Working Capital The Real Estate Podcast

Investing for Cash Flow in Real Estate with Marco Santarelli|EP6

May 26, 2020

In This Episode

Marco Santarelli is an investor, author, and founder of Norada Real Estate Investments He is the host of the Passive Real Estate Investing show — the show where busy people learn how to build substantial passive income while creating wealth for the long-term. He is also the creator of DealGrader – a scoring system that measures the investment quality of a real estate investment, giving you an overall snapshot of its profitability and investment risk. He is a licensed California real estate broker and runs a successful real estate investment firm focused on helping other investors build wealth through the power of real estate.

In this episode, Marco shares how he started his journey in his first investment at 18 years old, how he leverages, why he quit his corporate job and go full time in Real Estate. He also shares the lesson he learned from his first investment, his approach and advice to create cash flow, build portfolios, how to be prudent and intelligently in Real Estate objectives, and ultimately achieve financial freedom.

Enjoy the episode!



  • “If I could do it at the age of 18, anybody can do it at any age.”
  • “The thing is if you just need to build up your confidence by building your competence and there’s no excuse not to educate yourself”
  • “You should be investing in yourself and invest in those resources to educate yourself because that’s how are you going to grow”




Marco’s website

Marco’s Linkedin

The Passive Real Estate Investing Podcast




Jesse (1s):

Welcome to the Working Capital The Real Estate Podcast. My name is Jesse Fragale. And on this show, we discuss all things. Real Estate with investors and experts in a variety of industries that impact Real Estate. Whether you are looking at your first investment or raising your first fund, join me and let’s build that portfolio one square foot at a time. My guest today is Marco Santarelli Marco is an investor, author and founder of neurotic real estate investments, a national real estate investment firm offering turnkey investment properties in growth markets nationwide. Marco a pleasure to have you on

Marco (34s):

Jesse on her to be on your new show, and I’m excited to a speak with you and help educate your audience.

0 (40s):

Oh, awesome. You know that we just talk to a, prior to the show and I didn’t realize you were actually also a Canadian. So a that’s a interesting and somewhat where when I talk.

1 (50s):

Yeah, well, you know, Hey, we have a lot in common with peers, you know, Real, Estate Canadians, all that good stuff. No, it’s great. I mean, you have to get your start somewhere. So, you know, Calgary was my home town and that’s Western Canada, as you mentioned before and say, you know what? Real Estate is everywhere. So if you can learn how to invest in real estate and M you get the skills to do, and you can do it anywhere in there, I’m in Southern California and I’m, Investing all over the U S

0 (1m 11s):

It definitely a, a little bit of a different landscape. So yeah. You know what, let’s, let’s dive right into it. We talked a little bit about kind of your first investment property and how you kind of broke in, you know, basically you, no, nobody handed anything too. And maybe you can tell a little bit about that, that journey on your first investment.

1 (1m 28s):

Yeah. So my story is a little different than most people’s and, you know, they say, well, geez, I interview, well, I don’t know why it’s just, I just knew it an early age. I wanted to create wealth because I wanted time, freedom and want and financial freedom. And so I just knew as a teenager, that real estate was the best way to preserve and to build or create wealth. And so when I was 18, I had saved up enough from a part time job that I had that I could purchase. My first rental property was in Northeast Calgary. It wasn’t an end unit townhome and long story short I’ve purchased. This property was a lie. It was slightly distressed. I brought my uncle In, who was a contractor, and we fixed it up together. And then I put a sign in the lawn and leased it out. There was no internet back then. So I couldn’t go online to do any of that, but I ultimately leased it and managed it and held it for a number of years.

1 (2m 12s):

And that was where I got my start. It, you know, at the age of 18, when that first unit, and ’em the takeaway from that is twofold. Number one, if I could do it at the age of 18, anybody can do it at any age. The thing is, is you just need to build up your confidence by building your competence. And there’s no excuse not to educate yourself, you know, with your Podcast my Podcast on his podcasts out there, that books that are super cheap, I mean, who doesn’t want to spend 15, 20 bucks to educate themselves on it? You know, a book. So there is no excuse not to, to educate yourself and build the confidence that you need. You know, everybody starts somewhere. That’s a great place to start for most people in other people who want to be even more passive than they can go down the road of, you know, investing into syndication with someone else on an apartment complex are a commercial dealer, whatever it may be.

1 (2m 58s):

The biggest lesson learned from that very first deal Jesse was never sell. You’re a real estate. That’s a mean you don’t always hold a real estate. But the mistake I made is after a number of years, I had so much appreciation and I thought, Oh, geez, I could sell this thing. And walk away was a big chunk of cash. Well, guess what I did walk away was a big chunk of cash, but the stupidity in me, he didn’t put to use and buy more real estate at the time. I ended up ultimately doing that, but I ended up buying dumb things, you know, like another car and all kinds of, you know, weird stuff.

0 (3m 28s):

It’s interesting. I always a tell some, you know, a younger investors, you, no, it’s not, it’s a cliche, but it’s not timing in the market. It’s time in the market. And a, you know, I think it absolutely applies when it comes to Real Estate. So I find that most people that are in, in, you know, in their investment career, they usually have a bit of an arc in a story. And that first investment oftentimes does lead to their next phase, which is usually accumulation. If there is still a purchasing real estate today, how did that first a investment? How did you leverage that? You know, cars aside too, the, the kind of the next chapter,

1 (3m 59s):

I ultimately decided to get my real estate license thinking that that was going to help. And it was really more of a sale job. Like a lot of people don’t realize that getting real estate licence is great. If you are in your own state or your own local market, looking to invest in real estate, because now you have access to the MLS. You can leverage that, that experience and those tools, but more often than not, it really doesn’t help you. So if someone was to ask me, should I get my real estate license? My answer would be, well, it depends if you’re investing in your local market or not, and you always have to disclose if your, a real estate investor and you’re putting an offer on a property and its, you know, for personal gain, you know, meaning it’s your principle residence, or if it’s an investment property, you have to disclose the fact that you’re a licensed real estate agent, which is no big deal, but you just have to be aware of that.

1 (4m 48s):

But that’s what that was my next step. And then from there I went and bought another car on a condo and a, you know, that, that was the, the, the slow path to wealth. If you will, where I really hit the pedal to the metal was in 2004 in a nine month period, I purchased 84 doors and these were mostly single family homes, duplexes in fourplexes. So there was a lot of property. So 84 units, it is what I put under my belt in a nine month period. That’s when I decided was in the mid 2003 that I wanted to go full time in real estate knock, go back into the corporate world. I really wanted to take my financial future in my hands and do it right. And do it hard and fast. Interestingly enough, what put me on that path was yet another burden, another Canadian.

1 (5m 31s):

It, it was the guy who I’m sure you’ve heard of Robert, Alan, Robert G. Allen. He, you know, he’s written, you know, books like, you know, creating wealth and nothing down and all that stuff. So he, he’s a, he’s a Southern Elberton as well, living down in San Diego now. Yeah. I got an email in the middle of the summer saying, Hey, I’m putting on a three, a free three day seminar. And I had the title on my hands. So I saw, I said, Hey, let me go and check it out. So it was great. You know, the content was, was riveting, but a that’s what it gave me the kick in the past to just say, Hey, this, this was for you. This is what you should be doing is real estate. And so being a real estate investor and real estate entrepreneur, I just threw it all on the wall and just said, yep, this is it.

0 (6m 13s):

So that 70 to 80 doors or properties that you had predominantly single-family was the strategy with those where those buy and holds where they are a mix of flips. Where was that kind of a component there?

1 (6m 25s):

I’ve always been a big believer in buy and hold. And you know, to me, I divided real estate investing into two categories. There’s the active. And then there’s the, Passive the people who watched, you know, HGTV and all these other shows, thinking that that’s real estate investing. It’s a form of real estate investing, but it’s really transactional. You are actually running a business, a transactional business. So once you stop flipping the income stops and you’re getting chunks of Cash, that’s all well, a five. If you take that, those capital gains those chunks of cash and reinvest it into buy and hold rentals, which is the Passive real estate investing side of it. And that’s where you create cashflow and you grow long term wealth. My approach would be favored was the buy and hold approach because I knew that I can create wealth and grow that wealth over time and, and create cash flow, which leads to the passive income.

1 (7m 15s):

You need to achieve financial independence and, and ultimately a complete financial freedom. So there is nothing wrong with flipping houses and swinging hammers a, but just understand that you can’t do only that and do that forever because you actually need to create passive income for yourself. And building a portfolio is the best way to do that. And I wanted to do that quickly. So those, those units that are where I was purchasing, some of them were renovations, but for the most part, they were all intended to buy and hold, not to buy and sell and flip to someone else.

0 (7m 45s):

It was basically kinda getting that long term gain and, and that accumulation, so of those 80, do you still hold those today and are they kind of operated under management or did you kinda make a move into apartment’s? You know, where I think we were talking a little bit before about some of the larger deals,

1 (8m 2s):

No, over time. I mean, that was back in 2004. So for the most part, I probably liquidated all of those and then repositioned the equity into other real estate and, and other investments in other markets. And this is, it goes back to the story about that first unit I bought, I sold it, I got out this chunk of cash. This capital gains, what I should’ve done is what we call and the United States is, you know, a tax deferred exchange. You have the same thing in Canada as well. We call it a 10 31 exchange, but essentially taking that equity and moving it into other property, other like kind property. And usually when you do that, you grow your portfolio. You can take that one property and turn it into two, three or four because you’re rolling the equity out and turning it into down payments on multiple properties.

1 (8m 46s):

And so you can grow your portfolio and grow it and grow it. And it becomes almost exponential. The beauty of that is, and this is true for you and everyone listening to your show, as you gain equity and property, you can leverage that equity as down payments into a more properties and the people who live on the coastal markets. And this is true for Toronto and Vancouver in other markets around the country. I have jokingly say, these people are, are equity rich and cashflow poor. So if you are listening to this and your sitting on a bunch of equity, then you should think about doing a 10 31 exchange because you can take that equity and roll it into a larger and more stable portfolio with more cash flow. And that’s essentially what I was doing with a lot of those initial property’s is, is I got to the point where I either didn’t like LA the location or particularly the neighborhoods, because there are a lot of them were actually in C class and even borderline D class neighborhoods, a, you know, almost war zone type areas.

1 (9m 42s):

I didn’t know that at the time I learned my lesson, you know, the hard way dealing with tenants and having all kinds of tenant issues. But I ultimately moved into the types of properties that I really like, which are like B, B plus a minus neighborhood properties, better demographic, better experience, less brain damage.

0 (10m 1s):

Yeah. Its interesting, you know, we were talking with a, I dunno if it was a, an attorney, a tax attorney, you’re a lawyer. And, and my understanding was that it Canada’s still didn’t have an equivalent of the 10 31 exchange, but you know, I’m not sure if that a, you know, if that’s changed, but it’s always been something that at least from North of the border I’ve looked at or, you know, people at, at, at my company have looked at and we’ve always been, its always been interesting and, and it’s actually probably not coincidental that some of the largest amount of views that we get on the videos we do are from cash out refinances and just ways of getting that equity to work for you. Because I think there’s a lot of investors that don’t realize that as your property appreciates your actual return on equity is going down, right.

0 (10m 42s):

Because you are building up the equity in your, in your property and its kind of sitting there dormant. So I think that that’s a great, a great point. And I think the point on cashflow, you had to really a very good Podcast a, I don’t know how long ago this is now that you did it with ’em the gentlemen I think correct me if I’m wrong. Marco is the wealthy Gardner is the book that he wrote and kind of a little, a little bit of life lessons for his son and, and how to build wealth. And I think, you know, just on that cashflow point of view, what is your view on, you know, investors that go out there and they’re looking at equity appreciation, not necessarily ignoring cash flow, but maybe putting a little bit too, too much emphasis on the equity component. Like in markets like our, you know, Toronto California,

1 (11m 24s):

That’s a brilliant question. And before I answer that, I just want to touch on something you had said a minute ago. I I’ve always been of the mindset that there is no return on equity. Like, you know, you talk about the return on equity diminishing over time, I guess, form of a way of looking at that, that as if you put a down payment on a property, that’s your cash investment. And you’re going to get rate of return on that. You know, you can measure it in terms of your cash on cash return, whatever it is, but you gain equity in a property above and beyond your initial down payment. The return on that is essentially zero because it is not generating any, any income it’s just sitting there and its, you know, like I call it idle equity, dormant equity, debt, equity, whatever you want to call it.

1 (12m 9s):

When you get to the point where you can pull that back out, whether its through a 10th 31 exchange or a refinance or you know, an equity stripping in any way, shape or form and reposition it and now turned it into a new downpayment on more property that is generating income. Now you actually have a return on that equity, but that equity now has become the down payment or the investment capital on, on some other piece of property. So when people talk about return on equity, I’m not sure if the author of the book we were talking about before we went live a Frank going LA LA LA. I think he has a chapter in his book that talks about return on equity. And I think that was the only chapter I struggled with and his book because he couldn’t fully agree with a lot.

0 (12m 50s):

Well he had his, he has an interesting take on it because he I’m one thing I do like, and I think a lot it’s it’s misunderstood or maybe just misapplied as cash on cash return. He looks at it from a, a one time, one year, a type of metric. It’s not something it’s something you can tactically mathematically do every year. But it’s interesting that you mentioned that because in that chapter, I think if we’re talking about those same one, he says I, you know, a return on equity. He take, he says that he takes a nonstandard approach to return on equity. And it basically is kind of, you know, the equation for a return on equity. But as your property grows in equity and your amortization of your mortgage slowly gets paid off. That that’s what slowly going down because the equity is going up.

0 (13m 32s):

But I take your point, you know, mathematically going to zero because you’re right, th that equity is not doing anything for you. Its its sitting, it’s just sitting on the property and may be the takeaway is from an investor’s point of view. You know, once the, you know, this is all abstractions, but once the rubber meets the road, the reality is if you have that excess equity and your in your properties, that’s not working for you. Maybe that should tell you should start, start going on the acquisition, a move.

1 (13m 57s):

Yeah. I mean, it goes back to what I said before. If your equity rich and cashflow poor, then you have some great options in front of you where you can reposition that equity and turn it into a larger portfolio with greater stability and increased cash flow. And that is how you grow our snowball or the size of your portfolio and, and the amount of passive income that you’re creating for yourself. So to your, to your S your last question about investing for appreciation, or, you know, that that is essentially a form of gambling. I call it speculation. And a lot of investors, particularly in the early two thousands up until about 2005, 2006 was in the market when credit dried up in the market crash.

1 (14m 39s):

And then we had, you know, the great recession of 2008, a lot of people who were quote unquote Investing were actually buying real estate, looking at it as if it was a stock on the stock market. It was growing in price, not generating cash flow or what you would call dividends on the stock market. So that’s how people used to use. We invest in the stock market decades ago, they will buy stock because they were buying and them are investing in them for the dividends. But today people don’t even think about that. They ended up purchasing Starr in the hopes that the price of that stock goes up and it’s all capital gains. So that’s kind of a speculative mindset. And if you do that with a real estate, if you know what you’re doing and your, a great market timer, and, you know, you have other factors in play, you can do well.

1 (15m 27s):

But often when you are speculating in markets like Toronto or Vancouver, or, you know, coastal California, New York, New Jersey, even Denver, Colorado, places like this, these markets have been so hot. They’d been appreciating so much so fast that that is not sustainable. And you get to a point where the prices have gone up so much that the rents don’t keep up with it. You start to lose what I call their rent to value or a rental price ratio. When that starts to get really low, like it is here in Southern California. It is very, very hard to cashflow a property unless you put a large down payment. Now, the question is why would I wanna put a large down payment on a very expensive property, like 500,700,000, a million dollars when I’m going to get nominal cash flow for the cash that I put in the down payment, which means that my rate of return is very low, like single low single digit rates of return.

1 (16m 22s):

I have high downside risk, and I could have taken that same investment capital. And I could’ve put it into property is that we offer our client’s all the time in the mid West, the South, the Southeast, down in the corners of areas of Florida. And I can purchase three to five times the amount of properties. Number of properties in terms of units have higher cash flow, higher cash on cash return. You got to step back and think about that because if you want to be a speculator, great knock yourself out. But I don’t want to be putting my hard earned investment capital in markets where I have witnessed three to five years of strong appreciation and not know if I’m going to start, still see that for the next two or three years.

1 (17m 3s):

And it’s all based on a hope or not the fact that I have cash flow with that appreciation potential. I want both. And that’s what I always focus on.

0 (17m 13s):

Do you say to individuals that are trying to break into Real Estate and they happen to live in markets similar to ours? You know, whether its New York, Toronto, you know, you’re in San Francisco or a California like it, or a, sorry, LA, you are in these markets. And, and I get asked this question a lot because as you know, in Toronto, a condos, you know, we have a, a bit of a, a supply constraint and we are building more to meet up with the, with the immigration that we’re finding in the area. And I’m, I assume it’s not dissimilar from other U S market major markets. And when you start looking at these Investments, especially pre-construction, we’re talking about 2%, you know, it, a cap at that point, you start, stop losing all meaning. So, you know, what do you tell that individual that’s looking to break in, but just doesn’t see these class, a cash flowing properties that a, that we’re talking about,

1 (17m 60s):

I’m going to start with a major concept. And the major concept is to be market agnostic, which means you are not married to any particular market. You have to understand that a lot of these quote unquote Groos have falsely indoctrinated people too, to invest in their backyard. And they say, well, if you’re gonna invest in real estate investment within a one to two hour radius driving radius of where you live, what’s the logic and that if you are buying, fixing and flipping homes and you have to be actively involved, because now you’re an act of real estate investor. Sure. You want to be within a one or two hour radius of where you live. That just makes sense because you’re more hands on, you’ve got an active role, but if you got, if your looking for a rate of return and you want a stable portfolio and you want your money to work as hard as possible for you, then you need to be market agnostic.

1 (18m 47s):

It’s no different than investing in the stock market where you say, okay, I’ve done all my research. I’ve identified. Coca Cola is the best buy right now. Just like what Warren Buffett did. When are you investing heavily in Coca-Cola? Well, do you need to live in Atlanta, Georgia where the headquarters of COGA is in order to invest in Coke? Absolutely not. You know, that’s just silly while at the same thing, if you live in Toronto or in, in Southern California, whatever it may be and you want to invest in code that you can do it and that’s being agnostic to the market or location of, of the parent company or where the real estate is located. When you do that, and you realize that the United States is made up of over 400 large MSA metropolitan statistical areas, Canada is the same way.

1 (19m 30s):

Then you can step back and be objective nonemotional about it, and you can be objective and say, Hey, I have investment Capital I have 50,000, a hundred thousand, 200,000 a million to invest. Where am I going to put it? So I get one, the greatest return on my investment in terms of my cash on cash returns. That’s the immediate, where is the strongest appreciation potential, or that meets my buy box? Whatever my investment criteria is that could be Atlanta, Georgia. It could be Kansas city, Missouri. It could be Jacksonville, Florida, you know, where Marcus will have stability, job, job growth, population growth. They’ve got strong fundamentals. And I have the possibility to continue to see above average rates of appreciation while I still have that cashflow while I still have a good cap rate while I still have cash on cash return.

1 (20m 17s):

So if I can have the cashflow, which is the glue that holds my deal together, and I have the appreciation potential and the stability of the market, those are the markets I should be looking at, not where I live in my backyard here or Toronto or anywhere else. That’s being market agnostic that is being prudent and intelligent and objective about your real estate investing. If you do it any other way, you’re cutting off one or more of the legs of the stool you, you want to build in your investment strategy.

0 (20m 45s):

Maybe that’s a good pivot into kind of Norada Real Estate and what a, what you do today. Maybe, you know what the portfolio looks like today and what kind of markets that your active in. And then, you know, just as an addendum to that covered a little bit of it already, but what you’re looking for in those markets in terms of, you know, are they value at, are, are you buying a turnkey?

1 (21m 3s):

Yeah. So the last 16 years, our model’s been a very crystal clear. We offer turnkey rental properties in markets that make sense. And market’s that make sense is exactly what we talked about in the last three minutes. There are markets that have stability or growth, a growth and growth potential. They, they will cash flow from day one. So you can not only have inventory or get good inventory there and be B plus a minus neighborhoods, but the cash flow positive and they have that stability and the growth, the market itself, we’re in about 22 different markets. I track 405. So I know what’s going on in every market in terms of population growth, job growth, unemployment appreciation rates, quarterly annually over the last 20 years.

1 (21m 46s):

And I seen the momentum, I track the momentum of each market in terms of what its doing in terms of growth. And I can track this actually down two, a two zip code levels. I know it’s very nerdy and you know, I’ve got a little propeller head on with a little propeller spinning right now, but, but I like that stuff. I like to data to analyze the data. Now you can’t be everywhere. You know, 22 markets is more markets than I want to be in, in a perfect world. I would only want six, three cash flow, three appreciation markets. So when, when a client comes to us and they say, okay, here’s what I’m trying to achieve. These are my investment goals. Great. Let’s work with one of our investment counselors. We’ll break that down into an investment criteria based on your goals where you’re trying to go and you’re risk tolerance in your age and all that stuff.

1 (22m 29s):

Here’s your plan. Let’s map out a plan. This is what you should be investing in. And where now this is just counseling and advice. It’s not telling you what to do, but we provide a lot of that value in it and counseling for free. So take it and do what you will with it. But at the end of the day, you’re going to start probably in one market that meet your investment goals. It could be, you know, a cash flow market or market the sh that has strong appreciation potential, but that’s where you start. Or maybe that’s where you continue. And I have this rule of thumb three to five and three to five. And what that means is you build your portfolio with a three to five properties in one market that meets your investment criteria. Then you move to a second market geographically different.

1 (23m 10s):

And that typically means you are in a different state and that you do the same thing. You build a footprint there with three to five properties, and these are all managed by local full service professional property management company. So now you’ve got the stability of one market, the stability in a second Mark, and then you go with the third market and do the same thing. Now there are three to five properties that at this point you’ve got anywhere from, let’s say 10 to 15 properties in your portfolio. Some people stop there because that’s more than enough for what they are trying to achieve, but you don’t need to do that in more than five markets, because that’s probably overkill. If your, if your past five market’s, it probably means that your you’re underperforming some of those earlier market’s and maybe you do the 10 31 exchange like we were talking about before you probably equity rich over there and its time to reposition and rebalance your portfolio.

1 (23m 55s):

And just like you do with stock’s. So three to five to three to five, and a lot of rule of thumb, be market agnostic, invest for cash flow, but have market’s that make sense? So you have the appreciation potential go along with it because that’s what creates the true wealth, the greater returns, and really that’s, that’s the formula for success.

0 (24m 13s):

Mm. And in these markets, are, would we be typically looking at single family multifamily, a mix of a mix of both?

1 (24m 19s):

Well, interestingly, you, you, as an investor and independent investor can look for either one, no, it’s a very competitive and the multiunit and apartment space, everybody and their dog are chasing after the apartments and multi-units, and this has been going on for as long as I can remember. And I know a lot of people in that space, there are all good friends of mine, and they all tell me the same thing. Even Ken McElroy, you know, one of our Robert Kiyosaki’s rich dad advisors, I mean, he’s, he stopped acquiring properties. He is a lot actually gotten to a point where he’s unloading some property, if he can, because its really, really hard to find, especially value, add properties they’re out there. You just have to do a lot of hunting. What we’ve always focused on a, as a company in and, and you know, this is what we offer it is it’s a one to four unit residential.

1 (25m 4s):

So a single family, duplex triplex, fourplex. It is sometimes their new construction, 80% of the time they’re newly refurbished, their light new properties. Why? Because its the most abundant type out there. If you look at the housing stock in, in Canada, in the U S the bulk of it, probably 80% of it is made up of single family homes, single family, typically detached, but sometimes attached. But that’s, that’s, that’s where you have the volume and it provides, you know, there’s pros and cons to all of these different property types, whether its a single family, fourplex apartment, you know, the liquidity, the, you know, the upside potential, how its valued, how you create value, all those different things. But most of the people that come to us are saying, Hey, I want to get involved in Investing show me how, teach me how, give me the knowledge, hold my hand, walk me through it.

1 (25m 52s):

And more often than not, they’re they’re building a portfolio of single families, duplexes for a w***e fourplexes. And most of the people who’ve created wealth and are financially independent and real estate not to knock down on syndications. I do syndications too and all kinds of industries, but it’s not because they were having investors in syndications it’s because they actually built a portfolio Real Estate that they were direct owners’ of, they actually own the properties. I mean, held him and LLCs are a limited companies are whatever it is, but there were direct owners in the real estate portfolio.

0 (26m 22s):

Yeah, that’s interesting. You know, and again, it’s different Real Estate strategies, but syndication, we kind of laugh in, in, in our market because the, the, the market is so tight that the idea of a preface return, you know, He, you know, unless its a crewing too on a development and just getting paid at the end is I’m, it’s just not there in terms of the yield. But it’s, it’s interesting when, you know, when you’re talking about single family where we do see, you know, it’s talking to somebody from Philadelphia or the other day, somebody from Nashville and they were doing exactly what you touched on before, the kind of ratio between rent and value. And I was kind of blown away that, you know, what, you can get on $150,000 property, you know, somewhere in Philadelphia as opposed to, you know, New York city, which, you know, that sounds like a, it, it makes sense because one market is extremely hot and is appreciated.

0 (27m 9s):

But in terms of acquisition, the market generally is getting tightened. Maybe, you know, we don’t have too much time. I want to be sensitive to your time here. But just from a, I was at a meeting this morning with the NAIOP, which is for those that don’t know, it’s a national association of industrial and office properties. And we were talking of a bit of a macro view of the market. How just getting very difficult to find some of these deals. You touched on it with multifamily, how’s it from your point of view, in your own portfolio and what you do on a daily basis, how are you finding the market right now? We’re hearing words like post cycle a, you know, we’re hearing this morning, that inning, or how do you feel about the market? And that can be, you know, local markets

1 (27m 50s):

Of your choice. Well, the first thing you probably know this, but you know, whenever someone asks me how I feel about the market, the first question I ask is what market, you know, was like, which market are we talking about here? You know, the media always talks about, you know, the housing market and the thing is, is w point point to it to show me the housing market. What market are you talking about? Because the fact this is all real estate is local. You know, what happens in the real estate market is local. And, and, and, and actually you could argue that it’s hyper local, because even if you look at a large metropolitan area, I mean, Toronto is a great example, but you could break it down into it, you know, Scarborough and, and all these different Woodbridge and all these different local areas. And what happens in one is different than what’s happening in another one, they all have their own local economies, but the supply and demand dynamics are different.

1 (28m 39s):

And that drives a lot of pricing real estate. So this is specifically in, in residential real estate, the price in supply and demand dynamics changed that pricing. So w you have to look at it from a market perspective. And the easiest way to do that is just from the metropolitan area. I always look at, you know, a market like Kansas city or Indianapolis or Jacksonville or Memphis or wherever it may be. And you can talk about what’s happening in broad terms within that market. That’s really where you want to start. I call it The the funnel approach at the top down approach, start with the market and then start looking at some market’s and then neighborhoods. Then you start analyzing property. People do it backwards. They that they’re presented with a deal and they’re looking at this property and then they don’t put a lot of time or, or wait into the street, the neighborhood, the, you know, the suburb that it’s In, and then the greater market, they just get so hyper focused on the property that they, they don’t really consider the market.

1 (29m 33s):

You need to consider the market and the neighborhood and all that kind of stuff. It’s very important. So, too, you know, your question is a lot of markets have become kind of frothy, particularly coastal markets. And some of the heated markets where, you know, supply is tight and demand is strong. Like, you know, like for you to Toronto, for us, you know, parts of LA and Southern California, we are not building enough housing units. This is good news for real estate investors were not creating enough. Housing units is to keep up with population growth and demand. So that puts upward pressure on price and of both rent’s and pricing for housing, which, you know, if you own real estate, that’s great. If you are investing in the right areas that, Hey, that’s great for you two, because the tenant pools growing, not just the, a, you know, the buying pool.

1 (30m 19s):

So you have to look at markets individually. The problem right now is that the coastal markets are very expensive. Some of the big markets like Denver, Colorado have experienced tremendous growth and their, in my opinion, overpriced, but the demand is still there. So it’s going to keep prices up the Midwest in the U S down through to Texas and out through the Southeast and down into Florida, or really where there is still in inventory, which is an important, and the price was the number’s should see the price has the number of still makes sense where you can get housing that is still relatively affordable. It’s a relative term, but relatively affordable. And in relation to the rent, then you get for that property makes sense.

1 (31m 2s):

So you can get a good cap rate. You can get a good cash on cash return, you can cash flow it, and you can build equity over time because it’s in a market that’s stable and growing. So that’s a long answer to your short question, but you have to just step back and just say, Hey, there are hundreds of markets in the U S let me look at these and identify the ones that make sense from an investment perspective and give me what I need in terms of cash flow in growth. And that’s really how I look at it. So I don’t think we’re in a hurry, a bubble, no nationwide. I think certain markets like a San Francisco, Toronto AR definitely frothy. And umm, you could argue as overpriced because when you look at it from the perspective of affordability, how many people can actually afford, you know, properties in those, those markets.

1 (31m 54s):

When you see a affordability, you know, you’re taking the median household income and you’re looking at the affordability of the inventory in your market. When you get into the low teens, you got a problem, you know, 17% seems to be a break point here in Southern California. That’s when we kind of hit, you know, hit the tipping point. And you know, you see a pullback in the, the, the, the real estate market changes. We’re in an anomaly right now. We’re we’re approaching that problem point. But the problem, the problem, if you will see a problem in quotes, is that true? It is so high level and this constraint takes forever to get permits. They can’t keep up with, with supply for that demand that is just keeping the market rolling along, you know, a fast moving freight train.

1 (32m 42s):

So just keep an eye on affordability because at some point, you know, when you get to the point where most people can’t afford housing, you no, that’s okay.

0 (32m 49s):

Yeah. I think you, you touched on a great point and, and I dunno if it is relatively recently, but I got the email. I think you wrote an article, basically the 10 strategies for real estate and you know, a lot of these ones, a property management top down approach affordability is one where I know in my market in particular that, you know, we are so expensive and we are getting so expensive, but the reality is with I think, 300,000 a year in immigration and the GTA greater Toronto area, we are still supply constraint. And so we, you know, and I think it was 2017, 2018, we we’re up to 17 at 8% last year where you were up 9%. And that was only because we couldn’t build enough. So I think that’s a great point when it comes to affordability.

0 (33m 30s):

Just on another point you mentioned there, I’m not sure if your familiar with a, the Nobel prize is that Laureate Eugene Fama, efficient market hypothesis. And it did work on that. So every time I hear the word bubble now, and, and you actually just to kind of mention that when you set it, it, it’s almost lost, meaning in a lot of ways, because some of the hypothesis is you have to be able to look at it, look at the data before time and be able to accurately predict it. And a lot of studies have shown that that’s its very difficult to do even in crash. So I think affordability is a, it’s a great point. Marco in terms of a, you know, some of the resources that you have found that have been helpful for you, whether, you know, whether its an app, but a book, you know, of course you’ve, you’ve taken what or a couple of that you can ah, kind of put forth as something that’s helped you in your, in your Real Estate.

1 (34m 18s):

Well, I have a generic answer for you. It’s really two things. Books and podcasts and audio books. I mean, I, I have, I have 500 audio books on my phone. I subscribe to a lot of podcasts, but I don’t have the time to listen to them all. And I’m I love reading and I probably got about 2000 books on my bookshelf. So it’s so easy to collect and consume content, good content, educational content that there is no excuse, not educate yourself, but those are the best resources. Think about it. You know, why spend tens of thousands or hundreds of thousands of dollars in tuition going to school to get academic education when you can get practical, real world financial education at a fraction of that cost and a lot of its free.

1 (35m 8s):

And it will probably take you far further than a lot of the academic education you’ve gotten in school. You know, like taking sociology or whatever you’ve taken. Don’t tell my father that come on Marco you know, I mean, I’m not saying you don’t need it and you shouldn’t have it. I’m just saying, look, if you’re going to have that, educate yourself and just get by the books by the audiobooks, listening to podcasts, there’s a lot of great articles out there. Those are great resources. I mean my number one rule, my 10 rules is to educate yourself. So if, if that’s my number one rule, then you should be investing in yourself and invest in those resources to educate yourself because that’s, that’s how you’re going to grow. And that’s how you going to be successful. You have to invest in yourself first and then that translates into the real world as far as your Investing and whatnot.

0 (35m 48s):

Marco where can people reach you a, just to hear more kind of your insights and, and views on the market and real estate in general,

1 (35m 55s):

Really it’s just two websites are our property website where we put a lot of our content is Norada Real and O R a D a Norada Real and the sister website, which is the home for the Podcast that I do is Passive Real Estate

0 (36m 12s):

My guest today has been Marco Santarelli Marco thanks for coming on.

1 (36m 15s):

Jesse’s been a lot of fun. Thank you so much.

0 (36m 18s):

Thank you for listening to the Working Capital Podcast. My goal is to help individuals break into real estate investing as well as educate experience in investors. If you enjoyed the show, please share with a friend subscribe and give us a rating on iTunes. It really helps us. If you have any questions, want to learn more or likely to cover a specific topic on the show, please reach out to me via My name is Jesse Fragale and I’ll see you back here for the next episode or the working capital real estate podcast.