2020 Market Outlook

by Neal Bawa | Old Dawg's REI Network Podcast

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Will the next recession hit in 2020? What will happen to real estate prices? How should we invest? In today’s podcast episode, returning guest and CEO of MultifamilyU Neal Bawa shares his insights on the current economy, issues directly affecting real estate investors and prudent strategies to invest today and still profit big!

What You Will Learn

Will 2020 have a recession?
What key things you need to look at to determine to understand where we are as an economy in light of a recession
How is the Federal Reserve directly affecting our extended growth cycle
What will happen with real estate pricing in 2020?
How the 2020 economy will affect the real estate market
The 5 key sources Neal uses in evaluating the economy
Should we hold on to our cash in anticipation of great property deals ahead?
What are the best real estate investment markets for 2020

Market Outlook for 2020

  • He loves to talk about macro-economics and its impact on real estate
  • If you are going to look at how real estate will be impacted in 2020, you need to look at a number of things:
    • What’s the economy doing?
      • Because real estate depend is very tied to jobs, inflation, consumer spending and interest rates
        • For example, if we lose 2 million jobs, the demand for housing drops off
        • It’s not enough to say we have an under-supply of homes, when you lose 2 million jobs, you have an over-supply
      • The economy is always the foundation of everything we do in real estate
  • When you look at the economy for 2020, the key theme is “recession risk is definitely waning but an economic slowdown is extremely likely”
  • However, there have been a number of things that have happened to reduce the risk of recession:
    • The Federal Reserves extremely accommodating interest rate policy – When we thought we would see big increases, in 2019, we’ve seen significant declines in interest rates
      • Fed funds rate today is 1.75 – it was 2.5 a year ago
        • He sees a long term negative impact
        • But in the short-term, it massively reduced the risk that 2020 would be a recession year
        • It does affect growth, however, to cause growth to slow a bit
        • The Federal Reserve is forecasting:
          • A slow down in 2020
          • Consumer spending was at 2.4 in 2019, it’s predicted to go down to 2 in 2020
          • Real GDP was at 2.2, they’re now forecasting 1.8
          • Inflation was at 2.1, they’re now forecasting 1.7
    • We’ve done enough to avoid a recession in 2020 by slowing things down
  • The economy will likely have a negative effect on real estate but not as much as would have occurred in a recession
  • One of the “X-Factors” for 2019 was the trade wars but it looks like things have calmed down – a positive today
  • Neal sees a “slow down” coming but not a recession

Real Estate Pricing in 2020

  • Neal has looked at 5 sources
    • Today Magazine
    • Freddie Mac
    • Fannie Mae
    • Mortgage Bankers Association
    • National Association of Realtors (NAR)
  • The forecasts are all pretty consistent
    • 2-3% real estate price growth
    • Rent is growing at about 2%
    • That has actually ben the percentage trend percentages for the last 50 years
  • Interest rates in the 3.6% range
  • People are not buying because of the interest rates, they aren’t buying because home prices are still too high for their income

Multifamily Market

  • International Investors
    • Have been pouring money into the US
    • The US real estate market is still the best place globally to invest
      • The US economy is great – look at our GDP
      • Our debt may be 100% of GDP but that’s better than places like:
        • Chine is 200%
        • Japan is 250%
    • We are one of the few countries that have positive interest rates
      • There are banks (possibly Sweden or Norway) where you can get a 30 year mortgage at under 0%
        • So, if you buy a home for $400,000, you pay back $396,000 at the end of 30 years
        • The banks are getting money at negative 1% from the market
    • For the last two years, an insanely large amount of capital have been flowing from pension funds in Europe and Japan and other places with 0% interest rates.
      • Most is going to multifamily
      • It used to go to single family when the Chinese were investing
    • Who are the big buyers today?
      • Canada
      • Saudi Arabia
      • Singapore

Looking Ahead – Should We Hold Cash Waiting for the Downturn Deals?

  • The Federal Reserve Bank seems to have learned a lot from previous recessions
  • They are very sensitive to preventing a recession because the world economy is so much weaker
  • Don’t hold your breath for the recession, according to Neal.  He doesn’t think it’s coming in 2020

Where to Invest Today

  • Rentzilla – Major push for rent control by politicians
  • There’s no proof that rent control works – San Francisco and New York have it but they have the highest rents in the country
  • He doesn’t invest in real estate in Democrat states (even though he is a Democrat)
  • Landlords are under attack
  • Southwestern States are doing well in job and population growth, housing and investment opportunities
  • However, North Carolina, Texas, Florida and Georgia are doing better in job and population growth than California
  • Highest population growth city – Atlanta, GA
  • Other high growth cities:
    • Orlando
    • Dallas
    • Austin
    • Houston
    • Nashville
    • Boise
  • However, prices have risen in these places as well
  • Top States for Neal
    • North Carolina
      • Best Cities:
        • Raleigh
        • Charlotte
        • Winston-Salem
        • Ashville
        • Housing is inexpensive
        • Cashflow at 6-7 but appreciation is strong
    • Florida
      • Best City:
        • Jacksonville
    • Arizona
      • Best Cities:
        • Phoenix
        • Gilbert
        • Chandler
        • Mesa (a favorite of Neal)
        • Tucson
    • Texas
      • Best Cities:
        • San Antonio
  • He believes that Primary markets or MSAs are currently pretty risky
  • It’s better to look at secondary markets
  • Tertiary markets, however, could be a bit risky
    • Denver – prices have increased by 55-60%
      • A safer bet would be Colorado Springs
      • Any city within a 100 mile radius of Denver would be better
    • Nashville has also gone up 50% plus
      • Chattanooga is a better bet
      • Memphis, too
    • In California
      • The inland empire (Riverside, San Bernadino) is better than most of California
  • He can’t find any good properties under market
  • However, if you can find any, the “Rustbelt” may have those deals:
    • Indiana
    • Kansas City
    • St. Louis
    • Philadelphia
    • Ohio
      • Dayton
      • Cincinnati
      • Cleveland
    • But BE AWARE
      • Make sure you check population growth before you go into these places
        • Cincinnati is better than Cleveland or Dayton because population in Cincinnati stays the about the same while Cleveland and Dayton are losing population
        • Philadelphia is pretty good
      • Stay away from dangerous markets like Detroit
        • It does well during an expansion
        • It gets destroyed during a recession

How Should Old Dawg’s Invest in Light of a Coming Recession?

  • Multifamily is still pretty good
    • In 2008,
      • Single Family Homes went down 58% in value
      • Multifamily only went down 10%
        • Rents only decline for one year (that was in 2009)
  • We’ve turned into a landlord nation
  • Workforce Housing (Class C+ and B- properties) is a fairly good place to invest now
    • Older apartments with few or no amenities
    • Who are the Workforce Housing tenants: bus drivers, Starbucks worker, airport workers, retail employees, teachers)
    • Some prices have gone up there, causing cash flow to go down
    • But it’s still a good place to invest
    • This is type of property was the highest rent growth property in the last 6 years
  • Superstar Markets (like Phoenix)
    • New construction can be a good investment
  • REITs
    • Self-Storage
    • Mobile Homes

What Will Happen to Multifamily if There Is a Recession

  • Let’s say the second half of this year (2020) there is a recession – two consecutive quarters of negative growth
    • When this happens, the Federal Reserve will cut interest rates – maybe to 0%
      • It won’t help anything in the short term – it will take about 9 months to wind there way through the economy
    • In the short term, rent growth will go down and owners of apartments will stop distributing money to their investors and start focusing on filling their properties
      • People are losing jobs and will actually drive demand for apartments
      • Every recession, more than a million people lose their homes
      • Apartment owners will be focused on keeping occupancy up and delinquencies down
        • Once they stabilize their properties they can pay their mortgage and wait until the end of the recession
      • After the recession ends, it will take the Federal Reserve 2 to 3 years to even think about raising interest rates
        • In 2009, it took 6 years before interest rates went back up
        • Even if the next one s mild, it should take at least 2 years to go back up
        • Apartment owners will be able to increase rents, re-finance at GREAT low interest rates and it creates great cash flow
        • Although it can work out well for apartment owners, they still much management prudently all through the recession

A Message for Californians

  • Californians are probably breathing a sigh of relief to think they will be OK in 2020
  • However, be cautious, there are other factors that could hurt investors in 2020 in California and other “rent control states”
  • Legislators have been trying to win people over to the idea of rent control
  • If you are looking to invest or already invest in California, do a Goggle search and see what is ahead for rent control on California
  • It is a phased approach – Legislators are fighting a war, not a battle
  • At least two more tiers of rent control are coming to California within the next year, year and a half
  • Research what is ahead before investing in California rental property
  • He does not see California as a good place to invest for the next 10 years
  • He doesn’t see a “separate California Recession” happening but the regional economics is not good at this time
  • Flipping may have more opportunity than long-term holds but it’s still more likely that prices will decline and not go up

MultifamilyU.com

  • Neal always wanted to build the “Wikipedia of Real Estate”
  • He wanted a place where people could do a deep-dive learning without being sold an expensive package of stuff
  • He does 50 deep-dive webinars there every year
  • Content is not just on multifamily
  • There’s content on self-storage, legal info, taxation, AirBNB and more
  • The goal is to bring in experts from all over the U.S., with a “no sales pitch” approach and leave the webinars on the site
  • Neal has a dozen himself and he covers multifamily and insight on key US markets

This episode of the Old Dawg’s REI Network is brought to you by Mino studio.

NARRATOR: In a world where jobs are how most people make money; one man, one desire, one challenge, dares to break the mold. Welcome to the Old Dawg’s REI Network where we don’t work for money, money works for us. Coming soon, viewer discretion is advised.

NARRATOR: Welcome to the old dogs REI Network where cash flow is king, real estate investing, the means so you can enjoy your retirement dreams . This is the show where we cut right to the chase, no sales pitch, no long monologues, just simple how-to real estate investing advice so you can earn the passive income you need to enjoy your retirement today, and now your host and chief old dawg; Bill Manassero

BILL: Welcome to the old dogs REI Network, I’m your host Bill Manassero and this is the show where 50 plusers and anyone else who wants to join us get solid no sales pitch real estate investing advice

to help generate real cash flow. This podcast airs twice weekly on Mondays and Fridays and if you aren’t already a subscriber go to iTunes or Apple podcasts type in Old Dawgs speledl D-A-W-G, find our podcast and subscribe.

We’ve got a great show for you today we’ve got a returning friend I am very stoked about

It. This is the name you’ll recognize from episode 2-11 entitled “A Scientific Approach to Real Estate Investing”. I’m talking about Neal Bawa and Neil is just just I mean it’s that show was one of the most listened to podcasts that we’ve ever had great information but a guy who has taken technology and used it to do amazing things in real estate investing specifically in the multifamily space.

Neal you know, he brings an extremely strong strategic and operational experience to his role as the CEO of Gro Capitus Investments. Neal sources negotiates and acquires commercial properties across the U.S. for 500 plus investors. Current portfolio over 2000 units projected to be at three thousand in twelve months. The portfolio includes multifamily and student housing properties in nine US states Neil is a nationally recognized in-demand speaker at multifamily events IRA events and meetups across the Country.

Nearly 4,000 students attend his multifamily seminar series each year and hundreds attend his magic of multifamily boot camps. Neal’s nationwide meetup network and that we talked about this in his interview before just an amazing group that kind of took off and in the Bay Area. Multifamily university has thousands of members Neal leads Gro Capitus Investments where he is driving the

syndication and acquisition of multifamily properties.

Well Neal welcome back to the Old Dawg’s REI Network!

NEAL: Thank you Bill it’s it’s terrific to be back it’s always fun to be on your show especially because I think you have the best radio voice amongst all the podcasters that I that I you know I’ve been on so well it’s it’s fabulous to be back with you and the last time I was there I got incredible amount of outreach and comments from your audience so it it feels good to be back.

BILL: Oh hey it’s great great having you back.I always learn just tons of stuff whenever you’re on. You you have a sort of an out-of-the-box approach to you know everything from entrepreneurialismto to real estate. You name it, you really do look at things from different standpoints and I think it has really done well for you.

 I mean I think last time I interviewed you you had a thousand properties and now you’re gonna be coming up on 3,000 here. This is amazing and I am just dying to talk to you today I understand what well maybe you could just kind of give us just a little in your own words you know just sort of what you’ve been doing since gosh we talked that was back in June of 2018.What you’ve been doing since then

NEAL: Well I’ve been applying technology I’ve always felt that there is a place for more technology in commercial real estate commercial real estate is one of these areas that really hasn’t been penetrated as much by core technology as other areas it’s still kind of the old boys network and people sort of doing the same sort of stuff based on gut feel and my experience and my knowledge rather than looking at big data and and and coming up with these incredible insights that power companies like Amazon and Google and Microsoft and Apple right? These these companies are able to make you know be worth a trillion bucks each by using data analysis, why wouldn’t it apply to multi-family?

 

 So that became my mission passion and I’ve been implementing that also implementing outsourcing. I’ve hired a massive army in the Philippines to optimize my properties and I was showing you a little bit a little bit of that before the the interview.

 You know basically just reaching out to tens of thousands of tenants. So I’ve been in full experiment mode Bill. I’ve been trying my technology tricks that I’ve learned in my 20-year tech career and saying does this work in real estate? Oh it works oh this one works even better than it did back in technology right?

Those sorts of things and it’s enabled me to grow my portfolio very very quickly. We bought or built one hundred and eighty seven million dollars worth of multifamily last year and what’s and that what’s more important than that is that we the amount of cash that we’re distributing to investors went up 3x in 2019 compared to 2018 using techniques like that army in the Philippines, optimizing our properties by bringing in renters so you know those those sorts of things so I really feel more proud of the fact that our our distributions to investors have jumped to all-time highs than necessarily buying more properties.

BILL: That’s awesome and I remember when you were on before I just really latched on to the way that you brought new tenants I think you’d but you talked about the the apartment building you bought and south side of Chicago I think…

NEAL: yup., yup

BILL: And how you just just take took this whole you know finding good tenant thing in an area that’s probably not the best part of town and yeah and and then trying to bring good people in to to an apartment that you’re acquired and just the turn around and everything that happened all again using technology and outsourcing and just blew me away but I’ve seen now that you’ve applied a lot of those you know it’s a lot of that same approach to finding good markets.

You know projecting you know things that are going to happen economically and so forth and so that’s what I’m looking forward to today is kind of hearing you know what kind of an Outlook you have I know we’re we’re talking that there there’s gonna be a correction somewhere we just don’t know when. This is the longest period that we’ve ever had gone without a correction and in the history of this country.

Things are bound to happen it’s just it’s just you know I think economic science here but you know how do we position ourselves and and and what does that mean for us as investors and and maybe you know moving a little bit into you know where where are the

markets sort of the best markets to be in this time of the year and so forth

NEAL: I love that! I love talking macroeconomics and its impact on real estate cuz it’s a huge impact and people really don’t think about it. We’re so in the weeds all the time that we don’t think about the things that have massive impact we don’t think about how we could actually in in case of a recession, what could we do? And there are so many things that in in real estate that we can do to guard against these sorts of things that that happen.

So yeah I think that’s a great place to start. To me I think, you know if if I want to answer your question, maybe you know a little bit holistically if you’re looking at how real estate is gonna do in 2020 and if you’re looking to understand whether there’s gonna be a recession this year what are the typical sort of things that you need to don’t know about? Well, what’s the economy doing? Because real estate demand is very tied to jobs, inflation, consumer spending, and interest rates, right? So those are the four things that are really the key drivers a demand right if if all of a sudden we lose two million jobs our demand drops off. So we it’s it’s it’s not okay to say well we have an under supply of single-family homes. Well you lose two million jobs you have an oversupply.

 So the economy is always the foundation of everything that we do in real estate and when we’re looking at the economy in 2020 the key theme for 2020 is that “recession risk is definitely waning but an economic slowdown is extremely likely”. So at this point there have been three or four things that have happened that have reduced the risk of that recession. The first one being the Federal Reserve’s extremely accommodative interest rate policy when all of us you and me and everybody else was talking about oh my god interest rates are going to go up like crazy.

Well in 2019 we’ve seen significant declines in interest rates Right? So our Fed Funds rate today is 1.75 it was 2.5 a year ago everyone was projecting it would go up three quarters of a point and it went down three quarters of a point. Now I’m not gonna talk about what the long-term bad impact of that is going to be cuz there’s a long term bad impact of that but in the short term it massively reduced the risk that 2020 would be a recession her. It does affect growth though.

So it is likely that growth could slow a little bit and and when I look at all the forecasts right the Federal Reserve says “you know 2019 consumer spending at two point four we’re now forecasting two Percent. Real GDP was at two point two we’re now forecasting one point eight. Inflation was at two point one were forecasting one point seven”. None of those surprised me they’re all kind of more of the same that we saw in 2019 we’re gonna see a slowdown in 2020 and slower consumer spending slower GDP lower inflation but I think that we’ve done enough to avoid a recession in 2020.

Right now I’ll talk about what happens if I’m wrong but I think that we’ve done enough to avoid a recession and at least for 2020 achieved a a slow kind of muddling through stuck in traffic type of growth that we’re likely to see and it’s it’s definitely going to have a negative impact on real estate but not as negative as a recession would have had. That’s kind of my my feel for the moment and one last data point I want to give you their bill is one of the big X factors in 2019 was the trade war. Well for the moment it appears that things have cooled down because you know Trump and Lee were engaged in a you know “my guns bigger than yours” if you know what I mean war and they seem to have backed off quite a bit.

So we just signed you know phase a and we’re now looking to negotiate phase B. So for the moment it seems like there’s some rational thought being applied there and that was the big x-factor and that’s another positive today compared to six months ago. So I do think that we’ve got a slowdown coming, I don’t think that we’ve got a recession coming.

BILL: Mmm got it got it. And and what do you think is going to happen to real estate prices in the year ahead here?

NEAL: So when I look at the forecast right. I’ve looked at forecasts from five sources I looked at you know Today Magazine, Freddie Mac, Fannie Mae, Mortgage Bankers Association and the NAR the National Association of Realtors and their forecasts are all pretty consistent .They’re all forecasting a very small amount of a real estate price growth. So about maybe two to three percent real estate price growth and rents growing about two percent.

Now these numbers sound awful to those of us that have become spoiled by the last six or seven years but I want to remind you that two percent growth in in you know home prices two percent growth in rents is actually the long-term trend. If you look at the last 50 years that’s what prices look like two or three percent you know annualized Increases. So for the moment, because of the slowdown we’re kind of coming back to the norm that we used to have you know in this country before you know 2000 and and you know all kinds of things going crazy after that.

So I think that we’re looking at slow growth we’re looking at interest rates that are in the three point six percent for the 30-year fixed that’s what Fannie Mae and Freddie Mac are projecting, which is decent right so you’ve got you’ve got interest rates low enough for people to be able to buy but you’re not gonna see a lot of growth and in you know in prices and a lot of that is because of affordability.

Especially in California but also in other kind of expensive you know coastal states. The the the issue is not that people don’t want to buy, there’s plenty of buyers their ability to buy the homes that are in the marketplace today that are available for sale is restricted despite you know low interest rates by affordability because we’ve had such huge increases in home prices that now we’ve reached the point where you know only a certain percentage of those people can buy. So I’m predicting maybe a two to three percent home price increase.

Now California may not get that so I think that Southern California might see two to three percent Northern California might see a price decline and and the last 12 months have been completely 100% flat for home prices in the Bay Area and I think that we’re going to see another flat year in the San Francisco Bay Area in the next 12 months.

BILL: It’s kind of the same thing happening down here in Southern Cal too – it’s there there it has been declined and so yeah that’s that sounds about right.

What about in terms of looking at it from you know that like just focus maybe on the multifamily for example are we gonna look at the same kind of participation you’d see from international and institutional Investors? Maybe maybe heavier investing from that from that those groups? Do you think it’s gonna stay about the same?

NEAL: I think it’s gonna stay about the same. But when I say that I want to point out what “stay about the same“ means. So international investors have been pouring money into the United States because they’re this is very crystal clear, this is a fact the United States is unquestionably the best looking pig in the international pig sty no one no pick out there looks as good-looking as the U.S. pig does. And the reason for that is we’ve got actual growth.

I mean look at our GDP, our GDP actually works. Our debt is only at a hundred percent of GDP which you know we’re worried about but you’ve got other countries out there are two hundred percent. China’s are three hundred percent Japan’s are two hundred fifty percent debt to GDP. Japan’s got a declining population, China’s got real estate bubbles much bigger than ours. So you look at all these other pigs in the pigsty and then all of a sudden we look much nicer right? and we are the only country the only major industrialized nation that has managed to keep interest rates positive. Where you got the eurozone practically at zero I mean I heard about something recently that I first thought was a joke. Well but I want to tell you what why this is important to answer your question.

 There are banks and I think this is this happen in either Sweden or Norway. So there’s there’s a bank there that is giving you a 30-year mortgage at under 0% .So if you buy a four hundred thousand dollar home right? You will the bank will actually end up you you don’t have to repay the four hundred thousand so there’s no interest You no no interest at all but you don’t even repay the principal.

So instead of four hundred thousand dollars you repay them three hundred and ninety six thousand dollars right and you go how could the back possibly be making money if you you’re going to return on a four hundred thousand dollar loan if you’re only going to return 396,000. Well they’ll make money fine firstly because they’re charging fees and secondly because they’re picking up money at negative one percent from the market and they’re pretty much giving it to you at flat at you know at that at their cost so they’re still making that one percent arbitrage.

 When a world looks like this and the US doesn’t look like it well we tend to attract a huge amount of capital. So the last two years an insanely large amount of capital has been flowing from pension funds in the eurozone Japan in other places where interest rates are effectively at zero and and we we have positive and for interest rates. We are actually you know today a treasury bond is about a ten-year bond is about two percent.

Well a two ten-year Treasury bond in in Germany is negative and so money is flowing towards us. I don’t think that stops because I I think that there’s very little indication that these economies other economies are going to get better in the short term.

So I think that money keeps coming. A lot of it goes to multifamily you used to go to single-family when it was the Chinese bringing in the money but who are the big buyers today? it’s the Canadians, it’s the Saudis, it’s it’s the Singaporean. Singaporeans have really picked up because it’s it’s a very rich country. So it’s not really a huge amount of Chinese money anymore Chinese money preferred single family. The money from other countries tends to prefer multifamily. So I don’t expect that to reduce I also don’t expect it to go up in 2020 so about the same.

BILL: Hmm so as far as investors as they’re looking ahead here I know that there’s some that are thinking well you know I need to be more cash you know intensive here and it should be setting aside a fair amount of cash should should there be you know reduction in prices so that I can I can get those great deals. I don’t want to tie up everything what would what sort of your thought and you know the year the two years down the road?

NEAL: So my honest answer to you is this; at this point the Fed seems to have learned a lot of things from the previous recessions. They’re very sensitive to preventing a recession because the world economy is fundamentally so much weaker than you know past recessions ten or twenty years ago. They’re doing a lot to prevent a recession. I think that this whole “I’m going to sit on the sidelines” approach may not work well for you.

I want to remind people that the recession ended in 2009 right and and the primary effects ended in 2010 and since 2011 I’ve been hearing people that about sitting on the sidelines. In 12 there were people sitting on the sidelines then in 13 14 15 16 17 18 and 19 there were people talking about sitting in the sidelines and still that recession that we’ve been waiting for for the last six years hasn’t come.

You’ve got to understand that unlike the past recessions now are being artificially prevented by federal banks and for the moment they seem to know what they’re doing. So I would not put my leave my money on the sidelines I I think that this is you know for better or for worse the market that you want to live in. Your money on the sidelines is is losing because of inflation you’re at minus two percent anyway.

 You might as well jump in and look at the market place but you have to be careful where you go today. Whether it’s single-family or multifamily you have to be way more careful than two or three years ago.If you don’t think that you have the knowledge or the experience; yes, maybe leave the money on the sidelines and wait for a correction.

 Just don’t hold your breath for that correction because I don’t think it’s coming in 2020

BILL: Mmmm, I love it how about you know I know that there’s you could say there’s a national market. Although I honestly believe it’s really just a whole bunch of individual regional markets but in terms of investing and where to invest, I know places like California if when you know you in New York I want to really avoid. You know a lot of the coastal places especially those that are introducing rent control and you know just crazy pace. Where do you think is the good places to move in that regard?

NEAL: Mmm so you know I think you started it off right right so rent Zilla is is kind of rearing its ugly head again it’s it’s a populist measure, you know. The biggest benefit of rent Zilla is that politicians get elected when they use it in their campaigns. It doesn’t work it’s never worked you know. San Francisco and Oakland have rent control or two of the most expensive markets in the country. New York has had rent control for thirty years and it is the one of the most expensive markets in the country.

 So there’s no actual evidence that rent control ever works but it does get politicians elected and given the populist sort of wave that we’re a part of I expect that it will grow and other states will implement it. So my advice is this, I mean I am a liberal Democrat, cut me and I’m gonna bleed blue I do not invest in in in Democrat states. I do not invest in real estate in Democrat states right. I don’t mind investing in tech firms in California but I will not invest in real estate in these blue states that are all of them are gearing up for some form of rent control or the other over the next year or two.

So landlords are under attack, they’re just less likely to be under attack in high-growth you know southwestern states and I’m not suggesting that all Republican states are good for real estate investment but when I look at the landscape today I think that there is no two ways about saying that southwestern states are inexpensive, they are Affordable, they have the housing and they have the population growth in the job growth.

California today, is not at the top of the pack when it comes to job Growth, we’re in the middle. There’s other states like North Carolina, Texas, Florida, Georgia that are doing better on the jobs and they’re doing way better on population growth because California is losing large numbers of people to these states especially millennials, who are cash-strapped are moving.

You know for the last nine years the city that has had the most number of people moving in is Atlanta, Georgia. Other cities that have seen a lot of people come in are you know cities like Orlando, Dallas, Austin, you know even Houston has seen a lot of people move from from here. So that those cities have great population growth and it’s that’s driving their real estate and today it’s more profitable but having said that though, the other people know this what I’m saying is not some magic secret thing and so the prices in those areas have also been going up. So where last year I would say yep invest in Dallas or invest in Austin I’m not so sure about that anymore because prices have gone up there. Last year I would say Orlando, Nashville, Denver are good bets and this year I’m like no prices have gone up a great deal there. So, you know, Boise Idaho prices have gone up a great deal.

So where do you invest? Right? Where’s the right place to invest today? Well firstly, I feel that you should if you’re willing to look outside California you have to look at North Carolina. Today when I look at statistics and I’m you know I look at numbers all the time.

If you go to multifamilyu.com I have a presentation that has over a hundred city’s profiled. When I when I look at it I have to say I don’t know what it is that North Carolina’s politicians are doing but whatever it is it’s awesome and everyone else should copy it because I look at the list of cities that show up in my statistics and it’s Raleigh and Charlotte and Winston-Salem and Asheville.

 So many of their metros show up at the top of my list so and and housing is inexpensive in places like Raleigh and Charlotte. You can sell your property in California and buy three of them in a suburban part of Raleigh in Charlotte. You don’t want to go to downtown but 20 minutes from Charlotte downtown you can buy something very reasonable and it’s gonna cash flow maybe not at eight or nine percent a year.It’s gonna cash no more at six or seven but keep in mind these states have great appreciation potential.

So you you want to take a look at those options right and if you don’t like North Carolina then take a look at Jacksonville in Florida. That’s a strong market. If you don’t like that look at Arizona.  Really friendly to landlords. Phoenix is very hot so might be a little late but what about the markets around Phoenix? Gilbert, Chandler, Mesa Arizona in particular is a absolute favorite of mine because it’s a very fast-growing city.

Rents are still reasonable comprises are reasonable and if you still feel that that that is too expensive then look at Tucson which is about I’d say about 8090 miles away from Phoenix and is a strong market. Arizona State University has 55,000 students there so that markets growing really well they also are growing in the healthcare area and the healthcare tourism area those are strong markets to look at. You like Texas, look at San Antonio. That’s a market that’s developing a great deal So I still think that there’s a lot of good markets around the U.S. Bill .

BILL: Are you looking also at you know sort of secondary tertiary markets as well? Are you sticking primarily two major MSAs?

NEAL: Well I’m gonna say something that’s gonna get me beaten up by a few people but, I believe that primaries have today in 2020 the primaries have become more risky and in general the primaries have always been the safest but look at price Increase. Denver prices have increased by fifty five to sixty percent.

So I think Colorado Springs is safer. I think that you know practically any city in a hundred mile radius of Denver is safer than Denver itself. Same thing for Nashville, Nashville has gone up 50 plus Percent. So Chattanooga is a safer bet then Nashville is. Even Memphis in my mind is a better bet. So you’ve got a look at these secondary markets you know obviously tertiary markets are a little more dangerous even in California.

In my mind Riverside is a better bet entire I’ll be the entire Inland Empire is a better bet than Los Angeles at this point of time because the difference between price you know prices and rents between Los Angeles in the Inland Empire is so hug. They’re a huge massive amount of population is being driven into into the desert there.

BILL: Now our are you still finding deals I know you use data metrics a lot, analytics and do you view in your search you find areas where you can actually you know buy some properties under market value still in this economy?

NEAL: I have not found that to be the case. I think that today in 2020 we are in the ninth year of a real-estate expansion and if you’re buying a property under market then the overwhelming chances are that that property deserved to be under market. Right? So there’s something wrong with it something unusual and you’re probably gonna figure that out within three months of buying it that if it wasn’t worth the price that you were paying for It.

So no, I don’t I don’t see a lot of areas in the U.S. that that is the case. Having said that, if there was one area that you have a better chance of that it is the Rust Belt, Indiana, Kansas City, St. Louis, you’ve got Memphis itself I think…

BILL: Ohio.

NEAL: Yeah pretty much Ohio right so you’ve got Dayton Ohio, Cincinnati, Cleveland. There are definitely bargains there but be aware, that you should be looking at population growth before you go into these places. Cincinnati I think is a safer bet than Cleveland because it doesn’t gain population but it doesn’t lose any. Whereas Cleveland’s been consistently losing population, Dayton has been consistently losing population so I think Cincinnati is a good bet.

Philadelphia.. Philly is a good bet for if you want to look at cheaper prices and if you’re focused on you know finding deals that are below market. I think Philly still has a lot of housing that has potential and while the city was losing population in the past it seems to have flattened out for now. So those are definitely some places where you can get deals no doubt right.

 I would just say stay away from dangerous markets like Detroit because Detroit does really well in an expansion and then just gets completely hammered in every recession and I mean I you know I don’t think 2020 is a year but I do think that a recession is is is closed and going into momentum markets like Detroit, it may be a little bit too late for this cycle.

BILL: Mmm got it, good good good points where do you see the you know take look in our audience here you know primarily you know folks 50-plus in age and some are approaching retirement some are in retirement and where would you see it be the sort of smartest places for them to invest right now? and in the real estate realm and that’s a pretty broad well I mean we’ve got you know everything from REITs to single family homes to mobile home parks just you know storage and all these different areas. Where do you think is it sort of a good place for folks that you know again they’ve got this this nest egg and these funds that they they don’t want to risk and so what would you say sort of a good good place for them to go?

NEAL: Well firstly ,I think multifamily is more stable. I want to remind people that wild single-family home prices fell twenty nine percent in 2008 multifamily home prices didn’t even fall 10 percent. Multifamily rents only declined one year in 2009 they were positive an eight they were positive in Ten. Why? Because people need a place to Live. And when you go into a recession millions of people will lose their homes, and some will go live with mom and dad or live in a car or in a mobile home park but the majority are going to end up in an apartment. We are turning into landlord nation and there’s no two ways about that.

 I do feel that workforce housing right not necessarily like not C- but you know B – and C plus workhorse housing is a is a fairly good place to continue to invest in. Prices have gone up there so cash flow has gone down but I think that that’s definitely a good market to invest in. I also think that if it’s a superstar market like Phoenix then you should look be looking at new construction projects there. I I do new construction projects there and I’ve had a terrific response and I have a you know fairly you know oh I have an older audience that’s investing with me and they they like that particular market.

Um beyond what I do, I mean I think that self storage is the market to look at but I would say rather than investing in individual projects you might want to look at self storage REITs. I think there’s now some mobile home REITs coming into the marketplace so you might want to look those. Um, because I do think that there’s trends there I mean what if people can’t afford to live in apartments? They’ve still gotta go somewhere and the two places they go to is well they downsize their apartment and stick a bunch of their stuff in storage or they downside they downsize to mobile home parks right. So that that area unquestionably will continue to grow. During recessions mobile home parks will suffer because of delinquency a lot of you know tenants don’t pay but that’s a short-term thing once you get out those tenants you know the cash flow resumes.

So I think those are two great areas I don’t I don’t work in mobile home parks I enjoy multifamily/ I do do public storage projects, not very often though. So I think those are two good areas but certainly in mobile home parks in my mind are a good place to look especially if you believe that there’s going to be a recession in 2020.

BILL: And could you just define for our listeners or what you would say who are the workforce housing tenants?

NEAL: So the person who drives a bus, who works at Starbucks, works at the airport, people in retail, that all of those people are now workforce housing and unfortunately and this is sad teachers now are being driven more and more into workforce Housing.

So workforce housing is basically an apartment complex that has very little amenities you know. Might have a very small 20 foot by 24 gym but that’s really about it. You’ve got fairly small apartments 8 foot ceilings older properties 30 or 40 years old.

 Some of them have been refurbished so they look a little nicer on the inside but these are you know older apartments and we’ve got millions and millions and millions of these older apartments and the reason why these are better is if you look at rent growth in the last six years. It’s not the good-looking Class A it’s not the okay-looking Class B. The highest rent growth in each of the last six years has been Class C.

Once again, we’re becoming a landlord nation. People are living in apartments simply because they have no hope of owning a home. They can’t even put a you know down payment together let alone be able to pay the monthly payment and so there’s more and more demand for apartments as years go by.

Yes we’re building plenty of new apartments so there’s some incoming supply coming in but that incoming supply that’s coming in is coming in at $1,800 $1,900 a unit. Not in California, in California it’s more like $4,000 a unit.

BILL: Haha, really.

NEAL: Right whereas these these older properties are at $1,000 a unit. So that incoming supply is not an apples-to-apples. No one in America anywhere in any shape or form, today is building apartments and renting them at a thousand bucks. No one is able to do that because the cost of construction is out of control.

China is building a New York size city every three months. Every three months they’re building something the size of New York. Very consuming their own steel they’re consuming their own concrete and because of that the cost of construction in the U.S. that the labor and the material has gone up especially the materials have gone up a great deal. So no one can build an apartment complex at thousand or $1,100 a month in rent and as a result, those class the apartments that exist there’s a finite supply of them and that supply isn’t getting any higher but the percentage of Americans that need to live in them gets higher every year.

 This doesn’t change because a recession is coming right? Let’s say that 2020 is a recession here. Can I segue into that and give you kind of my feel for what happens if there is a recession?

BILL: Yeah

NEAL: Okay, well there’s ways to get around the recession. Here’s what is likely to happen. So let’s say that second half of this year is a recession. A recession is two consecutive quarters of negative GDP growth. So here’s what I would forecast happens you know you you get into the recession the Fed you know announces a recession and what’s the first thing that the Federal Reserve does it’s gonna cut interest rates it’s probably going to cut them from where we are today at 1.75 all the way to zero right.

So they could do seven interest rate cuts doesn’t help anything in the short term because it takes them about nine months to kind of wind their way through the economy but in the short Term what it does is rent growth goes down and all those people that are holding apartments they stop distributing money to their investors, like me. What they do is they start focusing on filling their properties, which isn’t that hard because now as the recession starts people are losing jobs, they’re losing homes.

Every recession more than a million people lose their homes. Well they start moving over to the apartments and because the apartment owners like me are not focused so much on raising the rents they’re focused on occupancy. They take all these people in and they keep their occupancy up. It’s not a great time for us. The delinquency goes up a bit because the people that lose their jobs that are living in apartments we have to process them out. But luckily, I don’t invest in California so it doesn’t take me six to twelve months to get rid of tenants that are not paying. It takes me six to twelve weeks to get rid of them and in some states like Arizona, only takes three weeks.

 So once I go through that transition my property stabilizes I’m able to pay my mortgage and wait. Wait for the end of the recession because that is going to be really awesome. When the recession ends it takes the federal reserve usually one to two years to even think about raising interest rates. The last one ended in 2009 we didn’t end up raising rates until six years later. Even if the next one’s mild it’s gonna take him two years, but imagine that when the recession ends and people start getting their jobs back, you can start raising rents at these apartment properties immediately and then you can refinance at some absurdly low interest rate because the fair is cut interest rates six or seven times.

That actually creates massive amounts of cash flow that we don’t even have today and we’re not in a recession today. So there’s a happy ending to the apartment and landlord story but you’ve got to be very prudent managing your property through the recession.

BILL: Wow great great information Neal Wow well any of the things that you think might want to add here’s where you start to wrap up?

NEAL: Yeah I I just wanted this is for Californians very specific. I know a lot of your audience of Californians. A lot of you are breathing a sigh of relief saying you know what rent control in California wasn’t so bad it wasn’t rakonian like New York our prices haven’t fallen. I want to caution you that the approach of legislators was to get you to accept rent control first.

Please, if your landlords are thinking of buying in California please go to Google and start looking at what they’re planning now. So this is a phased approach they’re fighting a war not a battle and I think at least two more tiers of rent control are coming to California within the next year, year and a half. So empower yourself read about them before you make decisions about investing in California.

BILL: That’s that’s I’ll tell you it’s a little disheartening I’ll tell you. I mean it’s got enough issues here you know with the homelessness and and some of the major metros just falling apart you know add to that rent control and Man it’s a economically it’s just a– it’s not in a great great shape here.

NEAL: Well California is a great state and will muddle along. I just don’t think it’s a great state for the next ten years for real estate. I want to be very specific right we are still a economic powerhouse there’s lots of great reasons for people to want to live in California. So we’re not going anywhere I don’t really see a Californian recession happening with the rest of the country doing well. I don’t see that at all but I do think that their cycles and California is just not a great place to be in real estate anymore.

BILL: Yeah I mean used to be even appreciation that was always gonna be a good one but right now it looks like it may be a while before it’s it’s it’s gonna good it from that standpoint too you know I know guys are flipping here all the time it’s not making money so I don’t know I guess there’s always those that know how to work it but..

NEAL: I would say that given that the economy still has some momentum. Today flipping in California may actually still be more Fruitful. I know your margins are much thinner than they were two or three years. Flipping in California still maybe more fruitful than long-term holds given where we are in the cycle. Given where we are California prices are the chances that those prices fall a bit or plateau for three or four years is much higher than them continuing to go up.

BILL: Good good information you Wow just this has been an excellent excellent view I love the information that you’re sharing again you’re you give us the opportunity to look at real estate from many different angles. I know we didn’t talk as much about the tech applications of what you do which are a big part of what you do and your success but we’re just gonna have to have you back sooner that’s all there is to it.

You’ve got a lot of neat things going on. Maybe you can share with people and one thing we didn’t talk a lot about too is you you’re really busy educating a lot of people too and yeah maybe you can tell us as I you know you kind of share how people can reach you and find out more about what you do but also about you know some of these great educational programs you have as well.

NEAL: Yeah. So, I have had I’ve always wanted to build the Wikipedia of real estate. I’ve always felt that real estate really didn’t have a place where people can go in and do deep dive learning without you know being sold some expensive package or some monthly subscription and so it took me a long time but I have lots and lots of friends in real estate and so we built a website called multifamilyu.com that’s multifamily followed by the letter U comm and we do 50 deep dive webinars there every year and those are. Even though the website says multifamily they’re on everything there there’s stuff there on storage.

There’s stuff there on on the legal aspects you know taxation. We just did one on taxation and 600 people showed up. We we do webinars on other alternative methodologies, we do Airbnb. So the goal there really was to say you know bring in experts from all over the US with a kind of a no sales pitch approach and have a deep dive webinar on their area of competency and leave these webinars on our site. So you know you can obviously sign up for the next the one that’s next week but you can also go back to the one that’s recorded from last week depending upon your aptitude.

I think right now there’s about 50 webinars that you can look at on the site because I I fundamentally think that we learn better in short-term format now. We’re not really set up to go to three-day classes. 45-minute webinars are really consumable. A lot of people are actually listening to our webinars on phones as they drive to work. So checkout multifamilyu.com. About a dozen of my webinars are on there and so are my deep dives on dozens and dozens of cities in the US you know and their prospects for real estate investment.

BILL: That’s great that’s great. Yeah I’ve actually I think I said you to me or what’s it that you’re also on

NEAL: That’s right

BILL: Yeah all right yeah we’re just great information-packed. I mean these these incredible seminars that just are just amazing and you know that and I’m very impressed with the quality of the Information. Not you know like you said there were nobody’s selling anything it’s just it’s just providing great Information. So, those that are looking to move into multifamily, I think that that’s a you know a great place to eat least get educated at least starting out so so how can people reach you? You know what’s the best way for for folks to to get a hold of you and to find out what you’re doing?

NEAL: Well I am very approachable so my first name Neal I use the Irish spelling N-E-A-L. So you can reach out to me at [email protected] or simply go to the website and fill out a form and we talk hundreds and hundreds of investors are benefiting from the cash flow and the upside that we give them where we optimize properties we buy you know older properties we build newer ones. If that’s in an avenue that you’re looking to get into especially with 1031 benefits then I’d love to talk with you just send me an email at [email protected]

BILL: It’s great great. Wow! This has been a blast Neal. Thank you so much, you know it talked about you know there’s another keyword here’s optimization.

I would love to do just a whole show on optimization because right now there are people still investing and still buying properties but you know they’ve they’re not necessarily pouring into those properties 2hat they should just sort of maximize their return and I think you again have made that into a science in terms of some of the things.

We had Anna Myers on, who’s your VP there and shared some great great information. That was episode two nine nine on called “Multifamily Data Science and Optimization”. Just to just kind of touch the surface of some of the things that you’re doing to take the properties you do have and turn them into you know cash flowing like you said you know two to two x or 10x or whatever it may be to to really make a you know make a property that might just be a moderate cash flow or to something that’s really really over the top. So that’s stuff I definitely want to talk about in the future.

NEAL: Sounds good I’ll I’ll come back any time.

BILL: Aha right, great Neal. Well Neal you know our tradition here you can’t get away without giving us your best old hound dog howl are you ready to close us out here with your best town dog howl?

NEAL: I am. Ready. This is good, this is great, ready? Gere we go. *Howls* How’s that?

BILL: That was perfect. Well thank you so much for being on. Really appreciate it Neal.

NEAL: Thanks Bill. Thank you, thanks for having me on have a good, a great day.

BILL: You bet I also want to thank all our old dawg listeners out there too for joining us. I know there’s a lot of other things you could be doing right now but the fact that you’ve taken the time to join us means a lot and we greatly appreciate It.

Please note everything that Neil talked about today and there’s a lot of good stuff there and links as well will be included in our extensive show notes at olddawgsreinetwork.com/blog and you’re gonna look for the episode with Neal Bawa.

Well that’s a show for today Remember; “Cash flow is king and real estate investing the means” until next time keep moving forward and may God Bless!

NARRATOR: Thank you very much for visiting the Old Dawgs REI Network. We would greatly appreciate if you would stop by iTunes and let us know what you think of the show. We would love if you could subscribe to the podcast, give us a five star rating, and write a review the more ratings and reviews we receive the more visible the podcast will be to others. Thank you

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