How to Choose a Side Business
Jack Butala: Jack and Jill here.
Jill DeWit: Hi.
Jack Butala: Welcome to the show today. Welcome to the Jack and Jill Show specifically. This entertaining real estate investment advice. I’m Jack Butala.
Jill DeWit: I’m Jill DeWit broadcasting from kind of sunny, kind of cool Northern California right now up in San Francisco.
Jack Butala: Today Jill and I talk about how to choose a side business. It’s a little bit more complex than you would think and we’ll get into that.
Jill DeWit: Is it now, Jack?
Jack Butala: It is.
Jill DeWit: Isn’t it like choosing a side dish?
Jack Butala: No, it’s not.
Jill DeWit: It’s just a side. It’s not the main one.
Jack Butala: This is one of those shows where-
Jill DeWit: Can’t this just be your hobby and just run wild with it, make all the mistakes that you want?
Jack Butala: Just poke me with a stick the whole time. No, it’s exactly not that.
Jill DeWit: Oh.
Jack Butala: It’s not your hobby. That’s actually one of my very first points. It should have nothing to do with your hobby. I had a side [crosstalk 00:00:57].
Jill DeWit: You mean I shouldn’t, this is a valid question. You’re telling me as I get into this it’s nothing about doing what you love and making it a side business? Maybe I like to scrapbook.
Jack Butala: I wouldn’t recommend that.
Jill DeWit: Okay, well I can’t wait to hear about this.
Jack Butala: Before we get into it, let’s take a question posted by one of our members on the jackjill.com online community. It’s free.
Jill DeWit: Can you imagine if I scrapbooked, and you came home and I had people sitting around and we’re all drinking wine and eating Cheetos, and we have all these paper and pages and stuff around? That would be kind of painful.
Jack Butala: You know, Jill, if it makes you happy, I’d be okay with that. If you came home with a heroin habit, then we’d have to talk.
Jill DeWit: Oh, now we gotta talk. Gee, thanks Jack. It’s always something. So many rules that you have.
Jack Butala: Like no heroin.
Jill DeWit: Exactly.
Jack Butala: No baloney and no heroin.
Jill DeWit: Okay, so I’m trying to pronounce this.
Jack Butala: Corey.
Jill DeWit: Corey asks, I recently purchased a land parcel in Jefferson County, Texas, and it was sold to the state.
Jack Butala: Texas, you think? I’m going to go with Arkansas.
Jill DeWit: Oh, no, we’re both wrong. Hold on. Let me read the whole question, that will help us. I recently purchased a land parcel in Jefferson County and it was sold to the state in 2007, which makes it past the redemption period according to the state of Alabama.
Jack Butala: Oh.
Jill DeWit: Yeah, we’re both wrong. The owner sent me a handwritten letter asking me to forward the amount so he could redeem his property back. I paid $450 for the parcel, and the deed shows how much was paid. Do I need to respond to his letter? Does he have the right to redeem back after 10 plus years have passed? Since he wants to redeem, how much should I be asking him to pay. Any help, any advice is truly appreciated, thanks in advance. This is all you, Jack.
Jack Butala: Yeah, what happens is, and I’ll try to be delightfully light about this. Property people who own real estate have to pay property taxes, and when they don’t, a long time passes, and the property goes back to the taxing authority, which is almost always either the state or the county, and that’s what happened here. It went so far back that it went to a public auction, and Corey bought it. Whoever this guy is who that’s responding is probably the person who owned it back then and just, they failed to pay their taxes. By the way, it’s not some Big Brother-type awful thing that happens. You get about 500 pieces of mail, and a million different ways to redeem the property for back taxes plus some fees all along the course of this. Why this person, I purchased ton of back tax property, and the situation Corey’s in, I’ve never experienced it.
Jill DeWit: Exactly.
Jack Butala: This is very strange. His question is, do you think it’s him or her?
Jill DeWit: I’m going to say it’s him.
Jack Butala: The question is, do I need to call this guy back, am I responsible for the redemption period? All those things are very state or county specific, but mostly state specific. I can only tell you what I would do. I would not call this person back. If I paid $450 for it, I’d offer to sell it to him for some amount that is less than retail, but more than 450 bucks. I’m pretty confident that’s [crosstalk 00:04:34]
Jill DeWit: That’s a good solution. You know what, you want to be a good person, say hey, I picked up your property, I’ll sell it to you, it’s all current now, whatever it is, I’ll sell it back to you if you want, because it’s gone all through the proper legal procedures. I personally do not think that this guy has a leg to stand on.
Jack Butala: Me either.
Jill DeWit: Meaning the former owner, not Corey. If you want to be nice, offer to sell it back. If you don’t want to or whatever it is, I would just contact the county and just double check, confirm with them, what do I need to do? They may even just say, this is what I’m guessing, that it’s been 12 plus years, that guy obviously found you, but he really doesn’t own it anymore. He got all the notices, it was taken back, it was done all the right way, and there’s nothing you need to do.
Jack Butala: Yeah, if this is a personal thing, then you need to make a decision on how you’re going to handle. Most counties have no patience for, so this back tax thing. We all sit around and say oh my god, you bought a property for $450 in Alabama, that’s awesome. That’s where we’re coming from. Where the county’s coming from are how many properties are in the thing this year that we have to deal with? This wasn’t part of my job description, so they have that attitude. There’s only 450 properties this year, well there was only 200 last year. We’re all jumping up and down here, and we have talk shows about it like this one. The county, they get very impatient with people who …
Jill DeWit: Don’t pay their taxes.
Jack Butala: It causes work for them, and they get, they are very happy with people like us most of the time.
Jill DeWit: Who buy it.
Jack Butala: Who come with a big cashier’s check and buy the whole auction. That saves them a ton of work. That’s where they’re coming from. They’re not going to, most of the time. Most of the time, they’re not going to be real happy to speak with a former owner. They’re going to be much more happy to have you deal with all the stuff, pay them, so it’s off their to-do list, and then you go deal with them.
Jill DeWit: Right, because you have breathed new life into this property. I’ve talked to them, and that’s how I think they see it. They’re like thank you, this one’s current again, they’re going to hopefully pay their, that’s how they see it. We’re going to pay our taxes, and it’s going to be great, and we’re back how we should be. They’re excited by the new guy.
Jack Butala: Every county’s different. I’ve seen counties, specifically in Idaho and northern Utah where they refuse to have a back tax property. They refuse to have even one single property go back. They call the members of their community, and they say, can you please pay this tax bill for this other person over here? They just don’t want to deal with it, it’s just not part of their culture. Then there’s places like northern Arizona or southeastern Michigan where there’s 40, 50, 70,000 units at any given time on the back tax roll. They’re used to dealing with it, so there’s lots and lots and lots of dough to be made with back tax property. That’s a topic for a different … and I’ve done it. We’re qualified.
Jill DeWit: Yes, you are.
Jack Butala: Today’s topic, how do choose a side business. It’s the meat of the show. How would you choose a side business, Jill? Would you say like you said earlier in the show? Oh, I love ice cream, I’m going to have an ice cream parlor.
Jill DeWit: Well, that’s certainly one way. You know what I would do, for me to personally sit up and pay attention and choose a side business, one is my innate way and one is what I’ve learned from you.
Jack Butala: Oh no. That means you’re all messed up.
Jill DeWit: No, my innate way is what do I know a lot about and what comes easy to me, and what would I be an idiot to not, seriously, move forward on and consider making a business. That’s one way. The second way, your way is what is out there? I’ve seen you spend time and do a tremendous amount of research and get to know other businesses and business models and stuff just to see if it’s a viable thing. That’s the other way.
Jack Butala: This is how an old-school accountant thinks about things like this, meaning me. Any side business that you choose or any business, for that matter, needs to have reoccurring revenue. The easiest and best example that I can use of that to make this point is a dry cleaner, where you just keep going back. You might change to a different dry cleaner, you might have less or more, or in a small town, a grocery store. That’s very reoccurring revenue. A lot of dry cleaners pick up the stuff right from your house to separate themselves from everybody else. That’s recurring revenue. Any type of subscription base on the internet is recurring revenue. It’s no accident that we have a subscription base and we provide data. These are things that I sat down with myself long before we ever started anything like land academy or house academy, and asked myself and Jill, we’re a landlord. What’s better than having somebody move all their furniture and continually pay, because they have to live somewhere and now they don’t want to move.
Jill DeWit: Got it.
Jack Butala: It’s maybe one of the best business models there ever was, if not the best in my opinion.
Jill DeWit: Versus making a one time use product.
Jack Butala: Versus being a salesperson, which is my example, or like a plumber, where they’re just waiting for their phone to ring.
Jill DeWit: Waiting for something to break.
Jack Butala: Or for that matter, a surgeon.
Jill DeWit: Waiting for something to break.
Jack Butala: Or a real estate agent. This is the innate problem with being a real estate agent is sales [inaudible 00:10:35].
Jill DeWit: Oh, there’s several.
Jack Butala: Well, yeah. It’s all the mental issues. I mean as a business model.
Jill DeWit: Oh, oh, okay, sorry.
Jack Butala: You sell the house, or you list it, you sell it, and that’s it. There’s no real recurring situation unless you know what you’re doing from a marketing standpoint, where you’ve got the next one teed up and the next one teed up.
Jill DeWit: Right, don’t get too comfortable here, because I’m going to come to you in a year with a better house, no. Could you imagine?
Jack Butala: Yeah, you could never do that. You want to make sure whatever business you’re in is reoccurring. Number one. Number two, you need to make sure it’s somewhat scalable. I hit on this just a couple minutes ago, scalable meaning not repeatable, but scalable. If you write a book, and you sell 10 copies, it takes just as much effort to write that book as if you sell 10 copies or 10 million copies. That’s scalable. If you write a piece of software, you write it, and you support it, and you sell it, 10 people buy it, it’s just the same amount of work as 10 million people buying it. That’s true scalability. Software and publishing are really good examples of that. What’s not scalable is anything to do with sales. You do it once and that’s it, and then you’ve gotta sell another one.
Jill DeWit: Well, don’t you have to sell your business? Come on, that’s the dry cleaner, don’t think there’s not sales involved in that.
Jack Butala: I’m not knocking sales. I’m just talking about scalability and repeatability right now.
Jill DeWit: Okay, I want to know what else you’ve sat down and had a chat with yourself about.
Jack Butala: What does that mean?
Jill DeWit: You started the whole thing, you started off by saying you know what, I sat down and had a chat with myself about this whole side business thing. My head goes, I go somewhere else, sorry.
Jack Butala: Like, I’m not happy with my current hair color?
Jill DeWit: Yes. No, just kidding. I don’t at all.
Jack Butala: It’s not something that’s ever cross my mind.
Jill DeWit: All right, so all right.
Jack Butala: Hold on, I have a couple more things to say, and then we’re going to get into like, what if I hate changing car oil? You want to make sure whatever business you’re in, you have very, very low fixed costs, meaning costs that are not associated with sales. The two that are most famous are real estate, so you go, let’s say you have an ice cream shop, you have to go rent it, get a bunch of equipment, this is even before you make a dollar. You have to staff it, it has to be open a certain number of hours, even if nobody walks through the door. Now you’ve got, some people call it overhead, it’s really called fixed cost.
Jill DeWit: True.
Jack Butala: You want very low fixed cost and very high variable cost, meaning if you do sell an ice cream cone that the vast majority of the costs that are associate in your company happen with that sale. Ice cream’s a horrible example of that. McDonald’s or any kind of restaurant is a really bad example of that, or manufacturing, for that matter. You don’t want, you have to spent a huge amount of up front money just to see what happens.
Jill DeWit: Exactly.
Jack Butala: This is a bad idea.
Jill DeWit: Right, and then you have spoilage, stuff you can’t shelf too. That would be scary.
Jack Butala: The opposite end of that is a drop ship company, where you have somebody in China making some kind of product that’s really unique. It’s on the internet, it costs you 42 cents to slap a website, you do a little Google ad work, some marketing, and bang, you sell the first one. A great example of this is a buddy of ours has a company that sells gopher traps. He doesn’t make them at all, he has somebody else make them and just markets it. Every time one sells, he makes 25 bucks. He doesn’t even ship it, they ship it for him. That’s an example of, I think he’s got 1500 bucks in his whole company, and he drops ships and makes 20, 25 dollars every time someone tells. He doesn’t even know, he just looks at the numbers. That’s a good example of variable cost versus fixed cost. We haven’t even gotten to the fun stuff yet. It’s killing you, isn’t it?
Jill DeWit: It is killing me. I’m being very patient. You see, I’m sitting on my hands.
Jack Butala: The final point here is, before we can talk about the fun Jill stuff is you have to sleep, eat, and breathe marketing for this company, which is really what Jill wants to talk about. Because you can’t market something and talk about something on a silly show like this unless you’re interested in it.
Jill DeWit: True.
Jack Butala: Let’s come full circle.
Jill DeWit: Could you imagine?
Jack Butala: If we had a bunch of oil change shops sitting around talking about this day in and day out.
Jill DeWit: We were doing oil changes?
Jack Butala: Yeah.
Jill DeWit: We could make that fun.
Jack Butala: We could, at a show like that, I would just talk about the customers.
Jill DeWit: Yeah, that’s exactly what would happen. This would be Car Talk.
Jack Butala: I would put some cameras in there and we’d make a whole show. It’d be fun.
Jill DeWit: Oh my gosh, that would be really fun. I’d be playing practical jokes on the mechanics, that would not be funny. Open up the hood and there’s a clown staring at you. I would do that.
Jack Butala: Oh my god, that’s a great idea. God, you can make fun out of anything, can’t you?
Jill DeWit: Oh yeah, that’s what I would do. That’s what happens when I get bored by the way, careful.
Jack Butala: I think that your dad, who is a life-long airline pilot, started a couple side businesses. Do you know anyone else that’s started a side business successfully and it replaced the regular business? Or a horror story, do you know any stories, because I’m full of stories about this.
Jill DeWit: Okay, well his side business was rental properties. It didn’t replace his business, but it was an awesome side income, no brainer. I’m trying to think, no, yeah.
Jack Butala: While she’s thinking about it, I want to talk about very, very briefly the few types of revenue there are on this planet. There’s operational income, the kind that you get from owning a company, like Land Academy or an ice cream shop or a manufacturing facility. Hands down this is the most profitable way to make money, operational income. Passive income, which is grossly overused in my opinion recently, because of the internet. People like Pat Flynn would just sit around and say, this magical thing called passive income where you just have to buy something and you don’t have to do anything else. You just watch the money come in. That’s fictional.
Jill DeWit: You just promote it.
Jack Butala: Passive income is like stock dividends, right. You have no control, don’t care, you just watch, you don’t even watch anything, you get a check every, whatever it ends up being now per quarter for one billionth of one penny for share per stock that you own. You just pay every day that it’s going to happen. That’s real passive income.
Jill DeWit: Right.
Jack Butala: There’s capital gains type income, where you’re flipping property. Sometimes you have to pay that. My whole point is this, there’s nothing better than operational income. It’s also the most labor-intensive. Jill and I have had companies in the past that we’ve sold that make 90 percent, 90 percent profit margins on operational income. The margins on how we flip land are in the thousands of percent.
Jill DeWit: Yeah, it’s true. It’s true.
Jack Butala: There’s all types of-
Jill DeWit: I want to ask you some questions.
Jack Butala: [crosstalk 00:17:50] Okay, good. I’m going to end on this before you get into it. Owning a successful business and making the money that you want to make has nothing to do with what you’re interested in.
Jill DeWit: All right, so to hit that point home for me, didn’t you?
Jack Butala: That’s it.
Jill DeWit: No, and I agree with you. I was thinking a bit more, I know a lot of people that started side businesses and failed, because it just wasn’t enough, like you said. They didn’t come at it from the right accounting perspective and really cover all the bases that you’re talking about right now. I have a few business models I want to run by you and ask you-
Jack Butala: Oh, this is fun.
Jill DeWit: Where they fall. You covered fast food, we got that. Talk to me about Costco. How would you categorize Costco, because they do a little bit of both. They have the membership and they have the retail.
Jack Butala: Funny you should ask.
Jill DeWit: Thank you.
Jack Butala: I studied this a little bit, because I’m fascinated by Costco, not as a consumer, but as a business model. The guy who started it, his whole model was, start a club, subscription revenue model, 50 bucks or 100 bucks a year. What is the cost of Costco?
Jill DeWit: 125 for the executive whatever.
Jack Butala: $100 a year, same thing with AAA. AAA the insurance slash auto, save my daughter from flat tire company.
Jill DeWit: That’s the one.
Jack Butala: It’s the same model. You’re paying $50 to 100 a year, and you get this unbelievable services that’s unmatched. At Costco, you get unbelievable product quality for cost, or as close to cost as they can come to keep the lights on and keep everybody’s paycheck clearing. Brilliant model. It’s brilliant.
Jill DeWit: Don’t you think he’s touching on both? He’s capturing both, which is brilliant.
Jack Butala: Well, he’s put himself in a position where it’s really easy, board meetings in a company like that go like this. Let’s raise our prices across the board three percent next year. Okay, all in favor say I.
Jill DeWit: Why don’t more companies do this? If it were me and I owned Walmart, I would be doing this for my prescriptions. Pay a membership, and all your prescriptions are half off or something like that, because we all know there’s a huge markup.
Jack Butala: That’s an incredibly brilliant question, Jill. Why doesn’t everybody do the logical thing in a company? It all makes sense to us. Here’s why. There’s board members. They’re a publicly traded company, they have to answer to a million people. Nobody at the top level of any company like that wants to lose their job, so they don’t want to rock the boat. They’re just lifers. Nothing gets done. Everybody who’s listening to this knows exactly what I’m talking about.
Jill DeWit: I know what you’re talking about.
Jack Butala: This is why people bail from quarter million dollars, half a million dollar salary jobs with stock options to go buy and sell real estate, because they can’t stand it. I did. I left a partnership situation at KMPG for exactly what you’re saying, because can’t get anything done.
Jill DeWit: I’ve heard politics are like that too.
Jack Butala: Yes, you have. Costco started that way, and they’re implementing the guy’s original model. McDonald’s is still implementing that same model. No change happens there. Walmart stayed, is implementing the original.
Jill DeWit: In N Out.
Jack Butala: Original model, perfect example, In N Out. If you’re from the west coast, you know what In N Out is. If you’re from the east, you have no idea what we’re talking about.
Jill DeWit: Right.
Jack Butala: In N Out is a hamburger stand model.
Jill DeWit: Still family owned and operated, and they won’t let anybody on the outside in.
Jack Butala: They have five or six products and that’s it.
Jill DeWit: It’s awesome. That would be a scary one too. It’s not a membership, like membership pricing almost, but just a very interesting model.
Jack Butala: There’s nothing better than publishing.
Jill DeWit: Publishing, books?
Jack Butala: Publishing, publishing anything. Where you write it once, software, books, or what we do, we provide content, there’s no better business than that. You need to stand, it’s busy. You’re not going to sit around and do nothing, I’ll tell you that. Once you have one success, like we have with Land Academy, everybody wants more. You just get on a treadmill, and it’s profitable. I don’t need to tell you, Jill.
Jill DeWit: Thank you.
Jack Butala: I’d highly recommend that. Here’s my final thought on this. There’s never been a time, ever, where it’s been cheaper to start a company. Ever. You’re sitting right in front of the internet, half hour from now on your computer you could have a website up, and probably for less than 100 bucks if you know what you’re doing and start selling some stuff, whatever it is. Sell yourself, I don’t know. Sell some real estate, that’s what worked for us.
Jill DeWit: I love it.
Jack Butala: I could talk for hours on this and I don’t want to. There’s only three people listening to this episode anyway left.
Jill DeWit: Oh, I’m sorry, are you talking to me? I left.
Jack Butala: Jill’s not one of them. You’ve done it again, you’ve wasted another 30 minutes listening to the Jack and Jill show. Join us tomorrow, where we talk about one of Jill’s favorite topics, why time off is so important.
Jill DeWit: Woo-hoo, and we answer your questions, should you have one, post it on our online community, jackjill.com. You are not alone in your real estate ambition. I helped you there.
Jack Butala: Yeah.
Jill DeWit: Good. You had a lot to say, I understand. That was good.
Jack Butala: I could go on for a couple more minutes.
Jill DeWit: There are a lot of notes, I was looking at your notes here. This is one, you really wrote a lot down.
Jack Butala: It’s so important.
Jill DeWit: It is.
Jack Butala: I wish I could communicate, like stand on a soapbox with a megaphone and say, don’t open a dress shop.
Jill DeWit: Yeah, think about it. Think before you do it. Isn’t that sad, you’re right. I’m with you, how many places have, we’ve all seen them open up and there’s nobody in there, and then you see them close up. It breaks my heart every time I see that happen.
Jack Butala: Or restaurants.
Jill DeWit: Yeah, restaurants, little shops.
Jack Butala: A restaurant, it’s the most popular business to start, and it has the highest fail rate in the whole thing.
Jill DeWit: Yeah, that’s gotta be tough. Hey, share the fun by subscribing on iTunes or wherever you’re listening. While you’re at it, please rate us there. We are Jack and Jill.
Jack Butala: Information.
Jill DeWit: And inspiration.
Jack Butala: To buy undervalued property.
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