Every Million Costs 5 Thousand in Monthly Payment (CFFL 543)
Jack Butala: Jack Butala with Jill DeWitt.
Jill DeWitt: Good day.
Jack Butala: Welcome to the show today. In this episode, Jill and I talk about how every million dollars of acquisition cost costs you $5,000 in monthly payment.
Before we get into this, let’s take a question posted by one of our members on a landinvestors.com online community, it’s free.
Jill DeWitt: Okay.
Allen B. asks, “How is everyone managing their terms deals? Are you using platforms such as Loan Geek or Simple Money? Or are you manually keeping track of payments and sending monthly invoices? I have five properties I’m currently marketing as cash only deals …
Jack Butala: Good for you Allen.
Jill DeWitt: Right.
Jack Butala: Awesome, man.
Jill DeWitt: … But I’ve had a few buyers who want to do terms. So, I figure since the whole idea of this business is to cash flow from land, I’d better get a handle on how I’m going to manage terms deals. My mindset is, the more automated I can make the payments and statements the better …
Jack Butala: Yeah, absolutely.
Jill DeWitt: … What does the Land Investors collective mind have to say about this?”
Jack Butala: That’s a good question.
Well so, I mean, Jill, you have historically managed our cash flow, our terms sales. What do you use? I’m pretty confident that we don’t use the most sophisticated methodology out there, which is why I think I would love to just hear your unedited, undiscussed answer, the truth of it. And then I’ll put my two cents in as how I think it should go.
Jill DeWitt: My team has it automated how you have directed them. Is that fair to say?
Jack Butala: A lot of years ago I spent almost a quarter of a million bucks on … This is a long time ago … On a relational database that handles the management of this thing. And it’s by no means the best way, in any way. Stuff gets imported through a spreadsheet and a CSV file, pretty much like it’s 1998. So, while there’s a lot of good … It works for us, let me put it that way.
There are other cooler, easier, simpler ways, like Loan Geek, I hear nothing but good things about Loan Geek and Simple Money. But in the end, if I were just starting out and I only have five properties, I would put it in a spreadsheet. Jill and I have created a tremendous number of helpful, I think, some of them are imperative tools to make real estate investing easier, and in the 21st century. Here’s a short list of them, ParcelFact, fact.com, so you can look up a property and get the GPS boundaries, that’s life changing. That was life changing even for us.
Jill DeWitt: Right.
Jack Butala: When you’re on the phone, you can time in an APN …
Jill DeWitt: And have right there.
Jack Butala: … And have it staring at you, and you can make a decision about whether or not to buy or sell a property.
Jill DeWitt: Right.
Jack Butala: Offers2owners.com, life changing when it comes to getting offer campaigns in the mail. There’s nothing cheaper, and there’s nothing more geared toward exactly what we do anywhere on the internet. And it comes with a ton of free help to get that first mailer because it’s a bottleneck. And there’s a bunch of other ones and I’m not gonna bore you.
I’ll tell you what’s not on our list, and probably never will be, a way to manage payments.
Jill DeWitt: Right.
Jack Butala: Which is one of the reasons I think our competitor, Land Geek … It’s so simple, I just don’t see why you would have to develop a tool to do that, especially for 5 or 10 or even 25 properties, when you can just put it right in a spreadsheet, it’s so simple.
Jill DeWitt: And you can automate it with things like FreshBooks and things like that.
Jack Butala: Right.
Jill DeWitt: So a lot of it is, it’s really what your budget is and how many properties you’re managing. Like right now, Allen, it sounds like you’re getting started, so don’t worry about setting up a huge, expensive system, I wouldn’t want you to set up a huge expensive system right now, because the time’s not right.
Jack Butala: Right, exactly, Jill.
Jill DeWitt: When it’s too much to handle, alright, now we got to look at something else and do this a different way.
Jack Butala: Exactly, that’s right.
Jill DeWitt: And yeah. And then it’s too much to handle because there’s just too much money. Then by that point, you won’t even really care, Allen, so that’s what happens too. “You’re like, I don’t really care, who’s taking care of it. You? Alright, go.”
Jack Butala: Right.
Jill DeWitt: So, there you go.
Jack Butala: Good answer.
Jill DeWitt: Thank you.
Jack Butala: If you have a question or you want to be on the show, reach out to either one of us on landinvestors.com. Today’s topic, every million dollars of acquisition price costs $5,000 in monthly payment. This is the meat of this depressing show.
Jill DeWitt: What the heck! What are you talking about?
Jack Butala: “Oh, but I want that house, it’s 1.2 million dollars.”
Jill DeWitt: Oh my gosh.
Jack Butala: “Okay, $7,000 a month in payment.”
Jill DeWitt: That’s so funny.
Jack Butala: “Oh, but I want that office building, it cash flows so much.”
“Does it really cash flow? It cost 10 million dollars. It cost $50,000 a month and it’s only half full. It’s generating $20,000 in rental revenue, but it costs $50,000 to service the debt.”
This is the harsh reality of real estate investing the wrong way. Go ahead.
Jill DeWitt: You so touched on the two notes that I made about this show …
Jack Butala: Go ahead.
Jill DeWitt: … Exactly. Note number one, when I read this topic, okay every million dollars …
Jack Butala: By the way, what happens before these shows now these days, not so much in the beginning, is one of us writes the title. And then we go off in our separate corners and we kinda mentally think about, “What do I want to talk,” and she talks about she wants to talk about, and then we see how off we are.
Jill DeWitt: And the bell rings, and we meet in the middle, and it’s a boxing match. Just kidding.
Jack Butala: How off we are. So it sounds like we’re not that far off on this one.
Jill DeWitt: No.
Jack Butala: So, go ahead, Jill.
Jill DeWitt: You usually go the data, you’re always analytical about … You know what I really thought, Jack? I was ready for you to come in and go, “Let’s do the math together, so shall we? Let’s go to this site, and here’s how we calculate it.”
Jack Butala: Oh, no.
Jill DeWitt: I thought that’s where you were going. I didn’t think you were going big picture on this, so I came along with my big picture, Jill inspirationalized whatever.
Every million dollars costs you $5,000 in monthly payments. Okay, that’s a fact. We can all do a loan calculator and figure that out. So here are my two notes, number one, what is important to you? Is that home, that yacht, that location, that zip code, let’s think about this everyone, that school district, that neighborhood, is all of that … I mean what’s important to you? Number one. So you have to really think about that.
Number two, are you giving up anything? And that’s almost even bigger for me. It’s like, okay, let’s talk about this. Okay, I want to live in that four million dollar house. Okay, well that’s $20,000 a month in mortgage payments, alright, traditionally. So what could I do with $20,000 a month? Well, in five months, I could pay for my kid’s college education, number one.
Jack Butala: I love where you’re going with this, Jill, this is actually part of what I wanted to talk about.
Jill DeWitt: Oh, good.
Jack Butala: And then we’re gonna talk about it at Donald Trump’s level. Or, I don’t mean Donald Trump, I mean like, Sam Zell or … I do mean Donald Trump. I don’t care about his politics, but I mean as a commercial investor.
Jill DeWitt: He’s still a good real estate investor, his whole business. So yeah.
So, I mean, are you giving anything up? I mean, now we’re … I know the next show that we’re gonna do, I’m gonna tell you about it right now, it’s house poor defined, so I’m touching a little bit on house poor. Do you really want to be … You know, you can’t go anywhere, yeah, you’re stuck with that car, “We can’t afford this, we can’t afford that, but, oh, look where we live.”
You know, you have to think about that stuff. What’s important to you, and what might you be giving up?
Jack Butala: Exactly.
Jill DeWitt: Thank you.
Jack Butala: So, the reason I wanted to do this show, this topic, is to really get familiar with how much it costs to finance real estate. In a shocking three zeros at the end of every number kinda way, I put it right in the title. For every million dollars of acquisition cost, it costs $5,000 a month in monthly payment. So if you buy an office building for a million bucks, but you got $25,000 worth in rent coming in every month, God bless you. The cost coverage there is really simple, it’s easy math right?
When you get into really large buildings and complex finance and hospitals and all that stuff, which is what I was involved in quite some time ago, it starts to make you nuts. The margins get thinner, “Oh, I have to do this deal because we’re publicly traded,” my point is this, we don’t have to deal with any of that, none of it. Jill and I, next month, are gonna release a dot com called land crowd fund. So if you got a property that you know you’ve done everything right, and you know it’s worth half, or 80%, or 20% of whatever you can actually sell it for next week, but you don’t have the cash to buy it, this site will solve that problem. It will match you with a pre qualified buyer, kind of like Shark Tank. Pre qualified buyer that’s happy with the piece or property, and they do want to give you the money to get the deal done.
So why the hell, if that’s the way … Because the Internet’s made this possible. Up till very recently, and let’s say five to eight years, you couldn’t do anything like that, it was just a pipe dream. You’d have to know or have a personal relationship with somebody like your uncle that would want to invest in it. So it’s getting easier and easier and easier to buy real estate of all prices using money on the Internet with like minded investors and partners, it’s a really good thing.
That same office building that we just referred to, that’s got … Imagine if it had no debt. You ever see these people, when there’s an economic downturn, and they just seem unaffected? You know why? Because they didn’t over leverage themselves, they just stay the course.
Jill DeWitt: Jack, can you please explain to me and to us, how and why this is so much different than just going to a bank and taking out a loan?
Jack Butala: What we do?
Jill DeWitt: With the land crowd fund.
Jack Butala: Oh, sure. So, what happens is, let’s say you find a piece of property … Now, I’m gonna use a real example right now. Somebody just brought me a deal. We’re in the beta version, you can’t go to the site right now, it’s working, but it’s got a curtain over it. Somebody just brought me a property on the site, it’s 13 acres in Malibu for $89,000. So I stopped what I was doing and I looked it up.
Jill DeWitt: Hello.
Jack Butala: The property’s worth, we’re still going through it, but I want to make … Before I get real excited about it, I’m gonna make sure it works. So what’ll end up happening is, I will … If it passes all my tests as an investor, are we gonna go to a bank with a deal like this, or are we gonna go through some costly, coocoo process of getting hard money lender, and fill out a bunch of forms, and they can look under my wife’s mattress to make sure that she’s not a liar. If I sound disgusted, it’s because I am.
Jill DeWitt: Right.
Jack Butala: So what’ll end up happening with this Malibu property is if it passes all my tests, you better damn believe I’m gonna write an $89,000 check to buy it, and we’re gonna go down the path with the guy that brought it to us, because that’s the kind of people we are, and we’re gonna sell it. We’re either gonna help him sell it, or he’s gonna sell it himself for a lot more than that, let’s just say 200 grand. It’s probably worth 10 million, we don’t know yet.
But let’s say it’s worth a million bucks. So we’re probably gonna try to sell it 250 or $300,000, triple our money real quick. And we’ll split the margin. So if we buy it for $90,000 and we sell it for 200,000, I’m gonna front the money, he’s going to collect the $200,000, 250 or whatever it ends up being. Let’s say we split the remainder, so we both make 70 or $80,000 on that thing after it’s sold.
The person that we sell it to is gonna make way more than that. And now … Remember the title of the show, every million dollars of acquisition costs $5,000 a month in payment? It costs nothing. There’s no debt on the property, all we did was we match a like-minded investor with a person who knows how to manipulate data and get it in the mail. It levels the playing field for new real estate investors in every way. That’s why I’m so excited about it.
Jill DeWitt: Yeah.
Jack Butala: I have been on the other side of this, you know, I have given back a full-blown office building to a lender because of this malarkey. You know, and said, “Here’s the keys, thanks.”
Jill DeWitt: Exactly.
Jack Butala: “You can keep my equity by the way.” Apparently there’s none left anyway.
Jill DeWitt: “You lost your number one tenant, that was me.”
Jack Butala: So you know, the old school of going to borrow money and then figuring out debt coverage and … I’m not even gonna bore you with it, it’s over. Thank God. The Internet is the great equalizer, and I love every part of it.
Jill DeWitt: You know, and my last thing I want to cover is, the whole point for me is trying to teach people the right way to deal with money is these situations, I think there’s still a large community out there that thinks that the next step is, “You graduate college, now you get married, now you have a mortgage, now you have a baby.” Hold on a moment, let’s stop for just a second.
The mortgage part.
Jack Butala: I love where this is going Jill, this is a total experienced female perspective, I love this, Jill.
Jill DeWitt: Thank you. We don’t have to put the mortgage part in there because you might be sinking your own ship before you even got started. The best way to do this nowadays is save up the cash and pay cash. I don’t care if it takes you five years, I don’t care if it takes you 10 years. If you took 10 years and rented and saved up a couple hundred thousand dollars to plop down cash, think about this everyone, say you started when you’re 25. And now you’re 35. And you rented a modest home with your small kids and your wife, and you spent 10 years saving up a nice chunk of cash, and now you can plop it down, now you’re 35, and you just bought a house outright, and you have no mortgage.
Can you imagine how great life would be at this point?
Jack Butala: I couldn’t agree more.
Jill DeWitt: Thank you. You could say, “I’m 35, I saved up, I have no debt. Baby, now what do you want to do?” And now our kids are eight years old by the way, because you started at 25, you started having kids, you know, they’re not even out of elementary school.
Jack Butala: Totally agree.
Jill DeWitt: And sure, you know what, it was kinda hard, you had to budget, you know what? It doesn’t have to be hard. You just had to budget and you lived within your means because you knew you were saving up to have a houses outright, I mean, that’s the way to do it everyone.
Jack Butala: So let’s say at the same time Jill, let’s take that a step further. During those 10 years, you learn how to send out offers to buy property. And the $200,000 that you’re gonna pay cash for is actually worth $400,000.
Jill DeWitt: Right.
Jack Butala: As if that’s not enough, let’s say you have an extra $5,000 bucks right now, and you’re 25, and you spend it on a piece of property, a rural, 40-acre property, 4 or $5,000, and you sell it for 10. And then 20. And then 40. And then 80. So you can get to that $200,000 number pretty quickly. And by the time you get there, you’re gonna know exactly how to buy a house for half.
Jill DeWitt: Exactly. So you’re saying you did both, so my dream example is, a 25 year old kid is quietly saving, maybe he saved up $100,000 just while on a budget. And you’re saying, at the same time of that, he took $5,000 and turned it into $300,000.
Jack Butala: In like a year and half or two years.
Jill DeWitt: Okay, now we’re looking at $400,000, but even more by then. Yeah, 10 years of being smart, you can make a whole lot of money.
Jack Butala: So why don’t you think people do this?
Jill DeWitt: I think that they don’t understand it. I think that, two things …
Jack Butala: Forget about our business, let’s go back to your original example. Save a bunch of money up for 10 years, and pay cash for a house. Why wouldn’t somebody do that?
Jill DeWitt: Do you know why I didn’t do it back in the day when I was that age?
Jack Butala: Yeah, why?
Jill DeWitt: Because I didn’t know, I thought that was the way to do it, it was society.
Jack Butala: Society, that’s one.
Jill DeWitt: Yeah, I was supposed to do that.
Jack Butala: That’s one reason.
Jill DeWitt: “You’re not a grown up if you don’t have a mortgage.” Seriously!
Jack Butala: I’m so glad we’re talking about this.
Jill DeWitt: Could you imagine? No, no, you’re not a model citizen or whatever, I don’t know what the right term is, but, come on, “You can’t raise a family in an apartment.”
Sure you can! What do you think everybody does in New York by the way, it’s kind of like an apartment.
Jack Butala: You know what, we’re going over on the time, and this totally going to the next episode.
Jill DeWitt: It is.
Jack Butala: So we’re gonna end the episode now, this one, and we’re gonna pick this right up on the next one.
Jill DeWitt: Okay, cool.
What is our next episode?
Jack Butala: Our next episode is called, House Poor Defined.
Jill DeWitt: Ooh, I can’t wait to talk about that. And, we’re gonna answer Marianne’s question about mineral rights.
Jack Butala: You are not alone in your real estate ambition. I think this is a good idea, Jill.
Jill DeWitt: I know, I’m like, “I want to talk about the next show, I can’t wait for the next show.” I kinda just went right into it. So good topics Jack, that you picked and set this up here. This is such important stuff for everyone, and it’s never too late by the way. My 25 year old to 35 year old, think about 35 to 45 year old.
Jack Butala: Yeah.
Jill DeWitt: I love it. Hey! And do you like our show? Please subscribe and rate us on iTunes or wherever you’re listening.
Jack Butala: Information and inspiration to buy undervalued property.
If you have any questions or comments, please feel free to email me directly at jack@LandAcademy.com.
I would like to think it’s entertaining and informative and in the end profitable.
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