Same House Costs Way More in Different Markets (JJ 685)
Jack Butala: Jack and Jill here.
Jill DeWit: Hello.
Jack Butala: Welcome to the Jack Jill show, entertaining real estate investment talk. I’m Jack Butala.
Jill DeWit: And I am Jill DeWitt broadcasting from sunny southern California.
Jack Butala: Today Jill and I talk about why the same house costs way more in different markets. I just learned this myself, and that’s why I decided to do a show about it-
Jill DeWit: Thank you.
Jack Butala: … because I was floored.
Jill DeWit: Thank you.
Jack Butala: I was very, very, very shocked at the relationship between the balance sheet and then how much money people make and the real estate they live in.
Jill DeWit: I thought there was something more to it, too.
Jack Butala: It turns out it’s really quite simple.
Jill DeWit: Yup. Super interesting.
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: You know what, Jack, that’s a lot of life. We build up these things in our heads, that it’s a big deal, and it’s really not that big.
Jack Butala: Right.
Jill DeWit: It’s like nah. No, that’s the reason why, that’s it.
Jack Butala: Yup.
Jill DeWit: Really, that’s all. All this time =I thought I was missing something. Nope.
Jack Butala: You know, I want to talk about this.
Jill DeWit: Thank you,
Jack Butala: I should do it right now.
Jill DeWit: Okay.
Jack Butala: What’s the opposite? So, usually I go into things. What’s the opposite of what you just said?
Jill DeWit: You think it’s too easy.
Jack Butala: You get into something-
Jill DeWit: You go, “Oh, I got this”. That’s the opposite.
Jack Butala: If they get into something, and they’re like, “That was worth it, that was fantastic, I’m so glad I did that. It wasn’t hard, the outcome was great, it’s exactly what I planned.” Has it ever happened that way? Does anything every happen that way?
Jill DeWit: Yeah.
Jack Butala: What?
Jill DeWit: Us.
Jack Butala: Marriage? I don’t think so. Kids?
Jill DeWit: I don’t know.
Jack Butala: When you line buying and selling real estate up, successfully, against having kids-
Jill DeWit: Mindset
Jack Butala: … and marriage and all of it, it’s so much easier.
Jill DeWit: Mindset. You know what, I swear it’s mindset. We all have to do the same things. We all have to get up. Everyone who has children has to make sure that they’re fed and their healthy and they make it to school and they have clothes and their shoes fit and whatever. We all had to do the same things. Be honest. But some people whine about it, and some people got it. It’s a mindset.
Jack Butala: Yeah.
Jill DeWit: You know, honestly this a little insight to me, when my kids were little, our kids were little and I was a mom, I thoroughly enjoyed it. I enjoyed the walk to school with the kids. I enjoyed making cookies in the afternoon. I know you’re like rolling your eyes, going “What the heck”, but I did. I was all in. It was at that point in my life, I was the right age, I set out to do it, there were no accidents, and that’s what I wanted to do.
Jack Butala: That’s great, love.
Jill DeWit: Thank you. And I didn’t complain about it. Even when there was times that we didn’t have a lot, you know, I’d come up with creative ways and the kids were happy. They didn’t know. You know, a picnic at the park, because we couldn’t afford to eat out to dinner. They thought that was the greatest things on the planet, could we do this every night? You know, whatever. So, I think it’s mindset.
Jack Butala: That’s a beautiful story Jill.
Jill DeWit: Uh oh.
Jack Butala: Let’s take a question, posted by one of our members on the jackjill.com on-line community.
Jill DeWit: Okay. That was really off topic. Anyway, Mark asks, “Hey gang, I hate to bring up the ugly side of making money.”
Jack Butala: What’s the ugly side of making money?
Jill DeWit: I didn’t know there was one. Speaking of mindset, “Is the money we earn in this business considered short term capital gain or income? The other question that has been on my mind is where is the income tax paid at the state level, the state where the land is or the state where I reside? Thanks, Mark.”
Jack Butala: There’s a saying in accounting, and it goes like this. Don’t let the tax tail wag the dog.
Jill DeWit: I did not know that.
Jack Butala: And I have believed that and lived by that my whole life. If you’re making a ridiculous amount of money, which a lot of us are in real estate. The tax situation, it’ll be figured out. That said, you do need to make some planning, and I think that you need a tax plan. And that’s a great way to look at this. Here’s my opinion, and I’m urging you to get a tax person that is comfortable with your risk threshold in the state that you’re in.
Making money buying and selling real estate depending on what else you do for a living and where you live and all kinds of other circumstances can be classified as ordinary income, or you may be exposed to capital gains taxes. It depends on if it’s your full-time real job or not. If you’re an engineer and you’re flipping houses on the side, I can almost guarantee you you’re gonna be exposed to capital gains. If you’re full-time been doing it for 10 years, that’s the whole source of your income, it may be construed as the other way. But find a tax person that can figure that out with you.
The other question is if I live in Michigan and I sell a piece of property in Arizona, we all know I have to file a Michigan state tax return, but do I have to file an Arizona tax return? I asked this question about four months ago to two accountants, and they both said just like in a television commercial simultaneously yes and no. Simultaneously. Yes, no.
Jill DeWit: Isn’t that funny?
Jack Butala: Yep. Let’s do it, Jill. I’ll [crosstalk 00:05:15].
Jill DeWit: I wish it was black and white. One, two, three. No.
Jack Butala: Yes. That’s what they said. And that’s my answer.
Jill DeWit: I know. I hate to be vague, but you’re right. I guess the whole point is here, Jack, is that there’s many ways you can structure it. It depends on how you want to, and when your tax guy and you and how you guys … If you go down the path to call it X, that’s fine as long as you do all the things that make you comply with that plan. Is that what you’re saying?
Jack Butala: Yes, and here’s another concept that I live by. Jill’s heard me say this a million times. Revenue justification, if you net $14,000,000 in 2018 and you’re staring at it in the bank and you have to pay taxes on it and you get two accountants and pitch them against each other, which one can save me the most money? I made $14,000,000. I have to pay taxes. One says you owe $4,000,000 and one says you owe $5,000,000. Does it matter? Does it really, really matter if you made that kind of money this year? What do you think?
Jill DeWit: No.
Jack Butala: It doesn’t matter to me.
Jill DeWit: No. There’s a certain point that it doesn’t.
Jack Butala: These are good questions, and thank you, Mark, for asking, but what you really need to do is figure out how to make 14,000,000 bucks like us.
Jill DeWit: Right. One of the main things is that we’ve done forever is having a licensed or whatever you want to call it, a real accountant on your team is always gonna help you.
Jack Butala: And one with a similar risk threshold that you have.
Jill DeWit: Right. Right.
Jack Butala: There are people in our group that self-described say, “I am a rule follower, and I’ve done transactions in 48 states, and I’ve filed 48 state tax returns.”
Jill DeWit: Oh. That’s not something I really want to do.
Jack Butala: If you read the Internal Revenue code, it’s very vague in my opinion. It’s like reading the Bible.
Jill DeWit: You know what it is? I don’t know. I hate to say it, but you know what? I can’t believe I’m saying this out loud, but in our government and everything there are gray areas. See, right? But that’s the thing. I wish there was an easy answer, but there is none. There are gray areas about this whole thing. You know what, Jack? And it’s not just what we’re doing.
Jack Butala: Oh, it’s every single business.
Jill DeWit: Exactly.
Jack Butala: Well said.
Jill DeWit: Thank you.
Jack Butala: You’re gonna run up against this on everything.
Jill DeWit: You could be selling sunglasses online, all right, and you’re selling sunglasses all over the country.
Jack Butala: And you’re delivering them everywhere.
Jill DeWit: Right. All over the country. Look at Amazon. Most of the time the state taxes don’t pop up, but now and then they do. I don’t even understand the formula. I don’t even care. I just pay for it. I don’t think about it. But I know Amazon right now is asking the same question. You know that? And going there’s gray areas here. We’re gonna go with it this way.
Jack Butala: I know somebody recently that has a company that’s based in Arizona and they live in Arizona and they operate in Arizona. Their LLC’s there and the whole thing, and they use a distribution center to sell their products, to distribute their products on the Internet out of California. Their accountant said you need to file a California tax return, and they did. So, you can take that how you will, listener. I’m not sure if they had to do that or not. I know what I would’ve done, but I’m not gonna say it out loud.
Jill DeWit: Thank you.
Jack Butala: Today’s topic, why the heck does the same house cost way more in different markets. This is the meat of the show. I can tell you this, it doesn’t have anything to do with the real estate itself. It has to do with a version of the underlying concept of pure supply and demand. That manifests itself. The example is a Hallcraft house built in the 1920s in three areas of the country: Florida, Texas, and California. This is just an example I put together in my head. The on in Florida costs 400,000 bucks. The one in Texas costs a hundred, and the one I California costs 4,000,000. Why is that? Is the view better?
Jill DeWit: Maybe the dirt’s better.
Jack Butala: Is the water quality better?
Jill DeWit: That’s it.
Jack Butala: Is the house itself built better? The answer to all those things is no. They’re exactly the same. Why is that? Because people are willing to pay more. Thanks Captain Obvious. That’s great.
Jill DeWit: Thankfully I didn’t have to say it.
Jack Butala: Why are they willing to pay more? That’s the real underlying concept that floors me.
Jill DeWit: Isn’t that funny?
Jack Butala: Because they have more money. That’s why.
Jill DeWit: And we do it.
Jack Butala: That’s why property costs more in other markets because the median income in Texas is way lower than it is in California.
Jill DeWit: Isn’t that funny?
Jack Butala: And Florida’s in the middle.
Jill DeWit: As a society we could all rise up and say this is ridiculous and say I’m not paying that much. I’m only gonna pay this because that’s what it’s worth over here. But as soon as you do that, that means someone just outbid you and they got the house and you’re left standing there.
Jack Butala: Or you could do like what Canada does, what people from Canada do, which I love. Property in Canada is very expensive, and when I was growing up it was cheaper.
Jill DeWit: Really. So, what do they do now?
Jack Butala: They buy property in California and Florida and Texas.
Jill DeWit: Well, we could do that, too.
Jack Butala: Okay. So, that’s my point here. This is not an economics podcast, all right? If it was it would be on the air for about two episodes. This is a podcast about how do we make money in real estate and make it fast.
Jill DeWit: Right.
Jack Butala: So, if you live in that $4,000,000 area in California, it’s real easy to justify paying the same price or 100,000 or 90,000 for a property in Texas. I’m not saying move there. I’m saying buying it smart and flipping it. Oh wait, that’s what this whole show’s about. This is really good news, why these properties are exactly the same in three states and so diametrically different when it comes down to pricing. I’ve been saying this for two years, pricing is the key to all of this.
Jill DeWit: Exactly.
Jack Butala: How’s that for boring?
Jill DeWit: I had a thought, and I was trying to figure out where I was going. What this whole topic brings up to me is the people that they … being in a real expensive market and going to a non-expensive market or vice versa, it’s very interesting. I’ve heard some people talk about where we are in southern California, people that have left, right, and they went to Arizona. That’s a popular place. And they’d buy mansions for what they could have here with the same amount of money. But then they realize, oh, I miss it. I wanna come back.
Jack Butala: I knew you were gonna bring that up.
Jill DeWit: And they can’t get back in. They think they can get back in.
Jack Butala: Twelve minutes and 20 seconds in. I was setting my watch.
Jill DeWit: Why is that? Why do you think that they have that concept? It’s not true. Unless-
Jack Butala: It’s absolutely true.
Jill DeWit: Unless I took a less expensive job now and they goofed themselves up and they … I still think they can jump back in.
Jack Butala: It’s all personal preference. My dad lives in Florida. I’m not interested in living in Florida at all. Been there a lot, that’s not my thing. My dad would consider moving to Texas for a lot of reasons.
Jill DeWit: Really?
Jack Butala: But I wouldn’t. I love California.
Jill DeWit: Oh, I do, too.
Jack Butala: And it’s worth it. I see the value in the extra expense, especially for where we are financially.
Jill DeWit: I do, too.
Jack Butala: So, but that’s not my point. My point is not primary residence. I knew you were gonna bring it back to that. Here’s my point. No matter what market you’re in, it doesn’t matter, forget about the actually piece of real estate. Forget it. Forget it. Just put it out of your mind. Everybody makes this mistake. Everybody HGTVs it. Oh, well what about the curtains? What about the garage? What about the foundation? I doesn’t matter.
Jill DeWit: No, it doesn’t matter.
Jack Butala: None of those things matter. What matters is the price of the real estate and the model that’s happening right in that little market.
Jill DeWit: Okay. I now know where you’re going with this. When I coach and talk to members all the time that they’re like I only have X amount to invest. All right. Then we need to put that in the right location where you can guy 10 not 1-
Jack Butala: That’s right.
Jill DeWit: … kind of thing. That makes sense because of a lot less risk. Especially when you’re new, if you’re buying 10 properties for $10,000 each than one property for $100,000 each, I’m just talking like vacant land kind of thing, that’s much easier to do.
Jack Butala: So, forget about the real estate is my whole point of this. That’s the takeaway on it. It doesn’t matter. And what you think about why it’s priced differently doesn’t matter. What matters is if a property in California sells, and you price it all out, and they sell for 4,000,000, you better be buying it for 3,000,000.
Jill DeWit: Right. Could be an infill lot right here.
Jack Butala: Or maybe less. Yeah.
Jill DeWit: Infill lot here. Infill lot in Orange County, California vs. an infill lot in Orange County, Florida, they’re different.
Jack Butala: Or in Manhattan, New York. They’re all different, but they only are relative to what’s immediately around them.
Jill DeWit: Exactly.
Jack Butala: I see this as a mistake. This is something I learned at this recent real estate group meeting that we went to. This guy broke up the anatomy of a real estate deal in four phases. You find the property, which is what we’re experts at. Usually we stop there, by the way. Oh, but wait, there’s three more things to do. No there’s not. There’s nothing else to do but find the property for us. Everything else falls right into place.
Jill DeWit: It’s automatically solved.
Jack Butala: It’s all based on finding a piece of property-
Jill DeWit: At the right price.
Jack Butala: … at the right price.
Jill DeWit: At a really good price.
Jack Butala: So, what were the four things? Find it, finance it-
Jill DeWit: Finance. Fix.
Jack Butala: … which you don’t need to do, fix it, fix it up-
Jill DeWit: Which you don’t need to do.
Jack Butala: … which you really should never do unless you’re an interior designer who’s married to a contractor.
Jill DeWit: Right, there you go. Good example.
Jack Butala: And then the fourth one is sell it.
Jill DeWit: Flip it.
Jack Butala: Flip it. That’s it. The four F’s. If you buy a property for 60% or 70% of what you can sell it for immediately, all those things fall right into place. It’s a matter of days. That whole group meeting, 90% of it was about fixing it, the fixing portion.
Jill DeWit: Isn’t that funny? I just think it’s HGTV that’s got everybody excited about it.
Jack Butala: People need to touch stuff-
Jill DeWit: Do you know what’s so funny?
Jack Butala: … and feel it and look at it and love it or hate it.
Jill DeWit: Who owns HGTV? I would venture it’s Home Depot.
Jack Butala: It should be.
Jill DeWit: It should be. If not, they should because they should’ve started this.
Jack Butala: That’s real money making. Those are the people-
Jill DeWit: That’s it.
Jack Butala: … contractors make the money.
Jill DeWit: I swear, Lowe’s and Home Depot-
Jack Butala: Real estate agents make a ton of money on that.
Jill DeWit: Oh, a lot.
Jack Butala: Everybody makes money except you-
Jill DeWit: To HGTV because it revives them.
Jack Butala: … except the guy who’s taking all the risk. You take all the risk on a flip like that. All of it. Does the lender care? No. The lender doesn’t care at all. They’re lending you the amount of money that if they have to take it back they’re gonna do great. The real estate agent makes all their money before you get the keys. Contractor, they love you, they see you coming.
Do you ever see these shows? The contractor’s like, “Yeah. Oh, that’s gonna cost $13,000.” Really? Where’d you get that number? Then no one questions it.
Jill DeWit: True.
Jack Butala: And then when you sell it-
Jill DeWit: No, wait, wait, wait. Let me finish this please. What it’s really, it’s because if they said, “Really? How’d you get that number?” “Well, that’s what my kid’s braces are gonna cost. And my wife needs a new car.”
Jack Butala: That’s the new boat I looked at last night.
Jill DeWit: Exactly. That’s why it’s gonna cost that. That’s the reality. It’s not, “Well, I guess I know this. It’s this many hours, and Jose’s not available, so I gotta get this guy, George”, and whatever. I don’t know.
Jack Butala: So, at the risk of sound like your annoying grandfather who’s angry, I’m gonna say it one more time. It’s not about the real estate. It’s not. The real estate’s just a vehicle just like a share of stock that you’re gonna flip really quickly just to put some dough in your pocket.
Jill DeWit: It’s an amazing time that we’re in.
Jack Butala: It is.
Jill DeWit: An amazing thing that we’re in, and I love it.
Jack Butala: Join us tomorrow where we discuss how the price of everything goes up while wages are consistently just stagnant and what it means with real estate.
Jill DeWit: It’s true. And we answer your questions should you have one. Post it on jackjill.com. Go there, it’s free.
Jack Butala: You are not alone in your real estate ambition.
Jill DeWit: So, I apologize. When we sat down to do this show, I wasn’t sure what property types you were asking about, so I didn’t mean to go on a different tangent.
Jack Butala: Don’t apologize. Do not apologize. I was actually hoping that you would go there.
Jill DeWit: Oh, okay.
Jack Butala: Because you should. When I first started thinking about this, that’s what I thought, too. I’m like, “Well, yeah, because we’re like people that fit in in California, and we like to be here”, and that’s it. It’s we see the value of the price different.
Jill DeWit: That’s true.
Jack Butala: I’m sure there are people who are listening to this in Texas, they’re like, “What the heck is that all about? Crazy California people.”
Jill DeWit: You know what? They’re right.
Jack Butala: Yeah. And the same thing with Florida. Both of you are nuts.
Jill DeWit: It’s really true. For the people who live in areas and communities that think we are nuts to spend this much money for this size of a house for where we are in the location to the ocean, they are correct.
Jack Butala: I will say in general you will get it back. If you paid cash for the three houses I described, you’re gonna get it back plus it’ll make it worth your while.
Jill DeWit: Right.
Jack Butala: In general.
Jill DeWit: In general.
Jack Butala: If you finance it at 2% and take a leveraged out at 8% and live there for 30 years or 15 years, it’s gonna be real tough to make any money at all.
Jill DeWit: Got it. Thank you, Jack. Hey, share the fun by subscribing on iTunes or wherever you’re listening. And 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 under valued property.
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