This episode introduces allocated overhead as the critical metric most operators ignore when calculating true profitability, distributing all non-asset-specific business expenses (software, marketing, personnel, gas) proportionally across every property ever purchased. The current $3,200 per-deal allocation reveals how many “profitable” deals actually lose money after accounting for true operational costs.
Key Takeaways:
- Allocated overhead reveals true net profits beyond gross margins. Tracking every business expense from LLC formation onward and distributing costs across all properties ($3,200 currently) separates real profitability from misleading gross calculations.
- Small deals get crushed by overhead allocation harder. A $10K purchase with $5K gross profit nets only $1,800 after $3,200 overhead, while a $100K purchase with $50K gross profit still nets $46,800 with identical allocation.
- Add 11% annual inflation cost to held properties. True inflation (currency debasement plus core metrics) runs 11% yearly, meaning 12-month holds require additional return adjustments beyond overhead and opportunity costs.
Listen to the full episode for the complete framework on calculating honest returns that institutional investors would scrutinize.
(Podcast transcript below)
Hi, Chris Duff over at Serious Land Capital, vacant land funding partner. So today wanted to go over how to actually calculate returns within your business. There’s a million different accounting methods, so you can definitely skin the cat different ways. So long as you’re being consistent with it.
but I think it’s hard to escape what might be putting the investments that you are pursuing within your land business in the black or the red when you actually break down true overhead expenses. So I was just commenting about this within Dave Denniston’s leadership in land.
school community. It’s free to join if you ever want to take a look at that. But they were just asking, you know, keep KPIs that you might track. And so one, my partners and I have been utilizing since the start of us being in land industry is allocated overhead or allocable overhead. One or the other. They mean the same thing here. So basically,
that will break up every non-property specific expense associated with running your company from the history of starting your company. you know, like the day you open up the LLC or the bank account, those expenses start being tracked and they are proportionally distributed or allocated across each
asset that you bring into the actual business, know, properties that were already sold or are currently in your portfolio would count in regard to distributing that allocated overhead. So
What we often see here and I get it like from marketing perspectives, you might hear, hey, I’ve never lost money on a land deal. I get why you’d want to say that and maybe actually believe that based on like the raw numbers that you’re looking at. any sophisticated or institutional investor when they would try to break down a company’s
financial statements like that wouldn’t necessarily hold muster for more properties than you might think. So, you know, the base way that, you you might start looking at profits into the business, let’s just say, you know, you sell off a particular property. We’ll keep it simple here. We’re not incorporating, you know, seller financed deals or
kind of some more complex transactions that might get cashflow over time. Like this is simply a purchase and then a sale of a property with all the net income coming in at once. you know, most folks would consider the gross profit to be, you know, net of any asset level commission, closing costs, whatever was.
um, spent directly on that property. So say you needed drone photography or you needed a survey septic, what have you, all of those would go into that gross profit calculation. So you’re just attracting all of those expenses associated with that specific asset and you arrive at your profit. Um, number, you know, assuming there was profit in, in the property. Um,
But in order to arrive at a true net profit, this is where it can get a little bit more complex in terms of how you allocate the overhead of running your business. It’s like I mentioned for us, and there is a certain level of art involved here, but the way that we’ll do it is, again, you’re tracking every single expense not associated with the…
any, any asset level purchases. So, you know, any of your software solutions, general acquisition marketing or disposition marketing expenses, personnel, costs, salaries, contractor costs that are, you know, not related to a specific asset, but, you know, just for general business operations, gas for your, car or whatever is being expensed, within the company.
That is all entering a pool that will again be distributed across all properties that you’ve ever purchased and are currently in your portfolio. So for example, the current allocable overhead or allocated overhead that we’re running in our business is roughly $3,200. So
what we need to do for every single property that we purchase, we take that gross profit margin, we subtract $3,200 and arrive at what the true net profit will be. Now you can see where the size of each deal can influence the margin more significantly or not. Let’s say we
bought a hundred thousand dollar property sold for 200, know, gross profit was like 50K for instance. You know, again, we run a funding business, we’re gonna be profit splitting and so forth. I’m just throwing out kind of round numbers here. But you know, coming back to us, 50K from a gross side at the actual asset level. And then I’m subtracting another $3,200 to arrive at
46,800 dollars in terms of my actual net profit allocated to that specific asset. Now, of course, that allocated overhead can be adjusting over time. You know, if I buy a lot more properties or I subtract my general business expenses, my allocated overhead shrinks. Or if I’m not buying as many properties and my general business expenses increase,
then my allocated overhead increases here. So it’s a flexible number. doesn’t stay firm. Generally you wanna keep it as low as possible. If it’s close to zero as possible, great. With the balance being, you still grow your business with as lean of an overhead as possible? And that’s a whole nother discussion. But just to show you like that, that number doesn’t always stay the same. We try to keep it.
You know, ours is roughly around 3000 and it has been running around there for a while. So we have pretty, you know, consistent monthly and annual expenses across the business. And we keep our rate of acquisitions pretty consistent as well. You know, roughly one every 50 deals being sent to us is being invested in. Yes, we’re growing as well. So we may be doing even more so that should be decreasing.
overhead, but at the same time, we’re going after higher value deals too. So that might decrease the total volume of individual deals while still increasing the total, you know, principle needed for the company and possible revenue in. So that that’s kind of another factor to keep in mind in terms of, you know, how are you defining volume just based on deals or actual capital being deployed there?
So that gives you a little bit insight on how we are utilizing it But you know on the flip side, you know, let’s say instead of a hundred thousand dollar deal. I was doing a ten thousand dollar purchase sell for 20 and You know, I’m netting or you know, I’m gross grossing 5k, you know same same ratio as the hundred K sell for 200 gross 50 This time I’m still grossing 50 % on the deal
but I have the same allocated overhead of $3,200, which demolishes my absolute returns and relative returns for that particular property. smaller properties are going to be hit harder from an allocated overhead perspective. Now, again, this is why I mentioned there’s a bit of an art to it. It depends how you might internally run your finances, again, so long as you’re consistent, where
You can have certain thresholds of purchase prices or exits within your portfolio that receive a greater share of allocated overhead versus not. you know, let’s say, and again, it can get complicated, right? The more nuance you throw into these calculations, you have to keep in mind the different proportions of size of deals that you have.
Available where that’s why it you know, it tends to be easiest just to have one allocated overhead associated with each purchase because you know, maybe I say hey, I want to give double the Allocated overhead for any deals above 100 K that exited out But if I’m not doing those in the kind of same volume is lower
value deals, then my overhead might, my calculations might become inaccurate because I’m miss weighting the, the overhead in relation to total volume of deals that I’m doing at each level. So that’s just something to keep in mind. It is possible. We have done that in the past. We don’t do that anymore. So I think, yeah, it was just, it was a bit too hard to track routinely. So.
That’s why we prefer to just do it as You know one one flat rate per deal which again incentivizes going after larger deals because it’s less impact on your Total rel or your relative proportion of profits But again, if you’re doing huge volume of low value deals you do decrease your allocated overhead even more so then
you might be able to get it low enough where it’s not proportionally disrupting your relative returns from that perspective. Different discussion, but the savvier investor would also include rate of inflation for total length of time that you’ve held an asset. True inflation when you consider the debasement of currency plus
just core inflation metrics is actually close to 11 % in the US. That’s a whole nother discussion topic, but if you’re just using, we’re recording this in early 2025, it’s probably only gonna rise later on. But if you’re considering, you held a property for 12 months, that would be a super long sales timeline in this industry, then you would want to incorporate another 11%.
decrease in terms of net return based on the current rate of inflation for US dollars and if you’re using other people’s capital to especially if you’re leveraging yourself You’d want to include the cost of capital as well, which could be separate from the typical allocated overhead with just baseline expenses within your company So I as I was talking through this, know, this would almost be
helpful to like whiteboard this out. I totally understand maybe some of you that this is kind of going over your head a little bit, just me speaking at you about this. But hopefully the base idea of just making sure you’re tracking your business operation expenses and incorporating that into the cost of each deal for true net numbers is critical to actually understand how
profitable your business is being on an asset level basis. Because if you just, you know, kind of go by that, you know, statement, hey, even though I only made, you know, $100 profit on this particular deal, like that just falls apart because your true net incorporating overhead is just, presumably inflation just, you know, makes that property a loss. So
You know, we just try to be as honest and realistic as possible when it comes to calculating our true returns. And this is all built within kind of a custom made accounting spreadsheet that we’ve put together over the years here. I’ve shared it with some folks love going over this. So if you ever have any questions, feel free to reach out, subscribe and share.
Hopefully this was helpful. SeriousLand.Capital for any of your funding needs. LandPricer.ai was just chatting with my engineering team, got a lot more done and tickets addressed earlier today. And Land Daily Diligence, we’re going live tomorrow for zero cost review of your land deals. With that, take care. Bye.
