Working Capital The Real Estate Podcast

The Mad Scientist of Multifamily Real Estate with Neal Bawa|EP45

Mar 18, 2021

In This Episode

Neal Bawa is CEO / Founder at Grocapitus, a commercial real estate investment company. Neal sources, negotiates and acquires Commercial properties across the U.S., for nearly 500 investors. Current portfolio is over 2000 units, projected to be at 3000 units in 12 months.

Neal also serves as CEO at MultifamilyU, an apartment investing education company. He speaks at events & meetups across the country. Nearly 5,000 students attend his multifamily webinar series each year and hundreds attend his Magic of Multifamily boot camps. Neal is the co-founder of the Multifamily Investing Meetup network, a group of investors that has over 4000 members.

In this episode we talked about:

  • Neal`s background in real estate and how he got into this industry
  • What cities make the most amount of money in real estate?
  • An eye-opening experience of building six campuses from scratch
  • How did he get 50 thousand people’s attention?
  • Failures while dealing with multifamily housing
  • Cashing out- when is the best time?
  • Generational wealth
  • Neal’s favourite real estate book
 

Transcript

Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesse Fragale. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you’re looking at your first investment or raising your first fund, join me and let’s build that portfolio one square foot at a time. All right, ladies and gentlemen, welcome to working capital the real estate podcast. I’ve got a special guest on the show today. His name is Neal Bawa. Neil is a technologist who’s universally known in the real estate circles as the mad scientist of multi-family besides being one of the most in demand speakers in commercial real estate.

Neal is a data guru, a process freak, and an outsourcing expert. He treats his $345 million multi-family portfolio as an ongoing experiment in efficiency and optimization. The mad scientist lives by two mantras. His first mantra is we can only imagine, sorry. We can only manage what we can measure. I like that one. And his second mantra is that data beats gut-feel by a million miles, the old how’s it going?

Neal (1m 4s): Fantastic. Thanks for having me on the show. Jesse. Excited to be here.

Jesse (1m 8s): Yeah, my pleasure. I’m very, very excited to have you on, it’s been a little while that I’ve seen a few of your podcasts in the background on, on different real estate forums and podcasts. So I was like, we gotta get them on and we have to talk about multifamily. So for those that don’t know you, Neil, perhaps we could take a step back and talk about, you know, your background in real estate and how you got into, into this industry.

Neal (1m 33s): Sure. Well, I am an opinionated data scientist. I am steeped in Silicon Valley lower. So I, I think like a lot of technologists and data scientists here in Northern California and my focus has always been by my frustration with how little data is used in real estate, real estate and commercial real estate are one of the largest industries in America, but has anyone in real estate ever tried to be like Amazon?

Amazon is not a, a, an e-commerce company. They’re a company that uses very large amounts of data to study people’s behavior and to make appropriate suggestions at the appropriate times. And, and, and so they really a technology company and a data science company, and look at where, where that’s gotten them. And I, when I, when I look at real estate, I feel frustrated that people are not doing that enough. And then I realized it’s because you really have to be steeped in Silicon Valley culture to kind of think that way to think about everything as mathematical.

And I know sometimes that makes us seem heartless because we’re not thinking about tenants, we’re thinking about mathematics, but actually our communities are incredibly well-run because we’re using mathematics to improve customer satisfaction. So I, as you can imagine, I’ve had a successful technology career. I’ve had a successful technology exit. I retired for three months, month. One was great. Month. Two was okay, month three was horrible. I realized, I, the next time I retire, it’s when you know, they’re, they’re carrying me out of the, you know, and, and to, to be buried.

And I wanted something that was passionate about Noah had already been passionate about real estate for a decade before my tech career ended. And, and I felt like this was something that I wanted to do, but I wanted to bring a different spin to it. So one day I sat down and I wrote some, a vision for how my company and what I do would be looked at differently from others. So, and some of those have come to life because for example, I’m called the mad scientist and multi-family cause I’m out there, you know, in a hundred podcasts a year at a dozen conferences talking about the use of data analytics to improve investor returns.

And it, you know, when I say it that way, it doesn’t seem sexy. So I tell people, you can use data to become millionaires in real estate, 10 times faster than other people that are investing in real estate. Now that sounds a little bit, bit sexier, right? They’re like, Oh, data, right? That’s, that’s pretty awesome. So, you know, so you can use data to cheat in a legal way and that’s become my focus. And we now have, besides the 500 investors that have given us money for our $350 million portfolio, we have 50,000 investors using the data that we published.

So each year we publish data and we publish data in lots of different areas, single family, multifamily, fourplexes, student housing. I think the one that’s considered, you know, to be the most powerful that the most number of people are following is that we publish a toolkit each year and be updated every year on how to figure out the best cities and neighborhoods in the U S with a focus on tertiary markets that nobody knows about. You’ve never heard of these. You’ve never heard of Idaho falls or Dalton, Georgia, or Durham, North Carolina, you know, places like this that make the most amount of money because they have extraordinary growth rates, new Bruns, Felds Texas, right.

You know, at the city, that’s 33 miles away from Haas, Austin, everyone, Austin, Austin, Austin, all the time. But did you know that there was city growing three times faster than Austin, 32 miles away? And it’s growing because of Austin, right? I’m obsessed with figuring out those cities, because that’s where the real money is because everyone’s overpaying in Austin, everyone’s overpaying in San Antonio. But what if there was city in between the two of them that nobody even knew how to spell, let alone invest it.

That’s where the money is to be made. And that’s, that’s what I have I’m obsessed with. And those are the, that’s the kind of data that we publish each year. And we talk about different cities and different parts of different cities, because there are no great cities to invest in, in real estate. This is a myth there’s only a quarter of each city. That’s great to invest in and we’re trying to figure out which quarter. And so, so that’s, that’s my, my story. I’m happy to tell you kind of how I got to this point from 2003 when I started, but that in brief is what I’m all about.

Jesse (6m 5s): Yeah. And that’s, that’s exactly what I wanted to talk about today. Why don’t you take us through the, the deal, which I think I first heard a little while back when you talked about how you built a campus, where you thought you were building a technology company and how you got started in real estate, it wasn’t like a lot of people you then that started in single-family and maybe do some flips. It was kind of ass backwards.

Neal (6m 29s): Yeah. I got into real estate in reverse. Most people start with a flip or a single family rental. My first foray into real estate was building from scratch a 27,000 square foot, $6 million campus for my company. This is a technology company. Everyone’s a geek. And one day my CEO comes to me is really, really angry. He’s like, I just met with our landlord. The guys are jackass and we’re not renting again. And you know, we, we have like roughly 11 months left on our lease and I’m like, that’s awesome, Paul.

Cause he’s, he’d always been in charge of all the rental stuff. And he’s like, no, we are going to buy a campus for ourselves and we’re going to have the company pay for it. And we have millions of dollars sitting around. We’re going to buy it. And I’m like, great, Paul, you go, he’s like, no, no, no, you go. I’m like what? He’s like, listen, I’m going to find an empty shell and you’re going to build it from scratch. And I’m like, so when am I going to build it? I’m already working 12 hours a day. This is a technology company. Everybody works their ass off. How are we going to build a campus while we’re running a fast growing company?

And he’s like, we will figure it out. Right? My, my CEO always said that when he wanted to duck an answer, basically what he wanted me to do was to run the company from seven to seven and then sit down with me from 7:00 PM to midnight, figure out all the action items and execute the next day. And so for 11 crazy months, he who knew a lot more than, I mean, he was like a mentor. There were so many things that he knew and he needed my counsel on things that I was good at. And we worked together. So I had this incredible mentor teaching me the ropes. And I didn’t have any fear because I had no investors.

It was our money. It was the company’s money. We had millions of dollars. We weren’t, we didn’t have any loans or anything like that. We’re just paying cash for everything. So as you can imagine, Jesse, I made a bunch of mistakes, but I didn’t really have to pay for it. And so that gave me a great deal of confidence. So eventually after that campus was built and it turned to be turned out to be the defining factor in our business, like completely crushed our competition because we had built a custom campus for our youth. And how, you know, we were technology education company. How many companies need com you know, end up building a campus.

That’s 100% suited their use. You can imagine how our competitors couldn’t compete. So I realized the power of real estate in terms of driving your business forward, which nobody talks about. But I also realized its power in lowering my taxes. I had the big fat tech salary, 350,000 bucks. I was paying and I’m in California. So I was paying 50%, you know, taxes each year. And for the first time in my life, my salary went up, my taxes went down and I was like, ah, this is really good. I mean, this is really amazing. I’ve learned something here. So we ended up building six of those campuses, either building or improving six of those campuses between 2003 and 2013.

And I got really hooked on the real estate. So I basically in 2008, I started a very interesting technology field, a single family journey myself and I started with a single family real estate. And we can talk about that if you’d like,

Jesse (9m 25s): Yeah, that’d be great to go into that. You know, it’s, it’s pretty incredible. I think your background is in data science, right? It’s it’s about numbers. It’s about data. At what point was there a light bulb moment during that maybe during that process, when you’re building these campuses where there’s that, that intersection between using relevant data and using it for your real estate decisions, whether it’s being through building through demographics, et cetera,

Neal (9m 53s): The biggest aha moments that I’ve had came in 2008, when I started doing single family, when I was doing the new construction, what I learned there was this, there is most new construction in the U S is done in a very poor way. You basically have an architect who comes in and tells you what to do. And then you have a builder that comes in and tells you what to do. But the truth is you don’t have to listen to either one of these people. They’re just, they’re just act as if everything that they’re saying is that the city law. So what I learned, the biggest thing that I learned was I would basically, instead of listening to them and them saying, we will spend a hundred thousand dollars on air conditioning.

I would go back to them and say, I want to spend $35,000 on air conditioning. How can you make it work? And often they couldn’t make it work for 35,000, but the question was so awful and observed that they would be, feel pushed and they will come back and say, well, I have this $63,000 option. Well, why didn’t you give me this option upfront? Well, I didn’t know if you wanted it, like what kind of customer would not want to know about a $63,000 option if it existed? And the truth is that option involved them jumping through more hoops.

And so they wouldn’t present it. So what I learned is you can actually easily save a third of the money in new construction. If you basically, you know, play your own tune, instead of listening to what the civil engineers, architects and builders are saying, right? So that was a very big aha moment for me. And I apply it now because today $200 million of my portfolio is new construction. So, but the really big aha moment, the one that my community that knows me, the 50,000 people that follow us, the really big aha moment came.

And it was tied back to 2008. So it’s, it’s the end of 2008. The world is coming to an end. The stock market has crashed. The people in my family who have been investing in real estate for years are saying, this is the worst time to invest in real estate, right? And I’m a math guy. I’m a geek, I’m a dork. Nobody knows me. I don’t know anybody. I’m sitting in an Excel spreadsheets. And every Excel spreadsheet is telling me only one thing that this is the best time to invest in real estate in the last 30 years. So I look at that Excel spreadsheet. I go around talking with people.

My family thinks I’ve gotten mad because I want to buy real estate. Or they’re like, are you crazy? You want to buy real estate. Now you you’re an idiot. We’re going to excommunicate you. Nobody’s going to talk with you because you’re going to lose all of your money and then come and beg us for help. I’m like my family must know something. So I go around, I talk to more people. Everyone is telling me, this is the worst time to invest in real estate. But the math is saying the exact reverse. So eventually after months and months of being internally frustrated, I decide I’m going to be a contrarian.

And that was the first realization that in real estate, you often have to be the contrarian because people tell each other things and then they start believing them because everybody is saying them. And usually everyone’s out of phase by a year or two, 2009 was an incredible time to invest in real estate and nobody was talking about it. So I was like, okay, you know, I’m going to do my own thing. What’s the worst that can happen. All this is stored money. I have a big fat tech job. I can always make it. So I started doing research and I’ve become obsessed with one idea. The idea is sure, this, that the data says, this is the greatest real estate market in the last 30 years, but isn’t it true that there are 3000 cities in America.

What if I figure out the city, that’s the best? The one that’s going to appreciate the most, right? Wouldn’t I then be, you know, insuring myself against my own stupidity or lack of experience. So I became obsessed with that idea. And I’m like, where can I go find data for 3000 cities? And the answer was in front of me, there was a website named Zillow. They had 3,300 cities, but the data was not in an Excel spreadsheet. It was on their website. So I hired a Ukrainian hacker, and I said, Mr. Ukrainian hacker, there’s this website, please very slowly take all the data from all these 3,300 pages and put them into Excel.

Please do it slowly because I don’t want to get in trouble with the FBI. He clearly didn’t hear me, right? You clearly didn’t hear me because the next morning it massive Excel spreadsheet arrived in my mailbox with all 3,300 cities. So the next month I was terrified that the FBI would knock on my door and, you know, S you know, accuse me of, you know, crashing the Zillow server. It didn’t happen. Luckily. So I look at that data and I start sorting the cities in that list by the fall from 2005 peak to 2009, you know, that kind of, you know, that trough.

And I started looking at the Delta between the two, because I came across a statement from some wise person that said in real estate, when things go up, they go up too far. When they come down, they come down too far, right? So I’m like, so maybe the city has come down too far. So I start doing my research. I look at the Delta, I sort the cities and the city that has dropped the most since 2005 peaks happens to be in California. I live in California. I’m really excited. And this city is called Madera. I’ve never really heard of it. It’s 144 miles away.

I jump into my car the next morning and I drive 144 miles. And I roam around the city. And I really liked the city cause all of the homes that are new construction, I’m like, look at all these beautiful homes. Look at the stonework, four bedrooms, five bedrooms, they’re all empty. Entire streets are empty. I’m like, I got to figure out the story. So I, I, I Google a real estate agent and I show up at their doorstep 20 minutes later. And I’m like, why are all these buildings empty? And he says, well, there used to be lots of farm workers in Madera. There’s all these farms around and all these farm workers, you know, Kaufman and broad called them in and said, Hey, you can buy these $300,000 homes without, without any money down.

And no, no income proof. So thousands of them, they bought thousands. Right. And then of course, late 2008, they realized that everybody was upside down. They stopped paying their payments. So these homes are all empty and I’m like, so no one has ever occupied these homes. Like, no they’re brand new. It’s like, isn’t this the greatest opportunity? What are they selling it for? It’s like, Oh, banks are trying to sell them 10 at a time. So I’m like, so what would I pay if I wanted to buy 10? Well, you probably pay under a million. So I said, okay. So what would it cost to make these today? Oh, probably 200,000.

So I said, so how can they be a bad deal? If it costs $200,000 to make it and they’re available for a hundred thousand, he said, Neil, the trick is nobody wants to rent them. And I said, so if I could find a way to rent these homes, I would instantly make a very large amount of money. So yeah, you would instantly make a million dollars. So I’m like, Oh, this is a great idea. So I go back home and I’m thinking, how do I convince people who live in Fresno, 22 miles away to come and rent these homes and rent them before I buy them?

Because if I buy them and it doesn’t work, then I’m out of money. So next week, weekend by next weekend, an idea came to me and you know, going back to my technology roots. So what I did was I drove to Madera and drove past Madeira to Fresno, which was 22 miles away, went to a broker’s office and said, I want to buy an older property. He’s like, no, no, no. I have all these brand new homes in Fresno that are empty. I’m like, no, I want to buy an older property. It looks at me like I’m an idiot. And he’s like, okay, fine. Let me show you a three-bedroom older property. So he shows it to me, really good price.

It’s it’s on Summerfield. And I buy it. As soon as I buy it, I hire the Ukrainian Acker. And I say, Ukrainian hacker, I need 10,000 leads. Tenant leads for this one property. It’s like, how many people are you going to rent the property out to you? You know, sounds like a Ponzi scheme. I’m like, no, no, I’m going to rent it to one person. But I want 10,000 leads. It’s like, what are you going to do with it? It’s like, you don’t worry about it. Hack the internet, figure out how to hack Zillow, how to hack Trulia, how to hack all these websites and get me like a hundred listings on each one of them for just this one property.

And he hacked them a 15 different ways. Now I actually teach that process, but react them. And so I ended up with a mountain of leads, like an Armageddon sized mountain of leads for people looking to rent this one property in Fresno. And so I hire a, my first virtual, I now have 18 full-time virtual assistants in the Philippines. I hire one of those guys in a lady. And I tell her, I want you to call all of these people and tell them, well, this property is no longer available. But if you’d like to see any of these 10 properties that are brand new, we’d like to send you pictures of these properties.

So people will be like, Oh yeah, I’d like to see pictures of 10 new properties. So that

Jesse (18m 11s): Is, this is this well they’re under contract or you haven’t even, you haven’t even gone to,

Neal (18m 16s): I haven’t bought the properties, but I’ve put them under contract. I haven’t paid anything. I’ve negotiated a price for these 10 properties. I’ve taken pictures of. And so we go, so we, we, we show these pictures to these people and they’re like, Oh, I love these properties while they’re in Madera. I was like, I don’t want to go to Bernadette. I want to rent in Fresno. What if we give you a $25 gift card to go to Madeira and take a look at these properties to see if you’re like, no, no, no, no, no, no. You’re you’re, this is some kind of Ponzi scheme or you’re, you know, you’re a scammer.

Most people would hang up, but every 10th person said, I don’t mind making 25 bucks. And eventually we raised it to 50 because we were seeing success. And so we managed to convince people from Fresno to drive 22 miles during the drive, they realized there’s no traffic. So they’re only 22 miles away. Some parts of Fresno were actually further because there was more traffic inside the city. So these were right off the freeway and people would go there and we would make sure that the women went there. Cause the women make all the decisions with renting, right? Men are just, you know, we’re optional accessories.

We’re just here. We’re just here. And they make all the decisions. And so women were walking and see these beautiful properties, five bedrooms, stonework, brand new nobody’s ever occupied them. Right? You had to rip the foil off. Right. It was so new. And they’re like, yeah, I want to rent here. And so I ended up signing rent contracts before I’d bought the properties. And the day that I bought the properties, 10 tenants occupied, I wish I had more than a hundred thousand dollars a year of cashflow.

And it changed my life Jesse because a hundred thousand, wasn’t a lot of money for somebody like me that has a big fat tech salary, but you know what it gave me for the first time, it gave me a sense of identity. I wasn’t just an employee of a successful company. I was somebody by myself. I was somebody that had my own, you know, identity and my mortgage and my expenses were all paid. And I started thinking about life a different way. I became a different person beyond that point. I want to emphasize this, that when you get to the point where 30 to 40% of your salary is met by passive income, your true self comes out.

You don’t have to squelch it down, right. You can actually be the person you were meant to be. And once I realized that this was giving me freedom in a way that I’d never assumed, then I never looked back. So, you know, the next part of the story was, I said, I am now going to take this methodology that has clearly worked for, and I’m going to create a Wikipedia type toolkit that I give out to people. So, and that’s, you know, that’s the next three or three years after that. But anyway, you wanted to know where I started.

Well, I started with 10 single families.

Jesse (20m 59s): That’s great. I mean, it’s an incredible story and I’m just, you know, you’re the numbers guy and I want to get into a little bit of the numbers and then want to make sure we have time to talk about, you know, from there, you know, where you’re at now and talk a little bit about real estate and what it can do for individuals looking for a legacy generational wealth. But before we do so, just to recap there, you, you buy these, you buy these properties outside of Fresno, you get them under contract, you get tenants prior to closing and you buy them at what was 50% of replacement costs.

Neal (21m 30s): Yeah. 90,000 each they’re worth about 300 each now.

Jesse (21m 34s): Okay, perfect. So when you went in there just out of curiosity, because it’s still, even though it was at that time, it was California. What type of yield were you getting on the properties? Like in terms of cap rate with, with the rental expectation that you, you knew was there? Well, you definitely knew it was there because you got them while you were under contract. And did people still think you were crazy at the time when, when they heard that yesterday,

Neal (21m 55s): The moment they figured out that these were occupied, nobody thought I was crazy. My family started going to Madeira and buying them because I mean, they were 10 caps on day one, once they were occupied. Right. So how do you get new construction properties at 10 cap? So I think that, that, yeah, I mean, once I was successful, it was obvious to everybody that I had an argument that made a lot of sense. So it, it, it, you know, my family, I was not ex community Cardo anymore for my family. You know, they, they were like, the guy actually knows something. So

Jesse (22m 25s): What’s really fascinating to me as I kind of hopefully mature over my career in real estate is the idea of market selection and demographics and how immigration plays into real estate and, and all those factors. I’d like to just hear your thoughts a little bit on your approach to market selection. And you know, what you look at because you, you are so heavily into the data. So it’d be great to get that angle. Sure.

Neal (22m 48s): So after these properties settled down in 2010, I became obsessed with something new. I became obsessed with figuring out the best cities in America to invest in at any given point of time. This last part is different because Madera was clearly the best city to invest in 2009, which not today, each year, it’s a different city, right? Mean every six months, it’s a different city. So I became obsessed with a new trend, which is how do I continuously know the best markets in America to invest it right?

And that led me to mining. I went back to the Ukrainian hacker and we started to mine, not just the Zillow website, but we’ve started mining the Bureau of labor statistics. We started a mine, a whole bunch of websites that had data census reporter. We started aggregating the data. And what we did was we took these massive data sets for 3,300 cities. And we started playing. What if scenarios? What if I look at a cities that have this much population, what does that mean for my real estate profits? What if I look at cities that have schools like this?

What if I look at cities that have, you know, this much job growth? What if I look at studios that have lowered lower crime? So we started playing, what if scenarios moving numbers in and out to build a very simple dashboard that gave investors an unfair advantage, right? And after a massive amount of playing back and forth, I found that there were five things that had the biggest impact. I’m sure that there are other things that have an impact, but the five things pretty much got you there 95% of the time.

And they were job growth, home price, growth, population, growth, crime reduction, and income growth, right? So jobs, income, home price, population growth, and crime reduction. These five appeared to have the strongest correlation to profit because I was obsessed about, you know, if I move this factor, does it move my profit up? What about this other factor?

And then, and people are like, but you didn’t throw schools in there. No, what I found was that these five factors accounted for schools, their pride, right. They accounted for them. So when I threw schools in, I was still ending up with the same let’s just study. So I took the schools back out because I wanted the simplest system. So now I was like, Oh, this is working really well. I can figure out some of these amazing cities that, where we can invest in. So then I was like, but how do I give this away to people? Right. I w I wanted to give it away. I mean, I’m a data scientist, you know, we’re like, we’re, we’re obsessed with just giving data away to people, right.

There’s data should not be charged for. So initially I was like, let me start a meetup group. So inside my technology business, we had big campuses, classrooms. I started a meetup. I became sort of, you know, well known in the Bay area as the crazy, you know, technologists guy who doesn’t do real estate. But, you know, as all these meetups and talks about all these cities and people would show up a hundred at a time. So I was enjoying that notoriety and building a database. I didn’t know what to do with it. Cause I was in tech full-time, but then I was like, but I’m a technologist.

We don’t do meetups because meetups are 50 people at a time. How do I get to 50,000 people listening to me? So I went around asking people, you know, what are these websites that I could host my education, my training, my content on eventually somebody says, don’t bother with anything else. Just go to <inaudible> dot com. Yeah. So I was like, okay, when do you, to me, I created a course. It was a video driven course of me talking with PowerPoint. And it was pretty slick. I actually had a cutout on the right side of the screen. And I, I, I made a a hundred minute course.

And I’m like, you know, if I can get to maybe 500 people a year, that’s a lot better than meetups because it’s doing it on its own. While if you go to U to meet.com/real focus today, you’ll notice a thousand five-star reviews. There are currently nine people taking it right now, right at this point. So I was able to achieve that scale through the use of technology. It’s the best reviewed course, the most popular real estate course on a, on a incredible website. People take it from all over the world. I think 60% of them are Americans.

And that changed things for me because now I was giving something away to tens of thousands of people. And as you can imagine, those people started to follow me. So I started to build a website. I built a website called multifamily u.com because by that time I was obsessed with, with multi-family. I realized the benefits of multi-family over single family, the scale, the cost segregation. There’s so many benefits that multi-family has that single family doesn’t have. So I became obsessed with that and built a website multi-family u.com started doing webinars there and all these people started to follow me.

And so, you know, this was around the time when our company was ready to sell. So we sold it to a private equity firm. I tried retiring that didn’t work. So I was like, okay, I’m going to go into real estate full-time. And because multi-family is something I was interested in, that’s where I ended up. And I already had this big database of people that sort of liked what I was doing. So they followed me in and started investing. So I started investing in unknown cities, like Dalton, Georgia, and Durham, North Carolina, and Idaho falls and St. George Utah. Right. And you’re like, these don’t show up in my list.

And I’m like, yes, that’s the point. They don’t show up in any lists. They’re too small, but they’re like twice or three times the growth. So, you know, investors started seeing returns and things sort of exploded. And then I went back to my roots and my roots were new construction because that started there. And so today, 80% of our portfolio is new construction. About 20% is a value add. And yeah, couldn’t be happier.

Jesse (28m 25s): Yeah. That’s great. And just for listeners, I know right before the call college just pulled up the Udemy and I just like this, you know, there’s a million, there’s a million, I guess people will leave their reviews here. But one Neil’s presentation was filled with invaluable information. That’s not readily available to the average investor at many, many, many hours of research have gone into this presentation. And it’s funny because it’s so true that, you know, in the commercial real estate, even, even the single family market for people that aren’t in the industry, you know, I have cousins and family that talk about how hard it is to get information.

And it’s, it’s an informationally challenged industry to say the least, even for those that are in the industry, I want to talk just, you know, you mentioned that you created this dashboard w and you have these, these proxies and different drivers, but to get a little bit in the weeds on the, the ones that you mentioned there. So you talked about population growth, crime reduction, home price, you know, those all make sense in terms of crime reduction. I’m curious how you go about finding that for a market on, on a larger scale. Because I know when I look into a market, depending on the, the city, depending on the municipality, they might have actual crime data reports.

They’ll actually have some of them.

Neal (29m 36s): No, no, it takes too long. All of that stuff takes too long. Remember my goal was you should be able to take a random city that you’ve never heard of. Jesse has never heard of the city, Sarasota, Florida. And he wants to know if this is a great city to invest in, you has to be able to do that in 10 minutes. Right? So all this crime report reading business would take forever. So what I did was I first figured out that the rules of thumb and the, and the metrics, then I figured out websites that are free, that I could apply those rules to test them back, test them a few hundred times, and then simply give it to people and say, go, go here, follow these three steps.

It takes 60 seconds. And if it’s above this level, then you’re good. Right? So that’s how simple I needed to make it. So crime, I wasted a humongous amount of time trying to correlate crime with profits didn’t work. What worked is it reduction in crime? So the Delta where crime reduces at a certain rate was, was key and a certain level of crime. So it had to be both together. So I found a website called city-data.com, which publishes this data for pretty much every city in the U S even zip codes.

Yeah. And so it has a crime table and you can scroll down, you can plug in your city, you know, so you go to the homepage, plug in, you know, Columbus, Ohio, or Sarasota, Florida. And then there’s this nice crime table that comes up, ignore the entire table that rapes the murders, murders, the robberies, ignore that. What are the last line it’s blue in color? That last line on the far, right? The number has to be lower than 500 for you to invest in a city lower than 500. And in the entire line from left to right. Crime should be declining.

Continuously. What I found was continuous decline in crime leads to a continuous increase in prices, right? And cap rates shrink. So it’s not just prices are going up because they’re going up in every market in the us, but cap rates are shrinking and crime is declining. And so you get a price increase and another price increase. And that’s what I mean about authorized cheating, right? So you know that because you know, what’s happening with that city, and you’ll notice that in the same state, you can have a state that’s not doing well, like Ohio, no population growth, right?

And then you have places like Dalton, Dalton, Dayton, Ohio, losing huge amounts of population. Then you have a place like Cincinnati, small population loss. Then you have Cleveland more population loss. Then you have Columbus 25 straight years of population growth in the same state. And that’s my point. Then you have these places all over the U S that are growing like weeds, and nobody knows anything about them. Right? And I wanted a system that didn’t take more than 10 minutes. So just the example that I gave you for crime, the same exact examples apply for population growth.

Because when people say invest in a, in a, in a city that has population growth, that is nonsense. That doesn’t mean anything. You have to have a certain amount of population growth before. There’s so many people in there that they’re fighting over the real estate, and that’s what drives up profits. So, you know, a place that has 1% annualized population growth, it’s not enough population growth for people to be fighting, right? But once you get to one and a half and 2%, and those numbers are all mentioned in the Udemy course, if you want to see them, that’s when people start fighting over real estate and now real estate starts going crazy.

You only want to go into cities where real estate is going crazy.

Jesse (33m 0s): I like it. So take us through that. You, you sell to a private equity company. You try, you try your best to retire that doesn’t work out for, for too long. And then you go into a real estate. Full-time can you talk a little bit about that process and what you’re doing, if it’s only multifamily, if you’re exploring, you know, mixed use or, or pure commercial, I’d love to hear that. So

Neal (33m 24s): I tried to do just multifamily value add, and I was a miserable failure. Okay. Because I spend two hours a day reading research reports. I am subscribed to every research newsletter known to man, and I’m paying, I’m paying for every service that you can imagine. Right? So I pay for all of it. And I, I look at this and clearly lots of these services point out to the fact that while in general, large multifamily is one of the most advantaged, taxed, you know, resilient and tax advantage classes in the U S it’s not always the best I had to end it.

That was a horrible thing I came to because I was just doing multi-family after multifamily. But eventually I had to say it publicly to people it’s not the best in any given year multi-family was either number two or number three in the U S number one would be something like self storage or mobile home parks or industrial. Those are the ones that were rising faster than multi-family that have higher Delta growth. And so I was like, why should I only do multi-family is someone holding a gun to my head? So I was like, I’m going to do self storage.

So I did that very profitable. I’m going to do industrial. And I did that. And just in case, you’re wondering why industrial is so hard. The answer is Amazon. We just had a pandemic and up, and e-commerce usage went up five X in, in, in a certain verticals. And so where do you think all this stuff gets stored? Right? If retail is going down, don’t you think that that would mean that industrial would go up, they got a store, this stuff somewhere, the logistics, right. So industrial use at this point in the U S has gone completely ballistic, right?

Didn’t never seen anything like it. Storage is very strong. Why? Well, companies are no longer signing office leases, but they have tens of millions of dollars worth of equipment in their cubicles computers. They have to keep them somewhere. They’re not going to throw them out. So they’re putting them in storage. And if people are working from home, so their ability to store stuff at home has decreased. So where glass Gus, what they’re doing, they’re putting them in storage. So bottom line is this. Those are examples that worked during the pandemic two years from now. It will be something different. I became agnostic to multifamily.

So what I decided to do was I said, multi-family is going to be my base. It’s going to be my foundation, but in any given year, I’m not going to do more than 50% of my projects in multifamily. I’m always going to go for the, the, the, the asset class that is the best in that year. And I’ve tried but failed to do other asset classes. I’ve tried to do senior housing. I’ve successfully done student housing. So I’ve tasted from many cups with, multi-family staying kind of my base throughout that process, but that ended this year.

So this starting this year, my base is no longer multi-family, it’s a kind of multi-family. And you can ask me about that if you like.

Jesse (36m 15s): Yeah. I’d love to hear it. And in terms of, so just to kind of cap off where industrial, I mean, our market has been crazy. Industrial in general has been crazy over the last year. Do you find that there are certain asset classes that are just, what I’ve found is that multi-family industrial, self-storage all the ones we just mentioned and talked about. They’re accessible to the private investor. And what we find in a lot of the major markets is once you start going into office or larger scale office, you start seeing institutionals the pensions. Do you find that there is just, and hotels, do you find that, that there is just that private investor?

There’s just that disconnect. And if so, what, what is that about the institutional? Is it the, the, you know, the longer term horizon or the lower yields in terms of breaking into those markets?

Neal (37m 2s): I think a lot of it is because you cannot really build large office buildings and hotels for the sub 30 million that tends to be popular amongst mid tier investors. So if Jesse and his team are buying it, you’re probably going to buy a 10 to $30 million properties. And there’s plenty of multi-family available. I can’t say the same for hotels. I can’t say the same offices. Yes. But the kind of offices that you want to buy, that cashflow, those are usually larger buildings, right? So an office project is typically larger, which is why they’ve always been popular on the institutional side.

But today a survey just came out earlier today from Marcus and Millichap. And when the survey asks people, what do you want to buy? Right. Right now they want to buy a multifamily, industrial storage, self storage. What do you want to sell retail, hotels and office. Yeah. Right. So, I mean, that’s where we stand today. And, and by the way, people still want to buy senior housing. Those senior housing has taken the biggest hit amongst all the verticals. It’s not retail. Retail is taken a hit, but you know, they reopened, but senior housing over the last 11 months has continued to drop in occupancy and has dropped to the lowest level in its history as of this month.

So you might think, well, they’re coming back. Well, not yet. I don’t know when they’re going to come back, but people still want to buy senior housing because the longterm, you know, the fact that America is getting older is, is something that people are still focused on. So that asset class is doing poorly, but people are still interested in it. My focus though has changed over time. And I think anybody who’s in it for a while should will see that as you know, I’m obsessed with numbers. So I’m, I’m, I’m looking at everything, you know, very different way. I’ve got weird rose-tinted glasses. So my investors would come to me and say, I love this project.

We made 24% annualized. Thank you. I did nothing. You send me these incredible monthly reports with videos every month. That’s awesome. I’ve never seen anybody else do that, but here’s the problem, Neil, after four years you sold it and all of the depreciation that you gave me those four years, God recaptured. And on top of that, I had to pay capital gains taxes on the gain at the end. And I had to pay ordinary income on all the cashflow you give. I don’t like doing that.

And I’m like, well, you know, taxes and death, right? The only two things that are sure, and people are like, no, no, no, no. You’re the mad scientist. Figure out a way where there’s no taxes. And I’m like, that’s, I mean, that’s a full Darren, right? So I start, but you know, people kept saying it for over the years. And eventually I’m like, there must be an asset class that has no taxes. If there’s a way to do it, I’m going to do it. So first I veered off to opportunity zones and things like that. I, I, you know, I did some projects there that were successful, but eventually I realized this is a very niche-y thing.

I need something that is more widespread, but it’s, tax-free so eventually after lots of research, I realized that if you do a certain thing, fourplexes are tax-free and, and you might say, well, everything you Neil is about to say applies to single family. And the answer is no only some things apply. Hmm. So when you, when you build a fourplex and you hold it for 30 years, you’re getting the depreciation for 27 and a half years. It’s not getting recaptured because you’re not selling it.

Right. And on top of that, when you’re bringing, building all this equity gain over 30 years, imagine how much equity you gain over 30 it’s imagined like tension indications, three years, each, right? So you’re building millions of dollars of equity, and you’re never paying any taxes on it. And when you die the basis adjust because the law says that and your kids never pay any taxes on it. And unless they sell it, those Millie, the massive millions of depreciation will, nobody pays any taxes on that either. So on the ordinary income, you’re not paying any taxes on the equity.

You’re not paying any taxes. You just have to hold it forever. And people are like, I don’t like holding it forever. I want to cash out. Well, who’s stopping you from cashing out by year five or six it’s equity has gone up to the point where you can refinance. It’s a single family loan, right? Anybody can refinance it, right. There’s 10 lenders within a miles radius that would refinance it, take all the money out, get to infinite returns, keep it forever. Rinse, repeat. Yeah. And it sounds too easy, but that’s what I found was the best. It, it completely got around the objections of people around taxation and depreciation recapture.

So the, there was one huge problem though. I was like, so people are buying their own fourplexes. How am I going to make any money? Right. So it clearly is the best option. I built an Excel spreadsheet that showed 10 syndications versus a four-plex hold five syndications versus a fourplex for three syndications versus a fourplex, hold it beats the shit out of everything. Right. Because they’re not paying any taxes. So it always beats the crap out of everything else. Yeah. But then I was like, how do I make money in this?

So I eventually figured out a model to do that. And that has become our new base. We’ll still do multifamily. We’ll still do multi-family development value-add but that’s become our new base. And the model that I figured out is I build those fourplexes where people, and I said, sell it to them. And it took me three years to figure out how to do that, because it’s much harder to do that. Then let’s say, just buying a fourplex, that’s in the marketplace. So that’s the model we have right now. It’s a true wealth building model. And I got to the point where I don’t charge any profit.

I just take fourplexes as my profit. Yeah. So as my investors build, long-term generational wealth. I’m building a percentage of that generational wealth by taking all of my profit in fourplexes. So I’m now going to end up with fourplexes in Idaho falls and new Bronzeville in Houston, in North Carolina, just wherever I’m building them. Cause there’s seven projects that we’re building at different price points, different delivery dates. I mean, that’s Nirvana for me because I’m not paying any taxes at all.

Jesse (43m 1s): Yeah. That’s incredible. So Neil, for obviously, you know, you figured out a way to scale it is the model is the kind of the aspect of private equity or syndication. Are you using a similar model when it comes to actually pulling the capital? Or is it just an individual investor for individual properties?

Neal (43m 17s): So syndication that in with individual investors. So we had to take our syndication model, which was tried and tested. We’d done it, you know, 17 or 18 times. And then we merged it together with an individual investor model. So we did both because you still need the equity at some point. So yeah, it’s a very interesting model that the way that we designed it, it absolutely doesn’t work. If you don’t have 30,000 investors following you, because it’s a very low, very, very large amount, you know, it’s a million and a half is the price of a four-plex. So people are putting down $450,000 to buy this thing.

So you have to have both the a hundred thousand dollars syndication investor and the rich dude. Right. And you have to match them together at the same time. So it was, it took us about three years to figure it out. But now that we figured it out, I’ve never had so much satisfaction with what I’m doing. I’m truly, truly building wealth for these people and giving them a predictable product. The other piece of it is when I started building them, I was building small communities. Then I realized there was a big, big problem. The property managers were not scaled.

They were single family property managers. Now I only build a hundred units at a time. So it’s, you know, institutional property managers that are used to managing multifamily. They’ve got an onsite property manager, all of those of large institutional multifamily, why we love it, but everybody owns their own fourplex and everybody controls their own destiny within that large institutional multi-track.

Jesse (44m 43s): Yeah, that’s incredible. So we’ve got a, just a few minutes left here. I, I can’t believe the hours flown by, but I did before we asked four questions that we asked everybody on the show, I wanted to talk a little bit about generally generational wealth and you know what you’ve done over your career. And you know, it sounds like you’re not retiring anytime soon. So maybe you can talk about that, that aspect of real estate.

Neal (45m 7s): To me, everyone needs to really research what generational wealth really means. The people, you know, you’ve heard this before that 90% of America’s wrists at richest hold a very large amount of real estate. Those guys were not flipping. They weren’t landlords. They were investors that bought real estate, held it for a long time and refinanced it out every five or six years to build wealth. That model is not part anywhere. I’m not sure why.

I think it’s because nobody benefits from it. So nobody teaches it right. Only the end investor benefits from it. So my feedback to you is research it because if you don’t, nobody will ever teach it to you, right? But once you understand what that model is, and once you take an Excel spreadsheet and sit in a corner for an hour and calculate the difference, I don’t think you’re going to do anything else in real estate. You’re going to know why people have become billionaires in real estate. I mean, one of them ended up as our president and it was generational wealth passed down from senior Trump to junior Trump who built on it.

Right? I want you to really understand that idea because in all of these decades of research, I’ve never come across anything more powerful, not just in real estate. I haven’t found any other areas. Real estate of course, is tax advantage. You know, compared to other areas and until our tax advantages go away, I cannot find anything else. That’s better.

Jesse (46m 35s): Unreal. I love it. All right. We, we asked, like I said, four questions to all the guests that come on the show, if you’re ready, I’ll kick us off. Shoot. What’s one thing that, you know, now that you wish you knew at the beginning of your real estate career,

Neal (46m 53s): The gut feel is one of the biggest problems in your life. People learn something, it works for them. And then their Gutfield tells them that because it worked once it will happen again. So I get gut-feel is a very evil and destructive force. People who say, I depend on my gut are basically saying I’m too lazy to do research. Hmm.

Jesse (47m 19s): Okay. Number two, here, mentors for the young people out there. Thoughts,

Neal (47m 28s): Sam Harris is the greatest philosopher in America. I love Sam. And while it’s just Sam harris.com, I would strongly suggest that you follow his podcast. He is the clearest thinker of all. You’ll notice that many of his thoughts don’t agree with yours. Republicans will not like some of his thoughts. Democrats definitely will not like some of his thoughts. So from a political perspective, you’ll have to be patient. But the clarity is absolutely astonishing.

This man would be Aristotle in a different time.

Jesse (48m 4s): Yeah. You know, to the chagrin of my Roman Catholic father, when I was younger, I got so into Christopher Hitchens and Sam Harris and Dawkins. And that Daniel Dennett, that whole explosion. That’s the first time I think we mentioned Sam Harris on the show. So that’s great. Third one. I mean, everybody has favorite books or is there a resource you’re reading right now? Well, there, I know there is, but is there one that you’d like to share with, with the listeners?

Neal (48m 28s): Yeah. I like to share a book. That’s not my favorite. So, you know, I have favorites like everybody else, but I’d like to share the book that I think has the greatest impact to the lives of people that read it and far and away, it’s the miracle morning, because while there’s many better written books for the 10 or 20% of people that read the miracle morning, that it really has an impact on it has an outsized impact because the miracle morning gives you the gift of time to go find your favorite book to go read your favorite book.

So if you haven’t read the miracle morning, try it. If you’re one out of 10 people that it’s changes your life. I mean, it’s just absolutely freaking astonishing.

Jesse (49m 10s): Yeah. And I’ll definitely, I’ll definitely agree with that. And I it’s how L rod, right? I think I read the, he had the follow up

Neal (49m 16s): I’ve I’ve spent quite a bit of time with him in person. He’s incredible.

Jesse (49m 19s): Yeah. That’s great. All right. My favorite one, Neil, nothing to do with real estate, your first car make and model

Neal (49m 25s): Toyota Corolla. You can tell I’m a, I’m a data scientist.

Jesse (49m 30s): That’s great. I probably would have guessed that Neil, for those out there, that one who, whether it’s take this course, reach out to you, get in contact in, into your sphere. Where can they work? Can they reach out to you? We’ll put it in the show. Show notes.

Neal (49m 43s): Well, I’ll bet you I’m the easiest amongst all of the people that have been on this show just simply Google my name. I’m the only Neal Bawa on the worldwide web, N E a L boa VWA and you’ll find conference presentations. There’s about a dozen of them. There’s a, about a hundred podcasts. There’s about a hundred YouTube videos. The websites multifamily followed by the letter u.com. We do about 30 webinars a year. We’ve done six of them since the beginning of this year. So it’s all, it’s a, you know, the first two months we’ve done six and roughly 40 to 50,000 people a year, sign up for those.

So check those webinars out. You know, I’m a dork I like to, to us with dorks. So you’ll, you’ll have some very interesting people sharing, some really out of the, out of the, you know, solar system ideas.

Jesse (50m 37s): The guest today has been Neal Bawa. Neal, thanks for being part of working

Neal (50m 40s): Capitol. Thanks so much for having me on the show.

Jesse (50m 44s): Hey everybody, this is Jesse Fragale. Before we started this episode, I just want to say thank you so much for everybody that keeps on listening, it really is amazing to me and I can’t. Thank you enough. What would really help us out is if you enjoy the show to go over to iTunes and leave us a five-star review. Also, if you have a favourite episode, what would be great is if you could share it on social media, whether that’s Facebook, Instagram, or LinkedIn, anyways, enjoy the show.

Favor. Listening to the working capital podcast. My goal is to help individuals break into real estate investing as well as educate experienced investors. If you enjoyed the show, please share with a friend, subscribe and give us a rating on iTunes. It really helps us. If you have any questions, want to learn more or likely to cover a specific topic on the show, please reach out to me via instagram@jforgalsorheadtowwwdotjesseforgalley.com. My name is Jesse Fragale, and I’ll see you back here for the next episode of the working capital real estate podcast.