Construction Business Owner, December 2007

The construction business is a hard way to build a fortune. Only a few construction business owners ever make enough money in their lifetime to acquire enough financial assets to become wealthy or retire in a comfortable way. But those who make it a priority to invest in real estate as a part of their business plan end up at least ten times wealthier than the average construction business owner. 

Every day, most construction business owners drive by lots of opportunities to get rich. But they don’t take the time to stop and check out vacant property, inquire about an empty industrial building or look for property on which to build their own office and yard. They’re too busy working to make any real money. They spend their time scheduling workers, ordering materials, bidding jobs and building projects for customers who are enhancing their real estate properties. Most contractors work too hard (and too cheap) helping real estate developers and owners create huge portfolios and make tons of money.

Business or Real Estate Wealth?

A friend of mine attended an annual business luncheon where the wealthiest business owners in his community gathered. The after-lunch speaker asked the attendees a series of revealing questions. He asked them to write down their current net worth based on what they had earned by working in their businesses over their lifetimes. Then he asked them to write down how much money they would have today if they had never sold any of the real estate they owned over the years. In almost every instance, the results were unanimous. These wealthy business owners would have a larger net worth if they had never sold any of their real estate.

I am asked to speak at fifty or more conventions and meetings every year. After I speak, people always come up to ask questions, give me referrals and tell stories my message triggered. They tell me they own a construction company or some other type of business. Then they tell me their secret to success: They really make most of their money owning real estate. Some own their company building or yard plus the shopping center next door, a series of homes they rent out, or several warehouse buildings, or they have a partnership interest in a customer’s self storage project. They used their companies to get started, create a positive cash flow and make a profit—and then they made it a priority to spend half of their time investing in wealth-building real estate assets.

Developer Versus Contractor?

As a general contractor, I can’t tell you how many clients I have built for who have an oceanfront home plus one or two vacation houses in fantastic places. Each year, they want to have a job meeting two weeks before Christmas to review building projects. Then they fly off to Aspen or Hawaii for their three-week holiday. When they return in January, they expect us to have solved all their construction problems and stayed on schedule during the holidays. It doesn’t seem fair does it?

As I looked at our situation, I started questioning my business plan as a contractor. We did more work than our customer, had more employees, took lots of risk, received a one-time contractor’s fee for all of our expertise and hard work and didn’t make very much for our efforts. I reflected on the hundreds of buildings we had built for clients who were now living off perpetual monthly rental income these projects produced.  

As an example, the first project I built as a contractor was for a woman who bought three acres for $150,000. We designed and built a 50,000 square foot industrial park for her on the property. Our construction contract was $1.5 million, and we made a contractor’s fee of $85,000 for overhead and profit. Of the $85,000 fee, $60,000 went for our overhead, leaving us a net profit of only $25,000. After tax, we ended up with a grand total of $15,000! Upon completion, she fully leased up the project, which initially generated a $5,000 per month positive cash flow. Now, thirty years later, her project generates a positive cash flow of over $40,000 per month, and she doesn’t even live in the same state!

What Business Are You In?

Think about your priorities and the purpose for your company. The real purpose is to give the business owner what the owner wants. Your business purpose isn’t to build buildings, install pipe, move dirt, hang drywall, or paint walls. You are in business to make a profit, build equity, seek wealth building opportunities and enjoy the benefits of business ownership.

It took me twenty years as a commercial general contractor to finally wake up and make a decision about my future. Year after year, we worked hard to make the industry average 1.5 to 3.5 percent pre-tax net profit. I endured lots of stress and took extreme risks building projects for customers who made millions owning and developing real estate. I started to realize that while our company did most of the work, our customers made most of the money. Why? Because I was in the contracting business. And my customers were in the wealth building business.

Building financial wealth is the outcome of consistently making a profit, retaining it, using it to acquire profitable business opportunities, create passive income and grow your net worth. Often, people ask me how I have enough time to run my construction company and write articles, author books and speak at conventions and company meetings. My answer is simple: “Duh! I’m the owner!” In the dictionary, the definition of “owner” doesn’t include words like worker, estimator, project manager, superintendent or hands-on control freak!

Change Your Business Plan!

Fortunately in 1994 I made a decision to change the way we do business. We are now in the opportunity business. Our construction business creates opportunities to cover our overhead and make a profit. It also puts us in the middle of the real estate market, which presents opportunities for us to own and develop projects. Our wealth building business plan is to seek real estate projects or property where we can add our construction expertise and create value-added real estate investments. For example, if we find an old under-utilized industrial building to buy and upgrade, it gives us the opportunity to generate construction income during the remodel. Upon completion, we lease the building to tenants. This creates long-term positive cash flow while increasing our financial wealth.

Seek Value-Added Property!

We purchased a 24,000 square foot well-located warehouse building for $1.25 million. It needed lots of refurbishment and a new tenant. Between myself and some friends, we invested $250,000 of cash equity and got a $1.3 million loan from the bank to buy the property. We spent $300,000 upgrading the building and then leased it to an excellent company at a higher lease rate. Today, we enjoy great monthly net cash flow and have been offered over $2.5 million from potential buyers who want to purchase our building. It’s not for sale as it will continue to grow in value and generate increasingly higher monthly cash flow for us owners.

Joint Venture with Customers!

Another type of win-win we seek is joint venture projects with our construction customers. We offer to take both construction and financial risk. This allows us to share in the eventual profits of development projects. For example, one of our customers asked us to build a project as the general contractor. I asked him if he had all the equity needed to complete the development transaction. He said he was investing $400,000 himself but still needed another $400,000 to put the deal together. I offered to provide the additional $400,000 equity needed for 50 percent of the project ownership and profits. This arrangement provided us with a $4 million construction job plus 50 percent of the overall project development profit. I funded our $400,000 equity capital partly from our construction fee plus $100,000 of my money and the balance from a few friends who were looking for somewhere to invest their money. As a contractor, our contractor fee for overhead and profit was $220,000. But as a developer, we made another $400,000 from our investment—an easy way to triple your return on energy!

 

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