Being Market Agnostic With Marco Santarelli

Episode 333: Being Market Agnostic With Marco Santarelli

View this episode on:

What is turnkey investment? What does being market agnostic mean? In this episode, serial entrepreneur and President of Norada Real Estate Marco Santarelli, stitches these two terms together and explains how we can take advantage of them in the real estate market. Sharing how turnkey has become a household name, he talks about selling turnkey rentals to people who want to create a rental income portfolio. He also teaches how to be passive investors with any asset class and how to be wealthy in terms of cashflow.

—

I’m here with Marco Santarelli and he’s in beautiful California. He’s going to talk to us about selling turnkey rentals to people who want to create a rental income portfolio. Marco, how are you doing?

Excellent, Mitch. I’m here in sunny California. It’s a beautiful day. I’m talking to you. What could be better than that?

How long have you been in the biz?

It depends on how far you want to go back. I bought my first rental when I was eighteen years old. I bought a rental, fixed it up, leased it, managed it myself, held it for a number of years. I’m not going to say how many years but it was a long time ago.

You bought your first rental at eighteen. That’s pretty good. I didn’t buy my first rental, but I bought my first little condo to live in myself, which ended up turning into a rental by the time I was 22 or 23, to get off to an early start. It opens your eyes early to the good and the bad.

Getting started early, when you have time on your side, it’s a huge advantage because you have the ability to let time work for you where you have an appreciation and equity growth in your property. The earlier you start, the better off you’re going to be in terms of cashflow and equity growth and the lessons you’ve learned. You’re going to make your mistakes early if you’re going to make some and everybody makes mistakes. If you have good mentors, you’re going to learn from people like yourself, myself, whoever it may be and avoid making those mistakes. It accelerates your success path. I didn’t put the pedal to the metal in the early 2000s. I dabbled with real estate knowing that I love it. I started at eighteen but it took off for me in the early 2000s.

Same story here. I started early. The light bulb didn’t go off until 1996. I was in my mid-’30s. I looked in the mirror and said, “What are you doing? All the money is over here.” Tell us about the offering properties turnkey. Tell us about that strategy because that’s what you do. Did I get that right and that’s primarily what you do?

Personally, I’m a real estate investor and a serial entrepreneur. When I got back into real estate investing in a bigger way in 2003, 2004, I was buying a lot of properties. In fact, I bought 84 units over 2,000 miles away from where I was living in Southern California. I bought those in a nine-month period. I had accumulated a large portfolio in a very short period of time putting together the systems and the teams that I needed to work with that were literally over 2,000 miles away. I was buying in Florida, Georgia and Michigan. In the process of doing that, investors were coming to me and saying, “Can you help me, coach me, mentor me, whatever it may be?”

I didn’t have the time to do that. That’s when the entrepreneur inside me recognized a niche and opportunity. The light bulb moment went off and I realized, “There are a lot of people out there that are spending literally up to $35,000 at that time in education through these different bootcamps and seminars.” I was part of that as well. I went to those same bootcamps, but they still weren’t pulling the trigger. They were learning the information but they weren’t ready to pull the trigger. They were looking for deal flow. I said, “I’m looking at a lot of deals. I’m underwriting and doing due diligence on a lot of deals that I’m not buying. Why don’t I flip them to you?” Initially I was charging them in the early days to assign them a contract.

It wasn’t wholesaling because these were all already cashflowing properties. I thought, “Why don’t I flip this on its head and become a broker, set up a model where I’m going out researching the markets, finding the neighborhoods and the deals and putting the teams together? I will give you what is now referred to as turnkey real estate investments.” It’s within this framework of a turnkey real estate investing system. I marketed the crap out of that word, turnkey. Now everybody uses it. You see it on online forums and whatnot all the time. I was the one who marketed the crap out of it and made it a household name. That’s how the business was born. Investors were coming to me and saying, “I need help.”

I always wonder who comes up with this stuff. I’ve come up with a couple of things like the OFV, the Owner Finance Value. The word turnkey, it hasn’t been around all that long as far as starting when you’re eighteen but it’s certainly known now. I read you’re in 22 markets. Do you care to discuss what states or what markets you’re in?

Yeah, definitely. In an ideal world that would prefer to only be in six, three markets that I refer to as growth markets and three markets that I referred to are your boring cashflow markets. The reality, and I know you know this living in San Antonio, I’m sure you have your ears to the ground, is that inventory is very tight. There’s diminishing supply, strong demand for rentals. There are a lot of investors out there wanting to get into this asset class and move away from other types of assets such as equities and whatever else. What we’ve been seeing year-over-year is diminish in a supply. It’s harder to get rentals in the market that we’ve been in for many years such as Atlanta, Georgia. It’s forced us to go wide meaning more markets. We have enough inventory for our clientele, our investors.

It’s grown from 6 to 8 to 10 ultimately to about 20, 22. That doesn’t mean we have inventory and all these 22 markets all the time because it ebbs and flows. The reasoning for the larger array of markets is to have enough inventory in the various markets. It’s a good mix of growth and cashflow type of markets. You’re in Texas. Dallas has been on fire for the last 4 or 5 years. Same with San Antonio, Austin especially. These have been in the past perennial cashflow markets, but now they’ve become in the last 4 or 5 years very strong growth market. You still can get the cashflow but less so. Why we’ve had to expand into 22 markets is because markets change. All real estate is local.

It seems like in the last 6 or 7 years, the whole world has become a house flipper. On every street corner, there’s a seminar if not three being given every weekend somewhere, locally. It’s been as tough as it’s ever been. I’m still going to buy 120 houses this 2019. Out of that 120, I’ll probably sell or finance 80 of them on 30-year mortgages. I’ll retail 30 and I’ll wholesale ten. It is tough and I can see why. I got my city of roughly two million people. I decided to roll up my sleeves and become the bear in the room. I got it down to a science. I have a good team. It was hit and miss. We tried a lot of different things, finally figured out what works and then it will change. It will work for a while.

What I’m doing personally is built on a simple principle that’s been around for decades, if not hundreds of years. It’s simply buy and hold. That’s it. It’s by prudent investment properties.

I was talking about finding those deals in those markets down to a science, finding those deals and then it will go for a while and then it will change. 

Turnkey Rentals: The earlier you start, the better off you’re going to be in terms of cashflow, equity growth, and experience.

There are two dynamics there. One is supply and demand, as I was talking about. When supply is constrained, especially when demand is up, it’s going to be harder to find that inventory. It makes it challenging to find inventory or get inventory in a particular market that you have in the light. The other dynamic, which is more of a macro level type of dynamic is the economics of a market and how all market changes. Every market goes through four different market cycles. Depending on what market cycle you’re in, a market will determine the strategy you should be using or whether or not you should even be in that market. In a market that has come out of a decline and is now in an accumulation phase, you’re going to find lots of inventory. There are a lot of sellers out there, a lot of inventory.

Your strategy is you can get in on a low-cost basis. Your cashflow, your cap rates, your cash on cash returns, they’re all great. When a mark has appreciated for 5, 6 years, year-over-year, and it’s now become a much more expensive market, your returns have dropped and inventory is going to drop too. Your strategy is going to shift. You either have to leave that market or you’re going to be doing something different. You might go from buying distressed properties from distress sellers to let’s say new construction, like build to rent type of product. It depends on the market cycle within that market. We’re in a country that’s so big, we have over 400 metropolitan statistical areas. What happens in let’s say San Antonio, Texas is different than what’s happening in Detroit, Michigan, which is different than what happens in let’s say Indianapolis. You have to understand the market, the market dynamics and the market cycle in order to determine your strategy there.

What kind of margins do you have to set up for these turnkey investors? What kind of numbers do you have to give them? Do you sell them houses at 70% of their value or 10% the cap rate? How do you price it?

Let’s step back here and understand the two roads that an investor goes down. They either choose the active or the passive role. If they want to be an active real estate investor, it’s someone who’s putting a lot of time, energy and effort and building the knowledge, building the team, spending the time, maybe meeting with prospective sellers, negotiating. They’re picking up a hammer or managing a crew. They’re fixing distressed property. They’re actively involved. It’s taking time, energy, resources. You can create your own wealth and equity that way upfront immediately because you’re creating value. At least if you do it right, you hopefully will create value.

The flip side of that is a more passive role and that’s where you’re finding a performing asset, a property that’s already leased, it’s cashflow positive. I call that simply a rent-ready property. You can find some of those on the MLS. The alternative is you work with a team and buy a turnkey rental that is ready to go. There’s nothing you need to do. There’s no deferred maintenance. There are no CapEx expenses. It’s professionally managed as tenant occupied. You’re adding one property after another to your portfolio and your cashflow positive from day one. That’s what a lot of people choose to do, especially professionals because they are limited on time, but they’ve got the cash and the credit.

When you’re looking at your returns or your margins as you’re calling it, what you’re going to find is that with turnkey rentals, you’re typically buying at or slightly below market value. Five years ago, all of them were below what you would call the appraised value because there was a lot of inventory, but now it’s tight. Sellers can get at or slightly below fair market value for those properties because there’s strong demand and they turn over very quickly. A roundabout way to answer your question is generally speaking, when you’re buying turnkey rentals, depending on the market and the neighborhoods you’re going to buy at or below market value. There’s not going to be a large “discount.” If you’re doing the work yourself. If you’re finding it, negotiating and maybe creating value by doing value-added repairs and upgrades, then you create more equity on the front end.

Keep in mind, we’re talking about paper numbers here. These are numbers on paper. It’s the appraisal, it’s market value versus your purchase price. When you look at your rates of return in terms of cap rates for example, I don’t know what your audience measure their returns in, but in terms of cap rates, they’re going to range from 6 to 7 on the low end to 9 to 10 on the high end. If you’re leveraging your investment, your cash on cash return is going to be 7%, 8%, 9% on the low end to the low teens on the high end. It’s based on the market. Huntsville, Birmingham will give you much higher cash on cash returns than a market like Dallas.

People are buying these properties. Why do people buy turnkey properties? I have some ideas, but what do you say?

The biggest reason is that they have a career. They work full-time. They have a family. They have their hobbies and friends. They have a busy life and they don’t want to reinvent the wheel. They don’t want to go through the education and the learning curve to learn everything they need to know. They don’t want to have to find all the people and the resources that they need and vet those service providers to build the team in order to identify the markets, the neighborhoods, the properties, acquire the properties, manage the properties, do the inspections, get the financing when it’s already put together and packaged for you. All of it is available for you on a “silver platter.” It saves a lot of time.

Probably as the easiest they make it look on Get Rich TV. 

No, it’s not. The thing that drives me crazy about a lot of those shows on HGTV and those other programs is it’s reality TV. They make it look fun and sexy. What they don’t show you is all the pain and the mistakes that happen and the losses that some of these guys take. A lot of it is scripted. I know, because I know some of these people that are on those shows. They’re friends of mine and there are a lot of deals where they lose money. I do the same thing.

I know firsthand because it was between me and another guy for San Antonio and he followed me around for three weeks. I saw these houses in my town that they said they made this money on it and I saw it go to auction. I know what the problems were. It didn’t ever sell. That was completely fabricated. I also know that when I was talking to the people there, they were asking me if I could buy and sell a house every six weeks. I said, “If I bought a house and didn’t have to even shampoo the carpet and I had a buyer the day I bought the house, mortgage companies can’t close a loan in six weeks.” They said, “Don’t worry, we’ll fix it.” I’m like, “I don’t know if I want to even be part of this.” 

That goes back to the active and passive approach. Those are active real estate investors that want to roll up their sleeves and be hands-on and do the work, find a deal. They’re in it knee-deep.

To tell you the truth, I offer an 8% rate of return if you loan me your money. Lend me your money, I’ll give you a first lien and I won’t let you in over 65% of the value. For most people, that was better than what’s going to happen to them when they go out there. Not to mention the amount of money you needed to spend on education or whatever. I offer education, you offer education. I’m not telling anyone not to do that, but I’m also saying there are certain people in the world, what’s a matter with a straight 8% with minimal risk? Backed up by a rural piece of property that’s worth more than you got in it, what’s wrong with that? That’s passive. Keep your life and have a life. When you and I started, we probably did the same thing. I had a job and I was burning my candle at both ends trying to get free of my job doing this every spare minute that I wasn’t at my job.

There are 101 ways to make money with real estate. That’s a known fact.

God bless America.

Turnkey Rentals: Active real estate investors are those who roll up their sleeves, do hands-on work, and find deals.

If you want to be extremely passive and be a note investor and make 8% on your money, not even worry about it, sleep comfortably at night. Great, invest in notes. You can invest in notes for 6%, 7%, 8%, 9%, and 10%.

Another reason why people do what you do is they don’t want the potential income. They want the depreciation and the write-off. They’re probably high net worth individuals. They’re getting smashed on the taxes.

The depreciation is huge. If you’re a note investor, you’re making interest income. It’s one dimensional. There’s nothing wrong with that, but you’re never going to create wealth over time. Your net worth is not going to increase because you have no equity ownership and you can’t participate in the upside. There’s a different strategy for different people at different times. You just need to know yourself where you are and what you’re looking for and that will determine the path you take. A lot of people don’t stop to ask, “What is it I’m trying to achieve? I have an investment philosophy and an investment strategy in order to make a plan.”

I want the audience to go to 1000houses.com/PassiveRE and there you can get The 10 Rules Of Successful Real Estate Investing as pinned by Marco Santarelli. You can also get The Ultimate Guide To Passive Real Estate Investing over there, which is the prelude to the actual book that should be coming out. Whoever downloads the guide will end up getting the book. If you go get that, The Ultimate Guide to Passive Real Estate Investing, you’re going to be in line for a copy of the book. That’s a digital download. If you want the hard copy, he’s willing to give you the hard copy if you’ve downloaded this guide. All you have to do is pay for postage, which is completely fair because sending these books to free would break a man if he didn’t parse the postage. Don’t think it’s a scam or he’s making money off the postage, that’s ridiculous. Marco, what’s the difference between being rich and being wealthy?

Rich is a big chunk of cash that you’re sitting on. It doesn’t necessarily mean it’s doing anything for you, but you could say, “I’ve got $1 million in the bank,” and that’s it, end of the story. When you talk about wealth, you could talk about wealth in many different ways. You can talk about it in terms of your health. Talk about in terms of finances. For me, financially speaking, when you’re wealthy, you are measuring in terms of time. How long can I live and survive and live my lifestyle based on my investments and whatever I have is my net worth? If I have passive income, if I have a check coming in, it’s not a check anymore, it’s auto-deposit. If I have $5,000 of passive income coming in from my rental portfolio each and every month, I know that I can live virtually in perpetuity off of that income because I’ve got all my expenses covered plus some extra to go travel or do whatever I want.

When you are wealthy, you are essentially living, month after month, year after year on time. I’m measuring wealth in terms of time, not a chunk of cash. If you’re rich, you could have $100 million, but what are you doing to turn that into passive streams of income where you can survive and also pass along to your children or your heirs? That’s the difference. Wealth is measured in terms of time. Whereas being rich means you have a lot of assets. It could be a lot of cars, could be a stack of gold, it could be a chunk of $100, whatever it is. That’s not cashflow. Think of what being wealthy in terms of cashflow.

You use a word that I’m intrigued by it. What is market agnostic and why is it important to be one?

I’m glad you asked.

I had never heard that term before. 

Being market agnostic means that you’re not tied to or married to any one particular market. This comes from the gurus, the so-called gurus that you may love or hate, where they’re teaching you how to be a house flipper and they say, “Don’t do anything outside of a 1 or 2-hour radius of where you live.” That’s okay if your market makes sense for the strategy you’ve chosen, which is the buy, fix and flip or buy, fix, refinance and hold properties. For a lot of us, like me living here in Orange County, California, to find a deal anywhere in Southern California is virtually impossible. To be married to your local market is flawed advice because the deals are not there. When you are market agnostic, you’re not married to your local market, you realize that you have a fixed amount of investment capital that you need to put to work and you want it to work as hard as possible for you. The best way to do that is to find the markets in the United States that are going to give you the best returns in terms of cashflow, in terms of upside potential and the stability of the market to minimize any potential downside risk. When you’re in a cyclical market like I live in here, Coastal California, we have strong ups and strong downs.

I don’t want to be on that roller coaster ride down. This is why this is not a market to invest in, one of many reasons. If I go to a market, like some of the Texas markets have been over the last couple of years, I could have had strong cashflow, good upside potential and minimal exposure to downside risk in terms of price depreciation. You can only do that if you’re market agnostic. If I do my research and I say of all the stocks on the stock market, Coca-Cola is by far the best buying. I have to buy it because it’s a killer deal. Their corporate head office is in Atlanta, Georgia. I live in Southern California. Am I going to say to myself, “I cannot invest in Coca-Cola because I live in California and the head office is in Atlanta, Georgia?” That’s absolutely stupid. This is being agnostic. You’re not married to the market. You’re not going to make your decisions based upon where you live. You’re going to make them based on prudent, objective, financial and mathematical decisions.

I will say that I have taught to stay local, keep it close and become an expert in your tiny little mecca until one of two things happen. You get good at what you do and you’re equipped to go out further and take advantage of another market because you’ve learned all the lessons. It’s hard enough to learn lessons sometimes in one city, much less multiple cities. I made that mistake myself. The other thing is if your market dries up or gets to where you can’t do anything, then you have to go someplace else. I teach a fair share of students who have to go do business from afar because where do they live is not going to work.

They’re in New York, parts of Florida almost all of California and a lot of Oregon. It’s not just economics. Sometimes the laws per your strategy don’t work so well in certain states. There are states that got regulations on how much interest you can charge on a homestead. There are states that make it very difficult for you to get someone out of a homestead if they don’t want to go. Florida is a killer on that deal. Trying to owner finance in Florida, you can do it and there are ways to do it, but it’s different than how I do it in Texas for some reasons. Texas and Georgia have the same exact real estate loss, foreclosures and everything. I didn’t know if you knew that. Talk to people in Georgia. They’ll tell you that the Texans copied them and if you talked to the Texans, they’d say the Georgians copied them.

To set the record straight, Georgia copied Texas. The foreclosure process is the same. We have some of the fastest foreclosures in the nation at 45 days. If you hit the timing right, but you never do, so count on 90 days for foreclosure, generally. If someone files bankruptcy or doesn’t want to go and lawyers up, then you’re in for a little bit longer haul. That’s the price of doing business. It happens to me once or twice a year. Instead of making a kabillion, I make a kabillion and a little bit less. That’s all. You hand it to your lawyers and say, “Call me when I got the keys.” Don’t stress out over it. It’s another day in life.

You emphasized, underscored what I said about being market agnostic. The thing is you have to fit the market to the strategy you’re involved in. My understanding of the strategy you take is it helps to be local if you’re doing all the work because you’re the one that is negotiating the deal, meeting with the sellers and doing all that stuff. It’s going to help you tremendously to be local unless you have a team elsewhere. If that stops working, you either have to move or you have to move your market and have the boots on the ground and team to help you in another market that does make sense.

I put it like this because the mind and the human body is the most adaptable thing in the world. You put it back up against the wall and it will rise to heights you don’t even know. People say, “I’m afraid to do business out of town.” Imagine you’re confined in a jail cell and you have internet access and a phone and you’ve got a family out there, you’re going to figure out how to do business because you’re not going to have a choice. You may end up being a multimillionaire from that sell. We rise to the level that we put our back to. If you’re afraid of that stuff, there are people out there that have already conquered it, go get around them. Marco might be a great guy. Tell us about your mentoring. What do you have? Do you have a mentoring program or do you teach people?

Turnkey Rentals: Market agnostic means that you’re not tied to or married to any one particular market.

I don’t have anything between free education and providing all the resources and properties that someone needs. That path in between is completely bare. However, in 2020, there will be a book and there will be an online training program and possibly a Mastermind or coaching program. These are all things that are in the works now and being built out. Now, I don’t have anything to sell in terms of education.

That’s fine. I’m pushing for that. For the audience, I’m sure loves that about you. You’re not selling anything. You’re just giving freely of your own will here. You do have a podcast. For the audience, I want you to go to 1000houses.com if you’re interested in Marco Santarelli’s podcast. Go over there, check it out. What is your podcast centered around? Mine is centered around on real estate entrepreneurial-ism, motivation and inspiration. If you fit any of those four categories, you’re welcome to come on the show and we’ll talk. What do you focus on your podcast?

I do talk about some of those topics. More broadly speaking, we talk about at the highest level real estate investing from every angle, from asset protection to financing, to market cycles, to strategies, identifying markets, identifying neighborhoods. There is a focus or a bent towards passive, not active real estate investing. We don’t want to heavily promote someone, pick up a hammer and find distress sellers of distressed properties and start doing the whole HGTV thing that they see on television. We want them to build a passive income portfolio. That’s the bottom line. We want you to be financially free. The way to do that is to build enough passive income through whatever asset classes you want. For me, I love real estate. I want to encourage, inspire and educate people to build up units of passive income in real estate. That’s the bottom line.

Is there anything else you want to say, Marco?

For a lot of people, they educate themselves. They become very well-educated but they fail in execution. Nothing happens until you take action. You can be the most educated, wannabe real estate investor in the world, but until you put the rubber to the road and start taking action, nothing is ever going to happen. Success all comes out of execution. Execution is absolutely everything. Take action. I see a lot of people wish to be rich, want to be rich. They educate themselves, they dream about it, think about it, talk about it with their friends, but they never end up picking up that phone or going online and doing the research or start analyzing properties or even writing offers. Whatever it may be, take a baby step and then take another baby step. By the time you realize that you’ve taken ten baby steps, you’ve taken one giant leap forward and all of a sudden, you’re under contract for a great rental. That’s going to give you $300 a month passive income, do that again and do it again. Before you know it, you’re going to be financially independent and ultimately financially free.

You don’t have to make great big deals or set the world on fire. You just need to do one. Get a wholesale profit or get a little positive cashflow and be able to wake up in the morning, look in the mirror and do your Rocky dance and say, “I did something.” I’d like to thank everybody for stopping by to get you some Marco Santarelli. Be sure to get over there to 1000houses.com/PassiveRE and get the podcast. What’s the name of your podcast?

It’s Passive Real Estate Investing.

Marco, thank you so much. Do you ever make it to San Antonio? 

From time to time, I do. I haven’t been there in a long time. I think I’m overdue. I’ll definitely look you up and hook up.

Will you please look me up when we get done here? I’ll give you my information or if you don’t already have it. I appreciate it.

Thank you, Mitch.

Important Links

• REInvestorSummit.com/Marco
• REInvestorSummit.com/Grow  
• REInvestorSummit.com/VAHelp  
• REInvestorSummit.com/aof
• REInvestorSummit.com/Coaching

About Marco Santarelli

Marco Santarelli is an investor, author and founder of Norada Real Estate Investments. He’s also the host of the top-rated Passive Real Estate Investing podcast.

• Here’s How »

• 1000houses.com
• Real Estate Investor Summit Facebook
• Real Estate Investor Summit Twitter
• Real Estate Investor Summit YouTube
• Mitch Stephen LinkedIn