How to Hedge Your Investment Against Recession with Neal Bawa
NEAL BAWA: Why is it that there are places in the US like East Detroit where you can get a 3 bedroom apartment for 500? And then, you have San Francisco where 1 bedroom apartment is $6000, Right? It is not the same! It’s not apples to apples, it’s comparing a grape to a watermelon.
ELLIE PEARLMAN: Hi! You are listening to Ready2scale, the second season of that happened. This season is focused on APS overall save. Asset, process, and strategy. Each guest on the show will reveal the assets to investing and why they chose to do so. From multi-family to industrial self-storage mobile home parks and more. Then they’ll uncover the processes, tools, and systems they’ve used to build multi-million dollar businesses. And finally, they’ll uncover new unique and exciting strategies to invest in the real estate from co-working to buy and hold, fix-in flips, co-living and much much more. Now let’s get the show started!
NEAL BAWA: Hey Ellie! Thanks for making read through such a long bio that I got to print that one down.
ELLIE PEARLMAN: Yeah I know! I edit and make it shorter but, I think we had a lot of, you know a lot of great things going on here so I decided to read through it all and give our listeners a little bit of you know, kinda good background and what you do and who you are. So, where do you live by the way? Where are you talking with me right now?
NEAL BAWA: I live in Silicon Valley, I’m in basically Northern California, and it looks like you’re in California too?
ELLIE PEARLMAN: Yes! I’m in Southern California, so, a little bit far away, but not that far I’m in Sta. Monica actually, and I think we both purchase multi-family properties, guessing you’re not buying anything in northern California or that would be a wrong guess.
NEAL BAWA: I tell people I am a blue-blooded democrat cut me and I’ll bleed blue, but I’ll only invest in red States. So, no California in the list, no.
ELLIE PEARLMAN: As well. Tell me about that, what do you like about student housing and multi – properties?
NEAL BAWA: I think, there so much have heard about, right? On your show, you know we talk about cash flow aspects and we talk about the fact that there are tax benefits, so you know there’s the usual stuff but I think, to me, it’s a little bit different. I believe that we are watching a slow-motion change in America. America is changing and becoming a landlord nation and renter nation. In the last 10 years we’ve created somewhere between 6 and 10 million depending upon where you get your data from, rent your households, that is a staggering number, never in history, never daring a recession in boom times have we created 10 million new rent-your-house holds in a single decade. if you take all of the single-family construction, all of the multi-family construction that comes nowhere close to that number, which means that we got supply-demand imbalance now I have said that you also probably heard that there are many markets around the US wherein certain sub-markets people are giving a lot of concessions, there’s a lot of oversupply, there’s new building coming in, people are offering 2 months and 3 months rents for free, What’s interesting is that both of these things can happen in the same time. And a perfect example is Atlanta. Rents in Atlanta are going up fast and most years they go up 4 percent, 5 percent, and 6 percent, but one part of Atlanta which is called Buckhead has a huge glut of new construction coming in, 30 thousand units or something like that, some of the seen number and so right now if you do to a classy apartment Buckhead you might be able to get 3 months of rent for free. So both of these things can happen together. But my properties are 15-16 miles away from Buckhead, so there’s no real impact on them and we’ll be able to raise our rents. So, the bottom line is America is going to a democratic shift. The Millennials, their psyche was damaged by what happened to their parents in 2008. They’re so burden by student loans, their insane burden when you look at the average loans that a Millennial has today compared to the average American 30 years ago, it’s not even comparable, there is no comparison, right? And then you got the older folks that should have now been to McMansions to smaller homes, they’re going from McMansions to apartments in the city. There are so many trends that are demographically providing a tail blend to multifamily and you know similar things applied for student housing go to a lesser extent than multifamily. And that’s why you had for two years we had industrial as the top-rated, you know commercial real state article and now we’re back to multifamily, so it’s multi-family then industrial back to multi-family. If you look at rents over the last 12 months, extraordinary growth over 3% annualized and we are in the 8th year of expansion that should not be happening, and the only way I can explain the fact that we should have been such powerful rent growth is because America is changing, it is becoming a landlord nation, it’s becoming a renter nation, there’s a change in the psyche of the average American.
ELLIE PEARLMAN: Yeah, and I think you describe you know, pretty well. I think right now we’re in a very very interesting you know time and we don’t know where expansion is gonna… into and to when it’s gonna continue. Right now the demand is very strong and I like what you said about not being in those core secondary markets like Bulkhead, which I use to live in, by the way, in years ago I don’t buy in downtown where you have all the class A buildings then a lot of competition and the high concessions I go 10, 15, 20 miles outside, because guess what it doesn’t drive only in investors to their same for renters, they cannot afford unit for 3 months they get 3 months for free. But then you’re stuck with the 17, $1800 maybe it’s not a lot for 1 bedroom, cause it’s still in California but then it’s a lot of money.
NEAL BAWA: Yup! A huge amount of money, Right? I think it’s a lot of money anywhere and you know, when we get to this strategy section I wanna talk about not just secondary markets, I wanna talk about tertiary markets because that’s the strategy that I’ve employed multiple times because I think it’s time to start looking at the tertiary’s, cause as you know even with the secondary’s it seems like every single day you just lose bids and you’re losing them now by a million dollars where 2 years ago you lose a bit by 200,000, now you’re losing the same bid by a million? So, I think that’s the strategy, also has to change, every strategy subject to change and improvement.
ELLIE PEARLMAN: Let’s go ahead and shift to the process, and I know you have a very robust system on how you chose your markets. And I know it’s a great system and I would love to hear from you. How do you do it, how you chose a market?
NEAL BAWA: Well I think that for many years, I made a huge mistake buying in Chicago earlier in the decade and suffer. I mean, it was horrible when I look at the loss of opportunity I lost lots of dollars there. After that, I decided that I have to go find a very discrete step by step templatized way to pick markets. Whether they were cities or neighborhoods. To my surprise, I find that there is neighborhood together so I decided I’m gonna be the guy so I put in together, and I’m going to give it away to anybody and everybody, almost like an open-source thing you don’t even have to mention that this came from Neal Bawa. Take it, use it, you can call it the Ellie Pearlman formula and apply it. It is meant to be given away because of its knowledge that everyone in real estate should have. So it took me many years of experimentation and gathering from thousand of cities and backtesting and applying some formulas and I came up with 5 formulas, which you know for this podcast I’m just gonna direct you to where that information lies because it might take too long to get through it. But what I found was they were 5 factors that appear to have the biggest impact on your profits in real estate. You wanna make money in real estate, and I’m talking about like filthy of seen amounts of money, understand that these 5 factors are driving everything. Number one is population growth. Number two is income growth. Number three is home price growth. Number four is job growth. And then, number five is a reduction in crime. So 4 growth factors and 1 reduction factor controls everything. These are called real estate demographics and they’re all-powerful. There are the differences, and the example I love to give people is, you’re flying in a jet near going from, you know Los Angeles, where Ellie lives to the San Francisco area where I live. Your plane is gonna be going 550 miles an hour, but let’s say that you had a 200 miles headwind now your plane instead of flying 550, it’s flying 350. But on the way back from San Francisco for some reason, you had a 200 miles tailwind. Now, your plane is still flying at 550 which in this example is your multi-family property. But because there’s a 200 miles tailwind, you’re not going at 550, you’re not going at 350, and you’re going at 750. Isn’t it an incredible difference between 350 miles an hour and 750 an hour? That’s what demographic tailwinds do. They change the game. You can screw up every rich way and still walk away doubling investor returns. That’s how powerful these are huge. They’re not the 800-pound gorilla in the room; they are the 80,000-pound gorilla. So, understand these 5 demographics. So, what I did was I started teaching this at meetups conferences across the USA. I teach them about 50 times a year. And eventually, I was like this is not enough, I have to provide ways so that people can take this whenever they want from wherever they want. So I went to udemy.com which is you know that the world’s biggest online University, and I built is a 2-hour step by step course with excel red sheets which you cheats on the udemy.com/realfocus. One word, so udemy.com/realfocus hit enter and you’ll notice of the hundreds and hundreds of real estate courses that are on udemy.com, this is the highest rank. And at any given point in time, 2000 people are taking this course. I looked at it yesterday, and there were 2170 people currently enrolled, taking the course right now. So, God only knows how many people taking, I think it’s, you know 10,000 people a year or something like that, but the most beautiful part of that Ellie is that people send me, out of nowhere, out of knowing them except for the fact that I know that they’re enrolled on that course, but they will send me my spreadsheets with those real focus formulas stilled in for some small tertiary market somewhere in the US. There are 5000 of these tertiary markets. And they tell me “Neal, by your formulas, this market is incredible”. Imagine how powerful that information is for me. Right? Imagine how I’m able to do.
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NEAL BAWA: Imagine the places that I’m able to find like Delton, Georgia, Right? Gainesville, Georgia, Saint George, Utah. Because these people keep sending me these spreadsheets, and that’s their way of thanking me. And it’s a huge deal for me because I would’ve never heard about these places. Kennewick, Washington is another one that comes to mine and so this Grand Rapids, Michigan. I know about these markets, not because I went in and implemented my system on them. Someone else did and sends it back to me.
ELLIE PEARLMAN: That’s very very powerful, and then you know when you think about all those markets you can just need a system to effectively and quickly. You know look at the information so where you can even find the information from a credible source to understand you know which markets are good markets.
NEAL BAWA: The short answer is the course itself. Remember the 5 things that are mention population growth, income growth, home price growth, job growth, and crime reduction. These are the 5 metrics. Now the information that’s what you’re asking about where do you get that? The answer is it’s all in the course but here’s a preview. Population growth information is available on Google. The information on home price growth, right? And on, income growth is available on a website called city-data.com. And so as the crime information for every city on city-data.com. The job information is available on a very specific website it is the departmentofnumbers.com that is deptofnumbers.com/employment/metros that gives you up to date job growth information for any city in the United States, once again that last link is so valuable. It’s deptofnumbers.com/employmet/metros. Every metro in the US big or small is in there and you’ll notice, the moment you go to that site you sort by the last column you’ll notice this, we don’t live in one America, and we live in two. There’s the America that we left behind we’re even at 3% unemployment these are cities losing thousands of thousands of jobs, and they’re pretty much in the same states, right? So we see Louisiana, we see West Virginia, we see Illinois, we see a little bit of Wisconsin area, so there’s an area that is weak compared to the sun bound which you rarely ever see at the bottom of that list because most Sunbelt markets are doing so well.
ELLIE PEARLMAN: Absolutely! And I think it’s so important to find the right market because the best deal with you know the very high cap-rate which is already a red flag, very high returns in the run market. All your numbers and your prediction might not be true you need a solid demand and you need quality tenants to do well.
NEAL BAWA: I think the bottom line is you said it exactly right; you need a combination of solid demand that stays throughout your 5-year process. And you need high-quality tenants. And so, I can tell you that, you know if you wanna do a comparison in terms of both demand and high-quality tenants I suggest these two cities on one side powerhouse cities like Saint George, Utah pick that run the real focus system on it. Watch what happens, then on the other side pick Shreveport Louisiana, not saying it’s the worst market in the US, I’m just saying I believe it’s the worst market in the US, okay? So just my personal belief. You’ll notice that difference that every one of those 5 metrics, it’s gonna make your eyes pop out about because for some reasons people think that there isn’t a huge difference, well if there is a huge difference, Why is it that there are places in the US like East Detroit where you can get a 3 bedroom apartment for 500? And then, you have San Francisco where 1 bedroom apartment is $6000, Right? It is not the same! It’s not apples to apples; it’s comparing a grape to a watermelon. That’s the difference between cities, a grape, and a watermelon.
ELLIE PEARLMAN: Yeah, and you said it right, and I love this analogy. This has been very very valuable, I appreciate you know, sharing this with me and my listeners.
ELLIE PEARLMAN: So I wanna move to the last, almost the last part of our discussion, and talk about strategy, so you mentioned earlier that you’re investing in current buildings, multifamily and student housing but also in development. I would love to know, and you also mention another topic that you wanna talk about, you know strategy section, but maybe first we can talk about how different it is to invest in developments, and I think, you know I hear a lot of investors that are pretty hesitant right now this late stage in a cycle to get into a development deal and I’m wondering how you see things because right now the cause of labor increase across the material increase so that translates into higher rents and so, what are your thoughts about developing at this stage of the cycle?
NEIL BAWA: Undoubtedly, development is riskier today than it was 6 or 7 years ago there is no doubt my mind, but there is a demand for investors in the right markets. As I mentioned I wouldn’t be doing if you gave me land for free, I would build something in Shreveport, Louisiana, but I can build enough in Saint George, Utah where occupancies 99.2% in the City of Washington which is next to Saint George. So when you look at these places where for whatever reason people have not built enough apartment complexes. That is a supply-demand gap. If the apartment complexes are not there Ellie, they’re not going to magically appear. They’re not there. That is a gap. It’s huge the only way to a filled-out gap at this point is to do new construction. Is it harder to raise money for new construction? Yes, it’s much harder, right? And you have to have a much, much larger database of investors? And mostly accredited investors will invest a new construction coz they don’t need the cash flow as much, so keep in mind it’s not just that you need more investors you almost always need 506c projects for new construction you very rarely when you see a developer doing a 506b because it doesn’t make any sense what so ever, right? Cause you…
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NEAL BAWA: Well, to me 506c is the project that you can tell anyone on the planet about you can put on the side of the bus, you can put on Google and what that means is you can only take accredited investors but you can scream it from a rooftop. Where in the syndication industries a lot of syndicators do 506b projects where they cannot do any kind of public advertisement, but then they can only market to their small database and even they got restrictions and got on how they can market to that internal database. So, bottom line developments a different world. I would tell you that in 99 out of a hundred syndicators when they look at the development they say this hard and they’re right, development is very very hard compared to, you know what we’re doing with lipstick on a pick tight projects over doing value at, and I would advise very few people to get into that as it happens, I had some experience with development before I became a real state guy. Back in my technology business I had to build campuses from scratch so I learned a lot there, and that knowledge was incredibly helpful in me getting into that development, but you know why development so late in the cycle, what if I have a million investor? Isn’t it still risky? The answer is simple, if you’re in the best markets in America, You cannot buy it there. Why? Because there are 5 cap markets, there are 4 cap markets. And there’s is no way to cash flow there, right? So you cannot use the standard Ellie Pearlman strategy in those markets then why not do a new construction? Also, we’re finding constantly ways to reduce the risk. My latest project is a 46 townhome project in North Carolina, with no depth, 0 depth. I’m building my cost just 12.5 in a million and I’m only using six and a half million dollars to build it because I’m doing a rolling process where I build cell rollover money by doing that I’m building something that has the least price of 18 million. My construction cost just 12 investors six and a half million, no loan. How could that be a higher risk than what you’re doing for example because you still have a senior loan? This means that if something goes wrong with your project the investors can lose money. With my project, the investors are the bank, they can’t lose money because there’s no more gage to pay. So the bottom line is you can do new construction if you find creative ways to do financing to reduce risk. So that’s a perfect example of strategy, I don’t believe anyone in the syndication world has ever done what we did with our TV project. By the way, that project is so unique that if you wanna take a look at it, its www.grocapitus.com/rtp1 . Just so that you can understand how someone can build a project where the finish value is 18 million, the construction value is 12 million and they’re doing it only with 6 million bucks, no loan.
ELLIE PEARLMAN: Yeah, that’s very creative. I haven’t heard of it.
NEIL BAWA: It’s strategy. That’s what’s making the source of things work. The other strategy is tertiary market places, right? So you look at a tertiary market place, no one’s really, there’s no competition there. There’s no new construction happening, nobody is giving any kind of incentives. And I think those markets are one that in many cases you can build without a significantly lower risk. Now, keep in mind there is one key risk. If a recession comes and we’ve been talking about a recession for 5 years now, but let say one comes, that tertiary market is going to be a bit harder. So anyone that is working, either building in a tertiary market, or buying in a tertiary market needs to understand that the moment they got the feeling that the recession has started, they need to stop re-having, they need to stop spending CAPEX, they need just focus on growing their occupancy and keeping their tenants base. They need to switch from; you know raising rents to giving concessions like this, quickly. But as long as you do that, in my mind today that’s a more profitable market you gotta be very careful about the recession there, but it’s a more profitable market.
ELLIE PEARLMAN: Yup! that’s very interesting, and I think you hit the nail on head because right now tertiary markets are, probably casual and better than other markets, for sure than core markets, but then what happened in a recession so I was trying to find those markets that are maybe than a core markets so you do have 5 and a half, maybe 53/4 cap rate when you purchase so you do have some significant casual coming in, a recession hits I wanna be close to maybe not in downtown or you know in core markets but close enough so I have significant amount of population in the area and you know diversity of employment that it’s not gonna be felt as hard as other you know smaller markets or markets that mainly you now 70-60% of my tenants they work for specific employer and if this employers gonna be effective in the recession then I’m gonna feel it pretty hard.
ELLIE PEARLMAN: You shared a lot of wisdom here and I really appreciate that you brought a lot of value to my listeners that’s great and so I wanna move to the last part the lightning round question part, are you ready?
NEAL BAWA: Alright! Bring it on.
ELLIE PEARLMAN: Alright, so what’s your favorite hobby?
NEAL BAWA: Actually, my favorite hobby is experimenting with growing tomatoes, so if you connect with me on Facebook, I connect with anybody that wants to connect with me. You’ll see videos there about various experimentations around growing bigger better tomatoes and I’ve done everything from multi-level growths to LED lighting, to using LED lighting at night 24 hours a day, using drip systems of different kinds so that the water is not, you know going like twice a week it’s going 3 times a day. All those kinds of things and I share that information on facebook videos, can check out my videos on facebook about always growth hacking tomatoes.
ELLIE PEARLMAN: Well, that’s insane, because my husband, he shares the same passion but he kills all his tomatoes for some reason, accidentally, of course. I’ll make sure that he’s gonna watch your videos, I think he’s gonna be very happy. So the next one is what’s the one thing that people don’t know about you? Maybe, growing tomatoes is one.
NEAL BAWA: That’s a hard one, I think, am in a cricket nut, I came from India and most people in America don’t know about being called cricket. I say as a statement that I’m about to say people shock. Cricket is the second most popular sport in the world, right after soccer, right? and there used to be a time when it was a boring old sport that you should take 5 days, and then they invented a new version which took in the entire day which still very boring. And then recently in 2008 or 2006, they invented a new slam-bang version that’s the same land as baseball and I’m a fanatic cricket fan and to me, I think that what draws me to cricket is just how strategic is the game is. I think that if I didn’t love cricket, I would love chess, because for me it is all about watching the movement of what’s going on, manipulating things around, and tweaking every single knob, right? My friends and multi-family called me the mad scientist of multifamily, and then that’s because I’m always looking at everything as if it’s a game of chess or a game of cricket.
ELLIE PEARLMAN: Well that’s interesting, I read about the fact that it was the second most popular game after soccer, I was also shocked. Alright, so Neal what do you wish you had known when you start it out?
NEAL BAWA: I wish I’d known more about picking neighborhoods, I wish I’d known more about picking cities I simply did not understand where to go I feel like I made a 10 times harder for myself because I did not have that information and I became not just passionate, I became completely insanely obsessed with making sure I spread that knowledge. So once again I know sometimes people go on a podcast and they’re like nobody gives away like huge information. Please trust me, all you have to do is go to udemy.com/realfocus and read the reviews of those people. It changes their lives. They’re saying it right there in the reviews so and there’s no pitch, I don’t even get your email address, I just hope you use it well.
ELLIE PEARLMAN: Alright, almost the last one. What is the number one advice you have for real estate investors who wanna scale either their portfolio or their business?
NEAL BAWA: I think I’ll give you two pieces because these are my two mantras, right? The first one is you cannot manage what you cannot measure. So the best CEO’s, the best chief operations officers, the best anything. One thing that they’re constantly good at is they’re measuring everything and they’re comparing it, and they’re building benchmarks. If you cannot measure you, you cannot manage. You’re just diluting yourself. The second one is tied to the first one and that is numbers beat got-feel by a million miles. It doesn’t matter how many experiences you have, but I can prove it that numbers will beat got feel all the time, and what’s amazing is even though, one of the reasons I have this second mantra is every once in a while catch myself using got feel. And then I go back and look at the numbers and even though I should be by now better at this, I’m not, my got feel doesn’t get any better but my number collection and my crunching ability get better every year. So once again even I used got feel and then go back using numbers I’m always humbled how bad we are as human beings at got feel cause we never remember our loses when it comes to getting feels just our victories, so don’t give ourselves away to much credit on got feel.
ELLIE PEARLMAN: Uhuh. And the last question Neal, Where can people find you?
NEAL BAWA: Well, firstly you can find me on facebook at my group which called MAGIC OF MULTIFAMILY. So just go to facebook type in the magic of multifamily, join my group. I’m in there constantly sending out videos, asset management acquisitions, demographics, buying real state there are tons of tons of information on there. we had between 100 and 200 people to that group every week so it’s a very powerful group and almost everybody in there is interested in commercial real state in some way multi-families, student housing, senior housing storage industrial, all of those, those people are in there. The second place is I find people like me. people that like deep dive you know, content and so invite them to my website, which is multi-family university or multifamilyU.com, there you’ll find dozens of webinars industry experts, no pitch stop very deep dive on so many different topics. If you’re a multifamily guy of the syndication deep dives, you’ll love the raising money deep dives. If you’re a single-family guy you’ll love how we pick cities by bringing in the forecast all over the US like that I’ve won the crystal ball awards multiple times so all of those webinars are on multifamilyU.com and they’re completely free. Thousands of people taking every month.
ELLIE PEARLMAN: Well that’s great! Thank you so much, Neal, I appreciate it and I think I learn new things and I’m sure you provided a lot of value to my listeners as well.
NEAL BAWA: Well thank you so much for having me on the show, Ellie.