Rapid Fire Listener Questions | PREI 342


Welcome to another episode of Ask Marco. You know, it’s been a while since I’ve taken some listener questions. So I thought I would grab three or maybe four today and cover some random questions. These all came in within the last four weeks. So these are relatively fresh.

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So the first question here is from it’s either Sharmay or SHARMs I guess it depends on whether it’s French or not. So if I’ve mispronounced your name, I apologize. In other case, the question is, hi Marco. Thank you for the excellent podcast. Our family appreciates you and your team for providing quality content and delivery and becoming real estate investors while you’re absolutely welcome.

The question is, would you please talk about the bi-weekly payment strategy in the primary residence? How can this strategy be set up? I’m motivated to save and invest in rental properties with your company. Thank you for sharing your expertise kind regards. Well, great question. So let me answer it this way. You’re basically asking about making by weekly payments or maybe some other form of payment strategy. So this is actually a great thing to do for people who want to accelerate the pay down of their mortgage, regardless of whether it’s a 30 year or 15 year or whatever it may be. Of course, you’re going to have to check the mortgage documents to make sure that you can do that without paying any fees or penalties. Most mortgages are set up where you can accelerate the payments or pay off additional principal without penalty. There may be a prepayment penalty if you pay it off within the first one, two, three, four, or five years, again, that will be in your mortgage document or your promissary note for your mortgage. But having said that let’s just quickly cover this.

First of all, let’s define semi monthly and bi-weekly because a lot of people get this confused by weekly, as in biweekly, payments is not the same as semimonthly, since there are 12 months in a year, you would make 24 half payments on a semi monthly plan. And because there are 52 weeks in a year, if you make a half payment, every two weeks, you end up paying 26 half payments or the equivalent of what is ultimately 13 monthly payments instead of the 12. So that little difference will result in paying off your 30 year mortgage in about 25 years. I’m just rounding it off here. So on a $200,000 mortgage at a 4% interest rate, you would save more than $23,000 in interest. Of course you can do more to pay it off faster and save more in interest. If that’s your ultimate.

Now keep in mind. This makes a lot of sense on your principal residence. If your goal is to reduce your debt and pay off your mortgage quicker, I don’t know if I would use the same strategy in all cases with my investment properties. Now that’s not to say that I wouldn’t or I haven’t considered it or I haven’t done so, but when I looked at my principal residence, I kind of liked the idea of having it paid off and have it free and clear unless I want to tap into that equity on my principal residence and pull that out. Tax-free to invest in rental property in other words, to grow my real estate investing. But I don’t think I would do that on my rental properties as far as paying them down early, because number one, my tenants are paying off the mortgage, not me. I’ll just let them happily pay it down each and every month in each and every year.

And number two, keep in mind that with fixed rate mortgages, you are talking about a debt that is fixed in payment, but variable in terms of inflation, which means that as time goes on, inflation is eating away or taking down the value of that mortgage. So what you’re actually doing as time goes on is paying it off with cheaper and cheaper inflated dollars, which means that the loan is getting inflated away. It’s becoming worth less every year, and you’re still paying it off with the same inflated amount of dollars or currency. So you’re actually getting a discount each and every year because of inflation. So there’s no need to touch your tamper with the mortgages you have on your rental properties, let your tenant pay it off and let inflation be your friend and inflated away each and every year. Now, of course, I’ll probably talk about this in a future episode, but there is this concept of the snowball effect where you pay off your mortgages one at a time and accelerate the payments and just carry forward what you’re saving on that first property to the second and the third and so on and so on.

And you have the snowball effect where you pay off your mortgages more and more rapidly as each and every year goes by. There’s nothing wrong with that as well. If your goal is to have a real estate portfolio that is free and clear of any debt or mortgage, and that’s great. I mean, a lot of people do that and that’s fantastic. But back to your question, in terms of paying off your mortgage quicker, having a buy weekly mortgage payment strategy makes a lot of sense because you’re effectively paying 13 monthly payments off of your mortgage and that accelerates the payoff and it cuts it down to about 25 years. So just to give you another example of that, if you have a $100,000 mortgage at a 5% annual interest rate and it’s fixed for 30 years, your mortgage payment would be about $536 per month. So the first month of that loan, your interest that you owe is calculated using an equation. I mean, you could use a mortgage calculator to figure this out, but basically what happens is $536 is broken up into $416 going towards interest in the beginning and 120 goes towards principle. So the next month your mortgage balance drops by $120. So it’s only $99,880 as each and every month goes by a little bit more goes towards principal and a little less goes towards interest. And so over the course of time, you know, that principals getting paid off faster and faster, but your mortgage payments are the same. They’re fixed. After about 15 years into that 30 year loan, the ratio of interest to principal starts to equal out.

So the point of this is that it makes a lot of sense to pay a little bit extra or however much you want towards the principal in the beginning, because what you’re doing is you’re flipping this equation upside down. You’re taking advantage of the fact that you are lowering your principal amount, which is what your interest is calculated against. So the sooner you pay off the principal and the more you pay off the principal, the less interest you’re going to pay in total over the life of that mortgage. So it makes more sense to start early, meaning towards the beginning than it does towards the middle, or even closer to the end. You just put the equation of that interest calculation in your favor by paying off principal earlier. And that could mean extra mortgage payments. So let me give you an example of that. If you want to pay off a mortgage sooner, you can do it in one of several ways, right? From the beginning, you can get a shorter term instead of a 30 year fixed rate mortgage. You can start off with a 15 year mortgage and that mortgage payment would be higher, obviously because you’re amortizing that same principal amount over half the time, 15 years. But because you were paying down your mortgage faster, you’re also reducing your interest charges. And that goes away sooner, obviously 15 years. So your total interest on that 15 year mortgage would be $82,859, less than half of the total interest that you would pay on the same loan with a 30 year term. So it’s actually far more advantageous to get a 15 year mortgage. However, I too, as many people do prefer to get 30 year fixed rate mortgages because I still have the option in most cases to pay it off in virtually any length of time that I want. So I can get a 30 year fixed rate mortgage, but pay it off as if it was a 15 year by adjusting my monthly payments or my bi-weekly payments as if I was paying it off as a 15 year mortgage.

I hope that makes sense. It’s really just a larger monthly mortgage payment, the equivalent of what it would have been as if I took out the 15 year mortgage, but by having the 30 year fixed rate mortgage, I now have the option and the flexibility to pay a smaller monthly mortgage payment, if, and when I want to versus having a 15 year mortgage where I’m forced to make that payment based on a 15 year mortgage. So shorter term is one way to pay off your mortgage quicker. Another one is what we just talked about having by weekly payments, where you’re making essentially 26 payments a year instead of the 12 monthly payments. The third way is something we just touched upon and that’s just make extra payments. Now, most mortgages give you the option to make extra principal payments. Anytime you want, many of them specify that you can do this once or twice per year.

Again, you need to check your mortgage documents, but if it gives you the option to make extra annual payments or extra payments period, what you’re doing is you’re paying down the principal, which will ultimately reduce the amount of interest being paid and based on how the mortgage payments are calculated in the payoff of that principle, you are reducing the term the time that it takes to pay off that mortgage by reducing the principal. So it’s kind of like a sliding scale, but it’s not linear. So again, I’ve said it before, I’ll say it again. The more you pay off and the sooner you pay it off, the faster you pay off your mortgage, because you are stacking the formula in your favor by paying less interest each and every payment or each and every month, that interest starts to diminish faster and faster, which means more and more goes towards the principal, which means that the term becomes shorter and shorter.

And then last but not least the fourth ways essentially refinance. If you have a a hundred thousand dollars mortgage or whatever it is at a particular interest rate, and the interest rates available today are lower than what you are locked in at then consider refinancing. Because if you can refinance the mortgage, you’re essentially just replacing that mortgage loan with a new one at a lower interest rate, which means that your monthly mortgage payments are going to be lower. And if they are lower and you bump it back up to what it would have been now, you’re making extra principal payments because you’re stacking that extra payment on your monthly mortgage payments on that lower priced mortgage, and you’re paying it off quicker. So again, I hope that made sense, but if you refinance at a lower interest rate, you’re going to have a lower monthly payment, but if you’re still paying it off, as if you had the original loan, the difference in your new mortgage payment compared to the old mortgage payment is just additional principal pay down that you’re making every month or every other week. And, uh, that just accelerates how fast you pay it off. This doesn’t work. If you’re just refinancing at a lower interest rate and still maintain the same term, whether it’d be 30 years or 12 years or 15 years or 20 years, you’re locked that length of time. But the way to make it work is just to make those extra principal payments. So you have it working for you.

All right. I hope that makes sense. That was a long answer to your short question, but yes, biweekly payments is a good strategy. It’s a very, very simple strategy and probably the easiest one to implement in terms of paying off your mortgage quicker. Okay.

The next question is from Gabriela and she writes in and says, hi, Marco, I love your podcast, a gym for newbies like me. I am a healthcare professional with no kids, no debt. I own a small condo in Miami beach. I have a 401k. What is the best way to invest in real estate cash purchase? I don’t have $50,000 cash. My credit score is seven 60. What would you suggest I start with please help Gabriela. Thanks for the question, Gabriella. Well, this is a pretty broad question, but I’ll give you a somewhat of a simple answer. First of all, let me just take the idea out of your head that you need to purchase all cash still to this day. I’m not exactly sure why so many people think that they have to invest in real estate purchasing it all cash, because if you were purchasing your own home odds, are you wouldn’t be buying it all cash. I don’t think at least not in this day and age, I would imagine that most people would have a down payment of some kind call it 20%, 10%, 5%, depending on the type of financing you’re getting, but this is on your principal residence, of course, but ultimately you would be borrowing the balance above and beyond your down payment.

The same applies with investment property. So regardless of where it is, you would essentially take 20 or 25% of the purchase price. And that would be your down payment. You would add some closing costs and a little extra in terms of reserves that you should have in the beginning as you start to build your portfolio. And then of course you scale that down because you won’t need as many reserves across a larger number of properties. So again, let’s take a hypothetical example. I mean, generally speaking, single family detached homes are going to range from 80,000 to about 225,000. That’s a broad range. The median would probably be 120, 130, 140. I’m not sure what the average would be, but it’s just easier to work with a hundred thousand dollars in terms of the math. But, you know, property values have been increasing year after year after year.

So what may have been a very common example at a hundred thousand dollars? Let’s say four years, five years ago is probably more like $130,000 today. But again, for the sake of math, take a hundred thousand dollar single family home, you know, somewhere in the Midwest or parts of the south Southeast. And if you have a 20% down payment, then you’re looking at $20,000 plus closing costs and a little extra for reserves. Your credit score is very high at seven 60. So you should have no issue qualifying for financing. Assuming you could show income, which I’m going to assume that you can. So if that’s the case, then you’re not looking at a very large amount of capital to get started or buy that next investment property. Anybody listening to this that has, let’s say between 20 and $30,000 of investible cash, whether it be in savings, parked on the side in your mattress, or possibly even in a self-directed retirement account, you’re in a good position to invest and purchase an investment property.

And of course we can hold your hand and guide you through this process and show you different markets, different property options, and whatnot. If you want to talk to my team of investment counselors, but regardless of how you do it, just understand that with the financing available today, especially conventional financing, you only need about 20 to 25% down. So I’m hoping this has given you some direction and maybe dispelling a myth that investors need to purchase real estate, all cash. That’s not the case. Of course the seller of the property is going to ultimately receive all cash, but it’s made up of your 20% down payment and the 80% financing coming from the lender that you’re working with. So together that’s a hundred percent and that’s what they get in terms of their cash payment. You know, that’s what shows up on their settlement statement at the close of escrow.

So anyway, it’s a very simple answer to your question. You don’t need to buy all cash. And in most cases it would be argued that it is not the best way to invest in real estate because leverage is a very powerful concept when used properly and good debt is very powerful. And to your advantage when it comes down to investing in real estate. So anyway, I could be labor that point, but I think most people listening to this have heard this time and time again. And I think you certainly get the point, okay, Gabriela, I hope that answers your question. If not, just hit me up or my team, and we can go into more detail about that.

All right, let’s take one more question here. This one is from Christine and Christine says, hello. We are putting some rental properties on the market that we’ve had for several years in Arizona. Finally, we can get more than what we paid for them instead of less. Uh, I’m not sure why that would be, but this is in camp Verdi and Clarkdale. One is a fourplex. The other is a single family home, both in good communities and they are good properties. Also my sisters and I are selling our family home in Point Loma, and I will have one third of that. The problem is it’s great. We can make a bunch of money selling these properties, but now we want to reinvest closer to home in San Diego county, Oceanside or Vista prices are insane here with multiple exclamation marks. So maybe we shouldn’t sell now question mark, but the interest rates are so low. So if we need to borrow money, the rate would be good and we would pay cash for most of the rentals. Well, here we go again with another question about, you know, paying cash versus financing, but that’s not the question.

So Christine goes on, we may come away with about $1.3 million. So we could either buy three cheap condos or two homes or townhomes. And then obviously the assumption there is that this is in Southern California, which is incredibly pricing, not sure what to do. I manage them myself. So I don’t want to invest far from home again. Thanks so much for any advice. Christine, I’m getting the impression from your question that investing quote unquote far from home was maybe not the best experience for you for a couple of reasons. One, you were probably not in ideal markets at the time that weren’t showing a lot of growth. I’m not sure the types of neighborhoods you were in, and that might be an issue because if you are in what I’ll call C or D class neighborhoods, you’re going to have issues and you’re not going to have the best experience.

In addition to all that, I highly suggest not self managing your properties. There might’ve been a case to do that. You might’ve not known any different. Maybe you want it to just maintain control, but you know, that just might be a perception and a false one at that, because generally speaking, you would be better off having someone professionally manage your property, regardless of whether it’s local or afar. If this is not what you’re an expert at, what you appreciate understand are good at or want to do, you’re better off making the investment of spending seven, eight, 9% of your gross collected rent towards professional management. I’m telling you it will take the stress off of you and allow you to focus on other things, better things, or, you know, improving on your investing. So the other thing I want to say is you’re in Southern California, which is very pricey, especially in Oceanside Vista or anywhere in San Diego county.

You know, the numbers really just don’t pan out and make a whole heck of a lot of sense, regardless of whether you’re buying, as you say, three cheap condos or two homes or townhomes, whatever, you’re also making the assumption here that you should buy all cash and not finance. So I’m going to give you three major tips, suggestions, whatever you want to call them. And I’m kind of painting everything with a broad stroke here to just kind of address your concerns and give you some guidance and point you in the right direction. As I see it, one other comment about what you were saying earlier about, maybe we shouldn’t sell them. I’m not sure if you’ve already listed them or sold them, or if you’re just thinking about selling them, but if you are considering selling them and you haven’t done so already, what I might recommend is speaking with my team about the benefits of doing a 1031 exchange, which is a tax deferred exchange.

And that would allow you to sell those properties and move the equity into other real estate, such as your investment real estate and defer the capital gains taxes, meaning that you can do that. Not only tax-free, but you can improve and increase the size and quality of your real estate portfolio. So you can get out of Camp Verde and Clarkdale, move into better areas, better markets leverage up, meaning that you can grow. If you want it to the real estate portfolio size that you have and do that in a way where you can increase your cashflow, increase the potential growth and equity that you have, um, in the coming years on those portfolios and just place them in a safer area, meaning in a market and the suburb and neighborhood that will better protect the equity that you’ve built or that you’re transferring. So again, that’s outside of the scope of this question right now, but that gives you the gist of it.

My three suggestions and tips are this number one, learn to be area or market agnostic, do not marry yourself to any particular market, be it in Arizona or Southern California or areas where you live such as Oceanside or Vista, understand that we are in a big country, made up of hundreds of markets, each one, doing something a little different than the other. They all have their own fundamentals and dynamics, supply and demand. So you need to choose that wisely as if you were shopping around for the best market to invest your heart or in dollars into. So be market agnostic. In fact, you should be agnostic across the board, but being market or area agnostic is a very large important principle. In my opinion, second, consider benefiting from the cheap financing available today, we are at historically low interest rates. Mortgage financing is a powerful tool.

It allows you to control a hundred percent of an asset and get a hundred percent of the benefits, but only put 20 or 25% down, which is incredibly powerful. So with a hundred, you’re talking at $1.3 million of potential investible income or not income, but capital, if you can acquire for every a hundred thousand dollars, three, $150,000 properties, which is what you can do because you’re looking at a down payment of roughly $30,000 plus and closing costs. So for every a hundred thousand dollars, you can acquire three beautiful in some cases, new construction, but $150,000 single family, detached homes. That’s incredible. You can build a very large portfolio rather quickly. And so consider using the power of leverage. It’s good debt that your tenants pay off. And it’s just going to supercharge your portfolio size and profitability.

And lastly, don’t manage them. Don’t think that you have to be the property manager. You want to be your manager’s manager. So you want to oversee your property managers that are managing your portfolio of properties. It is what they do best day in and day out. I’m guessing it’s not what you do all the time. So Christine, I hope that makes sense. Hopefully I’ve pointed you in the right direction. If you have any questions, just reach out to me or my team. And we will certainly give you a hand.

Well, that is it for today. If you have questions about real estate investing or finance, that you’d like me to answer on the show, simply go to our website at passive real estate, investing.com. Click on the Ask Marco link at the top. If you haven’t already remember to subscribe, we come out with an episode every week. Sometimes we do two episodes and you know, this is the best way for you to get notified when we drop a new episode on iTunes or wherever else you listen to the show that is it for today. Thank you for listening. And I will see you all in our next episode.

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