Welcome to Passive Real Estate Investing. I’m your host Marco Santarelli, and we have an exciting episode today. Why? Because we’ve been watching mortgage rates go up and guess what? They keep going up and they haven’t really come back down. So wouldn’t it be nice to be able to get mortgage rates that were around 6% or maybe five and a half percent or even lower? Well, I know you want that because it just adds to the cash flow of the property and it just makes it more attractive. Yet we got spoiled at 3%. And then, you know, we had that for a long, long time. And markets change. You know, real estate is like a pendulum. It swings one way, then it swings the other inventory goes up and inventory goes down, mortgage rates go up, mortgage rates goes down. Things are constantly changing. And so the only constant is change.
But I have something pretty exciting for you here today and I have a great, great guest, a friend of mine and one of our multi-city builders. He was telling me about some very special mortgage financing that he was able to put together and negotiate for the product line that they build in multiple markets in Florida. And I thought, wow, that’s great. Not only is Florida a great, great state to invest in and he has incredible product, but what if you were able to attach about a 5.5% mortgage rate on that, which is about 3% lower than what you would get if you just went to just any lender today and got what I’ll just call the regular financing. So let’s talk about that today.
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If you missed our last episode, be sure to listen to When are mortgage rates too high?
So first of all, let me welcome Jim to the show. Jim, welcome back.
Oh, thanks for having me again, Marco. Good to be back.
Great to have you back. Now, for those people who don’t know, Jim actually used to live here in the great state of California and now he’s living in the great state of Florida <laugh>. And I think it was a brilliant, brilliant move ’cause you moved out at a time where you were able to cash out and take your equity and leverage it and multiply it in Florida, which was exploding and still is from a population perspective and growth perspective. Do you wanna comment on your decision to move and then what has been going on in general terms in Florida?
California’s beautiful. I, I, no one can deny that, but I don’t miss paying 13.5% state income tax. And I also, Marco, I’m an old fashioned guy where if I have a good rental property in good condition, I don’t want to have trouble collecting my rents. So I like to go where there’s really favorable landlord laws and Florida has those. So I like to visit California, but my investments are in Florida.
Yeah, very cool. Well you made a great decision. There’s just a lot of great markets within Florida, all that are growing. Strong job growth, population growth, favorable tax climate, favorable business climate. That’s why so many investors focus on investing in Florida. And you know, I am too. I mean I’m working on a 36 unit project right now in southwest Florida and we’re very excited about that. So there’s just a lot of good stuff going on. So let’s start off with, I think one of the most appealing things, and it’s what you were talking to me about before and that is the incredible mortgage rates available that you’ve lined up that can be leveraged or used in acquiring the single family homes that you guys build, the duplexes that you build, the quads or fourplexes that you’re building in multiple markets throughout Florida. So before we, you know, focus on those markets and why we should be investing there, talk about this interesting, unique and attractive financing that’s lined up and how it works. So investors are very clear on what the potential is for it.
Yeah. You know, working now 10 years together with the neurotic clients, you’re always coming to us with saying, here’s the concern, here’s the concern. Our job is to find the properties and help solve the issues. And I think we both agree the issue since June of 2022. The thing I’ve heard over and over Marco is, gosh, I wish I had locked in before June of 2022. Right? So we’ve just seen rates go up and up and up and it’s not just the, the, the interest rates have gone up, it’s that the, the way the interest rates have gone up, they’ve taken away cash flow. And the basis of all of why we’re doing this, a starting point is cash flow. And so even with our new constructions, we wanna be able to get cash flow. And, and with my partner and I, we finally figured the only way we’re going to be able to produce cashflow and those solid fundamentals, you know, that you’ve been teaching for years is to start to get aggressive in buying our own mortgages and by pre-buying our mortgages for your clients.
It’s not cheap, but we’re able to get rates way below what the public rates are right now and get people off on on the right steps. So we actually pre-buy mortgages now for the neurotic clients. And by doing this, we’re able to lock them in again, like you said in the mid fives, which on a duplex or a quad loan makes all the difference between having cashflow or not having cashflow. And so we feel we’re defining the market odds right now with this and it’s helping people build their portfolio today and not have to wait on the sidelines again until rates drop in the next year or two.
Yeah. So tell me about the rates. I mean, what is someone looking at with this type of financing? Is it a, you know, fixed rate mortgage? Is it adjustable rate? What are the rates?
We have, we have both a 30 year mortgage. We also have a 30 year am mortgage with a 10 year fixed. So it’s based on 30 year am but it’s fixed for 10 years. That’ll get you a little lower rate than, than the 30 year. But we’re locking in again with us just paying everything with us and, and, and, and if, if an investor says, I don’t wanna pay any discount points to get my mortgage paid down anymore, we’re getting people in about the mid fives 5.75 and this is on duplex and quads, which, you know, are, are even, you know, usually more of a, a bank liability to banks for lending. They up up the costs. So that’s for that. And if people, Marco say, Hey, I really, I like that rate, but I wanna buy it down even more. If they’re willing to put in and wanna put in a, a discount point or two. Marco, we’ve bought people down to 4.75 so we can actually still get to the fours now that would be with commitment with them putting in, but if they don’t wanna put in any money, we’ll pay for those discounted rates and we can at least get you to 5.75.
Wow. Yeah. You really don’t hear sub 5% mortgage rates anymore. Mm-Hmm. It’s just doesn’t exist. Yeah. At least not today. Maybe in two, three years, you know, we’ll be back there. But not today.
Not today. And we don’t want people sitting on the sidelines for the next two years because interest rates are in the way. ’cause I don’t think we have a a rental problem. We don’t have a demand problem. No. It’s really just an interest rate problem. This is the one sector that is kind of throwing things out of balance and you and I are working to Correct.
Yeah, we do have another problem though, which is really to the benefit of the real estate investor. And that is we have an inventory problem. Absolutely. We still have high demand, low supply and there’s a strong and wide widen balance there. And that just means that if you’re getting involved in real estate, you get the benefits of real estate, you get the amortization and the depreciation, you get the tax benefit from. But in the inflationary environment that we have and the, the fact that real estate is continuing to go up because of price inflation, you’re gonna benefit from that even if the mortgage rates are higher. But now you can still invest today and not miss out on riding the equity train, but allow your property to cashflow even better today than it would otherwise if you were getting an 8% mortgage. Exactly. So this is just a way to set it up for yourself, take advantage of the tailwind that’s there with a better rate.
Absolutely. Absolutely. And it’s not only when you couple the rate with the areas that you and I are focused on in Florida, we also have a very healthy affordability index. And that’s something very important. You know, the average family income compared to the average price of a home, you know, like Jacksonville for example, our median value is right about 299,000 right now. You know, and we’ve had a number of neurotic clients coming from let’s say Salt Lake City. Salt Lake City is a beautiful city. And it also had great landlord laws, however, their median value is almost double ours. But the average family income is the same. And that’s a little bit out of whack. And what we’re seeing with Florida, why people are coming, we, even though we’ve had appreciation, we’re still very affordable, extremely affordable compared to other markets that people have been going to for the last few years. And the pandemic has kind of taken the value growth out of whack with cash flow.
You know what, let’s talk about that for a minute. ’cause I think it’s a great, great point and it’s very important that people hear this. It wasn’t something we had planned to talk about today, but you’re making me think about it. Something I haven’t talked about on the show for quite a while right now. Well actually I don’t even remember the last time I even talked about this. You know, there are so many people that are what I call equity rich and cashflow poor. You know, you mentioned Salt Lake City, which is a great example and I’m thinking of California specifically coastal California and even the entire west coast of the US and places in New York, New Jersey and whatnot. There’s a lot of people who own property today that have accumulated a lot of equity. Their cash flows haven’t necessarily gone up and in some cases they actually have negative cash flows.
Yeah. So I refer to these people as equity rich, cash flow poor. And what’s the solution to that? I mean, you don’t want to necessarily sell the property, take the tax hit and then figure out what to do with that cash as far as reinvesting in real estate or something else. But what you can do is what we call the ten thirty one exchange. So why don’t you talk about that? How does someone who’s sitting on one or more properties today with lots of equity and they’re not happy with their cash flow situation, move that equity into new construction homes in Florida to increase their cash flows, preserve their equity, and potentially or likely get more equity or appreciation potential.
And I think that’s the power that you’ve always shown with being able to move to different markets and, and have that versatility to go to a different market with different fundamentals can really accelerate your wealth. And before groups like Narada, you just couldn’t do that ’cause there wasn’t the communication or the setup to do that. But now someone in California, like I think I was telling you about the client I spoke to earlier, great property near Cupertino, right near the Apple headquarters, right? They’re sitting on a lot of equity, but they’re losing $2,000 a month. So they’re with their cash flow that just the rents haven’t gone up. Their mortgage is expensive. So we did the numbers with them or it showed, wow, if you want to 10 31 exchange, which means you’re gonna move all your profits forward, all that ca all that profit forward and you’re gonna take out the same amount of debt that fulfills the 10 31 exchange requirement.
They were gonna be able to go from one townhouse near Cupertino to a duplex and a quad in one of our main markets in Florida, move all the money forward, take on the same amount of debt. And instead of losing $2,000 a month, Marco, they’re gonna be a little over two and a half thousand dollars a month positive. And that is a huge swing. It’s something that I did years ago as you know, ’cause we’ve known each other a while. That’s what I did from Central California. I started to sell one house and buy two or three in Florida. And that is the same thing we’re seeing now where people are, they’re sitting on equity, they’re concerned, they’re eating their equity with negative cash flow. And there’s now outlets that you and I have put together where that doesn’t have to be the case. You can move your equity forward, your debt forward, and instead of be losing money every month, be gaining cash flow.
So for those wondering, well that sounds amazing, how do I do it? Contact your investment counselor here at Norta Real Estate. If you don’t have an investment counselor, just reach out to us. Go to our website. We will put you in touch with one or more, what are called 10 31 Accommodator, and they’ll get you all set up. It’s not a complex process. There is a timeline, it’s very strict, but as long as you’re within that timeline, then you can, you know, manage the entire process and do it all tax free. So now that’s a good segue to what you’ve got going on in different places within Florida. You know, we’ve got investors who are just coming in fresh, but we’ve got those who are doing a 10 31 exchange. Great. Now they’ve got their, their equity outta the property, they’ve gotta replace the property, they’ve gotta put it somewhere. And so we’ve got different options within different cities or markets within Florida. Why don’t you go over the different markets that you’ve got inventory or upcoming inventory in and then we can break it down into the product type as far as the single family homes, the duplexes, and the fourplexes that you’ve got going on right now.
That’s, that’s a great thing to speak on Marco. And as you know, you know, a lot of people thinking of Florida, they think of Miami, they think of Orlando, they think of Tampa. And those are great areas. That’s not where we focus. Our strategy is to focus on second tier markets that are experiencing really good growth and great buy-in prices. That’s where cashflow can happen. We feel there’s more stability there. So that’s where we focus. So as you know, our hub market, when you and I started working together over 10 years ago is Jacksonville, Florida. We’re still there. We’re still doing a lot there. It’s still one of our strongest hubs. So we’re doing a mixture of single family and, and quads there. The, the market in Jacksonville is probably one of the most strong diverse economies in all of Florida. But it’s always for some reason been the most affordable than the other three giants of Orlando, Tampa, and Miami.
So we are a big believer in Jacksonville for those fundamentals. We’re also just south of there in Palm Coast, which is really part of greater Jacksonville. Very favorite market of mine. It’s a, it’s probably one of our nicest coastal lifestyle areas. I got engaged there myself many years ago to my wife. And even though you’re into this nicer area, there’s still cash cashflow, which again is harder to find in certain coastal communities like Palm Coast. Now you go inland a little. We’re very active in the Ocala Citrus Springs and Inverness markets. This is the lowest hurricane zones in all of Florida. It’s also some of the most affordable buy-in rates. If people tell me, Hey, I’m a little worried about hurricanes, which our new construction mitigates a lot, maybe we’ll get into that. But if I’m worried about that and I want the cheapest buy-in, well I know I’m gonna take them to central Florida.
Ocala, which you guys have done a ton of properties with, has had one of the best growth patterns and still continues to have one of the best buy-in rates for the economy it has around it. And then if you go further south, we’re in about seven different markets, Marco, as you know, in southwest Florida. So if you kind of just take a pinpoint to Fort Myers and do a big circle around it, that’s where we are ranging for anywhere out to Lehigh Acres, down to Cape Coral. These markets have a real, real high growth rate as you know, through the pandemic. The number one fastest growing area in the nation was Fort Myers. Mm-Hmm. <Affirmative>. So we really went deep into that market, buying up properties in 2019, 2020. We’re sitting on over 5,000 markets total right now. Empty lots in Florida, a lot of them in Southwest. And that market, although it’s the hardest to get things built in because there’s so much demand, we have really set a stride and we’re building a lot of duplex and single families down in the southwest Florida market.
You mentioned Fort Myers. Are the new construction properties you’re building in Fort Myers specifically or across the river in Cape Coral?
Both. We we’re in, we’re in Cape Coral, we’re right in Fort Myers. We’re further inland in Lehigh Acres. We’re in Punta Gorda. We, we have gone into a number of markets down in that area. Fort Charlotte is doing very well. That’s another popular market of ours.
Yep. I’m very familiar with all those areas. I was down there back in 2005, you know, when those were newer cities, newer communities and just being built out. I mean, they’ve just been growing ever since. I mean, that just seems like yesterday, but it was so long ago.
Right. Like 15, 15 plus 18 years almost 20 years ago. That is now crazy.
Yeah. Yeah. It’s just amazing. I mean, it’s good to see. So talk about the product type. You’ve, you’re building singles, duplexes, fourplexes describe what they are, the size, the, you know, the layout, whatever you want about those.
We, we’ve, you know, we’ve, we’ve now built over 8,500 units and so we’ve really gotten the last nine years accustomed to what is going to be most favorable to tenants and to growth. And so we are now sticking to a menu of just single family duplexes and quads. We used to build some townhouses and some triplexes as you know, but now we found that the single family duplexes and quads are in highest demand with tenants have the best growth for our clients. A single family home, depending on where it is, will go all the way from about a 1300 square foot model to a 1900 square foot model. Our duplexes, we will do some three, two models, three bedrooms, two bath on each side, and two bedroom, two baths on each side. We are doing more two bedroom and two bath models for our duplexes. Why? Because the demand has been greater for those smaller duplexes and we wanna always go where the demand is going. And then for quads, our standard quad buildings, as you know, are always two bedroom, two bath units. Those of what have been the highest demand, had the most growth, had the best rental returns. And so that’s where we stick with our quads as well.
So talk about the numbers. What are the price points for each of those? This is a complex question. What are the price points for each of those model types and within the different markets? ’cause I know that prices change from market to market.
Yeah. Overall though, so, you know, we’re starting at about a $249,000 buy-in you Ocala. And we’re going right up to 950,000 for a quad in one of the nicest areas of Jacksonville. So that’s kind of our range from that and it’ll go in between on that. If you’re looking for our, our lowest buy-ins, again, you’re gonna go to the Ocala markets, our highest buy-in pricings, you know, which will be in the threes to the high fours for single family and duplexes, but probably poised for the most growth. You’re looking at Palm Coast and you’re looking at Southwest Florida and then Jacksonville would sit somewhere in between on that.
And then just real quick, gross rents on those same products. How are they stacking up relative to the purchase prices? Yeah, I know I, investors like ask themselves this all the time.
You know? Yeah. And to, to go over all of our markets cap rate wise, you’re looking at about five to a 7.5% cap. So we’re performing well on the new construction. You know, that’ll range a rent on a duplex from like 1395 to units all the way up to 2800, 2900 on a single family in a nicer area.
Do you have a preferred or favorable market? I’m not trying to steer anybody to one market over another, but is there a market that you choose over another?
You know, I, I like all the markets for, for different reasons and I think it’s saying I have my preferences, but also I always ask, what are you looking for? So again, if someone is like, I want the cheapest buy-in Ocala is my favorite market. Me personally, you know, since I’ve had such, you know, since the days of leaving California, Jacksonville just I believe is is one of the most interesting cities in the nation. You know, in 2005 when I left California and went to Jacksonville, it was really the only affordable coastal city in the nation. And and those words, as you know, Marco don’t usually go together affordable and coastal city <laugh>. And it’s still that way, right? And it has such a diverse economy. So Jacksonville is always someplace I highly encourage people. And then right now, like you had said right away, you were working on something in southwest Florida.
Port Charlotte is a very interesting market. And there’s a lot of growth. It’s good location. I like the Port Charlotte market. And I also for other reasons, you know, we went through that big hurricane last year and we out of 278 projects basically had no damage. And that has a lot to do with the new construction, new standards, the fact we have to build on higher ground. So to see it come through the way that it did and now see the rental demand that’s down there, I’d say Port Charlotte or Jacksonville are two of our 12 markets I’m really keeping an eye on.
So you mentioned hurricanes, you know, often when a hurricane goes through insurance becomes more difficult to acquire or gets more expensive for a period of time and then, you know, things readjust. What are you seeing as far as insurance cost and trends right now? ’cause I know that not every investor brings it up, but investors bring it up and they talk about, you know, the cost of insurance.
I think I sent this to your team the other week, Marco, true story, got an email from a, from a client of ours doctor, he’s bought a number of properties in Cape Coral and, and Fort Myers. And he sent me this kind of frantic email, said Jim, I just got a new insurance quote on my property at, I don’t even remember the address and I wouldn’t share it anyway, but <laugh>. And he said it went from $1,600 a month to $6,500 a month.
Wow.
I said Whoa. And I asked a simple question back, I said, did you get with Chris that’s the owner of the insurance company we we refer to and ’cause he owns a number of properties. He said, oh no I didn’t go with Chris on this one. I went with a national insurance company that I wasn’t familiar with. I said let’s quote it with Chris within three hours Chris got him a quote back, he was at 1600. The new national group said it was gonna go to 6,500. Chris got it done with better coverage for 1200 a year.
Wow. Huge difference.
Now the moral of that story, Marco, as you know, that’s why we work it as a team. We’re on the ground, we’re looking at this all the time. Chris is who I personally use for my portfolio. I’m always shopping mortgage lenders to team up with an insurance people. So has insurance gotten more difficult for certain properties in Florida? Yes it has. Especially if they’re older built before 2004 if they’re built on low lying ground because insurance companies take that into consideration. What we found, again, working with like our main two insurance companies were referred to, we don’t have any financial affiliation, it’s just who we refer to. They like new construction. Why? Because it’s built to a different standard. It’s built on higher ground When their analysts go in with bigger spreadsheets than you and I can figure out to how to analyze risk.
They like our stuff because it shows that it performs better. So if you’re looking like for example at our new construction or it’s an older home and it’s built on higher ground, you’re probably gonna get a break. So not all insurance policies are created equal. And that’s why I tell people they have to have a good group to go to for the insurance. But secondly they wanna look at the property itself because there can be a major difference. You know, for example, I live, you know, we were just talking about where I live. I live on a barrier island in a newer home, but there’s homes just eight doors down on this little barrier island that were built in the fifties on lower ground. They’re half the size of my house and their insurance is five times the amount. Why? Because they’re on lower ground. They were built to a different structural design and integrity. So you need to look for those things. So I’ve, I’m very optimistic on insurance ’cause all I work in is new construction as you know now Marco. And that can make all the difference as long as you also have a good insurance company to turn to because this is a really important one to shop around.
Yeah, for sure. So in addition to proper insurance and the right team member for your insurance needs, there’s also property management which you know as well as I do is very important especially for an out-of-state or long distance investor. Talk about the property management side of the equation because everything we want our investors to have is turnkey quote unquote, but turnkey rental properties as a turnkey rental investment. And you know, that’s basically the service we provide is a a completely turnkey investment experience. But talk about the property management side of things. What is available and then how does that work? What are the terms if you know? Yep. Yeah, let’s go into that.
As you said, you know, I was taught by a mentor years ago, you can get a house at 50 cents on the dollar but if you don’t have a management in place you could still lose money. It’s that simple <laugh>. So yeah, you know, management is something we were in before building and yeah, once we started building multiple markets, we will only build in the market where we’re building at least a hundred properties at least. And we set up management before we go in because we know the importance of management. So we now manage over 2000 individual properties, you know, and that’s multiple units. I don’t know how many thousands of units above that now. And management’s one of the most important things I think we bring to the equation. We also tried to do it at better rates because you know, some companies in Jacksonville for example, we started 10 to 12%, we started 8%. And then with some of our incentivized programs we do with like ADA for example, we actually give one free year of property management because if we can get that into our numbers, that’s only gonna help their initial cash flow as well. Right. So we do it from 8% of collected rents. You know, there’s a fee for the first initial fill up of the tenant and then it’s 8% collected rents, which for again your clients is WA for the first year.
Yeah, very cool. Well I don’t know what I didn’t ask you that I should have asked you. Is there anything else about the, the market or the investment opportunity there you’d like to share before we start wrapping up here?
No, I just think that you hit on the nail on the head with with inventory issues. That’s a very good thing, especially with Florida. And like I’ve learned there are some cold weather patterns right now in certain areas of the us. We just haven’t felt ’em in Florida. And one of the reasons why is we are still so behind on inventory for the population push that’s happened in the last few years. I feel very lucky to be a builder where we are because that demand is still there and that demand that can’t be filled too quickly is great for value growth and continued rental growth.
Yeah. And there’s still a very large number of people migrating to the state of Florida from other states, which just, you know, adds a lot of upward pressure on the demand for real estate in the state of Florida. You know, you’ve got your organic growth and people move within the state interest state. But yeah, there’s still a lot of people moving into the state of Florida, even from California, not just from, you know, the northeast.
Absolutely. I’ve met plenty of them. <Laugh>.
Yeah. Well you’re one of them. <Laugh>. I’m, yeah. Very cool. What else do you wanna talk about before we wrap it up here? We’ve gone about 28 minutes and I think we’ve covered a lot of ground.
I think, you know, this is one of many we’ve done together. We’ve had a great relationship working with with Norada and, and the property counselors have a great relationship with our team. They can answer any of your questions going through our performance. A lot of, lot of success stories, which I’m very proud of. And and you know, top it all off, which a lot of you listening probably know we love visitors. So if you have any desire to come visit for selfish reasons, we like that ’cause we have like a 95% buy rate. ’cause Once you see the areas, the team, the properties it gives a lot of comfort. So if you ever have the urge to come visit, please do. We set up tours all the time and, and we love having our erotic clients come visit us.
Yep. And you could turn it into a mini vacation as well. I mean, there’s a lot of the things to see and do and places to go in Florida, you know, from the beach and the coast to the theme parks to you name it. So Absolutely. Yeah. Turn your business trip into a tax write off and enjoy it. <Laugh> big tax write off for sure.
Well Jim, I appreciate you taking the time today. So thanks for coming back on and for everybody listening, you know, remember our strategy sessions and everything we provide, all our services are free. There’s no cost to you. So just reach out to my team of investment counselors and get your free strategy session. We can help point you on the right track and get you in touch with the right people to help you reach your real estate investing goals.If you have a question about real estate, submit that to me or to my team.
Remember to subscribe. It takes you a whopping three seconds to do so. So just click that button to subscribe to the show and that way you get every episode every week and help us spread the word. Visit us on iTunes, leave us a rating and review. Greatly appreciated. I do read all of them. So thank you in advance. And that is it for today. So thank you for listening and we will see you all on our next episode.
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