More Rapid Fire Listener Questions


Hello, my friends. And welcome to another episode of Passive Real Estate Investing. I’m your host Marco Santarelli. And I decided to do another episode of rapid-fire listener questions. I did one last week, I picked about four questions. I had some great feedback, so I thought I would do it again. I’ve picked about a handful of questions covering different topics so I could mix it up, but the feedback was great. And I thought, well, I’ll just pick some more and cover them quickly concisely and clearly, so we can just cover a bunch of ground, cause I’m sure there’s a lot of people who have similar questions to some of the people who submit their questions to me before I get into those.

I just want to say that I’m proud to have our podcast picked as one of the 8 Best Real Estate Investing Podcasts by US News and World Report.

Yes, that’s the one usnews.com. So they just picked this less than four weeks ago. I knew about it, but I forgot about it. I was going to mention it in a previous episode, but yes, we are one of the supposedly by Paulina Likos, she’s an investing reporter at US News and World Report. And she, I guess, likes our podcast. So she named it one of the 8 Best Real Estate Investing Podcasts in the US, so THANK YOU VERY MUCH!

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All right. So the first question is from John and John writes and he says, Marco, first, I love your show and want to thank you for all the insight and education you provide. My question is, do you think 1031 exchanges will be eliminated soon by Congress? Good question.

This is just my opinion. I don’t think it will be eliminated anytime soon. In fact, it’s hard to imagine that’s going to be eliminated anytime in the foreseeable future, the 10 31 exchange has been around for nearly 100 years, and it has constantly been under attack by different administrations, both federal and state level. And they have always been trying to eliminate or significantly modify the 10 31 exchange, which as most, if not, all of you know, is essentially just a tax-deferred exchange that allows you to take the proceeds or net proceeds of a sale and move them into some other like kind exchange. So that way you can continue to move your investments forward without being penalized by taxes in the process of doing so. But this has been under attack multiple times, even in different tax reform acts from 2014 to 2015, and there were budgets under the Obama administration that tried to modify or remove it.

It’s just going to continue. In my opinion, it’s important for us. It’s been around for a hundred years. It’s a critical piece of the US tax policy. Everybody who’s part of the 1031 exchange does pay taxes. They pay taxes in many other ways. So it’s not that they are working and living completely tax-free, that’s not the case at all. It’s just a way for them to defer their taxes so they can build more wealth over time. And at the end of the day, it is undeniable that the benefits that come from the 1031 exchange, which is part of the IRS tax code is good for the economy. It stimulates economic activity. And if it wasn’t for the 1031, there wouldn’t be as much activity. And the velocity capital would be much slower. So this is a good thing. It expands our economy expands the workforce.

It expands your net worth. I think there would be some very significant backlash if politicians seriously tried to remove the 10 31 exchange. So I don’t foresee it changing or going away anytime soon. So thanks for the question, John.

Next question from Robin. Robin writes in and says, as a newbie, I am trying to figure out how to get in the game. Should I save for my first down payment or open a business account and apply for credit? Robin, two different things here, regardless of how you come up with the down payment, you’re going to need a down payment, unless you have a very creative deal with a seller for a low down or no down deal. You’re ultimately going to need down payment. Typically it’s 20% of the purchase price. So if you’re looking at an 80,000, a hundred thousand, $150,000 property, you can just do the math yourself and figure out what 20% is.

So figure about 20 to $30,000. If you have a great, if you can save it, save it as quickly as you can and get that invested while you educate yourself, because you always want to be building your knowledge while you’re investing and never stop learning as far as opening a business account and apply for credit. Well, if you did open a business account, you wouldn’t be able to apply for credit right away, because you have no credit history. You have no business history, you don’t have tax returns or trailing 12 or 24 months of revenue to show a lender that you’ve got a viable business. It’s very difficult to just apply and get credit. And then even if you do, you have to understand that there’s going to be a cost for that capital. So that’s not a bad thing. You just have to make sure that you budget for that in your calculations when you are investing.

So that way you’re covering all your debt service. So your income needs to cover the expenses and the debt service. And then hopefully leave you with positive cashflow on a monthly or annual basis. Because if you don’t have positive cashflow, you are going to slowly or quickly drowned under the debt of the properties because you can only sustain negative cashflow for so long. You can only sustain it for as long as you have reserves to pay for it, to cover it. So positive cashflow is very important, but yes, you know, you do need a down payment, save it up fast as you can, whether that’s, you know, increasing your income, working twice as much, getting a second job, a side gig, you know, starting a small business, partnering up with someone who can contribute the capital regardless of how you do it. You know, you just can’t get around that.

All right, next question is from Justin. Justin writes in, and this is a little bit more of a complicated question. Justin says, could you touch base on using a 401k and in parentheses, a hundred thousand dollars to use for passive real estate investing. You had an earlier podcast episode that I listened to. My question is what is the best approach to drawing money out of a 401k? If I already have a loan on it, is there a way to avoid the 10% fee and high taxes for an early withdrawal? I think it’s about 30% all told is taking the hit the only way at this point, or can the funds be used to invest in real estate on a solo 401k type of process?

I haven’t found a path through the fees and taxes at this point, okay, I’m going to give you a simple answer. But first for clarification, a solo 401k is still a 401k. It just applies to a solo business or an S Corp or a C Corp with no more than one employee. Typically it’s just the principal or the owner of the company that opens up a solo type 401k, but a 401k is a 401k. It is self-directed, there is no way to get around the fees. You’re going to have a 10% penalty on you’re going to pay taxes on what you withdraw. There might be some other things involved, but that’s pretty much what you’re looking at. My question to you is why would you want to withdraw those funds when you can invest within your retirement plan, whether it’s a 401k or any other qualified retirement plan, as long as it’s self-directed, or you have checkbook control and you keep everything separate from you personally, you can invest in your retirement plan.

You don’t need to take the funds out. So I don’t understand if there’s a particular need for you to remove the funds from your qualified retirement plan. But if you don’t need to do that, then you can avoid paying any taxes or fees and you can invest in that retirement plan. Now, the only reason I can think of that you were thinking about this is because you want to take advantage of the financing available. For example, conventional loans, conventional financing, where you can borrow up to 80% of the purchase price. Well, that’s an interesting reason the math might make sense, and it might justify paying the taxes in the fee. You have to run the numbers personally. I don’t think it’s going to work out much in your favor if at all, but here’s an alternative solution for you. And I’m actually recording a podcast episode on Friday about this exact topic.

So you might want to hang tight and wait for maybe two weeks when it will be published. So if you’re listening to this and you haven’t subscribed to the show, be sure to subscribe that way, you’ll get notifications and you’ll see it in your podcast stitcher or podcast player. But what we’re going to be talking about is financing options available to those who have retirement accounts, basically those who have funds put away in any kind of retirement account. And they’re thinking about investing in real estate, using the funds within that retirement account. Now the terms aren’t going to be as attractive as conventional financing, nothing is that is the cheapest form of subsidized financing available to any investor. So keep that in mind, but the option for you to borrow and leverage a portion approximately half, if not more, but at least half of the purchase price and not even have the requirement to qualify for it personally, meaning that it’s the property that’s qualifying for it.

That option exists. So stay tuned. I’ll be talking more about that, but yes, you can take that a hundred thousand dollars use all of it or part of it, or portion of it towards your down payment for the purchase of one or more rental properties that you can hold in your retirement account and let it grow in that retirement account. All right, Justin, I hope that answers your question. Listen, for the other episode, coming up in a couple of weeks where we talk about leveraging the capital in your retirement account for the purpose of real estate investing.

Okay. Next question from Jason, Jason says, hi there. Your latest episode was about new construction. Multi-family in Phoenix. I’m interested in getting more information on this. Could you please contact me? Thanks, Jason. All right. So anyway, you know, I’ve just teed that question up for myself here. It’s really not a question for, you know, educational purposes that someone who is looking for information about new construction projects we have in the greater Phoenix metropolitan area. But the reason I put it in there is because I’ve been getting a lot of questions from people asking about information for the triplexes. And I believe even fourplexes that are going to be built in different subdivisions or suburbs of the Phoenix metropolitan area. So for information on that, that’s not a problem. Just contact your investment counselor here. And if you don’t have an investment counselor, fill out the form on our website, the contact us form, and you will hear back from my team within 24 hours and be connected with one of our investment counselors. We have nine investment counselors here. So although we’re all very busy, we’re more than happy to help you with it. And, uh, yes, they can definitely answer your questions and get you that information. So Jason, just,  reach out to your investment counselor or fill out the form on our website and we will follow up with you. All right.

Next question from Craig. Craig says, hello, Marco. I am a long time listener and I love the show. Well, thank you. And you’re welcome. I make sure to listen to the new episodes each week and listen to some of the episodes multiple times for refreshers and a deeper understanding. I have a hundred thousand dollars in liquid capital to invest in cashflow estate. I am saving $2,000 a month from my regular job and approximately netting, $1,900 a month from five cashflow properties. And all of the monthly cashflow goes towards buying more properties. Congratulations. That’s fantastic. My goal is to reach $15,000 a month cashflow as soon as possible.

How would you recommend that I do?  Should I try implementing a sort of BRRRR strategy method to maximize how many times I can reuse my capital to get more and more units for those that don’t know what the BRRRR strategy is? That’s spelled B R R R R. And what it means is Buy, Renovate, Refinance, Rent, and Repeat could also mean rinse and repeat, but that’s not what it’s supposed to mean. Uh, I’ll explain this in a minute. Let me finish reading Craig’s email here. He says, should I just continue on the path of putting 20% down on each property and just let it naturally snowballed into more properties? Should I stay fully leveraged? Meaning as soon as one of the investment properties has 10 to $20,000 that I can pull out in a refinance or Heloc and invest that into another property, I would greatly appreciate your insight and expertise in this matter, because I feel that the way I try and manage this critical $100,000 at this time could make a significant difference in me being able to obtain my cashflow goal.

Sorry for the long question, I hope very much to hear back from you. Sincerely Craig. Craig, thanks for the question. Great question. I love the clarity and detail. So rather than give you a long complex, detailed answer, you don’t need it. Here’s my shorter, clear, simplified answer to this. And this is the way I would look at it. If this were me, it’s basically this, at least for me, this is what it comes down to. I’ve done a number of these BRRRR strategy investments or renovations, and the problem with it. If you want to call it, that is they are, uh, somewhat time intensive. They do require your attention, a certain amount of knowledge, certainly the right contacts in order to be able to run the crew right from the acquisition of that distressed asset to managing your team or your general contractor, who’s managing a team, getting the property renovated, fixed up.

And then of course working with the lender each and every time you need to do a refinance and then handing it off to a property manager, unless you’re managing it yourself and then pulling out your capital, hopefully all of it. And then repeating the process over again. And yes, that method does a work, but make sure you’re clear on the fact that you need the right team. You need some expertise, you need some patients. There could be some brain damage along the way. They don’t always work perfectly. And they certainly don’t always work out where you’re pulling 100% of your capital back out, which is okay if you’re able to pull out 80% or 50%, well, you’re still able to pull out capital and reuse it or redeploy it on your next BRRRR flip or BRRRR property. Now, the other thing to keep in mind too is, and this is the biggest factor for me is two things time.

Do you have the time for it? I certainly don’t. That’s why I don’t do it anymore, but do you have the time and do you have the patience and willingness to do this? And I guess I’ll throw a third factor in there. Food for thought, depending on the market you’re looking at, it may be very challenging if not impossible, but certainly very challenging to find properties that meet the criteria for your BRRRR strategy, your BRRRR, renovation, and refinance. So you need to understand that it might take a long time, might be very difficult to find the right property that you can pick up at the right price that is going to give you the ability to renovate it and refinance out your capital. I know you don’t want to lose sight of being in a good market and most importantly, in the right areas, the right neighborhoods, that’s critically important.

So don’t go too low class, your lower end C-class neighborhoods just to try to shoehorn in a deal where the numbers work. And even if you did that, you might have problems refinancing the property for enough, to be able to pull out your initial capital. So you need to have a sharp pencil and really know how to run the numbers. I’m not trying to discourage you from doing this. I’m trying to get you to think about this at every level, because there are many moving parts, some additional risk, and assuming you find the right deal with the right numbers, the right crew and everything else also keep in mind that a renovation could take two to three months or more. And then you’ve got at least a month or more refinancing and then a little bit of buffer and some lease up time.

So you’re looking best case scenario, approximately four months to find, fix, and refinance or flip that property. You essentially flipping it to yourself, but more than likely five or six months per property. Now, if you’re saving $2,000 a month, plus another $1,900 a month from your cashflow properties to put towards down payment capital while you’re saving forth about $4,000 a month. So that means every five or six months, you have enough for a typical single-family residential property. Let’s just call it six months. If you’re able to save up about $25,000, that’s great. You can pick up another property without any hassle or brain damage every six months. So from a time perspective, that’s about a wash. If you’re able to save more faster from other sources, great, you’re going to be able to purchase one more property one or two months sooner. So that might mean that you’re doing three deals a year instead of two deals a year.

So personally I would rather scale my income and my ability to save and accumulate that down payment capital rather than the BRRRR. But if you like buying, fixing and refinancing properties, and if you enjoy that and you have the time and patience and energy and whatnot for do it, I’m not going to discourage you from it. So maybe that wasn’t a short answer to your question, but I hopefully got you to start thinking about this because it is really a different model. It’s, it’s definitely an active model of investing and there’s nothing wrong with that. It’s just not for everybody. And I’ve done my fair share of that. So I’m not doing it anymore. I don’t know if you had another question in here. Oh yeah. If you’ve got enough equity in a property where you can refinance it and still have a very competitive rate, even if your monthly mortgage payment goes up a little bit, the leverage or arbitrage opportunity there by pulling out $20,000 or more of equity that you could use for the next down payment on your next property is a great strategy because you’re pulling that out.

Tax-free, you’re still letting that first property pay for the equity. You just pulled out that you’re now redeploying into another property. This is very similar to doing a 1031 exchange. The only differences is that you’re keeping the original property here. Craig, that’s a good question. If you need more clarity on that, maybe reach out to my team. Uh, we can certainly put you in touch with some people that could help you, you know, if you need the help.

All right. Last question, Brandon, he writes in at the end of the episode, number 329,  I heard on March 9th, it mentioned a free strategy planning session. No cost, no obligation. Yes. I did say that. Is that still available? And how do I get that set up if it is? Thank you, Brandon. Yeah, we just refer to it as a strategy session.

So essentially what that means is if you’re thinking about investing in real estate and you’re looking to build your portfolio, whether you’re a newbie, just getting started with your first property, or you’ve already been doing this for years and you’re looking to add, and you need some help in terms of which markets, which areas, looking at some investment property options, tying you in with our network of lenders and title companies and inspectors and property managers and all that stuff. Well, that’s what the strategy session is for. But more importantly, it’s really to find out more about you and you find out more about us and what we can help you with and the services we provide and help give you some direction and clarity. Because at the end of the day, we can help most people that contact us once they understand what we do.

I mean, we definitely can help you because the people who really contact us already get it, they get it. They know what we do. We, they know what we can help them with. And they’re basically saying, yeah, I need the help. And so can you give me a hand? And so we work with them. You have everything to gain a lot of value and no downside. You know, our services come at no cost. Our counseling services are no cost. So we’re essentially helping you by figuratively holding you by the hand, guiding you through the process and helping you choose markets, areas, properties, tying you in with the right team to make that happen from financing to management and just making it happen for you. We want to see you succeed. And so we’re going to make sure that you don’t sit on your butt and watch other people invest in real estate when you could be the one investing in real estate.

All right. Well, I think that was,  longer episode than I anticipated being at 24 minutes, but I appreciate you listening. So that’s it for today. If you have any questions, you’d like me to answer that I haven’t covered already. Go ahead and submit those at passiverealestateinvesting.com, click the Ask Marco button at the top. Remember to subscribe to the show, share the show with other friends and family members that are interested in real estate and investing. I just refer to them as like-minded people, visit us on iTunes and leave us a rating and review greatly. Appreciate that once again. Thanks for listening. I will see you in our next episode.

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