Jason: Welcome to Howe’s New York with Brooklyn real estate attorney, Robert Howe. Tonight, we’re going to learn about how to buy a building and get some market trends from our special guest, Neal Bawa. Stay tuned for Bob.
Welcome to Howe’s New York once again and here’s our host, as always, Robert Howe.
Bob: Well, thank you, Jason, and welcome to Howe’s New York. I’m your host again, Robert Howe, and as always, we’re talking about a multitude of topics, including real estate community politics and any hot topics of the day. We’re broadcasting from an undisclosed location in Brooklyn, New York to a potential audience stretching from Longyearbyen, Norway to to Tierra Del Fuego, thanks to the power of Blog Talk Radio.
I’m here with my executive producer, Jason Versaggi, or Rising Tide Marketing, and tonight, we have as our guest, Neal Bawa. A little different topic than we normally do on our show, but Neal is the owner, manager, and lecturer on the topic of investing in multifamily buildings.
Along with that, we’re going to pick Neal’s brain a little later on in the show as to what he sees as the forecast for the remainder of 2018 in the real estate market.
Right now, welcome, Neal. Welcome to Howe’s New York.
Neal: Thank you, Bob. Thanks for having me on the show. I’m very excited to be on Blog Talk.
Bob: Yes, we’re excited to have you on and to talk about multifamily properties. Why don’t you give us a little background first? Your background and the background of your company and what you do and then we’ll get into how someone might get into this
Neal: Well, I hope that people will be
I fell into
When you work in technology, when you work in high tech, you’re working 12 hours a day and you’re working Saturdays and you’re working Sundays, and there’s a lot of great things about those jobs, but you do know that as you get older, you will want to slow down, you’ll want to spend more time with your kids.
I started to feel that right around the age of 34, 35, and so I started looking around to see how I could develop passive income. I had been involved in real estate for my job, because my job was for a technology education company and I had to build these large campuses, so I had to buy cold shell buildings and develop them into classrooms and restrooms and office spaces and so I had a lot of experience in commercial real estate, but I actually didn’t know much about single family or multifamily. So, I started in real estate in reverse.
As I started delving into it, I really started to fall in love first with single family real estate and then with multifamily, because of the fact that passive income is possible and because of the fact there were such massively strong demographic trends that were a tailwind for me.
As I went into it, the timing was wonderful, first for single family, I started buying in 2008 and I was buying at 30 or 40 cents on the dollar and the math all made wonderful sense and I couldn’t figure out why people around me were telling me that I was an idiot. I bought as many as I could. I bought 10, which is the maximum number of rentals you can get loans on. And then I actually separated my finances from my wife and I also bought 10 triplexes for her before she ran out of loans. All this time, people are telling me that I’m a moron, I’m an idiot, and I shouldn’t be buying any of these. I’m saying, “Did you ever look at the math? The math is incredibly compelling. I’m buying these properties that make me 10% on day one, but when I extrapolate 2% rent growth out 10 years, I’m going to be making 25% cash on cash. I can’t find anything like that.”
A lot of them would just look at me as if I was an idiot and I was like, okay, maybe they’re not looking at the mathematics of this. I’m a computer science guy, so I’m looking at the math and it’s so incredibly compelling, so I just kept doing it. But sooner or later, I ran out of loans and that’s when I found multifamily. I can tell you, Bob, once I found multifamily, there was no way for me to go back to
So, that’s my story.
Bob: Well, you, unlike a lot of investors, looked at the numbers and they made sense and you went with the numbers, rather than with the general real estate feeling pervasive in the United States 2008 until recently, of, “It’s a bad market,” “You shouldn’t get in, it’s dangerous, you could lose your money,” and you went against those trends because you looked at the numbers and the numbers worked for you. You really did not factor in the feeling, the real estate feeling that was going on in the United States, you just looked at the numbers and the numbers worked. That is a great story.
Tell us, we’re morphing into multifamily investment, explain what that is.
Neal: Sure. 1 to 4-unit properties in the U.S.
This also means that it never shows up on my credit. Technically, I could buy a million multifamily units and it would not show up on my credit because I’m buying a business. I love that fact of it and the fact that it is not a mortgage against my name, it’s a mortgage against the asset. This allows me to leverage and keep on growing. I’m currently at 1,100 units and I was at zero units five, six, seven years ago, and there’s no way to do that with
The other piece of it is, that unlike single family, let’s say that you buy a single family rental and that rental is $250,000, and that’s the market value. Well, let’s say you raise rents by $100, but your property is still worth 250. It’s not worth one dime more because you were able to raise rents. Its market value is really the ceiling.
Now, that’s not what happens in a multifamily. In a multifamily, if I have a 200-unit property and I raise rents by $25 on each of those units, on average in the U.S., I have just raised the value of that multifamily by $857,000.
Now, in places like the San Francisco Bay Area, I’ve actually raised it a million and a half, and this is not one of those happens in some instances sort of explanation. In every scenario, I raised the value of that property between 800,000 and $1.5 million on a 250-unit property. That’s because the value of the property is based on the income and I just raised the income, so I raised the value of the property immediately and I can cash out tomorrow, if I like, at that higher value.
To me, multifamily is a business, where single family rentals are like a job. That’s what I enjoy about it and that’s how I’ve been able to skim.
Bob: Yeah, so it’s interesting you ran out of—your credit was tapped in single families and you jumped to multifamilies where, you’re correct, the banks now look at it as different and say, “What can this property do on its own? We really don’t care about Neal’s credit worthiness. We care about what the property is spinning off.”
Then as you point out, you can increase your value on your own because that’s where the value of a multifamily is in the rent
Neal: In the income, that’s right. So, if I do a better job than the previous owner, my property is now worth than his within a month, within two months. I don’t have to wait for inflation, I don’t have to wait for values in that area to rise. In my mind, I have much more control over my destiny for my multifamilies than I do for single families. Keep in mind, the same thing happens for a recession. If a major recession happens, single family values could easily drop 20 or 30%, but keep in mind, in 2008, rents only dropped 9% nationwide—9%. Single family prices dropped 30%. That’s because when a recession happens, a lot of people lose their homes. Where do they go? They go to multifamilies. They go to apartments. So, rents don’t drop as much. They will drop a little bit because some people are simply not able to pay. People living in apartments may not be able to pay, so delinquency rises. I’m not saying recessions are good for multifamily, I’m really happy with the current business environment as it is.
But I also know that when bad times come, my overall rents are not going to drop 20 or 30%, they might drop 5 or 10%, because people still need a place to live and more people live in multifamilies during a recession than during a boom, because they have no choice.
Bob: Tell us, Neal, where was the first place you jumped in on a multifamily and where were you looking for these properties?
Neal: That’s a very good question because a lot of people that come to my website, which is MultifamilyU.com, it’s an education portal for multifamily, it’s a free portal. That’s one of the key questions that people are asking: Where are you looking?
The short answer is: Wherever the data takes me. One of the things that I don’t like saying stuff is: Dallas is a great market. Now, as it happens, that is true, Dallas is a great market, but the answer really should be, let’s look at the data on an annual basis and make decisions according to that. So, Dallas does show up as a great market, but I’m not sure how much longer that will be the case.
My goal is to follow the data. I can give you my data sources. None of them are free, but thanks to the explosion in technology, resources that cost tens of thousands of dollars in the ‘80s, now cost less than $1,000.
For those of you that are looking to buy your first multifamily, maybe you are buying something that’s 5 or 10 or 20 or 30 units, the resources are inexpensive. There are two areas that I recommend and if you follow what’s in these websites, you will end up buying where I’m buying because I’m simply following that information.
The first resource is a website called Housing Alerts, HousingAlerts.com. It’s Ken Wade’s website. He’s a Stanford graduate, very, very smart guy. Basically, what he does is he uses a wide variety of data to predict growth in both housing, which most people are looking at, you know, new housing prices, and then also in rent. Folks like me, that are in the multifamily realm, are really looking very carefully at rental growth because while there is a direct correlation between housing price increases and rent increases, it doesn’t happen in every case and it also is not 100% correlating in every single case. We look at both of those and we look at HousingAlerts.com.
Another website that I also pay for is LocalMarketMonitor.com. That’s LocalMarketMonitor.com. That’s Ingo Winzer’s website. I’ve actually had Ingo present to my students and he uses three or four big data points and translates that in the housing price increases. There are population increases, job growth, income growth, and housing trends growth. He’s looking at these four pieces and he’s using them to extrapolate future price increases and I care a lot about future home price increases because they are a multifamily demand is a lagging indicator of home price increases. Why is that?
Let’s say home prices are increasing in Salt Lake City. For some amount of time, people will be able to stomach those increases. They’ll keep buying homes. After a while, they won’t be able to buy homes, so they’ll start renting homes. That’s the second choice.
Well, after a while when prices continue to go up, they won’t be able to rent single-family homes either, so then they’ll rent apartments. This means that
This is really awesome for
I love these data sources because single family gives multifamily guys like me a unique advantage, a way to see the future.
Bob: Let me ask you: Of course, you’re on the West Coast, if I’m not mistaken, Neal, and we’re on the East Coast and we have these things called rent controls and rent stabilization and things like that. Does that show up in your metrics or how might you factor in or factor out those regulations?
Neal: The short answer is: As much as possible, we try to stay away from rent-controlled areas. I think that rent control is a very socialistic mechanism that has not succeeded. You look at the most expensive market in the U.S. for rents and it’s San Francisco. Well, it has rent control.
You look at another very expensive market in the Bay Area and it’s Oakland. Well, they have rent control. There doesn’t appear to be any evidence that rent control actually reduces the rent in a particular market. In fact, what it does is, because of
Now, that’s a very slow process. I would not recommend people going into rent-controlled markets until they completely understand the laws and they have a very good plan of doing enough rehab to increase their rents. One of the ways of getting around rent control is to rehab the property to a certain level where you can increase rents. That is very complex. There’s a lot of laws involved, so I suggest that most people that are buying their first or second multifamily stick with market rates. Don’t go into an area that has rent control initiate.
Bob: So, someone who is interested in making their first investment in a multifamily, most likely would they be buying in their own community or around their own community?
Neal: I think that the resources that I gave you, Housing Alerts, Local Market Monitor, there’s another one called CityDashData.com, that’s free. Housing Alerts and Local Market Monitor will cost you about a thousand bucks or a little less. But if you would like to know local markets and you don’t want to spend a lot of money, here’s another one: NeighborhoodScout.com. Go in and buy a $50 a month membership to NeighborhoodScout.com and start looking at all of the neighborhoods around you. You’ll notice that real estate is extremely, extremely specific and extremely local. You might see a Class A area right next to a Class C area and that happens in San Francisco all the time. One block you’re looking at a Class A building and a block from there you’re looking at people selling weed and all kinds of bad stuff going on one block over.
Real estate is very local, so use NeighborhoodScout.com, find good neighborhoods where Neighborhood Scout gives it a high investment score. A high investment score means there’s a lot of opportunity in that area and start
That doesn’t mean that you necessarily have to do it, though you’ll probably do better if you get over that mental hurdle of looking to buy locally. It’s more of a mental hurdle than anything else.
Bob: Besides the numbers, shouldn’t an investor, first-time investor or second-time investor be looking at cost of management and the phone call at 3:00 in the morning, “I don’t have any heat type of thing.” How are you telling your students to deal with issues like that?
Neal: Well, the key is good property management. When I’m teaching bootcamps on buying apartments, I give my students a set of resources and I tell them, “Follow these resources and you’ll end up with some of the best property managers in your area.” Also, it’s better to work with multifamily property managers than single family property managers. A multifamily property manager is more scaled, so typically has 2,000, 5,000, 20,000 units under their control, than a single-family property manager who might have 200, 500, 800. Because they’re more scaled, they’re more likely to be already set up to take that midnight phone call about no heat or the toilet
The key with multifamily is, that as you scale, as you get to bigger—and this may not apply for a 6-unit or a 10-unit multifamily, but certainly applies for a 50-unit multifamily, is that when you scale, you become less and less of a tenants and toilet guy and you become more and more of an investor. As an investor, it doesn’t mean that you’re not putting work in, but your focus is on financials, metrics, or numbers and on the performance of the property, not the actual tasks connected with the property.
Very quickly, my students kind of get to that point where they’re focused on performance and metrics than on tenants and toilets.
Bob: Now, we’re talking about basically you investing in a property on your own. Is there a vehicle for groups of people to invest with other groups of people if they’re maybe a little timid, shy, don’t have enough capital for a variety of reasons? Are there groups that either you put together or that you know of that someone can jump in and take a piece of a multifamily project?
Neal: Absolutely. Absolutely there is. In our case, that’s how we’ve gotten to our thousand units. We’ve essentially pooled investor funds together. So, at last count we had 208 active investors that currently have money invested through us, about $28 million of their money was used to buy over $100 million of real estate and we manage that on a daily/weekly basis. And so that’s a very passive way of investing in multifamily.
If you’re a technologist and you’re working 11 or 12 hours a day and you’re looking basically to place passive money for both cash flow and upside or eventual gains when the property is sold, then folks like me essentially are that bridge. So, we purchase properties that are $17 million that are cash flowing at 8% cash flow levels, about a year, year-and-a-half after we purchased them.
We’ve also purchased properties that are new construction properties that don’t cash flow in the first two
It all really depends on the project, but what’s nice is that there’s a lot of vehicles available for people that want to invest passively and think about it as just a way to get started. You should get a detailed monthly report from the company, the syndication company that you’re working with. The process is called syndication and by that, you can actually learn a lot of multifamily over the first two or three years and then decide if you want to buy one yourself.
A lot of my students are actually not looking to buy multifamilies with their own money. They’re looking to use
Bob: Yes, syndication is the way to go for the people who don’t want to dive—who just want to put a foot in the pool and not dive in the deep end right at the beginning.
Neal: Exactly. A way to kind of watch what’s going on. It’s just they’ll have a nice view
Bob: Gotcha. Talk a little bit, I’m looking at your website, I see you’re doing webinars and Meetups and things like that. What might a novice want to look at or take or attend any of your either webinars or your
Neal: The place to start for everyone is my most popular webinar, which is called Multifamily Fundamentals and I teach it every month. It’s an hour long. It is absolutely data-packed. You don’t have the time to blink. It’s an hour and then after that, I answer questions for about 15 minutes. And it covers pretty much at a higher level, all of the aspects of buying a multifamily.
And then after that, if you get interested and you go, “Okay, well, fine, that’s great, but I want to dive down a little bit deeper,” then there is a second webinar, also free. All of the webinars on my website are free, and that one talks about how to do analysis on multifamily properties.
Most people feel comfortable doing analysis on single family properties. Even though I’m not sure they do a very good job of it, but because they know that a whole bunch of other people that they know have purchased single family, they feel that it’s easy enough so that they should be able to do it.
Well, analysis on the multifamily side is a little bit harder. There is quite a bit more to learn, but it is a one-time process. This webinar, which again, is very data-packed, shows you what to look for. What are all the terms? What is the difference between VCR and cash-on-cash and cap rate? What are the rules of thumb to think about when you’re looking at rehabbing an old property and creating new units, what kind of rent bumps would you get?
All of that information is discussed in a 75-minute event and that’s the Analyzing Multifamily Properties Event. I teach that every month as well.
Bob: And I see you have a—is that within the Meetup concept or are these individual, separate webinars?
Neal: These are all webinars that anyone in the U.S. can take. You don’t have to be in the San Francisco Bay Area. The Meetup concept is for people that are local to the San Francisco Bay Area. So, we’d run Meetups here. It’s really the same content. If you’re in the Bay Area and you like face-to-face interaction, you can attend the events by going to physical locations. We have two physical locations in the San Francisco Bay Area.
But the same content is also being shared to you through webinars. In fact, sometimes the webinar content is better because you also end up with a recording. You might go to an event and you might really like what I have to say, but 30 days later, you might not remember the specifics. But when you’re going to a webinar, you have a copy of the recording with you, so you can go back 30 days later and say, “What did Neal say about how to calculate cap rates? Oh, okay, let me watch this webinar one more time.”
I think the digital piece actually has some benefits that the face-to-face doesn’t.
Bob: Gotcha. Why don’t we segue a little as we’re getting to the end of the show? A little bit about your market forecast for real estate through the end of 2018. You know, we’ve had maybe five years of saying, “The rates are going to go up, the rates are going to go up,” and they didn’t, but now they are going up. And a few new tax laws, also the complaint that inventory is tight throughout the United States. Give us your take on what’s happening, what might happen in real estate for the remainder of the year.
Neal: Sure, Bob. I’m generally a well-known bear. I’m usually bearish in my forecasts and 2018 is actually the first time in the last five years that I have a bullish forecast for the year, even though interest rates are going up. You look at all the different factors that are affecting numbers, and I have to tell you, Bob, the interest rates are not the big mega factor. The big factor is inventory. The supply is going to be the big overhang. The supply is going to be the primary determinant of prices in 2018, well into 2019 because we’re not building a good number of homes, but almost everything that we’re building is really top of the market. Because construction costs have gone up so much, builders no longer focus on building for the average American, their focus is in building expensive homes.
If you look at the row houses that we used to build in the ‘80s and the ‘90s, where are those? Everybody is building much bigger stuff. Everybody is building granite countertops and steel appliances. Well, that’s not what the average American wants. And so, we have a real supply problem. It’s going to persist throughout 2018 and 2019 and I think that it may not get resolved for a while until we have the next year’s session, right? I project a session in 2020 and I act accordingly. But until that happens, I think that we’re going to have supply shortages.
Now, having said that, for those of you that are interested in multifamily, remember this number: If interest rates go up 100 basis points—so right now, let’s say the interest rates are 4.75 on a 30-year fixed. Let’s say they go up another 100 points, 4.3 million Americans will no longer be able to buy homes. That’s 100 basis points. They could go up more, but in the short run, with the Fed raising rates four times this year and perhaps once or twice next year, we should see mortgage 100 basis points. Now we have 4.5 million brand-new people that cannot afford to buy housing that
This is why I’m so bullish about multifamily in general, but that doesn’t mean I’m not bullish about
But in the low end and the
Bob: I guess what hurt us in the 2008’s were bubbles. There are no bubbles around anymore, or are there?
Neal: There is a bubble. In my mind, real estate and stock are a bubble. Here’s the problem, and both should have corrected two or three years ago. Here’s the problem: What we have is a bubble that is hard to burst and why is this bubble hard to burst? Traditionally, bubbles, by their very definition, we look at a bubble, it’s an easy to burst
When it sees yield in U.S. stocks, when it sees yield in U.S. commercial real estate or even
What’s really happening is, all the time, there’s somebody poking a pin into the bubble and as air is rushing out, some of that $13 trillion rushes in and seals the bubble again. So, we have a very unusual situation. I’ve never seen it before. I certainly can tell you that the time since 2008 is unprecedented. You know, the monetary policy and its fiscal impact and its impact on the real estate market
Bob: They sometimes have rules of their own it seems, Neal. Well, Neal, we are at the end of our show. This has been a fascinating, a little more than a half hour of chatting with you and hearing your insights and love to have you back on another occasion to maybe focus in on another area of things that you teach, lecture on, or suggest that people invest in. We loved having you on the show and hope to see you in the near future.
Neal: Thank you so much, Bob.
Neal: Thank you, Bob.
Bob: You have a great website. Thank you, Neal. This concludes tonight’s radio program. Thanks to Blog Talk Radio for hosting our show and thanks to our guest, Neal Bawa, who talked about multifamily real estate investing, how you get into it, different ways you can get into it, why you should get into it, and if you need information about how to get into it, his website, MultifamilyU.com has dozens of webinars and Meetup and training programs that you can check out.
We thank him for coming on our show this evening. This is Howe’s New York signing off. God bless Brooklyn and all of its people. Wishing you a good night and a good morning and a good afternoon. I am your host, Robert Howe.
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