Evaluating Markets with Neal Bawa

by Neal Bawa | Starkey Multifamily Investing

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My name is Reed Starkey and I am documenting my journey towards multifamily investing. I will be interviewing the experts as I grow my team and also documenting my success as well as my setbacks along the way. I hope you will enjoy this journey with me.
Known as the Mad Scientist in Multifamily and Data-driven Multifamily Expert Neal Bawa discusses about evaluating markets.

For free knowledge webinars, please visit: https://multifamilyu.com

For training on how to find the best cities and neighborhood, kindly go to Udemy/realfocus

REED: Hey guys i just wanted to take a minute to tell you about Spotify where you can listen to all of your favorite artists and podcasts in one place completely free. You do not need a premium account. Spotify has a huge catalog of podcasts on every topic including this one here with multifamily Investing.

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REED: Thank you for tuning in to the starkey multifamily podcast my name is Reed Starkey and I have with me Neal Bawa. He is also known as the mad scientist of multifamily. I definitely like that title uh he’s also known uh for being the data-driven multifamily guru or expert i guess we’ll say. So um i would like to introduce Neal Bawa. Neal thanks for coming on.

NEAL: Thanks for having me on the podcast very excited to be here Reed.

REED: Yeah so so Neal, tell us a little bit about how you got started in the multifamily and and then we’ll tag into some of the bigger stuff you’ve got going on today.

NEAL: Sure, well a fairly atypical start right. So a lot of guys that get into real estate you know because they’re brokers or because they’re you know they invest in single family and uh that that’s that definitely didn’t happen for me. I’m I’m not part of the typical real estate Industry. I’m a technologist. I’ve had a successful tech career.

Worked for a company for 17 years that I was a partner in had a successful technology exit. Retired, found retirement to be the most horrible and boring thing that one can possibly imagine. I don’t even i mean retirement is not something to celebrate because your brain starts to melt down the next day and so that was that was horrible.

Um so i I’ve had all of that but I’ve always been in real estate and so people ask me how long you’ve been in real estate and my answer is well that depends on where you start counting because unlike most people that start with a single family rental I started with a new construction project in 2003. I was running a tech company, we had hundreds of employees and lots of cash and and we decided to build our own custom campuses as opposed to just renting an existing campus right.

So built our our flagship headquarter campus in Fremont California the home of Tesla so that’s a now that now the city is famous because Tesla built an even bigger campus but we built one that was really well known at that point in 2003 2004 and and and it really ignited our growth. The campus was actually part of the growth of the company so two years later i was forced to build an even larger campus and much more expensive campus and we didn’t have we just put up millions of dollars to build the first one so we didn’t have the cash to to to buy all of the second one and so we ended up doing a Syndication, an actual real estate syndication.

We didn’t even know that word, we probably violated every scc law that ever existed because we didn’t even know what we were doing right. We were not real estate guys and so we bought in a bunch of people and they all invested their money and we basically pulled together and basically built this building from scratch. It was 33 000 square feet and a fairly expensive building and it was really successful for everyone concerned.

There were a bunch of doctors that invested in it and we basically rented their suites back for for our business because that’s that was the purpose of building it our business was growing but we didn’t have the the money to build the whole thing. So we we had them buy shares in in the building and then they rented it back to us and 12 years later it still rendered back to our business.

So it really worked out for the doctors but it really also worked out for me because one of the doctors fell through and I ended up with one of the suites and I immediately noticed that my taxable income had gone down a great deal right. My income was up but my taxable income was down at the same time i was like ooh what is this right and i had this big fat tax salary so the impact was very substantial because I was paying 50 in taxes right.

I I live in Taxiformia so you know we get taxed like crazy. You know, so 53 was my my tax rate and that all of a sudden I’m like oh I’m paying a lot less in taxes than I thought i would and it’s like oh it’s this real estate thing. Oh so I’m making Money and paying less in taxes at the same? Time this is awesome. Can we can i do more of this? Yeah and so I decided to go out and buy 10 single-family homes in California, which i still own. Awesome you know single-family homes they they cash flow like crazy.

Then i got overconfident and went to Chicago and without really understanding the market bought 10 triplexes there, suffered. Six months later I was minus five thousand dollars a month in in cash flow because you know half of them were empty and the other half of the tenants were not paying and so I had this this horrible problem which led me to start researching something that I’ve become you know fairly famous for and that’s real estate demographics; the art and science of picking the best cities and neighborhoods in America, and it came out of the intense pain that I had to um to uh go through in in Chicago but the story ended well because I learned how to be a tenant marketing expert because what i realized is if I wanted to get rid of these properties I had to lease them up first and i had to lease them up with paying tenants not somebody who’d pay for a month and then stop paying. so i didn’t i needed to find a lot of really good tenants and to do that i became a tenant marketing expert.

I found a bunch of people in the Philippines that helped me and we Generated thousands and thousands and thousands of leads for those triplexes in Chicago and rented them up with great tenants and built a six-month history and then sold off those properties and so it it all ended well but during that process of pain is when I came up with the real focus system and now there’s between five and ten thousand people a year that study the real focus system to understand how to invest in the best Cities and neighborhoods in in California and all of this while I’m doing full-time tech right.

 So so it was uh it was interesting how things just kept rolling and then I invested in passive syndications and became friends with my syndicators and they started teaching me a lot of very useful stuff that that really helped me with my evolution as a multifamily syndicator. Once again, doing this while I’m running my tech business so when that business finally was sold in in July 2013 i was really ready. I had a big meetup group i had a fan following, i had people that were looking at all the data analytics stuff that i was doing and so the transition became fairly seamless.

At that point and flash forward six years later we’ve got a portfolio of over 200 million dollars. We’ve got about 1800 investors that are working with us on an active basis. Passive investors uh about 50 million dollars of their money has been invested and we’re on track to raise 35 million dollars in equity this year. So so it’s been a it’s been sort of a story that sounds like it was very planned but it was completely unplanned.

REED: Well yeah and it worked out great for you and you’re doing some big things. So right now you’ve got uh you just closed on something really big.

NEAL: So i closed on phase one. So it’s a uh, race mill is a 130 million dollar construction project in Provo Utah. One of my my favorite markets in the U.S. and I’ve been talking about it for three years. So if you’re listening to my podcast that I’m appearing on you’ve heard about Provo and so it’s it’s it’s in Provo it’s also an opportunity zone project.

 So it’s it’s tax-free um and that particular project is in four different phases. It’s due to to reduce the risk and phase one was a 36.9 million dollar project and with a 10 maybe 11 million dollar raise and so we we just closed on phase one of that project. So I’m excited because i don’t have to put in any work for phase two because i have a waiting list at this point of 71 investors that want to get into phase Two. So can’t phase two can’t come soon enough

REED: That’s fantastic. So do you run a separate syndication for each phase then?

NEAL: Yes we we we do not believe in the concept of funds. We believe that blind pool funds best basically are not the best service for an investor really should make their own decision on Whether they should be investing in in something or not.

 So all of our projects are single Purpose funds and so an investor can choose to invest in phase one of a project and not invest in any of the other phases or invest separately in in three other phases and get paid out separately.

REED: When you do it when you break it up into phases how do you determine the profit made for phase one as opposed to the profit on phase three?

NEAL: Well to some extent, by basically each phase you know truing up the other Phases but for the most part they’re separate buildings right? So phase one is one big multifamily building in a smaller building and phase two is condos and offices phase three is a separate multifamily building. So it’s not that hard to separate it out when you’re building separate buildings.

REED: Got it yep that makes sense um so that’s that’s fascinating. So, i want to get back to your Chicago thing when you talked about learning the different markets and i want to touch on a few things on evaluating individual markets. But tell me, first when you talk about a market being bad or good or even you know you’ll see better cap rates out out of metro areas? you know the more you get into the you know the further away from the metro areas you’re going to get better cap rates. Why are those in your opinion? Or are those in your opinion not as good of a deal and why?

NEAL: Well I think that the the answer is it depends. In 2019, Today, many of the tertiary markets are better than secondaries because i believe that what’s happening is that the primaries and the secondary markets are commanding such an insane price premium. That that price premium is not worth the benefit that you will get when you hit the next recession. If the next recession lasted for four or five years, the primaries in the secondaries would have been better choices.

If the next recession lasted nine months, which is the the typical duration of a us recession, then it makes sense to have gone to that tertiary, you will suffer More during that next recession in the tertiary. Tertiaries get hit harder but because you’re paying such a massive upfront price premium today for your primaries and secondaries in my mind over a five to seven year hold you’re going to come out ahead in the tertiary right. So all you have to do is to be willing to convince your investors that if a recession starts be much more conservative.

Don’t distribute as much cash flow. If you’re distributing eight percent drop to four and put the rest of the money in a um in a war chest in case something bad happens because statistically speaking it’s more likely that bad things will happen in a tertiary market during a recession than in a secondary the secondaries and the primary areas have more jobs than the tertiary does. So jobs do tend to flee temporarily during a recession. Also, tertiaries recover slower than primaries and secondaries.

 On balance today though, my belief is that if i look at 100 primary markets 100 secondaries and 100 Tertiaries, on average the tertiaries are going to beat the secondaries and primaries but there are individual primaries or secondaries that probably are better. So hopefully that answers that question I know that was a very technical answer.

REED: Well it was good and I got a couple follow-ups on that. So first of all, very simple question but for those that are unfamiliar tertiary market for primary and Secondary can you give a quick description of each?

NEAL: Sure so uh so a primary market is the San Francisco bay area and so it’s it’s a big market it’s a primary market. Institutionals love investing in primary markets. They rarely invest in secondaries. a secondary market is Sacramento Sacramento is about 100 miles from the San Francisco bay area. It’s still a million people but it’s considered by most people to be a secondary market. A tertiary market is a market around the Secondary Right.

So uh 50 miles or 60 miles from uh for whom Sacramento is a market like Yuba city or Chico or Stockton Modesto. These are all tertiary markets because they’re too far from a primary or secondary for people to effectively be commuting there right. So so a tertiary market could be one you get where you can commute into a secondary or you’re like a hundred miles from a primary.

So those are tertiary markets at this point of time so an example of a well-known tertiary market thanks thanks to all the work that I’ve been doing is is to my audience is St. George. So if you look at St. George the closest metro is not Salt Lake City even though St. George is in Utah it’s actually Las Vegas and Las Vegas is two hours away therefore St. George it is a true standalone tertiary.

REED: Okay. So thank you for that it was a very good uh description. So one other question i wanted to talk to you about and this may be a little bit difficult to explain? or even answer but we talked about markets so being overheated a little bit before the call and so there’s going to be a delta between maybe the value that a market gives you and the cap rate that the market has determined the value is.

 So how do you determine or do you look at that do you say you know these two markets have the same metrics as far as population growth and economic job growth etc but one is typically trading at a six cap and the other was at a five five cap do you look at that at all?

NEAL: I used to look at it and I no longer look at it at all. One of the weird things that happened in 2008 is so a lot of you know a lot of professionals that work in real estate know this. There is no real estate cycle. There are Roughly 400 real estate cycles in the U.S. because there are 400 named metros or msa’s in the um in the uh you know in the U.S. So these 400 metros they have their own cycles but unfortunately, in 2008 for the first Time in real estate history all 400 cycles reset.

Now, since they’ve reset they’ve gone at different speeds so some might be considered ninth inning of the ball game and some might be considered six but there really isn’t anything in the third inning of the ball game. Right? So the the u.s for the first time has seen cap rates of primaries and secondaries merging so much so that today a primary and a secondary has almost the same cap Rate. So this delta that you’re talking about truly doesn’t exist.

Now in some ways it does exist. In Cincinnati today, a typical class b is five and a half cap but it’s also five and a half cap in in phoenix and i would much rather pay five and a half caps in in phoenix because phoenix’s demographics are so much better than Cincinnati that it doesn’t make any sense to me that people are paying five and a half cap in Cincinnati. I wouldn’t mind paying six and a half cap in Cincinnati but it appears that practically every metro in the U.S. you know is is at the same cap rate for a certain class which makes no sense whatsoever. Right?

REED: So is there a way somebody getting into this could say you know maybe their home market is Cincinnati and look at it and say this is too low of a cap for what I’m getting? I’m not getting the same value as I would in phoenix because that’s one of the biggest things which i want to get into in a little bit Is how do you how do you pick a market?

NEAL: Well the short answer is you look at the Demographics. Right? So when I’m saying phoenix is better than Cincinnati, I’m not saying it because I’m invested in phoenix I’ve never invested in phoenix. Right? I’ve never invested in Cincinnati either but in my mind if you had 10 real estate demographers Sitting around a demographer sitting around a table and you basically asked them which of the two is substantially better all 10 of them would immediately tell you phoenix is substantially better than Cincinnati because they’re all using the same metrics, right?

So there’s Five basic metrics that appear to be universal that all demographic demographers use and in in and then maybe they have a sixth or seventh they’ve got all got their own tweaks but unquestionably all demographers use these five and that is and you know we’ll go through them one by one but here’s here they are quickly population growth, job growth, home price Growth, income growth and crime reduction.

So when you look at these five there’s no way that phoenix compares with Cincinnati it is so far above Cincinnati for all of those Metrics that you’re not even really comparing to apples to apples. Phoenix should be compared with Orlando and Cincinnati should be compared with Cleveland. So why are cap rates in phoenix the same as Cincinnati? I have no idea i think the only answer I can give you and i know it’s a stupid answer but might still be true is there’s lots of people that are rich in Cincinnati that don’t want to travel to Phoenix.

REED: That’s a good answer so..

NEAL: And that’s why what I’m saying is today doing the whole which markets have better cap rates is a futile exercise. Every market appears to be at five cap for B’s and six calf for C’s. It’s just there you know and of course there there’s really horrible markets that are you know seven or eight caps but i mean these are markets where there are ten percent unemployment where the us is at three percent. My question is why should you even look at those markets? You know what’s going to happen to them when you hit a recession right they’re going to go to 20 or 30 Unemployment. So just don’t even look at them they’re not worth it.

REED: Right

NEAL: At 10 cap they’re not worth it and you’re just getting one cap as a bonus you know going from six to seven.

REED: That’s interesting so and I’ve seen you talk plenty about the you know those five factors so i don’t know that i want to Bore everybody with too many details on them but do you want to take a few minutes and talk about each one and why that’s important?

NEAL: Sure I’ll do a quick view. Basically, you do you you want to invest in places that have at least one i’ll give you the the quick version of this right. You want to have at least one percent annualized population growth google will give you those numbers and you can it’ll give you a chart the older number the newer number make sure it’s about a percent higher is better right.

On the income side you want to be at About one and a half percent annualized growth in income minimum two percent is much better. On the home price side you want to make sure that you’re at least at two percent annualized home growth three percent is better and a lot of great cities like uh good cities to invest in like phoenix are at four percent annualized home price growth.

 Uh Orlando’s at close to five percent right. So it’s not hard to hit the home price number and then on the in the on the crime number you want to go to city-data.com type in the city’s information scroll down to the crime table at the bottom there’s a blue bar make sure that the number on the right is below 500. So a number below 500 means that your city is doing fairly well on the crime. It’s not a very heavy crime heavy city. Memphis is a crime heavy city, St. Louis is a crime heavy city, Oakland California is a crime heavy city.

You, unless you’re really experienced and you know these cities well there’s lots of Great money to be made in Memphis but if you don’t know what you’re doing in Memphis Specifically that may not be the best choice for you. Right?

So there’s people that will do really well with those those kinds of assets but they know exactly what they’re doing. So and then the fifth fifth one is job growth and that comes from the website department of numbers.com so that’s deptofnumbers.com/employment/metros. Go to that page, the column on the right is the one you sort and you’ll immediately notice that there is a spectacular difference in job growth between cities.

 At the very top cities like Reno Nevada, St. George Utah are at six percent job growth. That’s insane at six percent job growth you can make every single mistake known to man and still walk away doubling money in five years four in three years. Right? and then at the bottom of the list are a bunch of cities in Louisiana and Indiana like Lafayette Indiana and Youngstown Ohio. I can tell you, you could be.. God would have trouble doubling investor money in five years in in Youngstown Ohio or or in Lafayette Indiana. I mean, it is just incredibly hard.

REED: Yeah and and you’ve got some and the reason I tried to make that small is you’ve got some hour-long videos that are fantastic. Is there one particular you want to share with them that i can put in the comments ?

NEAL: Well i think to me the best way to have access to this information if you’re really into it and really everyone should be into it is udaemy.com/realfocus. So what i did Was people kept asking me to build a course around it so i finally did. It’s a completely free course. It’s very very step-by-step it’s very detailed comes with excel spreadsheets and completely free and and doesn’t sell or upsell anything.

So it’s it’s just my gift to people based on the pain that i went through in Chicago, it’s u-d-a-e-m-y.com udaemy.com/realfocus. Go there and you’ll notice that thousands of people are taking that course at this moment and also read the reviews. I think it’ll open your eyes to what is possible with real estate analytics. You know i tell people this read i mean and i hope you remember the the the if this is your one takeaway it’s worth it; “the least sexy things in life are the most sexy things in life” because the people that focus on the least sexy things get the most outrageous returns.

REED: Yeah I think that’s a great point and i i know that your Video so how i got turned on to you is i I couldn’t find anybody that had good resources on how to really dig into a market. You know they had just a few different things and they Mentioned the five points that you said but nobody really got into it and there’s a video and I’m pretty sure it’s on your um that website you gave me that is about an hour long. It’s it’s long and it goes into each section and it talks about him and it is fascinating so you know we just don’t have time for that on this show but i definitely recommend going there and checking it out. Uh, it’s wonderful information so thank you for sharing that so as the the man of the mad scientist of multifamily and the data-driven analysts so market is very important to you what are some other high on the list things that are important to you as far as what you look for?

NEAL: Well so a lot of people believe that our secret sauce is all this demographic Stuff and it’s anything but secret of 10 000 people are taking a course right now right? So to me it’s our least secret sauce it’s still part of our sauce it’s very important but what i consider to be our secret sauce is two things. Number one, we believe that asset management Again, very very unsexy, is the true secret to success. When I’m on Facebook and i see all these young syndicators high-fiving themselves on buying this property and buying that property and and this is in 2019.

I encourage them to understand what they’ve just done by buying a property. So imagine that you’re on a boat and you’re in the middle of the ocean right and what you’ve done is you’ve got this anchor and it’s got a heavy chain now imagine if you’ve wrapped that chain around your neck and you’ve thrown the anchor in the water now the day that you purchase that 200 unit property that’s you. That’s you now, over the next 24 months you have to make sure the anchor doesn’t drive drag you down because that’s the end of your property right and somehow magically you have to pull that anchor back up right and not fall off the boat right and you also can’t let the anchor go because the anchor is the property. You can’t just unwind it around your neck Either because that’s not going to work right?

So somehow you have to keep it tight around your neck and still hold on to it. That’s you and so the fact that for every 1 000 posts about people excited about buying a property, I cannot find one post about people talking about asset management. Really gets me because all the value that you promised your investors is in your ability to manage that property. In 2019, there are no good deals, there are no great deals. there are only market deals and everyone is overpaying. Neal Bawa is overpaying for every single freaking property that he buys. Okay?

And the the whole i have access to some magical off-site funnel where we get prices below the Market. Everyone that’s telling you that is a liar and it’s white, these are all white lies there is no such thing every apartment complex owner in America knows that they’ve got you know the market is on their side. If somebody is not listing it in the marketplace it’s not because he’s lazy it’s because he’s got something to hide and you’re gonna find that out within the first 12 months of wrapping that anchor around your neck.

It’s actually safer to buy properties that are on the market because if they have 10 people walking through it somebody basically finds a problem, they now have a legal binding requirement to disclose it to the others because somebody found it right in due diligence and asked them questions about It and they’re signing a document with you that says that anything that was known to us we told you.

REED: Yeah, right.

NEAL: What they’re banking on in offsite off market is that you’re not going to find it. So bottom line, if you’re going to pay market or overpay for a property then the only way you’re going to return money for your investors is to really work hard on asset management but absolutely nobody appears to discuss that in this indicator forums and i think you really need to change your mindset if you’re going to be successful. One of the quotes that I’m known for that makes lots of enemies um is that i believe that 10 of the syndications that are being sold or pitched in 2019 are going to hit Pro Forma. 10 percent Read right and i think that there it’s possible that half of them may actually not hit any returns any returns right.

 It’s possible that some of those properties could be mine i mean I’m not I’m not you know saying in any way that that that couldn’t happen to me right. We’re trying very hard to game the system by buying in in better metros and then we’re trying very hard to do asset management in a completely different completely revolutionary way That i don’t believe anybody else is doing. That still doesn’t guarantee to us that we can hit Pro forma and and to me it just seems like this is the multifamily industry may not be in a bubble. It’s expensive but it may not be in a bubble but i think that the multifamily syndication industry is in a bubble and a lot of people don’t agree with me but that’s my belief.

REED: Yeah it’s hard to disagree with you I mean you definitely see a lot of you know uh people that are i mean that weren’t doing it a year ago. I guess that would be me as well but um..

NEAL: So you’re you’re educating yourself right so that there’s a benefit there you’re listening to comments like this From people every day and i think that influences you in the right direction.

REED: Yeah i agree but i love your point and I want to get back to the you know the asset management you know we talked I’ve talked about this with a lot of people as you look at all the training that i have ever seen out there is all focused on getting a deal and it stops and that’s it and then you know but you own it for five years. You only tried to find it for a few months or you know however long it took you to get the first deal but you know the syndication the raising the money that’s all easy in comparison and then you got this long hold period that nobody talks about so..

NEAL: And to be honest i don’t think it’s five years anymore. I think that five years was the past I think you’re going to own this property on average for six and a half or seven years because there’s going to be a lot of them that won’t hit performance you’re going to struggle with them for years until you get them close to per forma and then you know you still have to get your end pumps beyond that point. So i think that today’s the journey is actually longer than most people think. They just the people that are thinking we got out in three years the answer is a whole bunch of people did it right not just you. All ships rising all chips are not rising anymore.

REED: When you say some of your secret sauces in the management of the property are there any particulars that stand out that i think that somebody may be able to gain from when they’re going into it and they got that anchor around their neck?

NEAL: Well i think the the first thing is that you’ve got to understand that this is a very big part of the job and simply working with the property manager once a week is is not enough. So one of the things I learned one of the lessons i learned early on is that there simply is no syndicator that I know of that knows how to read financials well enough. Well enough for the job and so very early on.

I hired a financial controller and i she has meetings independent of me and she had has ripped new a-holes to property managers on things that I could not even see and she has saved me insane amounts of money and insane amount of grief.

Not just in terms of money being stolen or money basically being wasted but also in terms of accounting nightmares where i would have had to pay fifty thousand dollars later to somebody to rebuild my accounting correctly. So the first thing is, unless you are a professional CFO go find a contract CFO. Please go find One because otherwise three years down the line you’re going to be finding one and overpaying them a great deal to rebuild your financials. Nobody nobody has the skill that’s needed.

REED: That is fantastic advice and I’ve never heard anybody give that so that’s uh that’s new information which is rare in this world so, I appreciate that.

NEAL: The second thing I I want to point out is that you know a lot of people believe that it’s the property manager’s job to manage the property. Our job is to basically just hold their feet to the Fire and that may have been true until about 2018 but today, if you want to double investor money in five years, at least that’s the ambition that syndicators have I don’t know how many are actually doing it then you’ve got to do more.

We believe in a very, and I’ll I’ll say this in a fairly long way so here come the quotes we believe in “in your face Interventionist activist asset management”. Where we look at what the property manager is doing Well and we try to stay out of their way and we look at what they’re doing poorly and we take it off their hands and people are like no Neal the right thing would have been to fire that property manager but I’ve fired a bunch of property managers and what i found is if I get a good property manager that’s not doing something well the best thing that i could do is take that piece away from him because he’s good at everything else or most other things, right?

So I’m done with trying to find that awesome property manager that actually does everything that is in that’s in their contract because i came to the Conclusion and you will come to this conclusion it might take you years and years of banging your head against the wall that no perfect property manager exists. For one simple reason, they don’t get paid enough to do everything that’s in their contract. So what they do is they do some of those things some of the times and then they do some things all the time. The things that they’re doing well and doing consistently, don’t interfere pat them on the back. The things that are doing inconsistently, stop trying to beat the crap out of them because if they start doing those consistently they’re going to drop something else.

Take those over and that’s the model that we’ve had. I built a team in in in a U.S. plus Philippines team that basically takes a piece up and because we’re doing that for lots and lots of properties in a centralized call center it’s very efficient.

REED: That’s fascinating well those are two golden nuggets for sure.

NEAL: Um they’re hard none of these are easy I Mean a contract CFO is not hard you’ve got to find one that knows a real estate. So you can’t you know start with the CFO that doesn’t know real estate but you know places like upwork.com have lots of great CFO’s but to imagine that you are competent enough to fully understand the financials of a 20 million dollar Property is hubris of a ridiculous level.

 

REED: Yeah that’s fascinating because you know they really do a lot of people would like you to think that they’re really as simple. So I assume there’s stuff that even that I’m probably unaware, that I don’t even know.

NEAL: I’ve been doing this a while and i will pass by a line and see nothing wrong in it and then Loretta, my CFO. in the same call will zone on it find something truly horrible that shocks me and then the property manager had missed. A massive mistake and i go there are some jobs where you have to be a specialist and accounting is one of them.

REED: And then you know maybe another good point is, I’m sure that Loretta is not cheap and a lot of people may be afraid by that but like you said she’s found you 50 000 mistakes that paid for her a few times over.

NEA:: Um, Loretta is free and the reason for that is, that at every single property I’ve ever involved her in she more than pays for herself. Number One, my property managers are terrified of her, even though she she’s never nasty she’s very matter-of-fact but they’re terrified because she knows they know how quickly she’s gonna find stuff right?

Plus the accounting nightmares that I’ve avoided and potential lawsuits with investors who figure out that I’ve completely screwed up the accounting also make up for her.  So she she makes up for herself in many ways. You know, theft prevention you know reduces my overall cost of accounting, prevents future lawsuits. I mean all of those yeah i mean she’s free.

REED: Yeah that’s uh that’s fantastic. Uh did you have any more on the asset management?

NEAL: Um, I think on of the things that I’d like to say is obviously property visits are necessary but I find that sometimes there’s too much of a focus put on them. Like, people believe that if they don’t go to the property every freaking week you know something is going to go wrong and if once you get to the point where your property manager knows what you want and you know you know what they want there’s a good meeting of the minds.

 I would urge you not to spend too much time on planes I’d urge you to spend a lot of time in those unsexy documents in charting everything right. One of the things is the human mind does charting so much better than numbers. So every timeyou’re looking at a table turn it into a Chart, a graph right and and look at it over time you know. How’s my physical occupancy doing? How’s my economic occupancy doing? How is my retention rate doing over time? Um how’s my um my Google reviews doing over time? You know when I started out was it two stars i mean i had two and a quarter now maybe two and a half maybe three.

You know that tells you how well you how happy your property manager is keeping your your property. Uh trouble tickets you know you’ve got maintenance tickets right. So if you got you know 30 maintenance tickets a month and you went and did upgraded a bunch of units and you’re still at 30 maintenance tickets a month what is going on there? Shouldn’t your trouble tickets be dropping some if you went out in rehab 50 units? Right? You know, are you tracking that? How many units are actually being turned on a weekly basis, a monthly basis, and quarterly basis? What is their overall cost? Um and then you know what is your capex budget to actual?

I think a lot of people are not looking at this. They’re just showing up at the property and i find that it’s actually disruptive. They’ve got a job to do you know they have to basically run around and follow you instead of selling the damn thing. You know? They’re selling the the units. So showing up at the property i think is uh without an agenda without specific action items is um counterproductive.

REED: Yeah very good point so we’re kind of squeezing in on time but there’s one thing i wanted to get into the last part was um you’re known for some of your controversial thoughts on multifamily.

NEAL: Well i gave you a few of those but I’ll repeat them. Number one, I think that multifamily syndication is in a bubble. I think that there are a lot of people that have got into this industry some of them are very bright. I mean i see some some hot shots like Omar Khan that I’ve gotten gotten in that are phenomenal but i also see a lot of people that are not getting in with the right mindset.

They’re getting in to make money from acquisition fees and any industry that is based on people filling their pockets with acquisition fees is going to suffer and i believe that the syndication industry is going to to create a bad name for itself in the next five years. So that’s that’s one of my my comments. Um I’ll the other one that i gave you is i believe that a vast majority of Syndication properties being being sold in 2019 are not going to hit pro forma or be anywhere close to pro forma.

REED: Yeah so when you talk about fees uh what are your opinions on where fees should be? So how are you structuring them fee wise? If you don’t mind discussing that.

NEAL: Well i don’t think my fees are low. I’m I’m known to be you know 70 38 pref. I think it’s not the fees that are a problem. I think that syndicators believing that the fees that come in should go to their pocket is a problem. So my current salary is one dollar and and health care so my company pays for my health care out of the fees and i like that because I’m more focused on the on the on the back end right. That’s that’s really where syndicators make money.

Syndicators that have been doing this for 30 or 40 years know that the back end is how you make money. The front end is for you to run your company. It’s for the Loretta’s, the asset managers. It’s for the people that basically providing value to your investors every day and I’m not seeing a lot of groups spending that money.

REED: Fair enough yeah i think that’s that’s wonderful.

NEAL: I actually think that a lot of people are receiving too little fees you know. There are unnamed gurus, now I’m not going to name them but they have projects where a team of four brand new syndicators is doing a 90-10 split with no acquisition fees. Come the next recession, I believe that the vast majority if not all of these brand new syndicators will return back to their jobs and when they do so absolutely no one is going to be managing their property. So underpayment of fees is the worst thing that an investor can do.

REED: Yeah i think i think there’s a good balance there so you need you know from the passive investor’s point of view you want the syndicator the sponsor to be making money without if your sponsor’s not making any money. He can be the most ethical person alive but inside of his head he’s going “Why am i putting all this work and making zero?”

So there has to be a balance there where everybody’s making money everybody’s happy and moving forward so that’s maybe one of the most difficult balances to find because everybody wants a lot of money up front but if it’s not balanced then nobody wants to play

NEAL: Yeah yeah I agree but I I I really stay away. As a passive investor I’ve invested in I think 16 syndications myself and one of my red flags is a syndication that has no fees up front. Unless it’s some company that’s you know worth a billion bucks and they don’t need the money. Um if there’s no fees up front and it’s it’s a very light resume, I stay very far away i don’t care if they’re projecting double your money in two years. It’s not something that I’m interested in.

REED: Interesting well it’s good to know um so Neal, thanks for coming out. You got some amazing amazing uh knowledge there and and i had To kind of cut some topics short to hit everything but I’m glad we got through it and uh i certainly appreciate your time it’s Uh we loved having you on there. So how can somebody get a hold of you if they need to?

NEAL: Well i think better than getting a hold of me is is is to kind of look at some of the stuff that we put together. So for the general public we put together more than 25 knowledge webinars in our library, is increasing all the time these are all deep dive Webinars they’re all free. They’re at multifamilyu.com multifamily university so multifamily u letter u .com and that’s really the best place to start interaction with us.

If you’re looking for the for training on how to find the best cities in neighborhoods go to udemy udmy.com/realfocus that’s another way to connect with us. Um I I you know I’m very available to people and so you can just add the word Neal, n-e-a-l in front of that multifamilyu.com and send emails to me if you like and i don’t promise that I’ll respond but uh probably will.

REED: Awesome! Well thanks so much. I appreciate every bit of it and uh i wish you the best of luck moving forward.

NEAL: Thanks so much. Thanks for having me on the show Reed.

REED: Alright.

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