Aug 22, 2018
Neal Bawa is the President & COO of Financial Attunement. He brings a new perspective to Real Estate Investing and Housing Trends using a data and business intelligence. We will discuss his unique analyzing strategies, some of the resources he uses for understanding markets, the local economy, and trends to make his buying decisions.
Hi Neal, welcome to the show.
Thank you, Agostino, I'm jazzed to be on the show. Thank you for having me.
Excellent. Well, you know, maybe can give us a brief introduction before we get going here.
Sure. So I am very different from most of the folks that show up in your show. I'm not real estate royalty. I come from a technology background: tech company. Ran my own tech company, sold it and basically learned real estate investing the proceeds of that money and eventually fell in love with multifamily and here I am. I own and manage about $100 million dollars worth of real estate together with my partner, about 220 active investors invest with us and we buy multifamily and student housing properties in seven states. The portfolio is currently slightly larger than a thousand units. So I'm absolutely passionate about multifamily. I love every aspect of it and I'm just a blessed person that's had two separate careers and love them both.
Excellent. We know one of the things I know about you is that you're really big into data and demographics and I'm actually certain that you must get a lot of questions about the real estate market, what it's gonna look like for 2018 and beyond. Maybe give me your opinion on what the world and US economy currently look like. What do you see it today and where do you see it going?
Oh, I love that question and I have to tell you, I've been teaching, I teach about 2000 students a year, various different seminars and webinars and real estate. And I love answering this question because, for the most part, I'm bearish, right? So if you look at me in 2011, '12, '15, '17, I was bearish. This is a change for me, Agostino for the first time I'm bullish on the world economy. I'm very bullish on the US economy, but only in the short term. And I define short-term as 2018, 2019 and the first half of 2020. So that's about two years from now, give or take a month or two. I'm bullish in that timeframe and there are reasons for that. If you look at the world economy from 2011 to 2017, there was always something bad happening. Sometimes it was China blowing up with its real estate mess that happened. It was Japan with their ridiculously overwhelming debt. It was a European zone with, you know, Greece being dead, man walking and Italy having a banking crisis. There was always something to point to and say, this is what's affecting the world economy. This is what's slowing it down. Except for today in 2018 in the short run, we don't see any of those things. Every economy in the world, whether it's China or Japan or the European zone or Europe or us, is growing faster than they were last year. The International Monetary Fund just updated their forecast for world growth they have. They've also updated their forecasts for our growth. So in the short term, the next two years, the world economy looks very, very strong and I hope I don't jinx it.
Well, if you have that kind of power, you're a different type of investor. That's true. I mean, I'm guessing the bullish part, short-term, bearish part longterm, is that. How does that impact the job market then? I mean, I'm sure right now you see obviously the strong job market. Where do you see, I guess jobs in the future as far as the slow down hitting first, where do you see it happening? Retail, manufacturing, or anything along those lines?
Well, I think manufacturing and retail are more likely to get hit than some of the other places. I think services are going to do fine. Technology is going to do fine, but here's the key part of this. I do not think that the job slows down leads to an increase in the unemployment rate. It actually leads to a plateauing effect. So if you look at the unemployment rate, it peaked at 10% in 2010 and since then it's been dropping down. It's now currently at 4.1% by the end of the year. Most forecasters are forecasting that it will drop to 3.8 - 3.9%. I'm good with that. I think that's what's going to happen and then when it starts to pick up, it's going to be a very slow and gradual pickup, so it might take an entire quarter for it to take up one 10th of a point, so I'm not at this point, over the next two years, forecasting an increase in the unemployment rate, but we're definitely going to see a decrease, a slowdown in the number of new jobs being created. Which is why for real estate professionals, this is a very critical time to keep an eye on the jobs and not on the national jobs because they don't matter. Real estate is local. You've got to keep an eye on your local jobs because some of the cities around the US are already turning.
Yeah, that's exactly it. So with that in mind, so if you're moving into a new market, what are some of the key indicators you're looking for?
Well, I'm looking at job growth, but I'm not just looking for job growth. Typically people say, well, 2% job growth. 3% is excellent. What I'm looking for is an acceleration in job growth. I'm looking for cities where job growth today is higher than it was three months ago, which is not very common because, for the most part, we are at an unemployment rate that's so slow. And so, so low that we're slowing, right. Our job growth is slowing and certainly not as high as it was last year, so I'm looking for those sorts of cities. When I see cities like Orlando where job growth is accelerating. When I see cities like St George, Utah where job growth is accelerating, that tells me that I'm still early enough in the cycle to make an investment in those cities.
Yes, yes, absolutely. I know you mentioned before the call and even Ohio might be one of these states here looking at too. Do you see the same sort of thing or sort certain market out here that you favor or do you still favor some of the other places you just mentioned?
Well, I mentioned Ohio to my students very often. Right. So when I'm talking with my boot camp students, I'm talking about Ohio very often because it's kind of like the Comeback Kid. Right? Ohio has had a very tough time. They've lost population. Columbus I think is the only city that has escaped the population loss, but it's very much a comeback kid. You see a number of cities turning around Cincinnati, Cleveland, even Dayton, Ohio, which is kind of the perennial laggard, turning around and producing jobs. So Ohio is one of those markets which is a higher level of risk than some of the western markets, but it's also going to produce higher returns if you keep an eye on the data. So if you're looking at the data, and I'm honestly not looking at the data in Ohio as, as, as often as you are, Agostino, because you lived there, but it's certainly one of the markets to keep an eye on because there's potential and there's revenue because it's coming off a low base. It's coming off a base where unemployment was high employment job growth was low, so it's coming off that low base. So it has the ability to get larger percentage gains than let's say, the San Francisco Bay area, which is coming off a high base.
Yes, that's exactly what we see out here as well. Uh, plenty of opportunities is finding the right opportunities is always the trick, right? That's always the thing that we're, that we're trying to look out for. And then, I guess you can say that once we do find those, those opportunities, getting the financing on some of these is also a key part of taking one of these deals down. So I guess, you know, interest rates are fine right now. I think they're great. Some of the hard money lenders are pretty good, but with interest rates on the rise, where do you see, I guess, how do you see it impacting real estate and other even other asset class? And if you're studying this
well, I studied that a lot. So one of the areas, and I have an actual webinar on my website and I'll give you the URL at the end of this presentation. I have a webinar that's called how the banking system changed real estate forever, and this happened in 2008 because of quantitative easing. The $4,000,000,000,000 that was injected by the Fed into the economy, warped our economy. Okay. Think about this. Never in history before 2008 has the Fed raise interest rates six times and they've now raised them six times in the last 16 months. And guess what's happened to them, to the cap rates in the past, you raise a point one and a half, your cap rate starts to go up, right? Which means homes get cheaper. Real estate gets cheaper, multifamily gets cheaper, but it didn't happen throughout the 16 months. Real cap rates skep declining, which means real estate kept getting more expensive and this happened both on the single-family and multifamily side. So what has really happened is that the connection, the causal connection between interest rates and cap rates has been temporarily severed because of the $4,000,000,000,000 of quantitative easing that we've engaged in since 2008. This is $4,000,000,000,000 of money that has no yield. It has zero yield, it can't really go into bonds or a variety of reasons, and even if it does, it's going to make one or two percent and that's not enough, but real estate and stocks are making six, seven, eight, nine, 10 or more percentage, and so a lot of that money flows into real estate, so despite the fact that interest rates have gone up, there is currently not a single shred of data that shows that cap rates have slowed down. They continue to decline. Real estate continues to get more expensive. In my mind, the Federal Reserve needs to withdraw a lot more than $10,000,000,000 a month from the market for there to be a slowdown in cap rates. I do think that the Fed raises another three or four or five times. Cap rates might plateau. The chances of them increasing are extremely small because the moment you see even the slightest a decrease in prices, all that money on the sidelines, that trillions of dollars that's on the sidelines, that dry powder reenters the market and yanks her rates. Cap rates down again and yanks the prices up again. So it's a very hard situation to be in.
Yeah, absolutely. I mean there are so many people that are pointing out there saying, oh, it's way too expensive right now, but I mean, I dunno. It's for those that are waiting, it seems to me like it's going to be a short-term thing in terms of how long it can possibly wait. I guess what I'm saying is is that if you're waiting for the prefer a big sale, I can't imagine it to be that. That material, if you're in it for the long term, I guess, if that makes sense.
Well, I'm going to give you a message and I give this to people. Clearly, those that are waiting for a big sale are going to be disappointed. Firstly in 2008 real estate crash because of an absurdly large number of subprime loans. We don't even have a 50th of that, that number of loans, subprime loans in the economy today. That's number one. Second, the people that are holding the homes are people like me. Landlords, we can survive a short a recession. We can survive a one year or two-year recession because the homes that we bought after 2008 are all cash flowing. The homes that were purchased in 2005, '6, '7, none of them ever cashed Lord. They were all supposed to appreciate that. That was a faulty premise today. These homes appreciate our cash flowing. We're going to hold onto them so the price decreases that people are looking for are not coming. People you might see a recession, you might see job growth fall. You might see the GDP of the US fall, but please don't think that millions of people are going to sell their homes just because it happened last time because there is no demographic data. There is no driver, no economic driver to support a large decrease in real estate prices or a large decrease in stock prices. Keep in mind, there are trillions of dollars out there. It's looking for yield and the stock market and real estate beat the crap out of every other kind of yield is especially bonds, so it's very, very difficult for the market to decline. Significantly small declines happen, but you're not going to see a flood of real estate come into the market because of a small decline.
That's right. Yeah, that makes sense. Now, I guess, what are your favorite tools when you're looking at data and making decisions as to what to buy? I mean, I imagine they must throw it a lot of resources and make people want it to stop whatever it is to do it and start writing stuff down.
Absolutely. So I'm going to give you a set of tools that I use and you know, unfortunately, these tools are not free, but I tell people that they are absolutely the best buy you'll ever make. Now keep in mind I don't benefit financially from any of these tools. I'm not involved in these companies, but I highly recommend them to people. Even if you're buying a single home. Let's say you're buying a home that's a rental home and it's $100,000. That's a typical home in Ohio, $100,000 rental. I can tell you that over a 10-year timeframe, use of a single one of these tools, a single one of these tools will save you at least 40 or $50,000. So the tool that I use to pick my cities and I use a variety of them and I'm going to name all of them, but, but here's a good tool to use.
It's called local market monitor, localmarketmonitor.com, and this tool basically ranks markets in the US. They are currently ranked 320 markets in the US and you know, if you go and buy a national membership, I think you're going to notice that there's a very strong correlation between what I have purchased in the last two years and what's at the very top of their list in terms of markets. You'll notice a very, very strong correlation. Now I don't just depend on the local market monitor. I pay for Costar, which is $32,000 a year. So it's for multifamily guys like me. But if you're in that sort of range, look at Costar. If you don't like a local market monitor, an alternative is housing alert. That's housing alert. Start calm. That's Ken Wade's company. They're brilliant. They charge a little bit more than Local Market Monitor that is a little above a thousand with Local Market Monitor being a little below a thousand.
I find the services to be equivalent, so I suggest them over housing alerts, but maybe you like the approach that Ken Wade takes. That's a phenomenal tool. Once again, it will rank every single city in the US. Now, none of that matters without the second tool because a lot of people say stuff like Orlando is awesome. While I guess Orlando is clearly one of the top five markets in the US, but do you understand that? When I say the word Orlando is awesome, I should also be adding a second statement and that is in a city as awesome as Orlando, at least 60 percent of the markets are awful, are awful to buying. These are markets with crime. These are markets with delinquency and so you need a neighborhood tool. The tool that I prefer, and there are several of them out there, is neighborhood Scout, neighborhood scout ranks, individual neighborhoods, so anytime I'm pitching a deal, whether it's a deal that's $2,000,000 or $40,000,000, I'm presenting my investors with reports from a tool name, neighborhood scout. It's very inexpensive. Anyone can afford to buy the data that it gives you for investment is staggeringly good.
So those are my two favorites. I could keep going for a while, but as long as you pick one of these city tools and one of these neighborhood tools, you are ahead of 99 percent of all investors in the United States.
Oh, absolutely. No, this is great. Valuable information. Absolutely. So when you think, you've touched on this just a second ago, as far as when you're talking to your investors and you're providing them with this data, so you're and you're modeling your acquisitions, how does that data make its way into your whole process? Is that something you do before you even handle the financial side? I mean, how do you make the decision whether to pursue a deal? Like how does, how does that data make its way into your decision process?
So I will look at a deal anywhere in the US. I'm not stopping myself. Deal flow is, is extremely tiny right now compared to what it was two or three years ago. So I look at deals all over the US, but I sort them in the order of my favorite cities. Right. So a deal from anywhere in, in Utah or in Bose, Idaho or in certain parts of Washington is going to get looked at before our deal from let's say a St Louis, Missouri or Detroit, Michigan, right? Those are, those are not my favorite cities in the US, but when I'm looking at some of the cities that are in my real estate trends, webinars, for example, we've had a couple of thousand people watch those. Those are great cities. Orlando is going to get my attention and Tampa is going to get my attention way before Fort Lauderdale ever will because Fort Lauderdale is really inexpensive city at this point in time.
So a lot of the appreciation that had to happen has already happened. So you start with cities and you sort them based on your data. Now the neighborhood piece, I don't go to my agents and say, I will only buy in this neighborhood or that neighborhood. I would never buy anything, Agostino. I mean there's no choice to do those kinds of things. What I do though is when a property arrives, I pull a Costar report and then to make sure that Costar hasn't gotten anything wrong. I pull a neighborhood scout report, I compare the two of them, and if that neighborhood looks good, then I start to underwrite it and if I have two opportunities at the same time, I might use this data, whether it's from housing alerts or local market monitor or Costar or neighborhood scout. I might use it to eliminate one dealer or two, but for the most part, I just use them to rank my deals and I think that's the approach that everyone should take. You don't eliminate, obviously if your neighborhood scout says that this is a war zone, you just dump it immediately, but most of the time it makes sense to use it for the purposes of ranking your deep.
Now that's interesting. How to use the data then from a longterm perspective or do you use it? I mean it seems to me like you can also determine that maybe after 10 years a certain area may improve or decline or do you have someone on your team perhaps that keeps track of that sort of thing? Or does any of these services actually alert you when those sorts of things happen?
Well, none of these services have the ability to predict anything further than two or three years, so most of them are either predicting a year out or three years out. The only service that I find that very useful for those that are in the apartment business may not be very fruitful for those that are in the single-family business is we are apartments.org. That's weareapartments.org. This site has longterm predictions for apartment needs by metro in the US. So you look at Phoenix, you look at Orlando, you see massive needs, but when you see Pittsburgh you see almost no need at all in the long term. It doesn't matter what's happening in Pittsburgh in the short term, it seems like the metro is doing well, but I want to look at that ten-year timeline and the only website that provides objective data-driven information on longterm multifamily need is weareapartments.org. So if a, if a metro doesn't show, you know, big gains over a 10-year timeframe that I usually tend to be not as bullish on that particular metric.
No, that's great. I mean that's one of the things that I imagine in your model that if you follow a typical syndication model, at least one that we follow anyway, is we do a refi at five years or so, Polo the money distributed to investors then sell at 10. But it's also worth noting that every year we're tracking or released. We're trying to keep an eye on, on that property of the neighborhood and if there's any improvements or any declines that may impact the overall valuation of that asset. So that's certainly one of the things that we want to keep track of.
I do something similar but not quite the same and the reason for that is to me, I'm trying to generate the maximum annualized returns. So if I see an area slow but it's still decent, I might make a decision to sell that property even though it's still continuing to move upward. So it's a very, very subjective decision as you said. You've got to constantly look at the data and figure out what is the maximum annualized yield that I can give to my investors.
Yes, absolutely. So how do you see the uh, the rest of 2018 planning out at least the short term anyway? I know you said you were bullish and but other sorts of hints and tricks.
Well, you're going to see inventory shortages worsen. There is no doubt in my mind in the Class-C, B-minus category, you're going to see inventory shortages worsen and there's a variety of reasons for that. I think that as the millennials get older, they don't want to live with parents anymore. You're going to see demand go up, you're going to see supply go down. For people like me that are looking to buy, there's going to be less and fewer deals available. That's why I've started to construct, so I just finished doing a finished a 102 unit mixed-use property in Utah. I'm also building a 322 unit property in buffalo because when supply problems become so bad that it becomes totally a seller's market, it makes sense to start doing some construction and become a seller yourself. So that's really one of the solutions and I'm predicting that we're going to see another surge in multifamily completions in multifamily construction, but I think the big picture for those of you like you Agostino that are buying existing properties is you're going to find inventory will get tighter. You're also going to find that there's not going to be much of an impact from interest rate hikes in 2018. We could see some impact on the market in 2019.
No, that's interesting because I think what we're also finding is that there's a lot of out of state money that's coming in and driving some of these prices up to almost to a point where it doesn't even make financial sense. I mean we'll, we'll analyze A.
I think half of those people are coming from me. I know because on my webinars I have hundreds and hundreds of people and I'm constantly telling them stories about Ohio and Columbus, so I think I'm, I'm, I'm a partially to blame for all your in, in Ohio, there were go on your next deal, man.
Well, because it's driving some unrealistic returns. It's just, it doesn't make any sense.
Unfortunately. California investors are like that. We are unrealistic in general, which is why I own nothing in California by that and the taxes are just. Just that.
That's funny. So I know you mentioned Orlando is definitely one of your favorite places. What are some other best metros and worst metros that we should pay attention to for 2018,
so it really depends on where you are in the US. If you're in Ohio, I want you to look at Columbus. If you're up north in these Chicago, Wisconsin area, grand rapids, Michigan cannot be beaten if you're in Florida. That entire area that starts at Orlando freeway for starts at Orlando, ends in Tampa with Lakeland, Florida in the middle. That area is phenomenal to look at it. I think there are tremendous deals in that area in general. So the middle of Florida is phenomenal and if you're the west coast, Boise, Idaho is great. Both Phoenix and Tucson are good cities to look at. And then secondary cities like Tacoma, secondary cities like Spokane, Seattle, still too expensive, but Tacoma's not and neither is Spokane. So those are great opportunities for investors on the west coast to look at.
Nice. Yeah. Well, I'm going to check those out too. So shifting gears a little bit on tax reform. I know that that tax reform bill, this star just recently passed and I was fortunate enough to see some good stuff, at least with my recent return. How do you see other real estate investors capitalizing from that reform bill?
I think it's huge. I think it's. It's insanely beneficial to multifamily investors. I'll give you one piece and it's so big. That is the. It's the size of an elephant, right? The depreciation schedule has been changed, so now you can basically depreciate a much larger portion of a multifamily year in year one, and that's juicing our return sometimes by five or six percent a year. I mean that's absorbed. I'm usually interested in anything that can reduce my returns by one percent a year. We're talking about five or six to six percent a year in post-tax revenue, just coming from the depreciation change. So that by itself is absolutely massive. Then you'd also. There's some not so well known pieces of tax reform that really encourage companies to buy real estate, so it encourages, you know, companies like Apple to own $100,000,000 or billion dollar campuses as they bring money back in from outside the US because one of the big pieces of tax reform was that you're paying a lot less taxes on money that you've stashed abroad and we're talking about hundreds of billions of dollars when they bring that money in because of the changes in the tax bill, it actually makes sense for some of that money to go into commercial real estate.
Now, not a lot of it is going to directly go into multifamily, but it's definitely very positive for commercial real estate as a whole because there's a ton of benefits for companies to buy real estate and those benefits really come from many different clauses and the tax reform bill with depreciation acceleration being really the big one. The elephant. I don't see any downsides of the tax reform bill for investors. I see a ton of downsides for individual homeowners because obviously, you know, especially in expensive states like the east coast or west coast states where you've gotten rid of a or you put a cap on what you can expense in your, your income from a taxation perspective, from a property tax perspective. So a lot of downers for single family but are a ton of benefits or investors.
Oh, that's interesting. Especially the depreciation side. So I'm assuming you're doing cost seg on all your properties, right? This appreciation applied a straight line or so this essentially helps with the cost seg process. Your cost seg gain in year one is going to be much larger from now onwards compared to what it was in 2017.
Wow. Very nice. So it seems like even if you're doing a straight line, it's still going to be. It's going to be good. The use cost seg is going to be massive. It seems to me.
Wow. Yep. Yep. Straight line still has some benefits, but why would you not want to do cost segregation? Cost Segregation is authorized. Cheating. It's legal to every property. The first damn thing that we do is cost segregation. I mean, that's a way for us to return it ridiculously negative k wants to investors, why are you giving them money? I have investors who refuse to believe that I'm giving them so many losses while handing them money and I tell them it's the law. I'm not doing anything wrong at all.
Well, and that's the thing is though I find that many multifamily investors I've been aware of cost Seg, that's actually happened on several occasions at this point. It's quite interesting. I know that you're educating many, many people. So what advice would you have for aspiring real estate investors?
Well, the one thing I want to tell people is it's important to educate yourself and so many guests on your podcast have already said that, but jump in, I see so much analysis paralysis and one of the pieces of that is, oh, the market's so expensive. It doesn't make sense for me to jump in now. Not really. There is no real estate market. There are real estate markets with an S. there are 2100 separate markets in the US and for every market that is in a 10th inning like San Francisco or New York, there's a market that's in the third inning like Las Vegas. There's a market in the third inning or maybe in the fourth or fifth inning like Columbus, Ohio. Know your market, know your data, but the whole concept that other markets too expensive and it's too late for me to jump in is nonsensical. That's just you being lazy.
That's my message for you. There's plenty of opportunity in the market and there always is for people to jump in. You know what I do is I teach people multifamily and I teach multifamily boot camps. I don't like these expensive $40,000 boot camps and people are pitching, so my boot camp under a thousand bucks. It's very specific. It's very step by step and it says do all of these steps and you can go out and buy multifamily on your own and they don't involve me. I don't want to get a piece of it. Here's exactly the process that you follow to go out and buy multifamily and that's why a lot of people benefit from that and really enjoy that process. If you're interested, if your listeners are interested, the boot camp is that multifamilyu.com. That's multifamilyu.com/bootcamp and if you want to take all of my free content, there's a ton of free content that I teach about real estate that is at multifamilyu.com. I think it's August Tino. Let me. Let me check on that, but I think that it's my team set up a link for you or your people. They can go directly to that link.
The education side of things is so important. I think that many people, they either try to jump in or they get to just get scared and they get that analysis paralysis. We have so many of those people at our bi-weekly meetings and some of these people have been studying this stuff for years. Started by doing. I'm really big on education but also taking, taking action. You have to take massive action. That's the only way to go.
Well, from my perspective, I think if you want to take action, go to multifamilyu.com/agostino. All of our webinars are stored there, including the ones that we've done in the past. Take a look at them and you'll notice that the webinars are designed to drive you to act next. So education is overrated. Training is underrated. I want to train people to go out there and do these things themselves. Take some of the fear, some of the phobia off because I think that's really the value that we can provide to up and coming people and hopefully you have a chance to partner with them as their, you know, once they're on their way.
Excellent. So I know you've got a lot of stuff going on. So what is the most exciting thing you have going on right now?
Well, I think what I'm finding is that the incredible rise in prices in western cities, Seattle, San Diego, Los Angeles, San Francisco barrier has created a very large number of 10 - 31 millionaires. So they've created all these people that make no money. There's not much cash flow in their properties, but there are millions and millions and millions of dollars of 10:31 funds and they don't know what to do with it and I think that I'm looking towards creating a solution for these people and that's what I'm working on. It's not a done deal yet. We've done a few deals and I'm very excited about that because these people can go from being the rich, from an accredited investor perspective to being cash flow rich and they can do it in a very short amount of time and many of them actually suggesting that they invest in Ohio in, in some of the cities that you're looking at that have cash flow. And I'm very excited about taking people from being paper millionaires to being cashflow millionaires and, and that's, that's just blowing my mind how many of these people are out there right now that don't have a...
Excellent. Well, so how can people reach you?
Well, the best way to reach me is through my website, www.multifamilyu.com. So my, my website has contact information to get started again is www.multifamilyu.com/agostino. That's a good way to get started and then we can continue the communication. We can, hopefully, some of you end up showing up for my boot camp, the multifamily that I teach that students around the US take interesting enough, I have more students from Ohio than I do from most other places in the US and I've never figured out why people are here, are hungry, there are plenty of deals out here and uh, they just seem to understand and apply that education and actually take action right afterwards. So I'm glad to see that. Glad to see that very vibrant community out here. It is, it is. Absolutely. Well, thank you very much for joining me. I truly appreciate it and look forward to talking again soon. Yes, yes, yes.