Lately, I’ve been thinking about the role that depreciation, terminal values, and ongoing capital expenditures play in affecting investment returns. With most assets, the value lies in something physical that deteriorates/depreciates over time. If you buy a rental property and rent it out to a tenant, the IRS gives you a 27.5 useful life for the property according to the schedule. If you don’t replace the roof, remodel the kitchen, fix the foundation cracks, or get the termite treatment, you won’t be able to charge much for rent in 2047, if there is even a house left at all at that point.
In the context of investing, it stands to reason, the worst businesses are those that perpetually require additional capital to maintain its cash-generating capabilities, and the best businesses are those that continue to throw off cash with minimal capital investments or even manage to grow in value on … Read the rest of this article!
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