Depreciation is Real - Don't get Caught Like I Did!

[Ben Leybovich]

Took a call yesterday from a local investor. She is looking to "unload" some units. The problem - she wants above market prices...:)

And here's how this happens:

She owns a PIG. Translation - a building similar to the ones you CA guys buy turn-key in Ohio. You know - 70 years old functionally obsolescent crap with lipstick on it - you know the ones?!

BTW - looking at my T12, 3 out of the 4 houses I still own in my portfolio in Ohio lost money in 2014. Can you guess why - CapEx, otherwise known as replacement of depreciated components. Just sayin...

Well, she tells me that she'd just spent $35,000 remodeling the down-stairs unit (it's a duplex) and she wants that money back...

I spent 30 minutes on the phone (cause I am a nice guy) explaining to her that replacing electrical, plumbing, windows, fixtures, and all the rest of it was something that she HAD TO DO in order to make the place stay alive, but none of those things improve the rent or add to the value. At the end of the day, what she still has is a pig; just has some lipstick on it.

Depreciation is not just a tax break. Real physical items depreciate over time and eventually exhaust their useful life, at which point you MUST spend the money. But, you won't get it back.

Don't get caught by the real depreciation y'all. You can thank me later...or now :)