Never has there been a more polarizing figure in American Politics as President Donald Trump. His book, “The Art Of The Deal”, was a New York Times bestseller before he ever sat in the Oval Office. In it, he lays out the boldness and brashness of deal-making he used in the business world.
In the world of Texas Rangers baseball, General Manager Jon Daniel is the one who has his detractors and fans. I am not here to debate the merits of Donald Trump or Jon Daniel. But like Trump, JD has been scrutinized over his dealings within the confines of his business: Baseball.
Most of the money made by Donald Trump was with real estate. So I decided to equate the dealings of Jon Daniel to a real estate transaction. (It doesn’t hurt that I happen to know something about real estate investing and can make the comparison) Daniels has had some fantastic deals and some duds over the years. But let’s focus on the positive.
First, let’s lay out the parameters. Within real estate investing, the ultimate goal is to make money. The first piece I ever wrote for Dallas Sports Nation talked about currency (money) in baseball. Prospects are what is traded within the confines of baseball. They can be used to purchase help at a trade deadline or during the offseason. It is important for any contending team, to have the currency to help out by the trade deadline. For a rebuilding team, having a huge bank account can lead to a faster rebuild. Especially if you are on a budget. If you don’t have money to spend in free agency, then you can horse trade for cheaper players with your prospects. There are a few types of real estate investors. There are flippers. There are those who buy and hold. There are also those who do a 1031 tax exchange.
So let’s get down to business…
In real estate the art of flipping has become popular from HGTV. You take a home that needs some love and buy it at a discounted rate. Then you pour money and sweat into fixing all its flaws. Once the house is upgraded and in great shape, you sell it for a profit.
Example: Buy a house for $100,000.00 that needs work. Put $50,000.00 worth of upgrades into a new kitchen and bathrooms, etc…. Then you sell it for $200,000.00 and a profit of $50,000.00. It sounds easy, right? But if the market cools or you end up having to spend more than expected, the profits can decrease or even disappear. Its why you need money in the bank to cover your losses.
In baseball, flipping a player is similar. You sign a player that has been discarded or undervalued to a cheap contract. That player finds his groove and increases his value. When the market is right, you sell him to another team for some prospects.
Example: In 2007 Jon Daniels signed former Los Angeles Dodger All-Star closer Eric Gagne to $6 million dollar deal. There were incentives that could increase the deal up to $11 million if he performed. Gagne had a bad spring but found his groove in May. He had 16 saves and an ERA of 2.16 leading up to the trade deadline. Daniels took advantage of his success. He flipped Gagne to the Boston Red Sox for Kason Gabbard, Engel Beltre and another outfielder named David Murphy.
2019 Possible Flips: The Rangers have two very prominent candidates to be flipped this year. Hunter Pence and Danny Santana. Pence was considered all but retired when the season ended in 2018. Now he is a right-handed bat that is the target for a few teams needing help at the plate. His veteran presence in the clubhouse is also attractive. Santana is another possible flip. The more valuable of the two, he is having a career year after signing a minor league deal with the Rangers. But his value is higher because of the versatility and control that comes with him. As long as Santana remains on the 25 man roster, he is under the team’s control until 2021. This makes him a candidate for the next sort of deal. The “Buy and Hold”.
BUY AND HOLD
In real estate, there are those investors who like to buy and hold property. These investors aren’t looking for quick cash. They are usually playing the long game. They buy a property for a discount rate and hold them as a rental property. In real estate the property usually is self-sustaining. The tenant pays down the mortgage. Even if the property doesn’t gain any value, the investor comes out ahead if his loan balance is paid off. In most cases, the value goes up while the loan balance is paid off. Either way, it is a win for the investor in the long run.
Example: Investor takes out a loan and buys a house for $100,000.00. His monthly mortgage payment is $1000.00 a month. He leases the property for $1200.00 a month. Over a period of time, the mortgage balance on the property is paid down from $100,000.00 to $60,000.00 by the tenant(s). If the owner sells the property for the original price he bought it, he makes $40,000.00. If the owners sell the home for $180,000.00 he makes $80,000.00 profit because the tenant paid down forty grand.
In baseball, the buy and hold is similar except for the rising value. A team picks up a player off of rule 5 or waiver claim. Said player ends up becoming a significant piece for a playoff team for a couple of years. Whether the players’ value goes up or not is irrelevant. His low salary and contribution allow for money to be spent on better players or free agents.
Example: The Rangers claimed right-handed submarine pitcher Darren O’Day off of waivers in April of 2009 from the Mets. O’Day ended up pitching in 62 innings with an ERA of 1.94. Then in 2010, he appeared in 72 games with an ERA of 2.03. He ended up a key right-hander out of the bullpen, all the way to World Series. O’Day ended up hurt in 2011 and was released after the season. The Rangers ended up winning the deal because he was a huge contributor for little to no money.
2019 Possible Buy And Hold Players: The biggest one to leap off the page is Danny Santana. Santana signed a minor league deal with the Rangers. Since Santana is still in his arbitration years, he can remain under control for the next two seasons. Should the Rangers decide to keep Santana, he will be a cheap option as a utility player playing every day. If he continues to contribute at this level, he would become a huge asset. Even if he eventually comes back down to earth the Rangers will have capitalized on him during his peak value. Should the Rangers compete as expected in the next two years, Santana could be a cheap piece that helps. Even if he winds up a player coming off the bench or spot starting a few times a week.
1031 TAX EXCHANGE
In real estate, there are investors who do what is called a 1031 tax exchange. They have a valuable piece of property that if sold will cost a lot of profits in taxes. These investors will sell the property and use those funds to buy more real estate within a certain time period. If they do this, they avoid taxes and expand their portfolio with multiple new properties.
Example: A person takes an investment property worth half a million dollars and sells it. They take that money and buy two or three new rental properties. In a few years they will have multiple properties that could be just as valuable. Plus they avoid the tax hit.
In baseball the 1031 tax exchange is trading a valuable player for a bunch of prospects. These prospects could become their own valuable assets or contributors. This is usually done right before that valuable player hits free agency and will cost a lot of money (taxes).
Example: In 2001 the Texas Rangers drafted Mark Texiera 4th overall out of Georgia Tech. Tex got to the big leagues quickly. In July of 2007 the Rangers saw the writing on the wall. Texiera would be a free agent after the 2008 season and was looking to hit free agency. Jon Daniel moved Texiera to the Atlanta Braves right before the deadline for a package that included three key pieces to the 2010-2011 World Series teams. In the deal, the Rangers got Elvis Andrus, Neftali Feliz, and Matt Harrison. All huge contributors to those playoff teams.
2019 Possible 1031 Tax Exchange: There is really only one or possibly two that could be considered in this category. The obvious one is Mike Minor. But do not discount Lance Lynn. With his numbers and controllable years, he could fetch a nice return. Beyond those two the most valuable one isn’t for sale. Joey Gallo would be the biggest name of them all. He could demand a king’s ransom. But no way he on the market at this point in his career.
July 31st is tomorrow. There will be a lot of horse-trading with currency (prospects) around the league. The Rangers have the luxury of not having to do anything. Their biggest assets are under control through next year. So unless they are blown away, they can hold on to them for next year or this winter.
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