August 13, 2019

JF1804: Finding & Investing In The Best Real Estate Markets #SkillSetSunday with Marco Santarelli


Marco has been on the show a few times now, and he always delivers tons of value for us all. We’re having him on again today to talk about something specific, finding great markets to invest in both passively and actively. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“Markets change, they’re not static” – Marco Santarelli


Marco Santarelli Real Estate Background:


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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, where 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 Sunday – a special segment for you called Skillset Sunday. You know what we do here, but just as a refresher – we will help you hone or acquire a skill that will help you in your real estate endeavors.

With us today to talk about the skill of how to find and invest in the best real estate markets, Marco Santarelli. How are you doing, Marco?

Marco Santarelli: Doing great, Joe. I’m glad to be here, how are you?

Joe Fairless: I am doing well, and I’m glad that you’re glad to be here, because we’re glad that you’re here. A little bit about Marco – he is an investor, he is the best-selling author and founder of Norada Real Estate Investments. He is a nationwide provider of turnkey investment property and has been one since 2004. He’s based in Orange County. He’s the host of the top-rated passive real estate investing podcast as well, and you recognize his name because you’re a loyal listener. Episodes 111, 1012 and 1425 – those are the three episodes he’s been on. He’s back and he’s here to share with us how to find and invest in the best real estate markets. First thought, Marco, do you wanna give the Best Ever listeners just a little bit of a refresher, and then we’ll dive right into it?

Marco Santarelli: Yeah, for sure. To make a long story short, I  did buy my first rental when I was 18, around the time when I could qualify for financing… And that’s essentially when the writing was on the wall… But I wanted to invest in real estate, because I looked around and I came to the realization that I didn’t want to struggle financially. That was the situation with my mother, because my parents got divorced when I was 16. I ended up living with my mother and my brother, and she had to work two jobs pretty much all week long; I recognized how much work she was putting in and I didn’t wanna be the person that lived that same life or lifestyle at the time… So I decided that the only way to make money is business and real estate, and that’s the course I took, on both fronts.

I bought my first rental, held it, made the mistake of selling it years later, but I did walk away with some great equity, but that was a lesson learned. Then you fast-forward to 2003 – I continued with my real estate career, but went full-time and put the pedal to the metal and acquired 84 doors in nine months early on in 2004, and then just continued from there. But to wrap up your question, it was the same time that I started this business to help other real estate investors invest in single-families, duplexes and fourplexes to create that passive income, create wealth and become financially free… So here we are today.

Joe Fairless: So you work with investors who are looking to purchase turnkey investment property and have been doing that for almost a decade and a half… So describe to us just the typical customer of yours, and then let’s go into how you help them find and invest in the best real estate markets.

Marco Santarelli: Coincidentally, our ideal client is very similar to yours, with the exception that you’re talking to people who are looking to participate in a large real estate deal, like an apartment complex… So they are partners in the deal with you, but the similarity is that they wanna be real estate investors, they wanna be passive real estate investors, they wanna create wealth and they wanna create passive income. So you can choose the large real estate route, which is apartments, or you can choose the smaller real estate route, be a  direct investor, own those single-families, those duplexes and fourplexes, and that’s really the wheelhouse or the space that we’re in – that direct ownership of these cash-flowing rental assets. The end goal is the same, the vehicle is just slightly different… But it’s the same asset class.

So when you were working with them and you were helping them identify the best real estate markets, how do you structure that conversation?

Marco Santarelli: Well, it all starts with what we call a strategy session. We wanna really find out where that investor is today and where they wanna go. Some people refer to that as their goals, but take that and turn it into a roadmap, and then you break that roadmap into specific milestones and criteria. That criteria is the driving factor that helps determine what markets you’re in, what neighborhoods you should be in based upon your interests, your goals and your risk profile, and also the types of properties you’re gonna put into your portfolio. And that is not black and white; it could be a combination of single-families, and fourplexes, and maybe apartment syndications, and who knows, maybe there’s a sprinkling of investing in notes, just having promissory notes.

Joe Fairless: What are the two extremes of stances that an investor might have in terms of — I assume it’s uber-conservative compared to [unintelligible [00:06:51].14] So if you have someone on each end of the spectrum, what type of markets would you suggest for both of those individuals based on those extremes?

Marco Santarelli: Well, there’s really two answers to that questions, and they’re different. You’re talking about extremes of investors. First and foremost, there’s the type of investor — really, there’s three answers to your question, because you have passive real estate investors that want to invest and just take the income and grow the wealth. Then you have active investors who like to roll up their sleeve, swing a hammer, and fix and hold or fix and flip a property.

The next level down is you have investors who are more speculators in nature, the borderline gamblers, and they wanna be focused on hypergrowth markets; they’re essentially chasing after appreciation, which is not the way to invest, in my opinion. Then you’ve got those who are saying “Cashflow is king. I’m investing for cashflow, but I’m gonna buy smart and right, and let the equity and growth in the property happen naturally over time, because that’s what’s happening in that market.” Then you can break that down ever further into a third layer, third level of investor type, and then you have those people who are focused on cashflow markets, and then you have those people who are focused on  markets that have more growth potential. And of course, then there’s the hybrid between the two, where you have growth and growth potential combined with moderate amounts of return in terms of cashflow, cash-on-cash return etc.

Joe Fairless: Will you associate some markets to some of those examples, just so we get some context for what markets would fit into certain categories?

Marco Santarelli: Yeah, for sure, Joe. So we’re talking big-picture here… We classify markets generally speaking into three kinds. Whenever we take on a market – we’re in 22 markets right now, so we have at any given time 100-200 properties available for sale, cash-flowing from day one (we call these turnkey rentals) and we classify them in three categories: cashflow markets, growth markets, and then what I’ve mentioned before is the hybrid market, which is a combination of those two.

To give you some examples, cashflow markets today – because let’s face it, markets don’t stay static; they do change over time, and we’ve seen this especially in Atlanta, we’ve seen it especially in Dallas to a lesser degree, but the same thing… But cashflow markets would be like Birmingham, Alabama, Huntsville, Alabama, Memphis, Tennessee… Those have predominantly been cashflow-based markets.

Then you’ve got growth markets, where you’re seeing above average appreciation rates compared to its historical norm… And if the trend is there and will continue to be there for 1-3 years, then we classify that market as a growth market. It’s basically gonna give you more growth and equity in terms of appreciation. That would be Atlanta, that would be Dallas, to a large degree Houston, San Antonio… Those are examples of those types of markets.

Now, all these markets I’ve mentioned were in those markets. Hybrid markets are Indianapolis, the outskirts of Chicago (the Metropolitan Area), Jacksonville, Florida is pretty much a hybrid market… Kansas City is a hybrid market, although it’s experienced a lot of growth here in the last 2-3 years.

Joe Fairless: And when you take a look at each of these markets… Let’s pick the cashflow market category – have there been any markets over the time that you’ve been really focused on this that have jumped in and out of that category?

Marco Santarelli: Yes, they do change. Most markets don’t change, and don’t change quickly, fortunately, because real estate is kind of a slow-moving asset class… But we were in Atlanta almost from the very beginning in 2004-2005. It was for the longest time just a sleeper market; it was not necessarily “boring”, but it was boring enough to be a great, stable cashflow market. And then somewhere around 2012 Atlanta just took off like a rocket. Inventory dropped, it was hard to find inventory on all levels of real estate, from your retail higher-end markets, to even your low-end 40k, 50k, 60k property. It was just being squeezed.

So inventory was tight, demand was strong, pushing prices up, so we saw this strong appreciation in Atlanta, and usually that appreciation – at least with residential 1-4 unit properties – it far outstrips the rents, which means that it grows faster than the rental income grows. So now you start getting this differential between the two (the delta) and that squeezes your cap rate, it squeezes your cash-on-cash return.

So Atlanta went from being essentially a cash market, quickly becoming a growth market, and still to this day it’s hard to get inventory there, and the numbers are really tight. The same thing has been happening in Dallas over the last three years or so, and we’re seeing that in San Antonio as well. So yeah, markets change; they’re not static. Nothing in real estate is static, for that matter.

Joe Fairless: You’re in 22 markets… What markets would you stay away from, assuming that the variables in play currently are how they’ll be in the future for those markets?

Marco Santarelli: Well, that is a fantastic question. Markets to stay away from – we could probably have a podcast episode on that question alone… But the first thing I’m gonna say about that are markets that are experiencing depression, lost population, meaning their net migration is negative and has been negative for years, meaning that is the trend… Because you need people in the market, and more people coming in, or more people growing there organically, to sustain the demand on real estate. So the people who rent your properties have to be people who live there and work there. So if you see negative migration, that’s a bad sign; you probably wanna do really good due diligence, or stay away from that market.

Same thing with jobs – you wanna see positive job growth, job stability, and a diverse economy. If you don’t see that, that may be a market you should avoid. Because let’s face it – there’s so many other markets you can choose from, and the United States is such a large market geographically speaking that it’s really made up of over 400 metropolitan statistical areas and probably over 600 if you include micro-markets. So there’s a lot to choose from, and this is why you shouldn’t necessarily be investing in your so-called backyard… It’s because odds are there are better opportunities in other markets if you just look around and start to look at things such as job diversity, the economy, growth, population, housing demand, and all that good stuff.

So stay away from markets that have negative factors like that, and then if you wanna break it down a little bit more granularly, I would stay away from submarkets and neighborhoods within markets that are not that great, that are not providing you with solid returns in solid locations. Here’s what I’m thinking as I’m talking… I’m kind of tripping over this a little bit, because what I’m thinking of are the investors that make the mistake of buying rentals that are 40k, 50k, maybe 60k for a single-family home… Because often what we find is that those markets may not be so great, but more specifically the submarkets and neighborhoods they’re investing in are the markets you wanna stay away from… Because that 50k property probably will stay a 50k property ten years from now, because it probably was a 50k property ten years ago. So choose wisely; it’s not just about the market, it’s also about the neighborhood as well.

Joe Fairless: Thinking of the major cities – and I’ll include Huntsville, Birmingham… That type of level and up in terms of population, in the United States; let’s just broadly think about all the cities… You come across a million dollars; who knows how you came across it, but it’s an extra million bucks, and you have to invest it in turnkey rentals in the United States. But there’s a catch. You can invest it in any market in the U.S, but the catch is that there are five markets that you’ve got to cross off your list; you would never ever, ever invest in those markets… But they’ve gotta be major cities. What are the five markets that you must cross off your list before you actually pick the market that you wanna invest in?

Marco Santarelli: That’s a good question, it’s very interesting. Joe, do these markets have to be ones that I would consider otherwise?

Joe Fairless: No. They can just be five major cities that you wouldn’t consider, so the first five off your list.

Marco Santarelli: Well, if I wouldn’t consider them right from the get-go, then that’s easy, because there’s many of those markets… And I will just rattle off some names: San Francisco, Los Angeles, New York, Washington DC, parts of New Jersey. I don’t know if I’m answering your question, but I can tell you what all these markets have in common…

Joe Fairless: Yeah, please.

Marco Santarelli: If you look at these markets, you’ll see — Seattle, Washington is another one. They’re very, very expensive, and I wanna say overpriced to the point of they’re bubble markets. And the problem there is this — it’s what I’ve talked about before; if you have properties that are so expensive, you have two problems. One is the ratio of what those rental units, whether it’s an apartment complex, or more specifically single-family homes – what they rent for relative to the purchase price or market price of that property is so out of whack, is so out of line, that there’s no way you can get a decent rate of return, if at all, on those properties, without putting a large down payment. But then you’re not really using your capital properly, you’re not leveraging your capital, you’re not getting the greatest rate of return. These are very expensive markets.

So number one, you don’t get the right cap rate, the cash-on-cash returns and everything else. Number two, because they’ve had such a huge run-up, there’s greater potential for there to be a pullback or a turn where that real estate market turns and you see the equity and the property values come down. That means that the downside risk is higher in those markets than in a more stable market, where you see the cycle in that market, appreciation-depreciation, be more like a soft wave, as opposed to a rollercoaster.

That’s the problem with these expensive markets – they’re out of whack, they’re overpriced, often they’re not landlord-friendly, and it’s hard to actually get a rate of return. Besides, you can’t leverage your investable capital as far in those markets as you can in some of these more stable, diversified markets.

Joe Fairless: On the flipside, that million dollars is split up into four chunks of  250k. You must invest 250k in four different markets. Which four markets do you choose right now?

Marco Santarelli: Well, if that’s a personal question you’re asking me what I would do…

Joe Fairless: Yes.

Marco Santarelli: Okay, so I would probably pick two markets that are growth-based, meaning that they’ve got the cashflow, but I’ll still have strong appreciation potential, and then I’ll pick two that are more stable markets, but “boring” markets, that are cashflow-based. So I may pick a market like Huntsville as an example, and maybe Memphis, maybe Birmingham or Oklahoma City. Two of those.

And then I would take two that have a stronger growth potential; probably Jacksonville, Florida, maybe the Greater Chicago Metro Area… And I would do 250k in each of those markets… And that’s a lot of property. 250k is enough to acquire 20k-30k per door as the minimum down payment. It gets you a lot of property. That’s a pretty sizeable portfolio.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Marco Santarelli: Thanks for asking. We have two websites. Our property website, where we have free information and the properties that are available – or at least most of them – are on And then the sister website, where we also have a lot of articles and free content is the home of our podcast, and that is

Joe Fairless: Marco, I love catching up with you. You take such an analytical approach to it, but common sense and very easy to follow and understand. I love the three different kinds of markets, how you categorize them – cashflow, growth and hybrid. I like how you talked about what you’d stay away from and why, and why would you go towards a market, and how to think about it in terms of a personal portfolio.

Thanks again for being on the show, I really enjoyed our conversation. I hope you have a best ever day, and we’ll talk to you again soon.

Marco Santarelli: Thank you, Joe.

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