Listen to the Podcast Here: Welcome back to The Real Estate Nerds Podcast! On today’s Bad Beats episode 5, real estate attorney and intrepid host Scott Smith interviews fellow real estate investor Marco Santarelli. Marco is the founder of Norada Real Estate Investments, a nationwide provider of turnkey cash-flow investment properties. Since 2004, they’ve helped over 1,000 investors create wealth and passive income through real estate. Marco also shares his expertise with investors all over the country for free as the host of the popular Passive Real Estate Investing Podcast. Today, he tells Scott about one of his worst deals, and shares what investors can learn from his mistakes. After all, as us true Real Estate Nerds know, a Bad Beat is only a failure if you don’t learn from it. So that’s exactly what we’re going to do. Let’s dive right in. Description Useful Resources Bad Deals and Good Deals All Start the Same Way Scott introduces Marco and gets his perspective on the many ways deals can go bad. In the beginning, it can be hard to tell what you’re in for amidst all the excitement. [1:00] Marco jumped right into real estate at 18 years old, the moment he became eligible for financing. 15 years later, he’s still in the business and helping other investors find high cash-flow properties. He’s seen great success, in part, because he’s willing to look at and learn from his mistakes as an investor. [3:00] Both experts agree that good deals and bad deals look the same at first glance. Marco recommends a top-down approach that takes the whole picture into account, rather than remaining hyper-focused on the property itself. [4:00] “You can’t look at the property and the property only. You have to look at the macro picture…You start with the market, then work your way down to the suburb, the neighborhoods, then the property.” He suggests further analysis on the tenant, management aspects, and other details of the deal structure. [5:30] Small errors in judgment can escalate quickly. Marco tells a wild story of trusting the wrong property manager. They had a good relationship and had worked together before, that ended abruptly when she ran off with $6,000 of his money. There were red flags he ignored because of their prior success. [6:10] Scott points out how it can be hard to let go of a formerly trusted colleague, even if they’ve done you wrong: “It’s like a breakup, where I’m still in love with you, even though you’ve been terrible to me.” [7:20] In retrospect, Marco realizes that he should have brought in outside property management. He’d known his runaway manager as an agent, but had never used her as a property manager. Our guest and host agree that just because a person is outstanding at one job doesn’t mean they’re qualified for another one. Marco Santarelli on How Deals Go Wrong Strangely enough, the $6,000 Marco lost isn’t the bad beat he came on our show to talk about. Scott and Marco dive into the dirty details of Marco’s worst deal. [9:45] Scott asks Marco about what his worst deal was, and what circumstances led up to it. To understand what went wrong, Marco explains the context of the deal. Hhis business, Norada, helps investors with turnkey investments. His company plays an active role in “We want our investor-clients to take their “chunks” of cash and convert it into cash-flow, where you have a stream of cash Flipping business. Things started well enough, and he developed an active business that saw initial success. [12:20] Marco’s very first deal under his new business lost him $17,700. Fortunately, his next deals covered the losses and he was making decent average profits. But the complexities of his business set-up, market issues, and operational issues with appraisers contributed to feelings of frustration and dissatisfaction. [13:30] When Marco realized how much his business was taking him away from his true passions in life, he knew it was time for a change: “What was once a baby grew into a monster. It was sucking up more and more of my time…I’d built myself a business that was really a job.” He began scaling down and selling off his properties. [14:34] Marco points out that the realities of flipping are stressful, time-consuming, and not nearly as easy as the media would lead new investors to believe. He cautions against getting investing advice from reality shows: “If you watch HGTV, or you watch all these flipping shows on TV, let’s face it, it’s reality TV. They’re going to show you what they want to show you that makes good TV, but it’s not as sexy or as glamorous as you see on TV.” [15:00] While TV shows show the “wins” in flipping and make it look like easy money, Scott Smith points out that there’s actually a high level of knowledge required to be a successful flipper. Effective flippers understand markets, unexpected price increases, contractor relations, repair times, and much more. Marco agrees, and offers advice to those considering entering real estate as flippers: “If you’re going to flip property, even if it’s just one, you need to understand that nothing goes exactly as planned.” [17:00] While Marco started out in flipping, his Bad Beat started out as a joint venture he was persuaded to get in on. The sponsor who approached him allowed him control over the deal. The first few went well, and they quickly were earning capital in the millions. But over time as operations scaled up, this side project become more problematic and emotionally stressful. Market conditions and Marco’s lack of fulfilment drove him to shift his focus towards buy-and-holds and helping other investors. [19:00] Appreciation has influenced Marco’s transition: “We’re in a seller’s market in virtually every part of the country, and because of that, prices are appreciating or going up faster than rents.” This created a major problem for Marco’s turn-key properties, as flipping is difficult in this climate. He was forced to diversify, as investors had lower interest in these deals and sales naturally slowed. Conservative appraisals created yet another problem. [21:00] Tight inventory made good deals increasingly hard to find. “When you’re averaging single digit returns, that’s not enough meat on the bone to continue trying to build the business [22:40]. Under these circumstances, Marco was faced with the choice of being more selective and screening deals more carefully, or downgrading the class of properties he was buying to maintain a profit. The only alternative of moving to a different market didn’t appeal to Marco at all. The Takeaway: Vet Your Team and Know When to Walk Away Scott and Marco end the show by discussing their strategies for evaluating potential team members. [23:30] Our guest highlights a truth of the investing world: “Real estate is a team sport. You never do anything by yourself.” Scott agrees, and regularly encourages his clients to have a dream team of an attorney, a CPA, and a dealmaker. Marco has prepared a team on the ground in Chicago, but hasn’t yet advanced in making purchases as he is still unloading his existing properties. [27:00] The two investors discuss their habits for vetting a team. Scott takes new team members to hang out where he lives in the Austin area, sometimes taking members on a hike or other normal activity. This helps him get to know the other person, as their defenses drop and it allows both people to feel each other out. Marco sees the wisdom in this strategy, but acknowledges that you never really know what someone is like in a business sense until you’re already “in bed” with them. He believes the best you can do is get to know someone, do your homework on them, and look at their work and references. [28:30] Contractors are trickier to vet, but tools like Angie’s List can help. Evaluating their past work and taking these relationships slowly can also help, in Marco’s experience. [29:30] Scott Smith sometimes gets a work product from a team member, then has another professional come in to evaluate that product. Putting the professionals head-to-head gives Scott insight into both of their characters and their work. He notes that this strategy is particularly useful for his own kind: lawyers. This “test” can be done inexpensively, and Scott isn’t afraid to have a little fun with watching fellow lawyers face off for under $100: “It’s also just kind of entertaining to watch a cock-fight every now and then.” [30:30] The major lesson Scott observes from Marco’s story is the value of walking away before a Bad Beat gets worse. Marco’s business wasn’t a total failure, but it simply wasn’t sustainable when scaled up under current market conditions. Marco has retained his success by sharing his knowledge and experience with new investors and being willing to diversify. Connect with Marco Santarelli Follow Marco Santarelli’s business activities by checking out his main website, NoradaRealEstate.com. Listeners can also check out his podcast, which has achieved a spot on the Top 20 podcasts on iTunes. Check out past and current episodes or join the community around Marco’s podcast at PassiveRealEstateInvesting.com, where Marco also hosts a wealth of free investing information and resources. Listener Resources Thank you for joining us on today’s episode of the Real Estate Nerds Podcast. For even more free educational resources on real estate investing and the law, check out the Royal Legal Solutions blog. You can also reach our host Scott Smith directly, connect with him on LinkedIn, subscribe to the Royal Legal Solutions YouTube channel, or join our investor community on Facebook. Don’t forget to subscribe to stay up to date and have the most current episodes of the Real Estate Nerds Podcast directly in your listening library. Every subscription helps us create new, custom content for you. What did you think of today’s episode? What would you like to hear more about in the future? Leave your thoughts and questions in the comments section below, or leave us a review in the iTunes store. We love hearing your feedback, so fire away. Join us again next week to learn how to be in the know for the best deals. Thanks for listening and joining us on our journey to become better investors! Hosted by Scott Smith, Lead Attorney and Founder of Royal Legal Solutions. Schedule your personal consultation now. If you have questions about our content or suggestions for future episodes or guests, reach our podcast team at [email protected].