We are Profitable While Most Real Estate Niches are in the Red (LA 1279)

We are Profitable While Most Real Estate Niches are in the Red (LA 1279)

Transcript:

Jack Butala:
Steve and Jill here.

Jill DeWit:
Hello.

Jack Butala:
Welcome to The Land Academy Show, entertaining land investment talk. I’m Steven Jack Butala.

Jill DeWit:
And I’m Jill DeWit, broadcasting from sunny Southern California.

Jack Butala:
Today Jill and I talk about how we are profitable while most real estate niches are in the red.

Jill DeWit:
We were talking about this earlier today. I was thinking how I wrap my head around this and what I think about is who’s losing sleep right now. That for me is my alternate title.

Jack Butala:
I look at everything like risk, and we’ll get into this in the meat of the show, but it’s very, very risky to have all of your eggs in one basket.

Jill DeWit:
It’s true.

Jack Butala:
If you’re, let’s say, an apartment building owner, did you do anything wrong? No. It’s just nobody could have predicted this situation.

Jill DeWit:
It’s true.

Jack Butala:
But I think most apartment buildings that I know of are, and really commercial real estate, are based on 75% occupancy pays all your bills in a best case scenario.

Jill DeWit:
Gosh.

Jack Butala:
And then that 10, it’s even really probably higher than that, 85-90%, so it’s that last 10% is profit.

Jill DeWit:
Yeah.

Jack Butala:
So when you get a substantial number of people that are allowed to not pay, and I don’t care how you feel about that, that’s just the fact, then it’s got some massive, massive financial hardship. Like Jill said, if we had a bunch of apartment buildings, I’d be losing some serious sleep. And then even worse would be office buildings.

Jill DeWit:
Right.

Jack Butala:
Before we get into it, let’s take a question posted by one of our members on the landinvestors.com online community. It’s free.

Jill DeWit:
Nick wrote, “I’m about to call the county for a couple of properties I have under contract to purchase. What things should I be asking the county when I call?”

Jill DeWit:
Good stuff. Nick obviously is doing his due diligence and making sure he wants to buy the properties. The first thing I do is I don’t want to call the county and be that guy and ask them every last question when I have a lot of answers of my own. So the first thing I would do is, I use Neighbor Scoop. I go between Neighbor Scoop or Title Pro, because you have that, Nick, and you can get the ownership information, you can get the vesting deed if you didn’t already get it from the seller, confirm ownership, you can check out zoning if you need to, confirm size, confirm annual taxes. There’s all kinds of things you can do.

Jill DeWit:
The things that you call the county for, the few things you might need help with from them are, are they current on their taxes? Stuff like that. And how far back does it go if they’re not current? Did they stop paying in 2016 or did they stop paying in 2019, whenever it is? Get the total amount of taxes. It’s very rare, but you can ask them, too, are there any liens or things that you can spot that you see here on the property? Anything else that’s been recorded against the property?

Jill DeWit:
What’s possible? This is my favorite thing. This is usually why I’m calling, too. It’s really those two things, and I might, while I’m talking, too, I’m going to verify everything’s right too. I’m like, “Hey, just to make sure for ownership, I see, George Smith Family Trust. Is that what you’ve got?” “Yup. That’s what we have, too.” So I’ll just double check that, even though I probably got the vesting deed already because I did it myself.

Jill DeWit:
But the big thing, too, is I’m asking the county, what’s possible? I want to know. Do they know if it’s buildable? Is there anything that they know about it? Is there utilities? It looks like there’s utilities at the street. What can’t I build there? For example, can I put a mobile there? If the answer’s no, are there any restrictions as far as what kind of site built or what kind of building we have to put there? And find out about anything like that that you need to know that you’re, as you put in your posting, conveyed to the seller. So that’s, and again, I don’t want to waste their time, so I’m not going to call them and ask them all the questions that I have at my fingertips. I can do that.

Jack Butala:
Some of the real nebulous stuff that should be on your due diligence list when you buy a piece of property or whether you’re deciding to buy a piece of property can’t be found on the internet. If you just look at it from a number standpoint, I bet 90% of it you can do on your own through Neighbor Scoop and everything else. But one of the things is use. And so Jill said it.

Jack Butala:
Or zoning. There’s especially like in California, there’s a lot of zoning designations. Somebody spent a lot of time on this back in the day. It’s strange, and so finding out exactly what the … I struggle with this online when I go up and look. We just bought a property that’s LCD 22, and to this day, I don’t know what that is. It’s some version of it’s in LA County. And so I couldn’t get the … we had to call the county and it still was kind of nebulous.

Jack Butala:
So zoning and use is really I think the real value of the stuff.

Jill DeWit:
That’s it. Exactly.

Jack Butala:
Today’s topic. Why we are profitable. Well, most real estate niches are in the red. This is the meat of the show.

Jill DeWit:
I was reading an article on what you just said about the 75% occupancy. Is that same for residential and commercial.

Jack Butala:
You mean apartments and offices?

Jill DeWit:
Right.

Jack Butala:
Yeah. I think actually, 75 is really, I think … I don’t think I’m right.

Jill DeWit:
Is it low?

Jack Butala:
Yeah. I think it’s low.

Jill DeWit:
See.

Jack Butala:
I think it’s closer to 90%. The 75 comes from real small apartment buildings. You’ve got four people in an apartment, a quad. You’ve got three, it needs to be full. You can’t run on-

Jill DeWit:
To make money.

Jack Butala:
Right. But a Class A apartment building, that’s got three or 400 property apartments in it?

Jill DeWit:
Yeah.

Jack Butala:
It’s closer to 90%, especially if it’s leveraged, like rates leverage the heck out.

Jill DeWit:
That’s true. I’m sure it’s low. Because I was reading this article last week about New York and even though they opened up when they opened up, everybody could go back just in the last few weeks, days that New York you could come back to work or work on the office at 50% capacity. Some of the places were as low as 6% capacity. Even at-

Jack Butala:
Oh, geez.

Jill DeWit:
I’m not kidding. So I’m like, and you know they’re not paying their bills and that’s … talk about that’s my thing here. For me, I’m thinking about who’s losing sleep, and it’s these poor guys,

Jack Butala:
That just fosters all kinds of real physical plant issues. If you’ve ever owned a boat, you have to use it or it’s just going to sit there and rot.

Jill DeWit:
Right.

Jack Butala:
Same with a building.

Jill DeWit:
Exactly. I was hearing, too, I was on a neighborhood what do you call it? It was a neighborhood call with our mayor and the city manager and different people talking about … this was last week going into 4th of July weekend, and they were all talking about what to do over 4th of July weekend, and it was really great because they let the public, us, call in and ask questions or just make a statement basically. And this very sweet gentlemen said, “Look, I’ve been in this beach since the seventies. I have since moved away, but I own four business buildings on Pier Avenue,” he said, “and of those four of them, no one’s paying rent and it’s because you guys,” and it’s really a bummer with this whole thing.

Jill DeWit:
A lot of it’s just inconsistency. We can open, then we close. Open and then we can close. I’m just thinking about him. He’s losing sleep. It’s not really about what’s going on. It’s about this poor guy. Who would have thought? And these are buildings worth probably no less than $10 million a piece.

Jack Butala:
Yeah. That’s a good number.

Jill DeWit:
Because of where they are.

Jack Butala:
Super good number.

Jack Butala:
I’d say that’s a good bottom number, and here he’s got nobody paying rent and he’s responsible for his mortgage and just losing sleep.

Jack Butala:
Hopefully doesn’t have one since the ’70s.

Jill DeWit:
Hopefully.

Jack Butala:
If we didn’t refi and all that stuff. That’s really why the show is called Real Estate Niches. And when I wrote the title, Jill’s got a different perspective on it and that’s what hopefully makes the show kind of fun, but I look at it from a corporate Wall Street financing standpoint. And if you own shares in a real estate investment trust and you’re going to look at quarterly performance, it’s a disaster out there. I mean, everybody got sent home.

Jack Butala:
The last thing you want to own right now has anything to do with the office buildings. Everybody got sent home. I did a walk around. Jill and I, when we went to go look for office space in an adjacent beach town, this is probably, I think our lease is up in November or some number like that, and so we were begging the property owner, the office building owner to give us adjacent space.

Jill DeWit:
More space?

Jack Butala:
If it comes up, please call us. We’re growing out of our space. And he said, “Yeah, really? That’s funny.”

Jill DeWit:
Yeah, Nope. I even knocked on doors. I personally knocked on neighbor’s doors. “Are you going to renew?”

Jack Butala:
And so we couldn’t get any adjacent space. So we started, we were looking for and found an alternative space. Well, I don’t need to finish this thought and you know how this story ends now. I walked the building yesterday. There’s exactly two tenants left in there in that entire building and us.

Jill DeWit:
It’s scary.

Jack Butala:
And this is a tiny, tiny little example of Manhattan skyscrapers. What’s happening with that?

Jill DeWit:
Right?

Jack Butala:
It’s tragic and sad.

Jill DeWit:
I know.

Jack Butala:
So on to the show. Wouldn’t it be great to buy a piece of property for four grand that’s worth 40 and sell it for eight or 10. That’s the business we’re in. That’s the business that our members are in, and it’s working out great. When all this stuff happened. I said, “That’s about the end of Land Academy.” I really said that to myself. Did you say that?

Jill DeWit:
No.

Jack Butala:
Now everybody, tons of people are signing up. We had some attrition. As you know, we have a 500 person cap and that was one of the best decisions Jill ever made ever.

Jill DeWit:
Thanks.

Jack Butala:
And so we had a lot of attrition when this all happened, which I understand, but boy, I mean, we get a ton of new signups all the time, and reports, even better, reports that this is really working at the same level that it’s working for Jill and I. Now’s the time to buy.

Jill DeWit:
We had members that left us years ago. They got in, they weren’t real serious about it. I understand. And they started doing other stuff and now they’re like, “I don’t know how to put food on the table,” and they’re back.

Jack Butala:
Yeah.

Jill DeWit:
So that’s really good. I’m so glad. I was just going to say, I was thinking once upon a time, some of the things that we look, I never looked at office space. When we talk about branching off into other areas and not having all your eggs in one basket and looking at different property types, it was funny that we never threw around office space. I don’t know why. Neither of us have.

Jack Butala:
I know why.

Jill DeWit:
Why?

Jack Butala:
That’s not an accident.

Jill DeWit:
Okay. Well, we looked at apartments. Explain it. Why would you never do an … okay. Pre-COVID times? Let’s just say in a beautiful market, why would you never want an office building?

Jack Butala:
My very first experience as an adult, as an adult professional out of college was to work for a full commission, commercial real estate broker in Detroit during recession, coming off of tail end of recession, and they threw me in the office space department. I just walked in and said, “Can I do this?” And they said, “Sure. We need somebody in the office space department.” Well, you can imagine why. and so I immediately got control, a listing for over a million square feet of office space and leased exactly zero of it a year later. Office space as a product type-

Jill DeWit:
I’m sorry. It’s not funny. That’s crazy.

Jack Butala:
My second year-

Jill DeWit:
I’m sorry.

Jack Butala:
Hey. Ramen. Lot of ramen that year. My second year I killed it because I changed product types. I changed to healthcare, and nobody asked me to do that. I just did it. But this isn’t about me. Office space as a product, some people swear by it. They love it. Institutions love to buy Class A office buildings and then swoon somebody like JP Morgan who owns or needs a ton of space, and so it’s a whole different thing than what we do. It’s all about leverage and raising equity portions and creating the debt piece that’s all perfect, that it all matches. And then you can get it on a cap rate so it cashflows and on and on and on and play that game, that institutional game while you raise rent 3% every a year, and it creates a different capitalization rate from which to sell the building, and you usually sell it to another institutional buyer or a real estate investment trust. So it’s a relatively small group of people that trade these assets all the time because they’re placing equity and placing capital. That’s the game there. It’s not about the real estate. It has nothing to do with self preservation and retiring, and I never wanted to sit around in a suit on the 40th floor somewhere and recapitalize a building.

Jack Butala:
And so I quickly moved on from that and realized that it’s just kind of a money game, which is fine. I’m not knocking that. I think it all comes down to you anyway, and this is really why we are sitting here right now, it comes down to buying property under value. And so when you can remove a lender and all this and take your suit off and not have to go to work, Oh, it’s sounding exactly like our job description right now.

Jill DeWit:
Wear shoes.

Jack Butala:
And this is better job description since I got out of that fast. It’s just it’s a lot. There’s game. It’s a game. This isn’t a game, what we do. What we do is we buy real estate land very, very inexpensively and resell it to somebody who wants it or is going to use it. I’ve owned exactly two office buildings in my life and it both ended in a mess.

Jill DeWit:
I forgot it. You did do that. I forgot. How about apartment buildings? Ever owned that?

Jack Butala:
Oh, yeah, I got out of those okay.

Jill DeWit:
Okay.

Jack Butala:
And rental houses. Wait.

Jill DeWit:
I remember that.

Jack Butala:
Jilly and I have still have some rental houses and those seem to be fine.

Jill DeWit:
Those are okay.

Jack Butala:
And I really think that’s because the tenants, we have a personal relationship with the tenants and that family members

Jill DeWit:
We undercharge a bit, too, by the way. That’s another thing,

Jack Butala:
We paid cash for it.

Jill DeWit:
Yeah.

Jack Butala:
When you start leveraging, that’s why the real estate world, this is really what this is about. This is really the meat of the show. When you start leveraging both debt and equity and playing a game, this debt equity game, and it’s not just real estate, it’s companies and everything, and then you can’t … the thing that’s creating that, making that work, the income stream, which is a single point of failure, which is a bunch of people in an apartment building who are losing their jobs or whatever, the thing’s going to come crashing down. And so that’s what we’re seeing. Then that’s very, very risky in my mind and that’s truly why I got out of that.

Jack Butala:
What we do? Buying an asset for cash with a title agent, $10,000, let’s just say, that’s worth 80 and we sell it for 40? I don’t see any risk in that. What’s the worst thing that can happen. I ended up with a grossly undervalued asset that I handpicked out of 50 or so that day that all want to sell me their property. So that’s why we’re sitting here.

Jill DeWit:
Exactly.

Jack Butala:
And that’s really what this is all about.

Jill DeWit:
Thank you.

Jack Butala:
And that’s why I sleep pretty good.

Jill DeWit:
Happy you could join us today. Monday through Friday, we’re right here on The Land Academy Show.

Jack Butala:
Tomorrow, the episode on the Land Academy Show is called Price Precision: The Price Precision Effect And How It Works For Us. You are not alone in the real estate ambition.

Jill DeWit:
Keisha didn’t catch that. We are Monday through Friday, Land Academy Show. We might talk about houses now and then because stuff just comes up and it applies, but it’s back to Monday through Friday Land Academy.

Jack Butala:
So a professor at Cornell released a study on something that he calls a price position precision effect, and it turns out it’s something that Jill and I had been doing for a lot of years, and then we teach it to our members and it works great, so we’ll talk all about it tomorrow.

Jill DeWit:
Cool.

Jill DeWit:
The Land Academy Show does remain commercial free for you, our loyal listeners, so wherever you’re watching or wherever you’re listening, please subscribe and rate us there. We are Steve and Jill.

Jack Butala:
We are Steve and Jill. Information-

Jill DeWit:
and inspiration-

Jack Butala:
… to buy undervalued property.

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