EP 14: Neal Bawa: When Tech meets Real Estate, with The Mad Scientist of Multifamily Part 1

When you buy something, you can never change its price. So if you bought it, it was too expensive and you bought it anyway. That's it. You made that mistake and there is no way to undo that at all. No way that mistake's made. There's a whole bunch of properties right now in Phoenix that are going to go back to the bank because they were purchased for an extremely expensive rate.

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Hey, hey, hey. Welcome to Think Outside the Stocks. Another episode. And this episode actually is a very special episode and very close to my heart. And the reason is my original mentor, coach, guru in this multifamily syndication journey is here with us today. Neil Bawa, the one and only Neil Bawa, the mad scientist of multifamily Syndicated world is here. So, Neil, welcome to Think of Sentence Talks.

Well, thanks for having me on the podcast. I'm very excited to be here. I've known you for years and years and years and it's thrilling for me to be part of your journey, especially the podcasting journey.

Yeah, I really appreciate, I mean, so grateful to have you here today, Neil. And like I said that I started my journey with you with a reason. Right. I am a tech person like you and I resonated with what you have been doing in multifamily, especially coming from that huge data background. Right. I think that's what it resonated with me the most. And also the amount of education and amount of giving that you have done over the period of time is just immense. So I always like to introduce my guests with three fun facts. Uh, so listeners, if you are listening today, Neil Bawa, the three fun facts about him said Neil Bawa is a technologist in Silicon Valley turned into real estate investor, a syndicator. He's actually a real estate investor and syndicator with a Flare. And that's the technology part of it. He's a technologist and data scientist in real estate world and we like to call him very fondly mad scientist of multifamily. He has his sets of algorithms and data sets that, you know, he has built over a period of years and he loves to give it away. He loves to educate people based on that. Neil is a data guru and process freak and also is an outsourcing expert. The next fun fact about him as is that he is an actually an accidental, you know, developer. In real estate, typically people start their journey with single family homes, multifamily and maybe into development. In, in his tech world, he actually started his journey as a developer. So that story, Neil, by the way, always fascinates me. Maybe you can, you know, throw some more light on that, I believe. Yeah. And in his portfolio, the third fun fact is he has actually about 31 projects more, close to 5,000 units in 10 different states and coming close to about a billion dollar portfolio in value. That's humongous. You know, it's in development of multifamily student housing, self storage, some value add, built to rent. It's an immense amount of different asset classes and different markets he believes in and he invests and brings investors on the board as well. So with that, Neil, welcome back again. And from your own mouth, would love to, you know, hear a little bit more introduction with a little more, more flair from you. Sure.

As you said, I'm a technologist or data scientist. I look at everything from a lens of data. The world looks to me like it did to Neo in the matrix. Everything is about data. As I'm looking at you, I'm already doing a number of different calculations. So my brain does that all day long until I sleep. And I live in Taxifornia. So it became obvious to me that real estate was the best way for me to keep my wealth rather than make money. Right. They always say it's not about what you make, it's about what you keep. And math told me that there was no better way for me to keep my wealth than to get into real estate. I started, as you said, as a developer, an accidental developer because my boss gave me the job of building a brand new technology campus in Fremont, California. And it was both a nightmare and a delight to do that. And that was in 2003. So 20 years have passed and then I got the real estate bug from that. There were no investors in that building, there was no bank. The company was paying for it. But going through the process and recognizing the huge tax benefits, the huge benefits to the company itself, I was just wowed by wow. Real estate can make an enormous difference to, to my life in so many different ways. And I got the bug from there. Bought a dozen single family homes in California, then expanded to various parts of the US Made my mistakes, did bad things, lost money, and started to share that information in a meetup group in the San Francisco Bay area with a bunch of other geeks and dorks. No, no investors. I mean, it was just a technologist just sharing his thoughts. And one of them suggested that I create a data science toolkit to find the best cities in the U.S. i created that over a Christmas holiday and started, you know, started teaching that in my meetup group. And then another guy came in, I think he was from Apple, and he said, you should not be teaching this in a meetup. You should actually post it on the web. And I said, okay, maybe I'll try that, but I don't know where. And he said, there's this website called Udemy, which is a online course website. They allow you to post it for free. So I posted it there. I thought maybe 50 people, 100 people will show up and that'll make me feel good. As of Yesterday, there were 11,000 people taking that course.

Wow.

And it's a, it's so. It's the most popular real estate data science course in the US and there's all these geeks and nerds out there that think like me, and so I work with them. There's about a thousand of these geeky, nerdy investors that are currently invested in our projects. And we try lots of different things. We believe in diversification, so we try industrial and self storage and student housing and multifamily and build to rent single family townhomes. We do different kinds of projects and see what really works for us. And so far it's been going really well.

Well, what a journey. Neel, thank you so much for sharing that. One of the key things that you said, I'm going to go back to it. And you know, we think outside this talks, our philosophy kind of. I always see people focused on, okay, what is my investing returns, what is this investment going to give it to me in terms of cash flow or returns. Right. And I ask them that let's step back a little bit, change the perspective. It's not just about investing and giving you that returns. It's about growing, preserving, protecting and passing your generational wealth. Right. And you pointed very rightfully that it's not about how much you make but how much you get to keep. Right. So those tax benefit that comes with the real estate, that's really a key point and thank you for sharing that. That journey of you know, development to single family and what you have done with Meetup and you know 11,000, that's incredible number by the way. And those who are listening, if you want that link, I'm going to put post it in my the show notes and you will have access to that course as well. But again, you know listeners, I know you are tuning it in and you are thinking that, you know there is this mad scientist of multifamily and we are thinking outside the stocks. What's in it for me? We are going to talk about, you know, from the passive investor perspective about the entire situation that we are in today. Neil comes with such a strong research and data based point. So we will talk about that and we will talk about that. What's his thoughts on, you know, what that path of progress is. So, so, so just if you're listen, listening and joining in, stay tuned for this all information. So Neil, with that, you know my first question is going to be a little longer question. It' kind of amalgamation of couple of more questions that I have together. But what I see here, right. I mean you have talked about in several conferences and stuff like that is that we are sitting on a trifecta. We have the inflation, we have recession and we have the high interest rate. So we're sitting on that trifecta and you know there are some things we are expecting it to calm down. Some things we want it to like go up. Right. For example the interest rate, we want it to start a reverse cycle. Right. Start that coming down a journey with interest rate with the single family homes or the values of the real estate. It is kind of adjusting right now. So we don't know how far that will go. And when it comes to recession again, I mean looking at 2008 all over again, are we looking at a soft landing? What makes that, you know what, what is your perspective about all these things and how does it affect the real estate? I know there's, you know, you talk about kind of a crystal ball and nobody has that crystal ball but with your data sets you kind of have created that crystal ball. You can predict some of the things and that's what you have seen over the period of time. So would love to have your perspective on our current situation here.

Sure. Let's say you're a limited partner, right. So you're an lp, maybe you've invested in multifamily in the last few years. Maybe you've invested in different asset class. Really, the question you should be asking yourself is, what am I learning as an investor from what's happened in the last 18 months? And does it make it easier for me to invest or does it make it harder for me to invest? And I find that sometimes that question is not being asked. What happens is investors say things to themselves like interest rates are too high, I shouldn't invest, or rates are going up, or cash flow is going down, or a recession is coming. Well, the truth is all of these things have been happening in the last 50 years where people have made an absolutely staggering amount of money. So these are part of the investing cycle. For example, I always say recessions are a really good thing. And sometimes people are taken aback by that. How can a recession be a good thing? My answer is, if you don't have a recession, you'll have a bubble. When you have a bubble and it bursts, then the recessions are 10 times longer and 10 times deeper and they hurt everyone, especially poor people, a lot. So it's infinitely preferable that every three to five to seven years you have a recession, and that recession deflates any bubble that might be building. And this time that recession has deflated very, in a very fairly orderly way. The bubble that was building in multifamily real estate, it has so far failed to do so for the single family bubble. So we'll talk about why it is that the single family bubble has not deflated in the last 12 months where this, the multifamily bubble has. So that's good, that's good. That's great. Because the economic cycle, it needs both up and down. If you're thinking I'm going to invest in something that always goes up, then the answer is it's going to go up, up, up, up, up, up, up and crash, because there's no other way to end that process. So I'm actually pretty relieved with what's happening in the last 18 months because values are adjusting. So I'll give you an example of why that would be potentially good for you. Right. So I'm going to give you two investors, right, so John and Jake. So John invested 18 months ago when values were extremely high. Right. So today the average property in the United States that John had invested in 18 months ago is worth roughly 18% less. If it's, you know, in certain markets like Phoenix or in Atlanta, then it's probably 25% less. So I can't say that John's in a very good position. He invested two years ago, and now the value of his property has gone down by 25%. You know, Jake didn't make that investment then and is looking at it now, and he's like, oh, my God. Recession. Oh, my God. Interest rates. The big question that Jake should be asking himself is, isn't it cool that I'm investing after these values have declined after they've gone down 18% or 25%, depending upon the city that you're investing in? And you might say, Neil, but doesn't that also mean that the property's income has gone down? The answer is no. U.S. net operating incomes for average properties have increased in the last 18 months. So if the net operating income of the property was $1,000 18 months ago, it's probably 1050 or 1025. They haven't gone up, like, a crazy amount, but they've gone up a pretty reasonable amount. And so it's like, so the property's incomes have gone up, but their prices have gone down 18 to 25%. Yes, because even once a property makes a higher level of income, it still has to pay its mortgage, and that mortgage has gone up a very substantial amount. Right? Oh, that's bad. You know, because then that means cash flow has gone down. You're correct. Cash flow has gone down. The big question is this. If you were buying something, it doesn't even have to be a multifamily, just something, anything, right? And there were two choices. One is low interest rates and extremely high price versus high interest rates and extremely low price, which of the two would you pick? I can tell you that If I asked 100 savvy investors, people that have been investing for a decade, 99 of them, if not 100, would definitely pick the cheaper building, Right? They wouldn't pick. And they'd be fine with the high interest rates for one simple reason. When you buy something, you can never change its price. So if you bought it, it was too expensive and you bought it anyway. That's it. You made that mistake. And there is no way to undo that at all. No way that mistake's made. There's a whole bunch of properties right now in Phoenix that are going to go back to the bank because they were purchased for an extremely expensive rate. I was thinking about buying some of those. Luckily, I didn't, because the mathematics didn't make any sense to me. I think I'm too conservative for what people were doing back then. So I'm pretty happy that I didn't engage in any of the madness that went on in 2021 and just sat on the sidelines and cursed the market. So to me, I think that the odd thing is, oh, well, yeah, interest rates are too high. The answer is, look at any buying opportunity. I'm sure that all of you would agree that 2009, 2010 was an incredible time to buy. I mean, if you bought a building in 2010 and you held onto it for the last 13 years, you probably made a 10x return on your money. So you invest 100 grand, you probably made a million bucks, right? By now, probably more, by the way, I would say probably made 2 million bucks, right? So incredible opportunity. Do you know how afraid people were into 2010 when they were buying those properties? Because the properties were cheap, but everything else was wrong with the economy, right? So unemployment was almost double what it is today. Right. Interest rates were not as low as they were during COVID Right? They were low, but they weren't that low. Lending wasn't available. You know, loan to values were low. So the people that made the investment in 2010 that made enormous, insane returns, the first question they ask themselves is, am I buying something at far below its value? Right. That's really the question you have to ask today. Now, are you buying something at far below the value? I wouldn't say so. Are you buying it below its value? Very, very likely. Because interest rates change. They go up, they go down. If you look at the last 50 years, interest rates are high roughly 5 to 7% of the last 50 years, and they're low the rest of the time. So the big argument that one would have to make against buying today is, oh, no. For some reason, something has changed so fundamentally in the US economy and the world economy that interest rates are now going to stay high without any break in the middle for the next five whole years. And if they do, then you're building the building that you're buying today. You won't lose it, but you just won't make any cash flow. Right? It's just, it's gonna break even and just sit there for five years not making you any money. But I think that that argument is extremely illogical because there isn't a single time frame in the last 50 years that you can find that is five years long where rates were not low. Because all you really need is a window for them to go down and find they'll go back up. But if you took advantage of that window, as many of us did in, you know, in the past three or four years, then you've locked in a rate at a lower level, you've increased your cash flow, and now you've gotten the best of both worlds, which is a low price because of an interest rate event followed by a low interest rate a few years later. Right. That's the belief that the smart money in the industry has that somewhere along the line. And Nobody knows, maybe two years from now, maybe 18 months from now, rates are going to drop and we're going to have a chance to refinance. Everything that happened in 2010 was simple similar to that. And so when I look at it and I compare John and Jake's story, there is zero doubt in my mind that Jake, you know, buying into a property today is making a much better decision than John making a decision 18 months ago. John's decision was based on hype. Everything was going right. People were making truckloads of money. Properties were going up 35% a year. But he wasn't asking that question because he was part of that hype. Right, right, right. Today, Jake's like, no, I'm just buying something that's 18 to 25% cheaper and its net operating income has increased. Right. So you're making the Warren Buffett decision today. And, you know, if you ask Warren Buffett today, he wants to buy lots of stuff. I mean, this is public information, right, that Berkshire is basically making acquisitions because they know prices are down, stock market's down about 15, 20%. So they're making acquisition because everything looks cheap to them. So I think if you think like Warren Buffett, you'd be very interested in investing today, but not blindly investing. I think that there are challenges in multifamily. There's issues. We are going to go into a recession. It's an extremely unlikely scenario that the recession doesn't occur in the next 12 months. I'd say maybe 10, 20% chance that it doesn't happen. But once again, that is part of the cycle. If most people out there did not think that a recession was happening in the next 12 months, there is no way the price would have declined 18 to 25%. So you would have never had this benefit. These things are all connected. There is no great opportunity without some risk. Right? Great opportunity. Zero risk only exists in comic books. So in a real world, as an investor, you're taking risks. And to me, I'm much more likely to take risks like my 401k in 21, 2021, 2022. I didn't make any investments. I have 30, 35 limited partner passive investments myself. I'm making lots of them. I just invested last week into an industrial building. It's very small building, two and a half million dollar project, just 10 investors. I put money into that. I found a fund that's doing a short term rental fund. They're now able to buy buildings for much cheaper than they were able to buy 18 months ago because the Airbnb market has significant distress. You know, prices have gone down there. So they're like, this is a great time to buy. You know, rents are still high and they're probably going to see rents decline during the recession. They probably won't give me any cash flow for 18 months. But what's what I'm interested in as a seasoned investor is basis. My basis in an Airbnb that they're buying today is at least 20% lower than a year ago. And when the economy recovers, the price, the rents are definitely going to be higher than they were when people were buying, you know, a year and a half ago. So I think all of my examples come back to this. Investing is all about toughening yourself up and your mindset. And so what there, if there are investors who think that today is a bad time to invest compared to 18 months ago, I sort of just laugh at that or chuckle. Right.

I love that example that you gave here, Neil. And I think the three things that I look at it as, number one, buying it, right, when there is an inflation going on in terms of the house prices too, and their high prices instead of that, buying it at the right point. And secondly, the rent growth has been good, so their income is going to go up in future also as well. Right. And the third thing is that whenever you see that pocket of low interest, you jump at it and you kind of refinance it. So that's kind of a great strategy for listeners and, you know, in real estate investors to look at. There's a lot of fear. And I think I, we, I do want to address that fear. I, you know, talk to investors and they are looking to sit on the sidelines. They are looking at what's going on in the market and especially the bank collapses that recently happened. More and more fear has been induced in their mind and right now they're thinking of sitting on the sideline. And I often, you know, ask them that how much is inflation eating into it? Even if you're getting, say that 4 or 5% in money market accounts or Treasuries or anything. Right. So what would you say about that? Addressing that fear and sitting on the sideline? What is the, you know, the biggest opportunity? And you talked about it a little bit right now. Right. So is this, is this a time to sit on the sideline or is this a time to take advantage of the biggest opportunity that the real estate is bringing it to you?

Once again, being data driven, all I can say is if you're making 5% in a money market account today, you're making minus 1%. Somehow, when, when inflation was at 1.5% and you were making half a percent in a bank account or a money market account, that delta was, was one. Right. So inflation was reducing your earning by one and a half percent. Money market was increasing it by, by half a percentage. The delta was 1%. Right. Today, inflation is at 6%. It's reducing your income by 6%. And money markets are increasing it by 5%. The delta is 1%. Nothing's really changed. You're still losing 1% in a bank account compared to 18 months ago or 24 months ago. This concept of safety is silly. What does safety mean for you? I mean, and there's still people out there, by the way. At least in a money market account, you might be making four and a half percent. Five. Five is rare. But four and a half percent. But do you know, most investors are actually, their money is in checking accounts. Right. So. Right. Bottom line is every single year, 6% of the money in your checking account is lost. It's lost to inflation. For some reason, people think this is okay. Oh, well, it's just inflation. No, it's not. You're 6% poorer, and then next year you're going to be another 6% poorer, and the following year you're going to be another 6% poorer. So when you stay out, there is a loss. And when you stayed out before, your loss was smaller. Today, your loss is much larger because of that 6%. Especially if you have it in a checking account, not in a money market account. But even in a money market account, you notice you're losing 1% a year. You're not making anything. So when people say, I'm making 5%, what, they're just trying to make themselves feel better. The only reason a money market account is at 5% today is because inflation is at 6, not 1 and a half. So nothing fundamentally has changed in terms of your purchasing power. You have no benefits compared to before. Second, what you're saying is because there is some distress or potential distress in this market, it makes sense for me to sit out. But at the same time, every party that you go to, they're already telling you, you know, all that, all the quotes about good investors, what do they say, right? When everyone's greedy, be fearful. When everyone's fearful, be greedy. You've heard that, you said that, you've repeated it to other people, but somehow you haven't believed it. That it's when there's fear in the marketplace that there's more opportunity. Look at me, I'm a buyer and I'm not necessarily buying with your money. You know, I have a thousand investors of my own and I'm telling them right now in the next six months is a great time to be buying because there is a conversion happening here that is very rare. Normally market's pretty shitty to buy. Why? Because everything's okay. When everything's okay, buyers are in, sellers are in control, buyers are not. We just have to accept whatever life gives to us. But we really have no control today because of interest rates. We have balance. In fact, I would say that as a buyer, I'm in a slightly better position because of investors freaking out, not wanting to give me money. So raising money is harder, which means that there's less indicators trying to buy properties even though those properties are a lot cheaper. So I'm in a better position in so many different ways than I was before. Yes, I have to take on the job of, you know, raising money being a little bit harder because investors are freaked out. But I think that is a one time challenge and then I get to benefit from for five years having purchased a cheaper property. So I'm very much looking forward to it. I'm actually sitting on the sidelines because I believe that in the second half of this year prices will fall even further. But that's not too far. You know, we're recording this in April. I basically told my staff, you know, I want to make offers as of June 1st. So I'll be on the sidelines for another 30 or 40 days and then I'm making offers. I'm being aggressive. I'm also, I have a rescue fund. So there's properties that people bought 18 to 24 months ago that are in serious distress. Especially properties that were purchased in the first six months of 2021 are coming up for some serious distress at this point. And I'm looking forward to being able to either bail those properties out or simply buy them from the bank or buy them back from the bank. So it's a lovely environment to actually have some control as a buyer where I really had no control, you know, since, since COVID struck because the sellers had all of the control. So to me it makes a lot of sense to do this. And yes, I know that there's a recession coming. My question to you is, so what, what happens during a recession? Rents flatten out. They usually go down 1 to 2% in heavier recession. So like 2008, rents went down about 3%, 4% and then they, they made an abrupt U turn and went back up. So by, by the, by 2010, rents were fine, rents were doing well. Right. So here I expect that abrupt U turn because back in 2010 inflation was 1%. Today it's 6%. So it's actually there's more upward pressure on rents beyond the end of the recession. And so why be afraid of that recession? You're receiving a benefit of that recession in that the property is discounted. So the way I look at it is if I was going to buy a property for 30 million now because there's a recession, I'm buying it for 27 million. Well, I've made $3 million up front. Okay? That's my cash flow. A lower basis is my cash flow because there's no way the property would have given us $3 million of cash flow if the recession didn't happen. Maybe it would have given us half a million. But we're getting a huge discount here. So we're upfront making money and that is the only way to look at it. As an experienced investor, that is some.

Fact based, number based evidence and perspective on the recession and how actually recession is helping state to bring in more opportunities for investors. Before we continue in this episode with Neil, we had such an excellent conversation that we had to continue our conversation in part two of this episode. So part two when Neil discusses why the SVB collapse actually is a good news for multifamily industry, the syndication industry, I highly encourage you just to turn around and start Continue listening to the part two of this very, very interesting episode with Mad Scientist of Multifamily, Neel Bhava. Again, this is your host Madhavi Jain and see you in part two of this episode.

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