Sometimes, it can be unfortunate to find how so much focus is given on academic and professional education without having to recognize the importance of financial education. In our lives, not only do we live everyday pursuing our goals, but we also have to live a life full of financial matters. That is why as we have often seen, most still find themselves financially insecure and experiencing negative cash flow. And as we put it here, “Ignorance is expensive.” The good thing is we can always change that. Marco answers some of your real estate and other financial-related questions, touching on topics like investments, portfolios, financing, multifamily housing, funds, appraisals, and more! You’ll find yourself learning so much more and getting some insider tips on navigating your way to financial freedom.
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Negative Cash Flow, Multi-Family Housing and More
I’m back from Sandestin, Florida. I was there presenting to a group of professionals, mostly dentists and some doctors. We talked about investing and everything related to that. My main presentation there was about how to achieve extraordinary returns with real estate investing, which is exactly what we talk about all the time and what we do here. It was interesting to see. I was in a room of well-educated people who are fun, bright and great at what they do in their profession. It reminded me of the fact that our education system, our school system, the things that we’re exposed to focus on academic education and professional education.
There’s still such a lack of financial education, which is why these masterminds form all around the country. They come together in an effort to help one another, help each other and learn everything they can about investing. Whether it’s real estate, the stock market or alternative investments and asset protection, financing and the economy and where interest rates are going. These are things that I enjoy learning about. Maybe you don’t, maybe you have a partial interest and you learn what you can from books, from podcasts and whatnot. The more you learn, the more you earn, that’s the general saying. During that presentation that I did to this group, I asked the question early on in my presentation I said, “Finish the following sentence, ignorance is blank.” I paused for a moment and everybody said, “Bliss,” almost at the same time. No one answered the question properly, at least no one answered that question the way I wanted it answered, and the answer that I gave them was, ignorance is expensive.
You don’t know what you don’t know and what you don’t know is costing you money. It’s costing you the opportunity. It’s costing you time. When you understand an investment or an investment strategy, then you understand what to look for. You know the difference between a good investment and a bad investment or a great investment. Good is the enemy of great. You don’t want a good investment, you want a great investment. I like to say that ignorance is expensive, it’s not bliss. Bliss is sticking your head in the sand. Understanding that ignorance is expensive motivates me to learn more, to expand my knowledge, to read more books, to listen to more podcasts and audiobooks, to explore and experiment with new things.
Real Estate Portfolio
Someone was asking me some questions and I realized that I kept getting emails from people with questions. My Ask Marco questions, you can click Ask Marco! at the top of the website at PassiveRealEstateInvesting.com and submit your question. I answer almost every single one of those via email. You will get a response from me, maybe not right away but I will reply. However, I’d like to hand pick some of those. I’d like to do all of them but I’d like to hand pick some of those and cover them from time-to-time on the podcast here. This is another Ask Marco! episode and I’ve picked three or four questions here that span the gamut. The first question is from a gentleman named Thomas. He says, “I’m a young investor who is looking to begin building a real estate portfolio. I’ve started listening to your podcast every day on my daily commute to work. I enjoy the content and the podcast gets me excited to begin investing in turnkey properties. I was wondering what your recommended amount of capital is to get started in real estate to begin buying big great neighborhood properties in linear markets?”
It sounds like you have been listening to a lot of the episodes because of the way you’ve constructed that sentence talking about big, great neighborhoods in linear markets. It sounds like you understand the differences. The gist of the question is how much recommended capital? The range of properties that are sold in the Midwest and through the Southeast, which covers much the eighteen markets that we’re in have a price range of $80,000 to about $160,000. The median price of what is being purchased as a single-family detached home is right around $120,000 mark. I don’t know what your investment goals and criteria are, so I can’t put you in a box to give you a specific number, but I can make some assumptions and I can give you an example that will help you in doing your math. The math is pretty simple.
Let’s take a $100,000 property, conventional financing, which is the cheapest money it’s basically subsidized. It’s artificially low because it’s coming from two government-sponsored entities, Fannie Mae and Freddie Mac. That financing is available to you with a minimum of 20% down. They will lend you 80% of the purchase price and you come up with a 20% down payment. $100,000 property of 20% down, that’s $20,000. Let’s assume $2,000 to $2,500 in closing costs and let’s assume that you’re going to put a little on reserve at least in the beginning for your first few properties for a slush fund, a rainy-day fund or maintenance and repair fund. That’s $20,000 plus let’s call it $2,000 in closing costs, plus another $2,000 to $3,000 in reserves, which is good enough puts you right around the $25,000 mark per property. If you’ve got that in savings or in other accounts or in paper assets, you’re well on your way.
Going back to your other question here, big, great neighborhood properties. In the markets that we’re in, typically those are going to be in $100,000 to $130,000 price range. When you get into the $130,000 $150,000 plus, you’re typically an A or A-minus type neighborhoods. This is market specific, so let’s not get hung up on that. The bottom line is this, as a rule of thumb, $25,000 plus or minus is enough to get you that next property. Per property, per single-family residential detached home $25,000, $23,000 is what you need. If you have more than that, great. Some people have hundreds of thousands of dollars. We’ve worked with clients who literally have $750,000 plus and we have clients who have accumulated their first $20,000, $25,000. They’re getting started and there’s quite a wide range there. The point is to get started if you haven’t. If you’ve got the momentum and you’re building a portfolio, it can become addictive. Keep building that portfolio. My number one rule of successful real estate investing is to keep learning and keep educating yourself.
I’m not sure if I’ve completely answered the question, but that is where I would begin as a young investor. I started when I was eighteen and it was a townhome. It was the only thing I could afford, but I could qualify for financing. It was about $40,000 way back when and my biggest regret was selling that property. I held it for a number of years, it appreciated. I had a fair amount of equity in it but I was very short-sighted. The dumb thing I did was sell that property and that’s something that you shouldn’t do, hang onto it. If you’re wanting to sell it, selling it is not the way to go. You should do a tax-deferred exchange and leverage out into more property.
Renting Out Home
The next question is from Erin. She says, “My husband’s mother passed away and left her home to her four children. We are thinking of buying the siblings out and renting out the home. A great Location, one block from the beach. The rent income would leave us between $500 and $600 short each month, meaning it would not cover the mortgage and insurance, etc. Is this something we should seriously consider or walk away from as an investment?” If you’ve inherited this home, you and the others, this is pretty simple. If you’ve got negative cashflow in the $500 to $600 range per month and that probably doesn’t even include budgeting for vacancy maintenance and repairs. If that’s the case, you’ve got a very upside-down property.
Upside-down in the sense of cashflow, not necessarily equity. I don’t know what the equity in that property is, but the fact that you’re willing to buy out the other siblings tells me that there’s probably equity there. My suggestion, I’m not telling you what to do, I’m telling you what I would do. I would see if they would buy you out. I would take that equity and invest it into cashflow positive investments, cashflow positive real estate. If this is upside-down, I don’t see what the motivating factor is to keep this. If there’s some sentimental value that’s all well and fine, but I wouldn’t mix emotion with investing. With investing you want to be objective and keep emotion completely out of it because if you mix emotion with logic you’re going to make bad decisions. I don’t know what the rest of the situation is here, but basing this on the cashflow which is quite negative, I would sell the property with your other three siblings or have them buy you out, your quarter of the fair market value or whatever that share is in the equity and take that equity and turn it into one or more properties that will produce positive cashflow. That one’s simple. I don’t think I’m missing anything there. Hopefully, that’s helpful.
Multifamily Housing
The next question is within the context of some other stuff. In an email it says, “You don’t talk a lot about multifamily housing, duplexes, triplexes, quadplexes. You seem not to have a lot of inventory of that type. What’s the rationale for not having many of these? Price point for standard buyer, lack of value-add opportunities?” A great observation and a good question. The fact of the matter is that duplexes, triplexes, and quadplexes, as you go up in size, they become smaller and smaller in quantity. It is hard enough to get single-family detached homes, at least with good quality, what I’ll refer to as turnkey rental properties in good neighborhoods. Those are single families which are by far the most abundant product type or property type in the country. They’re very common. They’re pretty much everywhere.
As you get into duplexes, triplexes and quadplexes and even larger, it’s like going up a pyramid. It becomes smaller and smaller or fewer and fewer in size and in quantity. It’s not that we don’t want duplexes, triplexes and fourplexes or quadplexes. We do. In fact, when we have them, they sell very quickly. Investors, not all but many are very interested in that type of multi-unit product. The problem is that they’re hard to find, especially in the markets that we operate in and in turnkey conditions through our relationships, our boots on the ground. We do get them from time-to-time and when we get them often they move very quickly.
If you are working with one of our investment counselors, my suggestion is to let them know that you do have an interest in a duplex, triplex or quadplex. When we know they’re coming down the pipe and they’re coming into our pipeline, we can let you know about them before they go up on the website. The reality is that we have a lot of property on our website, but not all of the properties that are coming down the pipeline make it on the website. When we work with clients, they have specific criteria and we can earmark those properties before they even hit the site. We are onboarding very soon with some new construction duplexes in Florida. Keep an eye out for that and we still have, although there is a short, maybe it’s not even a waiting list, but there’s a reservation list in a six-month build time on new construction fourplexes and those are in Houston and Salt Lake City and in Idaho.
We still have those available, not in great supply but we still have fourplexes and duplexes come and go. I’m looking to ramp up the number of new construction duplexes that are coming down the pipe. It has nothing to do with price point. It has nothing to do with value-add opportunities. Here’s a little clue. The fact that these duplexes are new construction and the fourplexes are new construction and we’ve been selling those for a few years, also points out the fact that they are not abundant, they are fairly rare. They’re hard to find.
If you go into some sketchier neighborhoods, what I’ll call your C, C-minus and hopefully, you don’t look at any D class neighborhoods, but when you get into those types of neighborhoods, you will start to find more multi-unit type of properties. However, many of you including myself, are not too fond of having a customer in that type of demographic. The lower income, it has nothing to do with the person, but we find that they are typically more transient, less stable financially, change jobs often and sometimes when they leave your property, they don’t leave it clean. Often, there’s a lot of wear and tear and sometimes damage. Personally, that’s not my favorite. I’d like to stick to the B, B-plus, A-minus type neighborhoods. At least that’s the middle of the bell curve for me. These multi-unit properties are usually new construction and the reason for that is because anything else is hard to find and unless it’s being built, you’re not going to get your hands on it.
Keeping Funds
The next question is from Jake. He said, “While I am saving up funds for my next rental property purchase, what should I do with those funds? Should I leave them in the bank? Put them in the money market accounts, index funds, etc.? I was thinking of investing the funds while saving up for another down payment to possibly help grow the fund’s a bit, but not sure if this is a good idea.” It doesn’t matter where you keep it, keep it in a place where you’re not going to spend it, blow it on a doodad or something that’s a consumer item. If you’re saving and you’re on a fast track to save as much as you can, as fast as you can, building that top line in your income streams so you can put that aside and increase your deployable capital, your investment capital as quickly as possible, put it somewhere where you know it’s going to be safe and secure.
If you’re going to be saving the investment capital, that down payment in a short period of time, one, three, six months, I don’t think it’s going to make a lot of difference where you put it because the rate of return, in other words, the interest being paid or the yield on money market or index funds is nominal. At best you’re going to be able to keep up with inflation because you’re getting 4% maybe 5%, 6%, if you can get that, great, get it. In a savings account, you’re probably going to get 1% or less money market accounts and index funds are pretty nominal. It could be anywhere from 2%, 3%, 5%, 6%. Put it somewhere safe and focus on the accumulation.
I’d like to think of going broke twice a year. Save as much as you can and use that capital to deploy into an investment property. Save as much as you can, create a chunk of cash, deploy that into assets that generate cashflow. At that point, you’re essentially “broke.” That doesn’t mean that you’re living on scraps, but you have all your money deployed in the right investments, assets that create cashflow. Keep that in mind. You want to build up your investible cash as soon as possible and then put it into assets that generate income.
Someone writes in and says, “I’ve listened to other podcasts where they highlighted the difference between market value versus the appraised value of turnkey homes. They suggest that market value is the value where we should care about because that’s the price the market will bear. Although there is truth in this statement, they failed to mention the importance of appraisals for back-end refinances and cashflow loans. Do you believe homes should sell for market or appraised values or a combination of both?” The truth is that those are one and the same. An appraisal is supposed to be a document by a professional who looks at market comparables to give you what that market value is. They’re supposed to be telling you what the market is going to bear. They’re looking at comps which are historic numbers, but it could have been yesterday and the day before and the day before that and it’s what has been selling in the market. Don’t get these things confused.
Market value and appraised value are the same things. The appraised value is what the appraisal will show as the fair market value. I’m not sure where you’re hearing this or what that means. You said that the importance of this is for backend refinances and cash out loans. Maybe what you’re thinking here is that you are acquiring something all cash and you’re paying what you believe to be market value and that’s one number and that number might be different than what that property will appraise for. The thing is it’s worth what it’s worth at any given time. If you’re looking to buy something all cash and then refinance to cash out, in other words, you’re doing what’s called a cash-out refinance and getting a loan for up to 80% of that market value, which would probably be similar to what your purchase price is, that’s fine. It doesn’t matter.
At the end of the day, if you’re buying a property for $100,000, all cash in and it appraises for $100,000, you can do a refinance and pull out 75%, 80% of the money you’ve put in. I don’t see why you would want to do that anyway. If you’re going to buy something, buy it with financing upfront, otherwise you’re going to have two sets of closing costs because you’re going to do escrow and go through the title twice, one for the cash purchase and then the second time when you are working with your lender to refinance that property so that wouldn’t make sense. I only see people do that when they need a very fast close and they only can purchase it with an all-cash purchase because they need to close within a couple of weeks. Or if your credit is borderline or your credit profile is borderline that you won’t be able to qualify, but you have liquid capital to acquire one or more properties all cash.
Then six months or maybe three or nine months down the road when you are able to qualify for financing, you’ll get financing and pull that money out. That’s the only time I see people purchase properties all cash. Otherwise, the leverage part is one of the great advantages of being able to buy an investment property. There isn’t any other asset class where a lender is willing to lend up to 80% of that purchase price. That five to one leverage in real estate is amazing because you can’t do that in other investments. That helps accelerate your wealth creation and it also magnifies your cash-on-cash return, your rate of return on that investment.
Foreign Investing
My last question here is from Tony. He says, “I appreciate your podcast and your ongoing commitment to this project. I’m a Canadian and has certainly become interested in all the great stuff your company is doing. I’m wondering if you could do an episode or have any resources with regards to foreigners investing in the US real estate, particularly various implications for Canadians.” We’ve covered different topics on previous episodes as it relates to foreign national investors. Canadians seem to be probably the most active international buyer in the US in addition to Asian buyers out of China. We’ve had a lot of activity from Australians and even some from Great Britain. However, there are resources. We’ve covered some topics including financing and accounting.
One thing you might want to look into is Integrated Financial Group, I interviewed Chris Picciurro who talked about entity formations, tax planning and preparation as it relates to foreigners and how to best structure that, so you are a taxed in the least and you’re not double taxed. Maybe we’ll do another episode here in the near future that talks about investing in the US from out of the country. There were episodes that we’ve talked about that relates to you. Also, there are some financing options now available to foreign investors. Believe it or not, you can get as much as 75% sometimes 80% of the purchase price as a foreign investor.
This changes frequently, lenders come up with programs and then they take them away or change them, but there are some portfolio lenders here in the US that are willing to do that. You may want to give our investment counselors a call and explore that option if that’s something you’re thinking about. If you have a question about real estate or real estate investing, anything at all, send that to me. Go to PassiveRealEstateInvesting.com. Click on Ask Marco! There’s a simple little form there, fill it out, click send and I will reply to you via email. If I pick your question, I’ll cover it on the podcast as well so in that way you have the email and we can share, whatever your question may be to our growing audience. Thank you for making this show a success.
If you haven’t subscribed, please do so. We are on all the major platforms from iTunes to Stitcher to iHeartRadio. I love having you as my audience. I’m going to keep putting out quality content for as long as I possibly can. I want to help educate you and help you get on that path to financial freedom. My mission, our goal is to help as many people as we can, create financial freedom as possible through the amazing asset class known as real estate and more specifically income-producing real estate, which is what we refer to as investment real estate. We try to make that easy for you. It’s the easiest way to create wealth and passive income so you can create the wheel yourself, take the time and assemble the team, do all the heavy lifting and the work yourself and take that active approach or you can take a more passive approach where 70% to 80% of it is done. That’s what we offer.
Help us spread the word, visit us on iTunes, leave us a rating and review. I don’t want to twist your arm, but I want you to be honest and leave us a review that is helpful to others. If you are on the fence or you’re thinking about it and you want to have a conversation with someone who is a real-life active, engaged real estate investor, give one of our investment counselors a call. We are offering free strategy sessions and it’s there to help you, answer your questions, and share more of what we do to help you. Contact us or go to our website at NoradaRealEstate.com. You can also get there from our podcast website as well. Thank you and we’ll see you in the next episode.
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