Welcome to another episode of Ask Marco. So today I’m going to try something just a little different. I get a lot of questions that I can’t possibly keep up with people who are actually sending me, Ask Marco questions from the passive real estate investing.com website. So I thought this time around rather than take one or two and go relatively deep into the answers of the questions I figured I’m going to pull out four or five and just give you more of a rapid-fire response to these questions. So I’m still going to answer the question and I’ll do my best to give as much detail as possible, but I’m not going to ramble on about it. I’m going to try to answer it a little more quickly and then move on to the next question. So that way I can cover more questions in the same amount of time, or maybe a shorter amount of time, but this way it just gives you a more broader cross-section of questions. So I’m just going to refer to this as a rapid-fire listener question episode.
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So the first question is from Justin, Justin writes in and he says, Hey Marco, I am a new investor who recently purchased my first rental property and recognize the benefits of buying hold rental real estate. I was just listening to your podcast on investing in promissory notes. I was wondering where you put promissory notes in terms of investments. If you had $50,000, why would you choose investing in a promissory note over buying another property? Well, Justin, good question. I never said I would put it in one or the other. It really comes down to this. It depends. And as I’ve talked about in a previous episode, it comes down to what you’re looking for. You see with promissory notes, they’re very one-dimensional. They have a consistent stream of income, usually from interest, unless the note is amortized where it’s paying you back principal and interest.
So if you’re investing in a promissory note, that’s great. It’s the most passive form of investment. And it doesn’t necessarily mean it’s a real estate based investment. A promissory note could be backed by a company, a corporation, virtually anything that’s an investment related. It could be part of a fund and there are dozens of different types of funds at the end of the day. It’s a lender and borrower agreement. So you agree to lend your money at a particular rate of return, which is usually a rate of interest that’s paid on a monthly, quarterly or annual basis. Sometimes it’s not paid at all until the maturity date where you have a balloon payment for the principal, plus the interest as it accrued. But you know, it’s just interesting income. It’s very straightforward. There’s nothing complex about it. It’s very passive. Real estate is everything we’ve been talking about and everything you probably know about investment real estate.
It has multiple ways to make money or make a return. It’s not just the cash flow, which gives you cash on cash returns, but it’s also the equity growth over time from the amortization, the loan plus the appreciation that you get from inflation price inflation over time. Plus you have tax benefits and you’re able to leverage you can’t really do that easily with promissory notes. It’s a hundred percent of your capital being put to work with investment real estate. You can put as little as 20% down control, a hundred percent of the asset have a hundred percent of the benefits. And so you have the benefit of leverage. So those are the differences. I like to say that they’re both fruits, but different kinds of fruits. So you’re comparing an Apple to an orange. They’re both good investments. They have a different role to fulfill promissory notes are really good for retirement accounts of any kind, whether it’s an IRA, a solo 401k, a Roth account, promissory notes are ideal for that real estate is fine, but it’s not really the best place for it.
So that’s my quick answer. Just into your question about where do you invest $50,000 between a promissory note or another investment property. It just depends on what you want and where you are in life and what you want out of your investments, what your investment goals are. Okay.
The next question is from a Anand and he writes in says, hi, Marco. I listened to your podcast regularly. And it’s very valuable. Thank you for doing it. Well, you’re welcome. My question is when is the right time to create an LLC for investment properties? His second question is, is an LLC worth it for two to three properties or that risk can be minimized with umbrella insurance? Okay. And then to your first question, the right time is as soon as possible, there are a lot of investors who buy and invest in real estate only to form an LLC years down the road to transfer the title out of their name and into the LLC.
And the main reason, the primary reason an investor does this, whether it’s an LLC or other entity that’s advised by your asset protection attorney or whoever your trusted advisor is. And it’s typically an LLC is really just to get the title out of your name and into that entity. So that way you don’t actually technically own the property. Now, yes, you are a member of the LLC. You may own the LLC or you and some partners own the LLC, but at the end of the day, technically speaking, the property is titled in the name of that entity in your case, an LLC. So that means that should, in the unlikely case, a lawsuit or legal situation came to be, the property is not in your name. So a lawsuit that is against you will not likely affect you or the property. In other words, you’re basically creating separation between you and your assets.
Your assets should be held in their own separate entities that have their own liability protection and insurance and all that other good stuff. So if you look at what the wealthy people do, they really don’t own anything. They control everything, but they don’t own anything. So they hold everything in LLCs, in trusts. And in other protective vehicles now to your second question, is the LLC worth it for two or three properties? Yes. It doesn’t matter whether you have one 10 or 100 properties. You want to hold your assets in specific title, holding equity, holding asset, holding entities. And again, this is for mostly asset protection purposes, but it also gives you in many cases, tax efficiencies, there are more things and more creative things that you can do by holding your assets, especially if they produce income. They’re not just equity-based, but if they produce income, you know, you’re going to start asking the question, well, how do I defer or minimize or eliminate the tax implications of that income?
Well, you have more flexibility and more options if you hold your assets, income-producing assets in these various entities. But your question is, can you minimize the risk with umbrella insurance? Well, that’s a different thing. Insurance has to cover perils and whatnot that are covered by various insurance. Now, umbrella insurance is just a backstop. It picks up where your existing insurance coverages leave off, whether it be hazard or property insurance or liability insurance, whatever the case is. So, yes, it’s very smart to have umbrella insurance. So you want your properties. You want to have them in title, holding entities. You want to have the various insurances in place, property insurance, hazard, insurance, and other insurances like flood insurance or whatever. It may be rental loss, insurance, et cetera. And then you put an umbrella over that, which is the umbrella insurance. And that umbrella insurance policy is what backstops the various other policy.
So in case you run out of coverage, your umbrella insurance should pick up where that leaves off. So it gives you an extra inexpensive layer of insurance coverage. Okay. Anand, I hope I answered that question and I’m just going to continue going through these one after another. So thank you for submitting the question. I’m glad you liked the podcast.
Okay. Next question is from Martin. He says, hi Marco. Currently, I’m learning about creative financing as a real estate investor. I’m seeing a lot of people going about real estate investing this way since they don’t want to use their own money. Since there’s a couple of ways on how to finance the remaining 20% down, what would you recommend as a best approach to look for possible investors for an introvert if seller financing is not an option. As they say, your network is your net worth, which is the case seems very true.
Thank you for all your valuable content, Martin, Martin, I try and understand your question. It sounds like you’re looking for ways to finance the down payment, the 20%. So you would have regular bank financing at the 80% banker institutional lending, but the other 20% is done creatively. Well, I will tell you that it is not impossible. It is doable. I’m sure there’s a lot of people who do that. It is not as easy to do today as it was prior to 2008, when a lot of the financing rules and regulations changed because of the housing market collapse, which led to the great recession that lasted through to 2009, 10. So prior to that, and I was doing some of this myself, I was able to negotiate with the seller ways to have a credit back at the close, whether it was on the settlement statement or what they call the closing disclosure back then actually I may have those backwards, but regardless, they’re the same thing.
The closing disclosure or the settlement statement, there would be a credit back often that was a maintenance and repair credit or some sort of credit that the lender would allow because it had to do with improving the property. It wasn’t just a, you know, a down payment credit that wouldn’t fly because the lenders want to know that you have as much skin in the game as possible. They want to land, but they want to have a relatively secure position. So back then it was somewhat easier fact, I would argue a lot easier. The other thing that we were able to do back then is negotiate an agreement with the seller outside of the close, which was probably not above board. I’m not even sure if it was legal or not, but I know a lot of people used to do this and it was just fairly common practice, but they would negotiate some sort of credit back at the close.
Now you could do this with commercial loans without a problem. It’s just, it’s not kosher if you are using conventional financing, but essentially what it meant is that you would just move forward with the transaction, with whatever down payment. And then your agreement side agreement with the sellers that you would get some cash back after the close of escrow, directly from the seller. It had nothing to do with the title company or the escrow company. It was just, again, a side agreement. Obviously there’s a level of trust there because you have to trust the seller would be willing to do that. And they’re not just going to run off and say, well, you know, uh, sorry, you know, I didn’t agree to do that. You can’t really do that today. It’s much harder. I mean, if there were probably special circumstances and especially if you’re using a commercial loan of some kind or a portfolio loan, but if you’re using regular financing, like conventional financing, it is against the rules and regulations and probably against the law.
You know, not disclosing that stuff because it goes against the terms of that loan. But if you can find motivated sellers or distressed sellers that are willing to negotiate and do something with you, maybe you can negotiate seller financing directly with them and keep the existing loan in place and they can carry the rest of the down payment or in this case, the rest of the purchase price, or most of it now they become the bank. They get monthly payments from you, which is great for them because it can avoid getting taxed on the gains from the sale of that property. Not all sellers will do this. They have to be in the right situation for that to be something they would want to do in the first place. So this is not a direct answer to your question and probably not telling you what you want to hear, but what you should do is look up creative financing, either online or Amazon.
There are many books written on the subject. These are known as lease options, a lease with an option to buy wraparound mortgages contracts for deed. Those are three forms or three phrases you want to research and learn about because those are seller financing and creative ways to purchase with creative financing, seller financing in this case. All right, Martin, I hope that helps.
Okay. The next question is from Alex. He says, hi Marco. I’ve been listening and learning all I can from your podcast. It’s by far the best one I’ve come across. I’ve been on disability since late 2018. And I’m looking at using my disability to purchase an investment property while I still have the income stream. I’ve been turned down by the VA after they claimed to need a letter from the insurance company, stating that I would be on disability for the next three years and have guaranteed income.
That was obviously never going to happen. I have all the other requirements above 800 credit score, very low debt to income, and some cash savings. I was trying to keep the down payment at zero to take advantage of the VA loan options. Can you recommend any loan options that are similar or is convention with 20%? My only real way to move forward. I guess you’re asking if 20% down is the only real way to move forward. Thank you. And I’ll continue to keep listening. Well, thank you Alex, for the question. Glad you liked the show. Sorry to hear about your situation. I don’t know the details, but I hope all is well. Yeah, this is a bit of a tough situation. I actually did check with one of my mortgage lenders and they basically confirmed what you’re saying here, that you do need to have the ability to continue with that income for the next three years, how you show or prove that I’m not exactly sure, but you have everything else you need.
So you’ve got great credit, low debt to income, you know, some savings, which is good cause they love seeing reserves. I don’t know how you can prove or show that you have a three-year plus runway with that disability income. But if you can, I think you check a big box of the requirements for this. You may not be able to find financing at 0% down. That’s extremely tough to find today. Of course, you know, aside from VA loan options. So my suggestion at this point is for you to touch base with one of my mortgage. Maybe what I’ll do is I’ll email you and I’ll connect you with Erin and you can, uh, pass this by him. He can tell you what your options are. Hopefully, he can make something work for you. He is pretty creative, so he will be able to navigate any choppy waters to make this work.
If it’s possible. Of course, you know, he’s not going to break any rules, but he can certainly bend them. So that will help you. And his goal is to get you financed. So I hope that helps Alex and good luck with your situation. I had a few other questions lined up here, but I am going to hold off until the next episode because I am now at the 17-minute mark. So I appreciate you all listening. And if you have any questions, submit those at passiverealestateinvesting.com, just go to the Ask Marco click link button, whatever it might be. Remember to subscribe to the show, help us share this with other like-minded people. Thank you for listening. And I will see you all on our next episode.
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