Listen to Neal’s most recent podcast guesting, an interview with Todd Dexheimer of  Pillars of Wealth Creations

Striking Gold with Data

by Neal Bawa & Todd Deixheimer | Pillar of Wealth Creation

Neal: Data is the oil of the 21st century. Right? So once you had an oil well in your backyard, you didn’t go and find other ways to invest you just made sure that you dug another well next to it you with data. It’s literally like oil. It keeps giving for decades at a time. So really learn to be data focused and be okay with giving up some of your control to your data.

Think of that as a partner, right? So you have a partner its first name is data its last name is data and it stands next to you and whenever you asked him for a you know, his opinion he says oh this this is a horrible area. Don’t invest in it that point don’t be afraid of giving up control to data data.

He’s your partner. And you have to help him allow him to make a good decision.

Todd: Hello and welcome to pillars of wealth creation when we talk about creating financial success with a special focus on business and real estate. I’m your host Todd Dexheimer now, let’s get to it. How are you doing today?

Neal: Fantastic, thanks for having me on the show time.

Todd: Absolutely. I appreciate you joining us a little bit about Neal, Neal is the man who is known in the real estate circles as a mad scientist of multifamily besides being an entertaining speaker Neal is a data Guru process freak and outs Outsourcing expert Neal treats has.

200 million dollar multifamily portfolio as an ongoing experiment in efficiency and optimisation the mad scientist lives by two mantras. The first Mantra is that we can only manage what we can measure is second monitor is that data beats Gut Feeling by a million miles these mantras and a dozen other disruptive leaves Drive profit for his 500-plus investors.

That’s a good meal. I think we got some cool stuff to talk about because I love the de kind of the nerdy data stuff.

Neal:  I know I mean I tell people, you know, I’ve only ever invented one quote in my life, but I think it’s a good quote. I tell people that the Bible got it wrong by one letter. You know, it is not the meek that shall rule the world card.

It is the geek

Todd:  Right. Look at the

Neal: Top three richest people in the world. Bill Gates is a geek. You know, Jeff Bezos a geek right Elon Musk is a geek. I think the Geeks are already ruling the world and people haven’t figured it out yet.

Todd: A hundred percent and you’re on your way right?

Neal: I’m absolutely on my way as you know, I don’t I don’t want to be super rich.

It’s not something that is on my vision board or something that’s of interest to me. Yeah, I think what’s in of interest to me is to do things that are different disruptive to have the courage to say things that I truly believe in instead of just, you know, trying to conform and that that is very much on my vision board.

Todd: So tell me a little bit. Let’s get in. Let’s just get into it right now. What do you say in? What do you say that’s maybe disruptive. That’s maybe not what everybody else is saying? Right now

Neal: Sure so there’s a few things that I like to say that our more recent. Right? So I’m usually alone as a data analyst guy that basically gives people a set of metrics on where to invest but I think what is more current and in my mind, it’s more urgent to discuss is where do we stand in the cycle?

Where do we where do we think that things are going with multifamily and. There’s a few things that I hear out there that that scare me and stun me and I want to talk about them and I say I want to say these are not right the first thing that I hear over and over again, and and you know, I like you I consume a lot of podcasts and so I’m listening to this stuff and whenever I see something that to me is clearly the opposite of what the data says.

I write that down. So the first thing I’ve been hearing and I probably heard this 5 or 10 times in the neck last three or four months is that classy properties do well in a recession and I want to tell my you know, people listening that there are great reasons to buy classy properties today. I am buying classy properties.

I’m very bullish on classy properties, but no one should ever buy them because they do well in a recession. That’s just happened because somebody said it on a podcast or a webinar a conference and a bunch of people noted it down and started saying it to other people. And before you knew it everybody was talking about them doing well in a recession right by classy.

But I expect that when a recession happens, here’s what’s actually going to happen in 2008 look like this right firstly anybody who said that took that classy did better than Class B or a in 2008 simply hasn’t looked at the numbers. There is very clear evidence that the. The vacancy for Class C spiked and it’s spiked more than a and more than b and significantly more than a and significantly more than b now obviously there are Regional areas within the US where there was differentiation.

So you could look at your own area, but when you look at the US. There is no doubt in my mind that class C hurt a lot more. Now. The pain was mostly restricted to one massively bad year, which was 2009 or 10. I can remember from the chart. So there was one year where the vacancy spiked a great deal and then the following year it immediately came back down to about six and a half percent.

So they had one big year. That was way Beyond six and a half more like eight and a half or nine percent and then. They were six and then it dropped back down to the 5% level fairly quickly. So here’s what I believe will happen. If a recession starts, so when a recession starts the people that are living in class C card the vast majority of these people don’t have 500 bucks in the bank.

It’s sad that we are the richest country in the world and we vast majority the people that live in our class C Properties. The guy that’s driving the the UPS delivery truck. The guy that’s making coffee in Starbucks doesn’t have money to pay his next payment if he either gets his hours cut or simply loses his job.

So what actually happens is if a recession starts in a certain number of those people start to lose their job first in the first few months, you’re not going to notice much, you know happening to your occupancy because those people are still in there and they’re still trying to figure out how to pay you may be the first Monday borrow money from Dad or Mom or whatever it is.

And you start seeing your delinquency. Pick up you’re going to start seeing a significant increase in delinquency. And then you’re going to notice that the number of people in your apartment complex that are being sent to the lawyer is taking up a lot. So now you’re in this, you know, basically we have to evict a bunch of people face and depending upon whether you’re in South Chicago where it might take six to 12 months to evict or you are in, you know in Dallas where it might take a month, you know, that’s going to cause significant stress for your property either way.

Either way, there’s legal costs, right? And then what you’re going to notice is. For a while your occupancy may actually increase. And why does that happen? Well, it’s because the people that were losing their homes in the class A in the class B are now applying to your property. And so you might see this weird Trend where your occupancy goes down a little and then it goes up a little and it goes up three or four points as a bunch of those people that can’t afford Richard places get in now and then after that it’s going to go down because the all those people that you send to the lawyer they’re going to get processed.

And you’re going to kick them out and you can have a first group of those people that go out and then you’re going to have a second group. And then you are going to have a third group because not everybody loses their job in a recession at the same time as the recession goes on. There’s these tranches of people that are going to lose their jobs.

So now you’re going to have every couple of months you’re going to have an eviction set and that set on a 200 unit property might be 10 to 25 people. Each set right. So this is this is stressful because when people are showing vacancy on the web all the people that are not paying you tard, they’re still shown as occupied.

So your biggest problem is not your vacancy in a recession. Your biggest problem is delinquency. So your economic occupancy can fall very quickly in a recession to below 80% even though your physical occupancy is well over 90%. Right and this is what you really should be expecting also at the same time.

The people are living in your apartment complex all of those people. Some of them are going to walk up to the front desk and these are people who are experienced at this by the way. They’re going to walk up to the front desk and say I can’t afford to live here anymore. I’m just going to give you a key if you want to keep my deposit keep it and then Todd is going to be like no.

No, I don’t want you to leave my property, right? So what do I have to do to keep you well drop my rent by 50 bucks right now and sign a new contract. Bring a bunch of them will do this and in most cases because you know a recession is coming. You’re probably going to sign those contracts right at least you’ll sign some of them especially if you like them these are tenants that you know, haven’t given you any trouble in the past.

But now they know that they’ve got they’ve got, you know strength, right? They’ve got an argument. They know that you’re probably going to say yes to a $50 $100 cut and so people would negotiate that the people that are coming in through the door. Are going to repeat the same process your prospects are now basically asking for you know, a month free or two months free those sorts of things.

So now your incoming revenue is also going to be affected that is what is the reality of Class C. This is what classy looks like in the first nine months of a recession and I don’t I’m not aware of any classes in the US where. Overall, your economic occupancy is going to stay the same it is going to go down.

And so when I keep hearing these people talking about a recession as an event that they’re really happy about almost saying things like well, what wait what, you know, just wait until a recession happens and you’ll see how classy outperforms. And I’m saying in the last hundred years. None of that has ever happened.

You’re just listening to this stuff on some podcast and then regurgitating so that’s been one of my beefs.

Todd: Yeah, it’s fine. It’s serving perfect timing because yesterday I was speaking at a meet up and somebody asked me that question. Well are classy the best properties to buy in a recession because you know the exactly what you just said, they were stand and blah blah blah and it’s and I said well, Yeah, they look good.

Right. It’s a good thing to like say we can say it really easily because of course everybody moves down right and solve our class user just going to be completely full that sounds magical but like you said in reality. I mean who are the people that get cut? Every recession that happens, you know your manufacturing jobs your maintenance jobs your construction jobs.

They go from 40 are mandatory overtime right now in many cases to 40 hours down to 32 hours down to potentially even getting laid off and those are your tenants in class see a lot of times and they’re no longer employed in so they can’t or they’ve been cut so much so. The other thing is too is a lot of people don’t want to class down.

And so instead of clashing down there going to room up. So they’re going to join one of their buddies and they’re going to live in that class B or class a product. And they’re not going to move to the class C

Neal: and because that product is also probably offering a lot of concessions that time they have the ability to do that a Class B that may not allow buddying up in a good time will allow budding up during a recession.

Right? So I tell people this whole concept of people moving down. Is faulty because there are three things you’re not considering number one. People can move down besides a see. What are the three ways to move from a seed down number one mom and dad right number 2 trailer parks or mobile homes, and number three buddying up with somebody else in a class B.

Yeah, we’re classy, right? So the right either one of those can happen these three move Downs still mean that class C doesn’t just gained people. We also lose people.

Todd: Yep. Yep. Absolutely. What are your thoughts on? You know, when we look at statistics class a pretty much Class A Class B. Pretty much Class B Class C.

I feel like gets also some D lumped into it, which also throws stats off. We do you think that. Definitely affects it or

Neal: I think so. I think I think Class C plus like my of my properties. I have properties that are see – like, you know Windward forest in Atlanta. I have C+ like Woods of regime are in Fort Worth.

My feeling is that the property that is in Atlanta is more likely to hurt. Then the C plus that I have inwards a rich in in Fort Worth. So it’s definitely a difference there in terms of quality tenants and their ability to pay one thing. I do like to say is you know so far. This has been a slightly negative conversation.

Yeah, but I want to tell people. That nine months after the recession hits is a great time to be buying Class C because all of the people that experienced trouble during those nine months their income has been decreasing their NOS being decreasing right? So if you basically now are buying based on T3 nine months into a recession or maybe 12 months into a recession.

That actually is a phenomenal time Dubai. Because fundamentally besides the recession classy right now is in a very very strong Market we are because the the amount of Class C available versus the actual need is a very vastly different number. So when you do come out of that recession instead of seeing a basically a recovery that looks kind of like down flat for a long time and up.

What we are seeing with see is its down and then sharply back up and when it goes back up, it actually goes beyond what it what the original Trend right it turns to keep going at that sharp rate before it plateaus out at a 2% when growth again, so you have some recovery built in there. So if you’re buying one year into a recession on the downside you didn’t suffer.

You got a big discount and you know that there’s a very sharp upside right ahead of you immediately in the first year of purchase. That’s why you black by classy. So that is a reason to be excited about a recession not existing property. Your existing properties are going to suffer and what I tell people is people ask me.

So what are you doing? You have a classy property you keep buying class season.

Todd: That was my next question, right?

Neal: All right, my feedback. Is this the. Recessions are interesting in that they are always declared in hindsight. No one has ever declare recession saying next month is a recession or last month was a recession.

That’s not how it works. America has a number called the GDP or the gross domestic product when the GDP of the country is negative. For two successive quarters, the Federal Reserve declares a recession that they’re the only body that can actually declare recession. So now what that means is you’ve already had six months of a recession before you you know about it.

So what do you do as a syndicator? So you’re not six months behind. Number one each quarter make sure that you’ve bookmarked the u.s. Is gdps article is there’s this place is on the web like Bloomberg that have articles about the gross domestic product if you see a single quarter of negative GDP growth.

Here’s what I suggest you do and this is what I’m going to do the moment. There’s a quarter of negative GDP growth. You need to send an email to your investors and say we have a we’ve had a quarter of negative GDP growth and when we are reading about the next quarter, it seems like the next quarter may actually also be negative which means a recession will be declared three months from now.

as a precaution. We are going to build a war chest and so we are withholding your distributions for this quarter. The money that we have right now are properties doing just fine. We’re going to withhold this distribution and we’re going to put into our war chest now three months from now if we see a positive number for GDP, that means that it was just a false alarm one bad quarter happens all the time, right?

We’re going to go distribute the money in that war chest, but three months from now. If there was another GDP negative quarter and the recession has started guess what we’re going to do. The money that we were going to give you three months from now, we’re going to add it to our war chest and from then onwards we will wait until a recession ends.

The Federal Reserve says a recession has ended before we distribute that money. It’s your money. We don’t want to spend it. We see no reason to spend it on capex or upgrades or anything like that. It’s just going to sit in a place until the recession ends so that way. I basically bought myself, you know, three or four mortgage payments right in case something really really bad happens like 2008 and in my mind, that’s all you really need to do.

I don’t think you need to do more and honestly the worst that can happen is a couple of your investors are not happy about this do a webinar for 15 minutes and said, this is purely precautionary. Here’s what how my properties doing. Everything is going well, but my job. Is not to make you money. My first job is to protect your principal.

I’m here to protect your capital and when there’s a negative GDP quarter. My job is to immediately switch to focusing on protection of capital. I don’t think a recession will happen next quarter positive GDP growth you get the money. So it’s just delayed you say it that way every investor you have will understand.

Todd: Yeah, I know and great great Point good way to prepare your investors and solve all communication and right and setting expectations up if your investors are prepared for it and you’ve got a good reason behind it. Most people are going to respect that. You’re right. You might have a couple that are a little upset about it.

But you know, what if that second quarter happens and a recession is declared.

Neal: That they’re going to think you’re a hero they’re going to say, you know what this guy knew three months ago. He was already prepping three months ago. And that person is going to invest with you after this recession is over because it’s gonna say when bad things happen needle ba was there three months before anybody else was even talking about a recession.

Yeah. So the Imagine The Branding you’re going to build people remember how you did. At bad times much more than they remember how you did in Good Times.

Todd: Yeah, and we’re going to find out eventually. In

Neal: My mind, I’m not suggesting that a recessions beginning at this point. Actually. I do not believe that the chances of a recession or hi I believe they’re low.

I think that the FED is being overly accommodative something that’s going to hurt us 5 to 10 years from now there I go. Being being this accommodative at three point eight percent unemployment rate is going to create asset bubbles. Which going are going to be very very difficult to on, you know, without bursting.

It’s going to be very difficult to deflate them. But for the moment, I am very bullish that we are not going to have a recession. We’re going to see slowing growth. Right, so we might see a lower level of GDP growth than we’re used to a lower level of job growth and certainly a lower level of rent growth.

So we’re seeing rent growth moderating all across the u.s. Is not just you know, it’s not just the West it’s not just the East it’s basically all across the board. I see Dallas moderating I see, you know, basically all the super hot markets in Florida and Texas are also moderating. And moderation is not a bad thing.

We’ve had five or six years of ridiculously insane over-the-top rent growth. It’s time for us to have a year or two that more looks like 2% than five because if you keep having that 5% something really really bad happens and I’ll give you an example of this if your rent growth is four or five percent continuously were four or five years those same guys that work at Starbucks those same people that drive the bus.

Are now basically standing outside City Hall and screaming and now what happens is City’s make radical changes that can hurt you and hurt me. For example Minneapolis just out large single-family zoning, right? They were so they were people standing outside City Hall every day 400 500 600 people screaming at all the politicians coming out of City Hall in Minneapolis.

And because they did it for six months or a year eventually the city outlawed all kinds of single-family zoning. How does that hurt us in the short run? It means nothing in the long run though five or six years from now, you will notice that Minneapolis cap rates will keep going up. Why because a huge number of single units can now be converted to twos threes and fours and because that conversion is happening some of the multifamily supplies no longer needed, Minneapolis.

Todd: By the way, I live in Minneapolis.

Neal: There we go. 

Todd: So it’s not a hundred percent passed yet. It got passed but no it’s being fought and all this kind of stuff, but you’re at a fight

Neal: Right? I just don’t need to be in right if you don’t want to get there.

Todd: I agree and and Minneapolis is trying to do a lot of things.

They keep getting sued everything that they try to pass but. This stuff is going to trickle through and there’s you’re right. I mean these rents are increasing dramatically Minneapolis has seen nothing compared to some of these other cities right would have seen massive growth. So it’ll be interesting to see what happens if that growth does continue.

What about vacancies? I’ve seen vacancies in some areas. I was just reading an article on Austin Texas the vacancy rates like 7.8% right now. I

Neal: I think that the short answer is if you if you slice and dice it by B’s and C’s you’ll see that Austin has over built on the a side. So the vacancies there for a czar over 10% And what’s happening is that what they should have really done is decrease the rents on the A’s a little bit and they chose not to so their vacancies got back on up.

And really all of the Austin Market the bees in the sea should have seen a little bit of negative rent growth same as what happened in Houston with negative rent growth, but they haven’t decreased prices. So either you can drop prices or you’re going to see vacancy increase but it on the class C side.

I think Austin’s right around six or seven percent. I don’t think that to be in a ridiculous number. I know in this cycle. We think 7% is a horrible number, but you look at the last hundred years. People are like 7% No big deal.

Todd: Yeah, we’re used to in this market. I mean many apps talked about Minneapolis and Gad. I mean minneapolis’s are like 3.6 percent or something ridiculous.

Neal: I think St. Paul’s even worse, right? So ,so you’ve got all kinds of amazing first time things happening and what I’m seeing Todd is because podcast didn’t exist. Yeah in the last, you know, massive cycle at the way they do today.

When we say something it gets repeated by a hundred thousand people within a month or two and it becomes an urban myth so much faster than before that it actually starts to influence cap rates, right? And so I feel like part of my job is to basically speak out when I see these kinds of strange things happen.

So yeah, and you know, there’s a couple others like that that I want to talk about. But obviously that was the first one that that that shocked me and then the second one is this that I have a friend who works for a crowdfunding portal and it’s a very big crowdfunding portal everyone knows what it’s called.

I’m not going to name him because he asked me specifically not to he said something that shocked me too hard. He said. You know, we are looking at hundreds and hundreds of projects every month. We have a massive underwriting Department of a dozen people sitting in a room evaluating incoming projects.

He says it is our belief that the projects being purchased in 2019 Todd were less than 15% of these are going to be on performa. He says the lab number could be as low as 10% now. Some markets are doing better. Ironically Midwest markets are doing better in his opinion because there’s more room there and the cap rates are not so crazy out of whack as some of the other places but one of the things that I am worried about is that we are going to be are creating what I call a multi-family syndication bubble.

People ask me is multifamily in a bubble. I said no its you know, it’s price for Perfection, but that’s not the same thing as having a bubble a bubble simply means that prices are completely out of whack with reality. I don’t I don’t find that evidence to be there on the multifamily side because rents are continuing to increase, you know, fairly quickly.

I think a double could develop but what I do see tarde is I see a multi-family syndication Bubba. People like you and me and 10,000 others have gotten in somewhere along this cycle. And there’s so many of us that were actually beginning to influence. The type of properties that are appropriate for syndication multifamily is a very large Market, you know, there’s buildings that are six hundred million dollars that nobody is indicating.

So as a size of the market the syndication markets fairly small. But inside that that asset class that’s eligible for value-add. I think we’re beginning to create a bubble and I’m concerned about that because the percentage of properties that are meeting performa is dropping very fast. 

Todd: Yeah, I mean. There’s a lot of challenging to for me to find anything that works that makes sense in a lot of these deals that you see are on their second or third or maybe even fourth value

Neal: Add. Yeah, that that should be a red flag, right?

Todd: Red flag

Neal: How is it that we’re so smart that the first guy who did the value-add didn’t add the value that we want to add the second guy didn’t and then the third guy didn’t and now we’re like this.

People that are going to find additional value added the first three guys left alone. Well, they left them alone because they knew that it wouldn’t work. They try to unit or two. They tried a section or two. They tried messing with the rents and it didn’t work for them. So they wrote it up as the value added and you know put it to you gave it to you as an impossible job to do then I see more and more of those happening.

So one of the things that I do is whenever I see a property that’s been traded twice. I just walk away. I don’t even. Because in my mind I simply don’t believe that the chances are that both of those people were idiots. Yeah or lazy. Yeah,

Todd: When I say a lot of things it’s a great it’s a strategy that a lot of people do is they do their value and they get to stabilized and then they go on to another 10-15 percent of the units or maybe even lass and.

They do that second phase and sure it works on 10 percent of the units, but can you get it to work on the rest of the units a little bit of the market will bite on it. But is there enough of a market right on the rest?

Neal: That’s a very key statement at Todd. Let me simply because because on a 200 unit property you upgraded, you know, ten percent of the unit’s 20 of them and you got your rent bumps that does not mean that you will get the red bumps on the remaining 90%.

I think this is another one of those Urban myths that because you got 20 of them at a certain price. You can get the others. There are lots of reasons why you got on 20 there was there was a family that that was living in one of your older units. There were two bedrooms. And the husband got a raise and the wife is pregnant.

She’s concerned. She wants a nicer looking unit or they’re just fighting and and the husband is a peace offering says hey, you know, they’re the off unit down the corridor looks much nicer than ours and their it’s emptying out. Let’s see if we can pay a hundred fifty bucks more and move there. That doesn’t mean that every other one of those 200 units is having that conversation.

So I fee I continuously see this concept of well, just because 20 work 200 will work and I believe that that’s a nonsensical concept.

Todd: Yeah, so. I mean if we got the syndication bubble we got let’s talk about the positives. You know, how do we as an investor Bo people that are listening to us myself included.

How do you go about continuing to purchase multifamily assets and make sure we’re not. Participating necessarily at the bubble activity and protect our investors. Of course, that’s like you said earlier and that’s the number one thing is you’re trying to make sure your investors are their money is protected first and foremost.

Neal: So there’s many different answers to the question. So maybe I’ll give you a minute. Each on each of them. Number one is start considering new construction new construction is considered a much riskier asset class then value-add with and. That that is completely True by the way, it’s a much riskier asset class.

But here’s a question that I want to ask you Todd. You’re buying a 20 million dollar building and let’s say you believe Todd believes that the market is 10% overvalued. Okay, when that case you’re overpaying by 2 million 10% right? It’s very hard to come back from a 2 million-dollar hole that you’ve dug for yourself on day one very tough right now you go and do new construction.

And it’s a 20 million dollar building. So the land that you’re buying for it will be 3 million dollars and it’s 10% overvalued which means that you’ve dug yourself a $300,000 home hole on day one. You haven’t dug yourself a 2 million-dollar hole. So now you have a million seven as a positive. And that million seven will get taken on because of the higher risk of new construction construction delays construction overruns, you know higher prices due to the trade War things like that.

Keep in mind that at this point anybody who’s doing new construction is already pricing in the trade War. People who were doing it nine months ago were not pricing it in but the prices that I’m buying today are the already inflated prices, right which may actually go down if the trade war moderates and actually give me a bonus.

So now I have this million seven cushion on a 20 million dollar building to burn up. So what I’m finding is on a risk-reward basis new construction might actually be getting very close to value-add. Because of the fact that the value-add market is very inflated. So that’s that’s my number on answer look at new construction because on a risk-adjusted basis, it’s it’s getting there number two start looking at so if you don’t want to go into new construction because it’s a lot of headache and it is right or you simply don’t have the competency to do new construction.

Look at properties that have the potential to build more units. Right. So there are properties where you can like, for example, my Jacksonville property has the potential to build thirty two more units, right? So now I have another way to exercise my creativity and great create more noi there. Am I going to build fancy units?

No because you know, it’s a property that we’re buying at 80,000 dollars a unit. So I’m going to build the cheapest damn units that I can think of. And basically match color now, they will be nicer in the sense that they’ll have, you know nicer looking faucets and they’ll have nine foot ceilings, but I’m not making bigger units.

I’m not making anything grinder. In fact, I’m going to make smaller units. I’m going to make units that are actually six inches smaller on each side, but because they’re brand new and the ceiling is higher. They look bigger. Yep right now so as in-house maintenance exactly and doing a little bit of construction 20 more units or 30 more units actually massively different than doing a 200 unit project from scratch.

Yeah, you basically built that up then. Start looking from the very beginning add into your business plan a secondary source of income so our property in that we’re doing so let me give you both new construction and value-add examples. The one in Jacksonville is a value-add and we are using a company called hosty.

To do Airbnb units. So we’re doing furnished units and were you know, we’ve got the up what we believe are the right units that are facing the right Road and they’re they’re nicer better-looking units with better views and we basically furnished those and we’re running those kinds of experiments the property that I’m building from scratch happens to be in st.

George Utah my favorite Metro in the US to invest in. And there I have designated an entire 24 unit building for Airbnb because that area is zoned for Airbnb for nightly rentals. That’s what I’m doing is I’m building an apartment complex with a clubhouse and I found the building that’s free standing next to the street has its own parking lot and I’m saying this building is nightly rentals.

And I’m basically, you know working from the very beginning on installing locks with buttons USB ports, you know solar on the top because I’m the one paying for electric not the tenants from doing all of those things from the very beginning. So I’m pivoting in a way that I have this secondary source of income.

Another one is nurse staffing. So if you’re near a major Hospital. You you can you can do 13-week rentals with nurse staffing and that can pop your noi and a fourth way is is what we like to do across all of our properties and that is noi Optimizer noi optimizers the process of looking at your net operating income not as an asset manager you for a moment assume your property manager and say let me study what in this property can be improved.

If I was to provide the Manpower instead of my property manager because my property manager clearly is too busy to do this some properties that could mean that you hire people independently as contractors to make phone calls to sell washer dryer combos or covered parking. Or in other properties you have you noticed that their renewal rate is what’s really killing you because they’re you know, their renewal rate should be 60% and it’s 30% because they’re not making phone calls for Newell’s 90 days in and offering incentives.

Well, you basically hire a cold call guy or almost a cold call guy that calls on behalf of the property and you try and get your renewal rates from 40 to. The difference between a 40 and a 50% renewal rate is a massive saving of time effort turnovers cost you No Vacancy. It’s a huge difference. And so I encourage people to say I look at my property as an experiment and I say within this property and looking at all of my other properties comparing this property.

What the heck does this property do worst that tarred X Heimer can work on as opposed to Todd’s property manager and I think that last strategy is the most powerful of the four. 

Todd: Yeah oftentimes we want to just count on. The property management right? We think they’re they’re the ones that but they’re only as good as we are two for if we’re not leading them of we’re not we’re the leadership seeing and if we’re not able to actually help them Implement some of the strategies and make sure they’re doing.

But they’re not going to they’re not going to be good on their own. Well for the most part, well,

Neal: There’s a fifth strategy that people don’t like to hear about but I’d like to mention it one of the if you think that it’s a great property change your split with investors and give yourself a bigger bonus on doing a great job.

So if your investors are used to 70/30 come in with 80/20. And say I’m going to do a 40 60 Beyond a certain level and then go to work on that property work very hard on it and get yourself that 60%. You know if you as a bonus, so obviously you need to be very confident about a property do that because you’re cutting your your your piece but it’s definitely a strategy that I’ve seen so in st.

George I’m doing it. I’m 80/20 and then I reach a certain threshold and then I switch to a higher level.

Todd: Yeah, and I think that’s a great strategy because I think right now I hate to say it but I believe it’s true as there’s people out there right now that are. Find buildings just for just to get their fee just to get some of their fees and they’re not worried about performance as much as they are about capturing that fee.

And that’s what’s going to pay the bills at the end of the day. And that’s a scary position in order for me to watch that other people are.  I think dabbling in at this time.

Neal: I think that the that’s why I consider multifamily syndication to be a bubble because let me say this very bluntly multifamily syndication is an awful fee model you you could probably if you look at 20 random the businesses to get into the other 19 are definitely going to be better models from a fee perspective than multifamily syndication.

And this is not clear to people because you can get away with your first and second syndication putting money in the pocket by the time you’re in the third or the fourth if it’s going to your pocket something is wrong because you have to actually build infrastructure and costs and people and asset managers and all these fees that basically that you now have to pay as an active business.

So people that think that their fees going to their pocket, Our don’t understand what they’re doing and which is why I think when the next recession happens a bunch of these properties are going to lose their asset managers. Yeah.

Todd: Yeah. I agree … agree. They’re not doing it right there taking it for their own pocket like you said and they’re not building a business.

A lot of people are transactional and real estate and they’re only worried about the next deal that comes up. They’re not worried about actually building a positive business that’s going to sustain.

Neal: Yep, and that’s one of my you know, my other beefs when I look at 50 podcasts. If you compare the ratio of people talking about buying buildings the ratio of people talking about managing them.

It is completely out of whack.  Right buying a building is a let’s say a six-month process on average three months to find 3 months to buy. Yeah, right managing a building is a five to seven year process and the fact that no one talks about asset management or the challenges that they’re coming across their tells me that these are not professionals.

They don’t understand that in 2019 buying a building with these inflated values is the exact equivalent of taking an anchor wrapping it around your neck. And throwing it into deep water and now the next five and a half years is you trying to make sure that it doesn’t drown you right? That’s what you’re actually doing and from the very beginning you need to have strategies to make sure that that anchor doesn’t pull you down.

Yeah, or you don’t end up in a situation where you simply have no control the chain gets unwrapped the anchor goes to the bottom of the ocean because that anchor is your investors and your property. Right, so you can’t lose control. You can’t let go of the chain and you can get dragged under either and I think that most people don’t see it that way and the truth.

Is that is that what it is that way and if you start looking at it that way you’re going to be much more realistic about what you should be buying and what you should be managed.

Neal: Well, the first thing is that we do not trust our property managers to do everything. There are properties where we so last year. We raised 30,000 tenant leads independent of our property manager for our portfolio of properties 30,000 actual tenant leads phones emails and for a couple of our properties, we are processing those tenant leads.

Ourselves we have an army of you know, people that are processing those tenant leads because we find that the area which has the highest return on time and investment is Top Line. If you can give more qualified tenants to your property manager to process you can fix a lot of problems. You can fix a bunch of problems because the quality increases the time in property increases the vibe of the community increases the reviews increase.

All of that because you were you gave your property manager choice if your property manager has a unit to rent and only one app. There’s a good chance that he’s going to take somebody that he does not want to take somebody that’s very borderline. If he has two apps, trust me even within the confines of fair housing your property manager knows what to do.

So we believe in being super aggressive on lead management and. I mean, I don’t know of any other syndicator in America that could be on a podcast with Todd and say I generated 30,000 leads for my properties last year. What

Todd: Would you do to generate leads?

Neal: Leads? 29 different engines posting reposting full-time employees that are doing this at committed a massive amount of money to it because I believe that this is a cost that we should incur and that that’s most of it is coming out of my ass at my my acquisition fees.

Because what good is an acquisition fee if the property doesn’t perform. I can’t stay in business. I can’t make money on the back end. So I might as well give up a portion of that fee to optimize the property in a way that truly benefits me and truly benefits my investors.

Todd: You’re bringing that in-house you’re not using with third-party company.

Neal:  No third already company, but I haven’t had a good experience with them.

Todd: Obviously you’re using third-party company with your management team, but you’re doing something on top of that. What else do you do

Neal: think think of this as a property management company bolted on top of my third party property management company?

Todd: Yeah. Yeah. No that

Neal: That’s awesome. We

Todd: Definitely do some of that lead generation ourselves, but it sounds like I need to really step up the game because I’m not bringing that many hits.

Neal: It’s a big, you know, it’s 10. It’s a 10 property portfolio in nine different states. So they’re fairly large properties, but we are spending a lot of focus on that.

Yeah, we’re doing reputation management. So what we find is one of the best ways to help a property is to get its reviews from one and a half stars to three and a half Stars. And why three-and-a-half, why not four four and a half five we find that it’s hard to get it from one and a half to three and a half and a three and a half.

It’s the properties reviews are not hurting it in any way. So here’s what happens right you call you have a tenant he Phil, you know sees you on and he fills out a form and you call him and you schedule an appointment on the day of the appointment that guy now picks up his phone and types in, you know, the name of your apartment complex and it comes up on Google and at just as he’s about to tap the directions button.

He sees the Stars which are in yellow right below the address the star say one or one and a half or two two and a half. Guess what? He does. He Taps the stars and starts reading your reviews. This is like an hour before he was to leave for the apparent appointment. And then 2/3 of those people that are reading your reviews never show up.

They just don’t go they don’t live there anymore. They’re like, oh my God. This place is is a piece of shit and I don’t want to go there. And so now what you have is you schedule you spend your time. Your leasing manager spends so much time scheduling all these appointments, but your show rate socks.

It’s awful. And so when you act when you focus on getting the reviews up from one and a half star, two, three and a half Stars, you’re helping your leasing manager every single day.  And to us that’s a very high return on our time invested. And we also do that in-house

Todd: There any maybe couple couple little things that they do to help build that because obviously you got to have 10 sites are giving the good reviews?

Neal: Call your tenants right after you do a maintenance thing and ask them how it went and if they say and they say oh yeah things went well. They say could you please rank this maintenance minute visit on a scale of 1 to 10 and if they say 10 then say overall. Are you satisfied living in this apartment complex?

And they say yes, I am say, okay well in about 30 seconds, you’ll see a text message on your phone. With a link. I would be very grateful. If you could write a review for us. It’s you know, we want people other people to know that we’re working hard to do a job fixing your maintenance problems. And also checking to see your satisfaction level every 20 or 30 30th percent person that you talked to this way.

We’ll tap on that link and write you a good review.

Neal: Yeah, excellent hard. It takes a long time. It’s totally worth it.

Todd: Yeah. Yeah, excellent. Anything else on the asset management side

Neal: Little things. I mean, we I I’m known as the mad scientist because I run experiments. So you talk do you have cameras at any of your properties?

Todd: I don’t have cameras and any of my properties

Neal: If you if you had cameras. Would you point them to the parking lot? I’m assuming.

Todd: I mean that would be one good place to point them. But I think also on entrance doors and various locations

Neal: I have a suggestion. Yeah, make sure that all doors are covered in all staircases are covered.

Yeah, and don’t use them to prevent crime. They will prevent crime anyway, as long as you’ve got them there people can see them, right? That the the goal of cameras is to keep the honest people honest, right a professional Thief knows exactly what to do. Anyway, so today we’ll do that. But have you considered using them to track your with your tenants to see which ones have pets that are not in AppFolio?

Todd: That’s excellent. Yeah. It’s

Neal: A good plan. It’s extraordinarily profitable.

Todd: Huh? Yeah, that’s a great Point. Well cool Neal. I mean lots of really good information so far. What else would you like to tell our listeners about data? I mean you love data. I know that by listening to you by hearing young other podcasts and all that anything else about data that you want to talk to our listeners about.

Neal: But it within the confines of the time that we have left if I wanted to give you one nugget, it would be.  you know, I want to give you a message and then a tangible nugget. My message is this data is the oil of the 21st century, right? So once you had an oil well in your backyard, you didn’t go and find other ways to invest you just made sure that you dug another well next to it.

You with data. It’s literally like oil. It keeps giving for decades at a time. So really learn to be data focused and be okay with giving up some of your control to your data. Think of data as a partner, right? So you have a partner its first name is Daddy. It’s last name is data and it stands next to you and whenever you asked him for a you know, his opinion he says oh this this is a horrible area.

Don’t invest in it that point don’t be afraid of giving up control to data data. He’s your partner and you have to help him allow him to make a good decision. So that’s my focus in terms of a nugget a specific nugget on how to do this. I want to direct you to a website called neighborhood

It cost 39 bucks a month Yep. This kind of data taught in the 1980s used to calls cost 50,000 a year because there were no Cloud software company. So you were paying 50 Grand a year. Now, you’re paying 39 bucks a month. You can cancel anytime that you wish there’s no restriction. Yeah. Whenever you looking at an area go into neighborhoods Scout and type in you know, the address and hit enter and pull the report that report once you pull it maybe 20 times is going to make you a demographic expert and while this report has so many sections that I could do an entire podcast for you telling you what to do with each area and how to interpret every single page of it.

The one minute nugget that I want to give you is. The very end of this report has two very colorful sections and they’re right next to each other and they are rankings of the neighborhood from 1 to 5. The ranking on the left is the neighborhood’s ranking in terms of future. Future appreciation and the ranking on the right is how much of a blue chip is it?

So on the left if you had a ranking of 1 then future appreciation is very very low and and you’re not going to get anything out of it at all. Okay, if it’s five then future appreciation is spectacular and you’re going to do really really well on either single-family purchases or on multifamily rents on the right side is Blue Chip if it’s one.

Well, that’s your definition of a d if it’s two it’s probably a c or C – if it’s a three, it’s a c-plus. It’s a for its Abbey. It’s a 5 it’s either a B+ or an a right. So it’s a it’s a it’s Blue Chip ranking.  I know what I’m about to say is very difficult and I personally vouch for it, but try and find three threes or three fours or three fives.

My opportunity is own project in Provo is a 4/5 288 reports have been pulled in my account. This is the first time I’ve seen a 4/5, what does that mean? It’s for in terms of future appreciation out of 5, that’s a very high rating but it’s also five on the blue-chip, right? So it’s a blue chip. That is just beginning its run. You see I mean. By doing this to rezone

Neal: That is an opportunity zone. So it actually happens to be in an opportunity is on so it’s tax-free. It’s for on the on the on the future opportunity and five on the Blue Chip. It’s practically impossible to find those kinds of things. But of course I’ve been using data for five years, but my point is let’s say you haven’t used data at all.

And let’s say you would not done nothing with data what I just told you if you do it with 10 properties. It’s going to open your eyes on the quality of the area immediately. I’m not saying neighborhood Scout can’t be wrong. I’m not saying that they may not be interesting things happening in that neighborhood that neighborhood Scout doesn’t know all I’m saying is I simply say this I only have time to buy three to four properties a year.

So if neighborhood Scout says no I’m going to say no. I understand that some of those are missed opportunities. I am perfectly willing to walk away. I only want to go to the ones where it says. Yes. Right and that is my philosophy if if you do that and you’re willing to take the extra effort to find the the yeses, you’re going to be very successful.

Todd: Love it. I love it. And so many of us go off of our intuition instead of our instead of the data that tells us exactly. What we should be doing and I like that you take the data approach because it’s just the data doesn’t lie and

Neal: Doesn’t like right?

Todd: Oftentimes want to lie to ourselves though and make believe that the data is lying or or that we know

Neal: Better sometimes ourselves.

Right? So one of the things that I do that I suggest for syndicators that now have the money you have your acquisition fee and right, you know what the best way to use of that acquisition fee is. For your next project don’t underrate yourself. We use a third-party service if anybody wants a recommendation, I will be happy to connect you to them because I believe that we turn to convince ourselves all the time when we are underwriting.

We do a brief underwrite to make sure that it’s worth sending over we use a third-party underwriting service not because we don’t have the time but because they have no skin in the game. They don’t mind saying no when it should be no. Right. So that’s something that I recommend for people who have kind of gotten beyond the first couple of properties, obviously the first couple of properties you do what you have to but after that I think it’s a very good use of your of your acquisition money.

I’m pretty much paying $1000 every single week at this point for sorry.

Todd: Are you having them under right? Prior to putting in Allah or you having them out right after you get you know, you pretty much have the property or getting really close

Neal: Best and final Master file. Okay? Yeah, because it’s too expensive.

Yeah right to do it other ways. So so so they’re used to doing it in within 24 hours, right? Because I’m doing it every single week. So I want to go back finish with the two mantras right at the very beginning. I said, I live by two mantras right if you cannot measure you cannot manage. And the second one which you talked about basically a moment ago, which is data beats got filled by a million miles every single day.

I’m I’m humbled by how often data proves me wrong. And I have a very strong memory for every time I’m proven wrong and eventually I’ve gotten to the point where I say, my partner data is usually much more right than I am. And so it’s better to listen to that partner.

Todd: Yeah, absolutely. I got like we got to wrap up here, but I got a couple real quick questions.

If you got a few few minutes here, what’s your favorite book?

Neal: So for me, there’s a number of them. The one that I’m looking at that is my current favorite is traction because a lot of people read books on how to get started. But actually much more important is how to take something that you started and scale it and I find that traction which is where a very prescriptive book step-by-step do this.

Don’t do this do this in such a way for so many days is a phenomenal book to get from you know to get somebody who’s not a rank beginner. Somebody who’s done it for a year or two to get you to the next level. It’s a phenomenal book.

Todd: Yeah, Gino Wickman. So who wrote it,

Neal: you know we could do.

Todd: You know what cool last question before we wrap up.

What are your three pillars of wealth creation?

Neal: Well, I think you you know two of them already, right? So to me, I think the first one is measure everything. The second one is be analytical and the third one is don’t be afraid to do a deep dive too many of us say this is the property managers job.

It is only their job if you know how to do it better. If you don’t know how to do it better. It’s actually your job to get to the point where you can do it at least as well as they can. Don’t be afraid to be too deep dive. I

Todd: Like it. I like it a lot Neal. How can our listeners get in touch with you?

Neal: So I publish a massive amount of content both mine and other people like me at multifamily so multifamily publishes. You know, we do about 50 webinars here. We have one tonight Jillian Saudis presenting a webinar about how to raise money to my audience tonight. And so many many different webinars.

There’s data analyst that come in there’s due diligence experts. There’s people that are like loan Wizards that come in so go to multifamily the one area of the site that I highly recommend is multifamily slash toolkit, so, You know, I do hundreds of hours of research every year and that research is up-to-date And Timely it’s about every part of the business that you should understand and I leave it in there.

The toolkit is always meant to be free and the way that the toolkit works is people go in. They read it. They enjoy it. They connect with me on Facebook and then they send me more pieces of information. So it’s an ecosystem of people sharing data with no one ever paying anybody anything and so it becomes becomes stronger as more people join because my intent is that no one should ever pay and every time we do a major update in the toolkit.

We send an email to everybody that’s basically looking at it. Cool.

Todd: Well, that’s excellent. That’s a great resource for people appreciate that. Well, that’s that’s it. I appreciate you joining us Tom a great information. I could probably keep on talk to you for another hour or two,

Neal: But we should do another one where we talk about Asset Management because I think that one of my passions is that there’s not enough podcast telling newbies about what.

Asset Management truly entails and there’s too many about buying properties and raising money. I agreed to do that. Right? I mean our job is not just to educate them on the pre-purchase piece. But also the post purchase we should do a deep dive on that and talk about nothing but asset

Todd: Management and I think probably one of the biggest reasons why is because it’s not as it’s not as interesting.

It’s not as exciting. That is sexy.

Neal: Well, here’s Mantra number three. I didn’t get to tell you about this. In the multifamily business what is least sexy? Is most sexy right? You really have to think about that one, right? Because you have to think about what the heck does he mean the people that are doing the least sexy things are actually doing the most sexy things for themselves and for their investors their success rates are 10x or 100x what everyone else is doing because they’re able to drag themselves away from the showy stuff to the stuff that actually matters remember as a syndicator you’re poor if your property makes no money.

And you’re super rich if it actually makes money.

Todd: You got it. Awesome. Well Neal, I’m going to let you go. You have a fantastic rest of the day. Thank you so much.

Neal: Thanks for having me on the show.

Todd: Hey special thanks to Neal Bawa and I appreciate him joining us on the show today and a ton of value Tom of information and a lot of stuff.

You don’t hear from other other gas so really analytical like that approach. Definitely a lot. I mean that’s very similar to how I approach things and a couple things I took from this episode. First of all be analytical make sure you really date Dean Deep dive deep into the numbers. And pay attention to what’s going on around you whether you’re investing in multifamily or really anything or any type of business you need to understand the macro and the micro economics and what’s happening within so and then another thing he always talks about is just a measuring measuring what is happening.

Making adjustments making sure you understand where your business is at the last thing you know, he talks about is just looking for other opportunities looking for different second or secondary, you know opportunities to make money and other opportunities to cut expenses. So a lot of really… really, good information in this episode.

Again, take one or two things out of this episode and apply it to your business this week and the following and make those changes. In your business and it will push you to be able to have success as you continue down your path. So again, thanks to Neal Bawa for joining us and appreciate the information.