Hello friends, and welcome to another episode of Passive Real Estate Investing. This is your host, Marco Santarelli, and today I decided to grab more than a handful of questions from you to do an Ask Marco episode. So I’m gonna try to run through these as quickly but as thoroughly as possible, I want to try to get it done in 20 to 30 minutes just for the sake of time. And I’m going to queue up another Ask Marco episode here in the next week or two because I’ve gotten a whole bunch of questions. So without further ado, let me jump right in.
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The first question, and these are in no particular order is from Tom and he says, hi Marco. I hope you’re doing great and I would like to express my thanks to you for all the energy and time you put into your podcast.
Well, you’re welcome. I’ve been listening for a couple of years now and have gotten a tremendous amount of value from it. It’s helped me reshape my outlook on real estate investing and finance in general. Well, thank you. Appreciate that, Tom. I’m currently under contract for my first investment properties, two new builds in Florida, and while they’re under construction, I’ve been looking into setting up my asset protection. As such, I’ve been re-listening to some of your past episodes on asset protection. In episode 4 0 6, you mentioned that you would be willing to pass along a list of suggested asset protection firms to anyone who emailed. Could you please send me that list? Yes, I can. And I did, I’ve already replied to you prior to this recording between your interviews and reading his high quality books. I’m currently leading towards working with Garrett Sutton, but I’d love to hear any other recommendations or feedback on his firm and others.
So well, let me finish reading your email here. Also in one episode number 2 99, you mentioned a cash flow and returns spreadsheet that you developed, I believe on Google Sheets. Is that something you’d be willing to share? Thanks again for all your help, Tom. So regarding asset protection attorneys or actually any kind of service provider, what my team and I normally do is we will provide you more than one. If you have a request for an asset protection attorney or a tax advisor or whatever it may be. So often we will give you or email you two or three, maybe four, so that way you can pick and choose from companies and individuals that we know trust and work with. We don’t want to just give you one because we don’t want to quote unquote steer you in a direction of working with a particular company or individual.
So we try not to do that. I’m not saying it never happens, but generally speaking we try not to do that. So I’ve already emailed you a list of think of three, maybe four potential options, Garrett being one of them. So feel free to contact, you know, any or all and decide for yourself regarding your second question, the cash flow and return spreadsheet. I believe what you’re referring to is the episode that was something about the real rate of returns of real estate investing, something to that effect. So although I did email that to you because you emailed me directly, what I’m actually planning to do is create that as a downloadable Excel spreadsheet so that way anybody can download it off our website. I’ll just create a landing page of sorts and make it available as a quick and easy free download so that way you can just play around with it and do whatever you will.
All right, well Tom, thank you for the question and congratulations on everything you’re doing. Next question from Corey. Corey says, Marco love the podcast. I listened religiously. I purchased my first investment property last year with all cash that is currently titled in my name. I’m going to do a cash out refinance in the near future and want to then quit claim the property into an L L C. My question is, do I have to or should I have my wife as a member of the llc? Okay, interesting question. Not sure if there are benefits either way or tax implications. If I do, I plan to also put this into a land trust thereafter, I am not looking for legal advice. Any guidance would be appreciated. I wish you had enough time to do a podcast every day. I wish I had enough time to do anything and everything every day. <Laugh>,
I just don’t have the time to do a lot of things I want to do. I just have a lot on my plate and I travel quite a bit. So where do I begin with you not giving you legal advice, I’m not an attorney, but it is definitely a wise idea to have your properties or properties in an an asset protection vehicle or entity like an L L C, which happens to be the most common asset protection vehicle used by real estate investors and actually investors in general. So if your l c is considered a disregarded entity, meaning it’s a single member L L C, so it doesn’t file its own tax returns, but it is a true separate entity from yourself and holds title to the property, you can do that. Now if your wife is a member as well, if you are a married couple, my understanding with i r s rules, and I believe this is true in every state, is that you are still considered one member even though you may be listed twice if you are husband and wife fact, the disregarded entity status, at least from the eyes of the irs.
Now that may have changed. You’ll have to definitely check on that or check with your, you know, tax professional or cpa. But generally speaking, you’re not creating a partnership by having your wife on there. That wouldn’t make sense because now you’re creating an entity that has to file a tax return so there’s an extra expense and time involvement and complexity in doing so. Most asset production attorneys will tell you that is not necessary. You can just transfer title, which is what you’re referring to as quit claim. You can transfer title, title into that L L C and that lll C holds title to the property. And then that L L C is either held in your name or your you and your spouse, or it’s held by another entity like another L L C as a holding company. And now you and your spouse are members or owners of that llc, which, which is one extra layer, you’re one more step removed from the properties.
So that’s generally speaking how most asset protection plans are structured. Now you brought up something else here that doesn’t change anything in regards to taxes or tax implications because any expenses, deductions, income depreciation all flows through. In other words, it flows up through that entity and into whatever other holding entity is above it. And if that other entity is also a disregarded entity or flow through entity, then it continues to flow up until it reaches an entity or an individual that does file a tax return, which could be you. I guess that’s the long and the short of it. And yes, if you’re doing a cash out refinance, that is probably a wise thing to do in order to get some leverage on your capital and minimize the amount of down payment that you’re putting onto that property. And it doesn’t have to be the absolute minimum of let’s say 20%, you can leave 25% equity in there.
In other words, a 25% down payment or even a 30% down payment and have 30% equity. That is your own cash, your own capital in the property and still benefit by using bank financing or some sort of institutional financing to leverage the other 70%. And there’s nothing wrong with doing that. And that way you can take that other capital to 70% and use that as more investment capital or more down payment capital to acquire one or two more properties. That’s just kind of the smart way to do it. Yes, your cash flow will be lower when you’re applying leverage, but you’re now controlling two or three properties, which is a lot more than what you had before by buying a property all cash like you did in this scenario. And there might have been a reason why you did that. Maybe it was a deal that you had to close on very quickly or you were getting bigger discount or preferred terms or some sort of other incentives or bonuses by buying it all cash.
If that’s the case then and it made sense, then there’s no problem in purchasing it all cash to close quickly. I’ve done that in the past as well in order to close on a property at a much lower price than what the market value was in order just to get the deal. And then my plan was to essentially refinance it and pull my cash back out as much as I could. So Corey, nothing wrong with that. All right, I hope I answered your question there and good luck with everything. So that segues into the next question, which does have some numbers and asks the question as to whether she should sell or not. So this question’s from Teresa and she says, hello Marco. I have been listening to almost all of your podcasts. I guess that’s means episodes, but I still have this question and hope you can provide some advice of what would you do In my case, first I want to make sure I understand the definition of quote unquote cash flow when investing in rental property.
And then she goes on to define that in her own email. She has her simple formula set up here as cash flows equal to rent, minus expenses, reserves for vacancy and repairs. And she defines what expenses are, which are essentially insurance taxes, property management fees, and any lease up fees. So you basically have it right there, Teresa. Cash flow is essentially your income minus all your expenses, minus your debt service. It’s really that simple. Those three items, what’s leftover is your cash flow, it’s the the net leftover income which is profit on your property. It’s spendable cash, there’s nothing left to deduct. So she goes on to say, I also understand that when you invest in a market such as Florida, the cash flow will be very low compared to other cash flow markets such as Memphis and Birmingham, et cetera. Yes, that is basically true.
It depends where in Florida there are some and more expensive markets and less expensive markets, but Florida’s had a pretty strong run in terms of price appreciation. But generally speaking, if you’re comparing many of the Florida markets to other markets like Memphis, Birmingham, Huntsville, places in Pennsylvania, et cetera, yes, you’re gonna see a difference in cash flow. She goes on, say, invested in a rental property in Jacksonville, Florida in 2021. It was not new construction for the purchase price of $168,000 and currently Zillow the market value is 205,000 and then she breaks down the rent property management fees, mortgage and all that stuff. And she shows in her email that the leftover cash flow, according to her calculation is $93 per month. She says the $93 is not including any reserves for vacancy and repairs nor lease up fee, which are future expenses.
They’re unrealized expenses. She says last year the repair expenses were about $7,000. So you must have had a capital expenditure there, something major, it could have been HVAC related, could have been a roof, sounds like more of like a, a roof replacement. There. She goes on to say, since this is an older property that I suspect will have more major issues with plumbing, HVAC, or anything else, I am really thinking that this is not a great investment since there is no room for reserves to cover any upcoming expenses. I’m thinking that I should sell this investment and reinvest any proceeds into another better deal, other market that provides a better cash flow and also some appreciation or reinvested in new construction property that even if cash flow will be very low as as I currently have, but will have less risk in incurring major expenses in a few years, please let me know, know what you would do, hold it or sell it.
We’ll really appreciate your feedback. Thank you. This is a very good question and not a difficult question, but not an easy question at the same time because I would end up creating what if scenarios here, but I think a lot of investors come across this particular situation. So this would apply to many investors and potentially all investors depending on what you have and where you know the property’s located and what you’re doing. So let me say this without getting into too many details, if you, first of all, you’ve had some pretty good appreciation, if Zillow’s correct in this being 205,500, that’s a pretty good increase in a very short period of time. So you’ve got a fair amount of equity in there, let’s call it, let’s call it almost $40,000 of equity. And if the purchase price was 1 68, I would imagine that you’ve probably put 20% down.
So you’ve got a good chunk of equity in there. Now the question is, is is it better to take that equity and move it into another property that has potentially stronger appreciation potential or a good amount of appreciation potential, but better cash flow? Because you’re basically saying that you’ve got cash flow that equates to just over a thousand dollars, almost $1,100 a year, which is not all that much when I divide that into your purchase price of 168,000, it gives me the RV ratio, the rent to value ratio, or you could all also call it the rent to price ratio. And it is 0.66%, so less than 7% or 0.7%. Ideally we want to see it, you know, over 0.8%, closer to 1% when, if and when you can get it. So your 0.66% is not bad. We know the property cash flows, but it’s not great.
So could you do better on cash flow? Yes. Could you do better on your cash, on cash return with another property? Yes, from an appreciation perspective, will this property continued to appreciate? Yes, maybe not as much or as fast as what we saw in 2020 and 2021 and to some degree 2022 to a lesser degree. So you’ve probably caught a good piece of the last, you know, two, three years in terms of price appreciation. Is there more appreciation? I believe so. You know, we have a, a shortage or deficit in housing certain states and markets are certainly feeling more of a pinch in terms of supply versus demand. Florida is one of them because there’s a lot of people moving to Florida and the builders there are not keeping up as much as they should in terms of housing demand. So, and then on top of that, as we get more granular, Jacksonville, Florida is also a market that is pretty hot right now.
It’s doing very well. There’s still good momentum there. I’m bullish on Jacksonville, Florida. In fact, I may potentially be looking for a property this year just south of Jacksonville, closer to some of our other business offices there that’s located south of the Jacksonville city. So I like that market and I think you will do well regardless of whether you decide to sell this or keep this. But having said that, could you do better? Yeah, I believe you could do better. I think you can move this through a 10 31 exchange, which is a tax-free exchange into another market that will give you just as good if not better appreciation potential. Now, yes, that there’s a lot of those markets in the south and southeast right now. So you might be making a lateral move from Jacksonville to another market, another city, whether it be in Florida or not.
But here’s the thing, you have to look at different options and as many options as you can to find properties that can provide you better cash flow than the one you’ve purchased here, while not hopefully not trading down the appreciation potential because you want the cash flow, you want that income at the same time, you want the wealth creation that real estate gives you, which is the appreciation. And so it’s hard to pick markets sometimes because nobody has a crystal ball, but you can certainly look at factors in each market to see what is going on. Could you move this into a property that has higher rent relative to the price or a lower price relative to its rent? Sure you can do that in, in all kinds of different markets, but you may not have the same appreciation potential. And I keep bringing that up because it’s always a balance of what is the potential in that market for growth versus what are the numbers in that market, in that neighborhood between price and rent.
So all I suggest you do at this point is look around to see if there are other options where you can trade meaning a 10 31 exchange from this one to another one. Would I want to sell this? I guess that’s the question you’re asking me. What, what I would do, would I hold it or sell it? What I would probably do is, is consider or seriously consider doing a 10 31 exchange into another property and, and then say necessarily another market, cuz you can stay in the Jacksonville market, but find yourself a replacement property that provides better cash flow, meaning a higher cash on cash return while still having that appreciation that’s happening in the market and the future appreciation potential, which you see in many markets in the south and southeast right now. And Jacksonville is definitely one of those markets. So it might not be a big change, but it still involves doing a sale and purchase of a new property.
And of course, the right way to do that or the best way to do that is through a tax deferred exchange under the 10 31 i r s rules. Hopefully that made sense, Theresa, kind of a long answer to your question, but I kind of broke it down as best as I could. Hopefully that helps and definitely contact your investment counselor here. I believe you have one because I, I know I see your name quite often, but just talk to your investment counselor about how to go about doing that. All right, let’s move on. Chris writes in says, dear Marco, I really enjoy your podcast. It is very inspirational. Do you have any secrets or keywords in writing letters to homeowners inquiring to buy their home? There are several houses in my area that seem to be vacant and I would like to contact them in an intelligent impactful way.
Regards, Chris. Well, it’s a good question. I don’t really have any secrets or keywords. That’s not an investment strategy that I ever really spent much time on, which means that I was not going after absentee owner properties. Yes, there’s many of them all over the country. There are literally services that you can subscribe to and you can find them online if you do a search for absentee owner services or I, I forgot the phrases to use, but you can definitely find these services. And what they do is they will show you lists of properties in whatever areas you’re looking for are looking at that, have owners on title that are out of state, sometimes outta the city, but usually out of state. And those show you the properties that are owned by someone living somewhere else. And those are typically rental properties. Now, if you find one that’s vacant, odds are pretty high that it’s an absentee owner, and if that person lives out of state, then there’s probably a pretty good chance that they’d be willing to sell.
They may be what we call a don’t wanter, meaning they don’t want the property anymore and they are open to offers and you know, if, if you’re taking what’s essentially a hassle off their hands, they are often willing to negotiate some pretty good terms or pretty good sales prices in order to, you know, keep you as a buyer and, and make the sale go through. But as far as you know, keywords in writing the letters, there are many services out there. Again, you could do a search online for services that write letters to absentee owner properties. There are also books on Amazon that talk about this particular strategy. In fact, I would be shocked if you can’t find all kinds of information and examples online just by doing some searches for letters and postcards. And speaking of postcards, there are also services out there that will create postcards and or letters for you that look like they are actually handwritten by you and addressed by you coming from you going to non-owner occupied owners of these properties.
So that way you are essentially marketing to them and they may not respond on the first, second or even third letter or postcard they get from you. But if you’re persistent, and I’ve heard the number seven, you have to kind of hit them seven times before you start getting responses from these absentee owners. But it is certainly a strategy that you can put in place that could land you some pretty good deals. It will take time, it does take work and a little bit of money, money, but it might pay off. It might be fruitful for you. All right, next one from TT says, hello. I’m requesting a free strategy session if at all possible. I would love to be able to talk to you with my husband, have you on speaker so we can both here. We currently have a parcel of property and are trying to determine if it’s better to sell the parcel and put the money towards rental properties.
So as I recall, actually this particular one was not so much a question, but more of a, a request for a phone call. Tana goes on to say, we are retirement agent, so longevity of return on investment does play a role. Please let me know if there’s a time we can discuss strategies. The reason I put this in here is I just wanted to say that as much as I would love to talk to everybody, which is what I used to do many, many years ago when I was building this company up, and it was just me at the time, I just don’t have that kind of time. And that’s why I have a team of investment counselors here that understand everything that we do and drink the same Kool-Aid and understand real estate investing in our real estate investors themselves. You’re not gonna have a whole lot of extra information or bonus material talking to me versus one of my investment counselors.
So, you know, I do get a lot of requests to get on the phone, but the thing is, is I have so many things going on. I’m, I’m juggling so many balls right now with so many different types of ventures, businesses, and investments that if I did that, I would never have time for anything else. So, you know, I do apologize in advance that I can’t make, you know, or schedule a call with everybody. I do occasionally take a call or get on the phone with an investor and that often happens in person, which by the way, side note, I know you’ve heard the ads on the show, but Rub Con, the Real Estate Wealth Builder’s Conference is coming up in Phoenix, Arizona. And if you haven’t looked into that or bought tickets for it, I suggest you check it out. It’s it’s gonna be the second annual event, my friend Dustin is putting it on.
It is on May 4th through the sixth, May 4th through the sixth in Phoenix, Arizona. It’ll be at the Sheraton downtown. If you go to rube con.com, you can get tickets, you can get a discount using my name Marco, when it asks for the discount code, be sure to put that in. I believe it’s a 10% discount. It might be 20, but I think it’s a 10% discount on all tickets. So check that out. Rub Con is R E W B C O N Rube and means Real Estate Wealth Builders Conference. All right, kind of a shameless plug if you will, but that doesn’t do anything for me. I just want you to be exposed to other people, other speakers, networking with other real estate investors and of course I’ll be there. I’ll be there for the whole time and would love to meet with you, talk.
We can sit down, have you know, some drinks or dinner or whatever cuz I’ll just be there for the whole time. All right, ta, thanks for writing in. Moving on Matt, what does Matt say? Matt says, I currently have two investment properties purchased through Nora. My wife and I are both separately saving for down payments for our next investment home. My initial thought was that we do this separately so we can maximize the number of loans we have, but obviously this can take longer. We could also pool our money together and get larger properties faster, but have fewer loans and properties. Overall, what do you recommend? Well, I’m not exactly sure why you’re keeping your savings separate unless you guys just keep your finances completely separate and you have separate bank accounts and separate savings. You know, otherwise there’s no real advantage to keeping your funds separate.
You know, it’s just a matter of having the funds between the two of you to acquire one property after another after another. So it doesn’t matter if your savings are separate, assuming that you’re investing together regardless of who holds title, I assume you know, you’re both benefiting from your investments in investment portfolio. Also, having said that, conventional loans are separate on your credit reports and credit profiles. So you’re right about maximizing the number of loans you have. And the best way to do that is when you’re getting your regular loans, mortgage loans or what we call conventional loans. It’s best if you can qualify separately. So if you both qualify for financing, then just qualify separately, have only one person qualify for the mortgage. And then on the next one have, you know, the other spouse qualify for the financing. And then you just keep, you know, balancing them between the two of you.
So theoretically speaking, if you are able to qualify that way, you can have 10 conventional loans each for a total of 20 mortgage loans or conventional loans. So that gives you a maximum of 20 that you’re working with. And then beyond that, you know, you would just get non-conventional financing, which you know, of course we can offer you here through Nora Real estate funding. You can just contact us about that and we’ll help you with the loan process and you know, that’s good also, if you have a unique situation or maybe you just don’t qualify for conventional financing, you may be able to conve qualify for non-conventional financing. So again, you can talk to my team here, you’d probably be speaking with Kathy about that. But yeah, do the 20 total and if you don’t need to keep your funds separate, then pool your funds if and when needed in order to come up with the investment capital to take on that next property and then keep, you know, adding to your portfolio until you get to whatever number of properties you need or want.
Whether that’s 10, 20, 30, 50, you know whatever. So as far as a recommendation, Matt, I I mean I, it’s just everything I just said, you know, just, just pool your capital. You don’t necessarily need to go bigger and I don’t know what you mean by getting, you know, bigger property. Sometimes bigger is not better unless you’re talking about a duplex, triplex or fourplex, which is still in the residential financing realm. But yeah, I do agree about, you know, going fast, which means acquire as much as you can as quickly as you can in the right markets with the right numbers. Of course you want the right properties in the right places, but the recommendation is pretty short and sweet. It’s basically what I just said. So, alright, let’s see if I can get another one in here. Brian, he says hello. My wife and I are new to real estate investing and interested in starting out with turnkey properties.
We’re looking to buy in the next few months and would appreciate any guidance before diving in, especially to narrow down our strategies where we should buy and at what price range about us. We live in Southern California, well that’s where I live, not the cheapest place to live. We have a HELOC that we can tap into and also have some cash saved. Currently our monthly income comes from my W2 and her 10 99 job. Thank you Brian, thank you for writing in. I don’t think there’s a question here, but my only comment was, congratulations on having, you know, the interest and desire and the motivation and maybe the goal to move forward. Contact my team, let them answer any questions you have and put you on the right path, forward the right track. And that means whether you’re working with us or not. Cause we don’t know enough about what you are trying to do, but sounds like you want to start acquiring turnkey rental properties and we can help you narrow down the markets and the types of properties.
And of course that leads to the types of price ranges. And then you can start doing your underwriting and analyzing the properties to make sure that the numbers you’re looking at make sense from both a cash on cash perspective as well as the potential appreciation in a particular market, especially growth markets versus, you know, your basic linear markets that are not appreciating rapidly, but provide stability and that’s what you need as a minimum, a stable market. Well Brian, thanks for writing in and, and maybe I will throw this last one in here from Eric. Eric says, if my L L C is investing in rental properties in a foreign country, for example, Thailand, can I deduct operating expenses? For example, plane tickets, meals, hotels, mortgage interest, property tax, depreciation, hold nine yards, Eric? The short answer is generally yes. I mean, if you’re running a legitimate business and you have legitimate business expenses in pretty much in most countries and certainly in the us yes.
Now, if this is a US based business and you’re acquiring assets in foreign countries, the same thing still applies. You’re allowed to deduct operating expenses because they apply to your business. It, it’s money spent that is incurred in the normal course and operation of your business. So I think this is a pretty simple question. Of course, you know, when you’re talking to your CPA or tax advisor, just make sure that, you know, there are no special stipulations when it comes to owning foreign assets like real estate in other countries. There might be some other rules and regulations you have to follow, but generally speaking, operating expenses are always deductible and that’s just true for business in general. Thank you for the questionnaire, Eric. All right, well that is it for today. I appreciate you listening. If you have a question about real estate investing or finance in general, or even a personal question that you’d like me to answer, just simply go to passive real estate investing.com, click on the Ask Marco button, and I will do my best to get to it. And these are fun. I enjoy doing these. So if you haven’t already, remember to subscribe and share the show with your friends and family and other like-minded individuals. The show is available everywhere. Itunes is the granddaddy of the mall, so most of the listeners and the listener downloads come from iTunes. That is it for this week. Thank you for listening. I’ll see you on our next episode.
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