Hello my friends. Welcome to another episode of Ask Marco on the Passive Real Estate Investing Show. As you know, this is a show where we talk about all kinds of things, not just real estate, it’s about wealth investing, finance, the economy, the housing market, personal development mindset, and I guess whatever we want to talk about. So your suggestions are always welcome and sometimes I talk to people even at live events and they give me some pretty good ideas about what I can, should, and might want to cover. So I’m gonna cover about four questions or so from listeners. These are more recent questions, which is great. One of them is from last month, but the others are very recent. Before I do, I just wanna let you know that I’m recording this on Tuesday, May 30th. I will have my assistant edit this hopefully tonight, but it should be queued up for Wednesday morning Thursday at the very latest.
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But I am actually leaving town tomorrow for about 24 days on a four to five city stretch. And so I might be a little slow in upcoming episodes, but I’ll do my best to record and release them as I travel on the road. But just real quick to let you know about my trip, it’s gonna start with a annual cousin’s reunion or get together something that we’ve started doing on an annual basis in Las Vegas. So I have cousins that fly in from a couple different cities and this really all started with me playing at the World Series of Poker. I’ve been playing in the World Series of Poker every year, practically every year since at least 2007, probably before that. I actually don’t remember the first year, but I’ve been pretty consistent in going to the World Series of Poker. I am a pretty decent poker player.
I’m certainly not a pro, it’s not what I do for a living, but I love the game. It’s a very much strategic game. And what I like about it is the multiple dimensions that you are dealing with every hand in poker. It’s kind of like three dimensional chess, which is why I love it so much. And I just love the strategy and, and being able to not only play the hands and play the situation and play the position and play the number of chips that you’re working with against every other person’s stack, but you are playing the other players. So if you think about it, it’s really the only game that you could label as gambling, that you are not playing against the house, you are playing the other players, which I find unique and it’s part of what makes it fun. It is a social game.
There’s, you know, chit chat and banter and whatever, you know, conversations that go on. And it’s interesting the people you meet. I’ve met several of the pro poker players that you actually see on television, even to this day, more so in years past when it was more popular. But yeah, I’ve played head-to-head against some of these people and it’s always fun. Anyway, enough about that. Let’s talk about real estate. By the way, I just wanna finish that thought from there. I will be going to our Power Room mastermind in Scottsdale, Arizona shortly after that. I have several events going on in New York, including the Tony Awards. And then after that I’ll be going to Florida for two events. One is our money is Mastermind. It’s the first one that we are hosting this year as our mastermind for our money as subscribers.
And then after that we are doing some strategic planning sessions with my partners for some of the other ventures that we have going on loosely related to what we’re doing here with Nora Real Estate and Nora Capital. All right. Having said all that, let me get to the first question from Carrie. Carrie says, Hey Marco, I recently met you at the conference in Phoenix. Your presentation was great. I have been an investor since 1991. I have several properties that are paid off. My question is how to determine how to maximize the utilization of my equity on several properties while balancing the need for cash flow. As an example, three properties worth 400,000 each generating gross income of $3,000 each on a monthly basis. Thanks for your time and your educational content, Carrie. You’re welcome. So let me take a stab at this. So you are in a great position owning what looks like three properties worth 400,000 each.
That’s 1.2 million in equity. Good for you. And they each gross $3,000 a month. So that’s 9,000 gross. That’s not a bad monthly residual income. Since you have no mortgage, you’re really just deducting your insurance, which is probably nominal, and you are deducting property taxes. If you are self-managing great, you have a very healthy net income from those properties and a whopping 1.2 million in net worth just from those three properties alone. Good for you. So to your question, how do you determine the way to, I guess, maximize or utilize the equity to purchase more property? I’m assuming that’s what you are talking about. Here’s how you do it. It’s, it’s really a math question and a math problem. So you kind of have to work it backwards. And here’s how you do it. What you do is start rolling back the equity as if you had financing.
You can just use any mortgage calculator for this. There’s plenty of them online. You make an assumption. Let’s just say hypothetically, you were to put a 50% loan on these properties. So a $200,000 loan leaving 200,000 in equity in each property. My guess without running the numbers is that with 3000 a month, you’ll probably cash flow not great, but you’ll have positive cash flow and so they’ll still carry themselves and you’ll still have something to take home. Now, just follow me through on this example, that would give you $200,000 of spendable cash, the equity that you’ve pulled out of this property to use as a down payment or down payments on one or more properties elsewhere and still generate cash flow from these other properties. So you’re not really going backwards necessarily. Again, if you take those other examples of the properties that you will be purchasing, you may end up with more cash flow than you have without actually leveraging the equity in these existing properties.
But you start at whatever number it may be, let’s call it 50% equity or a 50% loan to value, meaning you’re pulling out 200,000 of the 400,000 of equity. You’ll move that equity of course into other properties elsewhere. But you just run the numbers with a mortgage calculator to see what your debt service will be on that $200,000 new mortgage on that property. Or in this case, you have three of them, you could say times three. And just run the numbers. So you take your gross income, subtract your property insurance, you subtract your property management. If you have that, you subtract your, your property taxes, and then you subtract your mortgage payment. In other words, your debt service from what’s remaining there, what’s left over is your cash flow. Now, if it’s positive, great, you’ve got positive cash flow on this property, and then you run similar numbers or a similar example on the other properties that you’re looking to purchase in another market, and you add it all up collectively, all those cash flows from all the properties that you are leveraging up into would be your cash flow, not gross, but your collective cash flow.
So that gives you an idea if you’re getting ahead of the game or behind the game. But here’s what you are doing. Even let’s, let’s just say hypothetically your cash flow is about the same when you’ve purchased however many more properties. Let’s, let’s just say double your portfolio from three properties to six properties because you’re not pulling out all that much in terms of equity, but you are pulling out equity so you can purchase more property. So now you have twice as many properties from three to six, you have the same equity because remember, you’re just moving that equity. You’re not spending it, you’re moving it, you’re taking it out of your current properties, putting it into new properties, and you’re generating cash flow from those three new properties that you’re purchasing. So the six properties are all generating cash flow. Granted, the first three, the ones you own now are generating less because you have debt service to service.
And now you have twice the portfolio still have cash flow, positive cash flow, and you have the same equity. This done right should put you ahead. And this is always a great strategy because it doesn’t actually move you backwards, it moves you forward when it’s done right. So you’re doubling up or increasing the size of your portfolio, which means as the years go by, the next 1, 2, 3, 5, 10 years, equity gains are compounded because you’re multiplying that you’re two xing, if not more, those appreciation gains because now you have more property to work with and more property to capture the appreciation you get on those properties. So again, I, I’ve said it three times, done right, this will put you in a good financial situation because you can potentially increase your monthly cash flow right off the bat and you put yourself in a position where you’re not only gaining appreciation on additional property, but you’re also amortizing loans on additional properties that your tenants are obviously paying, which means that your equity is growing faster, therefore your net worth, your wealth is growing faster.
So this is how leverage works and it’s the, it’s beautiful because it’s powerful. The power of leverage is amazing cuz you can certainly accelerate your equity gains and your cash flow. So given the limited information you have, it sounds like you’re sitting in a very good position to tap into that equity and build your portfolio. So if you need help with that, you know, contact my team of course, but if I remember who you are, and I think I do, you’re a pretty smart guy. And so having been an investor since 1991, you can certainly do this on your own, but of course we can help you shortcut a lot of this. So Carrie, hope that helps, but congratulations on what you’ve built. Only three properties yet you’ve got over a million dollars in net worth and 9,000 gross income per month. That’s great.
So anybody who is listening to this and is just getting started or even thinking about getting into real estate investing, this is the power of real estate investing. It’s accessible to virtually everybody. You don’t need to be an accredited investor. You actually don’t even need to be a sophisticated or smart investor. If you’ve got the right team around you, this is the type of stuff that you can accomplish. So, good job. Alrighty, let’s move to question number two from Mark. Mark says, hi Marco. I’ve been listening to your podcast for a little more than a year now. Great content, thank you for all your expertise in help in guiding small investors like me through the ever-changing market conditions. My wife and I are in our fifties and purchased our first single family rental in Tampa, Florida in 2021. So that’s two years ago. It’s a two bedroom, two bath condo that is cash flowing approximately $600 per month.
Well that’s great, especially with a condo. So you must have had a great buy or a good deal or you just are, are positioned in the right market like the suburb of that market. So he goes on to say, we also own our primary residence in Tampa. Both loans are in our threes, which I assume you mean the interest rate is in your threes. As we approach retirement around the corner, we are looking to scale up our real estate portfolio with the goal of increasing our cash flow enough to hopefully retire from our W2 jobs within five to 10 years. While I often hear you say on your podcast that it’s not a matter of when to buy real estate, but where to find a good deal. Yeah, that’s basically what I say. That’s close enough. The current market is very challenging with rising interest rates and home values that remain relatively strong, especially here in Tampa.
Well, that’s true. Tampa’s had a very strong run in terms of price appreciation. So it’s made it harder to find deals that generate good returns. Mark goes on to finish his email saying, we’d like to invest in a duplex or single family in Florida, not necessarily Tampa, perhaps the Jacksonville St. Augustine area, or any place where the numbers make sense. We are also open to other markets primarily in the south. My question with cap rates now running lower than interest rates on many single family deals, what are your thoughts about short-term rentals such as Airbnb’s? It would potentially require more cash up front for renovations, repairs, and furnishings, but cash flow could be significantly more than long-term rentals in a destination market like Florida. I also realized that a looming recession or slowing of the economy could negatively impact the math on short-term rentals, and that is true.
I appreciate your advice, any advice you might have, and once again, thanks for all you do. Thanks for the question mark. It’s a good one. So I guess the core question you have here is what are my thoughts about short-term rentals? Like Airbnb’s years ago, I was, I wouldn’t say bullish on them or interested in them, I was never negative on them. I always thought they were interesting, but it wasn’t something that I cared to learn about. And you know, this goes back to the whole thing I say about ignorance is expensive. There’s a lot of truth in that, and I proved it to myself. I did eventually get into the into the short term rental game. I do have one right now in Florida. It’s in the Orlando metro area. In fact, it’s 20 minutes from Disney World and the theme parks there, it’s doing fairly well.
The one thing that I will say about certain markets and kind of something to be cautious of is that there’s a lot of people that want short-term rentals in destination markets like Florida. So the problem there is that you might have a lot of inventory and, and certainly that was the case with me in the area I bought, there were a lot of rentals, both long-term and short-term, mostly short-term rentals. So I was up against a ton of competition and I had to differentiate what I was doing in that local area in order to stand out. So I ended up overspending, I will admit overspending on theming that particular property, it’s a six bedroom, six bath home. It’s rather large, but I wanted to make it the most eye popping, outstanding short-term rental in that area, in that whole vicinity. And I think I accomplished that.
It, I was told it was referred to as an extreme Airbnb. It is certainly over the top. It’s not just painting and, and you know decorations in the house. It’s well over the top. I should actually post an article on the blog with a link to the website, the YouTube video that has an aerial view. And by the way, this, if I do post that, which I probably will that’s an old video old in the sense that I, I did that after the first wave of upgrades and renovations in theming that property. I have since gone back and added more murals to the wall primarily, but I’ve also added some other little things here and there. So I don’t have a video of the new version of that home, the upgraded upgrade. But the point I’m trying to make is that you need to be careful if you’re targeting areas that are destination markets because the greater the competition, the more the supply and therefore all else being equal, it pushes the nightly rate down because everybody’s competing for that same customer.
And with more competition, it, it drives it down. Now having said that, that sounds like bad news if you will, but it’s not. If you do the short term rental thing, right, you can make some pretty good money. The nightly rates are high. It’s kinda like hotel rates sometimes more. But you have to realize that it’s not occupied all the time. Not every night is filled. And if you’re lucky, yes, you’ll have, you know, a very high occupancy rate. Anything cons, anything over 70 to 80% is considered very good. Like very, very good. So this is definitely a place where you need to run your numbers. And short-term rentals are definitely an area where you need to do strong due diligence in the area or the market or the neighborhood that you are looking to invest in, because you need to make sure that you got your numbers right because you’re making a lot of assumptions, you’re making assumptions about the the nightly rate and that the nightly rate will hold over the course of weeks, months, and years because markets do change and there might be more competition coming in.
So you have to understand that nightly rates fluctuate. It’s not like a short-term rental where it’s 1200 a month, that’s the market rent and it’s gonna be pretty consistent. And if it changes, it might change up a little bit or maybe even down a little bit. But you know, you’re not gonna have wild swings with short-term rentals. You can have very different nightly rates from week to week and month to month, especially during what are referred to as low season, high season. And that differs from market to market and region to region. It’s all local as well as weekends versus weekdays, et cetera, et cetera. So it is very, very much time of the year specific. But again, done right with the right due diligence and research, you can certainly make a healthy income off of a short term rental, but there are more moving parts and there’s more consideration because you are making more assumptions.
Yeah, I think I beat that to death. There was one other thing I wanted to mention about the assumptions. The assumptions have to do with the nightly rate as well as your occupancy. That was the other thing I wanted to mention. You’re making assumptions about the percent of the month, the, the number of nights per month that that property will stay occupied. And of course, it’s a different type of property manager. There are property managers specifically for short term rentals because they treat them like hotel rooms. They will go in, turn it over and go back once your short-term tenant leaves because the turn has to happen relatively quick as you may have someone moving in the same day that your previous guest moved out. So there are books and courses on this kind of stuff. It’s not something we necessarily teach, but I know that we have had clients that have purchased the turnkey rentals through us, through our network of property providers that have turned those properties into short-term rentals and are doing well.
Again, the key thing here is the location. Very, very much specific to its location, even down to the street level in some places. So Mark, keep that in mind, but just wrapping this up, you know, in regards to a looming recession or a slowing of the economy, absolutely that can affect you. Again, it’s gonna be very much market and location specific, but you know, a a a strong recession will prevent people from traveling. People will you know, stay home, sit tight, maybe do a vacation as opposed to a vacation. So keep that in mind, but keep in mind also that recessions are also temporary. You know, they might last anywhere from six months to two years. So could it impact you? Yes. Will it impact you? Maybe where you’re located with your, any rental, but especially short-term rentals will certainly be impacted by the depth of the recession or a slowing of the economy.
So again, something keep in mind, but those are forces that you can’t necessarily control, but you can anticipate and maybe protect yourself from. All right, thanks for the question mark. I was long-winded in my answer and I apologize about that, but I’ll try and give you more than you asked. All right. Third question, Danielle. I believe it is. Hello. I love your podcast and I look forward to them weekly. Thank you. exclamation mark, exclamation mark. Well, you’re welcome. I want so badly to start my journey with an investment property, but I feel stuck on the financing part. A little background into first, my husband and I own a home and are in the process of getting a HELOC which is a home equity line of credit, getting a HELOC open so we can tap into the equity if needed. We also have been pre-approved for what Merrill Lynch calls a mortgage 100, where they use our stocks as leveraged so we can get a 0% down payment loan and add a good interest rate due to the stocks with them.
Well that’s interesting actually, I’ve, I’ve never heard of this mortgage 100. So the ability to actually purchase a property with no down payment is intriguing. There are dangers with it, of course, but that can give you an infinite rate of return because if you’re not putting anything down, you know, any return divided by zero is well is not possible. But no down payment essentially gives you an infinite rate of return. The problem with that method is that the numbers don’t work on an investment property when you don’t put any down payment. So here’s my question. What do you think is the smartest way to finance the down payment? Would you use the HELOC? Would you sell stocks even though I know you get capital gains tax? I’m leaning towards this because I would like more balance in our investments anyway, so it’s not so stock heavy.
I would ideally have more in investments in real estate, multiple exclamation marks, or would you do the mortgage 100 since I am offered that and keep trying to make the numbers work, or maybe you have a different thought altogether, help exclamation mark. I just want to move forward so badly, but I want to be smart. Thank you so much, Marco. All right, Danielle, this again is a math problem, a math question. So I almost wanna recommend you talk to one of my investment counselors here because we have had quite a large increase in the number of resale properties that we have available to us. And what I mean by that is they are properties that are newly renovated. So they’re in like new condition, they’re not new construction, they’re just newer or like new properties. So they’re, there’s no deferred maintenance. It’s, it’s like buying a property in a, in a mature area, a mature neighborhood that’s not new construction.
And there are often many benefits to that, especially being in a highly desirable neighborhood that is a mature neighborhood. And the reason I’m bringing that up is because of this, those properties tend to do much better than new construction properties with the same down payment, meaning all else being equal, they just tend to do better. And the reason for that is because the purchase price for the same square footage is often lower than new construction and the rents being the same, the monthly rent. So said another way, the rent to value ratio or rent to price ratio is going to be higher with those resale properties than with new construction. Again, all else being equal. So with that in mind, maybe your zero down loan, that mortgage 100 product will allow you to cash flow positive on those properties. Again, we’ll have to, you know, run the numbers and show you different examples or, or some properties.
You can also go on the hunt yourself and pick a market or submarket or, or a smaller market and find some properties that might work. And you could just run the numbers yourself. You know, there’s more ways than one to do this, but here’s the thing. If you’re gonna finance something 100% meaning no down payment, you’re gonna have the largest possible debt service on that loan. So your mortgage, that mortgage 100 from Merrill Lynch will have the highest monthly payment because you’ve literally put no down payment against the property, you’re borrowing the full amount of the purchase. And if that doesn’t pencil out or pencil out the way you want it to, the solution is simple. Just scale it back. Just use 95% of that mortgage or 90% of that potential credit that you have available to you. It doesn’t have to be all a hundred percent down, meaning no down payment.
So just run the numbers and test it out, like I was saying at the very beginning of this episode, where you can run different scenarios of the mortgage calculator and see what pencils out. Now, of course, if you get into, you know, smaller markets, second tier markets like the Midwest and other markets that we’re in, and even tertiary markets, which are smaller markets that are really more further out, what almost call bedroom communities to some of the major markets, you’re gonna find the cost to purchase investment property goes down. Yes, it’s a, a smaller market, and I’m not saying go into towns, I’m talking about smaller cities where property values aren’t as high, the rent value ratios are better than other locations. It is just the numbers work better often in these markets, you may not see the same appreciation potential in tertiary markets as you do in secondary markets or the larger markets, but that’s okay.
It depends on what you’re looking for, of course, and your strategy. But if, if your main driver here is the the lowest percentage down, then those are places to look. What else do you have here? What I would recommend you do is look at a bunch of options, maybe consult with one of our investment counselors and run numbers on a bunch of scenarios. Pick a market that has stability and most importantly, in my opinion, make sure you focus on stable, good, good neighborhoods. Often how I grade them would be, you know, from a’s all the way down to D, which is a war zone. I like the b, what I’ll classify as B plus and a minus neighborhoods. If you stick to those types of neighborhoods, good neighborhoods with desirability, you will do fine. You will do fine. But again, don’t let the numbers steer you wrong and put you in c-class neighborhoods or undesirable markets because the numbers happen to work for you there.
I did that, that was my mistake when I first started early on in 2003 and early 2004, I didn’t really think much at all about the neighborhoods. I I just had lots of credit available and I went gangbusters buying property after property. Some of it worked out, some of it didn’t, and I ended up giving back or losing or selling some of those properties. So yeah, I learned from my mistake. So that is what I would do. I’ll kind of just wrap that up there, but again, I, I think we can deep dive into this if you want to talk to my team. All right, well I think I will take one more quick question here because it kind of ties into some of the previous stuff I’ve talked about. And this will be quick. Shara, I believe is the name. Hello, I’m an investor out of California and I’m wondering what out-of-state markets to pay attention to for buying rental properties.
Thank you Shara. Kind of a high level question and, but it’s a good question and I will give you a high level answer. <Laugh>, I’m going to avoid naming specific markets here. I might just gloss over some. But essentially what you are looking to do is what we talk about, what I talk about all the time, and that is focus on markets that have stability. They have stable job market or maybe a growing job market. So there’s job growth that would be ideal and a stable or ideally a growing population. Those are the markets you want to focus on and not necessarily the larger tier one markets, which are the, the New York’s, Los Angeles and San Francisco. Those markets are gonna be expensive and overpriced, and the rent to price ratios don’t work. Stick to ideally the eastern half of the US flyover country, the Midwest parts of the northeast, the south, southeast, and all the way down through Florida.
That’s where you tend to find markets that make sense in all ways, fundamentals and the numbers. So general advice, but not specific investing advice to you or anyone for that matter, but that’s what I would focus on. Out-Of-State markets, there’s many of them, you know, we’re in a country with over 500 metropolitan statistical areas, so you have lots to choose from. Even when you start breaking it down into submarkets and even areas and neighborhoods, you’ve got lots and lots and lots to choose from. All right, well anyway, Shara, all I can suggest is, you know, maybe follow up this question with a conversation with one of our investment counselors. That’s just such an easy thing to do. There’s no cost and there’s no obligation. Why wouldn’t you take advantage of that?
Alright, well that is it for today. I appreciate you all listening. I hope these four questions were helpful to most of you. If you have any questions, please send them my way. If it’s about real estate finance, me personally, doesn’t matter, I’m I’ll take it all. Just go to passiverealestateinvesting.com, click on the Ask Marco button and submit your question. Remember to subscribe to the show if you haven’t done so already. And share this show with other like-minded individuals like your friends and family. Thank you for listening. I’ll see you all on our next episode.
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