Hello, my friends. And welcome to another episode of Ask Marco where we’re going to cover some Rapid Fire Listener Questions. So I picked about four questions for today, and I wanted to mix them up a little bit. So these are going to be hopefully a little different than some of the past episodes.
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And let’s start with a question from Megan and she writes in and says, hi Marco, I am a new listener and I love your podcast. Well, thank you. Thank you for sharing your knowledge and expertise. I have a question about how to change an owner-occupied property into an investment property. I bought a duplex this year with one side, rented out and with the other side owner-occupied, I was single at the time since then I got married. Congratulations, Megan!
My now husband and I considered selling his place and living in the duplex together. But now we are wondering if it makes more sense to keep both properties. However, as I understand it, I am obligated to reside in the duplex for at least one year, as I bought the home with the intention to owner occupy and was able to pay a lower down payment as a result. Do you have experience with this? I am legally bound to reside in one side of the duplex for the next year, or is there a way to change this property into an investment and rent out both units? Very interesting question, Megan and a good one, by the way. I haven’t seen this come up for a long time and I just want to say congratulations on getting married and everything you’re doing. I think it’s fantastic. And the fact that you’re thinking about keeping both properties instead of either, or is very positive because it’s always better to have a larger portfolio and create wealth through the growth and equity of more than one property than just one property.
So this is why having a larger portfolio and mark multiple properties is such a powerful thing. So you’re thinking about this the right way. And so I’m happy to see that. Now this is an interesting question. So I’m not an attorney. I’m not giving you legal advice or financial advice or anything like that. But I have seen this come up a lot in years past where people would purchase a property. And this was especially true before, you know, the housing crash of 2006, 07′. And you know, the great recession that followed that in 2008, there were a lot of people who would purchase properties, you know, with a owner-occupied home loan to get the lower interest rates. And their intention really was not to live in the property. They were just trying to get a better loan and then rent the property thereafter. This still goes on.
The reality is, is that the lenders typically don’t check. And if they do, it’s usually shortly thereafter, often within the first two or three months, they just verify that you’re still in the residence, how they do that. I’m not sure they probably send letters to the residents. They may check whatever they can in public records. And that could be utilities. The thing is, is when you sign mortgage loan documents, you don’t want to lie. You don’t want to be fraudulent, but the key word in all of this is intention. When you sign the loan documents, you are saying that I intend, or I am getting this loan with the intention of living in the property as my residence or my principle residence. And that may be very much true at the time that you purchase the property and sign the loan documents. However, I know things happen in life.
People get job transfers or there may be a death in the family or health issues or whatever the case may be. And people have to, you know, move or downsize or whatever the case is. So at that point, your plans change. Therefore, your tensions were one thing at one time, and now those intentions go out the window. So it’s hard to argue that your intentions weren’t something other than what they may have been at the time. So your intention may have been to live in it. And that’s what you truly wanted to do for a period of whatever, six months, a year or more, but as time goes on, your intentions may change. And so all I’m saying is that if you did move out of that property and rent the other side of your duplex before the one year is up, you probably a won’t get caught as long as you’re making the monthly mortgage payments on time, and you’re not late or in a rears or have any late fees.
So if you want to be real honest and above board about at all, just contact the lender, notify them, send them an official letter and let them know that you got married. Things have changed. You intend to keep the property and you will continue to pay the mortgage on time as promised that’s the above board way to do it the other way to do it again. This is what I know has been done many, many times by many people over years across the country, they essentially just don’t tell the lender anything. It’s easier to ask for forgiveness than ask for permission as they say. So with that in mind, you could rent the other side, just continue making the payment, make sure you have it set up on auto pay and that you’re current on your insurance, property taxes and mortgage payments. And the lender just wants to get paid on time every month.
That’s what they want at the end of the day. So if you intend to do something different, they probably won’t know, and they’ll be happy that they’re still getting paid, you know, every year thereafter. Anyway, that’s all I really have to say about that. I think it’s a good idea to keep the properties and keep building your portfolio. So not about idea now that you’re married to move into your own principle residence and just keep the duplex as a rental. All right, Megan, if you have any other questions about that just out to me or my team, but I think that pretty much covers it.
Next question comes from Jim. He says, hello, Marco, thanks for taking my question. I am a state licensed general contractor in residential and commercial construction. I was approached by a friend who wants to invest personal money with me. He would put up the money and I would donate the time and expertise and would split profit 50, 50. He further stated that he could get other quote unquote silent investors to invest for larger deals. My question is, if we were to guarantee two silent investors, a 10% return or whatever the percentage is on their investment is the guaranteed 10% annualized or is the 10% of the amount invested paid, regardless of how long the project takes. For example, one invests a hundred thousand dollars and the project takes six months. What he or she get the entire 10% or $10,000, or would they get $5,000, which is $5,000 on a 10% annualized basis. I’m using these figures for easy math. Thanks again. Thanks for the question, Jim. Really the bottom line here is it depends on the deal. I assume you’re talking about a real estate project of some kind.
I don’t know if you’re going to be able to generate 10% returns in a 10 year period. It really just comes down to what the project is, but what you have here using your example is a situation where it depends on how you structure it. So if you’re bringing in outside investors and you and your partner are the general partners, you’re bringing in limited partners and essentially what you’ve created is syndication. So you’re going to have to have paperwork for this. You’re going to have to probably file if these are not friends and family, but you’re actually bringing in other people, other investors that are truly arms length, you’re going to have to file something with the SEC under regulation D it would be a 506 type of filing, like a 506 B or C. And so now you’re really in the investment game as a syndicator, raising private money and capital from investors, and you are responsible for that.
You have a fiduciary duty, et cetera, et cetera. So really you’re creating a business. It’s not just an investment anymore. And to your question about the rates of return, and it comes down to the deal. There are many, many ways an infinite number of ways to structure the deal. And so if this is a short-term flip and you’re expecting to make, you know, 10 or 20% return in a six month period, or even in a one-year period, it’s really just between you and your partner, how you want to structure it and what you want to offer investors. It has to be lucrative and attractive enough to the outside investors or the silent investors for them to want to invest in the deal with you. And that’s just one part of the equation, by the way, your reputation and your experience are obviously going to play into it, how good the deal is, the location, the terms, you know, there’s just a number of factors and variables here, but the rate of return is obviously one important factor.
And you need to assess if that’s lucrative enough for both you and your partner, putting in the time in that you’re going to be putting in as well as what you’re offering someone else. So it’s hard to answer this question in the sense that, you know, we’re talking about hypotheticals and just round numbers and examples, but if you are creating a syndication, you know, you want to keep in mind that there are a couple of basic ways to structure it. There are a lot of books out there on how to create a syndication, how to raise capital and do deals like this. But you know what you’ll generally see out, there is a straight split syndication where you might keep 20% of the deal and give up 80% that are paid out to the investors. And so when it comes to the cashflow, you and your partner would basically share in that 20%.
And then the other 80% of that cashflow goes straight out to the investors on a quarterly basis, or however you structure the payouts. And then when you sell the property down the road, three, five years down the road, maybe longer 20% of the net proceeds are shared between the general partners, which is you and your partner there. And an 80% of the profits from that sale, go out to the other investors, an alternative syndication structure out there as the waterfall structure, where you provide your investors a preferred return. This is essentially the quote unquote guaranteed return you’re talking about. So they might get the first 8% of the cashflow and anything above that will be split. However you agree to split that it could be 70, 30, 50, 50 or you could have multiple tiers in that waterfall where they get the first 8% of any profits made.
And then the next, let’s say 8 to 12% is split in some way, like 70, 30, 70% to the investors. And you keep 30% between you and your partners. And then anything above that is split 50 50. So there are many different ways to slice and dice this. So that’s 80, 20 or 70 30 split model comes up a lot and keep in mind too, that the more experienced and seasoned you are the higher, the percentage you can keep, whether on the cashflow or the proceeds from the sale. So if you’ve done a lot of deals and you’re very successful, then it’s not unreasonable to structure it where you’re getting 30 or 35% of the deal versus 20% when you first starting out. So a bit of a long-winded answer to your question, but again, the answer is, it depends, and you really can’t guarantee any type of return.
You can guarantee a preferred return provided the profits are there, but just keep that in mind as well. My advice is just to educate yourself as much as you can, even if it’s just at a 30,000 foot level of raising capital and how syndications work. I think if you educate yourself on those two things, you’ll be far, far better off with what you’re planning to do. All right, Jim. Well, I hope that helps.
Next question, Leslie, are there any benefits to purchasing and managing turnkey rental properties through a limited liability company, as opposed to doing so through our personal finances, we do have an established LLC that we used for a different side business a few years ago. Sincerely, Leslie,
Leslie, the simple answer to this is there are many benefits to holding your assets, especially income producing real estate in a limited liability company or LLC you as a general rule, don’t want to hold title in your name or your family’s name. So you want to keep your personal finances separate. You will get financing in your name because you don’t have a choice when it comes to conventional financing. If you’re getting a loan, that’s a non QM loan or a portfolio loan like you can through our sister company here at Norada real estate funding, then you can do it in an LLC, right from the get-go at close. But the reason you want to hold your property separate from your name in an LLC, a limited liability company is primarily for the separation of ownership in that asset. So you don’t carry the liability as being the owner. So should something happen to somebody at the property and it ends up in a lawsuit or you get sued for whatever reason from somebody, regardless of whether it’s related to the property or not. You don’t have those assets in your name.
So therefore any equity that is exposed is not at risk or has the liability of being taken away from you or having a judgment attached to it. And then you lose a portion or maybe a great chunk of what you own at the current time. So the limited liability is just for separation and protection. When it comes to asset protection, it reduces your liability. That is the main reason. Also it will have its own set of books. So you will be keeping track of your accounting separately, and that can still flow to you. You know, each and every year in terms of distributions, if you want to take distributions, but it’s treated as its own separate entity with its own set of books. It’s a separate business, even though you are passively investing in real estate, but you talk to any asset protection attorney and they will always tell you to keep your assets separate from your name in one or more entities like LLCs.
And this is the way you do it. It’s a basic building block. And the annual cost of it is minimal. Think of that expense as the cost for insurance. Just look at it as another layer to your asset protection onion. And these are just some of the costs that you will incur for that protection. Okay. Hope that helps Leslie!
The fourth question here from Sindhu, Sindu says, hi, Marco. I really like your podcast. And it’s inspiring me to get into real estate. I’m in my early thirties and live in New Jersey. I didn’t buy any property so far as I wasn’t sure if I wanted to live here in the future or long-term however, I feel like I’m wasting time thinking about it. Where else to go to start investing. I need your advice to help me get started. If I, to get into real estate in New Jersey, I heard in one of your podcast episodes about New Jersey being a red flag also is this next six months, a good time to buy given the interest rate potential increasing, just trying to make up this email here.
Is there anything I’m missing by buying an investment property first and not a primary home? Appreciate your advice. Okay. Sindu well, you’ve got about three questions going here. Okay. So first of all, regarding New Jersey, well, regardless of the location, I think the sooner you get started investing in real estate, the better off you’re going to be. And the more you could invest in the more you could buy the larger the portfolio and the sooner you could do it, the better off you’re going to be. You want to buy intelligently imprudently. You want to buy in the right markets, the right neighborhoods with the right type of property. That’s my basic formula. It always has been for the longest time. And you know, you have a team to help you if you have your own team. Great. If you don’t have a team yet, certainly contact one of our investment counselors here because we’ve got everybody and everything that you would ever need from beginning to end to invest successfully and passively in investment real estate, around the country regarding your market, New Jersey.
Are we talking about New Jersey, the state? If so, that’s a pretty broad, broad market. If you’re talking about a specific location or city within the state of New Jersey, then the question is, is where, you know, where are we talking? Most places in New Jersey are very pricey and I’m not sure if the rent to price ratios are all that favorable for you as an investor to get the types of cash flows and cash on cash returns. So the point I am going to make here first and foremost is be market agnostic. It doesn’t matter where you live. I’ve said for almost 18 years now, live where you want invest, where it makes sense. And so if you want to live in New Jersey and stay there, great, but make sure that your market agnostic don’t be married to any particular market. You need to invest intelligently prudently, and most importantly, objectively.
And the only way to do that is to be marketing agnostic. You’re not married to your local market. It doesn’t have to be in your backyard. So if there are no areas or markets within the state of New Jersey, that makes you happy, you’re going to have start looking cross border in other states. And we can help you with that. I mean, we publish tons of information on our website, at least two articles on our blog every week about a particular market where we do a detailed market spotlight and go into some insights. And I’m actually even thinking about creating a subscription newsletter that highlights and tracks markets and monitors them. So if that’s something you’re interested in listening to this, you know, maybe let me know, just shoot me an email or just contact my team. But it’s something I’m toying with right now.
But anyway, there’s nothing wrong with New Jersey. Just, you have to make sure you’re in the right locations and the right suburbs and neighborhoods, you know, for the best returns. Now you have another question here. You wanted to know if the next six months is a good time to buy given interest rate, potentially increasing interest rates. Okay. So I don’t foresee mortgage rates going up much at all. If any, over the next six months, they’re going to gyrate a little bit and there’s obviously market forces and conditions that will play with that back and forth like a tug of war. But the reality is, is interest rates are not going to rise much at all. If any, over the next six months or 12 months, probably over the next two to three years, we’re going to start to see some increase, but I don’t have a crystal ball on this.
It’s, there’s just so many dynamics going on right now. And with all the easing going on with the federal reserve, it’s really hard for them to tighten up on their policy. But at some point they’re going to have to pull on the reins a little bit and not directly, but indirectly that’s probably going to increase mortgage rates. So is it a good time? Yes. I always say it’s always a good time to invest in real estate because it’s not about when it’s about where, so if you have the right location, then you’re going to find deals that make sense that will generate, you know, cashflow and a cash on cash return. And over time they will provide you the benefits of real estate, such as equity growth, the tax benefits, the leverage on your investment capital. And it’s a hard asset. It’s going to keep pace with inflation over time.
So it’s always a good time to invest in real estate. It’s about where not when, so don’t worry about the interest rates. I mean, there was a time back in the eighties when people were investing in real estate and interest rates were 17, 18%. We’re nowhere near that. So, you know, if we could have invested in real estate back then at those high rates, there’s no reason why you can’t do it now. And your last question here, is there anything I’m missing by buying an investment property first and not a primary home? Well, no, but if you’ve got investment capital and you’re debating whether you should put a down payment on a home or get yourself an investment property, I would consider the options of owning one or more investment properties, as soon as you can, again, in the right markets, right locations, right. Properties have the right professional management team, unless you choose to self-manage.
But you know, if you make a little bit of a sacrifice right now in terms of renting and not going straight into home ownership and maybe living as comfortably as you can, but not above your means, but below your means and just take that investment capital and put it towards one or more investment properties. You’re going to be far better off in five, 10 years from now. So, you know, it’s nice to be a home owner and say, yeah, I own this, but at the end of the day, I’d rather say, Hey, you know, I started building an investment portfolio of rental properties in different markets. And and look back, you know, 10 years from now, or even 15 years from now, just be proud of what I’ve built, the cashflows I’ve created and the equity that I’ve created that increases my net worth that now I can leverage and tap into as well to further invest.
So it really just comes down to what’s most important to you where people of get tripped up with this is the pride of ownership getting in the way of actually making the move to invest in build a portfolio. So don’t let ego or pride of ownership get in the way of making objective, prudent, rational investment decisions, because it will cost you, you know, there’s an opportunity cost in bypassing the investment stage and going straight to home ownership, you know, and getting a primary residence. You can pencil out the math and see what this is going to look like five, 10 years from now by owning one rental or one principal property. That’s your home versus investing in rental properties and keep going down that road, you know, just suck it up and pay rent for several years while you’re building a real estate portfolio.
I think this is a great thing for 20 some year olds to do in 30 some year olds. I mean, if you can get started in your teens and your twenties and not think about homeownership right away, people would be far better off. All right, Cindy. Well, I hope I answered your question. I appreciate you sending that in. So thank you for that.
And that is it for today. If you have a question about real estate investing or finance, just shoot it over to me, go to passiverealestateinvesting.com. Remember to subscribe if you haven’t done so already, remember you can download The Ultimate Guide to Passive Real Estate Investing. It’s a free download on our websites. It’s a great primer on investing in real estate. Share the show with your friends and family and other like-minded people. Visit us on iTunes. We greatly appreciate the reviews and the ratings that you give us. We’ve got well over 1005 star reviews on this show, and I’m humbled by that. So thank you for that. And thank you for listening. I will see you all on our next episode.
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