Passive Real Estate Investing and Single-Family Properties

When it comes to investing in single-family homes, it’s really about the market. Understanding the location of which you want to invest in. Does it have what you’re looking for most properties? Be it cash flow, appreciation, or maybe a combination thereof? I can’t tell you how many investors that I talked to that make this common mistake. They get invested into a market with a certain expectation that it’s going to have a great appreciation or it’s going to be great cash flow, and then it doesn’t work out because they did not understand the market they were investing in. That is not why you should be investing there.

What I thought I would do with this podcast is to bring on an individual who I had known for 17 years in the real estate arena, in the real estate space, and he is an avid investor. He works with investors all over the country to source properties for them, to analyze the markets, to make sure that he’s matching them with the appropriate types of investment that are going to help them build their portfolio to get them where they want to be.

With that, I’d like to introduce Marco Santarelli, CEO and founder of Norada Real Estate Investments and he’s also the host of the Passive Real Estate Investing podcast. I don’t know if you guys have listened to this, but I have to tell you it’s on my list. It’s something I listen to every time he releases a podcast episode. I highly recommend you to get signed up for it so you’re notified whenever he releases a new podcast. With that, Marco, how are you doing today?

Marco: Great, Clint. What an intro. Thank you so much. It’s great to be on your show.

Clint: I’m glad I have you. This is something for the listeners. Before we got started we were just talking and saying he and I keep running into each other in different places. On elevators, in hallways, in hotels. We got to get reconnected and got on each other’s podcasts because it’s been some time since we talked and so we finally were able to work it out. I think we had this scheduled for seven months and things kept coming up and we couldn’t be…

Marco: Yeah. You and I travel so much. In fact, we were talking about that before the recording. We got to stay home a little bit more, but I’m excited to get you back on the show because I actually looked it up on our spreadsheet and the last time I had you on was about three years ago, so we’re long overdue to talk about asset protection and everything that goes into it. I’m really looking forward to getting you back on our show.

Clint: I’m looking forward to it. I feel a little hurt, it’s been three years. What did I do to deserve that type of treatment?

Marco: Well, we’ll make up for it.

Clint: Awesome. Talking about single-family homes, there are so many people out there that are turnkey investment providers. They can put you into some houses in certain markets that are typically outside of your own market. How did you get started doing this yourself? Because you live in California and I know you invest outside of California. Maybe start with that.

Marco: This goes back to 2003–2004. I’m here in a market that was accelerating in terms of price growth. It got to a point where not only was it very competitive and hard to find deals, but the better deals were actually in other markets like the Midwest, the Southeast, and the Northeast. I had to venture out of my market and start investing 2000 plus miles away in markets that made more sense for me at that time to achieve my investment goals. Not knowing anyone, not having a system or framework to work around, I had to create everything from scratch so I had to build my team, and teams are critically important in real estate. 

I was assembling my acquisitions team, my property managers, my inspectors, at that time my general constructors because a lot of it was distressed or semi-distressed and I had to fix it up, so I was more of an active investor than a passive investor. That’s really the genesis of my investing out of state. I felt and bruised myself many times. I got ripped off by many people, contractors, and property managers. I made a lot of mistakes, but fortunately, (a) I learned from that, and (b) now I can pass those lessons on to other people which is exactly what my investment councils and I do literally every day of the week. That’s how I got started as an out-of-state real estate investor. 

Clint: That’s my story as well. You realize there are better returns outside of the state in which you live. I live on the coast just like you do and you go to the middle of the country, I heard somebody say this the other day that was rather interesting. He lives on the coast and he said he will only invest in red states. He won’t invest in blue states. The numbers just always worked out better there. I thought you know what? I started looking at where I held all of my investments and I said, yeah, there’s some truth to that as far as the returns go.

Marco: Yeah, there is truth. A lot of that has to do with taxes whether property taxes, or state taxes, or just the unintended consequences of policies that politicians put through that end up driving prices up. The other thing probably wasn’t mentioned is that typically blue states have tenant-landlord laws that favor the tenant much more so than you as the landlord. The chips are stacked against you it seems.

Clint: Totally. There was an individual I was sitting next to on the plane just a week-and-half-ago, I was flying back to Washington, and this individual manages real estate in Spokane, Washington—another blue state of course—and it was amazing. One of the people on the city council had proposed to change the landlord-tenant regulations in Spokane such that if you evict a tenant—you bring in a lawful container action against a tenant—you have to give them back all their security deposit plus $1500 to find other accommodations.

Marco: Oh geez. That’s terrible.

Clint: It’s insane.

Marco: Think about this, Clint. How many new investors do you think are going to be interested in “investing” in that market, going forward? 

Clint: That’s right. Nobody is going to do it. Look at California. I think they are intentionally working hard to destroy the rental market there for people.

Marco: Yeah, they are doing a good job of it. 

Clint: So we figure out that we don’t want to invest on the Coast. You said you’ve done some looking around and I’m sure you’ve identified markets. What goes in your criteria when you’re looking for properties. What should people be looking at? And what do you look at?

Marco: I’ll say that’s a good question but I think I need to take you back a little bit in the sense of it’s not always and only about the property. When you’re investing, you really have to take a step back and take a more macro view of things, which interestingly enough, it ties into one of my ten rules of successful real estate investing, and that is number six which is to take a top-down approach. 

This is one of the mistakes I made early on. I was looking at properties and I was so fixated on the properties that everything I did, all my decisions were based on the property. I was investing from Florida all the way up to Michigan, so I was covering many states. I was actually actively investing in Detroit, Michigan of all places. Regardless of what you think of it—good, bad, or otherwise—the mistake I made early on is that I was being presented with properties that had incredible performance or actual cash flow because I had Section 8 tenants in them. 

What didn’t dawn on me at that time is that if I step back and look at the street, the neighborhood, the region around it, then the market too, I would have realized that maybe this wasn’t such a good investment because there were a lot of burnouts on the street. There were very high crimes, terrible schools. The demographic of the tenant pool in that area was sketchy, sometimes sketchy at best. They had little to no credit. They were always late on payments. Sometimes they miss payments. Eviction rates were higher. All these things play into the demographics, the neighborhood, the characteristics, and everything else tied to it. 

The point I’m trying to make is this. You really need to take a top-down approach when you’re investing. It’s not just about the property and the criteria for your property. You should always select the best real estate markets that align with your investment goals. Most investors start by analyzing properties and they have little to no regard for its location. That’s a big mistake. 

The best approach is really to first choose your city, town, or market based on the health of the housing market, the local economy, things that make up the local economy such as jobs, job growth, the unemployment, population growth. Is it a market that is declining in population or increasing? Then from there, you can narrow things down to what the best neighborhoods are in terms of amenities, schools, crime, renter demand, just the general appeal and demand for the local area. Then finally, you look at the best deals within those neighborhoods with your team.

That’s what it’s all about. Take a top-down approach. Don’t just be fixated on the property. Hopefully, I’m not sounding like a preacher here, but I like to take a top-down approach as opposed to just looking at the property.

Clint: What you’re telling people it sounds like there’s a heck of a lot of work that goes into this. It’s not simple as I’ve seen some people do to get on a website, they look at the top ten cities and think that’s where I want to invest. There’s more to it than that and if you’re not analyzing it, you’re not up on all of these various factors that you just mentioned, and there’s more. I know that because you have ten different steps. We don’t have time to go into all of them, but I think they can get a copy on your website where you can read about your ten steps.

Marco: Yeah. The ten rules are always posted on the top of the blog on both of our sites. 

Clint: Now people, you can see that link in the show notes. For those that want to go right to that after this podcast, what is the address?

Marco: Our main website is noradarealestate.com and it will be easy to find it from there. You just click on learn or blog at the top and then it’ll take you straight there. It’s the first thing you see.

Clint: Okay. You’re analyzing all of these, make sense and you’re finding the markets. Right now for 2020, because what I always hear from people, they’ll say Austin is great. I’m going to go to Austin (for instance) because it’s been hot. Yeah, it has been at certain times it was hot, maybe three or four years ago is the right time to invest there. But now, I think it’s getting extremely hot. 

It’s too hot for me to even consider it because of what we are talking about. Crime, taxes, things that make it hard to generate a return in that market. What do you see for 2020? Where are you guys looking?

Marco: With real estate, there’s always opportunity out there and what people need to realize is that the United States is made up of over 400 major metropolitan statistical areas and even pretty large regions. You can break them down to some markets, suburbs, and neighborhoods. You’ll always find some opportunity if you just open your mind and you realize that there are hundreds of markets to choose from. The question is which one makes sense today. The point of that is that all real estate is local. We’ve heard of this time and time again, all real estate is local. There’s a lot of truth in that. In fact, you can even argue that all real estate is hyper-local, not just local. 

Knowing that, (1) you can disconnect yourself from your local market if the local market—in other words, your backyard—doesn’t make sense for you as an investor. (2) It means that you need to be a little bit of a sleuth. You need to put on your due diligence hat and your research hat, and start using tools out there, whether Google as a search engine and other online tools, that help you find the market. 

There are companies including ourselves that do analysis and research. The markets I track 405 of them on a regular basis. I know which ones are appreciating, depreciating, which ones are trending in terms of employment and unemployment, population growth, all of those kinds of stuff. 

When you look at some facts or some data—you don’t need to be a data nerd to do this—when you look at some basic stuff, you can start to see which markets make sense. When you look at that kind of stuff and then you start to realize that a market is appealing from a macro perspective and you can get inventory there, and you can assemble a team there, and this is not the last thing but the number makes sense there.

You mentioned Austin. Austin doesn’t make sense as much today (if at all) as it did five years ago. But when you can look at the market and say yeah, I can get a single-family home. A nice three-bedroom single-family home in a good quality neighborhood, BB+ type neighborhood, for $150,000 and I can rent it for roughly 1% of that per month—let’s call it $1500 a month, maybe $1400 a month—I can tell you right now, if the property is in the Midwest or the Southeast, it will cash flow well. It will make sense. You will be in a stable neighborhood. You’ll have protection of your capital or downpayment. That’s the starting point, but guess what? You’ve probably down 70% of your due diligence by that point.

There’s opportunity out there, lots of it, and I’m just as bullish in 2020 than I was in 2019. The variable that changes is where you may be investing. It’s not should I be investing in real estate or does real estate make sense. In my opinion, real estate always makes sense because people always need a place to live. It’s Maslow’s hierarchy of needs. We need food, shelter, clothing. It’s right at the bottom of that pyramid. We need shelter. 

Number two, we have a growing population in this country, so demand is not only there. It’s increasing and the fact is that we’re not creating enough housing units every single year to keep up with the growth in household formation. That means things are stacked in our favor as investors and landlords.

Clint: All right. If you know this off the top of your head, what are two markets you recommended in 2019 but you’re not going to recommend in 2020 because the numbers have changed, which is not a good market anymore for your investment criteria?

Marco: I’m not going to say it’s a bad market, but one I probably put from, if I have to categorize them as green, yellow, red, what was green and now kind of more yellow, meaning that it’s hard to find good deals for one of two reasons: (1) lack of inventory or (2) the numbers; what I call the rent-to-price or rent-to-value ratios have changed. 

The one that popped to my head as you were asking the question is Dallas. Granted Dallas Metro is huge so we have to be careful because there’s probably a lot of areas and pockets where you can find deals if you have the right team and you know what to look for. But in general terms, from a 40,000-foot view, Dallas five or six years ago made a heck lot of sense. There was lots of inventory. You could buy three-bedroom homes for $100,000-$150,000. They all rent it for roughly about 1% sometimes more of that. It was just a phenomenal market. But it’s been red hot since about 2012. That’s when it really started to pick up and because of that, inventory levels have dropped and the numbers don’t make as much sense. Dallas is one of those markets.

I’m trying to think of another market off the top of my head that doesn’t make sense to me that made sense last year. We really haven’t dropped any markets from last year as of yet. We’re still at Atlanta which is really, really hard to get inventory in. We’re still in Dallas which is, again, hard to get inventory in. It’s not that we’ve given up on those markets. It’s just tough to get inventory. But we are opening up new markets. We’re opening up Baltimore. I don’t want anyone to react with a knee-jerk reaction saying that’s a crime capital of America. 

What you hear in the media happens within a two square mile radius. It’s just like Carlton in California, in Los Angeles County where you hear about gang activity happening within a two square mile area. There’s tons of opportunity in the Baltimore Metro area and the numbers are much more appealing than many of the markets that we’re in right now.

Clint: That’s funny you said that. A couple of months ago, we were looking at a multi-family. It went to the auction and I think we were willing to go as high as $650,000 on it because it was completely a gutted building. You’re going to have to put in probably, our numbers are high as we do the rehab on it. Wouldn’t you know it? That property went for $1.3 million, $1.4 million. I was shocked.

Marco: Wow. 

Clint: How are you going to make money at that? I was talking to my partner and he goes man, we lost that one. I said no, we’ll get that one because in five years, when that note comes due for those guys that bought that property and they can’t afford to pay it, we’re going to come in and pick it back up and all the work has been done for us.

You’re right. Baltimore could be a great area. We saw the opportunity in there ourselves. It was just one mistake some investor made because they wanted the property so badly that they’re willing to pay crazy amounts for it, but I see what you’re saying.

It is all market data-driven when it comes to making investments. When you go out there, I assume you’re part of a team because that’s always the problem with investing out of state. People don’t want to put their money into Baltimore. My first concern is usually about crime. You’re going to put me in a property that’s going to get busted, (2) I’m not going to have stable tenants potentially, (3) how do I know I’m going to have a property manager and they’ll be stealing from me? What have you done to address those issues? Those property management issues for people?

Marco: Having been in business for 16 years now and doing what we do today, you build relationships over the years. You get to know who are the strong, good, quality players. You work with them, you build your relationship, and we’re comfortable referring them. We vet these people. We vet providers and we love working with you guys at Anderson. You guys are quality. You put out good service and we hear that feedback from our clients, so we are happy to continue recommending people like yourselves.

When you deal with a service provider that’s doing a crappy job, guess what? You have a conversation with them, maybe you slap them on the wrist and you give them a fair warning, but at some point, you cut the tie. You let them go, fire them, whatever. That doesn’t happen to us, fortunately, but I guess it’s just a relationship that you build over the years. Being in this industry for so long, you hear the good players, you hear the bad players, you know who’s skipping town or leaving the country. So it’s actually vetting them, they prove themselves through time, feedback, and the relationship that you build. You keep those people and you get rid of the bad ones.

Clint: With your business, you actually can source properties for people, right?

Marco: That’s one of the many value-added services. I like to say that we provide the knowledge, the resource, and the property so people can build their real estate portfolio and invest successfully. The knowledge we provide is all free. It’s like you doing a podcast, you put out great content, and you’re educating people.

The resources are all the pieces of the puzzle that we provide whether it be a company like yours into asset protection. The lender that we work with, property managers, all that kind of stuff. Last, but not least, are the properties because you don’t necessarily start with the properties, but at the end of the day that’s ultimately what you’re investing in, are the rental properties that are in the different markets.

Tie those three things together is really the service we provide and at no cost. We don’t charge for our services to clients. It’s a free value-added service that we provide. But yeah, property and the people. Those are the two things that make this business work. You put the people and the property. 

Clint: If I came to you, what type of criteria would you be looking at? Because I don’t know exactly where I want to invest. All I know is that I want to get a 10 cap on my properties. How do you go through the process of helping an investor who they know they want to be involved in real estate, but they just don’t know where to go or what to look for? 

Marco: Clint, that’s a very good question. The answer to that question is really that everything always starts with a strategy session. That’s what we call it. It’s free. It’s anywhere from 15 minutes to an hour depending on the complexity and the questions of the person.

We’ll be the first to tell someone we can’t help them because of their situation, whether it’s lack of capital, poor credit, an unrealistic expectation. Someone coming to us saying hey, I’m looking for properties with (a) seller financing, or (b) a 15% cap rate. Good luck with that. Let’s be realistic here. 

Fortunately, that doesn’t happen too often, but at the end of the day, having an intelligent objective, a rational conversation that could go for 60 minutes or more will really help us to pull your investment criteria and your investment goals out of the person’s head, lay out a road map, and say okay, based on what you’re trying to do and achieve, it was in this time period. Here’s what we suggest. We can make recommendations in terms of markets, the number of properties, where those properties should be or could be, what kind of cash flow you can expect from it, what kinds of cap rates you can expect from those markets. 

Some people are very focused on cash flow. They are just looking for income. Some people are on the other end of that spectrum and they’re looking for capital growth. They want as much equity growth or appreciation as possible in the shortest time possible because they’re looking to leverage up that equity over the next three, five, seven years. 

Everybody is different. Everybody is on a different point on that spectrum, so it really starts with that conversation. Then from the conversation, we can put the facts on the table and layout a road map. That gives both of us clarity as to where they should be looking, what they should be looking for or at, and how they can proceed.

Really, that’s the answer to your question but there are tangents that spin-off of that. For example, someone coming from Washington or California might be what I call equity-rich and cash flow-poor. What that means is that these people are sitting on a fair amount of equity whether it’s a principal residence or more than likely in one or more properties that they own in these expensive somewhat overpriced markets. 

But guess what? If you can tap into that equity and literally move it, not spend it, but move it to other markets and build a larger portfolio that increases your cash flow, increases your cash-on-cash return, and over time potentially (but probably) increases your net worth, your equity because now you have more property but in markets that are going to be performing better, you’ve just hit the ball out of the park. 

A lot of people don’t even know they’re sitting at that potential, but until we have that conversation with them, that strategy session, they don’t know what they’re capable of doing. It’s okay. Come to us with questions and really, you don’t need a plan. We’re going to help you build that plan.

Clint: When you talk about the equity in existing properties or let’s say I didn’t have equity, what are the things that I go through a lot with people as I show them if you have $300,000, how many properties can you buy if the average property is $150,000? I use it in a different context. I use it with retirement plans, and most people are like you can buy two. Then, you show them that if you leverage them down, you can actually obtain up to 10 properties with that $300,000 if you’re using money the right way. 

But the question people say is well, who’s going to give me the loans? How am I going to finance a property in Maryland and I live in California? I go down to my local banks? Do you have lenders you work with? Is this one of those things if I came to you, you’re going to tell me all right, Clint. Here’s a strategy. Call these lenders here. We work with them. We vetted them and they can help you put this deal together.

Marco: Yeah, Clint. I don’t know what you think about that thing “one-stop-shop.” I’ve never been a fan of that and I really try not to use it, but it is fair to say that you can consider, like our organization, our company a one-stop-shop because we have, I call them resources before, but if I broke that down, it will be the lenders and those are conventional lenders, portfolio lenders. They’re even self-directed IRA lenders. 

It’s a whole slew of different types of lenders that are available to investors. That resources there, the property managers and the different markets, the title company, the home inspectors, the appraisers, the asset protection attorneys, the CPAs and tax advisers, all those resources, those people are there for us to put you in touch with and refer you to. 

I don’t like that term one-stop-shop, but if you think about it we’re like the hub of a wheel and everybody that we work with, all these service providers are on the spokes of that wheel. We can provide you all those things and that’s what we do. But at the end of the day, if you want to use your own lender, fine, go for it. We may caution you if you’re going to Wells Fargo or Bank of America. They’re not the best places to go for investment loans, for non-owner occupied. Legally we can’t say don’t, but we will make some recommendations for you.

Clint: That’s the key thing when you’re buying non-owner occupied property rental real estate. Having a lender that understands the numbers and your personal tax return if you already own some investment properties is crucial. We see this time and time again. Investors are struggling and they can’t get a loan for this property. They don’t like my tax return and they don’t understand why that is. Maybe you’re putting information on your return you shouldn’t be or need to change the way it hits your return to make the lender feel more comfortable, which is typically the main problem is the lender they have selected. That they’re not just experienced.

Right before we started the podcast today, I was responding to an email from a long-time client of mine. She and her husband, very successful in California. They have a house with over $2 million in equity, personal residence, and they were thinking about doing a home equity line of credit because they wanted to make the property appear as if there’s less equity available because he’s a doctor and they were concerned that somebody might say oh, let’s go after him.

Bank of America said oh, yeah. We want all of this information before we can consider we’ll give you this loan. We also need you through homeownership counseling in order to get a HELOC. 

Marco: No way. That is hilarious.

Clint: Yeah. Maybe that works with the millennial snowflakes out there. I get counseling and they really feel good about themselves, but I’ll tell you what, that’s offensive. And these people are active investors.

Marco: I was going to say that it is offensive. That’s terrible. I’ve never had a lot of luck with the major banks, particularly B of A. I’ll single them out. I’m not afraid to say it. 

Clint: Now you’re just getting yourself in trouble there. They’ll string you along and in the end, they’ll say hey, we can’t do this deal. We have a closing in a week. The seller won’t give you an extension on it.

Marco: Yeah, it happens. 

Clint: If somebody wants to get a hold of you and they want to talk about investing in different markets across the country, what is the best way for them to reach out to you?

Marco: We have a team of six investment counselors. We probably speak to about 600 investors a year easily and we’re probably placing them with a little over 400 properties a year right now. We do a fair amount of volume. It’s more than one a day. 

The best place to start as I said before is just to have that free strategy session. If nothing else, you get questions answered, you walk away with an education. Just go to the website, fill out the form, and just say I have questions. I’m interested in investing, or I’m interested in this market. Whatever it is, just put it in the subject line and some notes. You’ll be connected to one of my team and they’ll schedule a call with you and the way you go. That’s really the starting point. In fact, that’s the best place to start because it starts with knowledge and education, then answering questions.

Clint: Okay, great. We’ll have that link in the show notes. You want to go there, get a strategy session. There’s no cost. Marco’s team will give it to you for free. Then you can get an idea of what markets are performing, where you should be looking at for investing in 2020. You’re in the single-family but you do more than a single-family, though?

Marco: Yeah, 80% of the investment property that our clients purchase are single-family homes, is just the most abundant property type out there. The other 20% is made up of what I call duplexes, triplexes, and fourplexes, and often those are going to be new constructions as opposed to newly refurbished or what we call turnkey. 

That’s the product mix and occasionally there are other opportunities that come along. More passive type investments like real estate syndication or what a lot of people refer to as a group investment. Most of it is single-family, Clint. That’s really just what we offer.

Clint: Okay, great. 

Marco: By the way, I don’t know why I didn’t think about this before. If I may throw this out, I know you have a great book. I highly recommend your book. I have it in my bookshelf here and I figured it’s about time that I publish one too.

Not only am I releasing a book come April, but I’m actually giving it away for free. If anyone’s interested in that, all they have to do is just download the free report that’s on our website. It’s the same title as the book. It’s going to be called Passive Real Estate Investing. Come April, everyone will get an announcement that they can download. It will be paperback and a download so it will be free to all. 

Clint: Nice, great. They go to your site, passiverealestateinvesting.com. They can download that free book or at least get into the list of the receiver, correct?

Marco: Yeah. They can go to either website, passiverealestateinvesting.com, or the first website we talked about, the mothership, if you will, noradarealestate.com. Anybody who downloads that ultimate guide to passive investing is put on the list and they’ll be notified with an email saying the book is being released. Click here to download it.

Clint: Perfect. Marco, thank you. I know we’re out of time. It’s always been a pleasure speaking with you. We need to make this more current rather than every three years, okay?

Marco: I agree. We will for sure.

Clint: All right. Thanks for coming on.

Marco: Thank you, Clint. I appreciate it. 

Clint: All right. Take care. Bye-bye.

 
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.

Additional Resources:

• Claim your FREE Strategy Session
• Join our next Tax & Asset Protection event to learn more advanced tax minimization & entity structuring strategies
• Subscribe to our YouTube channel to make sure you never miss the latest strategies & updates