Welcome to another episode of passive real estate investing. I’m your host, Marco Santarelli, and welcome to the show and welcome to 2021. You know, if you are a new listener or this is your first episode, I hope you enjoy the show. I hope you enjoy this episode. And if you enjoy it, please remember to subscribe. We are available on all platforms from iTunes to iHeart radio, and we are heard all around the world. Of course, the majority of our listeners are in North America, but this is a great show because I like to share mostly stuff related to real estate investing. And that’s pretty much what I focus on. But of course, from time to time, we’re going to talk about things like personal development, your own personal growth and goal setting, and whatever it may be. So today, the thing I wanted to do is actually create an episode, which is just me, mostly a monologue, but I took three questions that I got from people submitting their questions to me via email through the website of course, mean I’m going to refer to this as just an ask Marco three-pack.
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So I picked three really good questions from three different people. And I’m going to turn that into just a single episode before we go there. I just want to comment. It’s just been less than two weeks of 2021, and it’s been such an interesting year so far. There is so much news and media attention on the changing of the guard here in the US with one administration leaving and another coming in, regardless of your political view. To me, it’s been an interesting theater show to watch I referred to politics as political theater, because so much of it just seems to be amusing to put it lightly. But anyway, that’s going on. We have historically low-interest rates, mortgage rates specifically, which has been not only fueling the housing market as a whole, but it is created just incredible opportunities for us as real estate investors to purchase with historically low-interest rates.
It’s cheap, cheap money. And if you really think about it, real rates of inflation are probably higher than the mortgage rate that you have. So it is essentially free money and not only is it free money to subsidize the purchase of your investment properties, but your tenants are paying it off for you. So if that’s a good deal, which by all accounts, it would be an is how much of that do you want? I would be scrambling to acquire as much down payment capital as you can, and build a real estate portfolio. If you haven’t started or just to increase the size of your existing portfolio, of course do it with the right team in the right markets, in the right places with the right properties. And you’ll do very, very well, but the mortgage rates have been incredibly low. And speaking about Lowe’s, let’s talk about highs for a sec.
I don’t know how many of you actually follow cryptocurrency and specifically Bitcoin, I’m not promoting advocating Bitcoin by any means. I do own some and full disclosure, but not a lot, very little, but I do find it interesting. And I studied it years ago. The whole blockchain technology is actually fascinating if you ever want to, um, you know, entertain yourself by learning something that is just really revolutionary. And I think is going to radically change how we do commerce and finance. In fact, it’s already changing how we do commerce and finance really the day will come where you will be making transactions and just doing regular commerce, using the blockchain without even knowing it, it it’ll be completely transparent just like when you go to a store today and you make a purchase with your debit card and it just goes through, you know, Stripe or whatever else it may be.
You don’t see the technology that’s behind it, but the whole blockchain technology and cryptocurrency specifically will change how we do commerce and it’s happening already. So, you know, that’s not fiction. That is a fact, but my point is, is that Bitcoin over the weekend. And I was actually watching this happen in real-time on my computer, but Bitcoin actually, I think it touched or just broke the $41,000 price point per Bitcoin, which is an all-time high. It was unbelievable. There was just rapid buying for the past three days, at least three days as of when I’m recording this. But yeah, it hit $41,000 and now it just dropped to about 33 34,000. And it’s hovering around that point right now. So anyway, that’s neither here nor there it’s been an interesting year so far. So a quick reminder for those of you that are not aware of the promissory notes that are available to you, if you’re an accredited investor through Norada capital management is a sister company to Norada real estate investing and Norada real estate funding.
Those are available to you for a limited time. We do these in tranches. So that gives you the opportunity to receive monthly interest income based on your level of investment, which the minimum is 50,000. And that starts at a 12% per year interest rate, which is paid monthly. And it goes up from there to 15% and then 15% plus a bonus. So if that’s something you’re interested in, just go to our website, there’s a page on there and you’ll find the link at the top, just click on notes. And the last thing is a bit of a teaser. I’m letting the cat out of the bag slightly early, but this is only just a teaser. So we will be launching. When I say we two business partners of mine are looking to launch a mastermind group of some kind. We have it pretty much mapped out, but we will be launching it this year.
And probably sooner than later, I have a nice surprise that goes along with that. I’m not going to mention that I’ll leave that for a future episode. So just subscribe and keep listening, because you will definitely recognize the name of the person associated and tied to this mastermind group. And it’s probably someone you want to be in the room with and meet because he is on television all the time. And he’s probably one of the most well-respected business people out there today. So I will, uh, leave that for another episode. So let’s jump in and talk about today’s topics. So the first one is really about healthy debt levels. And I got this question in from Kevin and Kevin writes in saying, assuming I am still building my single-family, residential rental portfolio, and actively purchasing and adding houses. What percentage of leverage or debt is quote-unquote healthy on a single-family, residential rental portfolio, when calculating that percentage, do you divide your total mortgage debt on the portfolio by the combined original purchase price of all the houses in the portfolio or the combined current as is value of all the houses in the portfolio or the combined after repair value of all the houses in the portfolio?
All right. I know that was probably a lot to comprehend. It was a mouthful and one long sentence. So let me break it down for everybody listening. First of all, Kevin, thank you for the question now for you and everybody listening. Let’s just break this down. I like to simplify things as much as possible. Really what you’re asking is what is a healthy level of debt as it relates to your portfolios of value? Well, the first thing I’m going to throw out at you is define healthy. What is healthy to you? I think this is a subjective thing for the most part because what is a healthy debt level to you might be a different or a completely different level of comfort and health to someone else. And it also depends on the perspective you’re looking at it from, is it a personal thing or a psychological thing where it’s just your comfort level saying that, Oh, I feel better if I only have 50% financing or debt, if you will, or leverage on my portfolio compared to let’s say what you might purchase a property for, which is 80% financing and putting the other 20% down.
So you have to kind of define what healthy is and what, and what it means to you. Is it more about comfort or is it more about what the lenders are going to see when you go and get financing for your next purchase or your next refinance or your next cash out loan? So the perspective whether it’s yours or the lenders or someone else’s is one thing about, you know, defining health or healthy. The second thing is about growth. Okay. If you are looking to continue to build your or portfolio as effectively and quickly as possible, then you’re wanting to leverage your investment capital as much as possible. You want it to go as far as possible or buy as much real estate or quality real estate as it possibly can. And if that’s true, then you want to obviously maximize your down payments against how much you borrow.
So you want to borrow as much as possible because you want to put as little down as possible because you want your down payment capital or your investment capital to buy as many properties as possible. It’s a lot of possible words in there, but get what I mean. So you’re maximizing the loan to value or LTV in order to get as much property in your portfolio as you can. And that’s a growth focus. The flip side of that is you’re focused more on income at a particular time for whatever reason. And so now you are looking to use that level of debt that you have, or that you carry or you and your spouse to be able to refinance and reduce your loan. So if your strategy is growth than you want to acquire, as much as you can with what you have, if your strategy is predominantly an income focus, because you have been building your portfolio, then what you’ll probably want to do is refinance your properties to get the lowest possible interest rates.
Assuming you haven’t done that already, uh, with rates as low as they are, and then reduce your loans as quickly as you can. And that doesn’t necessarily mean that you do them all at the same time. Sometimes the better strategy is a snowball effect of paying down the quickest one or the easiest one first, and then taking the extra cash flow from that one property and applying it to the next property that you can pay down the quickest and so on and so on. And that just creates a snowball effect. So what you have are completely debt-free properties as you go, this is not necessarily how you would start or what you would do in the early stages or early innings of your game if you will. So I know that’s kind of answering your question directly, but indirectly, but keep something in mind when it comes to loan to value.
This is kind of the other part of your question. What do you compare it to? Well, if you’re just buying your first property, or if you’re looking at any one property on day one, your healthy debt is essentially fixed it’s 75% or 80% of the purchase price, because that was what you bought the property with. You had a down payment of 20 or 25% or maybe more, and your loan to value is whatever the purchase price was on day one, as time goes on, you can compare that debt to your as is value. Your loan should be amortizing, which means that your loan is getting lower and lower. And hopefully ideally as time goes on, the property value will increase. So your equity is growing in two ways in the property and your loan as a percentage of what that property is worth as each year goes by, should be getting lower.
Your debt will get lower, your equity will increase. And that’s just basically how you create wealth with real estate. That’s how it grows over time. So at this point, it’s a point in time you’re comparing your debt versus the property value or your portfolio value at a slice in time. I don’t understand the after repair value part of your question, because the assumption that I’m making is that you’re not buying distressed properties. You’re buying properties that are in like-new condition or they are new. And so the property value is the property value. At that time, it’s not discounted because it’s distressed. But for me, I look at it this way. I don’t really look at it as a percentage at any given time and call that healthy or unhealthy. I look at the strategy is my strategy to continue to grow, uh, maximize my investment capital and maximize the equity by reusing that equity.
If I can pull some of it out to reinvest or refinance or do a 10 31 exchange to grow my portfolio moving forward, or am I at a point in time where I have the right number of properties for whatever my goals are. And I’m now looking to minimize or eliminate that debt to increase the monthly and annual cash flow. So healthy is just a matter of perspective and it’s subjective. It’s going to be different for everybody. So although this answer to your question is not overly specific. I want you to think about it in conceptual terms and from a strategy perspective, if you need more on this, just reach out to my team or myself and, you know, we can certainly talk about this further. Lastly, my closing comment on your question here is focused on growth and or the returns more so than what your loan to value is on a property or on a portfolio that comes into play.
When you are trying to grow your portfolio, it also comes into play when you’re trying to eliminate debt, because you’re now trying to increase income. Anyway, I hope all that made sense, Kevin, I appreciate the question. Thank you. Okay. Moving on. Next question comes from Alyssa and she says, hi Marco. I am a real estate investor, property manager, and mom of two little girls. Congratulations. I’ve been listening to your podcast while exercising and cooking dinner. Hopefully not both at the same time, but she says, well, exercising and cooking dinner, basically whenever I have time. And I love it. Thank you for the wonderful information you provide to your listeners. You’re very welcome. We are considering our next investment and I am particularly enjoying your market spotlights. I think I need to do some more of those well, considering places like Florida and Arizona, however, I can’t help, but wonder about what will happen in the next 10 years due to climate change, we are currently in California and the fires have caused us to consider relocating and investing remotely.
It seems like people are leaving California in droves right now as an investor, I am hesitant to select markets that are also experiencing extreme weather at the same time. These place’s growth and appreciation seem to be increasing at a really impressive rate. Thank you for your thoughts on this matter. It seems like this will be an important factor moving forward as an investor in our modern world, all the best. Alyssa, Alyssa, thank you for the question. All right, well man, let’s unpack this. So first of all, I hope you weren’t affected by the California fires, but it seems to be one of our four here. So it’s not unusual. We just seem to have them every year and some years are actually worse than others, but it seems to go in waves. One of my friends just moved into the Hills and they were less than one mile away from one of the last fires in Santiago Canyon.
So I can understand the stress and fear that comes from that. But it’s something we have to live with. I’m not sure how that plays into what you’re doing unless it’s, you know, threatening to you and you want to move for that and other reasons. And I wouldn’t blame you cause there’s a lot of garbage that California seems to carry with it as much as I love California at the same time. And I’ve been told to move many times. So, but anyway, yes, there are a lot of people leaving California and there have been a lot of people moving out of California for a long, long time. In fact, as far back as I can remember, which was 2003, but I’m sure it’s been going on for a lot longer than that. Interestingly enough, at the same time, there are also a lot of people who are moving into California, but I’m not sure what the demographic breakdown is.
I think, and I’m not a hundred percent sure about this. I think a lot of the people who are moving in are in the bottom two fifths if you will, the bottom two Quintiles of the economic spectrum. And a lot of the people who are moving out are people who are millionaires or high-income earners and wealthy people, even Elon Musk is now talking about moving, but there are many people who are in the news. It seems all the time who are relatively wealthy or high income earners, or have big companies with lots of employees that are moving out of state because of the crazy regulation, overregulation high taxes, California is either the first or second most taxed state in the country. And the franchise tax board is by many people, the most draconian state tax board in the country as well. So I mean, there’s a lot of reasons why I think people are moving out of the state, you know, even politics aside.
But when you talk about extreme weather, I’m not exactly sure what you mean by extreme weather. I know that we have all kinds of things going on around the country in terms of whether it be tornadoes or hurricanes or even earthquakes and fires, but I’m not sure how that’s affecting you, but climate change, you know, as much as that whole topic has been politicized, I will say that there is a lot of information and misinformation out there about climate change and the effects of climate change. And I think you and I, and everybody else should probably look at that cautiously and not get sucked into one argument or the other, or one side of the argument or the other. And it just seems that there are so many models out there that are so different from each other and sometimes they even contradict each other.
So I honestly don’t know, you know, what’s going to happen or how it’s going to affect real estate. But if it is an issue and sea levels are rising and you are buying property on the coast or near enough to the coast near enough to sea level, where that can affect you. Or if you’re in areas that are prone to be affected by hurricanes, then maybe avoid those areas. If you’re not comfortable with them. I mean, that’s just the simplest answer to the concern. I know there are forecasts out there showing temperatures rising anywhere from two and a half degrees to 10 degrees Fahrenheit over the next century, which is a hundred years how that’s going to affect sea level and you know, water along the coast. I’m not sure, but there all kinds of, you know, future effect projections, including temperatures, rising, making droughts, more common, sea levels rising.
What else is there? Precipitation patterns, changing hurricanes becoming stronger and more intense. The sea level predictions are that they will rise between one to eight feet on the high end, by the year 2100. So, you know, what does that 20, almost 79 years away? I don’t know. I’m not sure what is true, but I will say this. I am not going to let that affect my real estate investing at this point in time. You know, I’ve got property down in Florida and it is not far from the coast, but the one thing I love about real estate is it’s very slow-moving, especially relative to other assets and other asset classes and investments. So if you see something coming rising, sea levels or hurricanes becoming worse and worse year after year, you have to look at trends and you have to go back long enough, far enough in history, you know, to actually see this.
It’s not that things turn on a dime and change overnight. So if you see things that are progressively getting worse for you as an investor or a place where you live, then what you do is you just get up and move or you just sell your properties in that location and move your equity to a 10 31 exchange and build your portfolio or move your portfolio or part of it into another market. That makes more sense at that time. So I don’t think you’re going to be harmed or hurt by investing in markets that, you know, using your words are really impressive. But if you’re looking for that growth and appreciation, then consider more than one market that will provide you that growth and appreciation. It doesn’t have to be a coastal market and make the investment and then just watch it year after year and just see if things are actually getting worse.
And if they are, you have the knowledge and the awareness to make a move before the general public, before the masses, you can basically take your profits and move elsewhere and continue to build your real estate portfolio and stay out of harm’s way if that’s really what it is. So I guess the suggestion I have after saying all this boiling down, all these words to a few, it’s basically this just be aware of everything that’s going on at a high level, whether it be politics, geopolitics, interest rates, the economy, climate change, rising sea levels, whatever, just stay on top of it. You don’t have to be an expert, but just follow the trends and be aware of what’s going on year after year. It doesn’t even have to be month after month and you don’t want to drive yourself crazy and you know, worry and stress over it.
So I’m not sure if I’m answering your question. Exactly Alyssa, but I think what I’m saying is don’t let things like climate change and whatnot, hold you back, be logical, objective, and prudent. Put your thinking cap on, look at things realistically and objectively, make sound decisions, have the right team around you to advise and counsel you and just move forward. I don’t think that anything is going to change a lot from year to year the sky, certainly not falling. And you’re going to be fine in the short term and in the medium term long-term you can just keep your eyes open and watch how things are unfolding. All right. That was a general answer, I think for the most part, but I hope it helps. So good luck with that. And if you need help, just reach out to me or my team. All right.
Well, last question here is from Devin. Devin writes in and says, hi, Marco. I currently work a job where I receive a W2 income to verify my income. Okay. But I’m hoping in the next six to 12 months to leave my job and be self-employed. I also receive income from some stock trading. I do my concern. However, is that once I don’t have a W2 income to verify my income, it will be harder to get financing, to build a real estate portfolio for those who are self-employed, what is the best way to get lending? Thank you for all the content you share on your show. I look forward to each episode you release and love telling others about your show as well. My wife and I are in the process of getting lined up with one of your investment counselors to begin our journey in real estate investing.
That sounds great Devin. So first of all, thanks for the question. Congratulations on moving forward on investing as well as creating your business. And yes, we are looking forward and excited to helping you build that real estate portfolio. And you are going to take this one step at a time. So this is a very good question. And let me, I think I have an important tip here for everybody listening. So just hang tight. First of all, income is very important because when you get financing, especially conventional financing, you need to prove income. And the operative word there is you need to prove your income. So income is important. It is one of the main requirements to qualify that and your credit score, your credit profile, but your credit score, the thing is, is it’s not just W2 income that you need or need to qualify.
It can be any and almost all documentable sources of income. So if you are paid on a 1099 basis every year, that usually is qualifying income. Now I’m not a loan officer or mortgage broker. I know enough about it to talk about it, but ultimately I’m going to put you in touch with one of our five or six lenders that specialize in doing investment. And they certainly can get down into the weeds with you on this one. But all documentable sources are most, all of them are qualify as income. Now, when you have a good loan officer that you’re working with, like the guys that we work with, the people that we work with, they can help you structure your different sources of income in a way that allows you to qualify for financing. So this is not breaking any rules. This is just working within the rules that are there and the guidelines to help create the best possible scenario for you to qualify for financing.
So sometimes it’s bending the rules, but it’s never breaking the rules. And sometimes it’s just really reclassifying the type of income that you have that allows you to qualify. Whereas having it in a different way would not allow you to qualify. Also, the other thing that I want to point out is if you don’t have qualifying income, but your spouse does well, that will work. As long as your spouse can show income and they qualify, they have the credit score for it, then you’re fine. And often we always recommend that you and your spouse qualify separately if you can, and not be on the same loan at any given time, because you want to maximize the number of loans that you can get between the two of you, theoretically speaking, that’s going to be 20 conventional loans, 10 each, and then you get the portfolio loans thereafter, which is something we can help you with as well with Norada real estate funding.
Those are basically portfolio loans. They’re not the government-sponsored entity loans like the Fannie Mae Freddie Mac loans. So that’s what I want to say about the W2 income. There was one other thing I want to mention about that. Oh, you want to show one to two years of that income. So if you’ve been working with your current employer for two years or more then that should be a non-issue because between your W2 statements or your 10 99 statements and your bank statements and or tax returns, you should be able to qualify on that part of it without a problem. Now here’s a tip. I saw someone do this, or actually not saw someone actually spoke to me about this when it was too late. She wanted to get into real estate investing full time. And that’s great. However, the mistake she made is she quit her job.
And she was talking to me months after this happened, but she quit her job, which effectively ended her income, her W2 income. And she was no longer able to qualify. And I kind of rolled my eyes and I thought you really shouldn’t have done that. And the reason for that is you would have been better off keeping the job working and getting that income in order to qualify for financing while you’re investing. So you can continue to buy and build your real estate portfolio while you had the income. Then when your portfolio is big enough to support you, then you quit your job. Because at that point you don’t need that qualifying income. And it still is not a bad idea to keep the employment, the job, whatever it is, the business, to keep that income coming in. So you can continue to qualify for financing to do other things, but she kind of jumped the gun and decided to quit her job so she can get into real estate investing full time.
The problem is, is she essentially cut her legs out from under her because now she is a full-time real estate investor, but she’s not able to invest at least not get financing to invest. So that was a big mistake that she didn’t really consider before she essentially handed in her letter to quit. So don’t do that. Anybody listening to this don’t quit your job too early, stay with your employer or your employment or your source of income. Don’t cut out those sources of income because you’re going to need them to qualify. Now, if you are launching a business, my only advice there is these most businesses are not started by someone who just jumps into it. Cold Turkey businesses are difficult to start difficult, to grow and difficult to sustain for a prolonged period of time. But when you get past those major hurdles to your Mark and especially the five-year Mark, then you’ve got a legitimate, sustainable business.
So if you can build it on the side, part-time weekends, evenings, whatever do that while you have the other job. Yeah, it’s a sacrifice and yes, it’s going to be a time time-suck, but that’s the, uh, that’s the price you pay to build a real legitimate business. And so that’s what you’re going to have to do. My suggestion is if you can try to build that business so you can show at least a trailing 12 months of revenue or income that can allow you to qualify for financing and then leave your current employment. And before you do that, talk to a mortgage broker or a loan officer, talk to one of the ones we work with and ask them if you would have enough to qualify with what you have before you leave your job, because if you do great, then you can move forward. As long as you’ve got the income to survive and the ability to qualify for financing. So Devin, I hope that helps long answer to your short question.
All right, well, that’s it for today. If you have a question about real estate investing or finance, send them over to me, just go to the Ask Marco link at the passiverealestateinvesting.com website. Again for the third time, remember to subscribe to the show. Thank you for listening. I will see you on our next episode.
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