Math on Rental Property vs Buying and Reselling Land (LA 1335)
Math on Rental Property vs Buying and Reselling Land (LA 1335)
Transcript:
Jack Butala:
Steve and Jill here.
Jill DeWit:
Hi.
Jack Butala:
Welcome to the Land Academy Show, entertaining land investment talk. I’m Steven Jack Butala.
Jill DeWit:
And I’m Jill Dewitt, broadcasting from sunny Southern California.
Jack Butala:
Today, Jill and I took take a look at or talk about math on a rental property, versus buying and reselling land.
Jill DeWit:
I would like to take a moment and explain to everyone, this is business week. So if it sounds a little dry, it’s really some important business topics that we’re covering.
Jack Butala:
I love talking about this stuff, that’s the truth of it.
Jill DeWit:
That’s good. So, it’s exciting for you.
Jack Butala:
The whole premise of this topic is, we get some version of this all the time, “Hey, I’ve got a couple of hundred thousand bucks. What should I do? How can I really maximize,” the question is, how can I maximize it for my personality type? Because we have friends who have made single family, residential, rental empires, not joking. And we have friends who have apartment building empires. And everybody’s real happy and comfortable, and it all makes sense to them. And they look at us after a couple of drinks and they say, “What the hell do you guys mean you buy and sell land? To which I say, “What the hell do you guys mean? You 22 four-room apartments in Los Angeles, or four-unit apartments. That’s my nightmare.” And their nightmare is to buy rural vacant land. So, it ends up being a pretty funny conversation, almost always. But that’s what this show’s about.
Jill DeWit:
Thank you.
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:
Greg wrote, “I’m so sorry for not being a good rule follower without understanding the reasons behind things.”
Jack Butala:
Okay, stop right there. Greg, I love this. I love it. I love that you’re not a rule follower, and I love that you question everything. I think that those elements of a personality make you massively successful at whatever you’re going to try.
Jill DeWit:
I don’t usually get the same response out of you.
Jack Butala:
You people all need to start wearing a mask.
Jill DeWit:
That’s funny.
Jack Butala:
What do you mean? Why do I have to wear a mask? I’m just telling you, you have to. That’s a rule follower.
Jill DeWit:
I was with the kids in Costco the other day. Totally this. I’m like, all right. We’re weren’t sure if we were allowed to walk around and eat. They had a food cart right there. And I was actually with kid one and a friend, so I had two guys with me, and they’re starving. I’m like, “All right, we’re going to go over to Costco to hit the little food area and get some hot dogs and some drinks.” But they took all the tables out, right, because it’s all indoors in this Costco, because it’s in Seattle. I’m like, oh, okay. So, I’m not sure if we’re allowed to walk around the store eating like this. I think we are; it’s Costco. But anyway, I just turned to both of them real quick and I said, “Are we going to ask for forgiveness or permission?” They said, “Forgiveness” in unison. I said, “Nice. Let’s go get you guys some food.”
Jack Butala:
You’re a good mom.
Jill DeWit:
I am a good mom. Thank you. It’s really funny.
Jack Butala:
Can you repeat this?
Jill DeWit:
Okay, let’s go back.
Jack Butala:
Because I just love this.
Jill DeWit:
But this is how I roll anyway.
Jack Butala:
Me too.
Jill DeWit:
I’m always ask for forgiveness before permission.
Jack Butala:
Me too.
Jill DeWit:
So Greg says, “I’m so sorry for not being a good rule follower without understanding the reasons behind. Of course, I’ve heard if the owners are deceased, move on.
Well, I don’t think that applies, but okay, we’ll keep going. “If doing a self-close, agree to move on. But if going through title, I would imagine the title company would take care of these sorts of issues. And if the purchase agreement was worded so that the seller would cover any fees associated with providing clear and transferrable title, that would protect me from large attorney fees. I don’t pay until title closes. So I’m not tying up my capital. What am I missing? Under what circumstances does this not work? And is this a bad idea? Thank you so much for your experience.”
Jack Butala:
Question one he says, what am I missing? Question two, what circumstances is this a good idea or a bad idea?
So I’m going to, let’s take a couple steps back, because this is an incredibly intelligent question. And I can tell by the way you’re wording this, that you’re very, very new. So Jill and I together are going to dispel this hopefully efficiently, and so it’s easy to understand.
This is what almost always happens. Two people buy a property. Somebody dies, and hopefully the second person is alive and they’re willing to sell the property, and they’re making decisions for themselves. In a lot of cases, second person’s dead too. So this becomes this mystery of who can convey, legally convey the property so that when you get it, you’re the buyer now, you actually own it, and everything’s cool, and there’s not a cloud on the title.
And there’s a lot of variables. How it’s titled is a big deal. If it’s titled in joint tenants and that one person is still alive, you’re all set. This is the vast majority of the time where you run into problems…
Jill DeWit:
Can I follow-
Jack Butala:
And Jill, you’re an expert on this.
Jill DeWit:
The full description is, what you’re looking for is joint tenants with rights of survivorship. And that tells you exactly what it is right there. Rights of survivorship, and it could be four people, it could be two people, it could be eight people, it means that when whoever passes on, that is divided equally among who are left, and nothing special needs to happen. There’s no probate or anything like that. It’s just automatic. Sorry.
Jack Butala:
By the way, the stuff that we’re talking about here, this is not a rule following thing; this is how it is. And you don’t bend the rules on this. There’s no recorder or title agent that says, “Oh, they all died.”
Jill DeWit:
“If we file this paper, it’s okay.
Jack Butala:
Yeah, there’s no silver bullet.
Jill DeWit:
You either can or you can’t.
Jack Butala:
Right. What happens often, and I think what generates the most of these questions, is both people are dead, and the property is still in that person’s name or in the parents’ name, let’s just say. And the siblings or the person who is staring at a will that says I got all my parents’ stuff, in the will, is saying, “All right, I’m ready to do this deal. Let’s do it.”
And it’s not going to happen.
Jill DeWit:
Yeah, it’s not that easy.
Jack Butala:
The only way you can undo that… There’s a bunch of ways. It depends on the state that it’s in. This is a whole week of shows on this stuff.
But you are right about this. A good title agent is going to tell you real quick whether or not you can do this. And if we have any issues this, we do one or two things.
If Jill thinks there’s a chance, she sends it through a title agent. If there’s no chance, we do pass. And we have a database full of thousands and thousands of awesome real estate deals that we never purchased, because of these issues.
Jill DeWit:
So, I’m going to follow up this for you, Greg. So you’re looking for joint tenants. We just covered that.
You’re also looking for maybe it’s in a trust. That’s a whole different ball game. If it’s the Bob Smith Family Trust of 1994, and we’ve got the trust document showing everything, the property’s in the trust now, it’s not in Bob Smith’s name, this is a whole different scenario, too, we’re all set there. We just need the trust showing who is entitled, who is the person supposed to sign it, basically.
Jack Butala:
The executor.
Jill DeWit:
The executor, that’s what I was trying to say. That is a different scenario too.
So, there are a couple of situations. Just because somebody’s dead doesn’t mean move on. I guess that’s my point, is dig a little bit deeper, because there are a couple caveats. And Steven’s exactly right. I’ve done enough that I can eyeball it and know that “Ah, shoot, this state’s going to take a probate.” Now with COVID it’s going to take six months, when it used to take 90 days, and I don’t want to wait that long, kind of thing. And nowadays with COVID, I will tell the people, “Shucks, here’s what you’re probably going to need to do. Do you have a family attorney who helped you with some other things? Call them back and get this done. And then when it’s done and it’s in your name, then I’d love to buy it from you,” that kind of thing. And just explain it. “I don’t want to take this on, I don’t want to take this down.”
And some people do. I know a lot of members that do. They’ll say, “You know what? I’ll help this guy. Because I’m buying it at 1000 and it’s worth 50. I’ll help the guy, I’ll find him an attorney, I’ll hold the seller’s hand, I’ll pay for it, because I’m going to get the property in the end.” And they want to do those kind of deals. So, that’s another personal preference.
Jack Butala:
“So, that’s great, guys. What the hell do I do? That’s all complicated; I don’t understand anything you just said.”
Here’s what you do. Every single time you talk to a seller, you work this into your script, this sentence: “Is everybody alive and willing to sign? I’m showing on my computer screen that John and Sally Smith own this property as joint tenants with rights of survivorship.” And then if you’re probably talking to the kids or one of the parents, the seller says, “Sally Smith died in 1987. John Smith is totally alive.” Done. Okay, we can do the deal. So you do that. And that’s the good news.
If that’s not the case, the answer to the question is, no, everybody’s dead, and in their name, you have a choice right at that point.
Jill DeWit:
I’ll help everybody else out too. There’s a list of 10 things that you want to ask a seller when they first call you back. And if you want a free copy, which is true, my quick little inbound seller call sheet, you can get it for free on our website. If you want to go over to landinvestors.com, I think it’s on the left hand side. Scroll down. It says “Jill’s inbound seller call sheet.”
Jack Butala:
The title of it is what it actually is.
Jill DeWit:
It is. Go print it out, and you’ll have all the questions right then and there. Because you want to find this out. This is the kind of thing too you want to find out right away. The minute the person’s calling you, you want to find this out. You don’t want to go spend an hour looking at the property, looking at the numbers, seeing what’s possible, doing your due diligence, and then come to find out can’t buy it anyway. Great, I just wasted an hour.
Jack Butala:
Yep. You want to smoke that out real fast.
Jill DeWit:
Totally.
Jack Butala:
You can smoke out all this stuff out really fast.
Jill DeWit:
Yeah, you can. If you have that sheet, I’ll tell you right now, and I’m going to do a thing… What’s today?. Tuesday. Oh wait, it’s tomorrow. It is tomorrow. I am going to be live on YouTube and Facebook, I’m telling you right now and I’m going to do a quick little Due Diligence 101. And I’ll show you my sheet. I’ll have the sheet right there, and I’ll show you what to use to do your due diligence, the tool that I use every day, it’s a neighbor scoop, and how to navigate it.
Jack Butala:
Today’s topic, the math on rental property, versus buying and reselling land. You are not alone. Oh, this is why you’re listening.
Jill DeWit:
It’s just a coincidence that I thought about that. I’m like, “Wait a minute. Today’s Tuesday. Tomorrow’s Wednesday.”
Jack Butala:
I saw it on the calendar. I wasn’t going to say anything.
Jill DeWit:
I wasn’t going to say anything.
Jack Butala:
Why?
Jill DeWit:
I saw it on the calendar, but I don’t know what you guys do.
Oh, okay. It’s a pretend calendar. We do it just to throw you off.
Jack Butala:
I mean stuff changes every minute, as it should.
Jill DeWit:
Okay.
Jack Butala:
You’ve got a few hundred thousand dollars, or you’ve got five thousand dollars, or you’ve got zero. You want to maximize, and you know you want to be in the real estate business, then you’re probably young. If you don’t have any money, you’re young. If you’re old like me, I have a lot of money and you don’t know what to do with it, or some version of that in between.
Jill DeWit:
Who’s to say? You’re young and stupid with no money, or you’re old and stupid with a lot of money and just don’t think-
Jack Butala:
Yeah. And so much experience that you’re angry about everything.
Jill DeWit:
Exactly. Oh my gosh. Okay.
Jack Butala:
The question is, it’s a twofold question. How are you going to maximize your revenue? And then the second part of that is with your personality type. I’ve never had success with the rental business when I’m involved with the operations. I don’t have the patience for it.
What happens is this. This is a true story. True stories. And we never learn our lesson. We’ll probably do it next year. We go and buy a bunch of rental property, however that is .it’s either apartment buildings, houses, or in the case now here, it’s going to be mobile home parks, and individual mobile homes. And so you plow a bunch of money into it. Usually it’s in the form of a down payment, or you raise capital, or whatever, and you get a return.
And so when you buy rental property, you look at return on investment, internal rate of return, and things that. And if you do everything right, you’re going to be in the 20s. If you leverage it properly, you’ve got the right partners, people actually pay their rent, believe it or not, and right now a lot of people are not paying their rent, you’re going to get a 20% return. And then you’re done. Theoretically, it’s passive income. It never ends up being passive income. There’s always stuff to do. There’s always phone calls that you get. But it’s about as passive as you can get in the real estate venue, in the real estate realm.
Versus, you go and buy a piece of property. Here’s a real deal. Jill and I are buying two pieces of property in central California that are close to a small town. They’re each 20 acres I think, on a state road, for about $10,000 each. We’ll sell those properties for 50 to 60 to $70,000 each. We don’t know, some number that. So, $20,000 in, $100,000 out, $150,000 out, whatever the numbers are.
Is this a typical deal for us? Yeah. Was it a typical deal for us three years ago? No. A typical deal for us three years ago was buy for 20 and sell for 40, 60, 70. I guess that’s pretty close.
And if you know, Jill and I love acquisitions. We are acquisition people. I’ve been in some form of acquisitions since I was a young professional adult. And that will always remain. I think that the allure, what’s the real math on that? So let just answer the topic. If we do two or three deals like that, we’ve made 3 or $400,000. Let’s say we do a deal a quarter, which I think an infant can do, we’ve made 4 or $500,000 this year. A better way to say it is, if you’re doing all this stuff right, you make a hundred grand a month, you make a million dollars a year buying and selling land.
Jill DeWit:
Those are good numbers. That’s very attainable.
Jack Butala:
That’s very realistic. You’re not going to do that your first year in business. Maybe not even your second year. But if you stick with it. And now we have hundreds and hundreds of people in our group that are sending us thank you notes saying, “Yeah, you guys are right.” So, this isn’t some fluff.
You’ve got to work at it though. You own a company, you work eight hours a day, at least. In the beginning it’s a lot more than that. So, that’s the real math.
The real math on rental houses are, if you are lucky enough to have a source of capital that you don’t care about… I’ll give you the business model of a great friend of ours. This guy is a very experienced rental house manager. His wife has a brother, his brother-in-law, who sold his medical company and nets out $50 million. Doesn’t know what to do, because he’s a medical guy, he’s not a money person.
Our friend goes to the brother-in-law and says, “Hey, why don’t you set up a line of credit? I’ll go buy a bunch of houses, for cash. It takes the leverage out of it entirely.” There’s big debates about leveraging or not leveraging. Let’s just make it simple. He starts buying houses for a $100,000, and he rents them out for a thousand dollars. And he gets the portfolio up to a hundred houses. Now he’s making $100,000 dollars a month, and he’s just managing the houses. And when people move out, he rents them out. And he drives his little old 4Runner around like an old man, and pays the taxes on it, and he’s just the happiest guy ever. He makes about a million dollars a year, he and his partner.
So, which one would you rather do? And that took him three years to build that up. And you’ve got to clean the houses out. I’m oversimplifying. The houses that he’s buying are a mess. They’re old, from the 50s, in central Phoenix. The type of tenant you’re going to get, you’re going to get two or three or four tenants in there before you get the one that stays. There’s a lot of stuff involved.
Jill DeWit:
I’m laughing. I’m thinking about his horror stories. He can tell right away when people roll up, based on how their car looks and the trash in their car.
Jack Butala:
He looks in their back seat.
Jill DeWit:
Right? He does this. He’s learned to check that, to see what kind of tenant they’re going to be. Because if their car is a disaster, we got a really good idea of what’s going to happen in the house.
Jack Butala:
So, we both make the same amount of money. And Jill and I live at the beach with a cocktail in our hand just about every single afternoon. Because all we’re supposed to do is make a hundred grand a month buying and selling land? She doesn’t even need me for that.
So, that’s the math. The math is about the same on all these real estate investments. It’s just truly who you are.
Jill DeWit:
Right. That’s good. That’s a great way to say that. You summed it up perfectly. Happy you could join us today. Five days a week you can find us here on the Land Academy Show.
Jack Butala:
Tomorrow the episode on the Land Academy Show is how to structure your land business. You are not alone in your real estate ambition.
I forgot to mention there’s two components to these real estate businesses. And here’s where he might win, and we might not. There’s the income statement and the balance sheet. We covered the income statement. We both make the same amount of money. Great. He’s collecting appreciation on these assets, year over year, so his assets, on our national average houses go up 4% a year, nationally. Of course, we don’t care about national statistics, because in California they go up 11% and in Detroit they go down a negative 11%. So you’re never just four. So he’s collecting some pretty massive appreciation on a hundred houses as he goes, and he’s got something to sell at the end. There’s a pretty serious exit strategy. To which I say, and my hats off to him.
And he’s right. He’s right and I’m wrong. This is not our only business. We don’t just buy and sell. We have so much more free time. We have other companies, we have companies like Neighbor Scoop or Offers to Owners. Both companies can be, it depends on which month you look at them, can be profitable, and sellable. So we’ve chosen, because we have some tech talent, or tech patience, I should say, to build our balance sheet through other stuff, and diversify.
Jill DeWit:
That’s true. Awesome. Thank you for tuning in. We hope you find our content valuable, and we appreciate your support. If you haven’t already, please zip on over to our YouTube channel and hit that Subscribe button.
Jack Butala:
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Jill DeWit:
We are Steve and Jill.
Jack Butala:
Information,
Jill DeWit:
and inspiration,
Jack Butala:
to buy undervalued property.
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