Using Data to Understand Real Estate Markets with Neal Bawa
Neal: Thank you, Agostino, I’m jazzed to be on the show. Thank you for having me
Agostino: Excellent Maybe give us a brief introduction before we get going in here.
Neal: Sure so I am very different than most of the folks that appear in your show I’m not real estate royalty, I come from a technology background Tech company run my own tech company Sold it and basically learned Real estate investing the proceeds of that money and eventually Fell in love with multi Family and here I am I owned and managed about a hundred million dollar worth of real estate together my partner About 220 active investors Invest with us and we buy Multi-family A student housing properties in seven states The portfolio is slightly larger than Thousand units So I’m passionate about multi-family I love every aspect of it I’m just a blessed person that’s had Two separate careers and love them both.
Agostino: Excellent you know one of the things I know About you is you’re big in Data & demographics I’m certain that you must get A lot of questions about the real estate market. What it’s going to look like for 2018 And beyond maybe give me your opinion on what the world and us economy Currently look like what do you see today and where do you see it going?
Neal: I love that question and I’ve got to tell you I teach about 2,000 students a year Various seminars and webinars in real estate And I love answering this question Because for the most part I’m bearish, right? So if you look at me in 2011-2017 I was bearish this was a change for me Agostino For the first time I’m bullish For the world economy I’m very bullish on the US economy But only in the short term And I define short term as 2018 2019 and the first half of 2020 So that’s about Two years from now give or take a month or two A bullish in the time frame and there are reasons for that If you look at the world economy from 2011 to 2017 There was always something bad happening Sometimes it’s china blowing up with its really state mess that happened It was Japan with their Ridiculously overwhelming debt It wasn’t the European zone with Greece Being dead man walking Italy having banking crisis There is always something to point to and says this is what’s happening In the world economy this Is what slowing it down Except today in 2018 in the short run We don’t see any of those things Every economy in the world whether it’s china Or japan Or the European zone Or us is growing faster than they were last year The international monetary fund just updated their forecast for world growth They also updated their forecast on US growth So in the short term in the next two years The world economy looks very strong I hope I don’t jinx it.
Agostino: well if you have that kind of power you’re a different type of investor.
Neal: That’s true!
Agostino: So, I’m guessing that The berries bullish part short-term long-term is that How does it that impact the job market I mean by now you see Strong job market Where do you see jobs in the future The slowdown heading first. Where do you see it happening retail Manufacturing Or any along those lines?
Neal: I think retail and manufacturing will more likely to get hit and then some of the other places I think services are going to do fine Technologies going to do fine. The key part of this is I do not think Get the job slow down leads to An increase to the unemployment rate It leads to a Plateauing effect So if you look at the unemployment rate at peak of 10% In 2010 and since then it’s been Dropping edit concurrently it’s on 4.1% By the end of the year most forecasters Are forecasting that it would drop to 3.8 -3.9% I’m good with that I think that’s what’s going to happen And then wait starts to become it’s going to be a very slow And gradual pickup It might take an entire quarter for it to pick-up one-tenth of a point So I’m not at this point Over the next two years Forecasting an increase in unemployment Rate but we’re going to see a decrease a slow Down in the number of new jobs Being created which is why For the real estate professional This is a very critical time to keep an eye On the jobs and not on the national jobs because they don’t matter real estate is local You’ve got to keep an open eye on your local jobs Because some of the cities in us are already turning.
Agostino: Yeah that’s exactly it so with that in mind so if you’re moving into a new market What are some of the key indicators you are looking for?
Neal: Well I’m looking at job Growth but I’m not just looking for job growth Typically people would say well 2% Job growth is good 3% Is excellent What I’m looking for is an acceleration in job growth I’m looking for cities where job growth today Is higher than it is three months ago which is Not very common Because, for the most part, we are at an unemployment rate So low that was slowing Our job growth is slowing Not high as it was last year So I’m looking for those sorts of cities So when I see cities like Orlando Where job growth is accelerating What I see cities like saint George Utah Where job growth is accelerating That tells me that I’m still early enough for the cycle To invest in those cities.
Agostino: Yes absolutely I know you mentioned before the call even Ohio What are the states you’re looking at Do you see the same sort of thing Are you start to market out there. Favor or do you still favor the places that you just mention?
Neal: Well I mention Ohio to my students very often Right so when I’m talking with my bootcamp students I’m talking about Ohio very often Because it’s kind of like in the comeback kid Ohio’s had have had a very tough time they’ve lost population Columbus I think is the only city in Ohio that has escaped the population lost But it’s very much a comeback kid you see Several cities turning around Cincinnati Cleveland even Dayton Ohio Which is kind of like the perennial ladder Turning around in producing jobs so Ohio is one of those markets Which is a higher level of risk Then some of the western markets But it’s also going to produce higher returns If you keep an eye on the data So if you’re looking at the data and I’m not looking into the data In Ohio as often as you are Agostino because you live there But it’s certainly one of the markets to keep an eye on because There’s potential and there’s revenue Because it’s coming off a low base It’s coming off a base where unemployment is high Employment job growth was low So it’s coming off that low base It can get larger Percentage gains Then let’s say the san Francisco bay area that’s coming Off a high base.
Agostino: Yes that’s exactly what we see here as well Plenty of opportunities Finding the right opportunities is always the trick That’s always the thing that we’re trying to look out for I guess you can say that once we do Find those opportunities Getting the financing on somebody Is also a key part of taking this deals down so I think interest rates are good right now I think they’re great Some hard money lenders are pretty good But with interest rates on the rise where do you see How do you see the impact in real estate Now there are even asset classes If you’re studying us?
Neal: Well I study is that a lot One of the areas That I have an actual webinar at My website and I’ll give you the URL at the end of this presentation I have a webinar that says “how the banking system change real estate forever” And this happen in 2008 because of the Quantitative easing the four trillion dollars That was injected by the fed into the economy Worked our economy okay? Think about this never in history before 2008 Has the feds raised interest rates 6x And now they have raised them 6 times in the last 16 months And guess what’s happened to the cap rates in the past You raise points 1/2 your cap rate starts To go up Which means homes gets cheaper real estate gets cheaper multi-family Gets cheaper But it didn’t happen throughout the 16 months Cap rates kept declining Which means real estate gets more expensive This happened both in multifamily single-family side But what has really happened is that the connection The Causal connection Between interest rates and cap rates Has been temporarily severed because of the 4 trillion dollars of the quantitative easing That we’ve engaged in since 2008 This is 4 trillion dollars of money that has no yield has zero yields it can’t really go into bonds For a variety of reasons And even if it does it’s going to Make 1 or 2% and that’s not Enough but real estate Stocks are making 6 7 8 9 or 10 More percentage and so a lot How’s that money flows into real estate So despite the fact that real estate has gone up There is currently not a single shred of data That shows that gap rates has slowed down They continued to decline real estate has continued to become more expensive In my mind the feds has to withdraw a lot more than 10 billion dollars A month from the markets For there to be a slowdown in the cap rates I do think that the fits raises another three or four or 5 times Cap rates might plateau The chances of them increasing is extremely small Because the moment you see the slightest decrease in prices All that money on the sidelines the billions of dollars In the sidelines of dried powder Three enters the market and yanks the price Half cup rates down again Yes the prices up again So it’s a very hard situation to be in.
Agostino: Yeah absolutely I mean there so many people Pointing out it’s too expensive Right now but I don’t know for those that are waiting it seems to me It’s going to be a short-term Things in terms of how long you could Wait I guess what I’m saying is that If you’re waiting for a big sale I can’t imagine it That material if you’re in for a long Term I guess that makes sense.
Neal: Well I’m going to give you a message Can I give this to people Those that are waiting for a big sale are going to be disappointed. Firstly in 2008 real-estate crashed Because of an absurdly large number of Subprime loans We don’t even have a 50th of that number of loans In the economy today that’s number one second People that are holding the homes Are people like me landlords We can survive a short recession we can survive a one year or two year recession Because the homes that we board at in 2008 are all cash flowing The homes that are purchased in 2005 6 7 None of them are cash loan They were all supposed to appreciate That was a faulty premise Today this homes appreciate are cash flowing We’re going to hold on to them till the price decreases The people are looking for are Not coming people You might see your session you might see a job growth fall You might see the GDP of the US fall But please don’t think that millions of people are going to sell their homes Just because it happened last time Because there’s no demographic data there’s no driver No economic driver that supports a large decrease In real estate prices Or a large decrease in stock prices Keep in mind there’s trillions of dollars out there It’s looking for yield and the stock market And real estate and beat the crap out of Every other kind of yield Specially bonds So it’s very difficult for the market to decline significantly Small declines happen but you’re not going to see a flood of real estate Coming to the markets because of a small decline.
Neal: Absolutely so I’m going to give you a set of tools that I use And unfortunately these tools are not free But I tell people that they are absolutely the best buy you’ll ever make Now keep in mind I don’t benefit financially from any of this Tools I’m not involved in this companies But I highly recommend Them to people even if you’re Buying a single home Let’s say you’re buying a home that’s a rental home And it’s a hundred thousand dollars That’s a typical home in Ohio hundred thousand dollar Rental I can tell you that over a ten year time frame Use of a single One of these tools Will save you at least forty or fifty thousand dollars Soda to that I used to pick my cities And I use a variety of them and I’m going to name all of them But here’s a good tool to use it’s called local market monitor Localmarketmonitor.com and this tool Basically ranks markets in the us and they currently Ranks 320 markets in the us And he know if you go and buy a national membership I think you’re going to notice is that there is a strong correlation between What i have purchased in the last 2 years and what’s on the very top of the list In terms of markets you’ll notice a very strong correlation Now I don’t just depend on local market monitor I pay for costar which is $32 thousand dollars a year So it’s for multifamily guys like me But if you are in that sort of range look at costar If you don’t like local market monitor and alternative is housing alert That’s housing alerts .com And that’s Ken Wade’s company they’re brilliant They charge a little bit more than local market monitor a little above a thousand but local market monitor being a little Below a thousand I find the services to be equivalent So I suggest LMM over housing alerts But maybe you’d like the approach in that ken wade takes That’s a phenomenal to once again it can rank every Single city in the us Now none of that matters without the second tool Because a lot of people say stuff like Orlando Is awesome will i guess Orlando is clearly one of the top five markets in the us nobody understand that when i say Orlando is awesome I should be adding another statement which is in a city that is as awesome As Orlando at least 60% How the markets is awful Are awful to buy in these are Markets with crime these are markets with delinquency And so you need a neighborhood tool The two that i prefer and there are several of them out there is neighborhood scout Neighborhood scouts ranks individual neighborhoods So any time I’m pitching a deal whether is a deal That’s 2 million dollars or 40 million dollars I’m presenting my investors with reports from a tool named neighborhood scout It’s very inexpensive anyone can afford to buy the data that it gives you for investments is Staggeringly the good Those are my two favorites i can get going for a while but As long as you pick one of this city Tools and one of this neighborhood tools You are a head of 99% of investors in the united states.
Agostino: This is valuable great information So when you touch just a second ago as far as When you’re talking to your investors and you’re providing them with this data So when your modeling your acquisitions How does that data make its way into your whole process Is it something you do before you handle a financial side How do you make a decision when you are going to pursue a deal Like how do I like how this. data make its way to your decision process how does that data make its way to your decision process?
Neal: So I would look at a deal Anywhere in the US I’m not stopping myself deal flow is extremely tiny right now compared to What it was two or three years ago So I look at deals all over the us but I sort them in order of my favorite cities So a deal from anywhere in Utah Or in Boise Idaho or in Certain parts of Washington is going to get looked at before A deal from let’s say saint louis Missouri Or Detroit Michigan right those are Not my favorite cities in the us But when I’m looking at some of the cities that are in my real estate trends Webinar for example We’ve got a couple thousand people watch those are great cities Orlando Is going to get my attention and Tampa It’s going to get my attention way Before fort Lauderdale Ever will Because fort Lauderdale is really an expensive City at this point of time So a lot of the appreciation that had had to happen has Already happened So you start With cities and you sort them based on your The data Now is the neighborhood piece I don’t go to my agents and say I will only buy in this neighborhood and not in that neighborhood I would never buy anything Agostino I mean there’s no choice to do those kinds of things What I do though is when a property arrives I pull a costar report and then to make sure that costar hasn’t gotten anything Wrong I pull a neighborhood scout report I compare the two of them and if that neighborhood looks good then I starts To underwrite it And if I have two opportunities at the same time I might use this data whether it’s from Housing alerts or local market monitor or costar Or neighborhood scout I might use it to Eliminate 1 deal out of two But for the most part I just use them to rank my Deals And I think that’s the approach that everyone should take you don’t Eliminates obviously When your neighborhood scouts as this is a warzone You just dump it immediately The most of the time it makes sense to use it for the purpose of Rank in your deal.
Agostino: Now that’s interesting how Do use the data from a long-term perspective or do you use that I mean it seems to me Like you can also determine That maybe after 10 years Certain areas may improve or might decline Or do you have someone on your team perhaps that keeps track That sort of thing Or Any of this services alert you When those sorts of things happen?
Neal: Well none of these services Can predict Further than 2 or 3 years So most of them are predicting a year out or three years out The only service that I find that’s very useful For those that are in the apartment business May not be fruitful for those who are in the single-family business Is weareapartments.org This site has long term predictions for an Apartment needs by metro in the US So you look at phoenix you got Orlando you see massive needs Now when you see Pittsburgh you see no needs at all in the long term it doesn’t matter what’s happening In Pittsburgh in the short term It seems like the metro is doing well But I want to look at that 10-year timeline And the only website that provides objective Data-driven information On long-term multifamily need Is weareapartment.org So if a metro doesn’t show big gains Over a 10 year a time frame then I usually tend to be not as bullish on that particular metric.
Agostino: No that’s great I mean that’s one of the things that I imagined In your model that if you follow A typical syndication model this one that we follow anyway is we do a refiat 5 years or so We follow the money redistribute to investors Then sell it by 10 That’s it but it’s also worth noting that every year we’re tracking or we keep an eye on that property in the neighborhood are you if there’s any improvements or declines that might impact the overall valuation of that assets so that’s certainly one of the things that we keep track of.
Neal: I do something similar but not quite the same and the reason for that is to me I’m trying to generate the maximum annualized returns So if I see an area slow but it’s still decent I might decide to sell that property Even though it’s continuing to move upwards So it’s a very subjective decision As you said you got to constantly look at the data figure out what is the maximum annualized yield That I can give to my investors.
Agostino: Yes, absolutely so how do you see the Rest of 2018 Planning out at least in the short term anyway I know you said you’re bullish and What other sorts of hands and tricks do you see for 2018?
Neal: Well you’re going to see inventory shortages Worsen there is no doubt in my mind In the class c b minus category You’re going to see inventory shortages worsen There’s a variety of reasons for that I think that as the millennials get older They don’t want to live with their parents anymore You’re going to see demand go up you’re going to see supply go down For people like me that are looking to buy There’s going to be less and fewer deals available That’s why I started to construct so I just finished doing Hundred and two units mixed use properties Can you tell I’m also building a 322 unit property in In buffalo because when supply problem becomes so bad that it becomes a seller’s market it makes sense to start doing some construction and become as sellers Yourself and that’s one of the solutions Can I predicting that were going to see another Surge in multifamily completion in multi-family construction But I think the big picture for those of you Like you Agostino that are buying existing properties is you are going to find inventories Will get tighter You will also find that there’s not going to be much of an impact From interest rates hikes in 2018 We could see some impact in the market in 2019.
Agostino: You know that’s interesting because I think We’re also finding Is that there’s a lot of out of state money That is coming in and driving some of these prices up to almost to a point where it doesn’t make financial sense, I mean were analyzing.
Neal: I think half of those people are coming from me Agostino because on my webinars I have hundreds and hundreds of people And I’m constantly telling them stories about Ohio And Columbus so I think impartially to blame for your blows there in Ohio
Agostino: There we go.
Neal: Edit permission on your next deals man.
Agostino: This is driving unrealistic returns It doesn’t make any sense.
Neal: Unfortunately, California investors are like that we are unrealistic in general which is why I own nothing in California.
Agostino: Well that and the taxes. So, I know you mention Orlando as One of your favorite places What are the best metros in the worst metros that we need to pay attention to in 2018.
Neal: It depends on where you are in the US If you are in Ohio I want you to look at Columbus If you are up north in the Chicago Wisconsin area Grand Rapids Michigan cannot be beat If you’re in Florida that entire area that starts in Orlando ends in Tampa with Lakeland Florida In the middle event area is phenomenal to look at I think there are tremendous deals in that area In general so the middle of Florida Is phenomenal and if you are in the west coast Boise Idaho is great Both phoenix and Tucson is good cities to look at Secondary cities like Tacoma secondary cities like Spokane You know Seattle Is too expensive but Tacoma is not And neither is Spokane So those are great opportunities for investors in the West coast to look at.
Agostino: Nice I’m going to check those out too So shifting gears a little bit on tax reforms Hello that the tax reform bills that just recently passed I was fortunate enough to see some good stuff at least with my Recent return how do you see other real estate investors Capitalizing from that reform bill.
Neal: I think its huge It’s insanely beneficial to multifamily investors I’ll give you one piece and it’s so big That it’s the size of an elephant right The depreciation schedule has been changed So now you can depreciate a larger portion of A multifamily in year 1 And that’s juicing are returned sometimes by 5 or 6 Percent a year I mean that’s absurd I’m usually interested in something that can Juice my returns By 1% a year We’re talking about 5 or 6 per cent a year in Lost tax revenue Just coming from the depreciation change So that by itself is absolutely massive Also there are not so well known pieces of tax Reform that really encouraged companies to buy real estate So it encourages companies like apple To always you no hundred million or billion dollar campuses As they bring money back in from outside the us Because one of the biggest pieces of tax reform was That you’re paying a lot less taxes with money You stashed abroad and We’re talking about hundreds of billions of dollars When they bring that money in because of the changes in tax Bill it actually makes sense For some of that money to go into commercial Real estate Not a lot of it is going directly to multifamily But it’s definitely very positive For commercial real estate as a whole Because there’s a ton of benefits for companies To buy real estate and that Those benefits Really come from many Different clauses in the tax reform bill With depreciation acceleration Being the big one or the elephant I don’t see any downsides of the tax reform Bill for investors I see a ton of downsides for individual Homeowners because obviously Especially in is expensive states like The east coast are the west Coast states Where you gotten rid of or You put a cap on what you can Expanse from your income From a taxation Perspective From a property tax perspective So a lot of Downers for Single family But a ton of benefits for investors.
Agostino: That’s interesting especially the depreciation sides So I’m assuming you’re doing Cost sag on all your properties this depreciation applies to a straight line.
Neal: So, this is central helps with the cost set process Your cost sag in year 1 Is going to be much larger from now onwards Compared to what it was in 2017.
Agostino: Wow very nice So it seems that even with a straight line It’s going to be good if you used cost sag It’s going to be massive It seems to me.
Neal: Yep straight lines still have some benefits but why wouldn’t you want to do cost segregation is authorized cheating It’s legal to Every property the first thing that we do is cost segregation I mean that’s a way for us to return A ridiculously negative k1s to Investors While giving them money I have investors Who refused to believe that I’m giving them so many losses While handing them money and I tell them it’s the law I’m not doing anything wrong at all.
Agostino: Here’s the thing I find that a lot of real estate investors don’t know anything about cost segregation that’s happened on several occasions so it’s quite interesting I know that you’re educating many people so what advice do you have for aspiring real estate investors.
Neal: Well the one thing i want to tell people is It’s important to educate yourself and So many guests on your podcast Have already said that But jump in I see so much Analysis paralysis And one of the pieces for that is oh the market Is so expensive It doesn’t make sense for me to jump in now Not really there is no real estate market There are real estate markets with an s There’s 2200 separate markets In the us and for every market that is [indenting] Like san Francisco Or new York There’s a market that’s entertaining like Las Vegas there is a market that is 3rd or 4th tenting like Columbus Ohio Know your market know your data But the whole concept that the whole market is the expensive Then it’s too late for me to jump in is nonsensical that’s Just you being lazy That’s my message for you There’s plenty of opportunity in the market And there always is for people to jump in You know what I do is I teach people multi-family Can I teach multifamily bootcamps and I don’t like This expensive 40,000 dollar bootcamps That people are pitching So my boot camps under $1000 is very specific It’s very step by step Do all of these steps and you can go and Buy multifamily on your own Don’t involve me I don’t get a piece of it Here’s exactly the process you follow to go out And buy multi-family That’s why a lot of people benefit from that That really enjoyed that process If your listeners are interested The bootcamp is at multifamilyu.com That’s multifamilyU.com/boot camp And if you want to take all of my free content there’s a ton of free content That I teach about real estate Terrace at multifamily you.com/i think it’s Agostino Let me check on that but I think it’s My team is set up a link for you Or your people they can go directly into that link.
Agostino: You know the education in that sort of things is so important I think many people They either try to jump in or they just get scared They got the analysis paralysis So many of those people that are on biweekly meetings and some of these people A fully been studying this stuff for years I’m really big on education but also taking action You have to take massive action That’s the only way to get it.
Neal: Well from my perspective If you want to take action go to multifamily.com/Agostino All of our webinars are stored there Including the ones that we’ve done in the past Take a look at them and you’ll notice that the webinars are designed to drive you to action So education is overrated training is underrated I want to tell people to go out there and do these things Themselves take some of The fears Some of the phobias off Because I think that’s the value that we can provide To up and coming people and hopefully We get a chance to partner with them once They’re on their way up.
Agostino: Excellent, so I know you got a lot of stuff going on and so what is one of the most exciting things you have going on right now.
Neal: I think what I’m finding is That the incredible rise in prices In western cities, Seattle you know San Diego Los Angeles san Francisco bay area Has created a Very large Number of 1031 millionaires So they’ve created All these people that Make no money there’s not much cash Flow in their properties but there’s millions and millions and millions of 1031 funds and then they Don’t know what to do with it And I think that I am looking Towards creating a solution For this people And that’s what I’m working on It’s not a done deal yet we’ve done a few deals And I’m very excited about that because this person can go From being rich from an accredited investor Perspective to Being a cash flow rich And they can do it in a very short amount of time And many of them Are suggesting that they should invest in Ohio In some of the cities is that You’re looking at That have cash flow And I’m very excited about taking People from being paper millionaires To be in cash flow millionaires And that’s just blowing my mind How many of these people are out there right now That don’t have a solution.
Agostino: Excellent well so how can people reach you?
Neal: Well the best way to reach me is Through my website MultifamilyU.com So my Website has contact information to get started again is multifamilyu.com/Agostino That’s a good way to get started and then we can continue the communication we can and hopefully some of you end up show up for my Bootcamp the multifamily Bootcamp that I teach students around the US Interesting enough I have more students from Ohio That I do than most of the places In the US and I’ve never Figured out why.
Agostino: Well people out here are hungry there are plenty of deals out here and they just seem to understand and apply education that Takes action right afterward So it’s glad to see that very vibrant Community Out here.
Neal: It is it is absolutely.
Agostino: well, thank you very much for joining me I truly appreciate it and I look forward to talking again soon.
Neal: Sounds good Thanks so much!
Agostino: Thanks Neal, As you heard from Neal knowledge is data trends and understanding The markets Using data it’s a great way to protect you Your investors assets and maximizing growth That’s data analytics neal also enjoys teaching and mentoring he has presented to hundreds of real estate events Has been attended by over a 2 thousand people as well So I’ve been through his material That’s worth to check out You can learn more about what he teaches And you can also reach him via his website at multifamilyu.com I hope this episode helps you guys and I’ll see you on the next episode.