Maintain RE Investment Portfolio, Market Shifts - Article | Think Realty
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How to Maintain a Profitable Investment Portfolio in a Shifting Housing Market

“Live where you want, but invest where it makes sense.” Marco Santarelli, founder and CEO of Norada Real Estate Investments, is known for saying. Santarelli, who invests in cash-flowing turnkey rental properties in markets around the country, has maintained a profitable investment portfolio for more than two decades thanks to this philosophy; despite choosing to live in one of the toughest real estate markets in the country, California. “Your local market will not always be the best,” he warned at a recent Think Realty National Conference & Expo, where he told Atlanta, Georgia, students that although “Hotlanta” is certainly a hot market at present, it could be heading for a shift in the coming months.

Local Market Insight: Atlanta, Georgia

“I love Atlanta and we’ve been investing in property in Atlanta for more than 10 years,” Santarelli said. He called Georgia’s capital city a “perennial market” because Norada has remained active in the area far longer than is typical because the market has been so steady and strong. However, he warned a sign that has many investors excited about Atlanta does merit a close eye in the future: “In the past few years, the market has been appreciating faster than the norm. That compresses your CAP rate because rents do not keep up with appreciation.”

CAP rate, the ratio of net operating income (NOI) to property value, is commonly used by turnkey rental investors to compare the relative merits of investment properties in various markets. When appreciation outpaces rental income, the ratio declines and the amount a property cash flows may also fall if property taxes and other costs associated with property values rise. For example, if a property is worth $100,000 and the NOI is $10,000, then the CAP rate would be $10,000/$100,000, or 10 percent. However, if the property appreciates extremely quickly (say, by 12 percent) and rents remain relatively steady, then the new CAP rate would be $10,000/$112,000, or 8 percent. While that CAP rate is still solid by many standards, if it continues to fall, then investors like Santarelli might start looking in other markets.

Digging Deep into the Data

Because Santarelli and, by extension, Norada, are “market agnostic,” meaning that the company enters and exits markets based on hard facts and is not attached to any investment locale for any “softer” reasons. The company’s analysts focus on digging deep into local trends and data. “There is no such thing as a national real estate market,” insisted Santarelli during his breakout session at the conference. “All real estate is local and should be evaluated on that basis. You have local politics, local trends, and unique local economies. The U.S. housing market is not one big, national one, but at least 412 smaller ones that are primary, secondary, and tertiary markets.” He recommended that investors in every market, even steady, strong ones like Atlanta, “think of real estate as hyperlocal,” explaining, “Even in Atlanta, what happens in the core of Atlanta is very different from what happens in Stone Mountain or Decatur [two very different Atlanta locales].”

Santarelli also cited the housing market in Detroit, Michigan, as an example of how local politics can affect a market’s behavior in positive or negative ways. “In 2004, Kwame Kilpatrick was mayor of Detroit and everyone thought he was great. The market was going great as well.” Shortly thereafter, Kilpatrick encountered his much-publicized legal troubles and the market began to flounder. “I can’t say conclusively those things were directly correlated, but local politics can get in the way of progress,” Santarelli pointed out. However, he ended up going to jail and that hurt local markets,” he explained. Kilpatrick was elected to the mayoral position in 2002 and became Detroit’s youngest mayor at the age of 31. He received a great deal of criticism throughout both of his terms, but also cut property taxes, which was good for investors. In 2008, after a long legal battle, Kilpatrick pled guilty to two counts of obstruction of justice, accepted various penalties including paying the city $1 million in restitution and resigning as mayor, and admitted to lying under oath, among other things. By this time, the housing crash had already slammed into the city, and Kilpatrick’s practices while in office had not bolstered its ability to withstand the financial stresses of that time period.

Sound Advice to Students and Investors

At the event, Santarelli took a few moments during his training session to speak with attendees about their personal investing strategies. One student reported he was already a land owner in Syracuse, New York, and was hoping to also purchase investment properties in Atlanta. Another couple observed that their current investments in California, while appreciating, were not really something they could replicate in today’s housing market in that state. “You got in at a better time than now!” Santarelli agreed. Of the Atlanta area, he recommended caution, but noted that his team is still purchasing properties in the area at present.

“If you can find the deals and know how to negotiate them, you can still get a lot of properties,” Santarelli said, adding that his team works with many investors in the Atlanta area to help them build local and out-of-state portfolios. He noted that Norada is watching the Atlanta market closely as the city makes a bid for Amazon’s second national headquarters, dubbed HQ2, because that will certainly “drive jobs and housing” wherever the internet behemoth decides to build. He emphasized the key to any market analysis lies in educating yourself about the market and then making sure your education is up to date and accurate. “Ignorance is not bliss. Ignorance is expensive,” he said.

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Carole Van Sickle Ellis is the editor-in-chief for Think Realty Magazine. You can reach her at cellis@thinkrealty.com.