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Real Estate Investing with Analytics

by Neal Bawa | Anderson Business Advisors Podcast

This podcast interview of Neal Bawa is hosted by Toby Mathis of Anderson Business Advisors Podcast

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Rather than investing in real estate with emotion, try a more measured approach. Crunch numbers because data beats gut feel and you can’t manage what you can’t measure.

Today, Toby Mathis of Anderson Advisors talks to Neal Bawa, founder and CEO of Grocapitus, a commercial real estate investment company. Neal is the CEO of MultifamilyU, an apartment investing education company. He’s known as the Mad Scientist of Multifamily and uses the power of numbers to acquire properties and create profit for investors.

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Voice over: Welcome to the Anderson business advisors podcast. The nationally recognized preferred provider for asset protection and tax planning in the nation. This show is for investors and business owners looking to save on taxes and build longterm wealth with Toby Mathis, an attorney, author, business owner, and a featured instructor at Anderson’s tax and asset protection event held throughout the country. Enjoy the show

Toby Mathis: Hey guys, this is Toby Mathis with the Anderson business brief that I have a fabulous expert, Neal Bawa. Hey, Neal. I they’re like I’ve known Neal for a few years. He’s dealt with our firm for a lot of years. And you’re your own partner? I, yeah, he I’ve worked with him for, I think it’s going on close to 10 years now.

Fabulous real estate investor, just a wealth of information. We’re really lucky to have him on and right off the gate, like Neal, maybe just give a quick. Summary of your credentials as to why anybody would want to listen to such a guy who knows all about real estate.

Neal Bawa: Well, I mean, the moniker says it all I’m known in real time as the mad scientist and multifamily, I’m someone that likes to experiment with data analytics and numbers to create profit for real estate investors. So 250 million portfolio, there’s about 500 investors investing through us and they’re investing because they understand the magical power of numbers. Grow profits for real estate investors.

Toby Mathis: You just said something that a lot of people, a lot of people are investing with emotion and you, you tend to be a much more measured. I would say that you guys crunch your numbers. I’ve looked at a bunch of your projects. It’s pretty amazing what the deep dive you guys do.

Neal Bawa: I think part of it is because of our beliefs. So, you know, my number one belief is that data beats gut feel by about a million miles. Right. Okay. And my number two gut feel is you cannot manage what you cannot measure.

So we’re all about measuring things. We’re all about experimenting when we’re all about having failures. Right? So at my company and Toby, we celebrate failure. So when there’s a failure, there’s an actual high-five because what we find is that if you get a certain number of failures, you’ll get a very high rate of success by get better.

Nobody wants failure, but failure is a necessary step to success and companies that succeed before they fail, end up basically with people with their heads filled with hot, hot air, and then they have some spectacular implosions, like the, we work implosion that we just saw. So actually having little failures on the way to big successes is necessary. So we celebrate that.

Toby Mathis: Interesting. You say that because one of the, one of my past guests. Was the number three virtual office with no debt, no nothing, not publicly traded. And they’re behind Regis. Who’s gone bankrupt before and we work and he just said, the numbers don’t make these, this was long before the market discharged them. And he was just like, Yeah. Did that whole business model. It’s a lot of debt for a company that’s not making any money. And it seems like it’s burning through too much, too quick. 

Neal Bawa: Yeah. I’ve, I’ve been scratching my head for a while and you know, there were a lot of people that approached me to say, Hey, let’s just do a clone. We work. And I’m like, why? And they’re like, well, because they, they make a lot of money. And I said, no, no, no, no, they’re worth a lot of money they make.

Toby Mathis: But I know that shared office space and everybody that’s that does it is like, what the heck are these guys doing? But I guess it’d be, have lots of money.

You can make that mistake and you can say, I don’t want to make the numbers would have told him, don’t do it a long time before they actually spike. And let’s talk about somebody that’s going on right now. That’s very timely. And as we sit here, we’re in the beginning of March in 2020, and I want this to be something that we can look back on in a year or two years and say, they’re dead on. Right? And that’s this, the coronavirus that’s going around. What is the effect on real estate in your mind?

Neal Bawa: I think that the effect is very strong and it’s both good and it’s bad in the short term, I expect that most of it is going to be bad. So today, today is the 11th. And in the last day we’ve gone in the U S from having 26 cases to today having 1200 cases worldwide, we’re at 120, some thousand, 126,000 cases.

And today is the biggest day. We’ve already had 7,000 cases worldwide. So to me, this is an absolute. Exponential curve pandemic. I think that it will force us into some kind of quarantine worldwide within the next three or four weeks. And so I expect that I economies across the world will slow in March, April, may, and June.

I think we’ll get a hold of it by July as a result. It’s possible that the world goes into a recession. It’s possible that the us goes into a recession. If we don’t, we’re going to come. Very very clearly. A lot of it depends on how much stimulus we intend to inject into the market. The fed is doing their part.

Now, now it’s up to the politicians, the feds already card interest rates. The politicians need to actually provide true stimulus into the economy. If they do their job, we may not go into recession, but we’ll come very, very close to zero growth. So meaning environment. Where growth is slowing. A lot of people will get laid off the three big industries that we’ll see layoffs in our oil because of travel the travel industry itself, and then tied to tourism.

So if you’re, if you’re invested into hotel stocks or Airbnb stocks, those are going to get hit really, really hard in, in Q2 and possibly even in Q3. So in the short run, you’ve got all this economic weakness that leads to less people wanting to buy, you know, real estate. But I look at it as. Yes, you’re going to go through a lot of short-term pain, but in my mind, and I may get beaten up for saying this a year from now, it’s all going to end up being worth it because we’ve already seen as a five or six days ago, the federal reserve takes out a standard playbook and says, Oh, economic weakness, let’s cut interest rates.

And they cut interest rates in the middle. Now, even without a, a meeting, they just called a meeting together and said, Hey, we’re going to cut interest rates by half a point. And as a result today, March 11th. Interest rates for 30 or loans are at 3.29%, which is staggering given. They were a percent and a half higher, which is huge, only about 12, 13 months ago.

So we’ve seen an enormous decline, which means that as a, as an a real estate investor, you can buy a heck of a lot more real estate and get the same exact profits. Right. So huge change there. And what will also happen is despite the fact that interest rates are dropping and probably will keep on dropping for the next three to six months, you’ll still have a lot of people that will be in the market that are paranoid, right?

So I’m a numbers driven investor. And I can tell you Toby what I’m telling my investors. I’m telling people. You better keep some powder dry because in Q3 of this year, we’re going to be buying real estate. We’re going to have a lot of people that will freak out in Q2 and say, we should sell it simply because they’re feeling bad about the economy and the debt and things are going to start dumping.

Cause they can’t carry it. They’re going to be concerned. There’s going to be some short term pain. It just feels like we’re going back in time a little bit. It does. And, and I w what’s important though, is that understand that the coronavirus event, right? Is by itself weakness, but it’s not the kind of weakness that we saw in 2008 where you had all this crap in the market.

Be those bonds that were basically sold as a bonds that turned out to be, see, none of that has really happened. The world economy is in a decent place. The U S economy is in a very, very strong place. So I expect that unlike 2008, We, if we see a downturn, it is going to be a sharp V. Right? So I can draw on the screen.

You know, sometimes you get one of these recessions that you go down and then you kind of go along the bottom for awhile, and then you start moving up then, or you can have a V recovery where you go down and sharp up, or you can have what is known as a sharp, weak. We, and that’s what we’re seeing right now with the stock market, very sharp down, and then a very quick realization that at the bottom that, Hey, wait a minute, the world economy is only affected by this in a very short-term way.

And then a quick back up. So we might see the stock market recovering Q3 to reasonable levels, but because there’s people who only react by panic, we might see some inventory in the marketplace. So to me, I see Q2 Q3 of this year as a great time to be buying dips. At unheard of interest rates, which I think people should lock in for as long as they possibly can.

Toby Mathis: Yep. I, a hundred percent agree with you. It reminds me of like 2001, 2010, when money was cheap and properties were aplenty and you didn’t have a ton of buyers.

Neal Bawa: Yeah, it was, it was interesting. Back then I asked a Ukrainian hacker to mine the Zillow website basically said go to the Zillow website and basically mine, every single page for every single city in the U S can up with a list of 3,300 cities where he mined the 2005 peak versus the 2009, you know, prof.

And I basically just sorted it. And I came up with a list of these are the cities that have dropped the most because real estate, you know, this Toby, when it goes up, it goes up more than a church. When it goes down, it goes down more than it show it, right. It always overreacts on both the upside and the downside.

And so I was looking at this city called Madera, California. That’s 144 miles from me in the San Francisco Bay area. It’s near Fresno and this city had. Brand new Kaufman and broad four bedroom homes that cost $160,000 to build available in bulk, you know, groups of 10 for $90,000 each. And so my family is like, are you crazy?

The world is ending. Don’t buy real estate. I’m saying no, no, no, no, no. You don’t understand math. It’s something that costs $160,000 to, to build is available for 90,008 cash flows on day one. It will revert to the norm at some point, because the cost of construction has never come down in history. All the, it goes out.

Right. And so now though, they’re they cost about 230 $240,000 to build. And so my family is thinking I’m already gone insane, right? So I go there and buy 10 of these. And they’re like, why are you, why aren’t you buying one? And I said, because buying one is the problem and opportunity of this scope. I need to maximize my number of loans and the only way to do that, you know, you’re allowed 10 loans.

I’m just going to buy 10 and I still own them Toby. And today my wife loves them. She thinks that they’re her children. She doesn’t want me to sell them. And today that number side of my head is saying, why am I not selling these? Right? Because I bought them at $90,000. Each there’s $275,000 each I should be selling them. But no, you know, I want to stay married. So at this point I’m keeping my mouth shut and just taking in those 15, $16,000 a month in, in, in, you know, rents that I’m getting, you know? Right. 

Toby Mathis: Yeah. I’m a big believer in your holding period should be forever. Anyway, when you buy something. You’re not usually buying it to sell it, unless you’re doing a syndication, you have an exit. Right. But for the most part, I’m buying something with the idea that I want the cash flow. So I just want the income stream for a long, long, long time.

Neal Bawa: That’s exactly what and I’ve been doing. You know, I bought those in 2009 and here we are in 2020, right. 11 years later and amazing cash flow. And I think that here’s the one thing I often say to real estate investors.

What a lot of you don’t do is, you know, you look at the coronavirus, right? So we went from 20 cases to 40 and 60 and then 200 and then eight, 600, and then a thousand. This is known as exponential curves, right? Some people call it a hockey curve. What I want you to do is that when you invest in real estate, don’t just project it out three or five years.

I want you to project it out 10 years. At the end of that 10 years, you’re going to be stunned with how much wealth you created real wealth that you created. Because at that point it’s taking very little of your time. You paid off most of the, of the principal requirement or a good portion of it. And prices are so far beyond what they were when you purchased these properties that the worst recession in the world would still not bring you down to zero cash flow.

You’d still have cash flow. And that is an insane message. The other message that I like to say, say to real estate investors is this every single real estate investor today thinks that real estate prices are too high. I have a message for you. They’re only too high. If you don’t take macro economics into account, if you do take macro economics into account, they’re not too high.

In fact, they’re perfectly where they should be. So let me explain this in 1982 interest rates were at 18%. So you remember those days, right? You know, you had interest rates at 18%. You had banks basically paying you 12 or 13% interest rates back then today, a bank pays you zero. Right? So as of March bank pays you absolutely zero.

But that wasn’t the case. Before 2007, seven banks were paying you a certain amount of interest. So what has happened over time is as be risk less. Returns have shrunk. Right? So 10 year treasuries went from 5% in 2006 to four to three to two. Today there are half, four and a half percent compression that happened on the risk less side, 10 year treasury bonds, or has also happened in the real estate side.

But that gap, we call it the risk premium between what you get on bonds and what you get on real estate has actually increased over this time. It’s not decreased. So you are actually getting a bigger premium today for taking a risk in real estate than you were in 2000. I was in six or 2007, and most people don’t understand that the world is based on risk premium, not an actual returns because your actual returns are down across the board.

It doesn’t matter what you’re investing in because the world economy is slowing down because interest rates are lower than they used to be 10 or 15 years ago. The gap has actually increased. And that is the magic of real estate. That’s why I think it’s priced correctly.

Toby Mathis: Yeah, absolutely. And I, I’m kind of looking at the real estate side right now. Just like I’m a avid investor, you know that, and I know you have done, done a ton. It’s not like if you’re placing your properties correctly, if you’re buying in the cities where the growth is there, they need homes. Period. You always have a base level of what somebody is always going to need. I’ve never had property.

And I live in Las Vegas, you know, so I went, when we got hit, we went down 75% of our values in 2000, from 2008 to 12. It just, it rocked this city. My rents barely moved the entire time. Like I still looking at like, none of those properties, the values, I didn’t pay attention to. I just said, Hey, the cash flow is still there. People still need a place to live. It never went away.

Neal Bawa: That’s the message that I don’t think people give enough shore values go down, but in, in 2008, the worst real estate recession of all times rents went down 4% for the United States. Right. And why does it matter how much value is declined by because they went down and then they went back up.

I have about 40% spectacular level. So any, and all decline that you might’ve seen in value back then, firstly, if you held your way through it, it didn’t cost you anything. Right. And if your rent’s only declined one single year, 2009 by 4%, how could you not take that hit and then enjoy a ride, an incredible ride that you’ve had really since 2011, all the way to.

Do 2020, you enjoyed that incredible light because you had the guts to take on that one year worth of hit and that 4% headaches. So you can, it’s not a huge hit, but a lot of people back then were like, Oh, my property is losing value. And I encourage you that if you are a real estate investor, you should just focus on the rents.

And if your prints are not getting hit, then the, the value of the property is intangible. Anyway, to make that value, you’d have to sell your property. And the moment you do that, you’ve lost your cashflow.

Toby Mathis: And, the stock market is kind of interesting. You watch the volatility in the stock market and when somebody stock starts dropping 10%.

They freak out and sell. Could you imagine if you had a stock ticker on top of each one of your houses or on a property that said here’s what it’s worth today, you would trip out on any given day you’d you’d be selling it when you don’t need to be selling it either the good way or the badly it’s going to get you to do bad things.

Neal Bawa: And this is why I find it hard to be a stock investor. Right? So, you know, my millions of dollars in net worth of that, not $1 is currently invested in the stock market because today stocks have, you know, they’ve plunged for six straight days and they’re down about 24, 25%, which is, you know, now we’re now we’re now in a bear market.

The first one, since 2008, whereas. My parents are calling me at this point and I’m hiking the rents by four or 5% and they’re renewing right. They’re signing renewal contracts at this point in time. So when I look at this and I go, even if my homes go down, It’s very likely that rents will go up. They went down in 2008, but in the previous three recessions, 2001, 1992, eight, 1987, even, and real estate values went down.

Rents went up. So it’s normal for them to go up in a recession. Now, the biggest reason for that is the millions of people that lose their homes have to go live somewhere. And they’re usually living in single families for rentals or in apartments. So it’s normal for rents to actually take up a little bit.

They don’t go crazy, but they actually take up a little bit. So I’m looking at that and saying, my life is so much less stressful than the average stock investor who is glued to his computer, checking his portfolio every 30 days where I don’t give a damn I’ve got a one-year lease signed. I don’t care about it.

Toby Mathis: We treat the stock market the same way we do the, the real estate market. You buy things that are going to pay your rent. And, I had the best advice from a financial planner who worked with a bunch of the Seattle Mariners and the Seahawks when I was up in Seattle. And he said, I just tell them, don’t look at their statements because all you look at is your account.

How much is going into your account on a monthly or quarterly basis? They said we can devalue, don’t open up your statement because I don’t want you to getting crazy, either good or bad. Like, I don’t want you to see it run up and say, I better. So. I don’t want to see it go down and think I want to sell live off the cashflow. That’s why we build a portfolio.

Neal Bawa: The only caveat I would put to that Toby is every once in a while, I go back and see if I can refinance them and pull cash out and buy more, right.

Toby Mathis: Or trade them or trade them for something else you say, Hey, this city pay the, I know you’re a numbers guy. So the only reason I can bring this stuff up is, cause I know you look at the same thing you’re looking at.

Whether people are moving into a city, I’m looking at whether there’s growth. I’m looking at there. You know, that type of thing. If I see a city go the other direction, I might trade those properties for a city where it’s going up and all I’m going to do is just exchange those properties.

Neal Bawa: Exactly. I mean, I actually teach a course. It’s on you to meet.com U D E M Y.com. Just search for my name, Neal Bawa. There’s about 10,000 people right now. There, these are all real estate investors and they’re taking this course, which teaches you how to figure those things out that you just mentioned, right? Where are the poor people moving to where the income’s increasing, where the home price is increasing.

In about 10 minutes, the course basically allows you to figure that out for any city in the United States and then figure it out for any neighborhood in the United States.

Toby Mathis: So I like to look at w what are the big things you look at?

Neal Bawa: Top five, for me at a city level are population growth, income growth, home price, growth crime.

And jobs. Right. And I only look at jobs for the last 12 months, whereas for the rest of them, I’m looking at an extended timeframe three years, five years, 10 years. But jobs are like, I like this instant gratification. So I look at jobs for the last 12 months. And I, I tell the people that are taking that course exactly where to go.

Where to pick up the numbers and what numbers to use to figure out whether this is a good city or a good neighborhood to look at. And when I’m looking at a neighborhood level, I look at ethnic mix. I look at poverty levels. I also look at the total rents and there’s a Goldilocks zone there for rents.

Rents are too high, no cashflow rents that are too low, too much delinquency. So you’ve got to live in this Goldilocks zone. And I define that zone pretty much for every city in the U S.

Toby Mathis: What’s the, so it’s you, to me, it is a free course, or they got to pay something to get into.

Neal Bawa: It’s always meant to be free. You can take it and actually teach it to other people. It’s you, to me.com/real focus, I’ll be actually teaching it for Toby’s group and group very soon inside. That’s that’s a, that’s a great opportunity to do that live in, in Vegas.

Toby Mathis: Infinity group, which, which we love and cherish because it’s people learning how to. I just love the idea of cash flow. So I’m just a big, a big old softy when it comes to that sort of stuff. So the stock market, again, you can, you just have to divorce yourself from MSNBC, see all these other places where they’re telling you to buy and sell. You’re never going to time to market, you know, you’re never going to beat these robots or these other things, and then stock market.

So just treated like any real estate buy for the long haul and rent it while you have it. We go over all that fun stuff. let’s go back and I don’t want to waste all your time, but the Corona virus and what you would be doing, because again, people are going to be watching this. It’s going to be months after it came out and it’s going to play out.

It’s going to end up doing what it’s doing. Do you have an idea of the end game on the coronavirus? Where do you think it’s going to end up in the near future? And then B what people should be doing, like where they should be poised. And now you said quarter three. Have you have some powder drivers should have some cash to buy up some things that may be available. That right now they’re a little inflated in price and you’re going to watch them go down. So give us some ideas.

Neal Bawa: End game. Number one. Today is March 11th, 2020. I expect that by the end of March, certain portions of the U S will be in quarantine. Including my own area of the San Francisco Bay area, Seattle New York, and a bunch of others States will be, or population centers will be in quarantine.

This will be a good thing. It will, it will finish off this thing. It’ll burn it out. It’s not a mole light will burn it out. So that by my end of may, the Bureau sort of goes back to normal, right? So March, April may are going to be very, very tough months. It’s going to be unlike anything that we’ve ever seen before in our lives.

But by the end of may, it burns out. But now, because there was these three, four months a weakness and people getting laid off there’s opportunity in the marketplace, there’ll be single family homes that will come to market. There’ll be multis, small multis that’ll come to market. So my biggest message for everyone is that this is the opportunity that if you start in 2009, 2010, these homes were $90,000 and you didn’t buy them. You will get that opportunity again, it probably won’t decline as much, but it will decline. And that’s your opportunity? Dry powder Q3 2020. 

Toby Mathis: That’s great. That’s great advice, Emile. I really appreciate you. I’m going to put up that link so people can go to the you me. And then of course, I’m going to just say that they can always join in our affinity group.

It’s on our website so that they can hear more of what you have to say. I really appreciate your time as it. Now I’m going to ask you a very simple question before we go. Which is, if you could go back and talk to the young Neal, what would you tell the young Neal one piece of advice having, knowing what you know now, what would you go and tell the 16 year old, 17 year old Neal Bawa.

Neal Bawa: Don’t buy into the real estate hype. Don’t shovel the bullshit stick with the numbers, and you’re always going to come out ahead of all these other people that are hyping it up.

Toby Mathis: Love it. Thank you for your time, man.

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