Before I get to the question, two things. One, if you’re new to the show, remember to subscribe, just click the subscribe button and your player. Number two is I have been trying to keep these Ask Marco episodes to 10 minutes or less, ideally set out to make them a seven to eight, maybe a 10 minute maximum episode, but I seem to talk a lot and I ended up recording 12 to 15-minute episodes. So I’m going to do my best to try and keep this one to 10 minutes or less today.
So today’s question comes from Miles and he’s basically asking how do I build a portfolio when my target neighborhoods are very expensive. So let me read his email.
He says, hi Marco, thanks to quarantine. I’ve been able to really start to go after my passions and learn some new skills. One of the skills is real estate. Your podcast has been really helpful as I am trying to learn more about the industry, how to go about investing for the long term. I’m in my mid-twenties and am getting ready to acquire my first property. I would ideally like to manage my own property and therefore I am looking in the state. I live New Jersey. That’s a red flag right there. After some research, I have come to the realization that any class A or B type neighborhood is very, very expensive. I was curious how you would go about building a portfolio when the area you’re targeting is in the higher price range. And would you recommend going after single-family properties or looking at apartment complexes to acquire more units at once?
Thanks in advance and keep up the great podcast. Best – Miles.
Miles, Thank you for the question. It’s a good question. You actually have two of them here, but the main one is really how do you build your portfolio? So the short answer to your question of how do you build your portfolio when you’re looking at neighborhoods that are very, very expensive. And I say that in quotes your quotes because I’m quoting you, the simple and short answer is you don’t. And here’s why it’s very simple. First of all, think about it. Why are you going after those neighborhoods? My guess is it’s because you live in New Jersey and you want to be in close proximity and be in driving distance. And you want to manage them yourselves, which you have clearly said that you want to do that. Why you want that brain damage. I’m not sure if that’s something you want to do as a career choice or as a job or profession.
Great. You could pursue it and grow it as a business. And you can earn an income and build it as a true business. Something that is scalable and be a property manager. And then you can manage your own portfolio as well, or do it the other way around, manage your own properties and then build it into it business. That’s all well and fine if that’s what you really want to do. But the question is, is that, is that what you really want to do? Secondly, why are you targeting these neighborhoods? If you think you’re going to be more successful because you live close by then start to ask yourself why you think that, because that may not be the case. You probably, you understand those neighborhoods very well because you grew up there or you grew up around there and you know, what’s going on.
And if you know something that other people don’t like, there is gentrification going on and you see new businesses coming in and things being turned around and you expect with good degree of likelihood or probability that there’s going to be a lot of growth and therefore price appreciation, then maybe it’s worth pursuing, but that is not investing for cash flow that is investing for price growth. And again, there’s nothing wrong with that, but that may not be the best way to go about it. Especially in the beginning when you’re building your portfolio, I think you should be focused more on cash flow than capital growth. And you can have both, but don’t exclude the cash flow in spite of that capital growth. So ask yourself, why are you in the neighborhood and why do you want to focus on it if it’s because you’re comfortable with it and it’s okay driving distance and you just feel that you’re going to be more in control because you’re OCD or something like that, then sure pursue it.
But at the end of the day, you want your money to work for you. The hardest it possibly can. And in order for that to happen, you need to be agnostic. You need to detach yourself from any market, including your own, and just step back and look at the country from afar. Look at the country as a distance made up of over 400 markets and choose the markets that make the most sense. You want your money working as hard as possible for you, especially in your twenties. You know, it makes me think of a comment that Mr. Wonderful said, Kevin O’Leary. He was talking about money and he looks at his money as little stuff. And he likes to send his little soldiers out in the field to go to battle and battle for him. And then he wants his soldiers to come back and bring back more soldiers.
So he’s got a stronger army, so he can read the ploy that army yet again, to go out, fight, battle, and come back with more soldiers. So if you look at your money that way, where they are essentially tools, but a way for you to make more money than don’t put your money at risk, preserve your capital, minimize your downside risk. You do that by picking the right markets and picking the right neighborhoods. But you also have to look at the markets neighborhoods as places to put your money to work in properties that will generate more soldiers. In other words, more money, more cash flow. So when you do that, you need to basically step back, educate yourself, look at the different markets and is going on pick markets that make sense more specifically, markets that make financial sense for you and your soldiers, your money, and not base it upon the place you’re comfortable with like your home and the neighborhoods that you feel comfortable with.
Even though the numbers are too pricey. And you said it yourself, they’re very, very expensive. So you start off by doing some research, define your criteria, pick the markets that meet that criteria that will allow you to invest and will allow you to invest with upside potential. But at the same time, not taking away the cash flow that you need to float and carry your properties month after month and therefore year after year, as you gain equity. And as your cash flow grows and as your portfolio grows, so you can do more with it. So educate yourself, pick the markets, do the research. There’s a lot of that information online it’s free. Google is a great tool. Just use Google to do searches on the market. For example, you can type in places like Jacksonville, Florida, market trends, Jacksonville, Florida, housing trends, Jacksonville, Florida, population growth, et cetera, et cetera.
I try and target forwards in my searches, four to five. I always put the city and the state followed by two or three words of specifically what I’m looking for information on. And typically you’re going to find articles that will give you that information by journalists or reporters or people that have already compiled the information and have references and sightings to those other sources. If you need to go that far. So the information is available for the most part for free. There are services that are paid services that you can subscribe to, to get more detailed information and data, or just go to our website@noradarealestate.com. And we actually have very long articles or posts on our website blog. These are sometimes as much as 8,000 words or more, but they’re very long detailed market spotlights or research articles about markets around the country from Seattle all the way down to Miami.
So they’re there. In fact, what I’ll probably do is create a market page where you can find links to these articles. So you don’t actually have to do a search from the blog search itself. Although you can do that. It’s very easy, just type in the name of the market and the city, whether it’s Kansas City, Indianapolis, Houston, Dallas, et cetera. So hopefully that’ll help you and everyone listening to this and people who visit the website. So that’s the answer to the main question. I’m at nine minutes now. So I’m going to see if I can just answer your last question very quickly. Do you recommend going after single-family properties or apartment complexes to acquire more units at once? I actually answered this just a week or so ago in a previous ask Marco episode. So I’ll just give you the short answer here, but basically I actually prefer residential properties that are from one to four units, no more than four units.
Not that I haven’t invested in apartments in the past I have, and they have their pros and cons today. I would actually be more focused on single-family than I would on multiunit, especially properties that are above four units in size for multiple reasons. One is the availability, the liquidity, the cap rates available on single families versus apartments. They’re just more favorable. In fact, virtually everything is more favorable with single families. They’re also far more abundant, easier to find, easier to deal with, easier to purchase, easier to sell. Therefore, they’re more liquid in terms of this asset class called real estate and the numbers work quite easily. There also, if you’re in your mid-twenties and you don’t have a lot of investment capital, you can get a single-family home for 80,000, a hundred thousand, 120, $130,000. So a 20% down payment on something that’s, let’s say a hundred thousand dollars is only $20,000 plus closing costs and a little bit in reserves.
So it’s very easy to start getting into single families and you can build a portfolio pretty quickly. You know, once you get one or two, you get three or four and then you start getting five and six, seven and eight, and you build it up pretty quick. So miles, I hope that helps you. And I appreciate the question. This is a good one. Actually, I’ll leave you with that. If you have any more questions, just contact one of my investment counselors here at Norada real estate and that’s it for today. If you haven’t already subscribed, please do so. Help us share this show with other likeminded people, your friends, family, neighbors, that you like, not the ones you don’t like. Visit us on iTunes, leave us a rating and review. We greatly appreciate it. And once again, thank you for listening. I will see you on our next episode.
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