Hello my friends, and welcome to another episode of Ask Marco. I am recording this episode today here on the island of Maui in Hawaii. I’m out here to do a presentation on day two of a three-day event called The Wealth Summit, and that’s tomorrow. So I wanted to get this done because I have been out of town and I have not had the time to actually get down and do another Ask Marco episode. But anyway, today’s the day. So quick reminder, for those of you interested and who qualify, we have our next Power Room mastermind event, December 5th through seventh in Las Vegas at Caesars. If you wanna learn more, go to our website at powerroom.com make sure it’s a fit for you, and also find out if really it’s something you qualify for, if you’re interested, just hit the application button, fill out the form, and you will be contacted by the one and only the lovely Annie Yacht.
She is amazing. You’ll have a great conversation with her because she will be able to answer a lot of questions for you and get you plugged in with who we are, what we do, what you’ll learn, all the great stuff we do, all that good stuff. So anyway, check that out@powerroom.com. And other than that, let’s get to the first question.
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So the first question today comes from Diego. He says, Hi Marco. I wanted to ask you that if you could go back to when you were 23 and you started from nothing, what would you do differently to get into real estate investing or entrepreneurship in general? What steps would you take in order to ensure success? Thank you, Diego. This is a good question. I don’t remember if I answered something similar to this a few weeks ago, but I love these personal questions. I think they’re great to kind of just tap into other people’s experiences and my mind, if not other people’s minds.
But for me personally, there would be not much that I would change or do differently than what I did other than maybe do it faster and fast track it, even though I really started as a teenager diving into books and knowledge related to real estate investing and business in general. So let me answer this question for you a little differently, Diego, and for the benefit of people listening to this. So if it were someone else and you would were to go back, you know, as a teen or an 18-year-old, a young adult, or 23, I assume you’re 23, that’s why you’re asking, what would you do differently or what would you do? So the first thing, and I’ve said this many, many times over the years, is to educate myself. Now, I was already doing that, so I’m basically telling you educate yourself, and that means consume as much good content as you can as it relates to real estate investing, investing in general and business because those things are very tightly interconnected.
You don’t need to be an entrepreneur or start a business in order to be an investor or a successful investor at that, or to even get involved in real estate investing. In fact, a lot of people just get into real estate investing, have relatively speaking, a superficial knowledge of it, but have the right team to work with them and they become very successful. But the more you learn, the more you earn. There’s just a lot of truth in that. So educate yourself, and that means listen to podcasts, read books, as many as you can consume. They’re cheap. It’s the cheapest form of education. You can just go to Amazon and type in investing a real estate or anything like that and find all kinds of great books with great reviews, and you can learn a lot and be one of the most well-educated people, probably within your circle of friends and family.
So educate yourself, do it early and dig in deep. Secondly is learn and observe from other people. Other people who have success and experience are already doing it. Those are the people that you can learn from. And this is, you know, one of the things that I really love and enjoy about going to mastermind groups is I’m around other people who are doing it, doing things that maybe I’m already doing, but doing things that I’m not doing. And so there’s a form of osmosis there, but you can network and ask questions and learn what other people have done and what they’re doing, what caused them to fail, what help them succeed and all that good stuff. So learn and observe, Hang around other successful people. Make sure that within your circle of friends you have successful people, or at least get out and network with people who are successful, even if they’re not your friends, but they’re just acquaintances.
Thirdly, or maybe fourthly, make money fast. In other words, make more money fast. And this is really sometimes the stumbling block or the hurdle that a lot of people need to get over is they have the interest, the desire, they’re motivated, they have the education or knowledge, or at least they’re building it, but they can’t pull the trigger, at least not yet because they just don’t have enough investment capital or savings. So make as much money as you possibly can, as fast as you can, because that is going to be what makes you move forward or gets you forward once you take action. So you’re gonna save as much as you can as quickly as you can and deploy that capital as the investment towards that real estate. And we’re talking about a down payment here, your down payment and closing costs. The more you have, the more properties you can purchase and the faster you’ll get to where you want to get to.
And last but not least is take action. A lot of people think about it, read about it, educate themselves, listen to audio books, do all that good stuff. Maybe even hang around people who are doing it and they see what’s possible, but they’re either scared or I’m not even sure what other feelings there could be there other than fear or lack of self confidence. But take action. I mean, ultimately nothing will happen unless you take action. Remember I’ve said many times, there’s three kinds of people in the world. There’s those that make things happen. There are those that watch things happen, and then there are those that wonder what happened. So be the action taker, make crap happen. All right, Diego, hope that helps.
Next question’s from Dorian. Dorian writes in, Hi, I am from Canada and I’m looking to purchase my first investment property in the US. I’m looking for something close to the US-Canada border because of the distance in the podcast. You mentioned some sections in the Northeast us. What locations, namely state and city, would you recommend for a condo investment? Thank you, Dorian. Dorian, I have got a few things to say about this. <Laugh>. First of all, congratulations on wanting to make a move and invest, and especially out of state, in this case, out of the country, there’s a lot of Canadians that invest in the us. So there’s three things I wanna touch on here. One are locations. Two is the comments about investing in condos. I’m not sure why you’re choosing a condo. I have to guess it’s because the price point and thirdly is the northeast. So let’s start with locations. As far as our company here, Nora, real estate investments, we are in about 25 different markets peppered throughout the us, mostly on the eastern half of the US.
But as far as the northeast is concerned, Baltimore is one of those cities, and I’m talking metro areas here. So even though I mentioned Baltimore, it may not be specifically the city of Baltimore, but within the Baltimore metropolitan area, there’s Harrisburg, and York and Pittsburgh, Pennsylvania, those are three cities, three markets that we are in Pennsylvania. So those are definitely the northeast. What might be considered more of the Midwest, but I just chalk it up to part of the northeast is Ohio, so that would be Dayton, Ohio, Cleveland, and Cincinnati. Now, those cities are actually closer to you than some of these other cities I just mentioned, like Baltimore, for example. So if proximity is important to you, those would be actually considered closer and just chalk it into the Northeast us. However, as I’ve said many times, I strongly recommend you be market agnostic.
Just because they are closer to you doesn’t change anything about the fundamentals of the market, it doesn’t change anything about the economics and the financial performance of that property. It just makes you feel more comfortable. It’s a psychological thing. The fact that you can actually drive whatever, two hours, three hours from your home to get there is not gonna change anything. It’s not gonna help anything unless you’re self-managing. And even then, that might not be the best thing to do. So you’ll probably have a full-service professional property management company managing your properties in whatever city they might be in. It could be Dubai. So think of it that way. You’re running your business from whatever city you call home or your base of operations, and you are market agnostic and investment agnostic. You’re gonna invest in markets where properties make sense and you’re gonna manage the team that manages your investments.
So you’re essentially the CEO of your investment organization. And if you look at it that way, then location, city proximity doesn’t matter anymore. So I want you to think about that. The other thing you mentioned here is what I would recommend for a condo investment. Now, I’m not gonna tell you not to invest in condos. There are condos and condo complexes that make sense in different areas. But the thing I don’t like about condos are, the two things I don’t like about condos in general are, one is the condo fees sometimes, and often the condo fees are high or excessive, they cut into your cash flow. They may justify whatever the condo fees are going towards. But I think you would do better investing in single-family homes or detached homes, semi-detached homes like duplexes or even plexes and fourplexes. The thing with condos is when you are in a condo complex, whether it’s vertical or horizontal, it’s almost like you’re in an apartment.
You have that apartment feel, and the tenants don’t have the same, what I’ll call pride of ownership as if they were in a single family home or maybe even a duplex. So depending on the size of the condo complex, it might be an issue. The other thing too is some condominium complexes are non warrantable, which means that if 50% or a certain percentage, but 50% or more of the residents there are tenants than a lot or most lenders won’t actually lend on it. So if you’re looking for financing, you might have an issue there, even if it’s non QM or non-qualified mortgage financing, which is what you would be going for as a resident or citizen of Canada and a non-resident of the US. So you gotta think about that part of it too, that you might not be able to get mortgage financing, and that’s okay if you’re buying it with a hundred percent down, meaning no financing, it’s all cash.
That’s not necessarily the best strategy either because you have no leverage. But think about that from a financing perspective. So there’s a lot there to unpack, but generally speaking, my recommendations are always to be market agnostic. Put your money to work in the markets that are gonna give you the best returns short term and long term. And condos have not been my favorite. I’ve invested in condos before, got rid of them, don’t like them. And again, I’m generalizing here. There are some good condo deals out there, but as a general rule, you really have to take a close look at it. Okay, Dorian, hope that helps.
Next question from, I believe it’s Ellen and Susan. Hi Marco. My wife and I really enjoy your real estate podcast of the many podcasts we’ve listened to yours as by far the most content rich. Well, thank you. They go on to say thank you so much for sharing your wealth of knowledge and on real estate investing. Well, you’re welcome. Again, we are considering a real estate partnership. We would provide $50,000 for a down payment and the partner would perform a live-in flip, the partner would move in and renovate the home within a specified time. We are considering either a set interest rate for our investment or an equity split. How would you structure the deal to allow us to transfer the money to a partner for the down payment without the bank questioning it? The partner would use the down payment to obtain a traditional 30-year mortgage to acquire the property. Thank you so much for your time and consideration. Okay, a couple of things in here. First of all, regarding whether to go with a set interest rate or an equity split.
I think if there’s enough meat on the bone in this deal, definitely do an equity deal, become a partner, whether that’s 50-50, 60-40 or whatever, you definitely want to be involved on the equity side because then you have the equity component of the property, especially if it’s a distressed property and you got it at a discount and you’re able to fix it up and build equity into it. So this is a value play. Then you’re gonna be sharing in that 50-50 or 60-40 or whatever it may be, split on the equity in the property. So there’s instant wealth creation. Then the fact is, is as an equity partner, you’re gonna share in any revenues generated from this property if you keep it as a rental. And so now you have cash flow on top of that equity. So you, you’re far better off with an equity deal than an interest rate deal.
Interest rates are also taxed at ordinary income rates, whereas the equity is not only tax deferred until you realize that equity, but that equity gain is also taxed at capital gains rates, not ordinary income rates. So you’re far better off doing this as an equity deal. Secondly, you want to be on title, you need to be on title, you want to be on title. So don’t just lend the money to your partner because now you are a lender, not so much a partner. So you can use that as the town payment and then just make sure that you have a transaction that goes through title and escrow so you’re both protected in regards to the property and the title on the property, making sure it’s clean title. And you also want to be on title for your protection and you might have to hire an attorney to help you take care of this.
It won’t be an expensive thing to do, nor a time-consuming thing, but that just gives everyone the protections they need and making sure that everybody’s on title the way it should be. Now if you’re lending or contributing this down payment, you don’t need to necessarily give it or lend it to your partner. You could be the one putting up that capital and be part of that deal. You’re the cash partner, the other person’s doing the work. Maybe you’re both qualifying for financing, but if you’re actually lending it to them and they’re trying to get a conventional loan, then those funds may need to season for a period of time. It might be six months. It depends on the lender that you’re working with, but they might need to see where the funds came from and how long you’ve had them. So you might need to lend them to that person for a three or six-month period.
These rules in the lending industry change from time to time. So keep that in mind, but you definitely need to have an agreement. Last but not least, you mentioned that this person would be performing a live-in flip. And to me flipping means you’re either fixing it up and then selling it to someone else, or that’s typically what it means. Or you might be flipping it in the sense that you’re gonna fix it up. Now you have a newly renovated property and you’re gonna refinance it to try and pull your down payment money out or most of it if you can, and end up keeping it and then keeping it as either a rental, which is probably the thing you would want to do, or as somebody’s home, which is probably not what you want to do with this type of deal arrangement. But the thing is, you mentioned a 30-year mortgage, you wouldn’t want to get a 30-year mortgage if it’s something that you’re planning to fix.
You’re probably better off getting what’s referred to as a fix and flip loan or a renovation loan. Norada Real Estate Funding, our mortgage lending arm here can help you with that. Well, with all of these types of mortgages. So you might want to contact Kathy or my team here at norafunding.com or just go to our 800 number on our websites and inquire about that. So if it’s truly a fix and flip and you’re gonna be selling the property not keeping it, then a 30-year mortgage is not what you’re gonna use to acquire the property. You’ll want. A short-term is essentially a hard money loan. It’s a short-term loan at a higher interest rate, but it’s meant to make the acquisition quick and easy and then you get in, fix it up, and then get out and get paid. And that’s basically how you would structure that deal.
So hope that helps. But yes, do it as an equity deal if you can. I don’t know any other details than what you’ve provided me here, but that’s how I would do it because that would be a better deal for you.
All right, next question from Howard. Howard says, Hi Marco, I love your podcast. Thank you for doing it. Very informative and relevant to today’s environment. You’re welcome. My wife and I are both currently W2 employees and we have three short-term rental properties, Big Bear, Trucky, Palm Desert. We bought properties in areas where we enjoy visiting and at prices and mortgages we can afford, even if they go vacant for a few months, we don’t report any profits for the most part. And I actively manage two of the properties through Airbnb. Doesn’t make sense to conduct a cost segregation study. My accountant says, These cost $5,000 each and would not be worth doing for our properties.
Each property has roughly a $500,000 market value. All right, I’m concerned he may not be the best accountant for us as we delve deeper into the real estate game. What are your thoughts? And then Howard goes on to provide a little bit more color and information about their employment status and whatnot. He finishes off by saying, I love your podcast and appreciate your time and consideration. PS we may be reaching out to learn more about your promissory notes. No problem, Definitely do that. All right, so first of all, cost segregation studies costs are all over the place. You should be able to get a third party to do a cost segregation study for up to $1,500, a $1000 to 1500. I know there are some self-serve websites out there that charge $500 for a standard typical sized home. I don’t recommend you doing that.
You should always have a arms-length third party do the cost segregation. In fact, that’s almost mandatory because you can’t be doing your own cost segregation. So you need a professional party to do that properly and for you, and then provide that reporting, that cost segregation breakdown to your tax advisor or tax professionals so they can flow that onto your personal tax return and take advantage of that accelerated depreciation that you could use and put towards passive income. And that’s the whole goal here, is if you have passive income that you can’t shelter or you don’t have enough depreciation to shelter to defer those taxes now, then cost segregation makes a lot of sense. Or if you’re coming into a lot of gains, capital gains or passive income that the cost segregation can be applied to, then that’s when you would want to do it.
So if it makes sense for you to do this because you have a lot of passive income or capital gains this year or soon to defer, that’s when you should take a look at it. Now, I’m not a tax professional or a tax advisor. I understand cost segregation, but I’m not a cost segregation professional. I would definitely have a conversation with both the cost segregation people, and I’ve done at least two podcast episodes on cost segregation. So you can go to the passive real estate investing.com website, which, and I’ve said before, we’re going to be redesigning and rebuilding from scratch hopefully soon, probably in three or four weeks. I keep saying this, but just can’t seem to get to it. But there’s a search bar either on the top or on the right. If you type in just the word cost segregation, those two things, you should be able to pull up those episodes and listen to those.
But talk to a professional in this cost segregation space and talk to a tax professional. And that doesn’t necessarily mean it’s an accountant. In fact, a lot of accountants know how to fill up paperwork and crunch numbers, but they don’t necessarily understand the finance side of working with numbers. And those are two different tracks in the field of accounting. You’ve got your basic accounting as a profession, then you’ve got your finance accounting. So you want to talk to the right people, but it does make sense for a lot of people. It’s something you should definitely look into. In fact, I was just looking it up here. Episodes 380 and 392 are two of the most recent episodes I’ve done. The other ones on cost segregation specifically go back probably 1, 2, 3 years ago. But 380 was with Brandon Hall Advanced Tax Savings Strategies. And then the more recent one, number 392 with Tom Wheelwright was titled 7 Investments the Government Will Pay You To Make.
That doesn’t necessarily go deep into cost segregation, but I remember talking to Tom about it. So it’s something that you probably want to look into. But yeah, I mean, cost segregation is a great thing and it’s very advantageous right now, especially with the tax bills that have been passed in recent years, I think as far back as 2017. So there’s all kinds of things like accelerated depreciation, which is bonus depreciation, cost segregation. I mean, these are all really attractive benefits as a real estate investor. And if this is stuff that you don’t fully understand or you’re not sure what I’m talking about, listening to this episode, do some research, let’s look into cost segregation, listen to the episodes I’ve done over the years, maybe do some Google searches and find some firms that have articles and talk about it. But I, I really think it’s something worth pursuing.
All right. Next question is from Shevela. Hi Marco. I plan to use my self-directed IRA to purchase a rental property. What do you recommend I do with the monthly cash flow from that property? Okay, good question. Should I apply it to the principal balance on the non-recourse mortgage to pay it back quicker or reinvest it in a different way? It seems like a bad idea to let it sit as cash in the account not making any interest, and it would take quite a while for it to accumulate enough for a down payment on another property. Well, this is true. So I agree with you. Shala cash, just sitting idle, especially in a self-directed retirement account like an IRA 401k or whatnot, is a bad idea, especially in a high inflationary environment like we have today. So cash is trash in that situation because it’s being eroded away.
The purchasing power is disappearing at a very fast rate each and every year. So you want to put it to work. Now, one option is to pay off the loan if you can’t or won’t accumulate enough of that down payment capital fast enough to apply to another property. You have restrictions on how much you can contribute to retirement accounts each and every year. And this is important to understand. In fact, if you haven’t done so, you should listen to the episode I just did last week. The pros and cons of investing in real estate with an IRA or 401K with John Bowens. We did a pretty good deep dive into this whole topic, and we could have gone on for hours, but we, you know, stopped at about 55 minutes into the interview. But for 20 22, 21, 20 and 2019, the total contributions you can make each year to all of your traditional IRAs or Roth IRAs can’t be more than $6,000, $7,000 if you’re over the age of 50 or if you’re 50 and older, but it can be less if your taxable compensation for the year doesn’t allow for it.
So let’s just say you can contribute 6,000 a year plus whatever cash flows come from your property or or properties. It’s gonna take you certainly a number of years, 4, 5, 6, 7 years or more to accumulate the down payment that you need or want to purchase that next property within your self-directed retirement account. Now, side note, kind of going off on a quick tangent, if you own that property pretty and clear, which sounds like you don’t because you have a non-recourse loan on it, but if you did or if you have a property in there that is not leveraged, you could refinance that property with a non-recourse mortgage to pull cash out, now you have an investible usable chunk of cash to apply as a down payment to purchase your next property. It doesn’t sound like you have that situation, but for somebody listening to this, that is a possibility or an option.
Now, if you can’t accumulate enough because of your contributions plus what cash flows you have coming in the property, then you want to start thinking about other options rather than letting it sit entirely as cash. Those options include, for example, and this is not an exclusive list, but promissory notes, crypto assets, and I’m not making recommendations here, but of course you know, Bitcoin is the king of crypto assets, but that is an option that is allowed within your self-directed retirement account. So other note instruments or paper assets like promissory notes or crypto assets would be two obvious examples. The third and most obvious is obviously equities. The equities market, in other words, investing in the stock market, which I think a lot of people are a little bit concerned about or skittish on today with what we’ve been seeing recently, especially with quantitative tightening, which I expect to go on for a little while longer, at least the next three months or more.
But yes, you know, there’s nothing wrong with taking those cash flows and paying off that mortgage faster. You’re essentially accelerating the pay down. That to me is not a bad strategy, but probably my last option because if I can do other things within my self-directed retirement account that gives me greater gain or gain potential, I would certainly seek that if I can accumulate enough investment capital. And the thing is, is even if you only have a minimal amount, maybe 3000 from your cash flows and 7,000 from your contributions or 6,000 from your contributions, you’ve got eight, nine, 10,000, maybe a little bit more to work with each and every year, then you could use that and put it towards promissory notes and or crypto and or other paper assets. So anyway, hope that helps.
All right, last question. Jason. Jason writes in, says, Hi Marco. I’ve listened to your podcast for a few years now. Thank you for sharing all the insights on the show. Exclamation mark, and you’re welcome. I currently live in the San Francisco Bay area. I own several out-of-state rental homes. My goal is to continue to scale up and get as many doors as possible. However, my Bay Area primary home principal interest tax insurance or PITI accounts for a big chunk of my DTI, which is my debt to income ratio and getting additional financing is becoming more difficult. What are some alternatives to getting financing to continue scaling? Thanks, Jason. Thanks for the question, Jason. So first thing I might do is check with a specialized loan officer. And what I mean by specialized is the stable of lenders and mortgage loan officers that we work with through Nora Real Estate investments because all they do are mortgage financing for investors.
These are all non-owner-occupied v mortgage loans. Now granted the majority of them are conventional financing, but the reason I suggest talking to them is because of their knowledge. They can look at your situation and size up your debts and income and give you some advice or recommendations on how to restructure what you’re doing. So you lower your debt to income ratio or DTI and it puts you in a position where you are better able to qualify for conventional financing. So that would be the starting point because the conventional financing is gonna be the best and cheapest financing that you can get. It’s always the starting point. You want to use that, especially on more expensive properties. But that’s your starting point as far as financing is concerned. Mortgage financing. The second thing I would do is talk to your tax advisor to see if there’s something that you are doing or not doing that is affecting your debt to income ratio that can be changed or improved because sometimes you can shuffle some things around legitimately not illegally, that improves your debt to income ratio and maybe even reduces your taxes.
So you need the right tax advisor, not just a simple tax preparer or accountant that doesn’t understand the finance side or creative side of this, but failing that non QM loans or non-qualified mortgage loans, which is predominantly what we offer through Nora Real estate funding. Here are loans that will allow you to acquire additional investment real estate, non-owner occupied real estate to infinity. There is no cap or limit to how many of those mortgages you can acquire. Now keep in mind that the terms are gonna be very similar to most conventional financing, like your 30 or fixed rate mortgages. However, the loan to value might be slightly lower, maybe 5% depending on your credit profile and credit score, the property and location of that property, and a few other factors like the debt service income ratio or debt service coverage ratio of the property. So there’s different variables.
There’s probably about five or six that will determine the rate, but the terms are pretty much similar. But again, you know, like I said, the rate is gonna be a little bit higher, but expect that. However, if you are out of other options and you’ve got 10 conventional loans and you can’t get any more conventional loans, this is basically where you go. Lastly, another way to improve your debt to income ratio is to increase your income. Now, I know it’s easier said than done for most people, but anything you could do to increase your income, all else being equal will increase your income and lower your debt to income ratio. So that’s gonna help you. And whether that’s a pay raise or if you’re in sales or on commission increasing your commissioned income, or whether you have a side business or side businesses or a side hustle of some kind and you’re generating income outside of your normal employment or profession, great.
You know, if you’re claiming that or showing that on your tax return, then that can be used towards your income and lower your debt to income ratio. So anything you can do to increase your income is gonna be helpful in more than one way. So that’s how I would approach it, Jason. Hopefully that helps.
All right, I think that covers it. I think I did six questions today. Appreciate you listening and I’ll do another one of these episodes here real soon. If you have another question about real estate investing or real estate in general or finance and you’d like me to try and tackle that on the show, simply go to passiverealestateinvesting.com and click on the Ask Marco link and just submit your question and I’ll do my best to get to it as soon as possible. Remember to subscribe to the show if you haven’t done so already, Share the show with your friends and family and other like-minded people because they can benefit from some of this content as well. Visit us on iTunes, leave us a rating and review. I appreciate you doing that. I read all of them and I thank you in advance. That is it for today. Thank you for listening. I will see you all on our next episode.
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