Hello, my friends and welcome to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli. Well I wanted to do another Ask Marco episode cause I keep getting some great investor questions and I handpicked about four or five and I’m going to go through those today. And they’re actually quite diverse so some of them might not be applicable to you, but some of them probably help you out. So, let’s just see what we have here.
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The first one was kind of interesting, it, I just felt that it was all over the place, but it, it is a question from Luke. And Luke writes in and says, Hey Marco, I have an LLC that files as an SS Corp. I heard that it is wise to have three bank accounts for your LLC one for taxes, which the IRS has access to one for payroll and one for operations.
What are your thoughts on this and is it necessary for proper asset allocation and diversification of funds? If so, how much should be in the bank account for a business at a given time? Luke, wow, this is really just all over the place because we don’t know what you’re using your LLC for. Is it an operating business? Is it a title holding business? Meaning that it just holds title to assets and it doesn’t actually have operations like a real business, meaning it doesn’t have a product or service that it sells. It’s just holding assets for you. And as I read your question, it made me think of a book called Profit First. In fact, I don’t remember if I had the author on the show. I believe I did Mike Michalowicz. He is either the author of the Profit First book or the sequel to it, which is Profit First for Real Estate.
But you made me think about that because when you mentioned three bank accounts for your LLC or your company, that’s one of the things that they talk about is creating multiple accounts for your business. So you separate everything into its own bucket. And the way the Profit First model works is you could literally have up to 20 bank accounts for your company, but generally speaking you’re gonna have a profit account, another checking account for owners pay another checking account for taxes and another account for operating expenses, which is where you draw expenses from to pay for the operations of the business. And what you’re doing is you’re essentially bringing in revenue or income taking your profit out first, hence the name profit first, putting it into your profit checking account and then what’s left over is what you use for paying taxes and your operating expenses and whatnot.
So it’s kind of like flipping the model upside down. If you wanna learn more about it, you can go and get the book on Amazon or wherever, which is called Profit First. And then there’s a sequel again, like I said, for Profit First for real estate. I never adopted that model just for the record, I found it to be not so much that it was non-traditional, but a little confusing having to look at and track multiple accounts. Now granted, they all show up on your financial statements so they’re really in the same sheet, in the same reports and financial statements, but I just found it to be a little confusing. But you know what, A lot of people use it and they love the system and that’s great. And to be honest, I’ve never tried it so it’s hard for me to actually have an opinion on it based on real world experience.
But regarding your question about an LLC having separate accounts, I just don’t see the need for it. Especially you know, when you are trying to separate payroll from operations, I assume what you mean is your separating your pay because an SS Corp just pays its owner, it doesn’t really have employees, it pays you the owner, I can see an the operating account and then it’s not a bad idea to have a separate account for taxes if you know you’re gonna keep putting your hands on it. If you wanna put your taxes aside so you can’t touch it, that’s great. But the thing about the IRS having access to it, the IRS doesn’t have access to any of your bank accounts. If they have a judgment against you and they can garnish or go to the bank and tap into your account, well that’s something different.
But generally speaking, the IRS does not have access to any of your accounts. You need to pay them when the time comes for you to pay them. So Luke, I don’t know what you’re really thinking here. And then to your comment about proper asset protection, well that has nothing to do with the number of accounts and to a lesser degree the type of the entity. Now LLCs are certainly very common for asset protection S-corps and corporations in general are generally not entities that are used for asset protection purposes. So anyway, I’m not sure where you read this or whose advice this was, but I don’t think an attorney or CPA would ever give you this type of advice anyway. Maybe just reassess and educate yourself on that. You can read the book profit First or talk to an appropriate tax or legal advisor for you on that.
Alright, next question from Johnny. Johnny says, Hey Marco, personal question for you. I was listening to your last Ask Marco episode with the gentleman from Canada and it made me wonder, so what are you wondering about? Well, have you considered expanding Norada into international markets providing turnkey rentals in areas such as Canada, Europe, et cetera? I just think your team and you have given us clients so much comfort and knowledge in turnkey investing an international market could be an amazing addition. Thanks again Johnny. I appreciate you saying that. It crossed my mind, especially for Canada just being cross border and so close and having a very, very similar infrastructure and system when it comes to real estate sales there. What goes on in Canada is almost identical to what we have going on here in the us. The financing is a little bit different where there are shorter terms within an amortization period and the names of certain things like documents and notaries are a little bit different.
But for the most part it’s almost exactly the same. The thing is, is I have not thought about seriously expanding outside the US because there are just so many opportunities with the us. There are so many markets in the us, there are so many clients that we work with within the US there’s just so much going on. We do have international clients that come to us from Europe and from Canada. However, it’s just too complicated in a way to travel outside the US and work within international markets because tax laws and legalities change and you just have to double up on all the documentation and compliance and everything else you have to do. But I have thought about it. All I’ll say is that many of the markets in Canada and other places around the world are just too overpriced to be working in or offering product in.
So having an office in Canada or other places would just be to attract locals to invest within the US. As far as I look at it, I wouldn’t want to be doing business meaning selling property in those local markets. I don’t need to be there necessarily to do that. We just have to have a representation there and or licensing. But anyway, long story short, I’ve come to the realization that there are so many opportunities within the US for investors and access to property and financing as well. You know, 30 year fixed rate mortgages that it just doesn’t make sense to look cross border. So we’re just gonna sit tight and continue doing what we’ve done for the last 20 plus years here in the US and continue to help educate and service investor clients from all over with investment grade properties within the United States. I appreciate the question there Johnny.
Clint, write in and said Marco, I have been listening to your show for the past couple years. I want to thank you for the great content you put out Clint. You’re very welcome. I have four rental properties I have acquired over the last few years. They are properties with good bones in good locations but need updates when I buy. I put a little work in them with paint, flooring, appliances, et cetera, then rented them out. I self-manage them as they are within a couple of miles of where I live. I have about $250,000 in a Roth IRA I have listened to your shows about self-directed IRAs and read the book by Matt Sorenson. Okay, good stuff. Right now I have this money in Vanguard in an index fund and it’s estimated to make about 11% a year over the past few years buying rental properties.
I can see that I can make a lot better returns in real estate. I’ve always been a big fan of the Roth IRA but I am questioning whether I would be better putting it in a self-directed IRA where I can invest in properties or pulling some money out to just invest like I have done outside of the IRA. I’m 40 years old so I believe I would only be able to pull out my contributions and not the earnings of the Roth IRA. I ran the numbers with what I thought I would make in each scenario and wanted to get your opinion. So scenario one is leave it in the Roth IRA with Vanguard index. The estimated return is 11%. Scenario number two, move it to a self-directed IRA and invest in rentals.
The pros of this are protected tax savings in the Roth. The cons are the management fee and less leverage. The estimated return here is 12% and in scenario number three is to pull out Roth money and invest it in rentals outside the IRA like I have done with other rentals. Pros is he can self-manage and use more leverage, can take advantage of the depreciation and there are less fees. The estimated return is 28%. So he says, I came to the conclusion that pulling the money out and investing in rentals like I have been doing would get me the highest returns because the $250,000 would buy me five properties averaging $200,000 each with money left over for renovations. With the self-directed account, I would probably only be able to buy two properties since I would need 50% down and need to have cash available for repairs.
Therefore, making less on appreciation and having higher expenses with a higher interest rate in management fees. I can send more detailed notes on my math for returns if you want, but the question was already pretty long. Curious to see what your thoughts are on this and thanks again Clint. Well thank you Clint for the question. This is a long one without getting too deep into the weeds ’cause it is a long question and I can go off on a couple of different directions here. You probably answered your own question by thinking or feeling or concluding that scenario number three is your best option. The one thing you need to look into and be careful of is that if you’re pulling money outta your Roth, make sure that what you do pull out being 40 years old is not taxable. Obviously a certain portion of that, probably the majority of that to date is tax free.
You can pull it out of the Roth because that’s the whole idea of a Roth is these are all after tax funds but check with your custodian and your tax advisor just to make sure that what you’re doing is not going to have an impact on you in terms of paying fees or taxes on funds. That should be left in there. But if you can take the money out and use it towards investment real estate, then yes you can use leverage. You can put as little as 20% down. So leverage your money five to one, you can depreciate it and take advantage of that depreciation on your personal tax return. There probably will be fewer fees if maybe none at all. You can choose to self-manage if you want to, whereas you can’t necessarily do that if you are using a self-directed account of any other kind because it everything has to be third party arm’s length.
The moment you start living in using, taking benefits from those assets or managing you are essentially breaking the rules and now you are taking what is known as benefits from the assets in your self-directed account and at that point you basically get a slap on the wrist and you’ll probably be charged fees and taxes for using those funds or taking direct benefit from it in one way or another. So yes, I would agree that scenario number three using a Roth money is probably the best way. Of course we’re making certain assumptions here, but everything being equal, it probably is the best option with the highest rate of return. I don’t need to see the numbers for your math but I’m sure you’ve probably mapped this out pretty tightly. So that would be a short answer to this question. Congratulations on what you’ve done so far with the four properties.
Keep going but you’re definitely thinking about this in the right way and certainly asking the right questions. So if you got $250,000 to invest, yep, you can probably get another five properties and take all the benefits of real estate on those five properties and continue building your portfolio.
Okay Ross. Ross writes in and says, Marco, I’ve been listening to your show for a couple of months now and love it. My family and I currently live in Arizona, but we’ll be moving back to Colorado to get closer to the family. We own a five bedroom, three bath, 3000 square foot house with a pool that we bought back in 2021. We currently have a 2.9% interest rate on a 30 year fixed rate mortgage. That’s a fantastic rate. I really don’t want to give up our asset, but we would not be able to buy a house in Colorado unless we sell our house in Arizona and tap into our equity, which is around $250,000.
We would be willing to rent out our house in Arizona and rent in Colorado for a period of time. Is it smarter to never give up this asset we have right now considering our current mortgage and keep it as a rental for as long as possible or should we just sell it? I don’t have any investment properties at the moment, but I would like to start building my portfolio as I’m only 32 years old. Thanks for any advice. Well Ross, interesting scenario. You could also make the argument that your home in Arizona is not really an asset. If you really follow Robert Kiyosaki’s thinking and investment philosophy and whatnot, he wouldn’t call your principal residence an asset. He’d call it a liability because it’s not putting money in your pocket, it’s actually taking money out of your pocket. So you could argue it’s a liability, not an asset.
If you kept it as a rental and it generated a return, then you could argue that it would be an asset. I think the dilemma you’re facing is that you have an incredibly low rate of interest on a 30 year fixed rate mortgage, which is great. You pit the low, almost the historical low of mortgage rates with that 2.9%. So it would be kind of hard to give up because anything you buy now, you’re certainly gonna be in the five to 6% range or more. I mean interest rates or mortgage rates depending on your credit and the size of the loan are probably gonna be in the six or 7% range. So big difference from what you’ve got now, you do have a fair amount of equity at 250,000. Sounds like you have a big house in a nice house, but if you’re moving then you’re moving.
If you have cash on the side you can use for a down payment, then you can buy your home in Colorado and get financing on it. Now granted it won’t be 2.9% but you can move, have a new home in Colorado with whatever financing you can get based on the down payment and mortgage size that you need. That would be your new principal residence. Then you can keep this home. If you’re able to do this, keep this home in Arizona and assuming you could rent it for enough to help cover your operating expenses and your debt service, you can keep it as a rental. I don’t know if you would have positive cash flow on this. I’m guessing you probably have a break even or a negative cash flow overall, meaning net net that’s the case and you can carry it for a period of time and ultimately turn it into positive cash flow or hold it and benefit from the appreciation gains only to sell it later.
Then it might be a great investment to hold. Again, this is assuming you’re able to move to Colorado and you have the cash to do it. In other words, buy your own place. Of course there’s always the option to rent, which means you don’t need a big chunk of cash to live in Colorado. You can just turn this property in Arizona into your rental property and hold it for you know, a medium term or long term or forever. So this is a math question, a math problem that you have to pencil out. Of course, making some assumptions about the rate of appreciation in each of those markets doesn’t make more sense to buy or rent. And yes, it does make sense to rent over buy in many cases, not always. Again, you have to look at what the cost of living is in Colorado and what you’re accustomed to and what you can afford.
The other thing I guess I’m gonna say about this is that if this is your principle residence, a lot of equity in this property and you’re moving to Colorado, you have exemptions on how much you can take out in capital gains, meaning the appreciation in your property tax free and if married and you’re living with a spouse your capital gains exemption goes up. But you can take up to $500,000 of that equity out and carry it forward into another property tax free. In fact, you don’t even have to put it into a property. You can take it out and just have it in your bank account as cash. So I don’t know if you’re married or not, but there are exemptions to the capital gains that you have in the property. Of course you have to be living in the property for two years or more in order to take advantage of that.
So consider that as well as part of your decision. Now having said all that, I’m not really giving you an answer as far as what to do because the answer is always, it depends. You have to pencil out the numbers in the different scenarios of buying or renting in Colorado and then selling or keeping the property in Arizona and then just work out the numbers in terms of what you’re sitting on in Arizona, positive or negative and what you’re doing in Colorado, which will always be a negative. But the question is do you rent or buy? And you can see where you sit. You’ll probably pencil out four different scenarios with this, but based on that you can figure out what is gonna make the most sense for you financially. Keep in mind that assuming the market continues to appreciate, not like it has been since 2020, but if the Phoenix area or the Arizona markets continue to appreciate at a reasonable pace, you know, you can see some decent gains here over the coming years, but is that gonna continue to happen in Colorado?
Maybe, maybe not. Colorado has had some pretty strong price appreciation gains over the last three years and there’s definitely a cooling period going on. You can talk to one of my investment counselors about this if it makes sense for you. But we don’t actually provide rental property or income producing property in Colorado because for the most part the numbers just don’t make sense. It’s appreciated so much that rents have not keep up and therefore even with larger down payments, it’s hard to generate a positive cash flow on properties in many of the Colorado markets. So you kind of stuck there in a sense. Alright, well I appreciate the question Ross.
As always, this is the occasional Ask Marco episode I wanted to do. I’m doing this kind of like right before I’m leaving for a flight to Chicago for one of our major events. And so I just wanted to get this in the can as quickly as I could before I left for the next four days. But as always, if you have a question about real estate investing or finance and you’d like me to answer it on the show, just go to our website at passiverealestateinvesting.com and just click the Ask Marco link. Remember to subscribe. If you haven’t done so already, you can share the show with your friends and family. I’m sure they would appreciate it. We appreciate all the ratings and reviews you’ve provided us on iTunes or any other platform that you’re on. And once again, thanks for listening. I will see you all on our next episode.
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