Marco Santarelli on Creating Passive Income with Residential Real Estate – EP 45

September 2, 2021

Marco Santarelli on Creating Passive Income with Residential Real Estate

When you have your mind set on achieving financial freedom, it’s easy to get impatient. But you can’t start generating wealth-building passive income overnight.

Marco Santarelli is the CEO and founder of Norada Real Estate, and host of the Passive Real Estate Investing podcast. From a young age he wanted to be rich, so he could do whatever he wanted with his time. He also understood that he had to play an active part in making that happen.

Even as a teenager, Marco leaned into his entrepreneurial drive. At 18, he bought his first property, laying the foundation for what would later become his ticket to long-term wealth: residential real estate. However, there were more unseen obstacles coming.

When I asked Marco about his journey from being a kid with a dream to financial freedom, he said that the word that best summed it up was “tenacity.” It took decades for him to achieve his goals, but he needed that time to learn the skills that would ultimately help him succeed.

I think that’s the perfect lesson for people aspiring to financial security. The road may seem long and it may seem rocky, but you have to ignore the many off ramps and keep going to get to your destination.

In today’s conversation, I speak to Marco about his fascinating path to becoming a nationwide real estate mogul, his advice for people looking to get started in the real estate industry, and why you should choose steady income over gambling on one big pay day.

Featured on This Episode: Marco Santarelli

✅ What he does: Marco is the founder and CEO of Norada Real Estate, real estate investment firm providing investors with quality new and refurbished investment properties in growth markets throughout the U.S. He’s also an author and host of the Passive Real Estate Investing podcast.

💬 Words of wisdom: When Marco’s attempt to cash in on the Dot-com boom imploded, he returned to real estate, and learned the value of creating consistent cash flow over hoping for one big payout.

🔎 Where to find Marco: LinkedIn | Instagram | Twitter

Investor Insights

Look for the lessons in your failures

It took decades for Marco to fulfil his childhood dreams of making enough money to feel comfortable and free. His very first business venture was a computer game he programmed as a teenager! He got into real estate at 18, then switched to a tech startup.

At first, it looked like he might be another winner in the Dot-Com Boom — but when the bottom fell out, he had to close the company and fire his 105 employees. However, all of these ventures taught him valuable soft skills — like marketing, sales and networking — and that last failure ultimately pushed him to go back to real estate, which has proved to be the key to long-term prosperity.

When you’re considering real estate investing, look for these two things

The two factors Marco looks at when assessing real estate opportunities in a particular area are job and population growth. More people means an increased need for housing, and a simultaneous increase in jobs indicates the area is financially robust enough to support its new occupants.

If you’re just starting out in real estate, Marco recommends buying single family homes. They’re always in demand and are easier to finance straight away than, say, a 50-unit apartment building.

Prioritize a steady stream of income over get-rich-quick schemes

The reason Marco chose to go into real estate — and rentals in particular — was because he recognized that it would provide him with steady cash flow, which he could reinvest into buying more homes.

If you have a full-time job, look for a way to make extra money on the side, and invest it into projects that will continuously accumulate wealth. Passive income has to start with an injection of cash, but after that, it will continue to grow on its own — and you can put the gains into more wealth-generating avenues.

Episode Highlights with Marco Santarelli

You’ll have cheerleaders and critics

“You’re gonna have people surrounding you who say, Good for you, good job, keep going. My mother was very supportive: she’s somewhat entrepreneurial herself. My father is the opposite, the most conservative person you could meet. So I had that encouragement on one side, but then you have a lot of naysayers and people on the other side. They’re not necessarily trying to tear you down, but they hold you back, or they’re very skeptical of your abilities.”

An epiphany from the ashes

“When our dot-com business failed, I had to think about what I really wanted to do. What was it I wanted to spend my life on? I took about two years off, and thought things through, and I realized, You know what, I don’t want to be in corporate America. I don’t want a J.O.B. — which many people look at as an acronym for just over broke. I realized I’m an entrepreneur and I love investing, especially in real estate. So I figured, let me go back into real estate as an investor.”

Indicators of a strong local housing market

“You want to be where there’s strong demand and growth. The two core things I look at in the market are job growth and population growth. If you have those two things working for you, you can’t help but see prices go up, as well as rents. Rents usually trail behind, but you see prices go up and then rents will follow.”

Build-to-Rent model is on the rise, serving the renter community

“So, the build-to-rent model is something that started to come up four or five years ago, maybe longer, but it really started to make the scene four or five years ago. And that came out of a couple of things. Number one, demand has been growing and supply has been shrinking. So, I started the company 17 years ago, for the majority of that period of time, we were selling what we called turnkey rental properties, which were properties that were acquired and then renovated into new condition. And that was existing inventory. It was out on the market, not necessarily on the MLS, but it was an existing inventory. It might have been built 10, 20, 30, 50 years ago, but that type of inventory has shrunk tremendously.

People aren’t selling. And the people who are selling are selling property very quickly and usually in great condition, and we don’t have very many foreclosures. We don’t have distressed inventory REOs, like bank-owned properties. So, that has dried up. That has forced builders to come in and fill that gap, that void of rental properties, investment properties, properties that are basically serving the rental to the renter community, people who are not homeowners or don’t want to be homeowners.”

Why a side business should be a main goal

“If you work nine to five and you’re on a fixed income, you can still achieve those financial goals that you set for yourself: You just have to be very disciplined, and maximize what you keep from your ordinary income. Put it into real estate, and whatever else you’re investing in. But if you can create a side business and generate profit from it — regardless of whether it’s $1,000 a month or $10,000 a month — you’re able to supplement your ordinary income with passive or portfolio income. You’ve accelerated your ability to accumulate those income-producing assets.”

Why cash flow equals freedom

“I call cash flow the glue that holds your deal together. If you buy real estate and it’s cash flow-positive, you’ve got income coming in to cover your expenses and your debt service. Over time, your equity grows, from amortization of the loan plus the appreciation. Your wealth is growing, your net worth is growing, your properties are becoming more valuable. As time goes on, your cash flow will increase. So now you have more passive income, which leads to true financial freedom, which ultimately leads to financial independence, and that time freedom that everybody wants.”

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Read the Full Transcript with Marco Santarelli

Justin Donald: Well, hey, Marco, it’s great to have you on the show, and it’s been a little while since you and I have caught up. So, I’m glad to be able to hang out here today.

Marco Santarelli: Justin, I’m really excited about this today. I was looking forward to it. Our interview before, it was incredible. We could have probably talked for hours. And so, we’ll maybe just pick up where we left off and some things. This is great.

Justin Donald: No kidding. I mean, I really feel like we could have talked for, like three, four, five hours. So, part two right here. So, this will be fun. And for anyone that wants more info, you can check out the podcast interview I did on Marco’s show. But Marco, you have a really cool story. You didn’t just grow up with, like, this whole idea, like we’re in such alignment on so many things. And you didn’t just grow up, like thinking about I need freedom, but you live an incredible life. You have tons of freedom. You had built just really what most, many, probably everyone would call an epic life, but I want to know about Marco before freedom. So, I’d love to hear your story.

Marco Santarelli: The one word that popped in my head, Justin, as you were saying, was tenacity. I never really thought about that prior to this interview, but me before reaching a level of, call it financial freedom or time freedom is my ultimate goal. It’s not so much to finance, but it’s what it gives you, which is the time freedom, really was just school of hard knocks, like trying, falling down, getting hurt, cutting your teeth on things, knowing that you are going to fail time and time again, but being tenacious and getting through it all. Meanwhile, you’re going to have people surrounding you that are going to say, “Hey, good for you, good job, keep going.” Like my mother was very supportive. She’s somewhat entrepreneurial herself. My father is just the absolute opposite, the most conservative person you would have ever met.

So, I had that encouragement on one side, but then you have a lot of naysayers and people on the other side that are just trying to, not necessarily tear you down, but maybe hold you back or they’re very skeptical of your ability, or maybe they’re just going to be no longer friends in the future because you reach a new level of success and freedom that they don’t have and they’re going to lose you. And that could be jealousy or could be just something else. But one thing I knew for sure is that I wanted to be an entrepreneur, I wanted to have a successful business, and I wanted to invest in real estate. And I kept trying and trying and trying till I started to succeed. And believe me, there were more failures than success.

So, you asked me what my past was like before getting to maybe where I am today. It was tenacity and education. Don’t forget about education. I mean, reading books like yours is incredibly important. You have to fuel and feed your brain before you can manifest all that stuff in the outside world.

Justin Donald: Well, thank you. And I feel like you’ve done so many things right. And if our listeners and those that are watching can just live vicariously through you, take some of these lessons that we’re going to get into today. It really cuts that learning curve because I really believe when there’s a blueprint, you just follow it. You copy what other people, what other successful people have done before you versus trying to do it on your own and using trial and error to figure it out. You can do that. It’s just a longer process than to just do what other successful people have done. So, I think about you. I think you and I are probably similar in the fact that naysayers motivate us versus depress us. I would imagine that’s the case with you. How did you respond to people that basically said you couldn’t do it, and this is a pipe dream what you’re talking about?

Marco Santarelli: You’re not going to like my answer, probably, but I honestly ignored those people, I tried to ignore those people. I didn’t let them eat away at me or get to me because I just flat out didn’t want to believe them. So, I think if you set a goal or a vision in your mind and it’s strong enough and the desire is strong enough, you will keep pushing through. No, I mean, this might sound very ambiguous, like a very ambiguous answer to your question, Justin, or very superficial, but really, if you just step back and think about it, if you want something bad enough and you have a strong enough why, for me, it was really time for you. You might don’t know that at the time.

Long, long ago, I wanted to be rich, but rich morphed into wealth. Rich was about how much cash you sit on, how much money do you have, just deployable chunks of cash, but wealth morphed for me into something that became ultimately time freedom, that financial freedom that led to time freedom and having time, not so much money, but wealth could be measured in terms of health or other things as well, not just money and time freedom, but riches became wealth and then wealth became okay. I want to live life on my terms, do what I want when I want, and not have to worry or sweat or stress about punching a clock or working for somebody. So, that was my why and that drove me all along. And now granted, it took a couple of decades. It wasn’t like overnight.

And I started when I was, well, 13, if you want to include my time programming on a computer, developing a game which never got off the ground, but that’s my entrepreneurial journey starting point. And then, I just worked through the years from one thing to another. I had an office coffee service that I started up, bought a van, bought a bunch of automatic coffee makers, started planting coffee makers in offices and selling them the coffee and the cream. And then, I got involved in three network marketing companies and I learned tons of sales experience from being at network marketing, being able to know how to approach people, talk to them, and open up a conversation.

So, all those things were never big successes. In fact, by all accounts that were probably net failures, but what did I walk away with? The intangibles, the soft skills about being an entrepreneur, being tenacious, persistent, people skills, sales skills, marketing skills, I mean, those are invaluable because you can carry those forward with you from one business to another, one journey to another, one event to another. Sorry, if I’m being long winded about your answers here, but it’s like as I answer them, they kind of morph into other things.

Justin Donald: This is awesome. I love it. And you’re so spot on when you talk about soft skills. I mean, this is what the world wants today, it’s what the world needs. If you’re going to be successful at a high level, it’s the soft skills. And you don’t have to post a successful business profit in your first venture, but you do need to post successfully learning the soft skills that it takes to really do the next phase or the next step because there is a compounding effect that happens. You build this foundation, this base of ability to communicate with people or being able to read people or being able to speak comfortably and confidently in front of a group of people, look at people in the eye, shake their hands, have a firm handshake, all these different things that are often overlooked, but it starts to compound and it compounds exponentially.

And so, when you find yourself in that next situation, the next opportunity, you’re able to deliver in a way that you weren’t before. So, I always look at the previous “failures” as really just successes in the making. And so, I’m curious where your story goes from there. So, whether you are successful or not, in my mind, you built the foundation you needed to have the success that you’re having today in that next venture. So, where did that lead you?

Marco Santarelli: Well, there were a couple of stepping stones along the way from where I left off. I would say the next major stepping stone, kind of the big one, was late 1998. So, if you’re old enough to remember, not you specifically, but people listening to this, back in that time, the internet kind of got started in 1994-ish. That’s when it really became the talking point that was at every cocktail party, no matter where you went, was on the TV all the time, like what is this internet thing, how do you even spell that? But every company wants to be a dot-com company and many of them, most of them fail, like you remember, Pets.com, for example. Most of them were failures, but everybody wanted to become an internet or dot-com millionaire, as they called it.

So, me and two other partners got on this row to create a dot-com company, and we did start off in 1998, 1999 launching this business. We raised $9.5 million of venture capital funding out of San Francisco. We had 105 employees at the time at our apex, our peak, and things were humming along. Now granted, we weren’t cash flow positive. We had revenue, but we weren’t cash flow positive, which was okay back then because nobody valued a company based on cash flow. In fact, they barely even measured market capitalization based on revenue. It was just based on sheer attraction and eyeballs.

Well, the stock market crashed. The Nasdaq crashed, if you remember, in 2000, and that took a two-year unwinding period, but we ultimately got to a point where after the stock market crashed, our venture capital funding dried up. And we didn’t have– was that term when you launch a rocket, you break out of the gravitational pull and you have that inertia to keep you going? We didn’t have that. So, we had to close the company, we had to fold the company. I had to lay off 105 people. I was the third last to leave, and a great experience, but unfortunately, I did not become a dot-com millionaire. Neither did any of the partners. We had a great experience, but we had a tremendous failure. But the question is, what do we walk away with? We walked away with a great experience and a great lesson of what not to do, as well as what to do, what to focus on.

That was a major turning point for me because that’s when I decided to get back into real estate, and it made a complete shift because that’s when I started my existing business, Norada Real Estate Investments, and I started to get into real estate full time, but that was the major stepping stone that really gave me a pivot out of the corporate world and into something that was truly only something I was building.

Justin Donald: Yeah, timing. Timing is everything. Timing. You build this business a decade later and maybe it has completely different results, but because of the timing, which is a truly relevant factor that everyone needs to consider, no matter what they’re doing, I mean, even in real estate, you need to figure out the timing because a lot of people were wrecked in 2008, 2009 based on timing as well. The idea’s great, dot-com company is still great today. Real estate is still great today, but just paying attention to some of the warning signs when they exist, sometimes they don’t exist or you don’t see them and you’re blind to it, but when you go through it, you’re then that much more keen and aware the next time around of what those look like. Now, you mentioned you got back into real estate. What were you doing in real estate? And why did you leave?

Marco Santarelli: I don’t know if I ever really, truly left. I got into real estate at the age of 18. I bought my first rental when I could qualify for financing. I had to literally wait until I was 18 years old, but I had enough of a down payment to buy that first property, fix it up, wasn’t a wreck, but fix it up and put a sign on the lawn because there was no internet back then, but put a sign for lease or for rent and lease it out. And then I imagined myself, but that was my first rental property and that was the writing on the wall. So, I continued to sell and buy real estate over the years. I kind of left it because I was so involved in other businesses thinking that that was the path I wanted to go.

So, to your question, getting back, when our dot-com business failed, I stepped back and I had to think about what I really wanted to do, what was it I wanted to spend my life on? And I took about two years off and I sat back and thought of things through and I realized, you know what? I don’t want to be in corporate America. I don’t want a J-O-B, which many people look at it as an acronym for just over broke. So, I didn’t want a job, but I realized I am an entrepreneur and I love investing, especially in real estate. So, I figured, let me go back into real estate as an investor.

So, I went down this path of investing in real estate. In fact, let me quickly tell you the story of how that happened actually. It was kind of like interesting timing. In the middle of 2003, I got an email from someone who was a well-known author, you probably recognized name Robert G. Allen.

Justin Donald: Yeah.

Marco Santarelli: So, he wrote about 20 books. Some of them were co-authored by Mark Victor Hansen, the Chicken Soup for the Soul author. So, I got this email in the middle of the summer that he was putting on these large events in Orange County, California. This massive real estate event for free was a three-day event, and you could come for free and learn from various instructors. And I thought, well, you know what? I love real estate. I don’t have a job. And it’s something that I’m certainly interested in. And why not?

And so, I went, and there was this massive ballroom of over 2,000 people in it. And this three-day event was just incredible information. One of the speakers, Glenn, his name is Glenn Purdy. He had you riveted to your seat, you wouldn’t get up even if you had to go to the restroom because the content was so fantastic, but obviously, they were selling something at the back of the room, and people were always at the end of the day, running to the back of the room, credit card in hand, signing up for these $15,000, $25,000, and $35,000 boot camps.

Well, I had time on my hands and I had a credit card, so I thought, well, why not? So, I signed up and I started going to these various boot camps around the country that they were putting on. Well, that did two things, and this was really the major turning point in my life. Number one is it put me back on track to invest in real estate, but invest in real estate full time and seriously invest, like actually making lots of acquisitions. During that period of time, during the nine-month period, I acquired 84 doors in nine months. That was a lot of acquisitions in a very short period of time.

While that was happening, the second major turning point in my life happened and that was this. People were coming to me, saying, “Marco, I see you’re buying a lot of property. Can you help me? Can you coach me? Can you mentor me?” And I said, “I’m honored that you asked, but I honestly don’t have the time to do that. I’m too busy doing my own stuff, my own deals,” but what I did say to them was this, “I see a lot of deal flow. I’m not buying all the properties I’m looking at. So, why don’t I just either hand over the ones I’m not buying or if I have them under contract, I will sign the contract to you and make a small profit.” That was what created Norada Real Estate Investments. That was the day or the month or the time that I started this existing business.

It was an opportunity I saw. It was a light bulb moment. I saw the opportunity. There was a need for people to have someone guide them in actually pulling the trigger and buying property. They were getting the education, they were spending the money on it. They were reading books or going to boot camps, but they weren’t buying property. And I thought, this is perfect, this is what I love doing and I’m good at. Why don’t I find the markets, the neighborhoods, the deals for you and provide that to you? And that’s how the business was born. So, one, full-time real estate investing took off like a rocket. And two, I started a business that is literally helping thousands upon thousands of people create wealth and financial independence through real estate.

Justin Donald: That’s incredible, Marco. And I love it. Your journey isn’t just about you. It’s about bringing other people alongside you, arm in arm, and accomplishing this vision of passive income and real estate is the vehicle, it’s a great vehicle. I’ve invested in real estate for years and I’m in many different asset classes and I’m just so excited about it as an asset class in general. Now, you’ve got some different types that are very overpriced or definitely at the high end of the cap rate spectrum or price spectrum. So, I’m curious where you’re finding the sweet spot.

Marco Santarelli: You’re asking in terms of the types of real estate or are you talking about the areas in the country?

Justin Donald: Either, I mean, we could get into both. I think both are extremely relevant.

Marco Santarelli: Well, I’m incredibly bullish on residential real estate, and the reasons are probably obvious to many, I am not so bullish on the commercial space, especially in terms of retail just because there’s been a lot of suffering, well, actually, over the last decade, but specifically over the last year and a half, with COVID, a lot of the service space, businesses have been either put out of business or really displaced, but I’m very bullish on residential real estate for many reasons. One, we have an environment in this country right now where we have a huge shortage on inventory. Meanwhile, we have tremendous demand in most every market across the country for residential real estate. So, that’s a bullish environment.

You want to talk about locations, we can get into that, but you have to understand fundamentals when it comes to real estate investing. If you’re looking for strong fundamentals, you want to be where there’s demand, strong demand and growth. The two core things I look at in the market are jobs, job growth, and population growth. If you have those three things, really it’s two, but those three things working for you, you can’t help but to see prices go up. Prices appreciate as well as rents follow that it usually trails behind, but you see prices go up and then rents will follow behind, but that’s what we’re experiencing in a lot of the markets, especially in the Southeast parts, most parts of the Midwest and the Northeast. That’s actually true in the west as well, but the Western markets are so pricey.

Actually, you’re in the nominal market being in Austin. Austin has also become quite a pricey market, being kind of a jeweler in Texas, but we’re seeing this all over the country, housing shortage. In fact, Freddie Mac had a report that was out recently and they were basically saying, depending on which part you read and which– it was a couple of reports that came out, but they were basically saying by the year 2030, which is nine years away, we would have anywhere from 900,000 housing unit shortage to a four million housing units shortage by the year 2030. That’s an incredible shortage.

Builders are trying to keep up with that demand right now and they’re just cranking them out, but at the same time, they’re not meeting the existing growth and demand that’s coming out of the population, both organically and migration coming in. We’ve got Gen Y and Gen Z sitting on the sideline right now. They’re slowly starting to come into the housing market, looking for rentals. Many of them, especially Gen Y, are starting to get into the housing market now, looking for homes to buy. And what does that do? Well, it’s just creating upward pressure on pricing and demand because they’re looking for housing, can’t find it. And guess what? It’s just creating a perpetual problem with the shortage of housing, so.

Justin Donald: Yeah, no kidding. You mentioned jobs, job growth, and population growth. And I look at a lot of these, too. This is important to me. And I also like comps, rent comps. And I use a website called BestPlaces.net. I’m curious where you look to get this data. You want it always to be getting trusted data, so where do you go for this information?

Marco Santarelli: So, I’ll start off with the most basic and easiest. Literally, if you go to Google or any search engine, but I use Google. If you go to Google and you type in the name of the market, such as Austin, Texas, followed by a one- or two-word keyword phrase that is the type of information you’re looking at, such as population growth, job growth, job demand, real estate prices, real estate trends, anything like that, you will come up with a whole bunch of articles as well as websites that provide that data, but you will find articles that are talking about that specific topic that you typed in, and those will all have the data concisely put into 500 to 1,500 words within the article, often with the sources of where that data came from. And so, all of a sudden, it becomes just this mushroom of information where it leads you off on these different tangents of additional information about that whole topic. Believe it or not, that is the simplest thing to do and the best thing to do because people have already done the research for you. You can find it, and it’s just a springboard to a whole bunch of other sources and websites that provide it.

But aside from that, there are websites like the one you mentioned, NeighborhoodScout.com, which I actually helped form. I’m not an equity member or a partner or anything like that. I just know the guy who started it many, many years ago, the owner, and he was consulting with me to help shape it from being homeowner specific to investor focused. So, that’s a great website. A lot of our data comes from proprietary sources or subscription services like CoreLogic, John Burns Real Estate Consulting, among many others. So, we kind of aggregate a lot of the data ourselves, but there’s a fee for that. So, you can pay for some of it, you can get a lot of free just on websites.

Justin Donald: That’s awesome. Now, you mentioned that you love residential, you focus on residential. I was hanging out with a dear friend earlier today and we are talking about some new investments he’s doing. And he also is big in residential single-family homes and he just sees this huge boom in the build-to-rent space. So, you’ve got, in many cases, neighborhoods, whole developments that are popping up where the goal isn’t necessarily to just outright sell a home, the goal is to develop these straight into rentals. And you have people that can get brand-new homes that are cleaned and furnished and everything. And so, I’m curious where that plays a role or if that plays a role in your investing?

Marco Santarelli: Well, that plays a big role. So, the build-to-rent model is something that started to come up four or five years ago, maybe longer, but it really started to make the scene four or five years ago. And that came out of a couple of things, number one is what we were just talking about where demand has been growing and supply has been shrinking. So, what we used to sell, I started the company 17 years ago, for the majority of that period of time, we were selling what we called simply turnkey rental properties, which were properties that were acquired and then renovated into new condition. And that was inventory, that was existing inventory. It was out on the market, not necessarily on the MLS, but it was an existing inventory. It might have been built 10, 20, 30, 50 years ago, but that inventory, that type of inventory has shrunk tremendously.

People aren’t selling. And the people who are selling or selling property very quickly and usually in great condition, and we don’t have very many foreclosures. We don’t have distressed inventory REOs, like bank-owned properties. So, that has dried up. That has forced builders to come in and fill that gap, that void of rental properties, investment properties, properties that are basically serving the rental to the renter community, people who are not homeowners or don’t want to be homeowners.

So, it’s been driven by two things. One, organic growth, just the natural growth and necessity of having that housing stock number. Number two, the investor community looking for inventory that they can’t find through what used to be a traditional channel for them and us of existing housing stock, now they’re being forced to look at new construction, which is fine. I mean, the new construction portion of our business has grown tremendously over the last three, four, five years. It used to be zero percent, and now it’s probably closer to 20%, maybe even 25% of what our clients are purchasing. So, there’s nothing wrong with it. It’s just organic growth. I mean, the path of progress, right?

Justin Donald: Yeah. And so, in the world of residential real estate, there are a few different directions you could go, but I’m curious what your sweet spot has been. Are these single-family homes inside of one particular market or is it three particular markets? Is it some variation on residential? What does that look like for you, where you found the most success? It’s your bread and butter.

Marco Santarelli: Well, me personally, I’m a huge, huge fan of single-family detached homes. I love just a detached home on its own lot with four completely independent walls. You’re not sharing it with anybody else. As far as our clients and our company are concerned, we sell everything from single family to fourplexes, so singles, duplexes, triplexes, fourplexes. The reason we chose that, I mean, this is obvious to you, Justin, but really, it’s because residential financing, which is the most attractive form of financing, covers well that size of unit, from one to four units.

When you get over four units, you’re into the commercial space, it’s different financing. The terms are slightly different. It isn’t as attractive. And also, those types of properties are harder to find. As you get into larger and larger units, it’s kind of like going up a pyramid. The value and availability of that type of product become much, much smaller, exponentially smaller. So, the most abundant unit type in the country is the single-family detached home.

Real estate, as a general rule of thumb, is kind of an illiquid asset class, but within this asset class, the most liquid form of asset or product type is the single-family home. So, it’s easy to find, easy to finance, easy to sell, relatively speaking, easy to sell, easy to understand, easy to fix, easy to lease, easy to manage. It is just the ideal housing unit or unit type. And so, it’s great, especially as a starting point for most real estate investors. And let’s just think about this, like kind of future cast here. Let’s just say you’re a new investor or you only have one or two houses or rental units and you want to build your portfolio. It’s the fastest path to building up that unit count in your portfolio, just acquiring those single-family detached homes, regardless of how many markets you’re in, whether it’s one, two, three, or five, by building it out with single-family homes.

And guess what? If you build it up to 5, 10, 15, or 20 single-family homes, put yourself down the road 10 years from now, maybe 15, whatever your time horizon is, but certainly more than 5, 10, 15, 20 years from now, and look back at what that portfolio has done for you in terms of equity growth and the positive cash flows that are coming from it, which will continue to grow over time on average. You can do extremely well. You don’t have to go down the road of saying, “Oh, I have to have a 50-unit apartment building.” Sure, you could do that, but it’s kind of hard to make that leap in the beginning. Kind of the rule in Monopoly is four green houses, one red hotel. So, if you want to take that path, sure, go for it, but you’ll be very successful just building a portfolio of 10, 15, 20 single-family homes over the course of whatever, one to ten years.

Justin Donald: Yeah, it’s such an interesting point because I hear so many people who invest for the long term as you should, but they invest often based on appreciation. And so, you see a lot of people getting into these hot markets because these homes are appreciating or all kinds of real estate is appreciating at a pretty fast clip. Now, one of the things that I know about you is you’re into cash flow. So, it’s not just about the appreciation. The numbers have to work, it’s got to make sense. And so, I’m guessing that that makes some markets a little trickier than others based on that, but I kind of want to discuss and unpack that a little bit and then also like the typical terms that you get from a lender.

Marco Santarelli: So, you talk about investing, I do differentiate, it’s actually one of my 10 rules of successful real estate investing is don’t speculate. The mistake that was made back in the early 2000s, like from 1999 to about 2005, 2006, is that people who were so-called investors, and I say that in air quotes, were really nothing more than speculators. They were buying property, hoping and watching prices go up, property values go up. A lot of that was artificial. It wasn’t actually being driven by true supply and demand market forces, like organic population growth, etc. In most markets, that wasn’t happening. That would be Phoenix, Las Vegas, San Bernardino, California, that county, and Southwest Florida, particularly the Cape Coral region. That was ground zero for the foreclosure crisis that came out of 2006 and then created the Great Depression through 2008.

So, those types of people were not really investors. They weren’t investing for cash flow. In fact, cash flow didn’t even cross their mind because their time horizon was 6 to 12 months. Most of those people were buying homes or putting them under contract, letting the builder build it out, and then their goal was to flip it to the next person 6 to 12 months and make a capital gain, a chunk of cash, not streams of cash, which is what is your cash flow, but they were focused on chunks of cash. That’s a speculative play. And that’s, in my book, not truly what I would define as investing, but I refer to this cash flow as the following: I call cash flow the glue that holds your deal together. So guess what? If you buy real estate and it’s cash flow positive, you’ve got income coming in to cover your expenses and your debt service. What happens over time? Over time, your equity grows from amortization of the loan, plus the appreciation that happens on average over time.

So, now, your wealth is growing, your net worth is growing. Your properties are becoming more valuable, whether because of inflation or not, plus you have this cash flow, that’s the glue holding your deal together to allow that to happen. And as time goes on, your cash flows will increase. So, now, you have more passive income, which leads to true financial freedom, which ultimately leads to that financial independence, that time frame that everybody wants. So, you need to have those dynamics all working together. That’s true investing. And that’s actually leveraging the power of real estate to let that happen. When you’re speculating, guess what? You might as well go to Vegas and roll the dice because you may not actually end up where you want to be. You’ll get caught with your pants down. And that’s what happened in 2006 with the housing market implosion. It makes me think of that stripper, if you remember in the movie The Big Short. You’ve seen the movie?

Justin Donald: Yeah, great movie, fantastic movie.

Marco Santarelli: It’s a phenomenal movie. And that is so true.

Justin Donald: And in fact, it’s worth a revisit, if you haven’t seen it in a while.

Marco Santarelli: 100%. Yeah, I mean, I love that movie. I bought the DVD, but now, you could stream it today, but I bought the DVD because it’s so worth watching over and over again, but that one scene where he’s just sitting at the strip club, the strippers telling him, I got five houses plus these two other ones, and she wouldn’t be able to refinance them when the loan was due, but that’s exactly what happened back then. They were all speculators.

Justin Donald: That’s so interesting. And then, from a lending standpoint, I know you said it’s more attractive often for you on that side of things. What do those terms look like?

Marco Santarelli: Well, today, if you’re getting a loan to buy a rental property, something that’s an investment property, which we call a non-owner-occupied property, it’s not a primary residence, it’s not a second home, it’s truly a rental property, you can get conventional financing that’s in the range of your credit and few other factors, let’s just say between 4% and 5% for nominal rates. I mean, we’re talking historically low-interest rates, which is basically free money. I mean, if you think about the rate of inflation, if you look at real rates, not nominal rates of inflation, they could arguably be called 4%, 5%, 6%, 7%.

If you look at food, it’s been appreciating or being inflated and having price appreciation above 10%. Like when you look at red meat, it’s been crazy, but let’s just call it 5%, it’s free money. You’re getting 30-year fixed rate mortgages that are locked in, that do not adjust at the rate of inflation. Whatever your mortgage payment is today, it’ll be the same 10, 20, or 30 years from now. So, it’s a beautiful thing because inflation is eating away at your mortgage that you’re locking in for 4% and 5% rates and you’re able to acquire residential real estate that’s going to help increase your passive income and increase your net worth. So, I know that’s not exactly what you asked me, Justin, but I want to throw that in there.

Justin Donald: Well, it’s beautiful. Now, the way you look at it is great. I think that that’s powerful. What’s the down payment for one of these, a rental property, but with a conventional loan?

Marco Santarelli: If you’re getting conventional financing, your down payment is going to be 20%. That’s the operating minimum down payment and that’s true for your first four to six properties. After that, it bumps up to 25% as a down payment. And you can get up to 10 conventional loans per credit score. One of the tips we give married couples or partners is if you’re going to get conventional financing, you want to maximize how many you can get. So, theoretically, between the two of you, if you both qualify, you can get 20 conventional loans. And that’s the way to maximize the cheap GSE, the government-sponsored entity money, which is basically government-subsidized financing for the housing market. So, that’s the starting point.

When you’ve tapped out your 10 conventional loans that are 20% to 25% down, then you have to move into non-QM, non-qualified mortgage money, which is often referred to as portfolio lending. And there, you can have a theoretically unlimited number of mortgage loans which are going to have a slightly higher interest rate, but the terms are relatively the same. You can still lock in for a 30-year fixed-rate mortgage, or you can get hybrid loans where you’re locked in for 3, 5, 7, 10 years, and then it becomes an adjustable-rate mortgage. Those are options, so.

Justin Donald: And for someone new that is just getting started out, maybe they are renting and they want to get their first home or maybe they have their first home and they’d like to get a second home, there’s a big difference between having a rental property versus a primary residence or a secondary residence. And obviously, it would make sense to utilize those whenever people can, but I’d love to hear some of the differences as you see them.

Marco Santarelli: Are you comparing, like a primary residence versus a rental property?

Justin Donald: Correct, yeah.

Marco Santarelli: Well, I mean, obviously, you need a place to live, so you’ve got to make a choice. Are you going to buy a place to live? Or are you going to put your money into a rental property? I’m going to kind of change your question a little bit, take a step back from this. A lot of people who are in the coastal markets, like California, New York, New Jersey, people who are living in markets that are very expensive, overpriced is what I’ll call it or bubble markets, sometimes they face a decision. Do I take my savings, buy a single-family home, and live in it? Or do I rent and buy a rental property, ideally in another market?

Now, that thought usually never crosses their mind, both the fact that I could rent and buy a rental property or I could rent and buy a rental property in another state. If you look at California, if you’re going to buy a single-family home, you’re looking at very, very minimum, $500,000 or $600,000, but probably closer to $700,000, $800,000, $900,000 plus. Well, if you had to put a down payment on something like that, now, sure, you get less than 20%, but let’s just say it was 20%, 20% on a million-dollar home wouldn’t be a starter home, but here it is, it’s $200,000.

What if you continue to rent, which, by the way, will give you more house for the dollar by renting in coastal California, as well as many other markets around the country, you’ll get more housing for the dollar, more square footage for the dollar renting than you will buy, but now take that down payment that you have a $200,000 or even $100,000 and use that to acquire to two, three, but probably even more like four or five single-family homes in some of the other markets that we’re focused on, like the Midwest, parts of the Northeast and Southeast. Guess what? You’re going to have positive cash flows from those properties. You’re going to have a great portfolio that’s going to grow in value over time. And that’s your net worth and your equity and create wealth for you, but you can take that positive cash flow, the excess, and start putting it towards the rent that you’re paying here back in California, New York, New Jersey, wherever you may live.

So, now, you’re subsidizing your rent, maybe living rent-free because you’re paying your rent with the income coming from your properties. So, you really have to take a step back and ask yourself and run the numbers. It’s a math question. Does it make more sense for me to buy a principal residence and pay a mortgage on that principal residence or build a portfolio of rental properties if you can essentially triage your money into more property than you can with one single-family home? I don’t know if that made sense, but…

Justin Donald: Yeah, it totally made sense. And you went exactly where I was wanting to go because I know a lot of people that aren’t buying, they’re renting, but they are then investing in other homes. And in some cases, they’re investing in primary residences in a zero-state income tax state. And so, there are other benefits to that as well, having your primary residence in Texas or in Tennessee or Florida or wherever else.

Marco Santarelli: Yeah, absolutely. Yeah. I mean, if you have the freedom and flexibility to do that, you can move to a zero percent state tax state, do it. I mean, what do you save, you just reinvest in some more real estate, or you live a better lifestyle. It kind of goes full circle back to your book, The Lifestyle Investor, have the lifestyle you want, be an investor, let the investments feed your lifestyle and grow that, you’re the living example of exactly what you wrote in your book. So, it’s great.

Justin Donald: Well, it’s awesome hearing so many different ways to do it because a lot of people get paralysis and they’re like, what, I don’t know what to do. I could do this or that or the other thing. And the answer is you just start somewhere. You started with one strategy and that worked for you. I started with one strategy and that worked for me. And I know a lot of people that started and so do you started with different strategies than what we started with. And it worked for them because they stayed disciplined. And so, when I think about you and what you’ve accomplished, I’m curious, when did financial freedom become a reality for you?

Marco Santarelli: I would say it depends on how you’re defining that, probably after the first two years of when I founded this business because I needed that business to start creating a predictable income stream that I now was able to partly live off and partly reinvest. So, you take the profits from your business. This is why those two things are so powerfully integrated. People who can actually create a successful business, remove the ceiling, the income ceiling, and now they can live off a part of the income from a business and take the excess profits and invest it into assets that produce income. And so, what you’re doing is you’re just funneling your excess income and profits into income-producing assets, which now further fuel that cycle of creating more financial freedom. It’s the fast track.

And people who are listening to this, I want to be very careful. If you work nine to five and you’re on a fixed income and you can’t accelerate that, well, you have to understand that you can still get to your destination and achieve those financial goals that you set for yourself. You just have to be very disciplined and maximize what you keep from your ordinary income so you can put it into real estate and whatever else you’re investing in, but if you have the ability to create a side hustle, side business, and generate profit from it, regardless whether it’s $1,000 a month or $10,000 a month, but you’re able to supplement your existing ordinary income with passive or portfolio income or business income, great. Now, you’ve accelerated your path to be able to invest and accumulate those income-producing assets faster.

But if you’re in a position where you actually have a business that you can scale, now, you’re in the perfect position because now you scale that business to as high as you want it to be and you take all that excess capital, all that assets profit, and you just rapidly funnel it back into income-producing assets, like income-producing real estate. And now, you just fast track your financial goals. So, that’s where it really all gelled for me, is like after about two years of being in the business, realizing that, okay, I live off of this piece and I just invest all the rest.

Justin Donald: And I love how you have this simple way of explaining how to accelerate it because that is the idea. Like, you could have these assets that are creating some income and maybe it’s enough to cover your car payment first and then your mortgage and then half of your expenses, but instead of using it to actually cover those, as long as you have income coming in, why not take that and put it into more investments just to amplify that return? And so, you’re spot on on that.

And there’s so much that you and I could continue to talk about, like when I think about you, Marco, and what resonates the most with me, it’s bigger than just the strategy. So, your strategy is real estate and you’ve done really well with real estate, but you have something more important than strategy and that’s mindset. You have a picture in your mind of what it looks like and you’ve got these tools to get you there, but the way earlier that you defined wealth and buying your time back, having time freedom, these are important, like freedom in general, time freedom being the most important of your freedoms, but recognizing that wealth is different than being rich. Rich is a component of having money. It’s a financial measurement, right? And in many cases, it’s kind of vague, like it’s subjective, but wealth, there are different facets to measure in it, but you have the overlying mindset, the overarching mindset to all this. And I’d love to hear where you learned about that or how you got to the place that allowed you to think in the way that you have to get you to where you are today.

Marco Santarelli: Well, I hope I don’t disappoint you by saying that I’m not really sure, but I will tell you something I learned more recently about maybe my childhood. I recognized at an early age that we’re all born with one thing that we can spend and never get back. And that’s time. So, time is the thing we all have in common. We have a finite amount of it. We can spend it. We can’t get it back. There are no refunds. And it really comes down to a question of what do you do with the time that you have? How can you improve your life and other people’s lives given the finite amount of time that you have?

I literally know a guy who’s got a clock on his laptop when he opens it up, it got its countdown timer and that timer shows how many hours he has and minutes he has left to live in his life. He’s kind of made an estimation of the average lifespan, his age, and a few other factors. And he knows, he sees his life countdown, which is kind of a weird thing, actually, but that’s him.

Justin Donald: Probably motivating, too. You look at that and you’re like, alright, I’ve got to take action in my life. I’ve got to…

Marco Santarelli: Well, it makes you think about it every day. I mean, you’re thinking about it all the time. You can’t ignore it, but realizing early on that we have a certain amount of time, the question is, how are you going to spend it? What are you going to use it on? I think it made me realize early on that I need to focus on that. And I didn’t call it mindset back then. I didn’t even know what wealth was, I called it being rich, but I knew enough that I needed to figure it out.

And so, I took it upon myself, even before I had a learner’s license. I couldn’t drive a car. My parents had to drive me around, but I had them drive me to stores to buy books that I could read about business and real estate. I didn’t know what to do with it, but I was just accumulating some knowledge. And then I started listening to Tony Robbins and I started listening to Zig Ziglar and many of the other greats, Napoleon Hill, right?

And you just start to gain this stuff through osmosis. So, I knew what I wanted, I just didn’t know what it was or how to get there, but I was maybe just ever so slightly smart enough to start to pull those things into my life and learn from it, eat it, and feed off of it and grow, but the point of all that is this. That information is widely available today. We have the internet, we have audiobooks, we have paper books. They’re damn cheap on Amazon, like your book, The Lifestyle Investor, and podcasts. There’s no excuse today to not learn anything you need to know, to move you forward.

So, it doesn’t matter how old you are, where you are, what point you are in your life. You can improve yourself and your lifestyle and you can better you and your family and everything else around you. So, again, I don’t know what the turning point of the time was. And I’m probably not even answering your question directly, but I just know that at some point in my life early on that I wanted to go down this particular path and I just started to feed myself what I needed to keep going down that path. And I think anybody can do that.

Justin Donald: I love it. You took initiative. You knew what you wanted. You went out and got it. You seek knowledge and education. It’s just amazing. And by the way, major shout out to you. You’ve got an incredible podcast show that I want our audience to check out. It’s called Passive Real Estate Investing. And so, first of all, that’s incredible. What I’m really excited about for you, though, because you’ve been doing podcasting for a long time, you have a book that’s coming out. It’s not out yet. So, unlike other people I’ve had on the show where it’s like, hey, the book’s coming out. We’re in the final stages. And I know you weren’t even planning to talk about it. I just wanted to give a shout-out to you because I think it’s so cool that you’ve been able to package so many of your ideas in this book. And I know in time, it will be out, but I’d love for our audience to know where they can find you and learn more about you, Marco.

Marco Santarelli: Well, I appreciate you asking, Justin. So, really, there are just two websites that I ever mentioned, and you can find me and my team there, as well as more information on the book that’s coming out, which really at this point in time is an ebook. It’s a great primer. It’s a free download. There’s no obligation for it, but people who download the guide called The Ultimate Guide to Passive Real Estate Investment, will get an email when the book is available, and it’ll become a free download or it’ll be available as a paperback as well, but the two websites, to answer your question, are the home of the podcast, PassiveRealEstateInvesting.com. And then our mothership website, if you will, where we have real estate-based information, markets, properties, and all that kind of stuff is NoradaRealEstate.com, N-O-R-A-D-A, NoradaRealEstate.com. It’s easier to go to PassiveRealEstateInvesting.com. They link to each other so either-or.

Justin Donald: Perfect. And we’ll include all this in the show notes. It’ll be easy for our audience to find it. Hey, Marco, thanks so much for joining us today. This has just been so much fun getting to know you and learning kind of where your life started and how you got to where you are today. You are just highly successful on many different levels and not just because you figured out passive income, but because you’re a student of the game of life. And I just think that is tremendous.

Marco Santarelli: Thank you.

Justin Donald: And to our audience, to our listeners, and to those of you watching, I want to challenge you and encourage you the way I do to end every episode, and that is to take action today, move one step closer to financial freedom and to living the life that you truly desire on your terms. Thanks, and we’ll see you next week.

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