Many investors have the same problem, they live in a market that is too competitive and HOT for them to find deals. Marco had the same problem, so he implemented a strategy to expand into new markets. Hear how he finds new markets, and then how he transitions into them. If you enjoyed today?s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
[spp-tweet tweet="?In the beginning we were in 6 markets, and that was the sweet spot, now we?re in 18? - Marco Santarelli "]
Marco Santarelli Real Estate Background:
- Investor, author and the founder of Norada Real Estate Investments ? a nationwide provider of turnkey cash-flow rental properties
- Since 2004, they?ve helped over 1,000 real estate investors create wealth and passive income through real estate
- Host of the Top 30 business podcast -- Passive Real Estate Investing
- Say hi to him at http://www.noradarealestate.com
- Based in Orange County, CA
- Listen to his previous Best Ever Advice here: JF111: The 10 Rules of Successful Real Estate Investing & JF1012: $6,000 POCKETED from His Property Manager and How He Dealt with Fraudulent Activity #SituationSaturday
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I'm Joe Fairless, and this is the world's longest-running daily real estate investing podcast. We only talk about the best advice ever, we don't get into any of that fluffy stuff.
First off, I hope you're having a best ever weekend. Because today is Saturday, we've got a special segment called Situation Saturday, where we're going to have a situation that will likely resonate with you right now, and perhaps in the future, whenever you're listening to this episode. We're not just gonna present the situation, we're gonna talk through the solution the situation.
The situation is if you are in a hot market, where the inventory is low, how do you go about transitioning into another market, to then find additional properties? With us today, Marco Santarelli. How are you doing, Marco?
Marco Santarelli: Good, Joe. How are you?
Joe Fairless: I am doing well. We are speaking to Marco about this because he has recently implemented a solution for that challenge and that situation, so we're gonna talk about that... And you recognize Marco because he has been on the podcast before, and you're a loyal Best Ever listener all the way back to episode #111. That is many days ago - over 1,000 days ago you were on the show... And then episode #1012 - that's like over a year ago you were on the show. Best Ever listeners, if you wanna hear his advice, then you can go listen to episode #111 and #1012.
Marco is an author, an investor and founder of Norada Real Estate Investments, which is a nationwide provider of turnkey cashflow rental properties. Since 2004 he's helped over 1,000 real estate investors create wealth and passive income through real estate, and he's also the host of a really cool podcast that I suggest you listen to if you're interested in passive real estate investing... And by the way, the name of it is Passive Real Estate Investing. You can learn more about his company at his website, which is in the show notes.
With that being said, Marco, even though we've got a bunch of loyal Best Ever listeners, will you give the Best Ever listeners a refresher of your background? Then we'll get into the recent challenge and your solution.
Marco Santarelli: Yeah, definitely. Great introduction too, thank you very much for that. So I won't go too far back, I'll just say that I bought my first rental at 18, and I knew the writing was on the wall, so I just continued down that path - got my license, continued to buy real estate, and grew it from there.
Where the turning point was was really in 2003, when I had taken two years off... I was kind of the fallout guy from the dot-com implosion... In 2001 I didn't wanna get back into the corporate world, and I loved real estate, but I didn't' jump back into it; I took some time off.
I got back into real estate late 2003, and in 2004 I purchased about 84 units in that one year. Those were mostly single-families and duplexes, so we're not thinking apartments here... And people were coming to me, asking me for help, and I didn't wanna be a coach or an educator, so again, making a long story short, I've decided to be the guy at the end of the food chain; I would let everybody else do the bootcamps, seminars, books and tapes, and I would be the guy who would be researching markets, finding deals, packaging it together, providing all the service providers that you would need to complete that solution as a turnkey offering. Fourteen and a half years later they say "That's all history", and here we are today, a very strong company, and we continue to grow.
Joe Fairless: A very strong company, continuing to grow, and you've come across challenges as you've grown, I'm sure, as any business owner and entrepreneur has... The most recent challenge with markets - what was going on?
Marco Santarelli: Well, you're talking about today, not in the past, I assume, right?
Joe Fairless: Yeah.
Marco Santarelli: So what we're seeing today -- and Joe, I know you're in the same school... What we're seeing is inventory being a drag on the market. The inventory is really, really tight, virtually in every market - primary, secondary and tertiary markets... And because of that, at least in the residential space it's pushing prices up.
In the commercial space, where you live, in investing in apartments, it's compressing cap rates, and that's a big problem, because everybody's chasing after good quality, or value-added plays... So what's happening is we're seeing less and less good inventory, and fewer deals out there.
So if you're in the commercial space, you see cap rates being compressed. If you're in the residential space, meaning one to four units, it's like banging a brick on your head; it's really hard to find good deals, and enough of them to have good deal flow, especially for a business like ours, where we're working with investors, trying to provide them quality investments in good, quality neighborhoods.
So the solution, at least for us as a business - we had to go wider, because we're not getting the depth... And what I mean by that is - in the beginning we were in about six markets, and to me that's the sweet spot; over time, that grew to 10, and then 12, and today we're in 18 markets, and we're forced to have to do that because if I'm looking for a deal for myself, or I'm looking for deals for our clients, the real estate investors, in order to find them, we have to go and look in other markets, and we're actually starting to tap into tertiary markets right now in order to get that width and depth.
The most recent market we've brought on was the Quad Cities market; you know, it kind of overlaps Iowa and Illinois... But you've gotta adapt with the times, and I like to refer to real estate kind of like the pendulum of a big clock. The pendulum swings one way, and then it goes the other way. So you go from buyer's market to seller's market, and everything has an ebb and flow. You have lots of inventory at one time, and that's great for you as an investor; you're in a buyer's market.
Then that pendulum slows down, stops and starts going the other way, and now you're in a seller's market, so prices go up, inventory drops down, and you have to adapt, you have to change your strategy.
Joe Fairless: As you've grown from a smaller pool of markets to a larger pool of markets, how do you qualify those markets?
Marco Santarelli: By far, one of the most important things I wanna see in a market - this should be a takeaway for all your investors - is to make sure that you have jobs and job growth, because people pay their bills with dollars, or they pay their rent with dollars.
Joe Fairless: Bitcoin, right? I thought it was Bitcoin.
Marco Santarelli: Well, maybe in a few years that might be the case... They actually do have cryptocurrencies specifically for real estate and for rents, but it's not mainstream yet. But you have to have income, and you have to have jobs in order to support that population, so the first thing I like to see in a market is job diversity, a stable job base and job growth ideally... It's okay if you don't have job growth, as long as you have the stability of the job market.
And then tied in with that - this goes hand in hand - is migration. A lot of times when you have a hot market... Like, you look at Dallas or Houston, for example - when you have a lot of jobs, it naturally draws people in like a vacuum from other markets, because they know that they're gonna have solid and stable employment there, and often when you have job growth, you have competition, and it drives wages up... So now you have people coming in that have a better opportunity for a higher wage; in other words, they're getting a raise. They move from a market to another market and they get a job raise.
So those are the two core things - jobs, job growth and migration. From there, I start to look at more specifically submarkets, neighborhoods and the numbers... Because just because you have a hot market doesn't mean that you have numbers that are favorable for investing in real estate... And I know I'm preaching to the choir with you, but some people may have heard this before and it just doesn't resonate.
I'll give you an example - there are a lot of people along the coastal markets (and I'm here in Southern California) that still think that investing has to be done in their backyard. They're looking at Los Angeles, maybe San Diego... These really expensive markets.
When you're spending 500k-700k on a single-family home, if that's what you're looking for - we're not talking apartments here - it's really hard to get a rate of return, let alone cashflow, when that thing only rents for about half a percent of the purchase price on a monthly basis, meaning that you're getting $3,500, maybe $4,000/month if you're lucky... Those numbers don't make sense.
So you have to be market-agnostic - you have to disconnect yourself from your backyard and your local market and just be truthful with yourself and say "Look, maybe I'm not living in the best market for real estate investing; I don't need to drive by it every day. I don't need to touch it and see it. It's not gonna change a darn thing." So you start looking at the Midwest, down through Texas, on throughout the Southeast as far as Jacksonville, Florida, Tampa, Florida, Memphis... These are markets where there is inventory, the numbers make sense, there is growth, it's got a stable job market, a diverse industry, and in fact, a lot of these markets are actually logistical markets. You look at Kansas City, Memphis, Jacksonville, Florida - these are all logistical hubs for one reason or another... So it's really hard to [unintelligible 00:09:58.08] industry away from those markets when you have logistics in place.
Joe Fairless: You mentioned three things you look for: job growth, job diversification and migration... Specifically, I pull it up, I've got it in front of me on my computer screen - what metrics am I looking for?
Marco Santarelli: If you're looking for metrics, what you wanna see is that you have what's called positive net migration... Because there's people that will say that people are moving to California, and that's true, but when you look at net numbers, meaning you take the people that are moving into California and subtract the people that are moving out, you have negative numbers, you have negative growth.
Last year we saw, as a state, 140k people leave the state of California... And what goes along with that are employers, like Toyota, Nissan, Carl's Jr. There's so many companies that move out, so they take jobs with them. That is a very negative thing economically speaking.
So short-term you might not notice it, but if you start measuring this out and mapping it out over the course of years, it can have an impact. You don't want headwinds when you're investing, you want tailwinds... So you wanna invest where markets are strong and healthy and ideally growing.
Joe Fairless: So positive net migration... Where can you find that?
Marco Santarelli: I've recently hired -- well, not recently... I've had some assistants that have helped me in compiling that information. But here's the simple way to do it - every city publishes this information, and they have different departments. There's a Bureau of Economic Development, there's the -- I can't remember what they call it... They have economic boards in every city, in every size of city... And if you go to Google or any other search engine and you type in the name of the city followed by "net migration" or the name of the city followed by "unemployment rate" or the name of the city followed by "job growth", even Google will serve up this information in the form of a chart right at the top of the page...
But a very simple, clean search where you have "city, state, job growth", "city, state, net migration" - all those types of search phrases will pull up 5-10 websites that have that information published either as an article, or as a service where you search and find that data.
Joe Fairless: With job growth and job diversification, any particular metric for each of those come to mind?
Marco Santarelli: I'm more after the trend than anything else, so when it comes to job growth, I'd like to just see that the last 2-3 years have had year-over-year increases, even if it's nominal... I just wanna see that it's not a negative trend.
Think of it like looking at a stock chart... If you're looking at a stock chart - not that I'm suggesting you invest in stocks, but if you wanna be long on a stock and you buy a stock, you wanna make sure that it's got momentum and you've got positive growth; in other words, the trend is upwards, and ideally, it's growing year-over-year rather than shrinking year-over-year, because that is a very strong indicator.
It's no different than looking at any kind of metric in real estate, whether it be, like I said, jobs, or the unemployment rate... And this is all widely available, even the Bureau of Labor Statistics, and the other -- what's the other one? These are all free websites by the government.
Joe Fairless: Census.gov?
Marco Santarelli: Yeah, Census, BLS.gov... All these websites publish this data for free, and you can search on it... And they also do quarterly reports. Also, look at attomdata.com - they publish a ton of housing data. That's another resource where you could pull up a lot of this information for free, and they actually do write articles about it on a regular basis to kind of summarize what has happened over the last month or last quarter.
Joe Fairless: Looks like it's attomdata.com.
Marco Santarelli: Thank you, that's it. I just bookmark all this stuff.
Joe Fairless: Me too, I'm with you. What about job diversification? Any particular metric there that you look for in terms of like one industry has a certain percent...?
Marco Santarelli: This is not a hard one, actually. Websites like NeighborhoodScout.com (there's a slew of them), they will provide a breakdown. City-Data is not too bad; it's dated, but City-Data.com - they provide a breakdown of each sector of the industry. For example, it might say 70% is in finance, 16% is in construction, 14% is in healthcare, and 10% is in hospitality and fast food and restaurants. What you wanna see is as many bars as possible.
If you go to - this is kind of my poster child market - North Dakota when we had that oil boom, there was a town there that exploded in population and there was no housing; people were literally setting up tent cities, and the reason for that was because there was no housing, and you couldn't build fast enough to keep up with the amount of people moving there.
Well, the thing is that economy was predominantly driven by the oil industry, so you had a lot of jobs because oil prices were up $100+. Then what happened is that crashed down to $40-$50/barrel, and the jobs disappeared because they couldn't support new exploration and running the wells. So they kept the wells, and people started moving to other markets. Well, now you had a surplus of housing.
So when you look at that, that sector is like a pig in a python. You have this oil industry and very little outside of it. That's the primary market. Then you have these tertiary businesses that really live off of that main economic engine, which is oil... Like your barber shop, and your corner store, and whatever else it may be.
Well, if people are moving away, the customers move away too, so those smaller businesses can't survive either, so you have a shrinking economy. I exaggerate the point, but the point being is you don't want to be in a market that is heavily stacked in one or two industries; you wanna see a falt, wide graph, not a tall, narrow bell curve.
Joe Fairless: It makes a lot of sense, and I appreciate you getting into the specifics of that. What are some markets that you've recently found? You've mentioned one - I think you said Quad Cities - that you weren't previously in...
Marco Santarelli: I'd say the newest additions would be Dayton, Ohio, the Quad Cities - those are the two newest ones. Sometimes we're in and out of markets; we'll be in a market for a short period of time because we have some inventory, and then it disappears, and then we're gone. This is true for places like Cincinnati, Ohio, Cleveland, Ohio... And I've never really been a huge fan of the North-East for the most part, so Ohio wasn't on my radar for the longest time, and I'm just being completely honest and transparent here... The thing is, they're not horrible markets; I'm not a fan of the cold weather, the Northern climate, but these are big cities, they have a lot of industry, a diverse industry profile... So as long as you're in these markets that have stability and diversity and you pick the right neighborhoods - ideally, for me it's what I would call a B+ type neighborhood, plus or minus - you should be fine. I think you've got 70% of it licked there. If you've got excellent management, that knows how to properly screen and qualify a tenant, place them and know how to manage that property, I think you've eliminated 90% of what I would call potential risks.
The last 10% - I don't think you could ever get rid of it, because it's what I call the human factor; we're dealing with people, and people are people, and things happen... Whether it's lost jobs, transferred, death in the family - whatever it may be, things happen, so you might have issues. But at the end of the day, if you're in a good market and you're in a great neighborhood, with good or great management, I think you're gonna do very very well, regardless of whether it's Cleveland, Ohio or Dallas, Texas.
Joe Fairless: Anything we haven't discussed as it relates to opening up a new market that you think we should discuss during our conversation?
Marco Santarelli: As an individual, as an investor?
Joe Fairless: Yeah.
Marco Santarelli: It's really everything we've just talked about... The U.S. is made up of over 400 metropolitan areas; you can get as granular as 600+. I think for the most part it's best to stick to secondary markets whenever possible, primarily being L.A. or New York; you may not make things work there. But look for good markets that have health and growth... Like we've talked about before - the jobs and diversity.
Then what you wanna do is make sure you assemble the right team. Now, if you're not working with a turnkey provider or someone who has the whole package, the whole team working with you, study the market, learn the neighborhoods, learn the areas that are the most desirable from a tenant perspective, that are not over-priced. In other words, you still wanna maintain as close as you can having that 1% rent-to-price ratio... So hypothetically - a $100,000 property, rents for about $1,000/month; it's okay if it's renting for $950, $900, even $800 if the property taxes are really low in that state... But you wanna be somewhere in the $900-$1,000/month on that 100k property.
Always have a top-down approach, and this is one of my rules of successful investing - start with the market, work your way down to the sub-market, the neighborhood, and then the property. A lot of investors do this backwards - they start with the property, they're presented a deal, and they follow along with it. It's newly renovated, it looks great, smells great, it's got a good curb appeal, the numbers are attractive, but it's on a bad street, or it's in a war zone and it's not conducive for getting the best quality tenants... So don't flip it around. Start with the top-down and think of it as a funnel.
Joe Fairless: How can the Best Ever listeners get in touch with you, Marco?
Marco Santarelli: Two websites, if I may... Our core website is where we have all our free information, and properties, and that's noradarealestate.com. And if I may plug my own podcast, it's Passive Real Estate Investing. You can find that at passiverealestateinvesting.com.
Joe Fairless: Marco, thank you so much for coming back on the show, talking about how to open up a new market, how to think about that, the specific things to look for - job growth, job diversification and migration, making sure that it's a net positive migration... And the approach that you've had to take with your business... And it's an opportunity, because ultimately, you're doing more research in new markets, and that opens up new opportunities, new relationships, and a more expansive offering set for your investors who are investing with you.
Thanks again for being on the show. I hope you have a wonderful weekend, and we'll talk to you soon.
Marco Santarelli: Thank you, Joe.