Investing: Building a Real Estate Empire with Neal Bawa
Casata Micro Homes | San Marcos, TX
210 Units: Brand New Modular Tech-Enabled Micro Home Rental Community
• Quick cash flow due to modular construction
• Tax-advantaged cash flow and appreciation
• Our metro, Austin, is experiencing hyper-growth
Neal Bawa: Thank you. Kathy. Thanks for having me on the show and I’m very excited that we were finally able to meet.
Kathy: Yes. It’s wonderful. It’s wonderful to have you here. I always love seeing you out and about at events. You are probably the best networker I’ve ever met. So let’s talk about how you got started in real estate and what you were doing before it.
Neal: Kathy, I am a technologist, so data science is my passion and I got into real estate in reverse. Most people that I know actually start by buying a turnkey home through Kathy Fettke. I think you know her.
Kathy: I do.
Neal: In my case, I started in reverse where my first real estate project was a $6 million new construction mixed-use office building in 2003, so it’s about 16 years ago. It happened because the company that I was working for– I was a minor partner there. The owner and CEO of the company decided, “Hey, we’re not going to rent, we’re going to build our own custom campus. It’s going to be like the Apple Spaceship campus, but we’re going to custom design it for our own use. By the way, Neal, you’re going to build it.” I was like, “Are you kidding me? I haven’t even rehabbed a kitchen. You want me to build a $6 million campus from scratch? I mean that has disaster written all over it.”
He was like, “No, no, no, no, I’ll give you some help. I’m an expert myself,” which he was, and we’ll figure it out as we go. The next nine-and-a-half months, we only had nine-and-a-half months to build because we were not able to renew our lease with general motors, our landlord who didn’t like us one bit. In nine-and-a-half months we ran a company that was growing up 30% year over year. We had 200 employees and we built a campus in the evenings.
It was terrifying because I was terrified of making a big mistake and the city coming in and basically kicking us out of our own building but it worked out. I moaned and I complained all the way with the whole nine months saying, this is not, how can this be my job? I’m a technologist, I’m a COO this is not my job. Since the building has been done, I’ve been thanking him. For the last 15 years because that experience, that learning that comes with building something that big from scratch, is spectacular.
Kathy: From the ground up. Why wouldn’t he just go get somebody who knew how to do that?
Neal: Well, I think he wanted the experience of doing it himself. I think that he’s my best friend and my mentor. Paul liked doing things and learning things by himself, likes, he’s retired now. To him that experience is great and I think that if he wasn’t the CEO of a technology company, he would have been an architect. There was so much that he already knew that he passed on to me. It was an incredible learning experience, Kathy, and I use it all the time. Just this year we’ve done $150 million in new construction projects and we’ve built 31 units or are building 31 units in one of my value-add projects using the same skills. It was phenomenal learning.
After that, just to complete that story, Kathy, like everybody else, I should have gone directly into commercial because I knew how to do that stuff now. In 2006 we’d run out of space. We built another campus, which was more expensive. This time he didn’t have enough money to basically pay for the whole thing. He came to me and said, “I know this a bunch of doctors, I’m going to stick them in a room with you, sell them on the concept of buying pieces of this building.”
We now call this syndication. I didn’t know that word. I probably broke every SCC rule ever written about syndication in the middle of that deal because I didn’t even know what I was doing, luckily no fees were charged. That’s what this SCC cares about the most. So, I brought these nine doctors into a room and, and sold them on this concept. I thought if I can sell one of them, by the time I’ve left the room, I’ll be great. All nine of them had their checkbooks out and now I realize why, no fees were charged, no splits were charged.
Kathy: They got the whole profit.
Neal: They got this whole purchased building, the caught all of it simply because all I wanted was to buy a 30,000 square foot building and use 13,000 feet of it and then gradually be able to expand into their suites. 12 years later, the company’s being sold. I’m no longer a partner there, but all of those suites are now rented back to that business that we sold. Imagine how much of a win-win it was for those nine doctors. 12 years later, same client, a hundred percent occupancy, never paid a dime either on splits or on fees.
That was incredible. A lot of people telling me, “Neal, what I miss, you should have charged millions of dollars.” I said, “No, because my business benefited by tens of millions of dollars in it with that massive expansion that we did. We were able to sell our business at industry class-leading levels.
That was a great learning experience to actually be able to bring other people’s money in and not charge them anything. In a way I was learning syndication and this was 2006 2007 and then in 2008, I went all-in on single-family. I’m an analytics guy so I figured out that Madera, California had the highest decline from the 2005 peak, bought 10 homes there, did wonderfully well with those and then went off to Chicago and bought properties there that I think part of that story where I’ve made my mistakes buying properties in areas that were not very good.
As a result of my disasters in Chicago learning more about areas, I then went out and wrote a course, basically think of it as my penance for buying in the wrong places in Chicago. I wrote a course and I put it up for free on udemy.com. I don’t even get people’s email addresses. It was just my way of giving back what I learned and now 10,000 people a year take that course. As I went through that process, I learned a lot more about where to buy in the U.S. and where not to buy in the U.S. That system now is basically part of the process that we follow when we’re buying multifamily properties.
Grocapitus Opportunity Zones
Dramatically reduce your capital gains taxes from the sale of stocks, bonds, real estate, etc. by investing in Grocapitus Opportunity Zones (pay as little as $0)
Neal: I’ll give you five because there it’s a five-step system. It’s a five-metric system. What I did was I used large data sets, which I downloaded from various places and bought from other places and I put them into statistical software and I said, “Okay, see if you can statistically correlate certain hypotheses that I have with huge amounts of real estate profit. What’s the correlation?”
I came up with five that appeared to have a very, very high correlation between these variables and the amount of money that a real estate investor makes. The first one was population growth. What we found was while you can invest in do well in places that where population is stable, for example, Cincinnati or Cleveland, you’re likely to do a lot better if you invest in places where population is growing.
The metric that I came up with was that you need about 20% population growth between the year 2000 which was my benchmark year and 2017 which was the year that I created the system. Then I gave people a way to use it every year. For example, next year it’s not going to be 20% it’s going to be 21.25 so I gave people the formula to use in terms of how much population growth you have and that kind of population growth is not very hard to find. There’s lots and lots of cities in the U.S. that grew by more than 20% in population over that timeframe.
That was the first formula if you want to call it that. The second one was income growth. I found that in those same cities if incomes grew by 30% over that same exact timeframe.
The second metric that I found was directly correlated to your profits was the household income growth. The number that made the most amount of sense was over that 15, 16-year timeframe, incomes in that area needed to grow by about 30% so roughly 2% a year, a little less, but about 2%.
What that meant was that metro was keeping up with inflation because if a metro is not keeping up with inflation, it’s actually going backwards. Most people don’t realize that, that you need about 2% a year just to keep up with inflation, just to stay in the same place.
20% on population growth, 30% on income, and the third metric, 40% over that same timeframe on home price growth. You want to see a growth in home prices as well, which is a direct correlation. If people are coming in, they’re competing for resources. When they’re competing for resources, that tends to create inflation, which tends to create the income growth, and that income growth tends to create competition for housing, which tends to create the housing price growth. A 20, 30, 40 growth over that timeframe, those cities have a much greater core relation to profit.
Once again, you can find cheap deals in any city in the U.S. You can go to Detroit and find properties for 10,000 make huge amounts of money. I’m not saying that’s not possible, but let us say on average, you went to Detroit and bought 10 properties, you went to one of the cities that match this rule and you bought another 10 properties. There’s a very, very high likelihood that you would end up making more money in these cities than you would in Detroit. You’ll see one or two of your Detroit properties will do really, really well, maybe three, maybe four, but on average, you’re going to end up doing much better in cities that have population growth, income growth, and job growth. Those were the three first three metrics.
Then I got stuck, it took me about seven or eight months to come up with the fourth one. The fourth one was reduction in crime. What I found was people want to live in areas where crime is going down, and through people talking with each other, folks realize whether crime is going down or going up. I tied that back to a website called city-data.com which shows you the crime for every city and every zip code in the U.S. and so I used my statistical system and I found that in that website there is city data crime index and you want to invest in cities where the crime index is lower than 500.
So, the U.S. has a very wide array of crime indexes amongst major cities. Boise is the best with a crime index of 214 whereas I believe Memphis is the worst with a crime index of almost 900 amongst the bigger cities. I’m sure that there are smaller cities that I haven’t looked at. There’s such a huge diversity between 214 and almost 900 and there seems to be a very strong correlation between these and your profits.
I found that if you stayed under 500 on the crime index in the city that you were going into, you had a better chance of making money. Once again, there are good cities that are over 500 so sometimes you have to know when to bail and bend the rules. Orlando, for example, is at 550, but I would invest in Orlando because it was at 750 on the crime index, same website, same line about 10 years ago. What I can tell myself is it didn’t quite make the 500 cutoff, but look at where it was 10 years ago and look at where it is today. Clearly the city is going exactly in the right direction. I can bend the rule just a little bit. That was crime.
Kathy: Which website do you use for the crime and the other metric?
Neal: The crime index is city-data.com, so don’t forget the dash. A lot of people come back to me and say, well we couldn’t find this website. There’s a dash there. City-data.com plug in cities. For example, if you plug in Columbus, Ohio and scroll down, you’ll see a white-colored crime cable. The bottom line of that is the index. It’s blue in color and the number on the far right you’ll see for Columbus is 406. I often recommend Columbus as a rust belt city because most rust belt cities, crime levels are pretty high where Columbus has a much lower crime rate because of its universities.
That’s my fourth rule. Then the fifth and final rule to find cities is job growth. I tried to correlate five 5 years, 10 years, 15 years of job growth. There was no correlation with your profits, but when I tried to correlate the last 12 months of job growth, there was a very high correlation with your profits, so the fifth metric is trying to stay in cities where job growth over the last 12 months is higher than 2%. There’s plenty of cities in the U.S. and this one’s a little bit harder for me to tell you so I’m just going to say it and hopefully people find it.
The website is D-E-P-T, that’s short for department, deptofnumbers.com/employment/metros. You will see every Metro in the U.S. and you’ll see brand new numbers, only two months old, of employment. The column on the far right sorted. If the numbers above 2%, that city is going to do really well for rent growth. Rent growth is the magic in owning a home.
If you cannot get enough jobs, if you cannot get enough income growth, you cannot get rent growth. If you don’t get rent growth, you’re not going to hit your goals, so stay above 2%. I tell people job growth is so insanely tied back to our real estate profits. Most people don’t realize it. Here’s a rule of thumb, Kathy, I think you’ll get a kick out of this at 2% job growth, you’re probably going to achieve decent returns. At 3% job growth. The city is hyper. Everybody wants to buy everything inside.
At 4% job growth. Your ordering, ordering champagne bottles, at 5% job growth, you’re dancing naked in the street with the champagne bottles. At 5% everything that you screw up is forgiven and it’s rare for cities to consistently sit, stay above 5% job growth.
My favorites are St. George, Utah, Reno, Nevada, Cape Coral, Fort Myers. These are cities that just often, like six, seven, eight months out of the year, stay about 5% these are very forgiving cities. You can make huge numbers of mistakes in these cities. You can screw everything up. Buy the wrong property on the wrong block, you’re still going to make lots of money because at 5% the city is in a frenzy. Everybody wants to buy everything inside, even at 4% cities are in a frenzy.
Kathy: That was you in that photo and I saw in the newspaper with the champagne bottle and you were right…
Neal: They had a strategic leaf placed. That’s right. It’s amazing how these numbers are very powerful. I tell people 2% job growth is okay, but push yourself to find cities that are 3% because 3% job growth is just so much money in your pocket, both on the rent side and on the appreciation side.
Kathy: Great information. I’m curious because I know you did a lot of research on the Chicago property that ended up being a disaster. In retrospect, what would you say you overlooked or just didn’t know to look at at the time? Because there were some good things happening in that area.
Neal: There were lots of good thing. I think the biggest lesson I learned, apart from what I already discussed, right? If you apply these five metrics, that Chicago property would not have done well on these metrics. I knew that. I can say I went in blind, right? Here’s what I learned. The property had huge numbers of good things happening in its immediate vicinity. About 600 yards away, the Obama presidential library, which is the most expensive presidential library ever built, it has a $2 billion budget.
It was being built. At that point when we bought the property, that location was not fixed. There was another location three miles away in Washington park. This was a Jackson park location. I had insider knowledge that Michelle Obama was pushing the president to pick Jackson park because she lived incidentally in one of the six buildings that I was buying. She lived there as a child for about three or four months. That was the building’s claim to fame. She wanted it built in Jackson park close to where she lived as a kid.
I knew that information from a counselor in Chicago and I believed him. Also, Obama wanted the Jackson Park golf course to be turned into a PGA championship golf course and he had approached Tiger Woods about it. Tiger Woods is a friend of Obama’s and Tiger Woods agreed, and so this was public.
Everybody knew that Tiger Woods was basically looking to take over the golf course. Then about a mile and a half away, there’s this U.S. steel website at U.S. steel piece of land. They’ve got it on the river, so it’s a phenomenal location, but nobody’s done anything with it for 20 years, it’s been shut down. The city was working with a very famous Chicago based group that revitalize it on a $10 billion project and they’d already spent $80 million bringing a road into the projects.
All these great things were happening, right? I was very excited about these things because I would like it if even if one of these things gets built in my window, I will exit well. As it happens, the big lesson here is that you cannot buy a property that is in a distressed area just because good things are happening around it. That is not a bet that I’ve ever taken again.
I took it once and it didn’t work out. The library got delayed because of the friends of Jackson Park are suing it and so now it’s being built so it’s just started construction, but it’s now out of my window. I’ve suffered for four years because it didn’t get built. The project with U.S. steel faltered because the partners argued and it didn’t proceed and Tiger Woods basically said, please start construction on the library first before I build my PGA championship golf course.
He’s sitting on that golf course waiting for the library to fully start construction before he does his project. Two out of three will eventually get built, but four years too late for me. That was the lesson I learned. You cannot go into an area that is not up to par and just based on future growth.
Neal: I think crime is really a big one because if the people tend to ignore it a lot, they look at the buildings, the bones of the buildings look beautiful, especially in places like Indianapolis, Kansas, Chicago, you have these beautiful brick buildings that look so much better than what we’re used to in California and I think that enchants people, and they don’t look enough at the quality of the area.
Kathy: What would be one tip you’d give to somebody just starting out?
Neal: Two things and I think they’re connected to each other. Do everything with intent. I see people going to meetup groups and they will go there and they’ll forget to take their own business cards or they’ll go to those meetup groups and they’ll gather people’s business cards and then they won’t do anything with them. You’ve got to make sure that if you’re going to a meetup group in the evening, that’s a great way place to find investors, find projects, find partners. It’s great, but be very intentional about the process.
I see a lot of people just not thinking through, why am I going to this meetup group? When I talk with people, what will I do with their business card that they’re going to hand to me? What is my next step? Then they come back from that meetup group and they don’t do anything with it.
Kathy: Neal, have you seen my drawer of business cards? Is that what– Are you pointing your finger at me?
Neal: You’re pretty good at this. No. I know that you go about this process. Obviously, you’ve got people on your side that follow up, but I find that individuals don’t believe that there’s value because if they did, then why don’t they touch those cards? Let me give you a one-minute 60-second rundown. I still go to meetup groups, though most of the time I’m teaching at them. I’ll still go to a meetup group if I see that there’s 160 RSVPs because I know there’s 80 people that’ll show up there.
Number one, when I go to that meetup group, they have this section called haves and wants, where they want people to stand up and say, “What do I have? What do I want?” I never go to a meetup if I don’t have the ability to stand up there for a moment and talk. Everyone that’s going to a meetup, if you’re looking for partners, projects or money, you need to be intentional about it and say what you want, and say with a great deal of confidence, practice it in a mirror before you go there. Think of it as you being the presenter of that meetup for the next 60 seconds. You’re the presenter, not Neal Bawa, not Kathy Fettke. It’s your 60 seconds so polish it up and make it compelling.
As soon as the presentation is done go in the back, create a group of people around you. I usually take an iPad, which has a flipbook going, it has a slideshow of pictures of properties. I just hold it in one of my hands, and I turn up all the brightness. People from 50 feet away are like, “Who is this guy and what’s he showing?” They just show up and they cluster around me. I start talking with them about multi-family.
Every time I get eye contact with somebody, and I feel that they’re interested in what I’m doing, I hand them my business card. As they take it, I say, “Can I have your business card, please?” If they say, “I don’t have my business cards with me,” I always carry a small notebook with a pen and a piece of thread attached. I hand that to them. Now they write their email address to me. Most importantly, when I’m done gathering all these business cards and these email addresses, I do something with them the next day.
Usually, after five or six minutes of talking to people, I walk away. I go to the bathroom “a lot.” I’m not really going to the bathroom, I’m going hiding somewhere so I can write notes on the people that I just met and decide which of the three buckets do they go into? Is it project? Is it partner? Is it investor? I write lots of notes and then I take pictures with my phone for my team and then I throw away the business cards because I never come back from a meetup with a business card.
The point here is not what I do in a meetup. The point here is, be intentional about everything you do, and think about why you’re doing it and what your next steps are, and try to do your next steps before you leave that location. I don’t see enough people doing that. If you’re intentional, and you go to a meetup every week, in a year, you’ll have more investors, projects, and partners than you you’ll ever need.
Kathy: Wow. Great tip. All right. Well, it has been a pleasure having you here on The Real Wealth Show, Neal. I look forward to seeing you. I think the next event I’ll see you at maybe is The Best Ever in Colorado.
Neal: That’s right, yes. We’ll be there in February. Thank you for having me on the podcast. I know this is one of the tough ones to get into so I’m delighted to be on here.
Kathy: [laughs] That was really, really great. It’s been just really a pleasure getting to know you lately. I’ll see you in the new year on the slopes in Colorado.
Neal: Sounds good. We’ll see you there, Kathy. Thank you. Bye-bye.
Kathy: Okay, thank you. Bye-bye.