Build wealth with your business real estate

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Join Ken and Michael Bailey as they discuss ways to use business real estate to its full advantage.

To learn more about Michael, visit his website at: https://www.impactdogcrates.com/

Transcript:

 

(00:01):
Welcome to the real estate strategies podcast. I’m Ken McElroy, and I’m here to give you creative ideas on how you can get started or continue your journey in real estate each week, we will bring you inspiring and informative conversations with successful people and their path to obtaining or investing in real estate. Enjoy the episode, everybody. It’s Ken

(00:25):
I’m here with my good buddy, Michael Bailey’s the owner of heater craft and impact crates. Hey Michael, how are you doing? So what we’re going to talk now about is, you know, how you can take a business and turn it into, you know, real estate acquisitions and kind of build wealth in other areas, you know, in more than just your business, what you’ve, what you’ve done very, very well. Michael, I’ve watched you slowly accumulate, you know, all this real estate. And so you have those assets kind of sitting over here, but before we get into that, once you give a little flavor and a little background about, you know, impact crates, cause it was really born out of the last recession we had in 2008. And as we roll into this next recession, I think a lot of people can get really depressed. They can real be real Philly bad about, you know, the loss of income, whatever that might be as an employee or employer, for example.

(01:18):
And you know, and then if, especially if you watch the news, right, right, right. So right. And so you fought hard through Oh eight. I wish I knew you then. We were good friends back then and I watched you do it. And you came up with this idea in a, in a business, a pet business that you were never in before, you know, essentially you reinvented yourself completely with the business that you had in place and your business is very different than it was in 2008, a hundred percent. I think. So the bottom line is that you know, we start out with heater craft years and years and years ago, we were in the Marine and automotive industry. So we sold to boat manufacturers like, you know like Mastercraft or sea Ray or any of those big guys. And we also sold the UTV industry in the RV industry.

(02:04):
So that’s, you know, Honda, Yamaha, but what happened in a way, it is obviously the recreational industry it’s called recreation. It, it got destroyed in that economy. People, if they’re going to cut there, if they don’t have money, they’re going to cut those areas for sure. It’ll happen again. And it’s going to happen again and it’s on its way at this point. Yeah. You said that you’re already seeing orders canceled. We’re always seeing orders canceling that business. So one thing I realized is that I needed diversifying to something that wasn’t so volatile or at least had a way more opportunity. Right? So number one, the Marine and automotive is very small. I mean, it’s, you know, what is there you know, hundred thousand boats or, or less built in a year that includes, you know, jet skis and things like that. So the market’s very, very small where the pet industry. So we got the pet industries, what we did. So we had, we had bought this company or partner with this company. We, and we we were in the gun case business and they came with a crate, right. So we got

(03:00):
This dog crate back in 2010, 11. Right.

(03:02):
So before you jumped right ahead, you know, here you are just got the heck beat out of you in Oh eight. And, but your mind is open and you’re like, how do I partner with this company while I’m not doing so well? Right. So talk a little bit about that. Cause that partnership was instrumental in where you are now.

(03:20):
I mean, we, we found an opportunity that was this company. They were wanting to get out of that business. And so we basically acquired them, you know, in so many ways and they got out of their business and we took over what they did. So

(03:33):
You have product lines and customer base, you know, that you had never,

(03:37):
That was what’s the interesting part about it is they were just, they had kind of gone through a transition where they had lost all their business. All they had was product lines. So they didn’t really have much of a customer base. And honestly the dog freight business can, wasn’t even developed to its full extent at that point.

(03:54):
So the here’s the thing, I find fascinating what you did and you got two businesses, yours and theirs, both just got hammered in Oh eight. Yup. Right. Yup. And you were like, okay, how do I, right. Yeah. They could have done that to you. Oh a hundred percent. But usually, right. So this is the point, like everybody’s getting pounded and about ready to get pounded, but you had the foresight and the vision to be able to go snap that up. And, and

(04:22):
I saw opportunity end of the day. I think that you know I’m a survivor personally. I’ve been, I was not going to give up or give in. So I think a lot of people give up too quickly. I don’t think they have to. And so I was going to fight for it. And so I saw opportunity in those that business and the dog Creek business. So we had already in place engineers and people like that that actually could develop products and make them better. So we went to work. So we, you know, we acquired the company, we got it, got it from him. And then we went to work, we started building sampling, dog crates, making them ourselves. And before you know it, we got a customer. And then before, you know, we got another customer. So again, I think it was something that we realized we could do. Cause we did it already. We made metal parts. We had metal fabrication equipment. So we started digging.

(05:11):
But here’s the thing, dog crates at the time there, most of them are cheap. Yeah. They’re plastic. They fall apart. I’ve bought a ton of these over the years, you came up with pay sickly, the rolls Royce of dog crates. And now like it was a massive market that was not served and people it’s. I mean, you lead the industry

(05:32):
Purdue now. I mean, I think we we have always, I’ve always personally seen value in quality, a good product that’ll last a long time. And I think that was just how I thought. So I wanted to build something that wasn’t a hundred dollars or $50. I wanted to build something that was between $502,000 today. And again, I don’t, it doesn’t take as many crates to get a lot of revenue if you think about it. Right. So if

(05:58):
I have to do 10 crates at a hundred dollars a piece, that’s a thousand bucks, but I’ve just so one, one to 10 ratio with a really good product and get, and get a customers that love it. It makes way more sense for me. It worked really well for me. Well, when you, okay, so I’ve had multiple dogs and multiple crates and usually there’s a lifespan on a crate. Yep. When you buy your crate, you, you know, it’s for life. It really is. I mean, that crate is incredible. I mean, you know, you know that it’s not, you’re going to have to buy something five, six years, seven years from now. Right? Exactly. I mean, our crates will last a lifetime, especially a dog’s lifetime or even more, even through a couple of generations of different dogs that you have in your family. I think that that’s what you did for the business and the industry.

(06:42):
You know, we brought them to our level of dog Creek without a doubt, without a doubt. So one of the cool parts was, you know, w we talk, I talk a lot with your son Hunter, but you know, kind of old school, new school. And we kind of did this on a video already with Hunter. If you guys have a watch that you need to watch that one because, Oh my gosh, he’s smart. And he’s very bright. I mean, and here’s the cool part, you know, obviously you’ve got the father son dynamic, you’ve got the family business dynamic, but you got a kid that’s 18 years old that you raised. And you’re like me, you know, we look at our kids, like they don’t know much. Right. I mean, that’s the truth. I think we do think that I do that. It’s not fair to them.

(07:25):
No, it’s not. I think, yeah, we do. We don’t live [inaudible] we don’t listen to our people. Exactly. I mean, I think it’s, it’s insane. I mean, I didn’t listen to my dad when I was at right. Me either. Yeah. I mean, I fought that battle and then we ended up being them. I do, but here’s the cool part. Then you let him come into the company I did at 18 and boy, what he’s done from a marketing sales. Hey, can I, what I can say about Hunter is he has been instrumental in growing our business and putting us where we are today. I can give him a lot of credit for that. I mean, I really can say that. I mean, it’s, it’s massive, right? I know business. I know. And again, it comes right down to me listening to the younger generation and, and not just we’re father, son deal, it’s listening young, Jewish generation, how they purchase, how they buy, how they think, what they do, what they’re looking for, those kinds of things. And it’s, it’s been massive. I mean, it’s, it’s been life changing for our business. It’s it’s you, your company has gone, the model has changed so dramatically, you know, you’ve gone from the old model of, you know, belly-to-belly sale to internet sales and direct. And so your margins are up and everything’s up and you kind of learned along the way. And I think a lot of businesses are stuck right here. Yeah. I think the old model of, for us was distribution the OEMs direct to the OEM’s, you know, the Costco

(08:56):
Selling to a reseller or whatever it might be. Even someone that was actually sewn on the internet, but they were, we were shipping it even for him. So we would have to, you know, build a product, everything like that. And we would, they would give us the order, we’d ship it to their customer and we’d have to give them, you know, 40% discount.

(09:13):
All they did is have the customer,

(09:15):
The customer. And we started realizing that, and this is where the younger generation came. Is that why don’t we do this ourselves? Why don’t we grow our own internet site? Right. And so again our, my theater generation let’s call it that. And again, I think it’s my son he’s been and done amazing, but that younger generation just does things differently.

(09:34):
Oh, a lot differently. I know he graduated in 2013. I think it was. Yeah. And then he came into your company and boy, what he’s done on the sales side has been incredible, but this is a real estate show. Right. So let’s talk about, okay. So we all know that the, you know, the ESBI model, the E employee self employed business investment model, we all know that you guys have locked. It, that you’ve watched the cashflow quadrant. What Michael’s done is go from S to B and now we’re going to the I, which is the investment part. So the business is now buying your real estate. Right.

(10:10):
I mean, if you think about it you gotta pay rent somewhere, right? Why not pay it to your own, your own yourself? So end of the day you pay, we pay rent to ourselves. That’s right,

(10:20):
Right. Yep. That’s right. And so, so what we’re seeing now, what, what was amazing is I’ve also watched you move from, you know, a small facility to a medium facility, and then just recently to a massive state of the art facility. That’s big, how many square feet is it?

(10:36):
About 60,000 square feet. Yeah. It’s pretty big. So, yeah.

(10:39):
Yeah. So I, you know, all paid by your business

(10:43):
A hundred percent. It’s not just paid. We make a profit,

(10:47):
Right? That’s the other thing there’s cashflow, cashflow positive.

(10:51):
You take, this is the model guys. The model is to start your business and then have that pay your rent essentially. But what we need to be doing here is you, your business is what your business. So heater craft has a business impact, craters, a business that business now leases from a building that you own, which is also an LLC or an individual purchase. So you purchase it here and then you lease it just like you would anybody else. Yep.

(11:19):
Yeah. It’s, it’s, it’s really, it’s, it’s not hard to do it truthfully. I mean, it’s really easy, honestly. And also I’ll add value to that. When a bank, or if you’re getting a loan for this building, the bank’s going to look at your business as well as your real estate. So it honestly, truthfully is easier because when you’re leasing to yourself, they know you’re not going to leave, get out of your lease. Right. So I understood that real quick in life that it’s, it’s, it’s a lot easier than you think it is. People might think it’s hard, but no, it’s actually easily.

(11:51):
You take the cash, your business is making and that’s your down payment. Then you go get a loan, you buy the building, you set it up. And then the business makes hopefully even more money. Right. And it pays itself off. So you’re, you’re paying rent to yourself. Here’s the other thing, huge tax benefits.

(12:09):
Oh, that’s right. It’s massive. Well, let’s talk about,

(12:12):
Let’s talk about, because we’ve talked about depreciation bonus depreciation, cost segregation, right? So you can accelerate the expenses in these buildings that you own and you can make even more money.

(12:24):
Yeah. It’s, it’s a, for example, this should, we’d bought the building dock in 2019, our first year depreciation or cost segregation. We did a whole whole deal on that and it will be, it, will we, again, we won’t paint taxes personally because of how we did that struggle.

(12:42):
Yeah. So the way it works, the way it works is let’s say you buy a, a, a building for 1,000,007, and the reason why well, let’s, let’s say it’s $2 million. You can depreciate that building over a period of years, it’s called an a non-operational expense and it can, it will offset your

(13:01):
Income. Right. Right. Well, yeah. Again, I think exactly. So for us, we have a holding company that has our, that we lease. Right. Right. The company releases from our holding company and again, cost segregation is a much rapid or a depreciation because there’s things that wear out faster in the building than other things. Right.

(13:22):
So what that means is Michael might have a machine in there that has a five-year life. Right. And so you can depreciate that machine for five years. Right.

(13:32):
Right. Or asphalt you know, there’s different, different years on different. Depreciations, it’s really interesting because I didn’t realize that things wear out faster than others. Right. But the steel buildings is only 39 years still, but steel part of it. But everything else around it is goes less and less and less. Yeah.

(13:48):
Yeah. So the buildings depreciate at 39 years, and then the things inside of it can be accelerated. Same with it, with a rental apartment, you know, the building itself in the park and the apartment building has 27 and a half years. But inside of it are appliances and stoves and, you know, things like that, that you can depreciate a quicker, right?

(14:08):
Again, asphalt’s one of them as like weird one, like an asphalt will ask, well, it does wear out after about 15 years, you need to start fixing it. And whatever electrical is, another

(14:17):
Electrical is another one. Yeah. And by the way, it’s not subjective. It’s not something you get to decide. The IRS has guidelines around this and the accountants tell you exactly what you can and can’t do. So it’s all perfectly legal. You do have to get a cost segregation study, which isn’t very much money, but they tell you exactly what you can and can’t do. And then you can take those amounts and offset your income.

(14:39):
Exactly. That’s actually the beauty of the beauty of is you offset your income. Right. So end of the day, I think that it’s it’s if you made a half a million dollars last year, personally, and you had a cost segregation of 30% on 2 million bucks a hundred. Yeah. You would, that’s so much money in taxes. She would say those are simple numbers,

(14:59):
But that’s the real truth. Right. So as you start to, so now there’s incentives even to do more real estate, right. Because as, as, as I’ve said before on the show here, the depreciation that we have on our apartment buildings offsets a lot of our income, if not most of the income and a lot of the properties that we own.

(15:19):
Yeah. Right. I mean, yeah, exactly. I mean,

(15:21):
So you can not pay taxes legally through depreciation. Yeah.

(15:27):
Obviously,

(15:28):
Great benefits. And there are plenty of others. Oh yeah. Right. Yeah. There are plenty of others as you own a business, you know, there are things that you can do legally,

(15:37):
Right, right. From a tax stamp. So, but bottom line, I mean, you’re a real estate, that’s your business. Our business really isn’t real estate truthfully. But what we’ve done is we’ve taken a manufacturing company where we build stuff and we’ve tried,

(15:49):
Turned it into real estate wealth. That’s right.

(15:52):
The company’s product lines, a sales pitch

(15:56):
For the lease that’s right. The rent. So let’s take a look at the buckets of assets that Michael has. He has his companies over here, which are only as good as somebody, what they’ll buy, but then you also have your real estate that pays for the company pays for that’s also over here. Right. So I’ve had friends that have actually sold their businesses. So let’s say you sold your business and I know it’s not for sale, but let’s say you did. You could actually lease it back to the people that buy it. Right.

(16:24):
Exactly. I mean, I mean, again, I don’t, I mean, I don’t tell you this and you know it, but end of the day, what, what’s better than someone else paying for your bills,

(16:33):
Right. Not me. So you sell your company, you go off and do whatever, but you still have the reoccurring revenue. So I have a friend that did this in the, you know, he had alcohol and drug rehab centers and he did a very good job and he was buying real estate and he was growing these businesses and he sold the company to a private equity group. And, but he didn’t sell any of the real estate. And so he did these longterm contracts. So the private equity group was paying him monthly. And so he could kind of figure out what he wanted to do next. Right. So he still had depreciation, he still owned the building. Right. Right. And you know, the only difference was, is he didn’t control the real estate or control the business, but he had sold that. So he cashed out in a big way. So, and this is how the rich get rich. Right. Right.

(17:23):
I mean, whatever. I mean, again, if you, if you bought a $5 million building and you, you know, it’s a, usually a 15 year loan say, and it was paid over, you know, 15 years and all of a sudden it’s paid for, by someone else. Right.

(17:37):
What else, what else can you do? And you got all the appreciation and you got the income and a lot of it’s tax free along the way. And so that’s the model guys. The model is to create a business and then have the business for the real estate. Right. Michael, it’s huge.

(17:51):
Yeah. I think it’s, it’s create a lot of family wealth for us

(17:55):
And will in the future and the legacy

(17:57):
In a legacy end of the day, is it, you know, it’ll pay for grandkids going to college and things like that, that know that we, we want to be part of it. Yeah,

(18:04):
Yeah. Right, right. Absolutely. And isn’t that what this is all about,

(18:09):
It really is about family. Right. And providing for your family and giving them opportunities.

(18:14):
I know, man. Well, I’m really proud of you and everything that you’ve done because I’ve watched you go from a massive, massive hit in Oh eight to, you know, basically reinventing yourself through a new product line to buying this state-of-the-art brand new building. And you know, and essentially just reinventing yourself in a short period of time in 10 years. Yeah.

(18:38):
No, it was one thing I would say though, even during the bad economy, one thing we were still doing, we were still, the company was still paying the rent. So that whole time we were still building wealth over that time, as bad as it was as hard as it was, we were still continuing to pay the rent we had to.

(18:54):
Right. And sometimes when you get hit on the income side, it’s nice to have that extra bucket of cash sitting there. When, you know, you have equity sitting in a building, it’s just an insurance policy that hopefully you never have to use, but it’s nice. Yeah.

(19:06):
It’s something that you can actually look back to and go, maybe that will help you save your business someday because you might have so much equity in this.

(19:13):
Yeah. Yeah. I got a buddy that owns a hundred houses in Wisconsin, you know, and you think, Oh my gosh, there’s a lot of work. And it’s true. He has a property management company that does it. I go, so Jeff, you know, what do you do for money? He goes, well, when I want something, I just sell one of the houses. You know, that’s what, that’s how he does it. That’s how he thinks. He’s like, you know, I got the renters paying them off, but you know, if I want to go do something and buy something, I just sell one of the houses. And I’m like, that’s a good strategy. You just got a hundred of them. It’s the same thing. Right,

(19:44):
Exactly. Right. So again, I think as you make money from your company, your product line, you can take that and reinvest it into real estate. I think real estate is a key to that. I think it’s all of us. It’s, it’s, it’s Stabler it’s more stable from an event,

(19:58):
Especially if you’re the tenant.

(20:00):
Exactly. I mean, yeah. I mean, exactly. I mean, it’s, it’s, it is more stable for us. That’s for sure. So cause it, it didn’t take the hit during the economy. It’s dark product line that took the hit

(20:11):
That’s right. It’s really something really. Yeah. There’s a few things, a few lessons here. One is the fact that you, you know, you reinvented yourself from 2000 and a lot of people are about ready to go through this right now. So don’t get discouraged to keep an open mind with these young guys, you know, open up your mind, a young gen X is your son really reinvented the, at least the sales and the marketing side of the business. And three figure out a way to, to, to roll all that into cash flowing real estate. Right. And, and, and be able to get this cash flow to you. Tax-Free through things like depreciation. Exactly. Right. I love it. Yeah. That’s all just

(20:48):
Blank off

(20:50):
What a great episode. I hope you learn something new from today’s guest for full show notes, check out Ken macra.com. If you enjoyed the episode, then jump on iTunes, subscribe and leave a five star review. Also, if you can check me out at Ken McElroy official on Instagram for daily real estate advice, see you next week.

A Key Factor to Digital Marketing that most Companies Miss

Join Ken as he talks with the father and son team of Michael and Hunter Bailey. They cover why it is important to have a generationally diverse team particularly when it comes to digital marketing for your business. Michael and Hunter compare and contrast the strengths and weaknesses that each brings to decision making for their business.

You can find out more about the business at their company website at this link: https://www.impactdogcrates.com/