Today I wanted to give you three listener questions. So let’s just call it an Ask Marco Three Pack. So today’s first question comes from Lucas and he says, hello, Marco, let me start off by saying thank you for your podcast. It’s been a great learning tool over the past two years. My question is in regards to VA home loans, which is veteran administration and the standard 10 Fannie or Freddie Mac loans. So if someone used a VA loan to purchase their primary residence, does that free up a 10th conventional loan that can be used as an investment property, essentially giving me 11 loans before having to start applying for commercial loans, one VA residence and 10 conventional for investment properties. Thank you, Lucas.
Lucas. Good question. I think this is probably one of those questions where some people are not sure or misunderstand it.
So the way Fannie and Freddie Mac look at your credit is how many home mortgages or loans mortgage loans do you have? It doesn’t matter where it comes from. It still counts as a mortgage loan. So unfortunately it counts as one of your 10. So if you have a VA loan and it’s actually on your credit report, it’s going to count as one of those 10. So you’re still going to be capped at 10. So you have nine Fannie Freddie loans and one VA loan. Simple question, simple answer, Lucas. I appreciate you. Um, submitting that. So thank you. And I’ll just keep that one short and sweet.
Next question is from Benjamin. Benjamin says, hello, Marco, my fiance and I just purchased the townhouse. We were renting the previous owner. The landlord was done being a landlord and wanted to sell. We purchased the property at below-market or right around market. And no, we can turn it back into a great rental. However, we purchased the property as owner-occupants. Our plan is to stay in the property for the next year or two before moving out and turning the property back into a rental. What should we be doing during this one or two-year period? I know there are unseen profits and appreciation and equity, but I feel eager to see the property cashflow are there projects to the house we should look into. It was just renovated in 2019. Should I be looking to invest as a limited partner in other real estate deals where I can maybe see quicker returns on cash invested?
Okay, well, let me just start off by saying if it was just renovated in 2019, which is just over a year ago, then there’s probably nothing you need to do or should do to the property. I can’t imagine that there would be anything you can do to that property other than add a bedroom to increase what you would be able to rent it for when you ultimately go and rent the property. So I don’t think anything you could do to increase the upcoming gross rental income on that property. The other thing too is you mentioned the next year or two before moving out, check with your tax advisor for the specifics, but as a general rule of thumb, if you live in the property for two years consecutively, you can move without having to pay tax on the capital gains of that property. I think the rule of thumb is it has to be two consecutive years over the past five. So if you wait the full two years and a day, then you will be able to move and keep that property.
And of course you wouldn’t have any capital gains apply to you at that point anyway because you’re not selling the property, but you can move to another residential property and consider that your new home and the capital gains exemptions. Now continue in kick in on that second property. So that first property can be actually labeled as a residential homestead or a home of yours. Now, something that you probably will want to do. And I’m assuming you’ve already thought about this, but find out what the market rent is compared to the purchase price or the, I guess, the market value in your case of that property, if they’re kind of in line and you know that you can leave that property as is, and keep it as a rental and move to another home and just let that property cashflow with the existing financing, then good for you, you know, keep it as a rental.
And if it’s in a strong market or an appreciating market, just keep it and let the equity continue to grow. But if the numbers are very much upside down, like you have a property in an expensive area, like a coastal market, for example, then it might make more sense to actually take the equity from that property and apply that to, you know, one or more investment properties for rental properties and other markets where the numbers actually make better sense because you clearly are interested in cash flow and you’re looking at your rates of return. So if that property cash flows cash flow as well, and it’s given you an attractive rate of return, keep it, if not, then just move on and take the equity and purchase other rental properties. The nice thing about real estate is that the math can help set the direction helps point the compass into as far as what you should do with the rental property.
So when it comes to decision-making with investing and especially with real estate, math is a good guide because the numbers either make sense or they don’t, they either meet your investment criteria or they don’t. So if you have a standard or a particular buy box or minimum criteria for the returns or cash flows that you want, it’s easy to compare against those metrics. So that’s the nice thing about real estate anyway, Benjamin, I hope that helps. And by the way, I didn’t completely understand your last question about, should I be looking to invest as a limited partner in other real estate deals? It sounds like, or maybe that implies you actually have a chunk of cash sitting on the sidelines or in savings right now that you could put to work. You could potentially use to invest well if that’s the case if you have investible cash right now, and you still have to sit in the property that you’re in now as your home for another year or so, or until you hit that two year Mark, then maybe consider looking at building your real estate portfolio.
Now, I mean, if that’s what you’re looking to do, of course, you could look at syndications sounds like that’s maybe something you’re considering, but if you want to put it to work, you’re probably going to get better returns by building your real estate portfolio. Be it single families or duplexes or whatnot. We’ve got properties in Southwest Florida, new construction that might be a good fit for what you’re looking for. I don’t know enough about what you’re looking for to actually make any recommendations, but I’m just thinking that if you know, you’re in the market, there are a lot of opportunities out there. Be it Birmingham, Alabama, Southwest Florida, the greater Chicago market area, Baltimore, Pennsylvania, Kansas city, Indianapolis, Memphis, Tennessee. I mean, these are all markets that we’re in that provide different benefits. Some are stronger cap rate and cash on cash return plays while others are more conducive to stronger appreciation potential.
You got to ask yourself what you’re looking for and where you are in your investing journey. If you’re young and you’ve got time on your side and the cashflow is not important for your survival, definitely try to build a portfolio. That’s going to appreciate as much as possible in the shortest time possible because the cash flow is less important than the equity growth and the appreciation. All right, thanks for your question. Benjamin.
Third question is from Eric. Eric writes in and says, hi, Marco, I have a seven or eight-figure 10 31 exchange to conduct the property that the exchange is coming out of has already been through a number of previous exchanges. Therefore, the basis is next to nothing on this particular exchange. Would it be better to exchange into fewer pieces of property with no financing to contain the basis exposure and then mortgage the new property and reinvest as a form of basis reset on the new investments? Or should I spread the 10 31 across as many pieces of property as possible. I’m listening to your podcast from the very beginning and finding them very useful. Keep up the good work. Thank you, Eric.
I appreciate the question and I’m glad you like it, the show. Okay. So with this scenario, difficult question, because it really depends on what your personal tax situation is, and I don’t know what those numbers are and if you’re okay paying taxes on anything that you do within the 10 31, that’s not likely to happen with you, but my gut and my knee jerk response to this as basically this spread the 10 31 across as many pieces of property as possible, you’re going to keep the new cost basis that you could use to carry forward with the new properties. I don’t see you paying any taxes, but if you need the cost basis for your personal tax situation, whatever that may be.
Um, and of course, I don’t know what that is. Then it might make sense to buy it all cash, but something tells me that you’re going to have some tax impact on doing that. I would talk to both your 10 31 exchange accommodator as well as your tax advisor and just lay out the two scenarios in terms of the tax impact, if any, at all. But the one thing I do like about spreading the 10 31 proceeds across as many pieces of property as possible is I like the idea of growing the portfolio in size number of doors. I like the additional leverage because the more leverage I have, the more net worth that I’m going to have later because that loan or debt today becomes equity tomorrow. As it’s being paid down by the tenants, also, it gives you directly or indirectly a form of asset protection, because nobody wants to go after somebody who owns property, that’s fully leveraged because there’s no equity to go after.
So in a very roundabout way becomes a form of asset protection. I also liked the idea of having more property and letting time increase the equity from amortization, as well as appreciation and let my tenants pay down the mortgage, which by itself is a form of return. In addition to the fact that inflation is eating away at the debt and making it less valuable over time. So it’s becoming worth less over time. I just liked the growth strategy and the best way to do that is to grow your portfolio as large, as possible, as fast as possible. And the 10 31 gives you a shortcut, a way to accelerate that on a tax-free basis. So the only way that this makes sense for you to keep the properties and keep the cost basis that you have would be a tax-related reason that I cannot think of because I don’t know what you have going on.
So anyway, it’s not a complete answer. It’s a partial answer to your question. So I apologize about that, but I just want to be honest and transparent about it, but do talk to your tax advisor, someone who does understand 10 30, one exchange as well, and the tax implications of these two scenarios. All right. Anyway, Eric, I appreciate the question. Hopefully, that was a start, but yeah. Talk to your tax advisor.
And that’s it for today. I appreciate you all listening. This was basically a three-pack of listener questions. I might keep doing this as well in the future, just to catch up on some of the questions that I’ve been getting and falling behind on. I will announce a mastermind group in the coming months, and I’m just giving you kind of a heads up something we’re still kind of finishing up in the background with two business partners in mind, but just keep your ears open and listen to the podcast. That’s it for today. If you have any questions about real estate or investing, be sure to hit me up, go to passiverealestateinvesting.com and remember to subscribe to the show. If you’re listening to this for the first time, we would love to have you as a regular listener. That is it for today. Thank you for listening. I’ll see you all on the next episode.
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