Hello friends. Welcome to another episode of Ask Marco. Well, I appreciate the listener questions that are coming in. These are some great questions I picked out five or six for today. The questions are just getting a little bit more sophisticated and thoughtful. Some of these emails are fairly detailed. There’s just paragraphs of information and I like the extra detail and information because it helps me to construct a better answer around the context and detail that you provide. So it is a good thing. Just takes a little bit longer to read and process of course, but that’s all well and fine. I actually love the questions and of course, you know, I love real estate. But before I jump into the first question here, I just hope everybody’s having a great year so far. It’s September. We’re working our way into that last quarter in the final stretch of the year. So hopefully it’s been a great year for you. For me, it’s been crazy, just a, a wild ride in a very positive way. So lots of good things going on, real estate related and otherwise. So with that, let me jump right into the first question here.
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So this first question comes from Tara. I believe it’s Tara, not Tara, Tara, I’m not sure now. Well, anyway, she says, hi Marco. I’ve been thoroughly enjoying your podcast, which is a wealth of good information. I’m just getting started in my path to financial and time freedom and I’m looking to get started in short-term rentals using other people’s money. She abbreviates that here. As OPM I currently have a condo, which is my private residence in Southern California, which is about $450,000 in equity and a 2.9% interest rate, which I assume is just a single first mortgage on there.
By the way, that 2.9% interest rate is fantastic. You’ve locked in near the bottom as far as principal residence interest rate, especially in California. Good for you. She says I have a small cash savings of about $60,000 and some stocks. So I’d like to also consider moving into a new primary residence and rent out the condo. Can you help me strategize the best way to go about getting started with my next step? Thank you Tara <laugh>, I’m sorry if I’m mispronouncing your name. Well, great question. So I think the assumption that I’m making which is the assumption you’re probably making is that it is in your best interest to keep the condo and move into another home in Southern California and keep that condo as a rental, which would make sense and might make sense if the market here wasn’t so expensive. But if you’re leaving that condo behind with all that equity, sounds like you probably have a relatively speaking small mortgage with a very low interest rate.
So your monthly payments are probably small and almost laughable in Southern California. But if you have a great first property and you’re living inexpensively by moving out now into another property, you’re gonna need a significant down payment, which it at this point, it’s gonna have to come from the property through either a refinance or an equity line of credit or an equity loan because you’re gonna need to add to the $60,000 that you have to create the down payment to move into another home. And of course this is gonna depend on the type of financing you get on that new home. If you have a very low down FHA mortgage that you can qualify for, great. But if you’re looking at conventional financing, you’re probably looking at a 20% down payment. 20% in Southern California is a pretty large number because of the property values here.
So I don’t know how much stock you have, but if you sell your stock to add to the 60,000 to come up with a down payment that you’re gonna need for your principal residence, which is a second property, in order for you to keep the condo as a rental, you’re looking at, you know, some good chunk of cash. So is this the wisest move? I don’t know. Maybe not. So what might be a better strategy here is for you to keep the condo and stay living in it with a low cost of living, possibly refinancing it. But that may not be your best option right now because you would be leaving that 2.9% interest rate on that mortgage in your property for something that’s gonna be substantially higher at this time. Let’s just call it in the 5% range, maybe the 6% range, depending what you can find.
And of course your credit and whatnot. So if you’re pulling equity out, that will give you the down payment or down payments that you need to purchase one or more properties in other markets that are not as expensive as Southern California and will probably generate a better rate of return short term and potentially long term. So I guess I’m looking at it this way. Do you need some extra capital? Yes, we all do. Even if you’re staying in the condo and you’re looking to invest in other markets and take that $60,000 as your down payment capital, of course don’t spend every last dollar. You want to have some reserves, you know, for emergencies and whatnot and you know, operating and living expenses. But yeah, it’s gonna be a situation where you have down payment capital to invest in other markets to purchase one or more properties.
You will be using OPM other people’s money and that’s gonna come in one of two forms or potentially both. That is using lenders to get either conventional financing or non-conventional financing. That’s gonna be the 80% bank financing or lender financing that that you’re gonna use to make that or complete that acquisition. And of course that’s in addition to your 20% down payment or maybe, maybe it’s a 25% down payment. It’s always good to get bank financing or lender financing OPM if you can. In addition to that, and this is, and or you can partner with other people who have the capital or the credit or a combination of both for you to purchase more property. And in that situation you are sharing in the equity and the cash flow and everything else, all the benefits that come along with it because it’s a partnership and it may not be 50-50, it just comes down to what you bring to the table and what you negotiate with your partner.
Now keep in mind you want someone who you know, like and trust, you have to have that trust with a partner because you know there’s an old saying that the hardest ship to sail is a partnership. So partners can be great, they can catapult you quicker and faster into new heights, but if it’s a relationship that goes sour or south, it can become a difficult breakup if you will. So yes, you do need OPM other people’s money. That could be partners, that could be lenders, it could be a combination of the two, but you’ll always need OPM other people’s money in some way, shape or form. Also, I will comment that probably the best thing to do if you’re looking to stay in southern California, it may be that your best strategy is just to stay in the condo, continue to take advantage of that 2.9% interest rate.
If you’ve got lots of equity like the 450,000 and you can actually tap into it in some way, shape or form, not necessarily refinancing out your old or original or current mortgage at 2.9%. See if you can pull some of that equity out. 50k, a 100k, I’m not sure what you’re working with as far as the market value of the property. So I can’t calculate the loan to value. If you gave me that number, I’d be able to tell you probably how much you could pull out because at the end of the day, it’s gonna be what is the total debt or leverage or financing you have on the property that a lender is going to look at and allow you to pull cash out from because they obviously don’t want a completely 100% financed property. So anyway, if you can tap into the equity or partner up with someone to help you along that will help you fast track things along here.
I hope that helps. I’m sure there are many people, especially in expensive markets, coastal markets like California, New York, New Jersey, up the west coast that are what I call equity rich, cashflow poor. So if you’re sitting on a bunch of equity, if you can find cost effective, prudent way to tap into it, it’s a good way to build your real estate portfolio and you know, if you need some referrals to lenders or if you want to start looking outta state at possible options, as always, contact my team here of investment counselors and they can drill down a little deeper and show you some markets that make sense with property options that make sense for the capital you’re working with. And by the way, if you have $60,000, that is definitely enough as a down payment on a nice property in a nice neighborhood in many markets around the us. So you can certainly get started there and then just continue to stack your capital so you can deploy it as down payments on more property.
Alright, next question comes from Danny. Danny says, Marco, I’ve really enjoyed your podcast and it’s answering so many questions I have. Well, I’m glad. Good to hear. I would like your input on paying it off or keep investing. I’m not sure what you’re talking about yet, but I see what you’re saying here. So I continue. I just bought a home for my mother-in-law to be very close to my wife and I two houses down as she needs the additional support it was available and we bought it off the market. We will start renting her home and she will start renting from us. The cashflow will be $0, we will put $125,000 in closing costs and approximately 25% down on a total cost of $478,000 with a loan total of about $358,000.
Okay, sorry for all the numbers here for you listing, but he’s really giving us a, a breakdown. The interest rate on that mortgage is about 6.85%. So Danny goes on to say this is a nice neighborhood just north of Austin, Texas. I think we purchased it after a bit of a correction and got a reasonable deal. My concern is the monthly payments, which are escrowed and they are $3,500 a month. I’m concerned that the monthly cost is a bit high and renting down the road might be difficult if my mother-in-law is no longer occupying the house. I see a path to pay it off in five to six years and my residence is also paid off with approximately $550,000 in equity. Should I pay off the new house or let it roll and build on my future? I’m 39 years old and have always been interested in real estate.
I even have two rentals or had two rentals in my past, which I wish I’d never have sold. I really want to exit the rat race down the road and put the hard work toward building my family’s future. Thank you for your time and I hope to hear from you soon kindly. Danny. Danny, thanks for the question and the detail. So again, I never give financial advice, just, you know, food for thought and of course what I, myself personally might potentially do. I think the best thing to do given this scenario from what you’ve told me, is to keep that second property as long as you need to, to support or help support your mother-in-law. It, it sounds like there’s more there than just looking at that property, as expensive as it may be, as a rental. So now hopefully, unfortunately your market is pretty strong, but hopefully that market continues to grow and appreciate over time and you know, there’s different reasons for appreciation of course, you know, some of it is inflationary, some of it is just supply and demand pushing prices up, which is also inflationary.
So it might make sense to keep that for, for as long as you can to help your mother-in-law. If your cashflow is zero and it’s a low or no maintenance property over the years, you’re gonna find that that property will generate a rate of return for you in terms of the equity, equity in terms of amortization of the loan, plus any appreciation that that market affords you. So it’ll still be a good positive investment for you. It is just not gonna provide you cashflow in the foreseeable future. But you’re young, you’re only 39 years old, you have lots of time on your side. That’s a big factor here in reading your question. So the equity should still build up over time. That’s a positive. And you know, the equity you have in that property right now, plus the equity you have in your principal residence, which is about $550,000, is what I call dormant equity.
It’s there, it’s part of your net worth. It’s not doing anything for you, which is why I call it dormant equity. You can put it to work and if you were listening to my, you know, my response to Tara Tara’s question, you know, you can tap into that and pull some of it out and start building a portfolio. If your principal residence is paid off and you can afford, you know, the monthly payments on that you can pull out, you can place a small mortgage loan on that of whatever, a hundred thousand, 150, 200,000. Again, I’m not telling you what to do, just you play with the numbers, run the scenarios yourself and you know, grab a calculator and figure this out. But if you can pull equity out, you can purchase 1, 2, 3, 4, or more turnkey residential properties in different markets. They don’t have to be in Texas.
But, you know, we have people doing this often where they have a lot of equity, they tap into it, they use that equity as down payment capital, you know, make some adjustments on their principal residence payment or their rental property portfolio payments. But as long as they’re still cashflow positive, they’re able to leverage that equity, that dormant equity and turn that into one or more properties. Now they’ve grown their portfolio and now they’re taking the benefits of the additional cash flows and the additional equity growth as well as the additional tax benefits through the depreciation of those additional properties. That’s the way you start to what I’ll call fast track your portfolio growth and your equity growth and your path to that financial freedom and time freedom. So this is a way to do that and do it relatively quickly, especially if you wanna stay an investor and not necessarily an entrepreneur or business owner and launch, you know, one or more businesses that can generate a lot of capital for you, but also carries a lot of risk, requires a time investment, requires, you know, a significant amount of sweat equity and all that stuff.
So, you know, keep that in mind. You can tap into that equity and start to leverage it. But remember, you’re only 39, you’ve got time on your side, you can definitely work this out and build it and it’ll benefit you significantly over time. So I don’t know, I don’t know if you have a complicated situation here. To me it sounds pretty straightforward. You know, you, you’ve gotta keep the mother-in-law, happy <laugh>, keep the house she’s close by and you know, it might be the slow path just keeping the way things they are right now, but you have the ability, it sounds like you have the time, the income and the capacity to to leverage this into something bigger. So anyway, I don’t know what else to pull out of this. I guess what I said is probably the most obvious and the low hanging fruit for you and your comment about, you know, paying it off in five to six years.
I’m not sure you should do something like that. I mean, if you have the ability to just pay the mortgage off slowly rather than quickly, that usually makes the most sense when you’re in growth mode. If you wanna start building your portfolio right now, paying it off would not be wise. And I think that for two reasons. One is let inflation depreciate and devalue that mortgage loan. So you pay it off each and every year with cheaper and cheaper dollars, meaning inflated dollars. So you know that loan becomes worth less. It’s not adjusting for inflation. So you’re actually gonna, over time, especially when you rent it out, have more cashflow coming in from higher rents and you’re just paying off the same fixed monthly dollar amount for that mortgage. Number two is if you take your investible capital and pay off that mortgage, then you don’t have any investible capital to put towards down payments on more property, additional property to help you grow your portfolio.
So for those two reasons, it doesn’t make sense at this age to pay it off unless you’re done buying residential investment property and all you want to do is just pay off the mortgages and not expand your real estate empire and live off the cash flows from those properties. But it doesn’t sound like you’re there yet. All right, hope that helps. Danny.
Next question, I think I’m pronouncing this correctly. Oleg, OLEG, Oleg, I believe. Hi Marco, on my initial current investment is only $50,000, but I really want to begin investing in real estate. So I think what you’re talking about is the investible capital you have to put towards a purchase of a residential real estate property. Okay? Can you please recommend someone reliable for fix and flips so I can increase my capital and then invest in your turnkey properties? I’m aware that I can get mortgages, but since I have a big family to support, I already have three of them.
Passive income is my dream and I genuinely believe your investment opportunities will help me achieve it. Well, there is definitely truth in that. So what it sounds like you’re looking to do is build your investible capital above and beyond the 50,000 that you have right now and that’s great. So you’re thinking about doing fix and flips, so that is something that can make you good. Chunks of money, good chunks of cash, A lot of people do that. Some of them do it very successfully, some of them do that and lose money. Remember when you’re doing fix and flipping, you are essentially running a small business. You might be a solopreneur, but you’re essentially building chunks of cash by properly and profitably buying and fixing property to flip to other end buyers so you can generate some cash from the proceeds of that sale. If you’ve never done this before, you’ll probably want to learn as much as you can about it and or partner with somebody who is doing it so you don’t make mistakes and step on landmines along the way because it can be an expensive learning lesson if you just don’t know what you’re doing, especially in calculating the numbers for the acquisition and the renovations because you have to make sure you have a margin of error and you build in your profit, you factor in or calculate your profit right from the beginning on the front end because you’re doing this for profit, you’re not doing this as a hobby.
The other option, which is potentially more sweat equity, a little bit easier and might be a better way to get started, is if you have the ability and the time to farm areas. You can’t wholesale properties, which is basically finding good deals out there, putting them under contract and then flipping the contract to an investor who will do the fixing and flipping instead of you. It you make less money at it, but it involves less time, less risk. In fact, I wouldn’t say no risk, but much less risk because when you put a property under contract, you have the ability to escape or get out of that contract with no loss to you as long as you do it within the timeframe and the the agreement. But you can make smaller chunks of cash and depending on the market you’re in, it could be 5,000 per house, 10,000 maybe more if you’re in a more expensive market.
An alternative to this is what I was talking about earlier in this episode and that is to just to partner with someone that can help you fast track, you know, the portfolio you’re building. So two things to think about anyway, not a long answer to your question, but we definitely would like to help you. And the sooner you can build those chunks of cash, the sooner you can start deploying it and building your portfolio.
Okay, next question from John. He says, hello, what is the best way to change property management? My current management has very poor communication, which by the way is one of my pet peeves. I should have changed them immediately when I was unsatisfied. Now I’m going through an eviction and I believe the poor communication has and continues to extend the eviction timeline. I feel like now I need to stick with them until the eviction is finished, then switch the contract says I have to pay three months in fees to cancel the contract before 12 months.
Thanks for all you and your team do, ex mark. Well John, thank you for the question and it’s a good one. Property management is definitely important, especially having the right management team, management company or management firm and communication is a very important part of that. So being one of my pet peeves, you know, I do judge our service providers including property managers based on their communication. So here’s the two suggestions or two comments I have. Number one, since you’re in the middle of an eviction, you don’t want to necessarily have the ball dropped unless they’re dragging their feet. Then yes, this would definitely be a time to consider changing, but what you might wanna do is negotiate an early release from that contract. Most everything is negotiable and this is certainly one of those things that can be negotiated. You can just be upfront and honest with them and just tell ’em, look, I’ve been having issues, your communication stinks, I’m not happy.
I do want to move on and see if you can just negotiate an early out. If you can do that, great. Move to another management company. Now while it’s vacant, the second thought or comment I have is wait it out, but check the agreement for the notice period. Meaning that if you have a 12 month contract and you are on month 10, you only have two more months before that contract is basically over and, and, and either it requires a renewal or it goes on a month to month basis or whatnot. So if you’re close to that 12 month period, you can maybe just wait it out and then have your new property management company lined up and ready to, to move in and take over. But my comment about checking the agreement for a notice period, check to see if the agreement requires you to give them notice, like 30 day notice or even 60 day notice before the agreement comes to an end in order to avoid any kind of complications or fees or whatever it may be.
So now’s the time to check that and find out if there are any timelines attached to that agreement. But keep in mind that having a very direct firm and professional conversation or discussion with them is probably the first and the low hanging fruit the first thing to do. So try and negotiate it out, but if you’re unsatisfied, you know, just negotiate the term or negotiate an out and move on to another property management company.
Alright, last question here for today, and we will keep it down to 30 minutes on this episode. Not sure in the nationality. The name is VOJO. I wanna say this is Slovakian, I’m not sure, but he says, hi Marco. Hope Paul is well, wonderful podcast with lots of information. I’m currently living and working in Ontario, Canada and plan to remain a Canadian citizen, but looking to invest in the US a more specifically in Ohio, Toledo, and or Cleveland areas.
I’m looking to get more return on my investments and don’t mind the slower appreciation and relatively smaller markets. I’m looking to invest in single family homes in and around the a hundred thousand dollars mark in the next several months. I was looking to set up the right business structures and grasp as to the best financial institutions, accountants, lawyers, and other relevant professionals that would work best for Canadians. I was wondering if you have any insights into this. Thanks and take care for now. Vojo, I believe so. Good question. The Toronto metro area where I assume you are, if you’re in Ontario, one of the most overpriced markets in the world right now. If and when those mortgage rates start to adjust in Canada, people are going to be forced into higher mortgage rates and you’re gonna see probably a wave of foreclosure activity and of course that’s gonna certainly affect the market.
So is it a good place to invest? Probably not. The numbers certainly don’t make sense. They’re, they’re just absolutely crazy in the whole GTA, the Greater Toronto Area. So having said that, yes, if you’re looking at Ohio like Toledo, I’m not a huge fan of, there are good deals there and certainly the numbers are very attractive, not strong for appreciation. Typically, Cleveland has its ups and downs in terms of, you know, market cycles, but again, lot of affordable housing with very attractive cash on cash and cap rates. But you’ve got several markets in in Ohio that makes sense from an investment perspective there. It’s more of what I’ll call a cash flow based market than a, you know, a, an appreciating market for the appreciation gains. We are in those markets on and off all the time. Cleveland, Cincinnati, Toledo, we have been for many, many, many years.
So based on that, you might want to get in touch with one of our investment counselors and have a discussion about what’s available, what’s in the pipeline, and being a Canadian, what type of financing is available. You know, we can certainly put you in touch with financial institutions and attorneys and accountants and cross border professionals that will help you in terms of structuring the right structures in Canada and on the US side, so that way you are not taxed incorrectly or inappropriately, but you know, there are systems in place and the treaties between the countries that will help you as a real estate investor. You just have things set up the right way. The a hundred thousand dollars mark that you’re making a, a comment on as your target, a hundred thousand dollars is probably what I’ll call, again, this is very much market specific C class or maybe lower B class in the areas.
If you’re talking Cincinnati or Cleveland, those are probably B class neighborhoods. Toledo would be certainly more upper B class neighborhoods. The larger the city and you know, it, it becomes very much area and neighborhood specific, but I’m generalizing here, a hundred thousand dollars mark is gonna be somewhere in a B class neighborhood, but the numbers are gonna be fairly attractive. Like a hundred thousand dollars property or even $120,000 property should rent for anywhere from eight 900 on the low end to as much as 12 to even 1300 on the high end, at least the last time I looked at it. But again, you know, I’m telling you it’s very much neighborhood specific. So yeah, but just contact my team and we can put you in touch with various lenders that will lend to foreign nationals such as yourself as a Canadian and the other team members you’re gonna need from accountants, attorneys and whatnot.
It’s not a complicated thing. The transaction is very much similar. In fact, it’s almost exactly the same for a foreign national as it is for a US resident or US citizen. If you have any other questions, just contact my team.
Well, that is it for today. If you are listening and you have any questions about investing or real estate specifically, or just finance in general, or a personal question for me, go ahead and submit that to me. askmarco@passiverealestateinvesting.com or just go to our website, passiverealestateinvesting.com and click the Ask Marco button. Remember to subscribe if you haven’t done so already, it’s really just three seconds to click that button, share the show with your friends if you can, love the ratings and reviews. I appreciate it, and I thank you in advance. That is it for today. Thank you for listening. I’ll see you all on our next episode.
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