Funding real estate deals with debt can be a game-changer, but it’s not without its risks. In today’s episode, Steven Jack Butala and Jill DeWit dive deep into the pros and cons of using debt to fund your next property deal. From traditional bank loans to the high-stakes world of hard money lending, we explore all the options on the table and share what you need to know before taking the plunge. Whether you’re just starting out or you’re a seasoned investor, understanding how debt plays into your strategy is crucial for success. Stay tuned as we break it down!

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The Truth About Funding Real Estate Deals With Debt: Risks And Rewards

I’m Steven Jack Butala.

I’m Jill DeWit, and this is The Land Academy Show.

The Pros And Cons Of Debt Financing For Real Estate

This is episode number 2,105. Jill and I will talk about the pros and cons of funding your real estate deal with debt. All week this week, we’re talking about the five basic ways to get any real estate deal funded. One of those ways is debt. It’s my least favorite way.

Debt, we’re mainly there. Is it a bank involved? Are you talking about any version of that? There are obviously, same thing.

There’s mortgage debt. You go to a big, huge bank or even small banks or a credit union. It’s usually your single-family residence, your primary residence, and then they slap all your stuff into a computer and tell you what you can afford, what you can’t afford. They judge you based on your credit score and the price of the property. Outside of that, they don’t offer any real input or advice. They say you’d need this much money down, this is going to be your interest rate, and this is how your life is going to go for the next 30 years.

Does a guy named Guido count as debt?

Yeah. You can go to Bank of America, or you can go to Guido.

Thank you. Probably different interest rates.

Guido’s not going to judge you at all. He’s going to say it costs 18% a week, and if you don’t pay, we’re going to go find your children.

I was going to say, “How do you like this bone? Do you like this bone intact?”

Those are two opposite extremes. One that’s right in the middle, here’s a good example. We’re getting into the topic, but that’s all right because it’s fun and funny. One of the types of debt financing that we see a lot, and I see it even with my personal friends who are very wealthy, is hard money lending. You can get hard money lending. If you’re not familiar with it, it is essentially, “I want to buy a house and flip it.” It’s very associated with renovation, which Jill and I aren’t big fans of either.

You buy a house, you go to the hard money lender, and they say, “Jack, it’s great to hear from you again. Do you need $300,000 for that? Okay, cool. I’ll send you the agreement.” Click. That’s why it’s so attractive. If you go to Bank of America to get funded for a flip, it’s going to take a couple of weeks, and they’re going to look at everything through a microscope. It’s a very unpleasant experience.

I’m old enough to remember that going to a company like Bank of America to get a mortgage was actually really easy. It’s just not anymore, like most things. Hard money lending is essentially, “I’m buying this house,” and they’re going to say, “Great, we need a $5,000 non-refundable, fill in the blank.” It’s all kinds of titles, but it’s just a fee. It’s a non-refundable fee. You get feed to death in hard money lending. “Here’s my $5,000, thanks very much. You need $60,000 for a down payment, and we’re going to charge you 18% or whatever the law allows in the state for an interest rate a year.”

Are we going to go through this all when we get to the topic part?

Yeah.

Good. I’m like, “Now it’s getting too deep. Do I need to start taking notes now, or should I wait until the middle and take notes?”

We were talking about burritos, so I thought you wanted to get in. 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.

Exploring The Timber Value Of Land

Michelle wrote, “I have a timber question. A seller wants to sell his 19 acres in a northeastern state. It is landlocked but completely treed with old timber. Has anyone ever bought a larger property for the timber value and then got it harvested to get the revenue from that? I’m guessing it’s way too much work. I would like to understand the value of the timber better. If anyone has expertise in that, I’d like to have a quick chat with you.” We have several people in our group that do this. It’s interesting because we have a lot of people that came to us in Land Academy because this is their business, and they want to find more great land that they can harvest, basically, and thin it out, and sell the trees.

We’re all entrepreneurs in this group, or people who want to be successful entrepreneurs, so it’s a very natural extension because so much money-making starts with land. It’s a very natural extension to say, “I got this property, and I can buy and resell it because that’s what my business plan says and my acquisition criteria say, but what if I put up a stadium? What if I put a marina in? This property would be an amazing golf course. How about a hotel? How about we de-timber it?”

That process is always, and with me too, and certainly with Jill, it’s always lying dormant under there, waiting. It’s waiting to screw up your life. You have to keep it pushed down like a spring, so it’s a very healthy, natural thing. That’s why you’re buying and selling real estate, because you let that part of the spring out a little bit. What has happened to me at this point in my career now is that when I see some huge potential that is outside of the realm of my acquisition criteria, I bring in somebody who knows all about it.

Just like she’s doing. That’s the value of this group too. We’ve gone down this path. You know what’s interesting is I’ll go down this path, but I won’t let it overtake everything else that I’m doing. That’s, for me, the only condition. We had this property one time. We’ve had many properties. We’re going to split it. We’re going to do this, do that, but all along, we try to sell it during the process. Don’t let it hold up the show. We’ll have it posted for sale. While we’re doing that, I’m going to look at doing a split because that can be even more profitable. If anybody comes along through the process, they can continue the process.

One time, it was here in Arizona. It was a house deal. I didn’t know how valuable some of these really tall, well-established palm trees are. Someone said, we started going down that path. The good news is we both put our foot down, like, “We’re not going to spend that much time on it,” because you could spend a week on it. You could spend a month on it. You come up for air going, “Now I know all about the palm trees, great,” but we started to go down the path, made some calls, found out what they’re worth, tried to sell them, and fortunately, because we were smart, the property got bought before that process happened.

I’m like, “Thank you,” and then they had the option, which I’m sure they didn’t, because they actually moved into the house and kept it. That’s what I would say with you, Michelle. I wouldn’t put my foot on the brakes because of this. Whatever value you find out, it’s for you and/or your buyer, and queue it up for them. Maybe you say, “Now it’s worth more because I know this is worth this. This is a process I’ve learned so far,” and then just see what happens.

Business Model For Buying And Selling Land And Houses

I would probably say, “I’ve determined that this property is conducive for deforestation. I will happily sell it to you, whoever is going to deforest it,” and make sure the numbers work there so that she buys it, resells it to the person who’s going to go do something with it. This is our business model for houses, and then she’s out of it. Is she leaving money on the table? Yeah. That’s the hard part.

I’m going to argue, no. I’m going to argue, “Don’t leave money on the table. You’re going to get some more. I know the value of this in addition to this, and that’s why I’m pricing it this way.”

I would say, if my business model is, “I send a bunch of mail out, buy for $30,000, sell for $90,000,” and she’s buying for $30,000 here and selling for $90,000 to a timber guy, but she knows he’s going to pull half a million dollars’ worth of timber out, you just forget it. Say, “Buy for $30,000 and sell for $90,000,” and just go about your business. Wouldn’t you do that?

I’m not sure.

See? The spring is coming up.

I’m not going to do it, but I may not sell it for that. We’ll just see. See how it goes.

You’re in the timber business, or you’re not.

That’s the point.

You’re in the land acquisition business, or you’re not.

You're in the land acquisition business, or you're not. Share on X

I’m not going to sell a property for $90,000 when it’s worth half a million in timber.

I am. Jill and I regularly buy a house for $300,000 or $400,000 and sell it for $80,000 to $100,000 more. We never do a thing to it. Not a thing. We sell it to the person who’s going to renovate it and sell it for $60,000 or $70,000 or some number that works for them. Here’s why. Here’s what led up to this, our business model is what I just described. We have done three or four renovations together in the way distant past. This is more than fifteen years ago or about fifteen years ago. What happens is, and it’s not us-specific, it happens to everybody. You walk through a house, you start renovating it, and things like this start to get discussed. We have a budget, and we have a whole model that we’re going to execute pretty quickly, theoretically. “What if we move this wall over here?”

That I don’t want.

“What if we put a chandelier in the bathroom?”

I don’t even do that in our own house.

“What if we deforested this land?” This perfectly awesome real estate deal, buy for $30,000, sell for $90,000, and we deforested it and got another $100,000 out of it. That’s what happens.

That I won’t do.

You have to keep yourself in check. Fortunately for Jill and I, we keep each other in check, to the point of nausea at times. Usually me making Jill nauseous. Maybe I’m doing it.

Maybe.

Our topic, the pros and cons of funding your real estate deal with debt. Here are some pros. It’s fixed. If you go to a regular institution, like I said earlier, put your stuff in the computer, and they spit back out what to expect, how much you qualify for, what the interest rate is based on your credit score and your assets and your family size and your income, fill in the blank. Congratulations. You’ve signed up to make a payment for the next 30 years. Every single month.

I don’t think that’s healthy. I think it does stuff to you mentally that’s not, and it’s very prevalent. Everybody, for some reason, in this country believes that just having a mortgage like that at a fixed rate for 30 years is a reward. I’m not sure why that is. It’s because we’ve been told that by our parents, and we’ve watched our parents be successful at it. Those times were different.

That’s debt financing in its simplest term. What’s worse is you go get a line of credit that’s not associated with any revenue stream. I’ll go get, personally, unsecured, a line of credit. Maybe it’s secured by some money that you have in the bank or even a private equity loan based on an asset. These are all types of debt financing, and Jill was right earlier. There are people that are in the education business, theoretically, on the internet that say you should go do this. You should raise capital by destroying your credit.

Borrow against this, borrow against that.

There are no circumstances for Jill and me, at this point in our career, and I really wish somebody would have told me this a long time ago, where debt financing for any reason is appropriate, including our primary residence, single-family mortgage.

My favorite thing is it’s all over HGTV. You watch these people on HGTV, and they’re just like, carrying costs. Carrying costs is really what the loan, by the time they add up, you watch them, and they do these renovations, and they’re all done, and they back out the carrying costs. They don’t talk about the stress I want with the carrying costs. They’re like, “This took us an extra, it could be 3 to 6 months to finish this project.” That could be $30,000 right there. I’ve seen that happen all the time with carrying costs, and they have to roll that into how much they made. By the time it’s all done, I’m like, “I made $28,000.” I’m going to argue it wasn’t worth it.

The Math Behind Real Estate Deals: Debt Vs. Equity Financing

There’s a lot of math behind what I’m saying here. It’s not just an opinion, and it’s based on a lot of your decades of experience. Let’s go through the math really quickly. Your model is to buy for $30,000 and sell for $90,000. Jill just said, if your carrying costs for, let’s say it costs three months to do the entire deal, which is about our average, the entire process costs $10,000. It’s got to come from somewhere. It comes from the profit.

Now you’re taking risk. There’s enough risk that you think it’s worth that much anyway. That’s acceptable to us as entrepreneurs, probably acceptable to you. Buy it lower, sell it higher. I’m going to take on debt financing, and it’s a carrying cost of $30,000 to even $10,000. It’s eating into your profit margin. Number one.

Number two, whoever you’re buying this property from knows that you’re going to get debt, and it’s an immediate turnoff to the seller. We’re in the business of making things easy for the seller, whether it’s land or houses or anything. If a seller of a house, let’s just use something that everybody’s familiar with, is staring at three buyers.

We're in the business of making things easy for the seller, whether it's land, houses, or anything else. Share on X

One’s all cash, like us, with a lot of experience and somebody that they can talk to, like Jill. In the middle, they’ve got a young family who’s going to get a mortgage from a huge institution, let’s say, Bank of America. It’s going to take 3 or 4 weeks to get it done. I’m not sure if they’re going to get qualified. There are all kinds of new variables introduced to this. The third person is somebody in between, “Wait, I have to sell my house first before I can buy this one.” No. It puts you in a massive advantage to remove debt from your life.

Does that mean that you have to have the money in your bank account? Absolutely not. That’s what going to get an equity, we’ll talk about this in the next couple of days, going to get an equity partner like us with a bunch of experience who can look at the deal and say, “This makes a huge amount of sense,” but you’re still walking in there saying, “Happy to pay cash.” They don’t know where the money’s coming from, the seller.

Debt doesn’t have any real place. There are very few circumstances where debt can help. I’ve said this many times, if you look at your mortgage, if you’ve owned a house for ten years, and you look at the amount of interest that you’ve paid, the amount of maintenance that you’ve paid, utilities, all the stuff that’s associated with owning that house, unless you live in Southern California, where everything doubles every ten years, the chances are that you’re not making any money.

It’s depressing.

It’s true, but if you have no debt or very low-leverage debt, you will do great. You will probably make a lot of money on the house. It just gets eaten up. Debt is a huge issue, all the way from the federal government down to every household in our country and many countries. Including Mexico, you have to pay cash for a house. You go to Aunt Tilly, please consider financing anything. It’s so prevalent. It’s so ingrained in our society, borrowing money for some reason. I don’t think it’s good at all.

Please consider, meaning spend time on it, not an option.

That’s what I mean. Thank you. Please consider not taking on any debt in your life. Join us on Wednesday, we’re going to discuss how to fund your real estate deal with equity. You are not alone in your real estate ambition. We are Jack and Jill, information and inspiration to buy undervalued property.

Important Links

• Steven Jack Butala on LinkedIn
• Jill DeWit on LinkedIn
• Discord – Land Academy Forum
• Land Academy
• House Academy