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The power of capital

 Trail riding early this morning, a combination of solitude, the wife is away, and jet lag, Asia for a week takes it out of you, meaning that I was at our local stable to take Artur.   Aside from two grooms, I was the only one about.  Arthur is my wife's horse.    

There is a great circuit around where we live, for riders, and before you ask riders are far more considerate than ramblers.   About three miles from our house a developer has built, because it's almost finished now, a small hamlet of apartments.   The result is very pleasing and affordable.   Several of our staff were considering buying or renting there.  First owners/tenants will take possession before September.   I think I counted about 24 apartments in all.   The developer broke ground 18 months ago.

On the other side of our property, a couple acquired an old farmhouse about five years ago.  I had a break there for 20 minutes, to give Arthur a break, and me a cup of coffee.    The old farmhouse needed a brand new roof, but the owners have decided to do it themselves.   Let's just say that the end result is unacceptable since it fails at its job!  The couple poured their savings into that place, and a lot of hard work, and yet after five years they have little to show for it.   The roofing job should have been contracted out, a professional outfit would have taken 10 days to get it done right.   Five years is too long, especially since it needs to be redone.   

I get the intention, of building without debt, but in this case, the cost of sunk capital for five years and the cost of all the material is huge.   Let's assume a 20,000 acquisition cost, 5,000 a year for five years in building supplies, and an interest rate of 6%.   Had the couple invested the money they would have 55,000 today.   Is this farmhouse worth 55k today?   I doubt it, probably around 20k.   Too much material has been wasted or has deteriorated.   

As I ride away, I consider the choices people make.  During my week in Asia, I met several small business owners, mostly from mainland China.   The drive these people have/had to build their business, but also how ruthless most of them have been is impressive.  All of them had "sold" their businesses to new owners.  When the price was right, they pulled the trigger.   Leaving 30 years of effort behind, because they made a dispassionate calculation.   This farmhouse is the exact opposite.   A weekend dream, that should have remained a dream, has probably turned into a nightmare. 

Well at least Arthur enjoyed our travel today.    

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