’s like selling off the kitchen and bathrooms in your home–it devalues the place, right? So, no taxes are owing unless you sell for a profit at some point in the future at which time capital gains taxes may be due. But since I intend for my kids and grandchildren to own this after I am gone, that tax deferral is, effectively, permanent.”
All this to say that my friend has made $300,000 per year from his woodlot for nearly 40-years, tax-free! He’d boost that by quite a bit if he stopped selling raw logs and started hawking mini-milled lumber instead…
FOR REAL ESTATE INVESTMENT AND BUSINESS COACHING THAT’LL HELP YOU PROVIDE FOR YOURSELF AND YOUR FAMILY FOR 3-GENERATIONS, PLEASE CONTACT:
Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD
Real Estate Investment and Business coach
ROYAL LePAGE Performance Realty broker
Ottawa Senators founder
-MAKING IMPOSSIBLE POSSIBLE
-FREEDOM VIA REAL ESTATE INVESTMENT AND PB4L, PERSONAL BUSINESS FOR LIFE
-FEHAJ, FOR EVERY HOME A JOB
-MAKE YOUR HOME WORK FOR YOU, INSTEAD OF YOU WORKING FOR IT
-HIGHER ROI NOT JUST FOR OWNERS AND INVESTORS, BUT FOR TENANTS, GUESTS, VISITORS, NEIGHBORHOODS, COMMUNITIES, TOWNS, VILLAGES, AND CITIES TOO
postscript: He fired his city accountant BTW.
postscript 2: What does $300k per year in tax free income make his 5,000-acre property worth?
Assuming he’s in the 50% tax bracket, it’s as if he had $600k per year in taxable income. At a 5% cap rate, it equals a capital value of $12 million or $24k per acre.
Basically, it doubled in value because he listened to a country accountant…
Image source: https://www.norwoodsawmills.com/lumberpro-hd36?GA_network=g&GA_device=c&GA_campaign=1494200310&GA_adgroup=55780291337&GA_target=&GA_placement=&GA_creative=285312081575&GA_extension=&GA_keyword=&GA_loc_physical_ms=9000683&GA_landingpage=https://www.norwoodsawmills.com/lumberpro-hd36&utm_source=googleads&utm_medium=cpc&utm_campaign=1494200310&utm_keyword=&gclid=EAIaIQobChMIj-iMsNeT4wIVTbjACh1CaAz4EAQYBiABEgIw5_D_BwE