Rather than investing in real estate with emotion, try a more measured approach. Crunch numbers because data beats gut feel and you can’t manage what you can’t measure.
Today, Toby Mathis of Anderson Advisors talks to Neal Bawa, founder and CEO of Grocapitus, a commercial real estate investment company. Neal is the CEO of MultifamilyU, an apartment investing education company. He’s known as the Mad Scientist of Multifamily and uses the power of numbers to acquire properties and create profit for investors.
- Why should you celebrate failures? A certain number of failures creates a very high rate of success. Failure is a necessary step to success.
- What are the impacts of COVID-19 on real estate? Some good, but mostly bad effects, such as an increase in confirmed cases, job loss, and economic weakness.
- Should investors consider buying or selling real estate right now? Plan ahead to project future wealth by buying and holding onto properties to generate cash flow.
- Should you invest in the Stock Market, real estate, or both? Why? The Stock Market is stressful. Even when real estate values go down, rents tend to go up during a recession.
- What should you consider when buying property?
- Population growth
- Income growth
- Home price growth
- What’s the future of real estate, interest rates, and economy? Things will get back to normal. Opportunities will be available to invest in real estate.
Full Episode Transcript
Toby: Hey guys, it’s Toby Mathis with the Anderson Business Brief and I have a fabulous expert Neal Bawa. Hey, Neal.... Read Full Transcript
Neal: Hi there.
Toby: I’ve known Neal for a few years. He’s dealt with our firm for a lot of years. Your old partner, John, I’ve worked with him for close to 10 years now. A fabulous real estate investor with just a wealth of information; we’re really lucky to have him on. Right off the gate, Neal, maybe just give a quick summary of your credentials as to why anybody would want to listen to such a guy who knows all about real estate.
Neal: The moniker says it all. I’m known in real estate as the mad scientist of multifamily. I’m someone that likes to experiment with data analytics and numbers to create profit for real estate investors, so $250 million portfolio. There are about 500 investors investing in us, and they’re investing because they understand the magical power of numbers to grow profits for real estate investors.
Toby: You said that a lot of people are investing with emotion and you tend to be much more measured, I would say, that you guys crunch your numbers. I’ve looked at a bunch of your projects. It’s pretty amazing the deep dive you guys do.
Neal: I think part of it is because of our belief. My number one belief is that data beats gut feel by about a million miles. My number two gut feel is you cannot manage what you cannot measure. We’re all about measuring things. We’re all about experimenting when we’re all about having failures. At my company, Toby, we celebrate failure. When there’s a failure, there’s an actual high five.
What we find is that if you get a certain number of failures, you will get a very high rate of success as you get better. Nobody wants failure, but failure is a necessary step to success. Companies that succeed before they fail end up basically with people with their heads filled with hot air. Then, they have some spectacular implosions like the WeWork implosion that we just saw. Actually having little failures on the way to big success is necessary, so we celebrate that.
Toby: It’s so interesting you say that because one of my past guests was the number three virtual office with no debt, no nothing, not publicly traded. They’re behind Regis who’s gone bankrupt before and WeWork. He just said, the numbers don’t make any sense on WeWork. This was long before the market just towards them, and he was just like, yeah, did that whole business model. It’s a lot of debt for a company that’s not making any money and seems to be burning through too much too quickly.
Neal: I’ve been scratching my head for a while. There were a lot of people that approached me to say, hey, let’s just do a clone WeWork and I’m like, why? They’re like, well, because they make a lot of money. I said, no, no, no, no. They’re worth a lot of money. They make actually nothing.
Toby: I know that shared office space and everybody that does it is like, what the heck are these guys doing? I guess if you have lots of money, you can make that mistake and you can face Blair. I don’t want to make tons of mistakes. Numbers would have told him don’t do it a long time before they actually spike.
Let’s talk about something that’s going on right now that’s very timely. As we sit here, we’re at the beginning of March in 2020, and I want this to be something that we can look back on in a year or two years and say they’re dead-on right. That’s the Coronavirus that’s going around. What is the effect on real estate in your mind?
Neal: I think that the effect is very strong, and it’s both good and it’s bad. In the short term, I expect that most of it are going to be bad. Today is the 11th. On the last day, we’ve gone (in the US) from having 26 cases to today having 1200 cases. Worldwide we’re 126,000 cases. Today is the biggest day. We’ve already had 7000 cases worldwide.
To me, this is an absolute exponential curve pandemic. I think that it will force us into some quarantine worldwide within the next three or four weeks. I expect that economies across the world will slow in March, April, May, and June. I think we’ll get a hold of it by July. As a result, it’s possible that the world goes into a recession. It’s possible that the US goes into a recession, if we don’t we’re going to come very, very close.
A lot of it depends on how much stimulus we inject into the market; the Feds doing their part. Now it’s up to the politicians. The Feds already cut interest rates. The politicians need to actually provide true stimulus into the economy. If they do their job we may not go into a recession, but we’ll come very, very close to zero growth.
In an environment where growth is slowing, a lot of people will get laid off. The three big industries that will see layoffs in our oil because of travel. The travel industry itself, and then even tied to tourism, so if you’re invested in hotel stocks or Airbnb stocks. Those are going to get hit really, really hard in Q2 and possibly even in Q3. In the short run, you’ve got all this economic weakness that leads to fewer people wanting to buy real estate.
I look at it as, yes, you’re going to go through a lot of short term pain. In my mind—I may get beaten up for saying this a year from now—it’s all going to end up being worth it. We’ve already seen as of five or six days ago, the Federal Reserve takes out its standard playbook and says, oh, economic weakness, let’s cut interest rates. They cut interest rates in the middle. Even without a meeting, they just called the meeting together and said, hey, we’re going to cut interest rates by half a point.
As a result today, March 11th, interest rates for 30-year loans are at 3.29%, which is staggering. Given they were a percent and a half higher, which is huge, only about 12–13 months ago. We’ve seen an enormous decline, which means that as a real estate investor, you can buy a heck of a lot more real estate and get the same exact profits. So, a huge change there.
What will also happen is, despite the fact that interest rates are dropping, and probably will keep on dropping for the next 3–6 months. You will still have a lot of people that will be in the market that are paranoid. I’m a numbers-driven investor. I can tell you what I’m telling my investors. I’m telling people, you better keep some powder dry because in Q3 of this year, we’re going to be buying real estate. We’re going to have a lot of people that will freak out in Q2 and say, we should sell it simply because they’re feeling bad about the economy, and the deaths, and things like that.
Toby: They’re going to start dumping because they can’t carry it. They’re going to be concerned. There’s going to be some short-term pain. This feels we’re going back in time a little bit.
Neal: It does. What’s important, though, is to understand that the Coronavirus event is by itself weakness. It’s not the kind of weakness that we saw in 2008, where you had all this crap in the market. Those bonds that were basically sold as A bonds turned out to be C. None of that has really happened. The world economy is in a decent place. The US economy is in a very, very strong place. I expect that unlike 2008, if we see a downturn it is going to be a sharp lead.
I can draw on the screen. Sometimes you get one of these recessions that you go down, and then you go along the bottom for a while and then you start moving up, or you can have a V recovery where you go down and sharp up, or you can have what is known as a sharp V and that’s what we’re seeing right now with the stock market.
Very sharp down, and then a quick realization that at the bottom that, hey, wait a minute, the world economy is only affected by this in a very short-term way and then it’s going back up. We might see the stock market recovering in Q3 to reasonable levels, but because there are people who only react by panic, we might see some inventory in the marketplace. To me, I see Q2, Q3 of this year as a great time to be buying dips at unheard-of interest rates, which I think people should lock in for as long as they possibly can.
Toby: I 100% agree with you. That reminds me of 2010 when money was cheap, properties were plenty, and you didn’t have a ton of buyers.
Neal: It was interesting. Back then I asked a Ukrainian hacker to mine the Zillow website. I basically said, go to Zillow website and basically mine every single page for every single city in the US and he came up with a list of 3300 cities when he mined the 2005 peak versus the 2009 draw. I basically just sorted it and I came up with a list of, these are the cities that are brought the most because when real estate goes up, it goes up more than it should. When it goes down, it goes down more than it should. It always overreacts on both the upside and the downside.
I was looking at this city called Madera, California. That’s 144 miles from me in the San Francisco Bay Area. It’s near Fresno. This city had brand new Kaufman & Broad four-bedroom homes that cost $160,000 to build available in bulk, groups of 10 for $90,000 each.
My family is like, are you crazy? The world is ending. Don’t buy real estate. I’m saying no, no, no, no. You don’t understand math. Something that costs $160,000 to build is available for $90,000. It cash flows on day one. It will revert to the norm at some point because the cost of construction has never come down in history. It only goes up.
Now though, they cost about $230,000, $240,000 to build. My family is thinking I’ve already gone insane. I go there and buy 10 of these, and they’re like, why are you buying one? I said because buying one is the problem. An opportunity of this scope, I need to maximize my number of loans. The only way to do that, you’re allowed 10 loans, I’m just going to buy 10.
I still own them, Toby. Today my wife loves them. She thinks that they’re her children. She doesn’t want me to sell them. Today, the number side of my head is saying, why am I not selling these? I bought them at $90,000 each, there’s $275,000 each. I should be selling them, but no. I want to stay married. At this point, I’m keeping my mouth shut, and just taking in the $15,000–$16,000 a month in rents that I’m getting. Up and down, right?
Toby: Yeah. I’m a big believer. Your holding period should be forever anyway. When you buy something, you’re not usually buying it to sell it. Unless you’re doing syndication, you have an exit. For the most part, I’m buying something with the idea that I want the cash flow. I just want the income stream for a long, long, long time.
Neal: That’s exactly what I’ve been doing. I bought those in 2009, and here we are in 2020, 11 years later, and amazing cash flow. Here’s the one thing I often say to real estate investors. What a lot of you don’t do is you look at the Coronavirus. We went from 20 cases to 40, 60, 200, 600, and then 1000. This is known as exponential curves. Some people call it a hockey curve.
What I want you to do is that when you invest in real estate, don’t just project it out for three or five years. I want you to project it out in 10 years. At the end of that 10 years, you’re going to be stunned with how much wealth you have created, real wealth that you created. At that point, it’s taking very little of your time. You paid off most of the principal requirement or a good portion of it. Prices are so far beyond what they were when you purchase these properties that the worst recession in the world would still not bring you down to zero cash flow. You’d still have cash flow.
That is an insane message. The other message that I like to say to real estate investors is this. Every single real estate investor today thinks that real estate prices are too high. I have a message for you. They’re only too high if you don’t take macroeconomics into account. If you do take macroeconomics into account, they’re not too high. In fact, they’re perfectly where they should be.
Let me explain this. In 1982 interest rates were at 18%. You remember those days? You had interest rates at 18%. You had banks basically paying you 12% or 13% interest rates back then. Today, a bank pays you zero. As of March bank pays you absolutely zero, but that wasn’t the case before 2007. Banks were paying you a certain amount of interest.
What has happened over time is, as be riskless, returns have shrunk. Ten-year treasuries went from 5% in 2006 to 4%, to 3%, to 2%. Today they are at half. That 4½% compression that happened on the riskless-side 10-year treasury bonds has also happened to the real estate side. That gap—we call it the risk premium between what you get on bonds and what you get on real estate—has actually increased over this time. It’s not decreased.
You are actually getting a bigger premium today for taking a risk in real estate than you were in 2006 or 2007. Most people don’t understand that the world is based on risk premium, not actual returns. Your actual returns are down across the board. It doesn’t matter what you’re investing in because the world economy is slowing down. Interest rates are lower than they used to be 10 or 15 years ago. The gap has actually increased, and that is the magic of real estate. That’s why I think it’s priced correctly.
Toby: Absolutely. I’m looking at the real estate side right now. I’m an avid investor, you know that. I know you have done a ton. It’s not like if you’re placing properties correctly, if you’re buying in the cities where the growth is there. They need homes. You always have a base level of what somebody is always going to need.
I’ve never had property and I live in Las Vegas. When we got hit, we went down 75% of our values from 2008–2012. It rocked this city. My rents barely moved the entire time. I still look at it. None of those properties, the values I didn’t pay attention to. I just said, hey, the cash flow is still there. People still need a place to live in. It never went away.
Neal: That’s the message that I don’t think people give enough. Sure, values go down. But in 2008—the worst real estate recession of all time—rents went down 4% in the United States. Why does it matter how much value is declined by it because they went down and then they went back up?
Toby: They got up about 40%.
Neal: They’ve gone up a spectacular level. Any and all decline that you might have seen in value back then, firstly, if you held your way through it, it didn’t cost you anything. If your rents only declined one single year 2009 by 4%, how could you not take that hit and then enjoy an incredible ride that you’ve had really since 2011 all the way to 2020? You’ve enjoyed that incredible life because you had the guts to take on that one year worth of hit, that 4% hit.
It’s not a huge hit, but a lot of people back then were like, oh, my property is losing value. I encourage you that if you’re a real estate investor, you should just focus on the rents. If your rents are not getting hit, then the value of the property is intangible anyway. To make that value you’d have to sell your property. The moment you do that, you’ve lost your cash flow.
Toby: The stock market is interesting. You watch the volatility in the stock market. When somebody stock starts dropping 10% they freak out and sell.
Could you imagine if you had a stock ticker on top of each one of your houses or on a property that said, here’s what it’s worth today? You would trip out on any given day, you’d be selling it when you don’t need to be selling it either the good way or the bad way. It’s going to get you to do bad things.
Neal: And this is why I find it hard to be a stock investor. My millions of dollars in net worth of that, not $1 is currently invested in the stock market because today’s stocks plunged for six straight days. They’re down about 24%–25% which is why we’re now in a bear market, the first one since 2008. Whereas my tenants are calling me at this point, I’m hiking their rents by 4% or 5% and they’re renewing. They’re signing renewal contracts at this point in time.
When I look at this and I go, even if my homes go down, it’s very likely that rents will go up. They went down in 2008, but in the previous three recessions 2001, 1992, 1987, even when real estate values went down, rents went up. It’s normal for them to go up even during a recession. The biggest reason for that is the millions of people that lose their homes have to go live somewhere. They’re usually living in single families, for rentals, or in apartments.
It’s normal for rents to actually pick up a little bit. They don’t go crazy, but they actually take up a little bit. I’m looking at that and saying, my life is so much less stressful than the average stock investor who is glued to his computer checking his portfolio every 30 days, where I don’t give a damn. I’ve got a one-year lease sign, I don’t care about it.
Toby: We treat the stock market the same way we do the real estate market. You buy things that are going to pay your rent. I had the best advice from a financial planner who worked with a bunch of the Seattle Mariners and Seahawks when I was up in Seattle. He said, I just told them don’t look at their statements because all you look at is your account. How much is going into your account on a monthly or quarterly basis?
He said, don’t look at the value. Don’t open up your statement because I don’t want you to get crazy, either good or bad. I don’t want you to see it run up and say, I better sell. I don’t want to see it go down and think I want to sell. Live off the cash flow. That’s why we build a portfolio.
Neal: The only caveat I would put to that is every once in a while I go back and see if I can refinance them, pull cash out, and buy more of them.
Toby: Or trade them. Trade them for something else. I know you’re a numbers guy. The only reason I can bring this stuff up is that I know you look at the same thing. I’m looking at whether people are moving into a city. I’m looking at whether there’s growth. I’m looking at that type of thing. If I see a city go the other direction, I might trade those properties for a city where it’s going up. All I’m going to do is just exchange those properties.
Neal: Exactly. I actually teach a course. It’s on udemy.com. Just search for my name, Neal Bawa. There are about 10,000 people right now there. These are all real estate investors and they’re taking this course which teaches you how to figure those things out that you just mentioned, where to put people moving to where the income is increasing, where the home prices are increasing. In about 10 minutes, the course basically allows you to figure that out for any city in the United States and then figure it out for any neighborhood in the United States, so check it out.
Toby: What do you like to look at? What are the big things you look at?
Neal: The top five for me at a city level are population growth, income growth, home price growth, crime, and jobs. I only look at jobs for the last 12 months. Whereas for the rest of them, I’m looking at an extended timeframe 3 years, 5 years, 10 years. Jobs are like this instant gratification. I look at jobs for the last 12 months and I tell the people that are taking that course exactly where to go, where to pick up the numbers, and what numbers to use to figure out whether this is a good city or a good neighborhood to look at.
When I’m looking at a neighborhood level, I look at the ethnic mix, I look at poverty levels. I also look at the total rents and there’s a Goldilocks zone there for rents. Rents that are too high, no cash flow. Rents that are too low, too much delinquency. You got to live in this Goldilocks zone and I define that zone pretty much for every city in the US.
Toby: Udemy is a free course or they got to pay something to get in here?
Neal: It’s completely free. It’s always meant to be free. You can take it and actually teach it to other people. It’s udemy.com/realfocus. I’ll be actually teaching it for Toby’s group very soon. That’s a great opportunity to do that live in Vegas.
Toby: Our little Infinity group which we love and cherish. I just love the idea of cash flow. I’m just a big old softie when it comes to that stuff. The stock market again, you just have to divorce yourself from MSNBC and all these other places where they’re telling you to buy and sell. You’re never going to time the market. You’re never going to beat these robots or these other things in the stock market. Just treat it like you do real estate. You buy for the long haul and rent it while you have it. We go over all that fun stuff.
Neal, let’s go back in. I don’t want to waste all your time. The Coronavirus and what you would be doing because people are going to be watching this. It’s going to be months after it came out and it’s going to play out. It’s going to end up doing what it’s doing. Do you have an idea of, (a) the endgame on the Coronavirus? Where do you think it’s going to end up in the near future? And then (b) what people should be doing? Where should they be poised?
You said quarter three. You have some powder drivers. You have some cash to buy up some things that may be available, but right now they’re a little inflated in price and you’re going to watch them go down. Give us some ideas.
Neal: Endgame. Number one. Today is March 11th, 2020. I expect that by the end of March certain portions of the US will be in quarantine including my own area. The San Francisco Bay Area, Seattle, New York, and a bunch of other states. Population centers will be in quarantine. This will be a good thing. It will finish off this thing. It will burn it out. It’s not a mole light. Will burn it out so that by the end of May, the world sort of goes back to normal.
March, April, May are going to be very, very tough months, that it’s going to be unlike anything that we’ve ever seen before in our lives. By the end of May, it burns out. Now, because there were these three or four months of weakness and people getting laid off, there’s an opportunity in the marketplace. There’ll be single-family homes that will come to the market. There’ll be small multis that will come to the market.
My biggest message for everyone is that this is the opportunity that if you start in 2009–2010, these homes were $90,000 and you didn’t buy them, you will get that opportunity again. It probably won’t decline as much, but it will decline, and that’s your opportunity. Dry powder Q3 2020.
Toby: That’s great. That’s great advice. Hey Neal, I really appreciate you. I’m going to put up that link so people can go to Udemy. Of course, I’m going to just say that they can always join our Infinity group. It’s on our website so that they can hear more of what you have to say. I really appreciate your time.
I’m going to ask you a very simple question before we go, which is if you could go back and talk to the young Neal, what would you tell the young Neal? One piece of advice. Having known what you know now, what would you go and tell the 16-year-old, 17-year-old Neal Bawa?
Neal: Don’t buy into the real estate hype. Don’t shovel the […]. Stick with the numbers and you’re always going to come out ahead of all these other people that are hyping it up.
Toby: Love it. Thank you for your time, man.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.