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To the spoils belongs the victor

Posted by John T. Reed on

To the spoils belongs the victor. Marshall MacLuhan said that. I love that line. As Harvard MBAs my wife and I know an unusual number of wealthy people. My middle son also got to know David Geffen, the richest man in Hollywood and others in that crowd.
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One thing I noticed is that in many ways, the things that YOU own OWN YOU. In my book How to Manage Residential Real Estate for Maximum Case Flow and Resale Value, I calculated that for each residential rental unit, you have to spend 4.6 hours on the various chores the unit demands: leasing, collecting rent and depositing it, advertising, repairs, paying bills, eviction, replacement of worn-out items, doing state and federal income taxes on the building, and so on.
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So if you own ten units, that is 46 hours a month. 40 units x 4.6 is 43 hours a week (4.3 weeks in a month)—a full-time job. Is that what you had in mind, rich guy? Being a super?

Second home

How about a second home. It does not trigger leasing, eviction, and rent collection—unless you rent it out. But just owning a building creates a bunch of things that have to get done.

You have people?

What’s that? You hire people to do those things? It’s not that simple. A. You need to know roughly how to do the jobs in question to know how to hire and supervise. B. The job of someone who “has people” is to recruit, train, and retain good people and to evaluate, counsel, and fire bad people. If you think you just hire people and forget it, you apparently have no experience at such situations. Recruiting, etc is different from collecting rents and leasing and so on, but it ain’t nothing, either.

If you rented it rather than owned it. someone else would have those duties

The standard here is what you have to do as renter versus what you have to do as owner. If you rent the second home or yacht, most of this stuff is the landlord or boat owner’s responsibility, not yours.
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My wife and I never bought a vacation home—even though we could afford it and I am a big real estate advocate. We watched many of our friends buy them. Indeed, we stayed in those second homes owned by our friends—last month a castle in France.
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We are glad we never bought such a home. It is a job.

The typical second home pattern

We have stayed in such places owned by others, and when we liked it, went back again. We saw the vacation home pattern with our friends.
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1. Buy it and invite friends like us to go there.
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2. Do a lot of work on the house.
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3. Take their small children there each year.
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4. The kids get tired of the vacation home and whine to go to Disneyland or Hawaii or some such instead.
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5. Parents bribe them by letting their kids bring other kids.
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6. The teenage kids simply no longer want to spend time at the vacation home, even with their friends, who also do not want to go there again.
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7. Recognizing the whole family is tired of the vacation home, they sell it.
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They typically make a profit, but transaction costs are enormous and take much of it. Gains are also taxed and less protected than owner-occupied principal residences.
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Better you put the money into your principal residence which you and your kids do NOT get tired of.
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Is a bigger principal residence more of a job. Yeah! But I did not tell you to buy a bigger principal residence. Do NOT do that. Buy a MORE EXPENSIVE one, because it has a better LOCATION. Is a more expensive residence a bigger job? No.

Foolish purchases of the nouveau riche

What THINGS do the wealthy own that the non-wealthy do not? their own tennis court and swimming pool. Indoor basketball court. Multiple kitchens (for entertainment they’ll tell you—but I suspect a relatively low percentage of the rich really entertain that often). A dozen or more bedrooms and bathrooms. That’s a hotel. They are generally vacant for years at a time. They have vast acreage. You don’t need that stuff. Neither do they. Why did they buy it? Because they could. They assumed that was what rich people do.
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It is what nouveau riche people do. Ron and Nancy Reagan had a ranch house with one bedroom. They did not want company. If you pay attention, you often read about a famous rich person like entertainment stars moving out of their mansion that previously was owned by Clark Gable or some such and moved into a fabulous, but much smaller, condo.

Rich people downsizing

Why? They figured out they did not need all that extra stuff. They are members of a tennis club rather than own a court. When they need a place for out-of-town visitors, they use a local hotel which is better all around. When they entertain, the rent an event venue for the day. For example, my wife had her retirement party at the Marine Memorial Club in San Francisco. That is why I joined it.

Personal property, too

Same applies to personal property like a yacht. If we wanted to ride around on a boat locally, we would rent one with a crew. A boat is a hole in the water into which you throw money. Same applies to other major personal property like a plane or RV.
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And it’s not just not using these things enough to justify buying them. Each is another job. It takes hours each month or year to own a large boat or a plane.
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To the victors belongs the spoils.

Better location home, not bigger

The fact is the needs of the rich are not much different from those of the non-rich: about 3,000 square feet of principal residence, car for each driver, nice clothes, vacations. The main real thing that you can buy is a great home location. Do it. Move up to the best, the place the movie stars move into after their mansion.
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Do not buy personal property that is not used daily—yachts, planes, RVs, vacation homes, pied-a-terres. You can and should rent them when you need to use them.

Rich trying to get richer

The financial guy for a famous rich man once contacted me. The famous man had heard of me and wanted my advice on real estate investing. I said he already has enough money. He does not need the hassle and job and risks of being a landlord. I suspect the agent did not relay that advice to the star.
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I wish the famous rich man HAD contacted me. I would have said let’s list the risks you and your family face: fire, car accident, kidnapping, burglary, earthquake, disease, hurricane, etc., etc. Now, let’s use your wealth to minimize each. If you have a home in FL, let’s get a normal 3,000 square foot home, but make sure its design and construction can handle a cat 5 hurricane.
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It need not be visible. Thorsten Verblen said the rich spend for display, not utility. He coined the phrase “conspicuous consumption.”
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Earthquake protection, hurricane protection, and so on can almost all be invisible. But each additional risk addressed and mitigated buys more peace of mind. And none of them buys another damned boring job you must spend part of your 24-hour day on. Rich people have more of a lot of things than other people, but the 24-hour day is not one of them.
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So your ship came in. You’re now wealthy. You can afford nouveau rich guy-stuff, but don’t. Don’t own something 24/7 if you only need it two weeks a year. You don’t need it and you REALLY don’t need the job that comes with it.


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