This week should be a good one from the sense that we should see Moncure listed by our good friend, Judson. Prices have certainly been on an upswing and we have noticed that the "foolish" money is back in the game. At the end of the day, this should mean a good listing price (stay tuned) and hopefully a good selling price. The fact that the Sanford area is in the heart of what is known as a possible fracking zone, should not hurt the price.
Concerning the "foolish money," we only mean that there are more bandit signs and people trying to get into this business than ever before. Subsequently, a lot of auctions have shot up to the point where there is marginal profitability in the deals. This is where knowing an area, or having someone actually on the street level is a good, good thing. There are also a couple of other approaches that can be employed to make sure that a "backlog" is always at the ready.
Right now, part of that "backlog" for us is the three residential lots that we are sitting on. Current sales and winter may be the perfect recipe for Box Bend Home to finally take flight. However, the one thing that we always look at is the amount of resources employed VS the return + the time it takes on that return. In the corporate world this is called, "ROCE." (Or at least in our corporate day job world.) Return on Capital Employed. IF we can make X percent on a project (renovation) that ties up less capital and can be completed in less time than, say, a longer project (like a spec home), it makes more sense for us to work on the renovation from a risk and return standpoint.
That is, X return in 90 days is better than the same X return in 180 days -provided that X truly is the same amount. Additionally, if we spread out our risk over 4 or 5 projects and leg into them*, we are at less risk than if we put all of our eggs, or even half of them, into one basket. So, less time at a similar percent return is actually a greater return and, for the most part, renovations should be less risk than new construction.
Let's look at the return portion one step further: If you double a penny every day ( 1 penny on the first day, two pennies on the second, four on the third day, eight pennies on the fifth day, and so on), you will be a multi-millionaire by the end of the month. If you double that penny every 30 days, it is going to take you a few years to get to the same point. Sit down with a piece of paper and work it out. (Side note: This is a great lesson for kids on the value of money.)
So, if we can turn that money over every 90 days, or even every 120 days, or less, than we are going to be doing a lot better than if we turning it over every 180 days. (State Street what?) And State Street is a good example of this idea in motion. If State Street represented all of our capital employed, we would be in a holding pattern for way too long. But because State Street only represents a fraction of our capital employed in Box Bend, we are okay to ride it out for now, make some necessary repairs, and move on.
We have a friend in the Charlotte area who is in a different but related industry. His goal is to turn over his business money (capital) every 60 days and at twenty-two percent interest. Do the math on this one and you will quickly realize why we approach him to mentor us a few times a year, and why we seek his advice in general. (He's successful at it and to say that he is "well off" is an understatement.) Quick side note on this guy; you would never know how wealthy he is. He isn't flashy and doesn't brag. In a room full of successful people, he will be the quiet one sitting at a table talking quietly. I think that I may have seen him in dress clothes once. He always wears jeans. What's the point of all this? Humility. And it is a great point. Our experience is that the ones bragging and driving the expensive cars can either rarely afford them, or are wondering why they can't get ahead. They neither understand the value of a penny, nor that of a dollar; or they have their priorities way out of whack. Usually it is all three. This guy is the opposite of that model. He can live a life that others only dream about because he is willing to prioritize, focus and live way below his means. He understands risk and diversification. He is a great model for the rest of us.
So, back to this week... We are going to try to keep our models in front of us this week, and watch the action we have set up on our own and with others. By sharing these little thoughts and lessons with you dear reader, we are hoping to engrain those lessons deeper into our own lives, and increase our own focus. To recap in five easy points (one or two may be "added" points.):
1) Moncure in Sanford (73 acres of land) should hit the market this week.
2) We are working on Moreland and State, and both should be done by the end of the month and on the market. Both are lessons in diversification and risk.
3) Risk and diversification go hand-in-hand. This is partly why we earn a return: willingness to take a calculated and diversified risk. Especially under the protective gloves of the return-time-continuum. (The other "why" we earn a return has to do with value.)
4) Speed counts but not at the cost of quality. (It is hard to purchase reputation.)
5) Humility and priorities are two sides of the same coin.
Stay tuned... We had a question from a coworker that we intend to answer here.
* "Leg into them." Legging into a position simply means that we are not jumping in with both feet at once. If we own five properties, we may complete two at the same time and then move on to the third, fourth, and fifth. This helps us manage money in terms of expenses and minimize cash needs. We first heard this term in options trading in the stock market.
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