Hello, my friends. And welcome to another episode of Ask Marco and a round of rapid fire listener questions. I’ve got a couple of great ones here today, and I’m recording this from my hotel room. As I’m traveling from one city to another right now, I just came back from a great three-day mastermind event in Salt Lake City. And there was just a lot of great content that I could take away from that, both on the personal development side, as well as building the business and making it stronger, improving the culture, and being able to provide better value and service for everybody who A – listens to this podcast, B – works with us at Norada Real Estate Investments and C – invests in promissory notes through Norada Capital Management, which has been an incredible success over the last one to two years. So I want to thank everybody for your support, your trust, and your involvement.
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With that, let me get to a few listener questions here. I think this is one that many people think about and either don’t know or don’t ask. So this first question is from Josh and Josh writes in and he says, hi, Marco. I stumbled upon your podcast a few weeks ago and have immediately appreciated the clarity you provide about passive real estate investing. Thank you. Well, Josh, you’re welcome. So he’s goes on to say, as a newbie, one question I’ve wondered about is how someone avoids the significant capital gains taxes. If they decide to sell their properties. Once a person has reaped the long-term benefits of real estate appreciation. After many years of holding investment properties, this assumes someone is just done, wants the money out in cash form, and isn’t rolling sale proceeds into new properties via a 1031 exchange. I’m a long way out from having to think about this quote unquote problem, and perhaps would personally try to keep the properties in the family business after I’m done. But I’d appreciate hearing your thoughts on the topic if you have time. Thank you.
All right, Josh. Well, yes, I have time. I’m making the time and I’m going to give you an answer. So first and foremost, my comment is why ever sell your properties? Personally, I don’t think there is ever a need or a time to be selling any properties ever, unless you a have some sort of very tragic situation where you are in desperate need of cash and you have no other option. You cannot borrow other from banks or institutions or from family or friends. And you’re really just strapped meaning that your hands are tied behind your back and you have nowhere else to turn. Hopefully you’re never in that situation, but unless you actually have a really compelling need to sell or you’re in the path of a comment and you’re going to get destroyed by something coming out of the out of the cosmos, I don’t seem to see a reason to ever sell property unless you are moving your equity to another better location for better upside potential, or just leveraging up and expanding your portfolio, which is the whole reason why you would use a tax deferred 1031 exchange.
So I’m not sure why you’re avoiding doing a 1031 as an idea or concept because it really is a great option to do a tax deferred exchange and roll your equity or your proceeds from one property or multiple properties into more or other properties. But ultimately if you have no reason to sell, you know, just keep them in your portfolio, keep them in your trust, keep them as part of your net worth and your assets, and then just put it in your will put it in your trust and pass it onto your, your kids or whoever. So, anyway, I just pose that question because I want you to think about, you know, why would you ever want to sell it like under what circumstances or reasons could that, or should that ever happen? So having said that, here’s my answer to your question. Here’s one way to actually keep the property, keep the assets, not have to give it up, sell it, pay any kind of closing costs or selling fees, and also be able to tap into that equity, to pull money out in the form of cash.
And that is simple. Just borrow against it. What you can do is you can put on a line of credit or HELOC a home equity line of credit and just have revolving credit much like a credit card. You just use it when you need it, as you need it at a very low interest rate. Number two is you can refinance the property, refinance the existing loan for a larger loan and be able to pull out some cash through a cash out refinance. And this is a tax-free event because you are borrowing against the property and it’s alone and you cannot tax alone. You cannot tax borrowed dollars. So that’s the second, second option. The third is similar to the second and that is simply this. If it’s tax-free or excuse me, mortgage-free and you don’t have financing on it. In other words, you own it free and clear, then just simply put a loan on it, putting a new small first mortgage.
It could be small, it could be large, whatever you need in terms of pulling out cash, but you can pull money out of your property in the form of cash relatively quickly through either a home equity line of credit or a refinance of the existing mortgage, or if it’s free and clear, just put a new first mortgage on there with, you know, a very low, historically low interest rate and just service that from the property. If it’s leased, you’re probably going to be able to cover that multiple times, especially if it was free and clear, but essentially you’re just letting the tenant pay your mortgage down over time. And then you can repay it anytime you want early. That’s not an issue. If you’ve got the extra capital or additional funds to pay off that mortgage in full, or maybe accelerate the payments and pay it down quickly, but you can pull money out from your properties.
The beautiful thing about doing this is one. You retain the property. Therefore you retain all the benefits and upside potential of keeping those assets, that property, and you still have access to capital and you can have that property service, the debt pay it down over time, even though you’ve borrowed the funds today, use them today, but it’s being paid down over time. Plus you have the added benefit of the inflation that is also eating away or eroding down the actual value of the financing on that property. So when you borrow against it, you can pull cash out, use that cash and still have 100% ownership in that property and retain it literally forever. So Josh, I hope that answers your question and hopefully other people are now thinking about how they can tap into the equity in their properties. And ideally that’s not for a vacation. It would be for investing in more property or other income-producing assets. All right, Joshua, I hope that helps.
Next question, Steve, Steve writes in, he says, hi, Marco. I recently closed on my 10th rental property. Congratulations! At the moment. I only have a commercial umbrella policy as asset protection, by the way, I have a comment, but I’m just going to keep reading here with the number of properties I own. Do you suggest an LLC? And if so, should I have one for each property or one general LLC encompassing all of them, if not an LLC, would a trust be more appropriate or should the umbrella policy suffice? I’m looking for something that is sufficient, but cost-effective for the number of properties I currently own. Thanks. Okay, Steve, what’s interesting about this question is I get this type of question often. I’m sure my team gets this type of question as well, quite often.
And I’m sure asset protection attorneys hear this often as well. First and foremost, my comment to your first sentence here about the commercial umbrella policy is asset protection. It is not asset protection, insurance policies like umbrella policies are there simply as insurance, nothing more. They do not provide asset protection. If you have an issue with the property at the property on the property, that’s when they kick in and their policy pays for damages or theft, loss, fire, whatever it might be. So never confuse asset protection with insurance, they are two separate things. So here’s the basic breakdown and I’ll lay it out this way. Llcs insurance, umbrella, insurance, and a trust. And this is not meant to be legal or financial advice or anything like that. But it’s a general concept that is used often with many asset protection attorneys and many investors all the time across the country.
Generally speaking, you want to hold title to your properties in an LLC. Now the question always comes up. Should I have one property per LLC, two properties per LLC? Or should I just put all my properties in one LLC? That’s a matter of choice. Generally speaking, if you ask an asset protection attorney, you want maximum protection, they would suggest that you have one LLC per property. It is not an expensive thing. Yes, you do need to maintain a separate set of books, which is not that difficult. There’s not a lot of transactions going through that, LLC. It’s just a title holding LLC. It’s not an operating business, but generally speaking, you’ll want to have an LLC for one of your properties or more. Now, if you have, let’s say three properties in a particular city or state, you could get away with putting all three of those properties in that one, LLC, in that state.
And that’s okay. Just understand the added risk or exposure that you have should worst case scenario. You have a lawsuit or something come up where you have an issue with a property that’s in a particular LLC. And now you have the potential liability or exposure of those other two properties within that same LLC being attached to some sort of judgment or lawsuit that came out of the first property. And this is the whole reason or argument for having a separate LLC for each and every property. Is it overkill? Possibly many would argue. It is overkill. But the question is, is how much exposure do you want to have for myself? I think that you have to look at this in terms of how much equity do you have in those properties within that single LLC. If you’ve got no equity, then you really have no exposure to loss because nobody’s going to come after those other properties.
If you have no equity, however, if you have three properties that are all free and clear in that one, LLC, you have a lot of equity in there. And so there is more motivation to just go after or try to go after the equity that is within that, LLC, if you do have a judgment against you from something that happened at one particular property, keep in mind, everything I’m just describing is very far-fetched. I mean, yes, there are lawsuits in this country, sometimes many and too many of them, but the reality is is that something could happen, but it’s not very common and somewhat rare. So, but you always want to be protected. So I’m not suggesting that you don’t have protection or an LLC, but let me bottom line, the LLC thing, you do want to have one or more LLC holding title to your properties on a per state basis.
So if you have three properties in Missouri, then you’ll need one or more, but at least one LLC holding title those properties. If you’ve got another three properties in Florida, you’ll want at least one LLC holding title to those properties or more so a state-by-state basis to take that all one step further, it would be wise to have those title holding LLCs that you have in the different states being owned or held by one parent top level holding company, which is also an LLC. And that is actually what you have ownership in, not the title, holding LLCs, that whole title to this properties. Think of it as a, as just a two tier pyramid with the title, but with the holding company at the top. And then the title holding LLC is underneath it clustered in each and every state that you have properties in.
We have asset protection attorneys that we can introduce you to and refer you to. If this is something you need help with, and it doesn’t hurt to have asset protection, attorney holding your hand and helping you with this. All right, let’s continue with your question here. So we talked about LLCs insurance. You definitely want insurance on each of your properties, call it hazard insurance or property insurance, but you do want coverage in terms of damages, fire flood. If that’s the case liability, those are all in that one policy that you get from your insurance company that is insuring your rental portfolio or your properties. So you don’t want to not have insurance. You always want to have insurance. And you also want that insurance to include one to $2 million or more, but one to $2 million of liability protection. Now, again, I will repeat that the insurance is not asset protection.
That is just protecting your property from damage theft, fire, water, et cetera, as well as it includes liability coverage should something happen and you are in a lawsuit and you need to have coverage for any claims from the other party. That’s the liability portion of that. Now those policies normally only go up to one to $2 million. I don’t know if I’ve seen many that are more than 2 million. They seem to cap out there, but there probably is higher three or $4 million policies. I’m not sure you’d have to talk to an insurance broker about that. And again, we can introduce you to some people, but if you want to backstop that, that’s where your umbrella policy comes in. The one that you have now. So when your liability insurance runs out, that’s when your umbrella policy kicks in. It’s like a backstop. It will fill in anything.
That’s more than that. If it ever reaches that point, that’s pretty rare, but that’s the extra coverage that you have. And that’s very inexpensive. So think of the LLCs as your asset protection, that first line of defense, along with your insurance, the umbrella policy, just backstops all of that. And then you can take that whole big picture and you can put that in a trust. And the trust is something is an entity that holds all your assets and everything that you own and control and puts it into a nice package. And you can create rules, how that trust is administered. Should something happen to you where it goes to your family, your heirs, whomever. So that’s just a quick overview of how this all looks and how you package it together. Again, you’ll want an attorney to structure a lot of this, especially the trust.
That’s not something I think you should do on your own, but the asset protection piece. And this is my point comes primarily from the LLCs, the separation of holding title in separate entities, not in your name. So in addition to that, of course you have your insurance policies and that just helps with the insurance side of everything. So, Steve, I hope that is clear. I hope that made sense. If you have any questions about that, just reach out to my team. And again, we can put you in touch with the right people that will help you with all this.
And today’s last question is from Daniel. He says, hello, Marco. I own a single family home. And also I am in the process of buying a second house to use as a primary residence. After looking into the options of what to do with the single family home and how the selling price has skyrocketed. I wanted to collect your thoughts on the golden question to rent or to sell. I still have a mortgage of $220,000, but the selling price can easily go between 390 to $450,000, which will leave me with about $200,000 in profit. I was thinking that maybe I should sell and buy a smaller, but new single family house for $200,000, rent it for about 1500 and be free of debt, or should I not sell and only rent for 2200 a month, which after all considerations will leave me around $500, monthly profit after mortgage maintenance, vacancy, HOA, et cetera. I appreciate your comments. I’ve been listening to your podcast every week and it has helped me to shape my investor mentality and see my family’s future from a different perspective. Thanks. You’re very welcome, Daniel. Okay. So I’m short on some facts here to be able to give you a good answer.
I don’t know where the property is located, what the market is like, what it’s doing. If you’re renting it for 2200 a month, right now, you’re pretty much in line with the 1% rent to value ratio, because it looks like your cost basis. Might’ve been around 220 to 250,000. If your mortgage is 220,000 right now, so you are doing okay and you have good cash flow of 500 a month, assuming it’s in a growing market, you’ll probably continue to see some appreciation, but reasonable appreciation over the long-term and that’s all well and fine. But the big issue I have with the scenario is the amount of equity you have there. It’s great. I mean, you want to have that, keep it, let it grow. But the question is, is what else can you do with it? Can you put this to better use? So if you’re not opposed, I don’t know, even though your age, so I don’t know what your investment time horizon is, but if you still have time and you want to continue to invest and grow your real estate portfolio and build on that, then I would suggest not being averse to having financing.
In other words, good debt financing, or leverage to increase the size of your portfolio as quickly as you can. And a great way to do that is to tap into the equity that you have in this one property. So this is just an idea and I suggest you actually speak with one of our investment counselors to drill down into the details of this and how it would work. Because right now I don’t have enough information, but I’ll just give you a general answer because this is one scenario. But if you’re sitting on a property that is cashflow positive right now, and you have equity in it, you could keep it that’s one option. So, you know, you have one property. It’s the original property you had as your principal residence, or if you’re getting another principal residence in you’re moving and now this becomes a rental.
The question is, do I keep it and own one rental? Or do I tap into some of that equity by doing a refinance? I was talking about this actually earlier and use that equity that you pull out again tax-free and use that as down payment capital to acquire one or two or three more properties elsewhere, or a third option is you sell this property using a 1031 exchange. And again, we need to pencil out the numbers. This is what you need to do and think about, but what if you could take that $200,000 in net proceeds from the sale of that property and use that as down payment capital to acquire a larger portfolio of properties. Again, tax-free because you’re doing this through a 1031 exchange. Now you can take that $200,000 and you can turn that into hypothetically anywhere from four to eight new properties.
Now, all of a sudden you’ve gone from one to worst case scenario, four properties, but possibly an additional eight properties or a total of another eight properties. And now those are all generating cashflow. Now let’s just take a, what I’ll call a worst case scenario. Let’s just say fully leveraged, meaning that you’ve got a 20 or 25% down payment on each of those, let’s call them eight properties. You are generating about $250 per month in net net cashflow. It’ll probably be higher than that, but let’s just kind of take this as a worst case scenario. Well, eight properties generating $250 per month. Cashflow is what, $2,000 a month. So I would say the $2,000 per month in passive income, positive cashflow is better than the $500 per month. You’re getting right now from your existing property. That’s rented at $2,200 a month. So if in the latter situation, in the scenario I painted for you, you still have that equity, but now you have it diversified.
If you will, across those eight properties that could be geographically diversified across two different markets, providing you a little bit more diversification, geographically speaking, and you’ve increased your monthly from 500 to about 2000 or more. So you’ve essentially three X, your monthly cashflow, and you didn’t pay tax in doing this. So it was really just a way to expand and grow your portfolio. I see no reason not to do that again. I need some more information, but think about that. You know, you can stick with what you have. You can feel comfortable with having it debt free if you want it to be that way. But now you’re only at, I say only in air quotes only at one rental property, one investment property, plus your principal residence. But why not take that one and turn it into four or more, if you can, and just generate more passive income.
So food for thought. But again, you know, if you want to have that discussion, just reach out to one of my investment counselors here, fill out the form on our website at noradarealestate.com. And we will just get back to you usually within 12 hours. And have you set up with one of our investment counselors? All right, Daniel, I hope that was helpful. And again, I appreciate the question comments, and I’m glad you like to show that is it for today. If you have any questions about real estate, click the ask Marco button on our website at passive real estate, investing.com and remember to subscribe. If you’re a new listener to the show, we were getting a lot of new subscribers or listeners to the show. It seems like every week now, which is great. The show has been growing rapidly, even though I’m only doing one episode a week. And usually those episodes are less than 30 minutes. Share the show with your friends, family, and other like-minded people that you know, there’s no reason why they can’t educate themselves as well on real estate and other things related to financing. Thank you for listening. I will see you all on our next episode.
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