Neal is President/ CEO at Growcapitus, a commercial real estate investment company that specializes in multifamily investments. His current portfolio is comprised of more than 1000 units, but Neal is on track to double in size over the next 12 months.

Neal regularly speaks at Multifamily events, IRA events & meetups across the country. He is also the co-founder of the largest Multifamily Investing Meetup network in the U.S. (BAMF), and has over 3000 members.

Mastering the Process of Market Evaluation & Selection in Order to Dominate in Your Respective Real Estate Niche

by Neal Bawa | Kevin Bupp Podcast EP185

Transcription

Announcer: You’ve been searching for the best way to generate passive income in your life and heard that real estate is a great way to do it, but you’re tired of all the so-called gurus who are all talk and no substance.

Get ready to celebrate because Kevin Bupp has spent 14 years successfully making it happen. This is the Real Estate Investing for Cash Flow Podcast. Now, here’s Kevin Bupp.

Kevin: Hey, guys, Kevin Bupp here and I want to welcome you to another episode of the Real Estate Investing for Cash Flow Podcast, where our mission is to help you build and maintain massive amounts of cash flow through income-producing real estate investments.

Our guest for this week’s show is real estate multifamily syndicator and educator, Neal Bawa. Neal is the President and CEO of Grocapitus, a commercial real estate investment company that specializes in multifamily investments. His current portfolio is comprised of more than 1,000 units, but Neal is on track to double in size over the next 12 months.

Neal regularly speaks at multifamily events, RA events, and Meetups across the country. He is also the cofounder of the largest multifamily investing group network in the U.S. and has over 3,000 members.

Now, before we get onto the show with Neal, I want to run through a couple quick items with you guys. First and foremost, importantly—this is very important, this is like breaking news. We’re just days away from the official launch of our second Mobile Home Park Fund. And I know you guys have been hearing me talk about it for the last couple of months, but we’re near the final home stretch. So, if there’s a chance that you didn’t make it into our last Fund last year, you missed out on it before we closed it out, now is your chance.

I will tell you that we’re so excited about this because if you guys have been tuning in for the last year or two or I guess I’ve been doing the shows about 4-1/2 years now, then you’ll know that we’re very into doing direct marketing and so I tell you this because I really, my team and I, we pride ourselves on our ability to uncover incredibly profitable mobile home parks and this is a very competitive real estate market we find ourselves in. In fact, that’s going to be one of those things that Neal and I discuss today about the competitive landscaper, the part of the real estate cycle that we’re in today and how it’s really challenging to find deals.

We’re going to talk about that in depth, but the reason why I bring this up now is we work with traditional brokers, like a lot of people do, but that’s not really our secret sauce. We spent many years basically researching hundreds of markets throughout the U.S. and have built a proprietary database of mobile home park owners and operators and that allows us to go directly to the decision maker, the owner themselves. We can typically negotiate much better deals than one would be able to get on the open market, you know, once it gets into the broker’s hands.

We currently have a number of parks in contract today, lots of other ones coming in the pipeline behind it and so if you’d like to partner with us on these future opportunities, take a few minutes, go over to SunriseCapitalInvestors.com and create a free account inside our secure investment portal. This will basically place you first in line to know when our fund becomes live again. We’re a very short period of time away, just days and days away from launching this and I love the ability and the opportunity to partner with you.

Again, so over to SunriseCapitalInvestors.com, create that free account. It’s really simple to do. You can even schedule a call with my team. We can jump on the phone together, give you some more details about this offering that’s coming about. Looking forward to the opportunity of working with you.

Next up, guys, we do have the ability to find great deals, but we’re always looking for more and so I bring that up because if you’re out there on the hunt, if you’re searching for different types of real estate, I know today we’re going to be talking about multifamily, so maybe you’re out there on the hunt for multifamily properties but you just happen to run across a mobile home park deal that seems kind of sweet and maybe you can’t take it down on your own or maybe you just want to flip it to an experienced operator. Well, we’re open to all those different scenarios. We can pay very hefty finders fees and we also have the ability to act as a cosponsor on a deal and actually bring the capital and bring the track record and expertise to help you take that deal down.

If you have an opportunity and you’d like to share it with us, you can send it to Kevin@KevinBupp.com. That’s my direct email. Again, Kevin@KevinBupp.com. We handle deals as large as $25 million. We handle portfolios, so it doesn’t have to be a single deal, it could be a portfolio of parks. We’d love to hear about it. Again, Kevin@KevinBupp.com.

Now guys, without further ado, I’d like to welcome our guest for today’s show, Neal Bawa. Neal, how you doing today, my friend?

Neal: Fantastic, Kevin, thanks for having me on the show. I’m very excited to be here.

Kevin: Yeah, looking forward to chatting with you and just to give our listeners a sense of geography, maybe take a minute and share with us where you’re from. Where are you calling out of today?

Neal: Well, I live in the San Francisco Bay Area, so I’m from Silicon Valley and I’m a technologist by training and software engineer. But the properties, my multifamily properties, I actually don’t have any in California. The vast majority of the properties are in states such as Texas and Utah because I find that living in California is awesome, investing in California, not so awesome.

Kevin: Yeah, I kind of feel the same way. It’s not the same dynamic going on between Florida and California, but in the niche that we’re in, I feel the same way. There’s a certain quality asset that I like and there’s a certain return I like to get when I purchase that asset and it’s hard to find the quality that I want and get the return that I want here in the good markets of Florida, at least in the mobile home park space. We only own one community to date in Florida and the majority of our assets are a thousand miles or more away.

We basically buy where it makes sense and I kind of suggest that most people that are getting into, whether it be multifamily or mobile home parks or any type of commercial real estate or any investing of any regard is that you want to invest where it makes sense. Don’t feel like you’re obligated to invest just in your backyard. I mean, otherwise you’re going to be missing out on great opportunities left and right.

We can dive into that in a little bit, but Neal, if you would, maybe take a few minutes and tell our listeners a little bit more about yourself and your background and how you got into real estate.

Neal: Yeah, I like talking about that because it’s a little bit different from your traditional person that you’re interviewing because I’m not real estate royalty. I don’t hold a broker’s license and I haven’t ever flipped a home.

I’m a technologist and I got into real estate as a way to invest the cash I was getting from my own tech company, which I eventually sold. I was a minority partner in that company, but I was working there for 17 years and there was a large amount of cash flow coming in every year and my tax rates kept going up.

Eventually, I went to my boss, who was the CEO of the company and I said, “Paul, I don’t work for you anymore. I work for the Internal Revenue Service.” He said, “Yeah, that is an ongoing challenge that most people experience when they get to your salary level and the only way that I found to defer that is real estate.”

So, I started working with him in real estate and we started off actually in reverse. We started with large commercial first. We needed a building for our business and it was an education business, a technology/education business, and we needed to build large amounts of classrooms, so we decided in 2003 to buy a building. It was a shell building, it was completely empty. And we looked at it and I said, “So, Paul, you’re going to have somebody build this out, right?” And he said, “Yeah, you’re going to do it.” And I said, “Oh, me? Me? All I own is a primary home. I’ve never done any construction. I mean, I have trouble fixing my sink when it gets clogged up.” He said, “No, no, no. I’m going to give you a mentor and he’s going to be somebody that has been in real estate for 20 or 30 years and he’s now a retired general contractor and kind of walk you through it.”

And I knew that’s going to get me in trouble, but with Paul, he thinks that I’m going to know all the questions to ask and I said, “Paul, I don’t know what questions to ask.” He said, “Trust me, it’ll work out.”

Luckily, as it happened, the mentor that was hired was actually very high quality and he helped me through that process. The general contractor that was hired was pretty good. The subs were pretty good. So, they didn’t, you know, they didn’t suck me dry and that was about a $4 million project and it worked out beautifully.

Then three years later we ran out of space in that building and we went to this building behind it, which was much larger. This time I was like, “Well, Paul, maybe we should repeat what we just did successfully, let’s build this out.” And he said, “Yeah, but this building is too big and it’s too expensive now. Prices have gone up in the last three years.”

And I said, “Well, what if you sell pieces of it?” And he says, “What does that mean? So, I said, “I’m going to go to the city and ask if you can actually sell pieces of office buildings.” And it turned out that you can condominiumize office buildings. People talk about condominiumizing apartments and those sorts of things, but you can do that with offices. I was able to condominiumize pieces of that building and sell it to individual investors that I knew, mostly doctors that live here in Fremont, and then rent the space back from them as my business was growing.

Today, in 2018, the entire building is rented by that business and so everybody really liked how that process went. They got to buy a little piece of real estate and build it up and basically rent it back to a single business over time. So, that was a great experience.

I started out basically with commercial and large commercial and then worked my way backwards into single family. 2008, great timing, I started buying single family and then went into multifamily, but I can expand on that story later. So, that’s the long answer to your question.

Kevin: Very interesting progression of events. Normally it’s the opposite direction, right? From single family into larger multifamily or commercial, but you went backwards.

I’d love to hear about your dive into the single family space in 2008. You just eluded to that. It was a great time, 2008, but as we all know, 2008 was kind of the end of the world for most real estate markets. [Laughs]

Neal: Yeah, right. And what really saved me was the same book that you hear about the most often, Rich Dad Poor Dad, so I read the book at that point in time and I start realizing that I’ve got to look for cash flow. I realized there were a lot of bad things going on, so here’s what I did: I’m a math guy. I’m a data analytics freak. So, what I did was I went to Zillow. Zillow in those days, because the world was crashing, this was almost the end of 2008, they had this page that was published which was showing the largest crash from peak in 2006. You had these hundreds and hundreds of markets in the U.S. and it was showing how much each market had crashed.

Even though I didn’t know anything about real estate, I said, I’m just going to use the data. I’m going to sort this page—and you couldn’t actually sort it, so I had to grab it and stick it in Excel and sort it—I’m going to pick the market that had the largest crash because one of the things that was in the book, in the Rich Dad book, was that real estate markets are deeply irrational. When they go up, they go up far beyond where they should, but when they come down, they also go down far beyond where they should.

I sorted the markets and it turned out that the market that had gone down the most was a market in California. It was a tertiary market next to the City of Fresno called Madera, 20 miles away. Because this was agriculture land and in 2005, real estate companies came in and started building these four-bedroom, 2,500 square foot homes and they built thousands and thousands of these homes and then all of these agriculture farm workers defaulted on them in 2008. Right?

Now the homes were selling essentially at 50% of replacement value, so I did the math on that and I said, How can I lose? If I’m buying these $250,000 properties if I’m buying them at $80 or 90,000? So, I bought one, I rented it out. Because I’m a technologist, I was able to manage it remotely and I figured out how to use Craigslist and a whole bunch of other engines to list my properties.

I bought one, a great experience, the cash flow was amazing, 8, 9, 10% cash flow. Bought 2, bought 3, bought 10, ran out of loans, refinanced, got my wife off. Then I went off to Chicago and started buying triplexes and bought 1, bought 2, bought 10. Ran out of loans for her as well. Then I said—and this is happening over a number of years and what I’m doing is, the moment I realized how amazing real estate is, I stopped spending money on cars. I stopped spending money on vacations. I said, this is a great timeframe, this is a great market, everything cash flows. I’m just going to take every dollar that’s coming out of cash flow and reinvest. I was in this crazy reinvestment, very frugal mode.

I’m buying a lot of properties but then eventually I ran out of loans and I realized that once you get beyond the single-family level, you have to go somewhere else. That’s when I discovered the wonderful world of multifamily and the wonderful world of syndication.

Right around 2011 is when I switched from single family to multifamily.

Kevin: Okay. Got it. What did that transition look like? What was that first multifamily acquisition that you took on?

Neal: I did a 7-unit and also a 12-unit. The 7-unit was also in Madera, California and I was lucky with that particular property because I actually didn’t have the cash to buy a 7-unit, so I was able to borrow cash from the family. What I did was, that particular property was unique in that even though it was seven units, it was three different parcels.

What I did was, I bought the seven units. I rehabbed the seven units and the triplex that was on there—there was a triplex, a duplex and a duplex—out of the seven units. I took that triplex, rehabbed it and sold it back and returned all of my loans. At that point in time, I had ended up with a free property, basically a five-unit property. I liked that model and then we did a 12-unit in Chicago, which was again, four triplexes, so it was four separate parcels. I kind of became a specialist in looking at multifamily, which had multiple parcels.

For that one, I bought one and three of my friends bought one, so we did this 12 units together and it got me my first little taste of syndication. It wasn’t truly a syndication because there were only three other partners, so it was a JV, where I charged a small little fee to each of those three people to bring them into the deal, just an upfront process. But I was getting more and more enthusiastic and excited about these other investors making money. That particular deal, everyone is still holding onto it in 2018 and it’s cash flowing at over 16%, so nobody wants to sell.

I was very excited about that and all this time, Kevin, I’m running my company, so I have 350 employees, I’m Chief Operations Officer of the company and I’m preparing my business for sale, because I knew I wanted to sell it. My CEO wanted to retire, he was in his late sixties.

I’m preparing this business for sale and this time I’m thinking, Kevin, maybe this is my future path. Maybe this is what I want to do in the future, so what can I do today to create this business three years from now, when I’m completely done?

The first thing was, I need to learn more and so I found two different ways to learn. Number one was: I went and signed up for a bunch of Meetup Groups and then I invited them back to my business. I was running a college, right? So, I had these huge classrooms with projectors and internet and seating. Every Meetup in town wanted to be there because normally they’re in cramped offices where there’s not enough seating, and here I had these 60, 70 student classrooms.

I started inviting Meetups into work and so I invited a fix and flip Meetup and a multifamily Meetup and a single family Meetup and all these different kinds of notes Meetups and I started to learn from them and it was great because I would work until 6:30 in the evening and then walk 150 feet to one of my classrooms and I was learning.

Kevin: That’s brilliant! [Laughs] I love that.

Neal: And all of a sudden everybody in town knew me because more and more Meetups were being held at my business, right? Which was a college. So, I gained notoriety, people started to connect with me, and sooner or later, somebody offered me a membership or a co-ownership of a Meetup and that was a multifamily Meetup.

Eventually, the more I learned, the more I realized multifamily was what I was interested, and I wish that mobile home parks were a Meetup back then, but there wasn’t a mobile home park Meetup in the Bay Area. That would’ve been awesome.

What I did, was I became a co-owner of that Meetup and started to teach. Now, I was barely brand new to multifamily, so the stuff that I was teaching wasn’t the stuff that I was doing. It was the stuff that I was learning as a passive in other people’s syndications. So, what I had done was I had a good amount of money at that point in time. I was investing 50 grand at a time in all these different syndicator’s projects and some were multifamily, hotel, strip malls, those sorts of things and I was putting money in.

But then I had a condition for them, Kevin. I don’t know if any of your investors has ever asked you this. My condition was that I wanted them to allow me to sit in their phone calls and so typical weekly, every two week calls they’re having with property managers, I wanted to sit in on them. They thought I was crazy. They said nobody has ever done that, nobody has ever sat on these calls. They’re very technical, we use all these terms, you’re never going to figure them out. I said, “Look, there’s this thing called Google, whatever terms you use, I’m going to Google them, but let me sit in these calls.” They said okay, they thought maybe he’s just going to come once and then never show up, so they gave me dial-in numbers.

Six out of the 13 syndicators that I was invested in let me attend those calls and so I actually started going and attending those calls and I would just round robin between the calls every single week, and I was learning crazy amounts of stuff, Kevin. It was amazing!

Kevin: Yeah.

Neal: What was cools was, that they were all specialists at different things. Some were good at rehab, some were good at buying cheap, some were good at finding off-market properties. They were all good at different things, but they weren’t necessarily good at everything.

When I was learning strategy A from this guy and strategy B and strategy C, I started putting that together and teaching at my Meetup and saying, “This is what I’m learning from different people.”

It was great because all of a sudden, people started to gravitate towards me and say, “Why don’t you syndicate?” I’m like, “No, no, no, I have this 12-hour a day technology job. I’m looking for other people in this group to syndicate and maybe I can help you.”

One day this guy walks in. His name is John Mark Lando [phonetic], he’s been in real estate for 35 years. He’s already syndicating, and he starts to teach, and I realize, this is the sort of guy that I need to partner with because he’s got—I’ve got the operational savvy, I can raise money. He’s got the track record, the real estate track record. So, I partnered with him, we did some information projects and then started to do formal projects and then it just sort of snowballed from there. 100 units, 500 units, and now I think we’re at 1,100 units. 1,500 if you count the student housing beds.

Kevin: Okay.

Neal: So, just—boom.

Kevin: Fantastic. I love it. I want to back up a little bit. I want to talk a little bit more about that Meetup Group. First of all, that’s brilliant that you’re basically able to utilize the space that you already worked out of. I mean, you guys had extra space in the evening time that you weren’t utilizing and that’s a brilliant thing.

But I want to talk about the power of the Meetup Group and more so from the standpoint of Meetup.com is a tool that I don’t know how long it’s been around, Neal, probably at least 12 years, pretty close to that. I’ve used it for many, many years now, but it’s a very complex, very dynamic tool that allows anyone in any part—I don’t know about the world at this point, I don’t know how many countries or if it’s just the U.S. at this point, I don’t know that. But if you have an interest in any topic whatsoever, whether it be sewing or real estate or bicycling or healthy eating or whatever it might be, you could find another core group of folks like within your market, within your region, that gather on a daily, weekly, monthly basis to discuss those particular topics pertaining to that thing you have an interest in.

The power of that is that folks like you and me, you know, we have an interest in real estate. You didn’t go this exact path, but folks like you and me could quite easily go create our own Meetup Group and be the facilitator. Be the one that actually brings all the talent and the brain power together. Give them a room, give them a forum, give them a stage to present on and sooner or later, just like what happened to you, just by default, you didn’t necessarily become known as the influencer, but I mean, you were the facilitator that was pooling these things together.

Neal: That’s right. Yep.

Kevin: It created a snowball effect for you. Would you say that you getting involved in those Meetup Groups was a major catalyst to where you are today? I know lots of other things happen, there’s lots of other ingredients involved, but would you say that you getting heavily involved in those Meetup Groups was a big catalyst to where you’re at today?

Neal: In my mind it was the single greatest catalyst.

Kevin: That’s awesome.

Neal: Being involved in that process attracted so many people to me. I know every Meetup Group organizer in the San Francisco Bay Area. Many of them have invested with me. Many of the others have helped me source equity. They provide presenters for my Meetup, because I have 12 meetings in a year and they’ve provided even other folks, such as loan brokers and key sponsors. I mean, all of the other positions, all of the other pieces of this puzzle have really come to me through that.

For me, that Meetup journey, to now today we have 3,700 members in our Meetup Group—

Kevin: Wow!

Neal: —was a staggering success. And it was just born out of this desire to quickly teach something before I forget.

One of the things that my mom taught me is the best way to learn is to teach. So, when I was a kid, I would go around teaching math to other people, because I was weak in math. I felt if I could teach math to other people, I was able to overcome my weakness in mathematics.

I felt like I’m learning all these great things in these calls with these syndicators. I need to teach somebody, and the Meetup seemed to be great because people are not paying for it, so I felt like if I did a presentation, if I bombed it, then there was no recourse, right? It wasn’t like I was charging a fee.

So, my guinea pigs, the people that were coming in, actually are now investors. Well over 125 of the active investors that I have in my database are Meetup Group members.

Kevin: That’s fantastic. Would you say that a majority of your attendees that come to your Meetup Groups, there’s probably a large number that are brand new, that are just trying to educate themselves, right? They’re just like you were many years back, trying to educate yourself and absorb and surround yourself with as much brain power as possible.

Then the other two categories in my mind would be the active owners and operators. The ones that are actually out there finding the deals.

And then there are the ones that are looking for the passive investments. They’re high net worth earners—or high income earners—and they’re looking to place their money into safe and secure investments and so they’re looking for quality operators.

What would you say between those two categories the split looks like on one of your regular Meetup Groups?

Neal: Well, I’ve given you an exact split because I’ve done this analysis for my Meetup Group. 1 in 15 is a high net worth investor that has invested in real estate many times before. An additional 3 out of 15, 4 out of 15, are people that own single family real estate but don’t necessarily think of themselves as investors going around investing in real estate, but they’re still potentials. These are people that can and will invest with you in the future and out of the remaining 11, roughly 6 or 7 are tire kickers, so these people that just, they’re learning more about real estate. Roughly 4 are people that are looking to create a career in real estate. Maybe not necessarily in multifamily, but they’re going around from Meetup to Meetup trying to establish connections and networking and trying to figure out what they should do when they become active in real estate.

It was 7, 4 investors and 1 high net worth investor in a group of 15.

Kevin: Okay. Love it. I love it. Good deal. Well, I want to switch gear a little bit, Neal, if we could, and I listened to a recent interview you did with Joe Fairless [phonetic] and you had made a comment—and forgive me if I botch it—but you made a comment regarding the irrational behavior of a lot of buyers out there in the marketplace today. Compressed cap rates, I mean, prices through the roof. The amount of competition, and I don’t care what asset class you’re buying in. I don’t care if you’re buying single family fix and flips, I mean, it’s really challenging to find good opportunities today. Prices are incredibly inflated.

So, talk to me a little bit about that and what’s your perspective? I know that we can’t really speak specifically to one particular market because every market is so different across the board, from where you’re at to where I’m at and everywhere in between. But just generally speaking, what’s your perspective of where we’re at in the real estate cycle and how does one navigate this irrational behavior of a lot of the buyers that are out there?

Neal: This is actually one of my favorite topics, I’m glad you asked me this. My education website, MultifamilyU.com, we have about 3, 4,000 students that attend webinars there and there’s an entire webinar that talks about this. It’s called Real Estate Trends 2018, so I suggest those that want to learn more about what I’m about to say go attend this webinar. It’s an hour long. It’s extremely entertaining and gives you a list of the best cities in 2018 to invest in, based on the philosophy that I’m about to give you.

No. 1, yes, the market is extremely expensive, and to certain levels has gone beyond 2006. Not quite because there’s been 10 years of inflation, right? There’s roughly a 30% inflation number that has to be there before you can say that the market has actually gone beyond 2006, but most markets are right there. They are back where 2006 was.

Let me first give you the bad news: It’s a very highly-inflated market. People are paying too much money. And the reason people are paying too much money is yes, this is kind of the mature market, this cycle has been going on for about seven years, but there’s a much bigger factor that most people don’t talk about.

In 2008, the Federal Reserve of the United States launched something known as quantitative easing, or QE. QE flooded the market with $4,200 billion. That’s $4.2 trillion of liquidity. Out of that, they’ve managed to remove about $100 billion. So, 99% of that money is floating around the United States looking for yield. It’s not really looking at real estate or looking at stocks, it’s just around there that money is looking for yield.

And the people managing that money, the money managers, are desperate for yield. So, if you throw that money into bonds, well, it’s not doing well because bonds are yielding 1 or 2% so that’s not going to work. Then they’re looking at real estate and they’re looking at, well, real estate in 2010 or 2011 was yielding 12, 13% returns average and so they were like, “Wow, let’s invest in real estate.” And then it came down to 10% and then 9% and 8, and today real estate is yielding between 7 and 8% as an aggregate class, right? Class A is in there.

But the problem is, bonds are still yielding 2%, so this gap—we call it the yield gap—between bonds and where real estate is, is still extremely huge, which is why we continue to see cap rates compress and we continue to see those numbers go down.

If that $4 trillion was not there, you would not see this compression. So, what’s happening today is not something that has happened in previous real estate cycles. It’s new, it’s unique, it’s because of that crazy $4 trillion injection that the Federal Reserve made.

People say, “Yeah, but the Fed stopped.” Yes, but they’re not taking the money back quickly enough. At the current rate at which they’re removing the money, Kevin, it’s going to take them 30 years to just remove that money from the market.

Here’s a bigger number: Worldwide quantitative easing is $13 trillion. We weren’t the only ones doing it. The European Union did it. Japan did it. China did it. India did it. And all that money is just floating around the world and since we are the best looking market in the world right now, it keeps on flooding into commercial real estate and stocks and that’s why you see all-time highs in stocks and all-time high in real estate.

The truth is that since 2008, we have perverted our real estate markets and that’s the bad news.

There’s plenty of good news, but we perverted our real estate markets and that’s why you’re seeing people offer irrational amounts of money for real estate.

Kevin: What’s your crystal ball show you? I mean, with that being said—and I agree with everything you just said there—but where does that place us in the coming years and how, at this point in time, for those that want to get in, whether it be multifamily or mobile home parks or any type of real estate that is, from an investment standpoint, what does one do? If they’ve got all this competition out there that’s willing to take a much lower yield than what you and I might be willing to take?

Neal: Well, the news is good actually, and I’ll explain why. You know, as a citizen of the United States, it’s not good news for me. But as a real estate syndicator, it’s actually good news.

The reason for that is, withdrawing this money would crash the world economy and the U.S. economy, so it has to be withdrawn over two decades. It’s not something that they can just take out of the marketplace.

My first message is, get used to lower yields. These ultra-low cap rates are different from previous cycles. They are not going to go away for a while.

Also get used to fairly low interest rates because the world has created so much debt since 2008 that we can’t really raise interest rates more than, let’s say 1% point beyond where we are because otherwise, the United States can’t pay its debt back, let alone all the other countries in the world which are in much worse situation than us. So, get used to low interest rates. They will go up from here but we’re not going to go back anywhere close to what we’ve seen in the ‘80s and the’90s where interest rates are 10, 15, 20%.

Both of those are good for real estate investors.

The third piece of it is that we are not likely to see a 2008-type crash. 2008 was irresponsible underwriting. That was the underlying cause. We sold homes to millions of people that should never have gotten them. Now the homes are being purchased by people like me. There has been the largest wealth transfer in the history of our country in the last nine years. People like me have 20 homes and those homes were purchased at very low prices. So, if a crash happens, I’m not going to let my homes go, I’m just going to drop my rents and I’m going to stick with it. Right? I’m not defaulting on my loans.

And there’s millions of other landlords throughout the U.S. that are in that same position. So, I don’t foresee a 2008-type crash. What I foresee is a recession and most people think it’s going to come in 2020. I agree. I think that ’18, ’19 are too strong because of the short-term effect of tax reform. We get a recession in 2020, people project 6 months, I’m thinking a year. I tend to be more bearish than most people, for a year.

But if you look at previous one-year recessions in the history of the United States, none of them are really awful for real estate. What happens is real estate dips and during that time, the only people at risk are the people that have bridge loans that are coming—that are maturing during that recession. That’s really your primary risk. Otherwise, you’re going to be able to hold through it.

What we’ve seen consistently is after those one-year-type recessions, standard recessions, if real estate was here before the recession, it’s going to go down and it’s going to come back up not just to the point where it was, but a little bit higher. So, your overall trajectory is upward, but you take a dip and then adjust back almost as if there wasn’t a dip, right? That’s what you’re going to see in 2020, maybe 2021.

For those of you that are buying real estate for the right reasons, which is cash flow, which is value add, which is looking at areas that have long-term demand. That’s why mobile home parks are doing well. America is becoming a country of rich people and poor people. We have 10-20 million people in the middle class every year, where a million of them become rich and the rest of them become poor and that’s why mobile home parks are in so much demand.

Same thing for multifamily. If you’re investing in multifamily, this may be an awful time for you to be buying class A, but this may be a phenomenal time for you to be buying class C, because after that inevitable recession, the demand is still there, and it grows much faster than construction levels. That’s the math.

Kevin: Got it, got it. The big question I have for you, what do we do today? Like what are you doing today? Like what are you doing today? I know that we had a brief discussion before we jumped on this call about you guys are buying, but you’re also looking at selling some of your assets, right? We’re kind of in the same boat, so we never really consider ourselves sellers, but we’d always sell when the timing is right, right? We just recently unloaded one of our properties that if you had asked us probably a year and a half ago, we had no intent on selling whatsoever, but the market—based on the market demand and the prices that we’re willing to pay for that property and the cap rate that it sold for, I felt that the timing was right and that we should take some money off the table and put it back into some future assets.

Talk to me a little bit about your strategy. What’s going to happen with you and your company over the coming 12, 18, 24 months?

Neal: Sure. My strategy is based on a single philosophy and that is, there is no real estate cycle. There are real estate cycles—with an S. Every single market in the U.S. is in a different phase of the cycle and my philosophy is that you have to understand the market cycles. You have to know where the markets that you’re investing are in that cycle. Once again, in that real estate trends webinar, I go in detail into market cycles and where different cities in the U.S. and different states in the U.S. are in the cycle.

Where you live in Florida, Florida is actually on the whole fairly early in the cycle and that’s because you’re a state that had such a massive overhang of foreclosures and it took so long to clear out that inventory that you really only worked through the whole inventory by 2016.

Las Vegas is early in the cycle because it was the hardest hit. Phoenix was very hard hit, so it’s early in the cycle.

Understanding where places are in the cycle is very important. New York was a very early recovery and that’s why today, rent growth in the U.S., in New York, in that entire city, is negative. Negative rent growth. Too much new occupancy, too many new buildings coming to market and very little rent growth.

But when you see markets like Orlando, extraordinary rent growth. We’re seeing 5, 6, 7% annualized rent growth because they didn’t build anything between 2008 and 2014. A six-year gap with no residential construction, either on the single family and multifamily side. I’m looking for those markets because they’re still early in the cycle and they protect me from the next downturn.

Let’s talk about that for a second. You mentioned some markets that you really like there. But where would one go to define that data based on what part of the cycle that particular market might be in?

Neal: There isn’t a particular place that you can go to and say, “Show me a listing of where things are.” It’s gleaned from lots of different sources. One of the sources that I glean data from is pricing in 2006 versus where you are right now and how far have you gotten? If you look at the recovery, the fastest recovery was Denver, Colorado. 100% of all homes in Denver, in the entire city, are well above their levels in 2006. Whereas the slowest recovery was places like Las Vegas because Las Vegas overbuilt to such a crazy extent that even by 2015, only 20% of the homes in Vegas had passed their 2006 level. Actually, I think it was lower than 2016.

Look at various sites that will show you what percentage of the homes in a particular market in 2018 have bypassed 2006 levels. If you’re 10% or 20% below 2006, that is a great market to invest in. Keep in mind, the market should have jobs and the market should have population growth. Those two are extremely important. But as long as that market has these two things and it’s still well below 2006, with 30% of inflation in the last 11 years, you’re in a very good place. You’re in an early stage in that market.

The ones that I like definitely are Phoenix, Las Vegas for sure, because Las Vegas is becoming a real city. They have a pro ball team now. There’s a lot happening there and it’s still so early. It feels like it’s in the fourth or fifth inning, where the rest of the U.S. feels like we’re in overtime. Those are the sort of markets that you’re looking for.

If you don’t like the quality of Las Vegas, because in the past it hasn’t been a high-quality market, then look at Utah. Look at the GPD growth in Utah. Across the board growth. Look at the technology companies that Utah is stealing from the San Francisco Bay Area and from Los Angeles. Companies moving there every other day.

Those markets, yes, it’s a lower cap rate market, but once again, it hasn’t recovered to where it was in 2006, 2007, so you’ve got that room to grow. It’s not a perfect situation, right? This is not the best market out there, that was 2012, 2013, but what’s nice is, if you know that there’s room for growth, you’re taking a lower level of risk for yourself and for your investors and there’s still plenty of markets like that. Boise, Idaho is a phenomenal market to look at.

Kevin: Yes, it is. Yes, it is. Do you guys currently own investments in Boise or Salt Lake? One of those two?

Neal: We have one in Salt Lake and one in Provo, which is south of Salt Lake. We’ve made a number of offers in Boise, but we’ve been mostly loosing those offers. I think the people that live in Boise like buying in Boise, so it’s a little challenging.

Kevin: Gotcha. It’s all great information. Neal, I know we’re running out of time here, but hopefully I can steal 10 more minutes from you. I want to ask you, I want to switch gears a little bit and I want to speak to those that are just getting started on their real estate journey that are looking to dive into—let’s just say syndication. I don’t want to really wrap this around any specific any specific asset class, but those that want to dive into syndication. They want to make real estate their career. They want to raise capital from investors and build a portfolio. What are some of the biggest struggles that you’ve seen new syndicators face when they jump into this space?

Neal: I think that the biggest struggle is actually the easiest one to fix because I find that people have trouble raising money. They say, I have trouble raising money. I don’t know where to find investors.

Well, the message that I have for you is today, the easiest thing in the world is to raise money. Look at where the stock market is at all time highs. Look at the amount of equity people have from real estate built up over the last seven years.

You couldn’t possibly find a better market to raise money than June 2018. Even President Trump is talking about an all-time-high economy. I’m not going to go into whether he’s right or wrong, but I can tell you that it’s a pretty high economy.

No. 1, if you’re thinking about raising money, now is a good time.

Here’s what I want you to do and this has nothing to do with real estate. Go to websites that teach you how to pitch and how to develop a pitch deck. And then go find any property that you want to pitch to an investor. It doesn’t matter if it’s a fix and flip or a multifamily or a mobile home park. Find one and take the content of that pitch deck, the content of that offering memoranda for that property and stick it into this pitch deck. There’s a bunch of these pitch decks available on the web.

I want you to go through that process. By the time you end that process and you pitch it to maybe three, four, five, six members of your family and friends circle, you’ll be able to raise money.

That’s a quick way to fix that problem. It’s all about having a pitch deck mentality. People are getting $100 million and a billion dollars from venture capitalists with just an idea. Real estate is much easier because it’s tangible.

Kevin: Yeah, much more tangible. Absolutely.

Neal: Exactly. You should be able to raise money today very, very easily. That’s the first challenge that I see.

The second challenge, which in my opinion is much bigger, though I hear a little bit less is, finding properties.

Kevin: Yeah.

Neal: Finding good properties, finding cash flowing properties. Everyone is dealing with that challenge, I am dealing with that challenge. I think the way to do it is to do essentially what Kevin is doing, which I’m building, which is to stay as far away from listed properties or pocket listings as possible and go direct to buyers, direct to sellers.

One of the ways that we’re doing that is we’re actually downsizing our portfolio instead of looking at 250, 300-unit, $30 million properties, I’ve started looking below $10 million because I’m finding that there’s more mismanagement in the smaller side of the portfolio where there’s one guy, he’s the property manager, he’s the owner, he’s the janitor, he’s the one doing tenants and toilets and they make so many mistakes that you’ve got more value trapped in there.

I’ve started to downsize and look in those. My last project was $44 million. I’m not doing those projects anymore because I’m not able to find value.

Kevin: Yeah.

Neal: Look in the smaller range and you’re going to see more mismanagement there and there’s value for you there.

Kevin: Would you also agree that underneath that $10 million value, you’re not dealing with as much direct competition from institutional or larger, professional operators. Would you say that’s an accurate statement? At least in the multifamily space?

Neal: I can only answer that for multifamily, it’s absolutely true. A lot of folks like me, previously we would call a broker and say, “If it’s not $15 million, don’t send it to me.” Right? I can imagine that hundreds of my fellow syndicators are saying the same things.

Kevin: Yeah. So, our space, a little bit different. A little bit different, but our space is if you can fly underneath the $5 million radar, then you’re staying away from a large majority of the larger institutional investors. Price points in our space is a lot lower than typical multifamily, but that’s kind of where we’re at in our sweet spots. Anywhere between like $1-5 million asset purchase price.

Neal: Yeah, that makes perfect sense.

Kevin: And just like you said, you find lots of operators that are the property manager, the janitor, the handyman, they do everything, and lots of areas that can be fixed. I mean, over time, those individuals get burned out, just like you or I would. I mean, we probably would last maybe a couple months doing all that, right? And they’ve been doing it for years.

Neal: Absolutely.

Kevin: And there’s lots of opportunity there. Find someone else’s problem and that’s where the money lies.

One last question before we get rolling here and wrap things up for the day. I want to talk to you about where you are today and the have you think back to where you started, and I don’t recall how many years ago that was. Was it 2008 when you first started buying real estate on your own? Is that the date?

Neal: Single family was 2008.

Kevin: Okay.

Neal: Large commercial was 2003.

Kevin: Okay, got it. Let’s go back from today back to 2008, so a 10-year span, you’ve learned a ton, you’ve done a lot of deals. If you could give yourself some advice, go back in time and give yourself some advice back then, what would that advice be?

Neal: Start out by learning more about markets. There is so much difference in between a Detroit and a Boise, Idaho in terms of quality. Because everything that you do in a bad market, no matter what you do, you’re going to end up with sub-par returns. Where if you get into a good market, not necessarily the best, into a good market, you can make a bunch of mistakes, have sub-par performance and have above-par returns. Understand market and market cycles.

Kevin: You know, I love that, and thinking back, how would you have done that? I mean, what advise would you give somebody that’s just getting started because I love that answer. Typically, the normal answer I get, Neal, is—and you know what it’s going to be—it’s, “I wish I would’ve got bigger faster. I wish I would’ve bought multifamily right out of the gate and not single family. I wish I would’ve bought ten times more property than what I have today.” That’s the normal answer, but I love the answer on the markets because really, at the end of the day, the market makes the deal.

You can take the prettiest property in the world, if it’s in a crappy market to where all you’re going to attract is crappy tenants and there’s no jobs, then who cares how pretty it is. I’d rather have a not-so-pretty property in a phenomenal market that I know no matter what, I can attract quality residents into and there’s plenty of jobs for them to be able to pay their rent check with.

Neal: Yes. Let me give you specific answers to that question: How do I do that? Right? I’m going to give you two answers. One is self-serving. Come to my website. The Real Estate Trends 2018 Event will give you the specifics of that. What are some of the things that I’m doing to track markets.

Now, here’s the other answer and this is my preferred answer, this is what I recommend to people. There’s two products out there that are single-family products but if you understand them well, they give you a lot of great multifamily data. One is called HousingAlerts.com and it’s a membership that you can buy for as little as $12 a month and I think their annual membership is $1,200 a year for the whole country. Most people don’t buy the whole country.

And then the other one is called LocalMarketMonitor.com. I have used both of these services and they give you a very good level of prediction on where are the best markets in the U.S.

In my mind, if you’re going to go out and buy a single-family home, one home, that’s your first investment, maybe it’s $100,000, right? $1,000 is only a 1% improvement. 1% is very easy to do. Very easy. Both of these products that I mentioned, it will cost you that less than 1%, but you will instantly be better off than 99% of the investors in the market.

Just so you know, I have no vested interest in either of these products. I don’t receive a commission for saying this, but these are excellent products to use. LocalMarketMonitor.com and HousingAlerts.net., check those out, they will allow you to rank markets in the U.S. and they will walk you through how they do it. You’re going to learn exactly how they sort markets.

Kevin: Fantastic. That’s great advice. Neal, now we’re going to enter what I like to call the golden nugget segment of the show and I’m going to ask that you leave one final golden nugget of advice or wisdom. You just gave some great ones right there so hopefully you got some other ones on backup. [Laughs] If you could leave us with just one last golden nugget of advice or wisdom that may inspire and motivate our listeners as they progress on their real estate investing career, what would that one last golden nugget be?

Neal: It’s a fantastic time to be a landlord. America is not becoming a renter nation, we are becoming a landlord nation. If you feel that this is the end of the real estate cycle, you are wrong. I want you to go to a website called WeAreApartments.org. That’s W-E-A-R-E, We Are, Apartments, with an S, dot org, and click on every single metro in the U.S. and look at the ones that have huge demand coming up in the next 13 years. Recessions will come, recessions will go, but the market for tenants is going to grow much faster than the market for owners over the next 13 years because our middle class is being hollowed out.

Don’t worry about the next recession. This is a great time to get into the landlord business. Whether it’s mobile home parks, whether it’s single family, whether it’s multifamily, go to WeAreApartments.org, pick cities that you like and you’re going to know more than more investors in the market.

Kevin: That’s fantastic. I did not know about that resource. Thanks for sharing.

Well, Neal, this has been a lot of fun and I really appreciate you coming to the show and for those that want to check out Neal and know more about his company, you can go visit his website. It’s MultifamilyU.com/Bupp. Again, that’s MultifamilyU, like the letter U, dot com, forward slash Bupp.

And as he had mentioned, he’s got lots of different resources. Neal, those webinars that you have on your website, are they free, do you have to pay for them?

Neal: The webinars are all free. They are offered both as recorded and upcoming events, so there’s live ones that are coming up, but there’s also recorded webinars that are available on demand. There’s no cost for any of them.

Kevin: Got it. Fantastic. Well, Neal, it’s been a lot of fun. Thank you so much for joining us and you have a wonderful day, my friend.

Neal: Thanks so much, Kevin. Thanks for having me on the show.

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