211: A Scientific Approach to Real Estate Investing

SHOW NOTES FOR EPISODE 211: A SCIENTIFIC APPROACH TO REAL ESTATE INVESTING

Neal Bawa is an engineer whose technology education company was so successful that he sought out real estate investing as a means to reduce his tax burdens.  Applying scientific principles, Neal quickly grew his real estate holdings to over 1,000 units worth more than $111 million.  In this episode, Neal shares his unique real estate investing approach and some of his secret tricks that continue to yield him significant wins in a very tight and competitive real estate market.

What You Will Learn

• Two secret ways to learn multifamily investing quickly
• What fast growing businesses and multifamily real estate have in common
• How to determine the best and the worst real estate investing markets in the U.S.
• Why you need to evaluate multifamily real estate trends in 3 different categories (or 3 buckets)
• What to do after you max-out your loan and you still want to re-invest and build more passive income
• How syndication works from a passive investors’ perspective
• What is the importance of a “data-driven approach” to multifamily syndication?
• A trick that helps you predict hot multifamily markets 18 months in advance
• How to determine the best markets to invest in
• What are the two characteristics a market needs before it can be designated a hot market?
• What are the 3 metrics you need to evaluate a potential investment market?

About Our Guest

Neil Bawa

Neal Bawa brings extremely strong strategic and operational experience to his businesses. He owns and manages an extensive Multifamily and single family portfolio of over 1,000 units in 7 U.S. States, valued at over $111 Million. Neal speaks at Multifamily events, IRA events & meetups across the country. Nearly 2,000 students attend his multifamily seminar series each year and hundreds attend his Multifamily boot camps. He is the co-founder of the largest Multifamily Investing Meetup in the U.S. (BAMF), with 3000 members. He leads the company and is driving the syndication and acquisition of multifamily properties. Neal’s past experience includes 17 years of revenue (P&L) experience as the senior-most executive in a California education company with over 350 employees and $40MM in revenue.

More About Neal

• Neal considers himself as not a real estate royalty nor a broker, but he is a technologist, a Computer Science graduate.
• He has run a technology education company for 17 years.
• As the company grew, he had the opportunity to buy and build real estate for the company – commercial spaces he was building as classrooms and offices.
• As a partner, he saw how the company was becoming successful and was cash flowing and he was paying humongous taxes — 53% out of his income
• He realized eventually, that the best way to defer or reduce his taxes is to invest passively in real estate
• He learned real estate between the years 2003 – 2008 as he was building college campuses, as large as 30,000 sq. ft.  He was buying shell campuses and do all the construction
• Neal’s education business is a degree granting business on the healthcare education side and was a technology business for corporations. His company taught everything from programming to networking, to Cisco engineers.
• Neal is in the business of education, thus the transition into teaching was very seamless.  And he was teaching in his own classroom in his own business.

How did Neal Got Involved in Real Estate?

• When the 2008 recession hit, Neal, as a mathematician, could not see the gloom and doom that everyone was talking about during the crash.  However, he did not see the downside but, instead, he saw the real estate opportunities.
• So, he bought 10 units in Madeira, CA, which is the maximum you can buy for the number of traditional residential mortgage loan.  He rented the homes out and was dazzled by the return that he was getting.
• Then, he went to Chicago, and under his his wife’s name, purchased 10 more properties, this time expanding into small multifamily properties, and bought 10 triplexes and add 30 more tenants
• Because his properties are all cash flowing and his own company was also growing, he wanted to reinvest and build more passive income.  But he was maxed out on the number of mortgage loans he could have.
• This was the time that he discovered about multifamily passive syndication and decided to learn more about it.
• He started investing with different multifamily syndicators across the U.S. on different types of properties – hotels, student housing, but mostly multifamily.

Learning Real Estate Investing as a Passive Investor

• Learning is his second nature, so he asserted his right as a passive investor and began asking a lot of questions (i.e. how often do you meet with your property managers? Can I as an investor attend one of those meetings?)
• Neal began attending property management and other operational phone calls where he began to pick up very interesting pieces of information.
• From those calls, he discovered a secret! Participating in many different syndicator calls, he discovered that different syndicators were good at certain things – some on buying, some on selling, some on rehabilitation, some on managing property managers – but no one was good at all!
• From the calls, he was learning what it took to be good at each area.
• Suddenly, he felt empowered with information.
• Overwhelmed with his feeling of happiness, all of a sudden it turned into terror in that he was afraid he would forget what he had learned.
• Neal knew, as an educator, that the best way to learn is by teaching. Quickly, he opened up his own multifamily meetup group so as not to forget what he was learning.

Learning by Teaching! Starting a Multifamily Meetup Group

• Neil started teaching people while learning
• He told people who attended the meetups that he hadn’t really bought a multifamily but was learning directly from the different syndicators.
• The goal was to attract 250 people members, and is today at 3,000 and growing.
• He is an open book and shared that he hadn’t bought anything
• Once he bought his first multifamily, he would tell people that he is a small guy and only bought 12 units, but he had passively invested in 2,000 units and was learning from the syndicators.
• This process led to the growth of the meetup
• He started to teach more often, teaching on webinars — the audience became national, and then started to teach multifamily boot camps.
• In 2011, as he was still running and preparing his educational business to sell

More on His Meet-up and Setting Up Multifamily Systems

• Neal, fascinated by the scale in apartments, he created a specific group through Meetup.com that was very specific for multifamily, which is called BAMF (Bay Area Multifamily) Real Estate Investing Meetup.
• Because he is the COO of his technology business, his focus is to grow companies, revenue and profitability.  So he focuses on things that have scale and gets rid of things that don’t.
• What does a fast growing business and multifamily real estate have in common? Scalability!
• So when he looked at apartments, this is one type of real estate where scale really matters.
• Therefore, with his real estate activities, he set processes in place that will not only work for a hundred units but will also work for 10,000 units.
• When Neal started teaching, he was not teaching syndication but was teaching how syndication works for passive investors because, obviously, he was a passive investor for all these syndication and he knows the basics.
• In his meetups, he would share what he is doing for his triplexes, with about 35 tenants, within a 10-mile radius.  He shared the problems he encountered.
• When he bought his first larger multifamily property, around 237 units, he started telling people about the problems he encountered with that property.
• People would come to hear Neal because he had no sales pitch, no product to sell.  He just had a real-to-life story and most stories were bad stories
• Focused many of his topics on things that went wrong and on the things that they did to fixed them. Because he was stumbling his way through these things, people really enjoyed that.
• So when he started the meetup, he only had 20 people who showed up.  Within a few years, a hundred of people showed up, and he was actually teaching inside his business.  He was telling people that they were standing in the college that he built and this is the first building that he ever built.   And this is the business that he sold to enter the real estate.
• While Neal was teaching, people were watching how he migrated from being a passive to an active real estate investor.
• He believed the story resonated with a lot of people and that the group sort of exploded (he added a couple of hundred members each month).
• Last count is almost 4,000 members.

Phasing Out of Technology and into Real Estate Full-Time

• In 2011, a man named John Mark Lando, came to one of his meetups
• John has real estate experience, has syndication experience, and realized that Neil had a skill that he was missing – larger scale operational experience.
• Neal was running a business with 350 employees, had the operational and marketing skills that John Mark Lando didn’t.
• They started to partner on new projects and they did several syndications together.
• The process of phasing out of technology and phasing into real estate was fairly long but also very seamless.  It just sort of happened organically.
• Ended up becoming a multifamily syndicator and ended up with more than a 1,000 units and a portfolio of over $100 million.

Taking a Data-Driven Approach to Multifamily Syndication

• Neal gravitated toward large multifamily investing because this is the specific area where he found professional metrics-driven processes and higher quality of teams.
• Large multifamily has professional full-time managers, underwriters, operations directors and operational staff to oversee the management of assets.
• This insures that the property managers are always being held in check.  This way, you are supervising them at a very close level and not allowing them to waste their time on other properties — to stay focused on yours.
• Neal has invested in gas stations and even technology companies but those businesses didn’t have the same degree of accountability.
• However, Neal also discovered that some syndicators were not “data driven” when in came to market area investments.
• When Neal asked syndicators’ their reasons for investing in a specific market area he found that their reasons are mostly tied to the fact that the property is in an area that is local, where they have contacts (or teams in place) and that are familiar to them.
• He was hoping they would say “That, after studying 88 different markets nationwide, we found that, after using these metrics to determine a quality city, this area came out on top.”  That would be the technological or scientific approach to determine where to invest.
• He concluded that most syndicators were lazy and were only investing in markets because they were familiar or comfortable with the markets.
• So, Neal decided to figure out, how one can figure out what are the “best and worst markets in the U.S.”  Thus, he started teaching an event – The “Real Estate Trends” event.
• “Real Estate Trends” event is one of Neal’s most popular events with 2,000 people a year coming to the event.  This is where Neal will slice and dice every metro in the U.S. and share with investors which markets are the best to invest in and when.
• He became known as the “Data-Driven Syndicator”
• Some questions that you might want to ask as an investors:
  • What are the metrics that we look at when we try to determine the quality of the cities and neighborhood?
  • At what point to exit the city and which point to enter that city?
  • Where is that data?
  • How do you look at that data?
  • How do you slice and dice that data?
  • How to use it for multifamily?
• This event really changed the way Neal did his syndication.  Everything became data-driven.
• Example of a data-driven approach: City of Orlando
  • Has a 3.3% job growth rate over the last 12months
  • Home prices gone up by 9%
  • Population growth is very high which is 2.5%
  • Income levels are keeping more or less up with home prices increases, but not quite
  • Analysis – That’s a 3% income level, but home prices are growing up by 9%, that gap of 6% is where the apartment syndicator comes in.
  • Here is the opportunity for multifamily syndicators!  Sooner or later, every single month, as home prices rise, there will be some people whom can no longer buy. They will need to rent!  This is the market that Neal is addressing as a multifamily syndicator.
• He didn’t like the fact that most syndicators were not looking at markets in this way

Multifamily Boot Camps to Determine Hot Markets

• Neal teaches a multifamily meetup where he teaches investors how to manually assess a market.
• The boot camp is where Neil teaches the whole process to anyone who actively wants to buy and rehab multifamily properties.
• By picking a good and bad city as examples, he walks them through free publicly available data that helps you answer:
  • How to find the property?
  • What are the best cities?  Neighborhoods?
  • How to find property managers?
  • How to raise money?
  • The population growth, rent growth, job rate, income growth
  • It takes about 2 hours in a lab at the boot camp
• If you don’t want to do it manually, you can buy the data too. Neil buys data on from following 4 data providers:
  • “Housing Alerts” by Ken Wade, statistician and MBA graduate of Harvard, ranks cities and neighborhoods in the U.S. Subscription is $1,200 a year for a U.S. wide subscription
  • “LMM (Local Market Monitor)” by Ingo Winzer, match data as that of Housing Alert on a local level.  Subscription is $900.
  • “Neighborhood Scout” ranks neighborhoods within a city, gives crime statistics, investment rate ranking, tells risk level in investing in a specific neighborhood.
  • “Co-Star” owns LoopNet, apartment.com and is used by professionals who buy multifamily.  Subscription is $32,000 a year.  It puts over 500 million pieces of data into the software every year.
• When Neil teaches trends at the beginning of the year for each year, he tries to figure out the pattern between these data but not fix them.  He tries to look for the ones that are common, then he ranks metros in 3 buckets:
  • Fix & Flip bucket
  • The Price Growth bucket, which is the appreciation
  • The Rent Growth bucket
• It is extremely rare for a metro to be in all 3 buckets at the same time.  That is just not how real estate works.  For 2018, one metro in the U.S. was in all 3 buckets, and that was Sacramento, CA, which is benefiting from the fact that people are fleeing the San Francisco Bay area because of high prices.
• Neil always looks into metros that are in 2 of those 3 buckets – the price growth category and the rent growth category (just for the reason that he is not into the fix & flip market).  If you see metros in both sides, you are ahead of everyone else because you have done something better than 99% of real estate investors in the U.S.
• Some high quality metros that show up on these lists are Dallas and Orlando.  And smaller metros like Ogden, Utah also show up on those lists.
• This is an amazing opportunity because you are really gaming the system if you are able to pick up that information once in a year and use it for single family or multifamily investing.
• You can get an 18-month advance knowledge of which metros are going to be hot once you subscribe to the data.
• If you study single family property price increases, you are going to see the multifamily opportunity follow 18 months later.  This is because, in a metro, you can see huge price increases.
• Nobody really wants to live in an apartment.  People prefer to buy homes or rent homes.  When you see huge home price increases, for a while, you won’t see the opportunity for multifamily.  But eventually, if prices increase at 9% a year and income is increasing at 3% a year, a gap is opening up.  That creates opportunity.
• By studying single family home data, you can predict multifamily market demand 18 months in advance

How to Look at a Market and Some of His Top U.S. Markets

• Two things to look at in a market: Quality and Inventory
• You are not trying to find the best markets in the U.S. because in the year 2018, there is not enough inventory in the U.S. to pick just one market.  You need to pick multiple markets.  You are trying to find a series of market buckets.
• You want to find markets that have good quality and you want to find markets that have high inventory
  • Markets with good quality market and with high inventory
    • Las Vegas, NV
    • Columbus, Ohio
    • Phoenix, AZ
      • Why?  They have open inventory and good quality markets
      • Here are the reasons why:
        • Columbus
          • 17% increase in population since year 2000
          • Fantastic personal income increases
          • Over 40% increase in home prices since 2008
          • Still has inventory
          • It may not be the best but you’ll still be successful in that market
  • Best Markets in the U.S. Right Now
    • Boise, Idaho
    • Tacoma, Washington
    • Utah (St. George, Provo, Ogden, Salt Lake City) – GDP increases are spectacular, still not too expensive right now so people can afford for price increases for the next 5 or 6 years without hitting any kind of ceiling
• In assessing a market…
  • Start looking at the population growth.
  • He has yet to see a market in the U.S. where population growth is stable or declining. There are instances where the population growth is slow even if it is a great market – but it is quite uncommon.   Most of the time, population growth is the quickest way (5 minutes of research on the web) to figure out whether you should look at that market.
    • Example: Detroit has had very heavy population losses for over 50 years except for the last 12 months.  He would not invest there!  People have been saying Detroit is turning around since the 60s.  Went from 1.5 million population – less than 500,000 today.
  • If the population is stable, and the other three numbers – rent increases, home price increases, income increases – are stellar, the market is definitely worth looking at.  Because it is a market that will have some bargains because the population growth is not here.  If those three numbers are stellar, population is assured in the future.  People will follow the jobs.
  • The question is not “Where are the best markets?”  It’s “Why are you investing in it?”  Is it for:
    • Rent – rent appreciation always trail
    • Price Appreciation
    • Fix and Flip
    • New Construction
    • Cash Flow
    • Long Term
  • Why is Seattle on the top of “Best Market” lists?
    • Best market for fix and flip as well as San Francisco Bay area.
    • Not good for price appreciation
    • Good market for new construction with a 24 month window.
    • It still has the ability for rent appreciation (rent appreciation trails price appreciation), but it will not cash flow well.
    • But because it is a good area, it is good for a long term
    • But it cannot maintain its appreciation curve since it has appreciated so much.
    • But there’s a lot of great  reason why Seattle is doing well
      • Companies are hiring like
        • Boeing
        • Amazon
        • Groupon
        • Microsoft
      • All of these companies are not just hiring, they are also projecting future growth over the next 2 or 3 years
      • There is no inventory for office buildings
      • Seattle remains strong

Don’t Look for Off-Market Deals – Focus on Efficiency With Your Existing Properties

• That’s where the gains are today
• There is not a lot of off-market deals
• You can’t pay “under market” today – you’ll pay market, at best
• The secret is in managing your properties better
• Make what you have today more efficient
• You can do a lot by optimizing what you already have to give your investors increased returns
• He teaches a “secret sauce” seminar one-a-month on what he is doing
  • In a nut shell, if you can optimize your properties through marketing…
  • If you can raise rents $25 above market…
  • If you can raise your occupancy to 2% above market…
  • …you can still get 20% plus returns
  • He shows how his company does this today
• Finding deals today is a lower priority than taking a decent project, at a decent price and optimizing the heck out of it

Biggest Mistakes

• He did not apply any data analysis to his initial properties.
• He basically just believed brokers, partners, and did no research.
• Ended up with a property in a rough neighborhood of Chicago.
• Neal applied all of his marketing strategies to fill it up and was successful.
• Signed 200 leases in a year through a marketing team that he built in the Philippines and India.
• In the end, that didn’t work because the huge percentage of the people who signed the leases were low quality tenants – he had 50% turn-over
• The big lesson he learned:
  • Despite the fact that he can have armies of people in the Philippines and India leasing up his property 3 times as fast as anybody else, he is still subject to the demographics of an area – the one thing that he couldn’t get beyond in the realm of multifamily.
  • This is when he determined that he has to be an expert in demographics.
  • If he is buying in a good area, he will buy at a price higher than other people and then he will optimize it so he can make the money.
  • But, it f he is buying in an extremely rough area, no matter what he can do, no matter what marketing he applies, no matter what buttons he pushes, the attrition and the delinquency will always defeats you.
  • Today, he is very careful about where he buys his properties

Building Off-Shore Resources

• He had always used off-shore resources for various tasks in technology
• He applied the same idea to multifamily investing
• He had a phone number established that went directly to the Philippines
• In the Philippines, the efficiency is 2 to 3X the efficiency in the U.S.
• Normally, for a 200-unit property, they have one leasing agent, who works 40-hours per week.  The leasing agent is also:
  • showing properties 20 hours per week
  • calling landlords to verify the type of tenant they are
  • They are not picking up the phone 40 hours a week and the reality is that the phone is ringing 60 hours a week
  • The leasing agent is being paid $22 per hour and they make one follow-up by text and one follow-up by phone and then they drop the call
• So, by redirecting all calls to the 24-hour phone lines in the Philippines, the staff in the Philippines, will make 6 phone calls back to the lead and will process the leads within minutes.  That way the lead does not grow cold and they get good qualified tenant applicants.  They people taking calls get better and better over time
• They can also maximize the number of views on all their online ads by using staff in India that is constantly refreshing the ads
• They had to re-train the on-property leasing agent because they are booking 3 times as many showings
• He uses overseas workers not to save money (even though they are making only $6 per hour) but to make the process more efficient

Biggest Success

• Understanding something that everyone in commercial real estate should understand — that cap rates allow you to take a dollar of revenue and multiply it.  However, the vast majority of people don’t apply that to every property and project within that property.
  • For example: a person has a 250-unit property and they have 40 extra covered parking slots to sell.  He can sell them for $25 per month. That’s $1,000 per month and $12,000 per year.  At 6.5% cap rate, that’s $180,000 in profit for investors.  All from $25 parking spots.
• His ability to look at the problem and immediately calculate the amount of profit that he will make when a property sells.  And a small number becomes a large number very quickly and able to assign resources to it.
• He can quickly do mental math in his head and take tiny little projects, assign resources to it that the average property manager would never be able to assign because they feel they are not paid enough to do this little things.
• He recognizes that he can assign staff in India and the Philippines to do these things because the multiple that he gets are so huge that he can’t possibly lose.
• In today’s market, you aren’t going to find properties that are 10% below market.
• Optimization works 100% of the time.  His focus is on operational excellence as opposed to finding super properties.

Advice to Audience

• Visit Neal’s website – multifamilyu.com and watch the real estate trends.  Neal will tell all market in the U.S. he is investing in.  It is a free webinar.
• Watch the webinar. Learn what people like Neal are doing.  At least it will direct you to the right cities.
• If you want to learn at a neighborhood level, the webinar will help you.
• If you want to learn the specifics of it, attend Neal’s Multifamily boot camp.  It is all about learning.  But don’t do it, if you are not willing to get into the weeds.  It is for people  who want to put time and effort in multifamily investing.  It is not passive investing.  You should be able to roll up your sleeves and get down in the ditch with your property managers and fix problems and create value by improving properties.
• If you are new to multifamily, and you haven’t done a lot of single family, start with 5 – 30 units.  If you have done a lot of single family, start with 30 – 100 units.  If you have enough investors, have connections with equity, then start at 80 units because you have a full time person at the property.

Where He Sees His Business in the Future

• Neal sees his business slowing within the last 18 months.  Multifamily and stock markets no longer obey the rules of  money.  The rule of money, which has been in effect since 1930 when we changed the financial system – simple stated, that when interest rates goes up, cap rates should basically go up with it.  And that means home prices should go down.  In the last 18 months, the Federal Reserve has raised interest rates 6 times, that is 1 ½% increase, and we have seen zero impact to cap rates which continue to decline.
• A year and a half ago, Neal started got very interested in the impact of quantitative easing or QE on real estate.  What it had done to warp real estate markets.  He realized that federal reserves has pumped in $4,000 billion into the market between 2008 and 2011.  That money is searching for yield.  The bond market produces almost no return.  So that money is slashing over into the commercial real estate markets, into single family real estate market and into stock market.  And because this market produces a lot more than bonds do, real estate no longer  obeys the rule of money.  And until this money is withdrawn from this market, our historical cap rates are a very silly way to calculate what will happen to real estate.  It is actually possible for real estate prices to go up another 25% or 30%.  As long as the yield is 5% or 6%, because bond is only yielding 1% or 2 % and that $4 trillion will go anywhere and everywhere to look for yield.  But there’s nobody withdrawing that money from the market.  The European Union continues to add money. China and Japan continue to add money.  We’ve stopped but we’re only withdrawing  $10 billion a month – at which rate it will take us 25 years to withdraw that money.  Until he sees that money go somewhere, Neal is bullish on real estate — even though it is a very expensive market.

Rap-It-Up

• Favorite Real Estate book:  Multifamily Millions by Dave Lindahl
• Favorite business book:  The 4-Hour Work Week by Timothy Ferris
• Most valuable web site for success (other than your own): Upwork.com
• Favorite app: Mint.com
• Favorite quote: “Since 2008, stocks and real estate do not obey the rules of money.” – Neal Bawa
• If you had to start all over, knowing what you know, and you only had $1,000 cash, what would you do to launch your real estate investing business?  Help the people that have the highest urgency – the people who are seeking a 1031 exchange money who basically sold their property and are within that 45-day window.  Source property for these people.  For Neal, 1031 exchange is a phenomenal niche.

How to Reach Neal

• multifamilyu.com/webinars

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