This is episode number 2080. As promised, we’ll talk about analyzing the landlord real estate model. It’s probably one of the most popular ways for new people or anyone to make a bunch of real estate. We’ll look at a personal case study that Jill and I have and some of our friends’ case studies. Where can you take this if you are organized and have the right personality type to be a landlord? Not many people do. Everybody starts out thinking they’re going to be a great landlord but nearly everyone I know hates it.

Everybody starts out thinking they will be a great landlord, but nearly everyone hates it. Share on X

“I’m going to be twenty-something in college. I’m going to buy the house and rent out all the rooms. It’s all going to be easy and great. No one’s going to miss a payment. Nothing’s going to get broken.”

“No one has pets.”

“No one’s going to have a party.” That’s good.

Land Pricing Strategies

We talked about your career choices in real estate. You have a lot of choices. Each day on the show, we answer a question from our Land Academy member Discord forum and take a deep dive into land-related topics by popular request. Jill, let’s take a question.

Jared wrote, “Pricing question for you, rock stars. It’s been noted many times in the past that the general pricing discount guidance of 20% to 30% of retail doesn’t hold for particularly large or valuable properties. I know it’s not an exact science but at what acreage/retail value would you start moving closer to 50% of retail as has been previously suggested?”

Thank you, Jared. We’re not picking on you but Jill and I have an internal saying that I’ll share with you. All conversations lead to pricing. We don’t say it fondly. Here’s a big overview. You’re going to establish what we call a retail price per acre in a ZIP code, county, or whatever you choose. It might be $1,000 an acre. That’s what’s listed for sale and that’s what’s sold. It’s a finite, accurate, no opinion, and no emotion figure.

If you look at everything that’s priced for sale and sold, and you come up with a number like $1,000 an acre, what we have done with a huge amount of consistent success, both Jill and I, and people who take this seriously in Land Academy, has sent out mailers for $200 to $300 an acre. That’s 20% to 30% of retail, exactly like you said, with success. For some reason, and I’m not picking on you, that’s not enough. We’ve been doing this for years. That simple explanation of what I said is not enough. Why is it not enough? Why do we perpetually and continually talk about more detail than what I said?

There are always new people in the group and they’re always learning. We’re always changing it. There are always new and better ways to do everything. There are always new tools or perceived tools to make it easier. People are hoping for an easy button and exact science. “I know it’s not an exact science but can you give me the percentage?” You negated what you said.

You have to feel your way through it, unfortunately. Every market is different. It’s silly but true. There’s so much that goes into it. You have to look at what’s active and what’s happening in selling in this area over here. Think about the East Coast and West Coast. Think about the beach and the deserts. It’s so different. You can’t always apply it. Things and days on the market are going to play. What’s happening in the area goes into play. The size of the property’s going to play.

Why Land Sellers Often Accept Lower Offers

I say this with love. This is why I chose this question. The reason that people want more is that they have this perception, “If I price my mailer differently than 20% to 30% of retail,” let’s say 50% of retail like Jared said, “I will do more deals.” That’s incorrect. It works that way with houses but not with land, and here’s why. People choose to call Jill back when we send a mailer out because they are sick and tired of owning a piece of land that they have never seen. They want the money instead of the land. They don’t care anymore.

They’re experiencing some type of life event like kids going to college, spouses passing away, and moving across the country. It’s all kinds of things that we’ve all experienced in life where we could use $20, $30, $40, $50, $80, $180,000 of cash infusion for something that’s in the garage essentially and being unused and unwanted. They might get an offer from us for 50% of retail. It might be 30% or 20%. They’re going to say yes.

Let me run this by you. Think about your primary residence. It doesn’t matter what you get in the mail. What if someone offered you twice what it’s worth on your primary residence? 1) You’re going to question it and go, “That can’t be right.” 2) You’re going to go, “I don’t want to sell.” Unless you’re in that life event situation, you’re going to go, “Maybe I’m wrong about what it’s worth,” but you know. You think your home is worth $1 million and they send it to you for $2 million. You’re going to go, “Something’s up here. I don’t think this person gets it.” You’re not going to call them, act on it, or go, “Ka-ching.” You know what’s going on but you don’t care.

Here’s the cherry on top of this concept. They don’t know what it’s worth and they don’t care. They never did. They never wanted it. 9 times out of 10, they’re not the person who decided to buy it. They inherited it or some other things are going on. $30,000 or $20,000 doesn’t matter to them. They just want to get paid when they close escrow. It’s the situation that we’re after, not the actual piece of real estate. It’s a life situation. Jill has nailed it. This does not apply to houses in any way. Most people know what their house is worth. It applies to land. They would much rather do a deal with somebody like sweet Jill on the phone who takes their calls and asks about their kids and dogs.

Follows through and gets it done.

Puts her money where her mouth is. They would gladly accept 20% to 30% of the actual retail value from somebody like that versus a curmudgeon like me on the phone who’s going to pay 50%. The whole process is awful if it’s going to happen at all. Jill and I can’t tell you the number of real estate all over the country. We get offers and Jill sometimes calls them back but it’s just silence.

I sign them and send them back to see what happens but it’s just silence.

Please don’t have this perception, Jared, and all the population. When it comes to land, offering more will not yield a higher percentage of success.

When it comes to land, offering more will not yield a higher percentage of success. Share on X

Thank you.

Analyzing The Landlord Model

Let’s take a look at the landlord real estate model, which is hugely profitable. Everything in real estate like everything in life has to work on paper first. I’ll bring this down to a real simple decision-making for the landlord model and then we’ll look at some of the more complicated, complex ones where you can make some dough. Visualize three houses on a block. They all look the same. One house costs $30,000 because it’s all a mess. One house costs $130,000 because it’s clean and nice in its original state. One costs $330,000 because somebody went in there and cleaned it all up.

They all command about the same rent. Which one are you going to choose? You’re going to choose the cheapest one. When you calculate a cap rate, you want that number to be as high as possible. Your rent is high and your acquisition price is low. You get two huge benefits from being a landlord. Number one, you get a median income. As fast as you can rent it, you get that monthly income. Hopefully, it’s more than what your costs are every month.

It better be or you did it wrong.

You also get the huge benefit of balance sheet equity increasing year over year. For the longer that you own the property, theoretically, in most places in the country, you’ve got this massive asset at the end. The huge reward at the end is when your heirs sell the property that you put into place, collect money on, and pay off the mortgage theoretically. You then have this asset. That can work well or it can seriously backfire on you, which most of the time, it does backfire. People don’t look at it in a spreadsheet or paper first. This landlord model is grossly misused and overused in my opinion. Here’s how a landlord model works for us.

You’re even talking about if all goes well. You haven’t even talked about all the things that could go wrong and do go wrong.

Let’s look at the money first and then we’ll talk about the social piece.

It’s not the social piece. It’s the money piece. If you think every single one of your tenants is going to pay on time every month for the 50 years that you own this, you have another thing coming.

That’s what I would call social.

I don’t call it social but okay.

If you’re going to go buy a house and rent it out, chances are you’re going to go get a mortgage. You’ve reduced your failure percentage possibility times to 80. If you buy a piece of property for cash, do nothing to it, spend not a single dollar, or rent it out to somebody who’s a nurse and the property is within walking distance of where she works, you have increased your success tenfold.

This is the stuff that people don’t talk about ever in this model. You have to set your cap rate in the beginning, set a lease rate that goes up 2% to 3% every year automatically, and set up auto-pay. What Jill’s about to talk about is all the stuff that can go wrong and it does go wrong. Make sure you calculate it in Excel or however you do it. It’s a few hundred dollars a month if everything works right.

You’re making a few hundred dollars a month?

Yeah, if they pay on time, they don’t destroy the place, they don’t have sixteen Great Danes, and on and on. As a landlord model, the SFR or Single-Family Residence, a freestanding house, is the worst asset you can possibly implement financially in that model. It’s too expensive to operate. All kinds of things can go wrong with the real estate.

You only have one door, which is not the best plan.

Here’s how the landlord model works well. You buy into a group from an equity standpoint class A apartment buildings that have 40 plus units. The per-door cost that you’ll refer to is closer to hopefully between $20,000 and $50,000, not $300,000. The rental rate is about the same. Hopefully, it’s in a good location and all of that. Everybody’s rents are going up 2% to 3%. After five years, you go through a lease-up. After eight years, the amount of revenue that’s coming in is way different than when you bought it. You resell it at a similar cap rate. That’s how being a real successful landlord works.

You can do the same thing with triple-net leases. McDonald’s and most of the fast food chains that we’ve ever seen are on a triple net model where somebody owns the building in a triple net lease. The restaurant pays for everything, including the real estate taxes. They pay for everything no matter what goes wrong. It’s a fantastic model but what you end up doing is having a cap rate that’s so low that is almost equal to the bond yield. That’s how low it is. It has super low risk but super low reward.

The Role Of Personality And Personal Preferences

Here’s the takeaway from all this. Being a landlord is not passive. There are too many people on the internet who say, “That’s the greatest thing ever. Buy a house, fifteen houses, and a small apartment building.” You set it and forget it. That’s never the case. We have a very close friend who owns hundreds of SFRs in the Western part of Phoenix. He started this many years ago. Our kids were in preschool together. He’s been doing this for that long.

Being a landlord is not passive. Many people say, “Buy 15 houses, a small apartment building, and just set it and forget it.” That’s never the case. Share on X

He does not have a property manager. He manages all his properties. He’s a former mechanical engineer so he’s got that weirdo personality. He drives a car that’s probably old and makes several hundred thousand dollars a month. He capitalized the entire scenario correctly with a family member who put in tens of millions of dollars at once right up front. He didn’t put any of his money and he operates the whole thing. It can work but I do not and I don’t think Joe does either with that personality type.

“Here’s how we do it all backward. Ask me how many doors I own that are sitting there. I rent one here and there to family and friends and then I undercharge them.” We’re doing it all wrong. The good news is we paid cash for everything. We had other plans for them. It’s not my thing. I can’t do it.

Here’s why it doesn’t work for Joe. This is a real example. A long time ago, during the real estate downturn around 2009 in full swing, Joe and I bought a property in a pretty questionable neighborhood for $25,000 bucks and it was nice. At that time, it was worth $120,000. We looked at each other and said, “I did very easy math. We can sell this for $80,000 this week.” We have $25,000 into it. We don’t have to do a thing to it, not even paint it. How many months would it take of rent for us to make up that $80,000 minus $20,000? That’s $50,000 or $60,000, and it was years.

We both look at each other and say, “I’m not waiting years to get a return on this. I want it now.” That’s why we’re flippers and not career landlords. Do we have stuff that we rent out successfully? Yeah. Are either one of us ever excited about it, want to duplicate it, or make it a huge business? Nope. It’s all personality type. Join us again where we discuss the pros and cons of real estate flipping. Jill and I have made tens of millions of dollars doing net over the years. I feel qualified to talk about what’s good about it and what’s bad. You are not alone in your real estate ambition. We are Jack and Jill, information and inspiration to buy undervalued property.