There are so many terms surrounding real estate with people coining their own terms and other old terms modernizing. Marco Santarelli, the founder of Norada Real Estate Investments, gives us a look at what turnkey real estate investing is and profiles an ideal turnkey investor. Marco is a real estate investor, an author, and the host of Passive Real Estate Investing. He shares some guidelines as to what to look for in turnkey operators and turnkey packages and gives advice on how much you need to get started with one turnkey single-family. Moreover, he talks about the differences between the market before and today and shares his worst and best investment experiences.
---
Demystify Turnkey Real Estate Investing with Marco Santarelli
Our guest is Marco Santarelli. Marco is the Founder of Norada Real Estate Investments, a prominent turnkey real estate investment provider. Norada provides turnkey real estate opportunities in a number of markets all around the country, essentially turnkey real estate opportunities for those that haven't invested before. His company will put together a single-family property, get it all renovated, bring the property management in and then sell that package to you. Marco, welcome to the show.
Thank you, Taylor. It's great being here.
I’m very happy to have you. I’m excited to talk. I've got questions from people in my network and from Facebook for you. I gave a little bit of a summary of turnkey investing. As a professional in turnkey real estate investing, how would you summarize what turnkey real estate investing is?
There's no formal industry definition of what a turnkey investment or turnkey rental is. I started this business back in late 2003, 2004. I started marketing the word turnkey very heavily. As the months and years went by, more and more people started using that definition. The problem is that a lot of people started using that definition in different ways. It meant different things to different people. What I dislike is that many people out there use the term with what I refer to as rent-ready properties. To me, that's different than having a turnkey rental property. Our definition of a turnkey rental property is a property that's in a good market, in a good neighborhood, it's in new or like-new condition and it is professionally managed by full-service property management.
More often than not and ideally, it is leased so you have a quality screened tenants in place that are paying their rent on a monthly basis and generating monthly passive income or cashflow for you. That forms the basis of what a turnkey rental should be. To take that one step further, it's not just about the turnkey real estate investments, but we like to layer that with experience where we provide counseling. That's the turnkey real estate investing part of it. The investment is a part of it and the investing experience having all the tools and the right team to be able to acquire those turnkey rentals go hand in hand. That's a long answer to your short question. That's what a turnkey real estate investment should be and that's the way we feel about it.
Who is the ideal profile of a turnkey real estate investor? Who's your typical best-fit person to invest in these types of properties?
I want to be careful not to exclude anyone because I will tend to say a busy professional. The reality is we have investors that are as young as eighteen years old to other people who are in their 50s and 60s. We have investors that are doctors. We have investors that are entrepreneurs. We have investors who are salespeople. We have investors who have blue-collar jobs like truck drivers. They come from all walks of life. The common denominator is this. The investors want to be passive, meaning that they have a life, they have their career, their jobs and their family. They have their hobbies and they don't want to be swinging hammers and looking for distressed properties or distressed sellers and doing it all themselves. They want someone to help them and maybe provide them with a solution that does 70% to 80% of the work. That part is already done.
It's like shopping. Here are the markets that make sense, here are the properties that make sense, that are cashflow positive, that are turnkey. Regardless of whether you're a busy professional or someone who is maybe not a busy professional, it can fit everybody's goals in terms of investing in real estate, creating a passive income and creating wealth. Long story short, this fits virtually anybody who's looking to invest in real estate. Most of the people that we do deal with are people who are a little time-strapped and/or don't have the knowledge or education to try to do it all on their own. At the end of the day, we're talking to people who are wanting to say, “Here's what I want to do. Here's what I want to achieve. Here are my goals. Help me build that out.”
Your ideal client is best categorized by what their goals are in investing, which is goals of investing in real estate without a huge time commitment. Most likely, they have some cash and some capital on the side that they're able to invest. This is not a no money down, get rich quick scheme. It is a way to invest in cashflowing real estate without purchasing a second job for yourself.
People want to continue doing what they're doing, but they know they need to invest. They know they need to focus on their future. Rather than handing your money over to Wall Street, achieve your goals using real estate, which is the most historically proven asset class out there to create wealth and income. Let the right team of people help you do that by providing those turnkey investments in the good markets. That's what it's all about. It helps you save time. That doesn't mean you're disconnected or disengaged. You have to be actively involved, but it's not a very time-consuming way to invest.
People want to continue doing what they're doing, but they know they need to invest. Click To TweetI put the call out on Facebook for questions for Marco around turnkey real estate investing. I want to dive into those. We have a question from a buddy of mine who's a surgeon, “If a particular house or a turnkey property such as a single-family is such a good deal and such a good cashflow opportunity, why don't you just buy the property and hold it for cashflow? Why are you selling it off to let’s say a surgeon from Virginia?”
It's one I haven't been asked for a long time because a lot of people have finally understood the business model. Our business is in the business of helping individual real estate investors build their portfolio of those turnkey rentals for cashflow and to create wealth. They are there because they're available to anybody who wants to invest in real estate, whether it's you, your doctor friend, me or my staff, we have a large inventory of them. At any given time, we'll have between 100 to 200 properties available on our website. They're not all necessarily on the website, but they're spread across eighteen to twenty markets and they come and they go. There are a lot of velocities. Sales are brisk and so deals or getting snapped up quickly. Number one, I couldn't possibly purchase all those properties myself if I wanted them. Second, I have my own portfolio.
Third, as I acquire more properties, I pick and choose from the same inventory that you would be looking at. First come, first serve. They're there and they're available for anybody who wants to purchase. It almost sounds like there's a little bit of a scarcity mindset in that question. I'm not saying that this is what your friend is thinking. I know people in the past that have thought, “There must be only so many deals out there. If you have these good deals, why don't you buy them yourself?” I do, but there are only so many I can purchase in a given year.
Another angle to look at it from is what does every party bring to the table? What you and Norada bring to the table is your ability to put together these investments, use things like hard money or some short-term financing to acquire these properties, rehab them and get them all set up. What an investor brings to the table is that additional chunk of capital to buy the property, get some longer-term financing and then hold it. It goes back to that business model. Your business model at Norada is not to buy and rehab these properties and know them long-term. It's to buy and rehab them and resell them. You buy some of them yourself, but it's just not feasible for you to buy all of them.
It's just not possible. Our business is there to be helping other people in educating them about how to invest in real estate the proper way, being market-agnostic, what to focus on, how to evaluate a market and neighborhood of property and all that stuff. That's what we do for free. We push that information out. We want to educate people in every way possible using videos, audios, texts, blogs, reports and guides. Our investment counselors do free strategy sessions. All that stuff is free. The reason we do that is that we want to be working with people who are semi-educated and knowledgeable. In that way, we can get right down to building a roadmap for them to build that portfolio. We start with their goals. We have that strategy session and define those criteria. Once you are clear on what you're trying to achieve, it's easy to execute on that plan.
We want to have a good quality property in different markets. In an ideal world, I would love to have only six markets, three cashflow-based markets and three that are more growth-oriented. I call them hybrid markets. They're across between pure growth and cashflow. They're in the middle of that spectrum. I would love to only have six markets and we used to be only in about five or six markets. Over the last few years, we have found that more and more markets are becoming a seller's markets. Inventory is low, it's harder to find good deals, they move a lot more quickly so demand is strong and supplies are dwindling.
When you have low inventory, the only way to keep up and service our clients with a good product is to go into more markets. We've had to go wider because we don't have the depth of inventory in the market. We've had to bring on more markets and those range as far as south as Lee County, Florida, which is where Fort Myers is located, to as far north as places like Chicago and Cincinnati. Most of it is in the Midwest down through Texas and throughout the Southeast as far east as Jacksonville, Florida. We had to go wide in order to keep up with the demand for that inventory.
I didn't know that I'd be coming up with this question in my head when we came into the interview. You said you started this business in 2003 or 2004 as a timeframe when you started the selling turnkey rentals. I'm curious about your opinion of the market now and juxtaposed with maybe 2005 to 2006 timeframe. I wasn't investing in real estate then. Was it a seller's market then much in the way it is now? Do you see any parallels between then and now or any extreme differences in the real estate market? What are your thoughts there?
There are definitely some similarities. We have seen large recoveries in virtually every market around the country so prices have rebounded to where they were at their peak in 2006 in many of the 400-plus metropolitan areas around the country. However, at this time around and this is probably the biggest difference, that price growth has been driven primarily because of short supply and true demand. Interest rates are still historically low, so cheap credit tends to drive markets and also create bubbles. The problem with the market back in 2006 is that interest rates were not only very low, but credit was incredibly easy to acquire. There was a lot of speculating that was going on. People were buying homes that they shouldn't have bought and couldn't afford with that ultra-cheap financing and very low down payments.
On top of that, you have investors who were speculating so you have the drive to push homeowners into home ownership when they shouldn't have been. The credit requirements were very low. Credit scores were as low as 600 and below to qualify for financing. We used to have something called NINJA loans, No Income, No Asset, No Job. As long as you can fog a mirror, you can get a loan. If you compare that now, property values are being driven up primarily because of the strong demand and low supply. Credit is still relatively easy to acquire and interest rates are still comparable. They're still very low, but the main difference is that now people have to qualify. The average credit score on the bulk of the loans that are being issued now is 720. You have to have a good credit score to be able to get financing now. If you don't have a 720-plus score, you're probably not getting financed. That is the main difference. We don't have a lot of these purchases and loans in the pipeline that have a high risk of default. That's the biggest difference.
Once you are clear on what you're trying to achieve, it's easy to execute on that plan. Click To TweetThings are better now structurally in the real estate market. Recessions are inevitable and will hit another one someday, but at least it's not going to be triggered by a credit crunch in real estate, which is good to hear. Hopefully, that's not going to be what happens. I want to get back to questions from the peanut gallery. Next one being, “What should an investor look for in turnkey operators or turnkey sellers, which may not be immediately obvious?”
The biggest one is reputation. That, by far, is the biggest thing to consider. Years of the business is important and something to look at. Reputation is the biggest thing. You could do a lot of research online and find a lot of dirt on certain providers. I'm not going to mention certain companies, but I will say that I could name three companies right now that comes to mind that are in deep water for one reason or another. I can't believe they're still running a podcast, but the issue I've had with them for the longest time is they're selling what I like to loosely call crack houses. These are basically $30,000 and $40,000 homes in questionable and sketchy neighborhoods. It’s often what I'll call your D-class neighborhoods and your C-minus neighborhoods.
They look great on paper. They sound cheap. It sounds like it's a cheap house. It's something easy to get into. The problem is that they're usually all cash purchases and it's hard or impossible to get financing. It's going to be hard to sell that property if you ever need to sell it. That's the issue I have with one particular company. They're in the middle of the class action lawsuit right now. There are some other companies out there that are also having their fair share of issues. In any industry, there are always a couple of bad apples, which give a black eye to any industry for that matter. Ask questions, maybe ask for referrals, certainly do some research online. Look at whether they have a good rating with Better Business Bureau.
If there are reviews online, which most companies do have now, there are forums online that you can put your nose into. There's one in particular. It’s a very big real estate investor-based forum online. They have all kinds of stuff on virtually everybody in the industry. Sometimes you've got people saying stuff that they don't understand, but if you read enough of other people's comments and reviews, you'll get a good snapshot. Reputation is a big thing. It’s getting on the phone and having a conversation with your team and getting a feel for their level of knowledge. Whether they're just trying to sell you something or truly try to help you is another thing you can do because everybody's got a sixth sense. Your gut will often tell you whether working with somebody or a company is the right thing to do. That's where I would start.
Looking at people's reputations online and doing some deeper research on how they've been rated with places like the Better Business Bureau. Maybe if you troll forums and stuff, you can find people who have done business with them in the past and get people's candid opinions offline about how their experience was. Especially in real estate, people are genuinely willing to talk and share and help especially if they've had a bad experience. They'll talk your ear off about it. If it's not public, you better hold on. You're going to get all the information you want. The next question is, at what point do you consider a property not turnkey? When would you walk away at Norada from a potential property? What are some of your criteria and what do you look for when you're putting together a turnkey package?
My definition early on describes what turnkey investments should be, in our opinion. If you have all that upfront and then you start going down the due diligence road, one of the main things that we have our clients do, and we won't do business with a client unless they order a home inspection. We insist upon it. It is worth $300 or $400 for that. Even if you were buying your own principal residence, you’d still want a home inspection done. It would be silly not to ever not order a home inspection. That is a critical thing. They usually come back clean quite well, but you want to look for things that are red flags or what I call must be done type items. Those need to be addressed. You might have some should be done stuff. Sometimes those don't impact the functionality or the safety or the value of the property. It's a matter of debate. Type things can be discussed and resolved and do get taken care of.
The last category is what I called could be done. You're never going to order a home inspection and have it come back with nothing on it. Nobody is ever going to say, “This house is perfect.” Even a new home is going to have a bunch of could be done items on the report. That's to be expected. Once you have that inspection done and you address anything that needs to be addressed at that point, you know that if you've picked the market and you pick the neighborhood well down to the street level, then you shouldn't have an issue. As long as that property inspects well, there's no deferred maintenance. You have a turnkey investment. If you're missing any of those things, that's not a turnkey investment. At that point, depending on what the issue may be, I would walk away from it.
For us, most of what we sell has to meet certain initial criteria before we consider it a turnkey investment. We do have deals that we believe are turnkey and it starts off that way. For one reason or another, we just don't know that there are issues with the property be at the foundation or some mechanical issue or something that didn't show up initially that's a deferred maintenance item, which usually can get resolved. Those things all of a sudden become not so turnkey. At that point, we’ll just cancel the transaction and pick a different property. I can't think of anything else that would disqualify because if it needs that initial litmus test, then usually it goes all the way through as a good deal or as a good investment.
Another question is one I got from one of my syndication investors that I do some investing alongside and invest with me. They have experience investing in syndications. Once you find an opportunity as a limited partner investor or capital partner, you invest your money and then you sit there and read the financial statements, and the general partner operates the property. As a turnkey investor, if this person is considering turnkey, what is the additional number of hours that they're going to spend on a turnkey single-family? What's the time commitment, especially compared to a syndicated multifamily or mobile home park investment?
If we take Wall Street out of the equation, meaning you're looking at a REIT, a Real Estate Investment Trust, which is investing in paper assets in the stock market. If we take that off the table, the most passive form of real estate investment you can make is going to be truly passive syndication. Meaning that you are a limited partner and you invest in someone else's deal. They’re the general partner and they're managing it and putting the deal together. That is going to be the most passive. You're still going to have some accounting work every month or every quarter. You get your K-1 every year that you put on your tax returns. There may be some webinars or virtual meetings that you're going to be involved in that could be once a year. It could be maybe twice a year or whatever the case is. That's your level involvement.
In any industry, there are always a couple of bad apples which gives it a black eye. Click To TweetWith a turnkey rental, you have direct ownership. You or through your entity own these properties. You have all the benefits. You make the decisions, not necessarily day-to-day but the strategic decisions about how that portfolio is going to be managed and if and when you ever sell. There’s a little bit more involvement and a little bit more responsibility but from a time perspective, it's not much at all. From an accounting perspective, you're going to put it in a spreadsheet or QuickBooks once a month or once a quarter or once a year. We’re talking about twelve entries into your books. It's not a very time-consuming thing because everything is automated. Your property managers will deposit the net rent into your account. What I like to do is I automate my payments with the mortgage company. Every month, they just automatically debit the same account and they pull out my PITI payment: Principal, Interest, Taxes and Insurance. I'm not having to write a check for anything because with single-family homes or one to four units, which is what we sell, single-families, duplexes, fourplexes, triplexes. The tenants are almost always responsible for their own utilities. If there's lawn maintenance, they typically take care of that too.
I'm not writing any checks. I get a deposit of rents coming into my accounts every month and then my mortgage companies pull out my PITI payment. I get a statement and usually, it's electronic. I don't even get a paper statement anymore. I just bank that into QuickBooks and that’s it. The only involvement I have beyond that is when I get an email from the property management companies saying that there's a pending work order. They got a call from the tenant so they're going to go and look into it and see if there's anything that needs to be done. If it's legitimately an issue that something needs to be fixed, it's my responsibility. Then I get another email saying that there's a repair that needs to be done. It's not the tenant repairs my repair. It's $250. In that case, it's more FYI than anything else so I don't need to do anything. If it's a bigger expense, then I need to get involved and make a decision and say, “Go ahead and do it or let's get another quote.” That's a worst-case scenario right there. That's about the amount of time you would be involved with your portfolio.
If someone is interested in getting started, what's a minimum that someone should have to get started? Is it going to be $5,000, $10,000, $25,000, $50,000 or $100,000 or more? What's the minimum if you want to get started with one turnkey single-family?
That same question applies whether you're getting started purchasing your second, your fifth, your tenth or your hundredth property. The answer is going to be the same. I need to give you a little bit of a broader and more thorough answer to the question because I just don't want to throw a number out there. I want people to better understand the answer. The properties that we sell are typically in B-class and A-minus neighborhoods. They're the bread and butter to nicer growth areas. We don't want to be in C-class neighborhoods. We don't want to be dealing with less expensive homes where you can get problematic tenants and more turnover and that kind of stuff.
The reason I'm saying that is because in the markets that we're in, those properties are going to range on the very low end, $80,000 to the high end $180,000. There's quite a range there. With conventional financing, the minimum down payment is 20%. All you have to do is do the math in your head and you can answer the question. Let's take $100,000 property because that's close to the average of what we sell. The average is $110,000 to $120,000 but the math is easy on $100,000. If you take 20% of $100,000, it's $20,000. $100,000 three-bedroom home is going to have a down payment of $20,000. Plus, you're going to have a couple of thousand dollars in closing costs, miscellaneous expenses and title, you're going to have a title company involves so you'll have title insurance and that stuff.
All in all, plus or minus about $22,000 per door, we’re talking single-family homes but the same could apply to duplexes and fourplexes. You just scale up the math. However, I will say this. You can get into a good turnkey property, a turnkey rental for as little as about $17,000 to $18,000 or maybe even $15,000. What I like to say using that $100,000 property example is that even though you're all in for $22,000 and now you own your next turnkey investment that's cashflowing every month and creating wealth over time. I like to tell investors, especially in the early days to have $24,000 to $25,000 even though you're not spending that other $2,000 or $3,000. It's just what you're going to keep on reserve in your account in case you need it. You don't need that for every single property. In the beginning, have extra available cash as a resource in case you need it for whatever reason. Have a buffer and have that operating capital. As your portfolio grows, you don't need as much. You can have less and less of it as a percentage. If you're starting out using that $100,000 property example, have about $24,000 to $25,000.
You mentioned about being adequately capitalized, especially in your initial properties to account for some unexpected cap X. Maybe you ended up needing a new HVAC system or something that wasn't identified on the initial inspection and you want to be ready for that. That's a prudent investment strategy and that's important to do. Marco, what is the best investment you ever made?
That sounds like a simple question, but it isn't. I can think of different examples for different reasons. I'm going to say that the first property I ever bought was the best deal. I say that because it was my first deal. I just turned eighteen and I was able to qualify for financing. It's the property that I cut my teeth on. It was the property that I purchased. I renovated it. It didn't even major renovation. I've updated the carpet and the flooring and paint and all that stuff. I did a fair amount of work on it. I personally interviewed the prospective tenants. I'm the one who put the sign on the yard. I did everything. It was a textbook deal, but I cut my teeth on that deal and that's where I got my start and I learned what I learned initially from that. That was my best deal just because it put the writing on the wall.
It's the one deal that got the ball rolling and got that snowball headed down the hill. It may or may not be the biggest percent return you ever made on a deal, but it's the one got everything going, which is a great best investment. What is the worst investment you ever made?
This is where I learned the importance of being in the right neighborhood. It was one of the first single-family homes I purchased in a neighborhood. This goes back to the whole thing of you asking how much I need or how little do I need to get into a deal. I was going for cheap. I was making a mistake of the note at the time of buying those relatively inexpensive properties. It was $30,000 to $40,000. This is true for most markets, or at least the markets that are more affordable and that this wouldn't apply to Los Angeles or New York or San Francisco or any of the coastal markets. When you're buying properties that are about $40,000-ish plus or minus in these more affordable markets, you're going to be in a C or a D-class neighborhood. You're going to have lots of inherent problems in these neighborhoods. A lot of it is anecdotally speaking. Personally, I had a lot of tenant issues.
Don't focus on price. Focus on value and quality. Click To TweetI know that clients in the past who bought in these areas also have a lot of tenant issues. Maybe not right away, but it's baked into the cake and it's a matter of when and not if. I've had a fair share of issues buying in these low-income poor-quality neighborhoods. This is why you don't focus on price. You focus on value and quality. I even had a person in one of these sketchier areas shot in front of one of my properties. I don't know what happened to them. I know they were taken away. I went to the hospital. I don't know if they died or not because I don't even know who it was. I just heard that someone got shot in front of my property and they were taken away. Go for quality. The worst deal is the ones that are in the sketchy neighborhoods.
That brings to mind a quote that's been bouncing around in my head that a previous guest told me. It was from Oscar Wilde, “A cynic knows the price of everything and the value of nothing.” That has stuck with me so much and I think it applies to a lot of life, but especially to business and investing. If we always focus on the price of a single-family turnkey property or the price of any kind of service you're having done. Even on your own house if you're having a renovation done and you only focus on the price, then the value is not going to be there. We need to focus on the value that we get and not so much the price. I love that and I always want an opportunity to bring that quote up. Thank you for that. What is the most important lesson that you've learned in investing?
One of the most important lessons I've learned on that first deal that I did when I was eighteen. I made a mistake, not too many years after, but several years after I bought it by selling the property. It appreciated quite a bit. I was focused on that capital gain, so I sold it and took the gains. I was happy about that because I thought I did exceptionally well. I did but what I came to realize is that one of the first things that happen is when you sell, you're going to pay taxes on those capital gains. Second, you don't have the property anymore, so you lose the cashflow.
The lesson I learned is that you never sell your properties. You can sell them to exchange them for other or more property and you do that through a tax-deferred exchange. We have clients doing that all the time. You don't sell just for the sake of selling. Unless you have an emergency or some compelling reason that you have to sell, then you shouldn't sell. That was the mistake I made. I sold this property that I purchased at the time for about $40,000. Now it’s worth close to $400,000. It would have been free and clear a long time ago and I would have been collecting $2,500 to $3,000 a month free and clear and just net cashflow from that one property. You can exchange but you don't sell.
Marco, where can our audience get in touch with you?
I'm going to give two websites because we have two websites. We have our main website where we have all our properties and free reports and that stuff. That's simply NoradaRealEstate.com. Then the sister website is called PassiveRealEstateInvesting.com.
Marco, thank you for being on the show. Is there anything else you'd like to share before we say goodbye?
I have a lot of favorite quotes, but I'm going to throw this one out really quick. One of my favorite philosophers and entrepreneur is Jim Rohn who unfortunately passed away in 2009. I happen to be good friends with his business partner. Jim Rohn is one of my favorites and he has a saying, “Never wish life were easier. Wish that you were better.” If you're always working on yourself and you're educating yourself, you cannot help but do well and do better in everything you do in life and in your business and your investing.
I'm a big fan of Jim Rohn. I love that quote. I encourage everyone to go look up Jim Rohn on YouTube if you need a little fix. Marco, thank you for joining us on the show. To all the audience out there, thank you. Please subscribe wherever you get your podcasts. If you're enjoying this show, please leave us a five-star rating on iTunes. It’s a big help. If you know someone who would benefit from learning these strategies to grow their wealth and increase their freedom, please share the show with them and bring them into the fold. Bring them into our little tribe here. We’ll see you on the next one.
Important Links:
- Norada Real Estate Investments
- QuickBooks
- Norada Real Estate Investments
- PassiveRealEstateInvesting.com
- iTunes - Passive Wealth Strategies for Busy Professionals
About Marco Santarelli
Marco Santarelli is the host of the Passive Real Estate Investing show -- the show where busy people like you learn how to build substantial passive income while creating wealth for the long-term. (Subscribe via iTunes, Stitcher Radio, RSS feed)
Marco Santarelli 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 purchased his first real estate investment at the age of 18. He successfully handled the entire rehab and property management of his first property without ever taking a course or reading a book on the subject.
Marco went on to get his real estate license and sell residential real estate for three years before leaving real estate sales to pursue other active business ventures.
Because of his love and passion for real estate, and desire to help others succeed in building their wealth through real estate investing, he eventually returned to real estate investing and founded Norada Real Estate Investments in 2003.
Today, Marco Santarelli 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.
