Neal Bawa (00:03:33):
And somehow, through a series of disastrous mistakes, we managed to build a campus and build it all on time, I think it took about nine and a half months. During the process, it was the most terrifying experience of my life for a technologist to be doing something like this in real estate, which is considered a very advanced art, to build something from scratch, most people in real estate don’t do it. And what was interesting was, by the time I finished the process, I’d fallen in love with the concept of real estate, with the concept of new construction. And then of course like everybody else, and this is another part of the story, I basically did the whole value-add single-family and multifamily thing, but eventually I went back to my roots.

Neal Bawa (00:04:12):
And now today, my company was sold in 2013, we had a fantastic exit, and here I am eight years later, my portfolio is about over $500 million, over 500 active investors. There are 22 projects, and of them, 15 are new construction, and seven are value add projects. So it’s been an interesting journey and we can talk more about how I got from that 2003 building to this 2021 point, but that’s a little bit about me. I’m ridiculously data-driven, I’m known as the mad scientist in multifamily because I spend a great deal of time publishing thoughts on the web about the lack of people being data-driven multifamily.

Neal Bawa (00:04:54):
People talk about data, but I don’t think they actually use it the way that me and my company use it. And so we’re nerds and we’re happy to chat with all the other nerds out there.

Robert Leonard (00:05:04):
Why were you tasked with building the campus?

Neal Bawa (00:05:08):
I was chief operations officer. It was a company with 350 employees and my boss’s approach is, “Anything that I don’t want to do, my second in command has to do.” He also said, “If we succeed at this, we will do it again. So it’s a skill that I want you to learn because I think you’ll still be here.” I was a partner in the business and obviously, he knew that I would be there until the date that the business was sold, which was true. And so the business was sold 10 years after this. And so he wanted me to learn the skill, and I didn’t understand what he was saying because it didn’t make any sense to me, but he said, “Neal, real estate can be fundamental to any kind of business.” And I’m like, “Why? It’s just another kind of business. What’s so special about real estate?”

Neal Bawa (00:05:48):
And then, I learned that over the years, companies like McDonald’s have become real estate businesses. McDonald’s is a real estate business that also burgers. You’ve heard that before, I think. Robert’s immediately is like, “Yeah,” he’s heard this before. Burger King is a real estate business. My family owns 112 Burger Kings and 80% of their equity has come from the land and 20% has come from the cash flow and the Burger Kings. 105 Burger Kings, they have Taco Bells, they always say this, “This is a real estate business.” And then I started looking at big companies like Google and Apple. Apple’s Spaceship campus in the Bay Area is now worth $12 billion.

Neal Bawa (00:06:29):
They spend $2 billion building it, which means that they created $10 billion in profit from a building. That’s got to be a world record by the way, to create $10 billion in profit from one building. So it’s astonishing how visionary my CEO was when he said real estate is central to all types of businesses. This is not something you hear about on this program often because people that come to this program are real estate professionals, I was a technology professional, I still believe I’m a technology professional. But I learned the right way that real estate is key to our business, so much so Robert that in the next 10 years, we built six campuses.

Robert Leonard (00:07:06):
I’ve actually seen that exact example. You mentioned Burger King, McDonald’s, Taco Bell. I actually worked at Dunkin’ Donuts back in high school, and I remember thinking to myself, the operations of the restaurant, of Dunkin’ Donuts, they really didn’t make that much money. I remember seeing that and I’m like, “It’s okay, but it’s not really like that much money as you would expect from like a Dunkin’ Donuts, it’s a big brand that a lot of people know.” So you just expect that they’re raking in all this money, but really, they’re not. And then like you said, “It’s the real estate play.”

Neal Bawa (00:07:37):
You know what’s interesting? I wanted to give you guys a nugget. This is just an open-your-mind-sort-of-thing. The biggest beneficiaries from the pandemic have not been the multifamily people, have not been the single-family people. You know who are the biggest beneficiaries from the pandemic? People that were sitting on single-net-lease land, people that were sitting on Burger King, Starbucks, Walgreens, Safeways, those areas, the cap rates went completely insane in the last 12 months because people realized that no matter what business kind of environment you have, people still need to buy burgers, buy groceries, and go to a pharmacy.

Neal Bawa (00:08:18):
So the single-net-lease business has become crazy. My uncle basically is buying Rolls Royces and stuff like that, he’s the one that owns 100 Burger Kings because the land that he was selling on is basically now gotten to the point where he’s like, “I don’t even care. I just need to open a Burger King, I don’t care if it makes any money or not, because I’m in the business of taking unimproved land, building something on it, building a Burger King. And the moment it’s built that land is worth an insane, astonishing amount of money. And then I sell that land. And then I use that land to build another four Burger Kings. And again, I don’t really care if the Burger Kings are making money 10 years from now, they’ll make money. But today that land, I can go in and buy it for 600,000 and sell for $6 million.”

Neal Bawa (00:08:56):
So those were the biggest beneficiaries of the pandemic, it wasn’t the multifamily guys. Obviously, multifamily has made a lot of money over the pandemic, but it’s important to know that there are lots of different business models in real estate.

Robert Leonard (00:09:08):
I’m assuming, since you guys were partners at that business, that you’ve probably stayed in touch. But I’m curious, have you guys stayed in touch? Is he surprised by your transition into real estate and everything that you’ve built now in your real estate business?

Neal Bawa (00:09:21):
No, I don’t think he was surprised. He’s my mentor, I still am kind of his closest friend. He’s now 70 and so he didn’t allow anyone else in his house except for me and my wife. So he was just cut off from everyone because he has some pre-existing conditions. And so, yeah, we’ve stayed very close, and he hasn’t been surprised by it at all because of all the things that we did. Because again, part of my story was, once we got into real estate, I started dabbling more and more. By 2008, when the crash happened, I’d been studying real estate, I hadn’t bought any except for my primary home. And to me, when I was doing the math in 2008, it seemed like the best time to buy real estate in history.

Neal Bawa (00:10:03):
And so I started telling people about that and they would laugh at me. The more they would laugh at me, the more angry I would get, because it’s like, nobody’s looking at the data. And I would be like, “Let me show you this on my laptop.” And they’re like, “No, no, no, you’re an idiot. If you think that this is the best time to buy real estate ever, you’re a total idiot.” And what I realized was this, that it is completely normal, you’ve seen this in the Big Shot, that guy was telling everybody, nobody listened to him. He ended up a billionaire obviously. So I realized that there’s a tendency for people not to look at the data, they getting driven by emotions.

Neal Bawa (00:10:37):
When real estate is crashing, they think it’s the worst time to buy when I think it’s the best time to buy. What I started doing is, I was like, “Okay, I’m going to start working on my own hypothesis, irrespective of everybody else.” Even the founders, the CEO who really believed in real estate said, “No, I’m not going to buy real estate in 2008.” So here’s what I did. I went and mined the Zillow website using a hacker, a Ukrainian hacker. I mined the entire website that I mind the BLS website. And I looked at the cities in the US that had dropped the most from the peak in 2005 to the trough at the end of 2008, and I sorted them out.

Neal Bawa (00:11:12):
And I found that the city… I live in California, and the city was in California. It was called Madera was 144 miles away. I show up there and I basically look at the homes and they’re all brand new homes that were built by Kaufman & Broad and sold the farmworkers with undocumented income. Now an entire part of Madera was empty, entire streets were empty, but the homes are gorgeous. They were beautiful, they were stonework, four bedrooms. They were stunning. They were brand new. Nobody had ever lived in them. And so I go in there and I say, “I want to buy 10 of these.”

Neal Bawa (00:11:37):
And they’re like, “Yes, but what bank will give you a loan? You need tenants. Do you want to buy them for cash?” And I’m like, “I have the money to buy them for cash, but I don’t want to buy them for cash because that’s just me throwing my money around, I need to somehow prove that these are rentable and profitable because theory can’t be proved unless they’re rentable and profitable.” So I jumped into my car, I drive down another 20 miles to Fresno. Fresno’s that the big town in that area and Madera is the commuter town. And I go there, I immediately put down a deposit on one property. And then I come back to my Ukrainian hacker, and I say, “This property in Fresno, I want you to give me 10,000 tenant leads, prospective tenant leads.”

Neal Bawa (00:12:16):
“Why? The market is pretty decent in Fresno, I’m sure you can rent it out.” I said, “No, I want 10,000 leads.” And then I go hire this lady in the Philippines and I tell her, “You’re going to get a truckload of leads for this property in Fresno. I want you to reroute those people to Madera by offering them $50 gift cards if they just go there.” Nine out of 10 people laughed at her thinking that it’s a scam of some kind. And she would be like, “No, no, I have these 10 properties in Madera. Here’s a website. Go check out this website. Click on this link, check out these homes. And yeah, you probably don’t want to go to Madera, you want to be in Fresno, but if you go there and check one of these homes out, I’ll give you 50 bucks. We’ll give you a $50 cash card or gift card.”

Neal Bawa (00:12:55):
Nine out of 10 people thought we were a scam, the 10th one was like, “Okay, I’m just going to go and get myself 50 bucks. I’m unemployed.” This is the beginning of 2009, lots of people were unemployed. People go there. And then they fall in love with these gorgeous, beautiful homes that are half the rent of crappy properties in Fresno, 20 miles away. And so four months later, all 10 of those properties are filled up, and I don’t even own them, I just have them in contract. Banks were friendly back then. And so I go and buy these properties in cash, and the next day I go back and refinance them. In a year, I’ve pulled out all of my equity and I have enormous cash flow. I have $12,500 in cash flow, of course, a lot more today because 12 years have passed so rents have gone up like crazy.

Neal Bawa (00:13:37):
But even then, all of a sudden, I’m making $10,000 a month, and I feel so different, Robert. I’m making way more money than that in my big fat technology job, but my life changed because I wasn’t dependent on my big fat job anymore. That’s the definition of freedom. When you can say, “Today, if my boss changes his mind and fires me, I might lose $300,000, but my mortgage is paid for, I’ve got all this other money coming in.” I just sensed freedom. And then I never got out of real estate after that 2009 episode, even though we didn’t actually sell the company until 2013. So I didn’t get into real estate full-time until after that.

Robert Leonard (00:14:16):
Did you just buy one of those houses, then do this gift card strategy and then buy the rest of them, or did you just jump in and have all 10 under contract?

Neal Bawa (00:14:24):
I bought one in Fresno as my anchor home, and then I put 10 in Madera under contract. So I bought 10 in Madera. Actually, it might’ve been 11 because one of them was my sister-in-law’s. So bought 11 in Madera, but they were in contract. And I told the banks, I’m going to try to rent them up because I can’t really afford to buy this many from one bank without renting them up. So the banks actually allowed me to have people walk through them. And once I had tenants lined up, I didn’t sign the tenant contract because that would be a violation, you can’t sign a contract on a property that you don’t own. But then I went back to the bank and I said, “Okay, this one has two tenants that are ready right now. I’m going to buy these two in cash.”

Neal Bawa (00:15:02):
I was buying them for $90,000, their cost of construction was 270,000. So when I did the math, I said, “This is the best buy ever. If it costs 270,000 to build a 2,000 square foot home and they’re selling it for 90,000, I’m going to make a lot of money.” So I would go and buy that for $90,000 in cash, sign the contract next week, move my tenant in, wait 30 days and refinance and take all my money out. We just kept doing that until my family came around and I went from being an idiot to a hero over 12 months.

Robert Leonard (00:15:29):
Was that your first real estate deal on your own?

Neal Bawa (00:15:31):
Yeah, my first 11, yes.

Robert Leonard (00:15:34):
Who is selling you these properties? And whoever owned them, why didn’t they do what you were doing?

Neal Bawa (00:15:40):
Well, firstly, banks don’t know how to lease these. And keep in mind, entire sections of the city were empty. So what I was doing is this bait and switch methodology. Of course, people are being offered money to do it. It’s kind of like a timeshare where people are, “Go look at this property and I’ll give you 50 bucks.” And people are like, “Sure, I’ll go look at it.” And once they went there, they realized how much better those properties were because my property in Fresno was a small three-bedroom, 1994 built property. And here they were looking at a 2006 build 2,000 square foot home with stone, built by a Kaufman & Broad. Imagine that upgrade and $600 less in rent. So obviously, people loved it once they went there and saw the properties.

Neal Bawa (00:16:23):
And to me, all I spent was basically 10 gift cards roughly for the property. So every 10th tenant that we sent to Madera would say, “Yep, I love this. I don’t mind the 20-minute commute. I’m going to take these.” So the bottom line was that banks in 2009, they just wanted to get rid of inventory. And the fact that somebody like me was doing this clever thing where I would put a property in contract, but not pay them until I had a tenant, they loved it. They thought it was a great idea, but they didn’t tell anybody else about it, which I’m surprised by actually.

Robert Leonard (00:16:52):
When you say that the bank-owned them, is that because they’re foreclosures?

Neal Bawa (00:16:55):
All of them are foreclosures. Yeah.

Robert Leonard (00:16:58):
Do you still own all these properties to this day?

Neal Bawa (00:17:01):
I’ve sold a couple. I needed cash to buy properties, larger multifamilies, so I’ve sold two, but I have nine. So I have a total of 13 tenants still in Madera and Fresno. And I think they produce about 250,000 in annual rent.

Robert Leonard (00:17:17):
What are those properties worth?

Neal Bawa (00:17:20):
I think they’re worth about 300 grand each. So they’re about three and a half million, somewhere in that range. So obviously I’ve gone on to buy a lot more stuff than just those properties in Madera. And that opportunity ended in 2011 when foreclosures ended in that marketplace. And I’ve moved on since then and bought stuff in all kinds of other places. And obviously, now, I’m a full-time professional, we build buildings. So for example, just in Phoenix, we have currently $160 million of assets being constructed, multifamily all of it.

Neal Bawa (00:17:51):
So there are 320 units and 240 units. Basically, we’re building 580 units just in one metro. And it’s not my largest Metro. Phoenix is not the largest metro that we’re in. And so we’re building and buying assets all across the United States, and doing very little value add, just so you know. I’m not doing much because the word, “value add,” and I know this is going to be counter to what people come in and say on your program. It’s worth having a dissenting voice in every program, I think. I think the word value add in the United States in 2021 is an oxymoron because 95% of all multi-families listed in the United States by a broker are already properties that at least one company has done value add on if not two.

Neal Bawa (00:18:41):
I recently saw one that had been sold three times and the first guy did about 10% of the property value add, the next guy did about another 60%, and the last guy did about 20%. So this property was being built as a value add, even though 90% of the units had been upgraded. And that’s very common, 60, 70, 80, 90% of the units are upgraded and they still call them value add. And even worse where in 2014, a property called Villa de Lago that I was a partner in in Dallas, not a single unit had been upgraded, that property ended up making a gigantic profit, massive profit.

Neal Bawa (00:19:14):
Today, there are no such properties. You don’t really find them. And if you find them, 90% of your future profit is being given to the seller. How has that value add? So I look at the syndication value add part of the multifamily industry and I find it to be a bubble. I don’t find the multifamily industry to be a bubble, it’s a $3 trillion industry, syndication’s a tiny part of it. It’s becoming a larger part. I think that used to be 1%, now maybe it’s even five or 10%. It’s the most bubbly part of multifamily. I’d love to be on a conference session at the Best Ever Conference or something else up on dais with a bunch of people, I’ve presented at that conference several times before, to really talk through why they still consider the American market to be value add.

Neal Bawa (00:20:04):
They’re paying less than four cap in certain cases for properties that only have 20% of unrehabilitated units. I don’t get that. And so I’ve tried to establish that point of view, no one has really listened to me. So I’ve gone over to the dark side and started building units. And I’m delightfully happy with the buildings that are finished and are coming to market. Like in St. George, we have a building… We studied St. George, I published data. About 50,000 people follow my data on Buying Cities. And so three or four years ago, I’m telling everybody, “St. George, St. George, St. George, Utah. Best city in the US to buy.” And people are like, “No, this is a tiny city of 100,000 people. You’re crazy, Neal. Don’t do this, You’re going to lose your shirt.”

Neal Bawa (00:20:44):
And I’m like, “But the data?” And they’re like, “No, you’re going to lose your shirt.” Because I’m stubborn with the whole but the data thing, I went and bought land. I built a 117-unit property in St. George. Took a while to get the entitlements and then COVID delays, etc. Now, it’s coming to market. I’ve raised my rent seven times. My current rent is 32% over the performer that I gave investors. It wasn’t even 32% in year six when I was exiting. So I’ve already hit my year seven projections, and I’m not done with lease-up. Why? Because of all these value-add people. These value-add people going around and buying 40-year-old, 50-year-old multifamily buildings at $120,000 a door, and then they have to raise rent.

Neal Bawa (00:21:26):
So they’re super aggressive in raising rents to try and hit their performer, so my new construction building that’s down the road can continue raising rents at an absurd level. And I’m able to make more money from one new construction building than I was making from five value adds.

Robert Leonard (00:21:41):
I have to say I’ve been a bit lucky that when you and I talked the first time, you taught me all about your data-driven approach, and it really resonated with me. I wasn’t one of those people that thought you were crazy. I’m an accountant, finance guy by trade, so I’ve always been interested in numbers and data. And so your approach has really, really stuck with me. And I’ve done the type of analysis that you just mentioned for all of my own real estate, and I think out of anything that I’ve learned, you’ve probably taught me the most that I’ve actually put into action.

Neal Bawa (00:22:11):
Well, I’m glad to hear that. It’s nice to hear that because so often, people don’t put it into action. And it’s so simple. I’m in markets like Provo, Utah, Idaho Falls, St. George, Dalton, Georgia. These are the markets that people don’t hear about, and they’re so filthy profitable, it’s just nuts. I can make every mistake in the book and double investor money simply because I have so much tailwind. Imagine flying a plane with three, 400-mile tailwinds, that’s what I’ve got with data. I tell people I’m the laziest syndicator out there and I can afford to be because the data upfront tells me where to go. So look at any $500 million-plus syndicator out there, you’ll never find them in more than two or three markets. Two, sometimes three, somebody maybe in four markets that they’ve been doing it for 10 years.

Neal Bawa (00:22:59):
I’m already in 10 states. I don’t say 10 markets, in some of those states, I’m in three different markets. So I’m in 10 different states, I think it’s 16 different markets and continuing. People are like, “You’re crazy.” The best kind of company has one market and you stay in that market. And the answer is fine, and you’ll probably make a lot of money because you know that market, but you’re not data-driven. Those two things don’t reconcile because the data changes. When I was talking about this data, I was saying in 2014, ’15, ’16, I was saying, “Dallas is the best market in the United States.”

Neal Bawa (00:23:33):
But you look at Dallas today, there was no rent growth in Dallas at all during the pandemic, none. There was no population growth in Dallas. And people are always like, “Really? That sounds odd. Dallas is like fastest-growing,” blah, blah, blah. Please go and check to see what the actual population growth in Dallas has been. What happened over time is the population growth moved from Dallas and Houston, which were the fast-growing cities, to Austin and San Antonio. So Austin and San Antonio had furious population growth during the pandemic, Dallas and Houston, basically nothing. 400 people came to Dallas in the 12 months of the pandemic, and nobody knows that.

Neal Bawa (00:24:14):
People are like, “Dallas is the greatest market in history.” The answer is, Dallas was the greatest market in history. Now, it’s a good market. I certainly think it’s a good market, maybe it’s even great, but it’s not the greatest. And that’s my whole point that the greatest market in the United States is always a moving target.

Robert Leonard (00:24:29):
You mentioned a couple of minutes ago that you paid a hacker to scrape all the data from Zillow. And I can relate to that because I did almost the same thing, I paid somebody to scrape all of the census bureau data for demographic data for 7,000 cities across the US and then I analyzed all 7,000 cities based on your six demographic data points that you recommend people look at, and I ranked all these cities, and I ended up finding a small market with about 100,000 people that nobody’s talking about. And me and my business partner, we’re doing it on a much smaller scale, we’re not doing syndications or anything like that, we’re doing our own personal portfolio. These deals are just absolutely incredible. And we’re using the exact same approach that you just mentioned.

Neal Bawa (00:25:09):
Fantastic. I’m really happy to hear that. I think that the system that I designed, it’s free, there’s no subscription, no upgrades, no upsells, I don’t have anything like that, to be honest. I’m a syndicator, I have more investors than I know what to do with. I love giving this stuff away because it keeps me honest. So the biggest selfish reason for constantly updating the Location Magic System is that it forces me to look at the data every month because we update it once a month. So it’s a system that allows anybody in 10 minutes to basically rank cities. They probably are not as crazy as Robert Leonard to go out and scrape 7,000 cities. But even if you have like five cities that you’re interested in, you can see which one’s the best and which one’s the worst very, very quickly.

Neal Bawa (00:25:53):
There are about 50,000 investors following it. But I’m astonished by how few syndicators follow it, because if they were, then I would have seen more uplift in these smaller markets that you’re talking about, Robert, and I haven’t. So it’s like, “Okay, great.” It seems like the people that are following it are the average investor who looks at the toolkit and says, “How can this be free?” And people send me an email and say, “Is there something about this data where I have to pay you? It’s like, “No, it’s free forever. You can even give it away to other people, I don’t care.” And they’re like, “I can give this away to other people?” I say, “Just go for it, go for it, stick your name on it and say, ‘This is Robert Leonard’s system, and give it away.”

Neal Bawa (00:26:26):
Data is meant to be shared. As far as I’m concerned, the model of the world that I am interested in is the Wikipedia model. And I’ll never change my mind on that. It’s the Wikipedia model. Data is always meant to be given away. And that’s the power of technology on the good side, as we all know about the power of technology on the backside. And so people come to me, and I know that there are about 50,000 active people using it because they come in every time something changes, we update the Excel spreadsheet and we send out an email to people and they come and grab the new stuff. It’s shocking to see that the professional syndication market, thousands of them have used this toolkit, but they don’t move their markets. You know why? They’re lazy.

Neal Bawa (00:27:03):
They already have the brokers, they already have the relationships. They don’t want to go to a new city and start from scratch. But the truth is, when you do that, you’re not giving your investors the best that they could receive. You look at my investors, many of them [are] projects that were 10 years long [and] are going to refinance and go to infinite returns by the end of the 24th month, because I’m aware of these tiny cities. St. George is no longer the best tiny city in America, it’s now clearly Idaho Falls, Idaho. And if you don’t understand that, go download the toolkit, play with a bunch of small cities, and it will be very obvious that nothing comes close to Idaho Falls at this point.

Neal Bawa (00:27:41):
I don’t know why Idaho Falls is the best city in America to invest in, I just know it is. The data points to that. I don’t know the causes, I can speculate to that, but data simply drives me to the conclusion that this city is going somewhere.

Robert Leonard (00:27:54):
Idaho Falls actually came up on my list as well when I did my analysis, this is a year or two ago. But I think people just don’t take the action. And I talk very publicly about the city that I invest in here on the podcast, and I have people reach out to me from time to time, and they’re like, “Well, why are you telling people where you’re investing? Aren’t you inviting a ton of competition?” And I’m like, “Yeah, maybe, but there’s going to be, say 250,000 people will hear this, 10,000 might actually look into it, and then maybe a couple will maybe take action on it. People just don’t take action.

Neal Bawa (00:28:25):
It’s very, very small. And actually, it’s very interesting that it’s very small. Look at Idaho Falls, it’s 125,000 person market going completely bananas, going completely gangbusters. But even my own investors, I’ve had to go through a step-by-step process of educating them on Idaho Falls before they were ready to invest. Now, of course, everything that we do in Idaho Falls sells out in five minutes, but until they were ready to invest, their idea of Idaho Falls was potatoes. People would say, “Why are you investing in the potato state?” And the answer is, “That’s the traditional Idaho.”

Neal Bawa (00:28:59):
Just look at what’s happened to Idaho in the last five years. It is the fastest-growing state in the country. And whenever I say that, when it comes out of my mouth, I say, “I know it’s the fastest-growing state in the country.” They’re like, “The potato state?” The answer is, no, it’s now the technology state because Boise is becoming the fastest growing tech hub in the country, in the country. It’s not Austin, it’s not Provo, it’s Boise, Idaho. Nobody really believes that. And so I basically say, “Okay, are you in front of a computer?” “Yes.” “Type in “fastest-growing state in the country, 2019″, hit enter. Great You see Idaho? Great. Now do it for 2018. You see Idaho there? ’17, you see Idaho there?”

Neal Bawa (00:29:33):
And people, eventually they start to come around and say, “Wow, how do you know all this stuff?” The answer is, it’s right in front of you. I just typed in six words into the web. We live in this technology Mecca, we live in this technology heaven where everything that we want to know is six or seven clicks away, and people don’t click six or seven times.

Robert Leonard (00:29:58):
We’re talking about data and we’re talking about it broadly. Break down for us exactly what data you’re looking at.

Neal Bawa (00:30:06):
Professionally speaking, we look at very large data sets, but I think for most investors, I’m going to break down what they should be looking at. So you should be looking at population growth. You want the city to have a certain population growth. And it’s the exact amount of population growth that I recommend is beyond the scope of this, but anyone can go to MultifamilyU.com, there’s a webinar stored there. It gives you the numbers, it gives you an Excel and a PowerPoint deck and that changes each year. So you need a certain amount of population growth if it’s a small city and a certain slightly smaller amount of population growth if it’s a large city. But start with population growth because that drives up prices. And then look at income growth.

Neal Bawa (00:30:43):
You want people not just to come into this city, but you want their incomes to grow once they’re in that city. And once you have population growth and income growth, that will inevitably lead to home price growth. And you might say, “Yeah, but you’re a multifamily guy.” Yes, multifamily rents go up 18 months after single-family home prices go up. There’s an 18-month lag. This is known as Neal’s Crystal Ball. My Neal’s Crystal Ball’s rule is that if home prices in a city go mad, then rents will go mad 18 months later. So everyone in multifamily has an 18-month awesome crystal ball, which most people don’t understand. They’re always like, “Why does it take 18 months?”

Neal Bawa (00:31:23):
Well, because when people are competing over homes, it takes them a while to come to the conclusion that they’ve lost the battle and they can never be homeowners because the homes have gone up beyond their income level, they can’t qualify. And those people, it takes them a while to reconcile to the fact that now that I’m not renting, I’m going to find the best damn apartment I can find, and then they go to your upgraded apartments. Robert Leonard goes and buys a 20 unit multifamily, upgrades it. He needs people that will pay 20, 30% more in rent than the unimproved units. Those people who were looking to buy a single-family home those are those tenants, because now that they’re not able to buy a home, they want to live in the best possible apartment possible.

Neal Bawa (00:32:02):
And technically they want to live in the best townhome possible, just so you know, but I’m not going to go into that. I mostly build townhomes these days because I find that body doesn’t want to live in apartments, they want to live in townhomes, it’s just that the townhomes are not there. There’s no inventory, so people go out and live in these rehabbed apartments. So when I build townhomes, people jump on them like hyenas basically attacking a dove. They disappear. We’ve had cases where we’ve had 42-person waitlists in the middle of January when it’s snowing on these townhomes, simply because there are not enough townhomes in the United States. People want a backyard, things like that.

Neal Bawa (00:32:41):
Bottom line is, you do the population growth, you do the job growth, and then you do the home price growth. And then the other two are crimes. You want to go to cities where crime is either low or it reduces. And the toolkit tells you exactly where to go and find that information. You don’t need to come talk with me, you just go to the toolkit and use it. Then the fifth one, which is all-important, is jobs, short-term jobs, last 12-month job growth. Anytime a city grows at 3% over the last 12 months, all kinds of completely backside insane will happen to real estate prices there.

Neal Bawa (00:33:11):
If it goes to 4%, it’s absurd, outrageous, once in a lifetime, and there are cities like St. George, Idaho Falls that are at that 4% equivalent today. Now, I said equivalent because obviously, because of the pandemic, every place in the US has seen a dip in jobs. So I’m looking at relative job growth as opposed to looking at the overall job growth because even St. George has probably only grown its jobs by 1% this year. Yes, but when you compare that to the dip that the rest of the US took, it’s grown it by 5%, which is a fantastic number. 5% is champagne bottles and dancing naked in the street with champion bottles. That’s how good 5% job growth is. But even if you go to cities with 3%, I’m yet to see a city of any size in the United States that isn’t a ridiculous seller’s market when jobs get to 3%.

Neal Bawa (00:34:02):
And this data is available for free, and I’ll tell you exactly where to go get the data. It’s updated every single month. It’s not two years old, it’s like a month and a half old. So everything’s available, people don’t want to take advantage of it. Well, fine.

Robert Leonard (00:34:16):
How did you come up with these specific data points?

Neal Bawa (00:34:20):
Once I finished mining the Bureau of Labor Statistics website, the Sensor Reporter website, city-data.com. I had a database of thousands of cities, and I did statistical analysis. I hired a statistician and used a software called R to do an analysis. And I said, “I want to tie these data points, population growth, job growth, income growth, home price growth. I want to tie them to how much money investors make.” And so the goal was to see what affects the investor’s pocket the most, what creates the most amount of equity, the most amount of rent growth. And so what we did was we applied one, and saw how much of a pop it had by comparing different cities, then we applied the next one, then we applied the next one, then we applied the next one.

Neal Bawa (00:35:00):
As we applied dozens of different parameters, some had a bigger pop than the others. We squeezed our data set down to four or five. For example, you notice that I didn’t say schools, because what I found is if you’re going into a city where incomes are growing, home prices are growing and crime is going down, the schools are taken care of. You are taking care of the schools at a city level by simply doing the other five. So when I added schools, I didn’t get any boost in your profits. Robert was still making the same amount of money if I had schools in there. So I picked schools. So by doing this, moving stuff in and out, I eventually realized that these five were controlling 97, 98% of investor profit.

Neal Bawa (00:35:36):
And the others were basically just taking me from 98 to 100. And I wanted a system that anyone could use without my help, without anyone’s help within 10 minutes. So with 10 minutes, I had to basically squeeze it down to that 97% of the factors, and these five factors that I just mentioned, that’s 97% of real estate profits applied back to 3,000 cities over the last 15 years.

Robert Leonard (00:35:58):
I think I speak for every investor that has benefited from your data, thank you for hiring the statistician so that we can just benefit from this and not have to go through that entire process.

Neal Bawa (00:36:10):
You’re welcome. I think I did it because I’m I know about these things, I like to know what’s the highest amount, I like to know the square footage of the highest mountain, I like to know what is the easiest path up that mountain. That’s just my personality. And I’m continuing to do that. For years, I believe that multifamily was the best asset class in the United States, but my data actually led away from it, multifamily in my world. Just you know, I’m very diversified across asset storage, industrial, multifamily, townhome, single families, I’m very diversified. I’ve even forgotten some student housing. So when I look at different asset class, I get a chance to rank them in terms of risk and reward.

Neal Bawa (00:36:48):
And to me, I can tell you that today, 2021, this changes every year. It easily counts home construction. It’s the highest risk-reward in the US, followed by industrial, followed by multifamily. Those are the top three. And then right after multifamily, almost at the same level is self-storage. And it’s not that I don’t like student housing, it’s just my metric doesn’t show it to be that awesome today, it did in the past, but that’s what the numbers are showing me today. So this changes all the time, but for a while, this ranking has endured. The last three years, it’s been townhomes, followed by industrial, followed by multifamily.

Robert Leonard (00:37:24):
Since you explained that there’s an 18 lag between increased rents, following an increase in housing prices, do you think that’s coming soon? Because across the US we’re seeing a lot of housing prices increase rapidly, and then that happened over the last year. So I’m thinking maybe the next six to 12 months, maybe we’re going to see rents increased dramatically. Do you see that?

Neal Bawa (00:37:44):
The next 12 months we’ll see the largest increase in rent in United States history.

Robert Leonard (00:37:50):
So should we, if as landlords, if we’re listening to the show and we own properties, should we be conscious of that as we look to extend leases and renew leases and things like that?

Neal Bawa (00:38:01):
Absolutely. I’m doing it. I’m not doing long-term lease renewals because I think that in six months I can raise rents again. I think that this is not the year where you raise rents once a year, I think you raise rents more than once. So you have to be crazily aggressive. And I know that sounds heartless because there are still people coming out of the recession. And for people that think I’m heartless, the answer is, look, if you have rehab units, you’re not attracting the people that don’t have money, you’re not attracting the people that don’t have jobs. They’re sitting at home, they’re sitting at home because their unemployment check is more than what they make normally, that’s not an issue. So the bottom line is don’t hesitate. You are about to see the largest increase in rents in US history.

Robert Leonard (00:38:43):
Are you worried about buying A-class properties right now? And the reason I ask that is because, typically, at least from what I’ve researched is that when a recession hits A-class is probably hit the worst, and so on and so forth. Are you worried about that?

Neal Bawa (00:38:58):
Absolutely. I don’t buy any A-class properties and I’ve never bought any. Building A-class properties is a completely different issue. And I don’t really build A-class. I build a kind of B-plus class. So that B-plus class, for example, in Idaho Falls, imagine I’m building… Think about this, Robert, you’ve got rentals. I’m building brand new townhomes. They’re 1,400 square feet, three beds, two-and-a-half-bath with a porch in the back, with a nice central walkway, dog run in the middle of a city, with a Starbucks being the next building, and I’m renting them at 1,500. Do I worry about a recession? At 1,500 bucks, this what I’m renting, brand spanking new. That’s not classy.

Robert Leonard (00:39:41):
We’ve talked a bit about the city level, and I know you drill even deeper than that into the neighborhood specifics. What are you looking for there?

Neal Bawa (00:39:48):
Similar stuff. I want to see what the neighborhood’s income levels are. I want to see what the poverty levels in the neighborhood are. I want to see, for instance, the ethnic mix of the neighborhood. Immediately, the word ethnic causes everyone’s hackles to go up, and the answer is no, I don’t care if they’re whites or blacks, what I want is I want a diverse ethnic mix. So an area that has all black or all white, or all Chinese, or all Asian, is going to be much harder to rent. You’re going to need a lot more leads, you’re going to have a lot longer lag time. So you want to go to an area where there’s basically a larger mix of people, a larger set of ethnicities because everybody finds that area to be nice.

Neal Bawa (00:40:27):
And those areas will rent very fast and we’ll stay rented because nobody will want to leave because once they leave, they can’t find something equivalent in the same market immediately. And so there’s a hesitation to leave. Remember, the profit is all in the churn. So there are lots of places like Las Vegas, for example, the rents are high, but the turn is very high. So you’re losing a lot of money in Las Vegas on churn because people come and go all the time because it’s a transitional city. And so most people that do the math, they don’t have the turn in there. They don’t have these churn statistics for various cities like Dalton, Georgia. Our churn is like 15% a year, in Las Vegas. Our churn is 60% a year.

Neal Bawa (00:41:06):
There’s an enormous difference in profit at the same rent between 15% tenant turning every year and 60%. That’s something that nobody looks at it, but it’s the biggest determinant of how much money you’re making on the cash flow side. I think that’s a key point I wanted to point out.

Robert Leonard (00:41:23):
Have you ever seen any part of your data-driven strategy not work exactly like you expected it to? Has that caused you to make any changes over the years?

Neal Bawa (00:41:33):
Yeah. No, I haven’t made changes, but I’ve seen it not work, but I’ve learned a few things. For example, in 2017, ’18, I became convinced that Denver was becoming a bubble because all of my data suggested that Denver was becoming more overpriced than any other market in the United States. I’d rank markets, and I’d see overpriced markets, and then I’d see a big gap, and then I’d see Denver at the top. So I started to say, “There’s no way this bubble is not going to burst. It didn’t burst. And so I learned something new from it that most people think that with bubbles, they only go one way. They consider a city to be in, my mind I was considering Denver to be 47% overpriced at that point two years ago.

Neal Bawa (00:42:14):
And then I noticed something odd happened, it became less overpriced. It became 40% overpriced, then it became 30% overpriced. I had to dig deep and figure out why that happened. And the answer actually, Robert, was that incomes in cities where home prices shoot up and rent shoot up. Don’t follow immediately, they follow in spurts. So it’s like a dam breaking, eventually, people are like, “I just simply cannot afford this wage.” And when that happens, it seems to happen across the board. And then within a single year, a city can gain seven, eight, 9% in income. And that’s what happened in Denver. In one single year, the city gained about 7.5 % in income. And when it gained 75% of income, it became less bubbly because those people could actually afford a lot more property because of a 7.5% growth. And that’s a lot of money.

Neal Bawa (00:43:05):
So 7.5% is about $4,000 a year. Well, assuming all four of that goes into your rent, well, you can afford a lot more rent now. So bottom line is when I looked at that, what I realized is most people think that everything just goes in one direction, it doesn’t. And so what we’ve done is we basically looked at where our salaries growing in a spurt? If they’re growing in a spurt, then that city has longer legs. For example, I’m not saying that the largest income increases over the next 24 months in the US are going to come in Phoenix, Boise, and Austin, because these cities have gone completely ballistic on home prices. And I think a catch-up is about to happen.

Neal Bawa (00:43:43):
So at some point in the next 24 months, that dam will break, workers will revolt, and employers will pay more. We’re going to see large income increase in those three cities.

Robert Leonard (00:43:53):
I know you’re a big fan of virtual assistant, how can the new and small individual real estate investor who not doing syndications, they just have their own small little portfolio, how can they leverage virtual assistants for their rental properties?

Neal Bawa (00:44:08):
I think it’s a mindset. I have read a lot of virtual assistant books. I don’t like any, I think I should write one, to be honest. I don’t think that anyone uses them quite like I do have. I have an army of them, there’s 20 full-time virtual assistants. They all work US hours, they work an average of 40 hours a week. So there’s roughly, I don’t know, four, 800 hours a week of virtual assistants. And they allow me to work a lot less. I work basically from 8:00 AM to 3:00 PM, Monday through Thursday, Friday, I played golf. And to me, that’s the life that I want and my virtual assistants allow it. And it doesn’t mean that I don’t have the US staff. So we have nine people full-time in the US, but the virtual assistants allow us both to create an efficiency and a scale that’s unmatched.

Neal Bawa (00:44:47):
Now, your question really was how does anyone apply that in their portfolio if they’re not the scale? The answer is simple, almost stupidly simple. And the answer is you look at everything that you don’t want to do, or are not good at, or are good at, but you think that it’s below your level and start writing that down and creating short screen-sharing videos and start handing those out to virtual assistants. The more you do it, the more you’ll find that they can do. They can do astonishing things. For example, on the screen right now, I can see a video of Robert, but actually, I have an LLC doc and tax filing tracker. This is an extremely complex document of my 22 LLCs. It’s entirely 100% maintained by virtual assistants.

Neal Bawa (00:45:32):
They might say, “Really, LLC tracking? There’s a lot of stuff like data organizations and legal tax classifications and registered agents. How does any of this stuff work with virtual assistants?” The answer is they can learn all this stuff, it’s just a matter of you. You are the problem with virtual assistants not working well. You keep thinking that they can’t do it. I keep pushing the boundaries in virtual assistants, and I know that from time to time, it won’t work. So I push the boundaries again, and then I push them again, and then I push them again. And it’s okay for the occasional failure. What I see though, is most Americans are like, “If it fails, I’m not going to try again. I’m going to hire somebody in the US.”

Neal Bawa (00:46:08):
My mantra is, it’s got to fail three times with three different virtual assistants before I think this is something in the US. And yes, there are things that our company doesn’t do with virtual assistants, we do them in the US, but there are very, very tiny fraction of our business. We think they’re a very tiny fraction of anyone’s business.

Robert Leonard (00:46:26):
Selfishly, I really hope you do write a book on virtual assistants, because I know I would be a huge fan of it. And if there’s anything I can do to help you bring that to fruition, let me know because I would happily do so. Where do the current books go wrong?

Neal Bawa (00:46:39):
I think that the current books have vision issues. They are good with, “Here’s what a virtual assistant does. Here’s what it doesn’t do. Here’s a set of tasks that you can give them.” All of that stuff is great, but what I don’t find in this books is a vision of where the virtual assistants can go to, a higher level and then an even higher level. And I think it’s because most people who write these virtual assistant books, write them from their perspective, so they’re kept by their perspective. I’m running if $500 million equity company with two-thirds of my employees being virtual assistants. So I have now got that next level of vision and that next level vision taken care of. And now we’re raising it to a fourth and a fifth level of vision. And that’s really it. Most people writing VA books have really never created armies. And so they’re still writing at their level.

Robert Leonard (00:47:28):
I actually have quite a few virtual assistants myself. Again, I learned this from you and actually also from Chris Ducker’s book, Virtual Freedom, but one of the things that I actually get from people from time to time is that I should be hiring in the US because that’s good for the US economy, and I’m hurting the US economy by outsourcing. What do you think about this dynamic?

Neal Bawa (00:47:50):
I have never found that I’m hurting the US economy by outsourcing. Let me give you an example of this. Pick a typical syndicator that’s been for five years, look at their number of employees, and don’t count the property staff because obviously, my property staff is at the property too. I don’t have virtual assistants at the property, I’ve got staff. Count the number of core people that they have. And you will find that the number of core people that a syndicator like me in the US is five to six people. I’ve got nine. So what’s interesting is that every single one of my Filipino army is there because of scale and speed. My company grows faster than any other syndication company in the US, and I end up hiring more people in the United States.

Neal Bawa (00:48:36):
So in the same timeframe, I now have 50% more US employees because of the Filipinos, because of the scale that they gave us. So this concept that because when you hire people in the Philippines, you’re taking jobs away from people in the US is an utterly nonsensical concept. It is actually the exact reverse of the truth because what ends up happening is, America is the most unique country in the world because of the speed at which our companies grow. Apple grows faster. Google grows faster. Apple has 20,000 employees in India. Google has 50,000 employees elsewhere. It doesn’t slow or stop them from growing, it speeds up their growth.

Neal Bawa (00:49:13):
Anything and everything, technology, virtual assistants, systems, processing, anything that accelerates your growth is going to create more jobs, not less. So it’s a truly nonsensical idea that we take jobs away.

Robert Leonard (00:49:26):
Under a website, you explained that part of your strategy is to divest a property and return the capital to investors within a three to five-year time period. Explain to us why you’ve chosen this time period rather than holding for the long-term, like say 10 years?

Neal Bawa (00:49:41):
That’s a very interesting idea, and I have a confession to make. I did that early on simply because other people were doing it. I felt like I didn’t want to be any different, most people said three to five years, and so I did it. And now that I’ve become more seasoned, I’m actually moving away from that concept. And newer properties are either the kind where I return their money in two years. So new construction product, go in, build it, sell it, give you higher returns in two years, or I show them how they can keep them forever. I think the right answers are two to three years or forever, not the five-year concept. And a lot of people are like, “Yeah, but I want five years of cash flow.”

Neal Bawa (00:50:22):
Well, if you want five years of cash flow, why don’t you keep something forever, because the big problem, the big flaw at the syndication, the syndication industry is very one-sided in their marketing. So they say things like enormous tax benefits due to cost depreciation, cost segregation, and the appreciation. It’s true. What they forget to tell, what I’ve never seen a syndicator say, which is completely true is, “When I sell this building in three years, all of that depreciation, cost segregation is going to be recaptured, Mr. You don’t end up with $1 of it.” So people are like, “So what did I get out of it?” Well, you’ve got to use that money for three years.

Neal Bawa (00:50:56):
Well, that’s not very compelling to use that money for three years, but what if there was a product that allowed you to depreciate for 30 straight years without one single dollar of recapture? Over years, I’ve built products like that. They’re not offered by anyone in the syndication industry simply because a syndication industry is about turnover, and I’m all about pre-post tax profit. I’m more interested in post-tax profits. So I realized that while syndication is a fantastic vehicle, it’s not the most optimized. And the richest people in America didn’t get rich by doing syndication or participating in syndication. So there are other models out there as well.

Neal Bawa (00:51:31):
My feedback is my website needs to be updated. And the truth is that I’m moving away from this three to five-year model, which was pro-syndicator anti-investor.

Robert Leonard (00:51:41):
Wonder if this leads into my next question, and so I’m not sure if it was a Facebook ad or maybe just because I’m part of one of your Facebook groups or something like that, but I was on Facebook the other day, and I saw something from one of your companies and it talked about how it was raising money for a property, but it basically said that the person was not investing in a syndication, rather they were actually an owner. And I read a little bit about it, and I knew I was going to be talking to you, so I figured, I’ll chat with Neal about this when it happens. I’d love to learn a little bit more about what that model is. And if you could explain a little bit more details about what you’re doing there?

Neal Bawa (00:52:13):
One of the things that happens is people go out and they do single-family rentals, and they have a subpar experience with a property manager, or they don’t get anywhere close to the performer that they’ve created. And instead, it turns them off of that single-family model, very often, it happens very often. So then they go and invest in syndication even though they’re having a subpar experience, there are people are not holding for five years, they aren’t giving them the IRR they promised, they’re giving them less than that. But when they look at it, they go, “Well, when I did single-family, I didn’t hit my performer, the property manager was horrible. I don’t want to deal with it.”

Neal Bawa (00:52:44):
The truth is, the truth is that if you look at the numbers, the single-family model is more compelling than what syndication people like me do. It is more compelling. The math is more compelling, but people don’t want to deal with subpar property managers. People don’t want to deal with performers that are inflated on these $50,000 properties in Dayton, Ohio, which have horrible maintenance problems and never really make any money. Chicago is another one where properties don’t make any money. Bottom line is, I became obsessed with the idea of creating the largest amount of wealth for investors, not cash flow, not equity, but wealth. And when I researched the models, the model was, the investor needs to hold fourplexes, not a fiveplex, not a threeplex, not a duplex, not a 30-plex, but a fourplex.

Neal Bawa (00:53:33):
And you might say, why fourplex? Because it’s the largest single-family loan. So it has all the benefits of single-family loans without any early payment, penalties. Multifamily often you’re selling a building, you have a $2 million prepayment penalty. You don’t have a pre-payment penalty of a dime for fourplex, but you get four times the scalability of single-family, 4Xs scalability, but you still get the single-family loans. You still get all of the other benefits, and you still get the ridiculous liquidity that fourplexes come with. You don’t sell a multifamily in less than six months if you’re doing it right, we can sell a fourplex in 30 days because anybody can buy a fourplex. Anyone that has a W2 income can buy it.

Neal Bawa (00:54:14):
So to me, it seems like the best product in America. And I was like, “Why aren’t there more fourplexes? Why isn’t there a fourplex in every part of the United States?” And the answer when it came to me was shockingly obvious because you need professional management. So what I do now is I build 100 unit fourplex communities with one enterprise property manager, the kind of property managers that manage 50,000 properties or 20,000 properties. They are managing them, but it’s not a syndication because every single one of those investors owns their own fourplex. And my goal is for people to never sell them. I tell people, if people say, “Why a 10-year performance?” “Well, just to make you feel good. The ideal performer is you will never sell this property, whenever you need money, you’ll refinance it.”

Neal Bawa (00:55:01):
Because refi of a four-unit is ridiculously simple compared to refi a multifamily, and it’s cheap. It’s cheap, it’s simple, there’s a million fourplex lenders out there just like there are a million single-family lenders out there, so don’t sell it. Don’t ever sell it, and don’t share it. You got 100 % of the profit forever. And most importantly, you’ve got 100% of the depreciation forever. If you don’t sell this for 30 years, in 27 and a half years, you’d have depreciated almost all of this property. And you’ve kept that depreciation, unlike everything else where it gets recaptured, you’ve kept it. When you do the math on that based on 30% income, it’s outrageously profitable. So I had to find a model to make it profitable for myself, which I struggled with for about two years, and eventually found a model that works for me.

Neal Bawa (00:55:46):
Bottom line is enterprise communities with large collections of fourplexes are the best of all worlds. It’s a large multifamily community, it’s run by professional management companies, but everyone owns their own dirt. And that’s what I do more and more. It’s only 20% of my business, but if the world is based on logic, one day, it will be 100%.

Robert Leonard (00:56:11):
That’s fascinating because actually a couple of months ago, I had a guest on the show who talked about the same thing. He does the exact same strategy. It sounds like you’re doing it a little bit bigger, I don’t think he’s doing hundreds of them or hundreds of units together. I think he’s doing maybe three or four, maybe five fourplexes together, but he had the same thesis.

Neal Bawa (00:56:29):
Probably the same we did single-family property managers. So if you’re doing five fourplexes, the property manager is a single-family property manager. If you’re doing 150 units, then you go to somebody that manages 100,000 units and has 20 people in the accounting team and CFOs and marketing teams. That scale, that’s what people wanted. That’s why they didn’t like that single-family property manager when they bought a rental, they want to be investors. And to be investors, your money has to be managed professionally. So a professional property manager has to manage it. So you get that humongous scale and you get full-time employees at the property.

Neal Bawa (00:57:07):
So imagine it’s a property that you own a fourplex in, but you also have an employee, a maintenance person that works nine-to-five of the property and makes 20 bucks an hour. And you get whatever share of that person that you need. If your property has no maintenance this month, you pay zero bucks. If your property has lots of maintenance, you’ll still pay only 20 bucks a month, but that person is at your property. That’s a ridiculous amount of scale without a ridiculous amount of money. That you can get if you have 20 units with five fourplexes. So I’m more focused on building 100 plus units and giving them that scale.

Robert Leonard (00:57:42):
Yeah, I think that’s the big difference. I have to think back, I don’t remember specifically, but I don’t think he provided any property management. I think he was just building these communities and then selling them.

Neal Bawa (00:57:51):
Then the only thing that you’re getting is scale. You’re buying a fourplex instead of a one plex, but you’re ending up with all the other problems. So he’s solving one part of the problem. My obsession was to solve all parts of it and create a situation where every one of my buyers would say it would be ludicrous for me to think about selling a property, which is as little work as owning Apple stock. So my goal was, and it’s going to take me a while to get there, but my goal was to get to the point where buying a fourplex, because it’s being professionally managed, would be like buying Apple stock, except Apple stock doesn’t give six, seven, 8% cash flow in a year. It’s just you’re borrowing somebody else’s company, here you own your own dirt, you own your own fourplex.

Neal Bawa (00:58:33):
You’ve got all of the benefits of ownership and depreciation, which no stock in the world has depreciation, real estate does, and it’s ridiculous. And so I looked at all of the benefits of Apple stocks, and then I added all of the benefits of real estate and I said, “Could I make this work?” And it’s taken me a long time to get there, but I’m very close.

Robert Leonard (00:58:52):
How do you think of four units versus five units? If somebody listening to the show is looking to buy their next multifamily or investment property, let’s say, they’re considering a four-unit or a five-unit. We just talked about all the benefits of four units, which I completely agree with, but one of the benefits of five units that I do really like, although the financing isn’t as good, is that if you just a small change in your bottom line and your net operating income drastically increases the value of that property when you’re not relying on comms. So do you think that the benefits that we just talked about fourplexes outweigh that potential value add of the five units and up?

Neal Bawa (00:59:26):
The answer is no, it doesn’t because we’re talking about two different people. In my mind when we’re talking about the fiveplex, we’re talking about the Robert Leonard’s of the world, the people that not only care about that net operating income, creating massive value, but are willing to spend repeatedly the time to do it. And then there’s the vast majority of investors who A, don’t care about that NOI increase, and B, don’t to spend any time doing it. That world is much larger than Robert Leonard’s world, it’s 100X bigger. My goal is to provide solutions for that world because that’s where I make a bigger impact. Robert Leonard’s world, yes, five is bigger, better than four because you’re spending sweat equity to grow the value of the property.

Neal Bawa (01:00:09):
But even in Robert Leonard’s world, I have a catch. I have a catch, I say, “For the, all the Robert Lennon’s of the world, five is only as better than four if you’re new to the business, because when you do sweat equity to raise the value of a five-unit, you’re shafting yourself, because the amount of work that you would have to do to raise the value of a 200 unit is almost the same.” So the goal is to go to five units, then go to six, then 10, 50, 100, 200 and keep going. And people are like, “No, no, stop at 200.” No, just go to portfolios. Go to 1,200 units, buy 1,200 units at a time, buy 2,000 units at a time. Bottom line is that if you are using your sweat equity to increase the value of a property, it makes sense for the property to be as large as possible. That’s a general comment.

Neal Bawa (01:01:04):
There are markets where smaller units have more juice in them, more profit in them, so it makes sense to go for the smaller ones rather than the big ones, which are at a low cap rate. So there are obviously some comments to be made there, but in general, I think that it makes sense for people to start at five if they’re doing sweat equity and then go up from there. Then you get the enormous scale of multifamily of 200 units.

Robert Leonard (01:01:26):
I have a bit of a fun question to wrap up the show here. When we were talking about data earlier in the conversation, I was thinking about this, and I’m glad it came back up because I’m big into real estate, but I’m also in the stock market. I’m not one of those real estate guys that doesn’t believe in the stock market. And so when we were talking about data and you just talked about Apple stock, I’m curious, are you involved in the stock market? And if you are, do you take a data-driven approach to the stock market like you do real estate?

Neal Bawa (01:01:53):
I do, but I find that it’s much harder to implement it. So the problem is that there are too many people taking a bigger data-driven approach to the stock market than I am, the high-frequency algorithms. So that market is much more evolved. It’s decades more evolved in terms of the use of data than real estate is, so I don’t have any key advantages in that marketplace. So the only recent ones that have worked really well for me is, when the pandemic started, I bought Boeing, I bought Starbucks, I bought a bunch of stocks that fell. So I did that because I felt that fundamental stocks would not lose value, and that’s worked out really well for me, but I don’t play with large numbers.

Neal Bawa (01:02:32):
When I’m in real estate, I play with tens of millions. When I’m in stock markets, I play with hundreds of thousands. So I think a lot of it is because I understand that I don’t have a fundamental advantage in stock markets because there are too many high-frequency algorithms that are always faster, better, cheaper than what I’m doing.

Robert Leonard (01:02:51):
Neal, thanks for joining me on the show again. I know I had a lot of fun, I learned a lot like I always do, and I’m sure the audience will feel the same way. For those that are listening that want to connect with you after the show, where’s the best place for them to go?

Neal Bawa (01:03:04):
We put all of our learning together at one portal, it’s multifamilyu.com. There’s no subscription, there’s no paid membership, there’s no evolve membership, it’s meant to be free forever. Everybody check out multifamilyu.com. Recently we had about 1,700 people that signed up to watch a guru in data. This guy knows 10 times more than I do. His name is John Burns. He runs the largest real estate consulting company in America. He had come in, and there were about 1,700 people there. And the week before, I presented on the impact of climate change on real estate and I had over 1,000 people sign on there. And then every four months, I do my Location Magic course online. Again, it’s offered for free and there’s usually 1,000 people signing up for that.

Neal Bawa (01:03:48):
So, you’re welcome to come and check it out. Nobody’s going to force you to sell anything, no salesperson will ever call you. We’re blessed with an enormous level of equity, we like to give data away. So join that community. The only promise we ask is that you continue giving it away to other people. Anything we give you, you’re free to give to other people, and we hope that you will give to other people because that grows the data-driven investing methodology that we are so incredibly passionate about. So check out multifamily followed by the letter u.com.

Robert Leonard (01:04:19):
I highly recommend that everybody listening to the show today goes and checks that out. It’s a resource that I use very frequently, I’ve relied on it throughout my entire real estate journey, and I will continue to do it for years. So, I highly recommend you guys go check that out. I’ll put a link to it in the show notes below. Neal, thanks so much for joining me.

Neal Bawa (01:04:36):
Fantastic. Thanks for having me on again, Robert.

Robert Leonard (01:04:39):
All right, guys, that’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro (01:04:44):
Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.