Building Wealth Through Real Estate

Wealth is built through the acquisition and use of assets, where an “asset” is anything that puts money in your pocket on a regular basis. Your personal time is a potential asset, but remember that rich people buy time with money, and poor people buy money with time. I will not be discussing “Time” as an asset in this article, because “Time” (as an income-producing asset) is something you want to move away from, not move toward.

Aside from “Time”, there are three classes of assets: (1) business assets, (2) paper assets (stocks and bonds), and (3) real estate assets. This article is about real estate assets, using Bountiful Baby as a use case.

We purchased the land and building where Bountiful Baby is located in 2011. The purchase price was $1,205,000. Of that, $138,500 was for the land, and the remaining $1,066,500 was for the building. The building at the time of sale was 26,931 square feet large (we have since added mezzanine that puts total available square footage over 30,000).

Since purchasing the building, we have put approximately $600,000 worth of improvements into the building. This consists of (primarily): (1) a large motor-generator that can generate power for the entire building during power failures, (2) whole building air conditioning (for the hotter days when the swamp coolers are not sufficient), (3) eight foot simulated wrought iron security fencing around the entire property, and (4) mezzanine.

This means we have about $1.8 million into the property now. A quick search on LoopNet for similar properties in this location suggests it might be worth $3 million now. So that’s already a $1.2 million appreciation on a $1.2 initial million investment ($1.8 million total investment).

Now let’s look at the tax incentives on this acquisition. First of all, using Section 179 of the IRS code, most of the $600,000 improvements was able to be written off as a business expense in the year it was spent. Furthermore, using a 39 year standard depreciation schedule on the building, about $300,000 of the building cost can be written off as a business expense for the 9 years to date. That totals $900,000 of business expense deductions.

To see the impact of $900,000 business expense deductions, you must look at your *marginal* tax rate— not your *average* tax rate. Tax rates are progressive— the more you make, the higher the percentage of your extra money is taxed. Thus, the marginal tax rate is almost always a lot higher than the average tax rate.

The highest tax bracket for federal taxes is 35%. The Utah tax rate is 5%. Combined, this is 40%. Thus, a $900,000 business expense deduction equates to a $360,000 tax savings on the deductions.

Add the tax savings to the building appreciation, and you now have more than a $1.5 million gain over a period of 9 years. And we haven’t even looked at the income generated by the use of the building for Bountiful Baby’s operations.

Business real estate investments are the only investments I know of where you can (1) use the building to generate revenue for normal business operations, then (2) get a business expense deduction for the acquisition of the building, and (3) see the asset appreciate in value.

That’s a triple win.


Disclaimer: A lot of what I wrote above has been simplified for illustration purposes, and is not exactly what I did. There are a few modifications to the above that a good asset protection attorney will suggest, and I followed. If you wish to do the same, a book I suggest you read is: “Rich Dad Advisors: Tax-Free Wealth. How to Build Massive Wealth by Permanently Lowering Your Taxes”, by Tom Wheelwrite