Wealth Creation: Part 8
Since I made you wait a few days, you get two wealth creation examples today.
When I opened my first concert venue, I realized I needed a sound system. You can't produce concerts without one, so the need was mandatory. I had just closed escrow on the purchase, investing every last penny I had into the real estate, so I didn’t think I could afford to buy a new one. With this limiting belief emanating in my head, I did what most people do, I rented a used one.
Unfortunately, the sound system I rented sucked and cost me $6000 a month to rent. It was a 30-year-old war horse that only worked well for hard rock music. My largest customer, a broadway musical producer, was not a fan! And I had a tough time early on coming up with the $6k a month expense. Other than my rent and labor bills, it was my largest business expense.
My Fox Theater business forced me to think outside the box if I was going to survive. Due to this, it taught me many of the wealth creation strategies I deploy to this day. After paying for this shitty sound system for two days, I begin doing research on top notch sound systems. I found out that the most respected company was Meyer Sound, and they manufactured locally in Berkeley, CA. They made the best sound systems for venues my size. Only problem was it cost $220,000 new and there was not a leasing option.
So, I started shopping around for lenders that did equipment loans. I was pleasantly surprised that there were many and it was easy to get approved due to the sound system acting as acceptable collateral. The interest rate was around 7.5% . Not terrible for a business loan. The best part was that the monthly payment was just $2604. Remember, I was renting the shitty 30-year old sound system for $6k a month. This would save me $3396 per month. A no brainer!
My accountant applauded the acquisition as my concert promotion company was starting to generate a profit. I thought he was just applauding the savings, but he explained that I could put the entire purchase on my Balance Sheet as an Asset and Liability. That I could depreciate the entire $220,000 over a schedule of seven years and that this would reduce my taxable profits by $31,428 per year, saving me on my annual taxes. Further, he explained with each payment, the liability would be reduced effectively paying down the asset, and the interest portion would fall on my Income Statement, further reducing my profits and tax liabilities.
This is when I learned that appreciated assets (real estate, art, bitcoin, etc.) where not the only assets I could use to build wealth. My sound system payments were half the monthly cost of that old war horse sound system I was renting and because it was such a great sound system, I could easily get all of my venue renters to pay me $2000 per show to use it, thus generating new revenue for my business from the acquired asset. By that time, I was producing over 100 shows per year. I was able to generate $200,000 in new revenue from renting my new asset in year one alone.
The sound system was paid off in its first year and I continued to use it for eight more years. It brought in just under $2 mm in the eight years I rented the asset. And here is the kicker, when I sold the venue, I sold it separately for half what I paid for it, generating another $110,000 to boot. While this asset did not appreciate, it did create substantial wealth. Not a bad return from one asset that use to be a painful $6000 per month expense.
