Trade-Offs

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Topic #1 – Trade-Offs

Discussion Question:

Making trade-offs is something we do all the time in decision making. We make trade-offs when we have to come to a decision and the alternatives do not perfectly match up with our objectives. Think of a past decision situation where you had to make one or more trade-offs in coming to your final decision. What was the situation, and what trade-off(s) did you made? How did the decision work out for you, given those trade-offs? 
(NOTE: This is more easily done by going through the PrOACT process.)

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1. Student’s reply:

Two years year ago my husband and I decided to go on investing some money on a business. The decision was either investing our money in an auto mechanic shop or buying rental real estate.

Investing in real estate is an exciting field because of the many different niches and strategies you can use to customize your plan to fit your personality and position in life. Becoming a landlord can mean a lot of work. Real estate is capital intensive and you always have to put capital into it to keep it up. There’s always money you have to put in but it is an asset that lasts a long time and hopefully will appreciate with time. You need to have a bit of a cash flow every month. Renting could work well for you if property values are rising. Consider whether the rent that you can charge will pay for the monthly mortgage payment, taxes and insurance or if you have to cover the difference every month. If you use an interest only loan, renting may not be the best option since your monthly payments will increase significantly if interest rates increase. Rental properties have continuous maintenance especially when a tenant move in and out. Renting it out for a long term is an advantage knowing there are expenses with every new tenant.

A good rule of thumb to use when determining how much you should plan on  expenses is known as the 50% rule.” The 50% rule states that, on average over time, expenses on a property will equal 50 percent of the income. So if a property rents for $2,000 per month, you can assume $1000 in expenses per month before paying the mortgage payment.

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On the other hand, when you are opting for a mechanic shop all that is needed are your expertise, some reliable tools, a proper license and more important is to get a nice location. You must choose somewhere close to a commercial area where there is parking available. There is a possibility that cars would get stalled in this area. Obviously if you open a mechanic business your target market are those people with cars. In order to become successful you need to target a particular niche. For example locating the business where drivers have a busy schedule. You can actually work on their car while they are at work. You can also post an ad in places where there a people there that might need your services. Repeat business is key to running a successful auto repair business. In addition to quality work and customer satisfaction, you have to offer rewards and coupons for inducing return of your customers. Resolve customer complaints promptly and accurately. There is satisfaction that being a mechanic is a fulfilling job especially when you see people happy after you fix their car.

The decision as to which business to get into was a very difficult one. Since neither one of us had any real experience with either business. We researched the alternatives in order to determine which business to go with. With rental properties the constant headache of tenant complaint and non-payment is always a constant threat. We will be in constant search of tenants and the screening process of finding quality tenants. In addition to tenant issues there are local rules and regulations govern rental properties that we have to keep up with or face major legal battles. Peace of mind was a major trade off consideration for real estate investment. With the auto mechanic shop, there the major plus is that payment is received once services are rendered. The business relationship between business and customer is relatively short term as opposed to long term (years) in the tenant landlord business relationship. The idea of owning an auto repair business appealed to us since all we had to handle was the front end, managing the shop, while mechanics on the shop floor did all the auto repair work. After considering the alternatives and tradeoffs we decided to invest into the auto mechanic shop.