Passive Real Estate Investing: Build A Smart Investment Portfolio with Marco Santarelli

CGT 13 | Passive Real Estate Investing

Marco Santarelli is a real estate investor, author, and founder of Norada Real Estate Investments. In this episode, Marco joins Brett Swarts as they talk about creating wealth through passive real estate investing and building a smart real estate investment portfolio. Learn the importance of positive cashflow and the core team you need to have to build long-term relationships that can leverage and find more opportunities for you. Marco and Brett dive into some of the solutions Marco has used to defer and/or eliminate capital gains tax and depreciation recapture.

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Passive Real Estate Investing: Build A Smart Investment Portfolio with Marco Santarelli

I’m excited about our guest. Many real estate investors struggle with finding turnkey properties in growth markets. Our guest has hand selects investment real estate deals nationwide with a focus on cashflow markets. We’re going to talk about the difference between buyer’s market, seller’s market and cashflow market here. He and his team have participated in the funding of more than 400 transactions per year and have achieved Inc. 5000’s top 20% list as one of the fastest-growing companies in America. Marco Santarelli, welcome to the show.

Brett, it’s great to be here and I’m honored. This is going to be a lot of fun.

You can find Marco at MarcoSantarelli.com. He’s also the Founder of Norada Real Estate Investments. That’s at NoradaRealEstate.com. Marco, will you give our readers a little bit about your story and your focus?

The short version of my story is, I bought my first rental property when I was eighteen. I’ve always been entrepreneurial as a teenager. I knew I wanted to invest. I knew I wanted to build a business and that’s what I’ve done for decades through my life. The writing was on the wall when I bought that first rental property. I fixed it up and I leased it. I managed it myself. I did most of it by myself, which was a good thing for learning experience-wise, but it was a mistake in hindsight because of what we teach about building the right team around you. I continue to invest over the years. Fast forward to 2003, this was after the dotcom crash in the early 2000s. I had time on my hands. I was in a position to be flexible in my time. I didn’t want to go back to Corporate America and have a job. What I did is I went to this free three-day real estate boot camp or seminar that was in Orange County, California. It was from a guy named Robert Allen. A lot of your readers might know who he is because he’s authored and co-authored many books.

You make all these different mistakes and you learn from that. Click To Tweet

I went to this three-day event and he did two things for me. One, it got me back into real estate investing. I wanted to do it full-time and I went into it full-time. I bought 84 units in nine months in the course of 2004. I built a large portfolio quickly. The second thing that happened is investors were coming to me early on saying, “Can you mentor me? Can you coach me? Can you help me out?” I said, “No. I don’t have the time nor do I have the interest.” At least at that time, I didn’t. “What I can do is I look at a lot of deals and I have deal flow. I can give you or assign over or sell you the deals that I don’t take.” That’s how the business was born. The systems I created, investing 2,000 miles away from Orange County, California and states like Florida, Georgia, Michigan became the business as it is now. It’s the systems that I was using. We help other people to build their real estate portfolios for free because we don’t charge for our services and it’s all about creating wealth and passive income.

Thank you for sharing particularly your systems, being in Orange County and being able to go nationwide. From what I’ve been able to gather, your research is excellent. You’re able to identify cashflow markets. Would you walk our readers through how you go about doing that and how your systems are different, which gives that competitive advantage for investors?

You’re talking about two things. First of all, when we’re talking about markets, what we look for and what we want in the markets that we provide investment properties in are two core things. One, it comes down to jobs or job growth within that market. Two is population growth. You want a healthy, robust economy. You want great diversity in the economy itself. There are jobs in all the different sectors or many different sectors, not just oil and gas or whatever it may be. Lastly, the numbers need to work. You can’t be in a market like San Francisco, New York or LA where it’s unaffordable, properties are overpriced and expensive and they don’t rent for enough to give you a good rate of return. You have to identify the right markets for investment purposes.

That’s part of the whole system, but the system is knowing where to look in terms of markets, what neighborhoods to be in, the types of properties and the numbers, the analysis on the numbers, having the right team around you for acquisitions, financing, property management, etc. I’m oversimplifying a little bit here, but if you put it all together and you follow it like a recipe, it will work for you every single time. It’s like checking the boxes on a two-page checklist. As long as you check all those boxes and you follow all the steps and you do your due diligence and your inspections, you verify information, you will be successful. It’s hard not to be.

CGT 13 | Passive Real Estate Investing

Passive Real Estate Investing: The numbers need to work. You have to identify the right markets for investment purposes.

 

When you’re building that team, you’re looking for a specialist, either a contractor or a specialist in lending, maybe title and escrow, realtors are finding you those deals. Walk us through your process for bringing on those individuals, especially if you’re doing it nationwide in multiple states and multiple locations.

The team is critically important. You want an acquisitions person, whether it’s a real estate agent or broker or a turnkey property provider like our company is or someone else. What we talk about and preach and even within our podcasts as you know because you were on my show, we are big fans of passive real estate investing, not active real estate investing. The difference is if you’re an active real estate investor, you’re buying a distressed property or a property from a distressed seller. It needs work. It needs to be fixed up. It’s like watching those TV shows on HGTV. There’s work to be done. You need to be actively involved.

You’re putting up the money and/or taking on the risk and/or managing the crew and/or being actively involved. It’s more of a business or a job than it is investing. It’s certainly not passive investing. The ultimate goal is to get to that point of passive investing. If you flip that around and you start acquiring properties 1 or 2 at a time and building up your real estate portfolio and all they do is put income into your pocket or money in your bank account every month, that’s passive real estate investing. That’s what we love. That’s what we teach. That’s what we help people do.

Your team is the acquisition person that could provide you that inventory. The property manager will manage those assets for you and each of the markets you have properties in. You need financing. You could buy this all-cash, but we don’t advocate that. You need your lenders that focus on non-owner-occupied properties. You’ve got the people who are on the sidelines, like your asset protection attorney, CPA and/or tax advisor, title companies, the people that are handling the transactions, property inspectors. You don’t need a construction crew and a general contractor in most cases because this is a passive, not an active approach. That’s the core team.

If you know what you're doing, you could do it right from the get-go, especially with the internet. Click To Tweet

There are relationships in the different cities or different states of where you’re working and cultivate more and more deals as you build long-term relationships, which you can leverage to find even more opportunities. What I’ve heard when I first started the business is the longer you work in this business, the easier it becomes and the more money you make. It definitely takes that initial 2 to 5 years building the teams, building your knowledge, getting the deal flow, getting the track record established. Walk us through that first 12, 24, 36 months, not only when you first did it, but more so when you said, “I’m going to expand outside of my area.” Maybe about those 84 units out of state, I’m not sure. Walk us through that initial start to a full-time investor, 36 months and what it took to get there?

As a business, we already have all that taken care of because of the years of working with different service providers in every market. We’ve vetted and worked with them so we have the experience. It’s easy for you as an investor and a client of ours because we already have that in place. We’ve done the legwork and the heavy lifting. Back when I first started, I made almost every single mistake you could possibly make. I lost a lot of money, not just made money. I got ripped off by people who were doing my management. One of the real estate agents I was working with was also my property manager and she stole $6,000 of collected rents from me. I didn’t have the checks and balances in place. You make all these different mistakes and you learn from that.

The systems that were created was thought about logically, creating a framework to work within having checks and balances. That takes time. If you know what you’re doing, you could do it right from the get-go. Especially with the internet, you can look up service providers that you need and you can also look up their reputation. You can vet people to a large degree online. I don’t put a ton of weight in references because anybody who’s going to give you references is going to give you their best references all the time. You can look up certainly references and testimonials and put together the team. Also, if you find a great person, whether it be a real estate agent or a lender or whoever it may be in a particular market, usually those people who are well established and have a great reputation are able to refer other people that they work with to you. You can build a team quickly from that one golden nugget person because they’re already working with other people who are rockstars in the space.

The thoroughbreds are running with the thoroughbreds. If you find that one and he built a good relationship, you ask them who are already in that space, in that city, in that town and have those relationships and have vetted those people. That’s why they’re working with them. You can leverage that to expand the business. You talked about systems, setting them up, adjusting along the way, persevering through this. Growing up, who was Marco before all of this real estate success and all of the mentoring and all the podcasts, all of these deals? What gifts were you given and how did they shape how you help others?

CGT 13 | Passive Real Estate Investing

Passive Real Estate Investing: You can build a team quickly from that one golden nugget person because they’re already working with other people who are rock stars in the space.

 

I was not born into a family of luxury or privilege. We didn’t have a lot of money. My parents both worked. In fact, my mother had to work two jobs for many years to make ends meet. I didn’t come from money. It’s interesting you asked me this question because I’ve been reflecting on my story and writing out my story. I knew at an early age that I wanted to be wealthy. This probably was around 8 or 9 when it happened. I made it my mission at the time to study everything and learn everything I could about business, investing and money including real estate. As a young teenager, I was buying and reading courses on business and real estate. I was nerdy. I was nerding-out on this stuff. At thirteen, I was coding and developing games in an effort to sell them, but I never did.

At age 15, 16, I was listening to Tony Robbins. I took it on upon myself to grow as a person and get into personal development and learn what I could about the things that interested me. I put myself on the path of wanting to be wealthy and learning about money. The thing is you don’t need to be young or old. You need to have the interest and the passion to do so. Anybody can do it. It’s never too late, especially with shows like yours and mine and all the free resources online and the books that are inexpensive. There’s no excuse not to educate yourself. That’s my number one rule of my ten rules of successful real estate investing is to educate yourself. Without the proper education, you are doomed to follow other people’s advice and you don’t even know if it’s good or bad.

Today’s access to information and quality content from people who have been in the trenches like yourself, who had the scars and who have helped a lot of people succeed in real estate, there’s no excuse not to dive in. We’re going to shift a little bit more to the tactical. You’re buying these turnkey properties and growth markets. You’re making good returns for you and your investors. You’re growing at a rapid pace.

Many investors that we work with are Baby Boomers and they’re looking for a more passive lifestyle as well and/or to supplement their income before they retire. They’re faced with highly appreciated assets such as primary homes, commercial real estate or businesses. They’re looking for someone like yourself, who specializes in commercial real estate where they can be passive. However, when they go to sell these highly appreciated assets or even when you go to sell yours for your group, they’re faced with the capital gains tax between 30% and 50%. What are some of the solutions you’ve used over the years to either defer, eliminate capital gains tax and depreciation recapture?

There's no excuse not to educate yourself. Click To Tweet

The big one, by far, without question is always the 1031 exchange. There are other strategies out there like the DST. Most of the people that we talk to and deal with end up using a 1031 exchange to take what they own and move that equity tax-free into a larger portfolio in other markets, markets that make more sense than the market that they’re in. I’ll give you a great example. People who live in the coastal markets, especially the pricey ones, all of California, the coastal states, Seattle, New York, New Jersey, I jokingly say, “They’re equity rich and cashflow poor,” but there’s a lot of truth to that.

When you have real estate and all this equity and it’s sitting there, I call it dormant equity. Dormant in the sense that it’s dead. It’s not generating a rate of return for you. What if you could take that equity, move it out of harm’s way, retain it all, put it into other markets and build a larger portfolio and increase your passive income dramatically in almost every case. You have all the upside, no downside. You have the ability to repurpose or rebalance your portfolio by taking that equity and putting it to work. The question is why wouldn’t you do that? When you realize what you could do on what you’re sitting on, you’re nuts not to do that.

Walk us through a scenario. Let’s imagine someone had a big old house or a business or we’ll keep it the 1031 exchange and investment real estate deal. It’s highly appreciated. They’re not getting as much cash-on-cash return. They can sell that and they can 1031 maybe into one of your deals, one of your opportunities. Are you helping them through that process? Walk us through how that works to maintain the tax deferral.

This is a grossly oversimplified example, but the math is simple. It illustrates the power of it. Let’s say you have a single-family home. You have $100,000 in equity in it. Let’s say you can sell that property and take out $100,000 in net proceeds from that sale under a 1031 exchange and turn that $100,000 in equity into easily three, but let’s call it four single-family homes in a market like Indianapolis or Memphis or Jacksonville or one of the 22 markets that we are in. Instead of having that one single-family home that’s generating $200, $300, $400 a month in net passive income, what if you turned it into four single-family homes in 1 or 2 other markets. You’ve increased your passive income to $800, $1,000, $1,200 a month. You can triple your passive income, retain the equity, diversify geographically and build your portfolio. If you pick markets that have strong cashflow and growth potential, you could probably do this again in 4 or 5, 6, 7 years. You do another 1031 on those properties or that portfolio you have and continue to leverage up and build. That’s how you accumulate wealth and accelerate your cashflow and accelerate your wealth creation.

CGT 13 | Passive Real Estate Investing

Passive Real Estate Investing: Income-producing real estate is by far the best investment that you can make.

 

That’s where your group comes in with Norada Investment Properties where you’ve identified those, you’ve secured those or they’re under contract that 1031 buyer can 1031 into alongside of you or by themselves. Walk us through how that works with your company.

We’re working with people who are doing 1031 exchanges all the time. It’s a common class of customers that we have, especially nowadays because many markets have appreciated so much and fast that those people who are educated in what I said are able to come to us and say, “Give us a hand.” “Talk to Brett, he can help you on the 1031 side and doing the exchange or whatever the case may be.” We then help put them into properties that we have available.

We’ll have anywhere from 100 to 200 properties available at any given time from single-family homes to duplexes to fourplexes that they can 1031 exchange into. We’re a key, core piece of that whole strategy that they’re going to need. We have pretty much everything that they would need. The 1031 or the DST pieces, we would have to work with guys like you because we don’t do that stuff. When we work together, we’ve pretty much got all the pieces to the puzzle that they need to go from A to B and do it seamlessly and improve their situation. There’s no rocket science here. It’s a matter of having the right inventory in the right markets available. We have a lot of it available all the time. It ebbs and flows, but it’s always there.

Part of the show, our goal is to bring on wealth advisors like yourself. You’re a wealth advisor for investment, real estate, and passive income. That being said, not every wealth advisor is in the investment real estate or passive income per se. What would you want to share with the fellow people who are maybe outside the industry looking in or looking to maybe help their clients diversify beyond the traditional investments? If there was either one mistake they’re making or one thing that should maybe try to implement, what would that advice be from you?

Without the proper education, you are essentially doomed to follow other people's advice and you don't even know if it's good or bad. Click To Tweet

I got to be careful of what I say. I’ve invested in virtually every asset class from precious metals to cryptocurrency. It spans the entire gamut. I would never say that one asset class is right for everybody because we all have different needs, goals, timing, life and all that good stuff. This does sound biased, but I can back it up with actual justification and facts that investment real estate or income-producing real estate is by far the best investment that you can make. It doesn’t mean it should be the only investment that you make. For me, it’s going to be the bulk of my investment portfolio.

I’m sharing this with other professionals. They may or may not know this, but the reality is that the benefits that are provided by investment real estate, the aggregate cannot be met by any other asset class. There was a time where the best tax benefits came from oil and gas investments. As a direct investor, being an accredited investor in a private placement, that’s no longer true. The real estate is the most tax-favored asset class out there. When you have the ability to have income, depreciation, the amortization of a loan, which increases your equity, the appreciation over time, which keeps lockstep with inflation or more and the fact that you could leverage 5 to 1 so I can put 20% down and own and control 100% of an asset, show me another investment that can do that. You can’t. It doesn’t exist. This is why I love real estate.

I have personal investments in the stock market and have dabbled in crypto. I found, for myself and my clients, are the best risk-adjusted rates of returns. Plus, you get the depreciation which offsets the income, which increases the cashflow. Most of our clients are looking for that cashflow. They want some appreciation, but they want to create and preserve wealth and get cashflow so they can free up their time and their energy, which leads us to our next question. What’s the most rewarding part about what you do for your clients beyond the numbers we’re talking about here and the returns? What is it that says, “This is my why behind what I do?” Maybe you want to share an inspirational story with one of your investors. Anything that comes to mind on that?

It’s wrapped up in our mission. Our mission is to help one million people create wealth and passive income with real estate because we want to help put people on the path to financial freedom. One of the best and easiest ways to do that is to build a smart real estate investment portfolio. Our mission is to help a million people. Whether they do business with us or not, it’s to put out that information and the knowledge and the resources for other people to use to help put them on that same path like we do with many other investors.

CGT 13 | Passive Real Estate Investing

Passive Real Estate Investing: If you’re putting money in your pocket, you’re in good shape. If you’re pulling money out of your pocket to maintain and keep your investments, that’s not a good thing.

 

The why behind that too might be more time with their family, more time to travel. They even don’t have to work on that day job. They might have to otherwise put in traditional investments. Part of my strategy has been focused or shifting from putting anything in IRA or 401(k) from the past and shifting to putting it all in investment real estate so that perhaps you have an extra 5 or 10 years to do what you want instead of maybe being forced to do what you have to do because most of the traditional tax deferral methods are 60 and above when you can start taking distributions without being hit.

If you had three things to share with the more novice investor and the person who’s been in real estate doing deals, given the current market conditions, a lot of places are more of a seller’s market. What are some of the adjustments you’re making with your outlook of the 2020 market? What are some ways to be in a more of a preserve your wealth versus create mode? What strategies are you encouraging others to take?

I’m a firm believer that regardless of where you invest with real estate, cashflow is king and the glue that holds your deal together. You can choose to be in a boring cashflow market and it’s strong for cashflow. You’ll weather through any real estate cycle in any economic storm that may come our way because people need a place to live or you can be on the other side of that spectrum where you are interested in growth. What I say is appreciation potential because you’ll get it over time, but some markets are definitely prone to give you far more appreciation than other markets for many reasons and usually centers around population growth. Regardless of what your strategy is, as long as you’ve got cashflow and a good cushion so you’ve got a comfortable capitalization rate on that property, you can weather through the ebbs and flows of the market, whether it be the real estate market locally and recessions on a national or a global basis.

To me, the fundamental part of it is to invest smart. Be in a good market, in a good neighborhood, a positive cashflow, have the right team like a management team. For us, we love the B-plus, A-minus class neighborhoods because we know that they’re good quality tenants. They have good jobs. They want good school districts. They tend to stay. They’re not transient. They don’t want to damage property. Smart investing. We counsel and guide people and advise them on all the things we’re talking about. When you step back and you think about everything we’ve been talking about here, it almost sounds like common sense. When you wrap it into a framework and a system that you can follow, then that becomes the recipe. I put cashflow high on that list. You want positive cashflow because that’s the cushion that allows you to ride through and sustain any disruptions in the market.

It's all about creating wealth and passive income. Click To Tweet

Debt to income ratios and/or how much debt you’re taking on a loan to value, do you have a rule of thumb? We don’t want to take on more than 50% debt or 60%, 70%. Every deal is probably a little bit different, but are you pulling back a little bit and saying, “Let’s put a little bit more of a down payment in case we have a downturn?” Any shifts on how much leverage you’re taking on deals?

The minimum you can put down is 20% with conventional financing in most portfolio loans. You’re always going to have your 20% equity in the deal. Keep in mind, prices are fluctuating all the time. Properties can appreciate and depreciate, but if your cashflow stays relatively consistent, it goes up over time because rents go up over time. They also keep pace with inflation, if not more so, many of the markets we’ve seen outpaced inflation by a long shot. As long as you’ve got good positive cashflow on your properties, that’s the stronger indicator of your sustainability. It’s not the price because market prices fluctuate all the time. They’ll go up and they’ll go down. What if you buy $100,000 property and it depreciates to $90,000 but it’s still generating $1,000 a month gross?

To me, it doesn’t matter whether that property becomes $90,000 for a year or two and then goes back up to $100,000 and then $110,000. I survived through the price changes in that market because I’ve got that cashflow. This is why I keep harping on this so much, the sustainability of your investments are based upon your ability to not have to feed the monster all the time. If you’re putting money in your pocket, you’re in good shape. If you’re pulling money out of your pocket to maintain and keep your investments, that’s not a good thing. You want good markets and good, smart, prudent investments but you want the positive cashflow as the overarching glue that holds it all together.

Cashflow is king. Not necessarily cash is king or even appreciation is king, it’s truly the cashflow to sustain you in growth markets or down markets or side markets. Last question, how do you stay centered in your values and keep from becoming discouraged? Let me give some context for this. A lot of our readers are business professionals, real estate investors. There’s a lot of negativity, whether it be in the news or the marketplace. There’s a lot of moving parts with the pace of information. The first part is, how do you stay centered in your values? The second part is, how do you keep from becoming discouraged when things don’t go as well as you’d hope?

Your second question is to have clear, specific goals. You want your goals to be specific, measurable, attainable, realistic and a timestamp on it. If your goals are inspiring, you’ll stay on course and stay on track. I break my goals down into business, investment, family, fun and health goals. If you have at least one goal in each of those categories and it inspires you and keeps you on track and it feels far enough out of reach but attainable, that helps to keep you on track. The value is something deep within you. You have to know who you are and be clear of what is important to you, what you love, be it family, faith, health, wealth. Those things that are important to you, you have to know. If you don’t know, you need to maybe step back and go on a spiritual journey to figure it out. Once you get clear on that, you’ll feel good every day. You wake up in the morning and smile on your face and you’re ready to rock the day. The way to stay centered is to be clear and know what your values are.

Thanks for sharing that wisdom and encouragement. Any last thoughts for our readers? As a reminder, you can find Marco at MarcoSantarelli.com and NoradaRealEstate.com. He also has his podcast as well. Do you want to share about that? You’ve released a video series, educational series on how to help people in investment real estate.

Simply remember passive real estate investing, that phrase. It’s the website PassiveRealEstateInvesting.com. That’s the home of our podcast and it’s the sister website to NoradaRealEstate.com where we have all our properties. On both of those websites, we have a free download. It’s a 40 some page primer on everything we’ve talked about and then some, it’s called The Ultimate Guide to Passive Real Estate Investing. If you download that free report or that guide, you will be put on a list to get a copy of the book that is coming out for free. It’s an actual book. That’s part of the whole mission of helping a million people is to give away the book.

“If you can help enough people get what they want, you can have everything you want.” Zig Ziglar said that one time. I appreciate all your generosity with us with your time and your wisdom. As always, I want to thank our readers for reading another episode of Capital Gains Tax Solutions show, where we believe most high net worth individuals and those who help them struggle with clarifying their capital gains tax deferral options. Not having a clear plan is the enemy and using a proven tax deferral strategy is the best way to grow your wealth. I encourage you to reach out to Marco, check out his content and his solutions for doing that.

Thank you, Brett.

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About Marco Santarelli

CGT 13 | Passive Real Estate InvestingMarco Santarelli is an investor, author, Inc. 5000 entrepreneur, and the founder of Norada Real Estate Investments – a nationwide provider of turnkey cash-flow investment property.  His mission is to help 1 million people create wealth and passive income and put them on the path to financial freedom with real estate.  He’s also the host of the top-rated podcast – Passive Real Estate Investing.

 

 

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