Welcome to another episode of Ask Marco on the Passive Real Estate Investing show. I appreciate you taking the time to tune in and listen to these relatively short episodes. I decided to take another handful or so of questions today. I’m getting more questions actually, which is interesting. And it might have to do with the markets, the volatility, the stock market, continuing to pull back higher interest rates, mortgage rates, maybe some uncertainty or lack of confidence about what is going on. We’re living in interesting times. It’s election week as you know, and there’s just a lot going on. I was actually watching the markets here recently, especially over the last few days, and I couldn’t believe how much movement there has been even on a daily basis. And so I’m sure that’s pretty unnerving for many people. It is for me, and I’m not even in the stock market and, and that might be a reason why I’m getting a lot more inquiries or questions about our promissory notes with Norada Capital.
And since I’m getting a lot of questions about that, maybe I’ll just take 30 seconds to tell you about that or a minute. And if you’re interested in learning more, you can go to the website at noradacapital.com and it’ll give you a much more detailed breakdown of information. And then you can talk to my team if it’s something of interest. But real quick, these promissory notes are not real estate related. I’m gonna take that right off the table because a lot of people wonder, you know, what, what is the fund built on? And it’s really a large portfolio of businesses. There’s over 16 companies in the portfolio. These are about half e-commerce based businesses that are growing profitable and literally growing month after month, quarter after quarter. And there are other assets in the fund as well. So it’s a large portfolio of essentially viable businesses that are growing that have a very large market cap.
And the revenues and cash flows from those businesses are what give us the ability to issue or pay 12 to 15% per year interest on these promissory notes. And this is paid monthly. So if you’re looking for passive income or predictably passive income, meaning that it’s paid at the beginning of every month, direct deposit into your bank account to the tune of 12 to 15% per year, then you might want to take a look at these notes and now grant it, It’s not real estate, it’s not a hard asset, it’s a paper asset. But if you’re looking for something to generate income or cash flow, something that exceeds the rate of inflation and something that can supplement what you already have or, or the portfolio you’ve built, and especially if you have a self-directed retirement account of any kind, promissory notes are ideal for self-directed retirement accounts, whether IRAs or 401ks.
Anyway, again, for more information you can head over to noradacapital.com, NORADAcapital.com and you can learn more about it there.
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If you missed our last episode, be sure to listen to How to Proceed in Today’s Environment – Aaron Chapman
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All right, so let’s get to some questions here. The first question, interesting one, actually, all the questions today are pretty interesting. They’re all over the place. So the first question comes in from Aaron. His email literally just said, turnkey availability. And I thought, well, maybe it was a turnkey question, but it’s not. He says, Marco, first off, I have really enjoyed listening to your podcast. While I haven’t listened to all of them, I have started at the beginning while I eagerly await new episodes, I’ll do my best to keep up. I’ve been traveling a lot, so I, I’m trying to crank them out every week. Anyway, he says I appreciate the nuts and bolts discussions that the books don’t mention.
I don’t need motivation, I’m already sold. I need the details. You provide that. Thank you. You’re welcome Aaron. So he says, I am a new investor. I have financing lined up, just saving up required cash reserves. My question revolves around the availability of turnkey properties that will still cash flow at today’s interest rates. I do believe that every market cycle is a good time to buy as long as the deal pencils out. And that is true, there seems to be 1% rule property still out there. You even offer some, but staring down the barrel of 7.5% interest or higher, it looks to me like I need a 1.2% or better deal to make sense. Okay, I’m gonna keep reading your email here where there’s only a couple more sentences and then I’ll explain that markets like Kansas City or Indianapolis look great for many reasons, but I don’t see Nore or anyone else offering turnkey properties that would work for me.
I’m considering something like Toledo as I’m confident money can be made just not in as nice of a market. While little potential for appreciation. Are there properties that never make it to the inventory on the website? Yes, and I keep saying that, but I definitely have to put some verbiage on the website to that effect cuz we probably only post about 10%, maybe 15% of all the properties in the pipeline, quote unquote on the website. It’s just not humanly possible to keep. So Aaron concludes his email saying, Can something cheaper be rehabed through one of your turnkey providers? That would make sense for me. Thank you for your time podcast and guidance, Aaron. You’re very welcome Aaron. Thanks for being a listener. So let’s tackle a couple of these things. First of all, the inventory we post at noradarealestate.com, they’re all properties that are for sale, of course for sale until sold, but they only represent maybe 10 to 15% of available properties.
Now that’s starting to change a little bit because there is a little bit more inventory coming down the pipe just because some people have been pumping the brakes a little bit in buying a little less or just waiting because mortgage rates have gone up. But that is not going to be long lived. That’s gonna be relatively short lived. So, but yes, there’s only 10 to 15% of the available inventory up on the website. So again, the best thing to do, always, always, always talk to one of the investment counselors here. They can shed more light on availability of properties and in what markets, especially the markets that make the most sense for you from your investment perspective. So the 1% rule you’re talking about here, yeah, I mean you could try to look for something that’s higher than that, which is gonna be much more difficult to do today than it was many, many years ago.
The 1% rule, I like to say, that is a nice to achieve number. It’s kind of an ideal target to achieve something higher than 1%, which is for those that don’t know what the RV ratio or price to rent ratio is, it’s essentially taking the monthly rent and dividing it into the purchase price. So again, hypothetical example, you have a hundred thousand dollars property, it rents for 1000 a month. You divide the thousand into the a hundred thousand and you get 1%, that’s your RV or rent to value ratio. 1% for many, many years has been that ideal target. It’s been harder and harder to achieve that as property values have been going up over the last five years or more. So you kind of have to throw the 1% rule out the window. Now that doesn’t mean it doesn’t exist, it still exists. And there’s two ways to achieve that.
One, you look for smaller markets or less expensive markets where rents are still relatively high and those are often the smaller secondary markets and the tertiary markets, not the major markets that I call tier one markets like Los Angeles, New York, big metro areas. You’re gonna find it very difficult to find properties that have a high RV ratio or rent to value ratio. And the reason this number is so important, it’s just a simple metric, but it gives you a quick snapshot as to the cash flow potential of that property. Meaning that after all expenses and debt service fully leveraged, will it still generate positive cash flow? The closer you are to 1% the better. And that means it would cash flow and 99% of the time, the other way to get a higher rent to value ratio is to look at lesser quality neighborhoods.
Meaning you’re dropping from an A to a B quality neighborhood or from a B to a C class neighborhood. I don’t recommend doing that, dropping from a B to a C or from a C to a D, which you know, might be borderline war zone. I prefer sticking to quality neighborhoods because that is the greatest way that you can help mitigate risk, downside risk and property risk and tenant related or demographic related risks. So for me, most of the properties that we offer that investors invest in are typically in a class and B class neighborhoods that could be a B minus, could be a b a b plus. But they’re typically A’s and B’s. We don’t have a lot in the C class. They do exist and we do have investors that want them. They perform better on a cash, on cash return basis, meaning a cash flow and upfront rate of return basis.
They don’t typically do as well from an appreciation perspective just because they’re in neighborhoods that don’t generally appreciate well even if the, the general market is doing well. So what should you do or what could you do? Well, one option is to look for markets and neighborhoods, that combination that can give you that 1% or better in terms of that rent price ratio. Or you can look at other markets that are doing well. They’re not necessarily the high appreciation potential markets. You mentioned one of them actually, and that’s Toledo. And we have been in and out of the Toledo market over the years, just depending on the providers that we have in the inventory. But we are in markets like in the state of Pennsylvania, the state of Ohio, the state of Alabama, the state of Mississippi, parts of Missouri, parts of Indiana, and I, I think I’m missing a couple there that do have property, not necessarily all the time, but often that are close to 1% or that 1% rule.
So again, the best thing to do is talk to one of our investment counselors here and they can help you with that. Your other question here is the whole thing about rehabbing. Well, because we offer turnkey ready to go properties and a turnkey service, it’s not that you’re looking at a distressed property through us in the hopes of having it renovated or rehabbed, whether you do it or you hire somebody to do it, you’ll need to talk to wholesalers in order to find those types of properties. And there is a lot of work involved in that and higher degree of risk, but it’s not something that’s impossible. There are many investors who focus on doing that because they enjoy it and they have the time, energy, and resources and the thick skin to be able to do that. It’s not for everybody. And that’s the key thing.
So if you are sold, like you said and motivated and you already have financing in place and you’re working on your cash reserves, you’re really 80% of the way there. Now you just have to be a little bit more clear and you, we can help you do this on the type of market you want to be in and certainly the type of neighborhood you want to be in. If you have that criteria, you don’t need a whole lot more. I mean, you can get more specific about the type of property, whether you want a three bedroom, two bath or something different. But if, if you have an idea of the neighborhood that will fulfill your investment goals, meaning a more boring market, like a linear market that is better for cash flow, cash on cash and will have a higher rent to value ratio versus a market that has stronger appreciation potential.
When you’ve identified that as well as the type of neighborhood you want to be in, then you’ll get better clarity on the price ranges and price points of those properties. And of course then the down payment. And that can vary quite a bit from market to market. Believe it or not, we’re still selling properties today in some markets that are around a hundred thousand dollars. In fact, I see a report every morning and I can see we still sell properties that are in the the 90, a hundred, $110,000 price point. And then there are many properties that are in the 200, $250,000 range and some new construction is also even higher than that in the $300,000 range. Now these, these properties don’t cash flow as well. In fact, many of them can be break even, but they have have strong or stronger appreciation potential in those markets.
And we’ve seen a little bit of pullback around the country. Some markets more so than others, but we have seen a cooling off in real estate markets around the country. And actually I want to do a podcast episode on this, just kind of a housing market update, but this was to be expected. We’ve seen almost 10 to 12 years of runs upward runs in many markets around the country. So a breather was expected and the catalyst for that was the rising mortgage rates. Now that’ll carry through until next year I believe. And we’ll start to see mortgage rates drop again at some point. I’m hoping six months from now could be 12 months from now. There are a lot of opinions out there, but it really comes down to the unknown of what the Fed plans to do with interest rates and what happens with credit in various markets.
So there are a lot of things in play right now. It’s an interesting time. Arguably we are in a recession of some kind and we just need to play out this uncertainty and volatility that we’re seeing in the market. But things always turn around, everything moves in cycles. So hang in there, but keep building up your cash reserves, Aaron and I, I think you’ll do well. All right, hope that helps. If not, definitely reach out to my team and we will certainly help you. Now, that was a long answer to his question, so I’ll just keep rolling forward here. So this is an asset protection related question from Ruth, I assume. Yes, she’s from California. So she was asking me a question that was about asset protection for California residents and investors with out-of-state investments. Now this can apply to anybody, it doesn’t matter if you live in California or some other state, But Ruth says, Hello Marco.
First, thank you for all your thoughtful guidance. You’re welcome. In previous podcasts you mentioned asset protection, and we’ve been reaching out to a few firms to understand the best strategy for us. The firms gave us all very different answers and all seemed very complex. In brackets. One included creating an offshore entity exclamation mark. Also, the proposed entity structure that was recommended seemed like it would create a lot of work to maintain and manage operationally, example, an accounting nightmare, or prevent us from taking advantage of other tax incentives, for example, short term rental loopholes. And the firm said that they would help create the structure that would be best for us, but essentially we would be on our own if there was a lawsuit that ensued. And that’s generally true. So Ruth goes on to describe her portfolio, which is pretty substantial in terms of market value and property values and to some degree size.
And then she concludes her email saying, As California residents and property owners, we are very aware that asset protection is critical. California seems to be able to reach into citizen’s business and assets. Yes, that is true. The franchise tax board is very draconian for sure. But we also want to make sure we are not creating structures that would overwhelm us and lose sight of our primary goals of securing our assets. Please advise on what you think is an appropriate level of asset protection. All the best, Ruth Ruth, thank you for the question. It is a very good question, a serious situation and consideration and something that not only you, but everybody should plan for. So first off, I’m going to preface what I’m gonna say. And this is true for everything on this show with every episode. I am not a financial advisor. I am not a cpa, an attorney.
I’m not giving you legal, financial, or personal advice or financial advice. Do your own due diligence as you’re doing and you know, just get as many opinions if you will that you can. I’m just gonna give you my personal take, and this is primarily based on my own experience as well as a lot of the attorneys I’ve talked to and the books I’ve read. So this is just kind of a general rule of thumb for me. I’ve talked about this in past episodes. As a very general rule of thumb, I like to hold property in an llc, a title holding entity, a limited liability company in the same state of the property. Now, if you want to be overly cautious and overly protective, you could have one LLC per property within that state. So with your California properties, and California is not the most friendly for LLCs, they have a very high annual fee of $800 per llc, which is probably the highest in the country.
But regardless, look at it as an insurance fee or an insurance expense, meaning what you’re spending on that LLC each and every year. Think of it as insurance. And in a sense that’s what it is. Asset protection is a form of insurance. So my general formula, if you will, is you hold property in an LLC within the same state that it belongs to, and then those LLCs can be held in one or more holding companies. That holding company is not an operational company, meaning it’s not selling anything. There are no transactions. It’s only revenue, which is typically flow through is the revenue from the properties or assets in the holding companies underneath it. So specifically real estate held in LLCs. Those LLCs are owned by that parent holding company. And you can have more than one if you want. You can spread your eggs in multiple baskets.
So you can have multiple holding companies and that just improves your asset protection scenario. So that is the basic structure. Then those holding companies are either held by you, meaning that you and and or your spouse or the combination of the two of you are the beneficiaries or members of those LLCs. Or to take that one step further and add one more layer to that onion, you can have a trust, a family trust, a revocable trust, some type of trust structure set up where that trust now holds ownership to those holding companies one or more, which of course also holds or ownership to those LLCs. The title holding LLCs, Holding your property. I know this sounds a little bit complicated, it really isn’t. It’s just a matter of layering your assets into LLCs that are held by a holding company or or more than one holding company.
And that can be optionally held by your trust, your living trust, and you can have multiple beneficiaries in that. So it’s not just you. If this is done right, you’ll have a strong asset protection plan in place. Now, again, I’m not an asset protection attorney, but if you take that model to an asset protection attorney, a good one, they’ll understand it and they would’ve seen it a thousand times. And if you need a referral, by all means just shoot me an email or my team and I’ll put you in touch with one or more asset protection attorneys that I know of that can help you with this. So I’d rather not mention names on the show, but just reach out to me. In fact what I’ll do is I’ll just reply to your email. It’ll just make it that much easier. All right, Ruth, I know that’s a lot, but it’s not a lot at the same time.
I hope that helps. But keep up the good work. You’re doing great with your portfolio. Hopefully you’re getting a lot of cash flow cuz some of these properties are worth a lot of money. And if you’re in California, I wanna say that you’re possibly one of those people I refer to as being equity rich and cash poor. Although that might not be the case, especially if some of these are free and clear. But then again, you’re still equity rich. And the question is, how do you put some of that equity to work in generating more income and more cash flow as well as diversifying that equity to protect it into multiple assets like other properties, for example. All right, hope that helps. Next question’s from Eric. So Eric’s email basically said newbie and I love newbies because we all get started at the very beginning unless you inherited a bunch of property.
So Eric says, Just getting into real estate and came across your podcast at your suggestion. I went back to episode 299 and it really hit home for me as it does for many people by the way that I really hope everybody listens to episode 299. Eric says, I was wondering if you have or can suggest a spreadsheet that can run those numbers for me. Thank you Eric. I don’t have it set up to be able to share it, but what I will do is I will create a copy of it and I will email it to you. And what I think I might end up doing is making it available as a resource for anybody that wants to download it. Right now it’s, it’s a Google sheet and I can’t just share it with the world cuz then you can, everybody can go in and start changing it and it’s not gonna make sense to anybody.
So I might just create it as an Excel spreadsheet. All right, Eric, thank you and glad you’re a newbie. Glad you liked the podcast. Thanks for subscribing and keep up the momentum, keep educating yourself and start investing in real estate as soon as you can and if my team can help you even better. Okay, I’m not sure I’m prepared for this next question. I skimmed over it. I’m not even sure I understood this, but I’m gonna go for it. So I hope I don’t butcher your name. I believe it’s cve. CVE writes to me saying in a subject line, finally making some money. Where and how should I start investing? That’s such a broad question, but here’s the actual email. Hi Marco. Thank you for your wonderful podcast. I am a big fan. Well, you’re welcome. I need your guidance. Here I am finally finishing my training in medicine and starting my first job next year.
My gross income is projected to be approximately $350,000. I assume that’s per year. I also sold my house in Chicago last year and have $80,000 in my account. I want to build a portfolio and seems like a diverse one would be ideal. When, where, and how should I invest in real estate after I saved some cash in my account as a strong cushion or as soon as I start the new job, or even today, should I start with investment properties and have a manager or more passive options as I will be pretty busy with work? Thank you so much for your guidance. All the best. I believe the name is c Well, thank you for the questions. Congratulations on your job. That’s a very good annual income from any kind of job. And I’m not sure where you’re living now, but that’s great that you wanna start building real estate portfolio.
So when, where, and how should I start investing in real estate when is yesterday? But in all seriousness, just start as soon as you can because you want time on your side, especially when you’re getting started. It doesn’t feel like you’re accomplishing much in the beginning, especially when you get that first property or the first couple of properties. But time will show you how that becomes, you know, an incredible investment because of all the benefits that real estate offers. So start as soon as you can. Where is a matter of similar to the first question that I answered here on this episode? You want to be in markets that have strong fundamentals, meaning that there’s jobs and ideally job growth and population growth, Those fundamental support a housing market. Now every market has a cycle. You can still have those fundamental elements and still be in a market that is experiencing a softening or a market cycle that is not opportune.
But there’s over 500 markets in the us So if one market doesn’t make sense, you find another one that does make sense, and that’s something we certainly do and can help you with. So the wear is, is really a matter of what fits your investment criteria. Do you want a market that has showing strong appreciation potential? It has been, you know, a momentum market with price gains and it’s looking like that will continue? Or do you wanna be any more boring type market? A linear market that has better cash on cash numbers? The upfront numbers are better. And this is a discussion you can have with my team. I’m just giving you a high level 30,000 foot view of it. So where is just the type of market and then also the where question is the type of neighborhood. And again, I, I talked about that earlier in this episode.
I won’t rehash all that. How should you invest? Well, it’s a matter of just having good credit, being able to qualify and having the down payment. Now you’re just starting a new job. So if you’re coming from another job that’s in the same industry, you should have no problem qualifying. If you’re coming from a different industry and you’re starting a new job, a new position, you may need to season that over a period of three or six months. It depends on the lender and what overlays they have on top of Fannie Mae or Freddie Mac lending criteria or whatever their guidelines are. So we can put you in touch with many real estate mortgage lenders that do nothing but investment loans for people like you, real estate investing. So it’s good to have that conversation and find out what you qualify for and when you can get started, it could be right away once you have, you know, your employment and you have a few check stubs or you’ve got a couple months worth of of income coming in.
So that shouldn’t be a problem. But yeah, when, where and how. So let’s see what else you have here after I save up some cash in my account. Yeah, I mean you always want to have, you know, reserves, you know, an emergency fund or you know, three to six months of living expenses to cover all your expenses, mortgage, rent, food, et cetera. And then everything above that is investible capital. If it’s not, you know, something you need to spend on necessities, then use it to create a pile of cash and then you deploy that pile of cash, you save it up, you have enough to make that investment, you go for it. Now it sounds like you wanna build a real estate portfolio, that’s great. You definitely want to focus on your new job and have the properties professionally managed by full service, professional property management.
That’s the best way to do it. But it’s not the only way you can self-manage. A lot of people do. I think most people don’t self-manage unless you’re literally local to the property. But if you’re not local to it and you have a full-time job, then you gotta focus on that, then by all means, it’s a good service to have a full service property manager managing your portfolio, especially as it starts to grow. You know, that’s my favorite way of investing, is building a portfolio that you control. You own through your asset protection entities. So you are the owner, but not technically the owner. It’s not titled in your name. You have them titled in the entities that you own and control. I think I covered all your questions here, but if I haven’t, you know, just again, reach out to me or my team, but congratulations on your job and I guess just start investing as soon as you can.
We have a very big country with many, many markets and submarkets. There are always opportunities and like I I’ve said before, I’ll say it again, it’s not a question of when should you invest in real estate. It’s a question of where, because there are always opportunities regardless of where interest rates or mortgage rates are, and regardless of what market cycles are doing, because again, every real estate market, every market is doing its own thing. There might be a rhyme and there there might be some commonality, but just remember that all real estate markets move independently of each other and they’re driven by different factors. Some are macro, some are micro market factors. So look around. All right, I hope that helps kave well, I had one more question. I’m gonna leave that for the next Ask Marco episode, which I’ll probably record here in the next day or two for the following week.
I wanted to keep this episode to about 30 minutes. It’s for me, that’s kind of the sweet spot. I know that a lot of people like to listen to an episode to and from work or while they’re doing something. So 30 to 40 minutes is typically what I try and shoot for. So that upcoming question is about being cash poor and house rich and when to cash out refinance. And then I also have another question that I’m queuing up for this next episode, which will come out very, very soon, like literally next week is about financing for four nationals. So if you’re looking to invest in the US and you need a source of financing, we may have another lender that I’m actually interviewing that does financing for four nationals who want to invest in US real estate. So stay tuned for that. I want to finish my due diligence before I announce anything concrete. But that is it for today. So thank you for listening. If you have any questions about real estate investing finance, or even a personal question, just shoot it over to me. Go to the website at passiverealestateinvesting.com and just click Ask Marco. It’ll go straight to my desk. Remember to subscribe to the show. It’s one click away. Share the show with your friends, family, another like-minded individuals. Any rating and review on iTunes would be greatly appreciated. Again, thank you all for listening. I’ll see you guys on the next episode.
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