Real Estate Syndication with Neal Bawa

Come on one level, this is George G. And the time is right welcome. Today’s guest is strong and powerful. Neil power. Neil, are you ready to do this?

Neal Bawa 0:19
Absolutely. George, great to be back on the podcast.

george grombacher 0:22
excited to have you back on Neil is the mad scientist multifamily. He’s a real estate investor. With over $500 million in assets under management. I bet that numbers higher now. He’s a technologist, data scientist and educator and the CEO of grow capitis capitis and multifamily you, Neil, welcome back for refresh your memories. Give us a little bit about your personal lives more about your work and why you do what you do.

Neal Bawa 0:51
Love multifamily. And these days love new construction, you know, I like like you, George, I’d probably want to do value add followed by value add value by value, right, except the word has turned into an oxymoron. So these days, I’m like, Well, if ever everybody in the world wants to buy a value, add, I think I’ll sell one. I’ll just make one and sell one. And I did one of those into and then 15. And then I’ll have 22 projects in 10 states in some level of construction, some of them are leased up. Some of them I’m going to hold for a year before I sell them off. And still doing value adds I just bought another one of my own value add so I I had a couple of partners in there that wanted exit. So I’d love that value add had no delinquency, so I basically bought it back from them. So still strong on the value ads, but but also enjoying the new construction aspect. And the numbers go up much faster with new construction. So yes, we’re not at 500 million anymore. We’re pushing 900.

george grombacher 1:51
Just small increase now.

Unknown Speaker 1:54
We did, we did raise $70 million in equity last year on a fund for new construction all built a rent all San Antonio Austin, my two favorite markets.

george grombacher 2:05
Nice. So when did you make the decision to go into the new construction? How and so how long have you been working

Unknown Speaker 2:15
on that now? About four years. And like everything else, it was basically one of those friends we knew that used to do that and had partnered with us on a value added project. And they came to us and we were like, yeah, these guys know what they’re doing, you know, we’ll, we’ll partner with them. And then it sort of got the ball rolling. And 12 months after I did that for the first time, I figured I think I can do it myself. So we went the whole hog. hired the director of construction, the owners reps, the you know, the staff that’s needed for all of the zoning, permitting licensing on all of those pieces and turn into a full stack developer. So now we have you know, as I said, 20 plus projects in some phase of construction and nine different states still love value add.

george grombacher 3:03
Got it? Nice. All right. So four years, three years, completely sort of autonomous. And now today 20 to 20 plus projects, nine different states. As you continue to add, I don’t know if the term is complexity, as you continue to add more projects in expanded in different states. Is it exponentially harder? Is it a little bit harder? Is it not harder at all?

Unknown Speaker 3:29
Um, the answer is very individualized our answer so I am obsessed with the structure and and process, right. So I’m called a mad scientist because I experiment with different kinds of processes and mundane prove that my experiment again, there’s no such thing as a perfect process. So for me, personally, I am working less than I’ve ever worked in my life. I don’t work Fridays I play golf. I work a seven hour day. And there are there are some weeks when it’s not four days a week. Now, I get about 200 hours a week of work done. And I mean that personally, because I have two executive assistants and a director of operations. I meet with them every day. I talk about the goals, I talk about what I need to do what I need to reach out. And I’ve implemented systems so that it’s still me. But other people are doing the work for me. My favorite methodology is on this phone here, right? There’s a you know, all iPhones have an app called Voice notes. Imagine if you wanted to, like just brain dump the next five minutes and five minutes of talking, by the way is an incredible amount of content. It’s like the equivalent of you writing a four page email. Right? I do that all the time, three, four times a day. I’ll turn on the voice notes and then I’ll speak for three or four minutes and those three or four minutes I get incredibly detailed. You know up go here open this Excel spreadsheet put this in as cells and columns call this person having fill in this column Lalalalala, right. But I don’t do any of these things myself, other people do them for me. And I can afford to hire them. Because as a developer, I’m charging massive, you know, development fees. And I’ve hired people to do those things for me, right. And they come back and they report on a daily or weekly basis to us chief operations officer who reports up to me reducing my workload. So, you know, I think that, you know, a lot of these principles come out of Timothy Ferriss book, The Four Hour Workweek, if you read that book, and apply it to real estate, you could you could go all the way down to four weeks, I just find that the 28 hours a week is the right for me, and I don’t want to reduce it any further. Because then, you know, I’d probably be just lounging around watching Netflix or eating too much.

george grombacher 5:46
Yeah, I’m sure that’s what you’d end up doing nail. It sounds like it’s on brand is doing that.

Unknown Speaker 5:51
I wouldn’t. But you know what I mean, right? I just this, this is the right amount I need to work. I’ve tried to retire, retirement is a horrible thing. No one should ever retire. So I came back to what do I want? I want 20 hours in golf on Fridays there. There you go.

george grombacher 6:09
Nice. Well, I certainly commend you for that. Alright, so you did the $70 million raise. And I don’t know how much into the nitty gritty that you’re willing to get on that, like how many people or entities came together on that and how that’s going, and then maybe what the future holds for potentially future investing.

Unknown Speaker 6:30
Just two entities, we had done five development projects with a partner in Texas, very, very competent people very ethical, we’d work with them through two years of extreme stress COVID, then construction cost increases, then lumber goes up to three acts. So you know, when you have these kinds of stressful situations, you find out if you’re, you know, really your marriage is going to last. And this was definitely a marriage that was going to last. So we said, Okay, we’ve done five projects, we did a a pilot project of 32 units and 56 and 76, then 96 and 128, it’s time to go big. Right? So we did a fund. The fund has eight properties all together has 1200 units. They’re all in Austin, San Antonio Fredericksburg, that that triangle in Central Texas, that’s very powerful, lowest cap rates in the US. And we went to our investors explained what we were trying to do, it was a blockbuster, we don’t have anybody else raising money for us. So we were able to raise $70 million from our investors and also from those investors, that gave us $70 million, then raise $30 million for a seed round. And we merge the two companies together to form a new development entity called you grow. So altogether $100 million was raised to 70 million, obviously, is a real estate deal. Just like any deal that you’ve been involved in George, the $30 million dollars is just seed money for a company to grow and spend as it as it deems fit.

george grombacher 8:05
Nice. Okay. So through all of that, happy, healthy, happy marriage, and like any relationship, take the good with the bad and the COVID. Certainly provided and you just laid all that out. What are you as as you read the tea leaves as as as you look to the next 10 years in real estate? What what is it going to look like?

Unknown Speaker 8:32
Well, real estate itself is about to go through, its most transformational change is called tokenization. Anyone who does or doesn’t under tokenization. Today, I guarantee you will understand it a year from now. And initially you’re going to be very, very happy. And there’s a reason you should be. And then three or four years from now you’ll realize oh shit, this is going to put me out of business. So tokenization is simply the conversion of all real estate in the world into stock. Right? Just like you know, you exchange stocks, you basically will do real estate tokens. It’s coming It’s very rapid. There’s over 100 companies at last count all startups venture back that are working on this in tokenizing. Everything from parking lots to of course multifamily to new construction. It’s it will hit us like a tsunami and this is the year it hits. And you know, I’ve talked to six technology companies that are white labeling tokenisation for you know, syndicators, such as George Wright. All of them have 15 clients only to our life, the remaining 13 Go live in all cases in the next three months. Which means that not right now there’s maybe four or five companies that have tokenized real estate in the US and in Europe. But by the end of q1 There’ll be over 100 that can be no breaks the dam and gives people this feeling so tokenisation is a huge change. It would take me a while to explain how this is But essentially property becomes stock. And people all over the world can buy property all over the world, using their phones. And I think that’s the big change in real estate. And there’s other big changes coming too that we have to deal with. Right? So, and it’s not good news. And I can tell you this, in the last 10 years, all ships rose, you know, low quality cities with no growth cities with population loss, their ships, Rose rents, Rose prices rose, it was like you couldn’t lose in the last eight or nine years in just about every scenario, right? Bottom line is that time has come to an end. Luckily, not this year. So 2022 is the last year of the all ships rising cycle. By 2023, you’ll have a majority of ships rising, but some beginning to fall. By 2024, you’ll have a lot more ships falling for one simple reason. Most Americans do not understand that the United States had one massive advantage over Europe and Japan. Strong population growth, it has ended. Okay, so the US is population is growing at a teeny tiny fraction of what it was 10 years ago. 2018 1920 21, where each year was successively worse, and even sticking people together in homes and preventing them from going out. didn’t create enough babies. So the demographics of the United States, which have always been one of the strongest in the worlds by 2023 2024. This, you know, we don’t have enough apartments, we don’t have enough real estate, that story changes to in some parts of the United States, we don’t have enough real estate today. It’s everywhere, right? That story is going to change it has to change.

george grombacher 11:56
Fascinating. So the story is going to change what will will then have plenty of real estate or perhaps will have the right amount and then it’ll flip

Unknown Speaker 12:07
not plenty. Yeah, plenty takes a long time George but I think what will we’ll have is there’s going to be some balance between supply and demand in a number of metros and then there’s going to be some metros which still continue to grow at absorbed rates. Like for example, I’ll give you an example. Right. So the the Marcus and Millichap report, which is one of the most important ones in our industry came out yesterday. It’s the one that has 50 Different metros and has a page for each REITs it’s one of the most biggest detailed reports, Austin is ranked the fastest growing city in the US population. Phoenix is in there at number three, I think so obviously those cities doesn’t matter to them, right, because they have massive, you know, in migration, so they’re protected and their their, you know, population growth levels are still going to be absolutely phenomenal in five years. It’ll take them 10 years to slow down to the to the rest of the US is level. But the cities that are now losing population, San Francisco Bay Area for the first time in its history, lost population, that trend is accepted is expected to accelerate places that are not gaining population like Cincinnati, you know, or Cleveland, Pittsburgh, these are at risk. Because so far what was happening was there there was so much demand for real estate that their ship was rising, even though their overall need for housing was not rising because they need to have more people that need more housing, but because of investors and those sorts of things that was happening, but as it becomes obvious to everybody, that the demographics party has now become patchy. People are not just going to go out and buy stuff in Cleveland anymore, just like they they buy stuff in Columbus. There’s nothing wrong with Columbus, huge population gain is the jewel of the Midwest. But I’m shocked to see that people think that Cleveland is Columbus, there is no comparison between these two cities, except the fact for the fact that they’re both in Ohio. One is clearly the best city in the Midwest. And the other one is a great American cities that has seen better times. Right. And I think we the message here is everybody is going to know this in two years. That era, you know, there’s there’s good citizen batteries, and this is nothing new. If you look at real estate in the 60s 70s 80s 90s at the same time, they were ships rising and ships falling Do you remember the great Houston oil debacle? Right. You know, Houston real estate just sort of melted right in, I think it was the 80s and then we had Seattle had a meltdown when Boeing left. And then we had a meltdown in Dallas for a while. So this used to happen it was normal. And then we garden doses every ship always rises mentality. And now we have to go back to reality starting 2023 So we get one more year of all ships rising

george grombacher 15:02
And then just become more selective with

Unknown Speaker 15:05
you know, yeah, if we go back to an equalizer remember the old style equalizers, you know, some equalizer? You know, some somewhere up somewhere down, right? So you got to fine tune. Right now he’s just everything’s at max. All right. Make sense? And some of those things. I mean, I’d love to talk about that. I mean, when I say everything is Max, I’m not bIessing you. Today, CBRE released a video? So? Yeah, actually, it’s Marcus and Millichap. So they have their their guy. He just came back from NMHC, which is the big conference in the multifamily industry it was last week. So it comes back and release this video, right. So this guy basically says In this video, he shows this graphic, which is just mind blowing. He says, there’s a there’s a graphic which shows you know, Class A Class B and Class C multifamily Class C old buildings 50 years and over not in the right best locations. Class A obviously could be like downtown or next, a train system. And throughout history, George, there’s been a gap between in cap rates with the cap rates being the lowest for Class A and being highest. For Class C, usually there was a respectable gap, maybe like a one and a half cap difference between C and B and then one and a half cap between B and an A. So all together like a three cap, you know, gap. And that’s the gap of risk for buying old assets. And he points out that today, the gap, the total gap between a Class C asset and a Class A asset in the United States as of today is 0.9. Cap, which is why I completely fail to understand why anyone is buying Class C assets today. Because you can just pay point nine cap and buy a Class A asset. You see what I mean? In the same market, an equivalent class A asset is point nine cap, I don’t understand how you could justify to your investors the risk that you’re taking buying a C asset today. So it makes no sense. And then on the other hand, what he did the other thing that he pointed out that blew my mind is through tertiary market, which means a market that is nowhere near a secondary or primary, right. It’s just in the middle of the boonies by itself. Let’s just say Idaho Falls, right, it takes you four hours to get to Boise three hours to get to Salt Lake. Those markets now are under four cap. That’s nuts. We live in this crazy world where every single branch of the equalizer is at max. Everything’s at 11. Everything’s are low. Right? So only way to go is down and we will but maybe not this year.

george grombacher 17:47
I appreciate that. Give everybody a little bit of time to to sell their rental properties in Cleveland. No.

Unknown Speaker 17:54
Yes, again, I think that was wrong with the cash flow in Cleveland, then I don’t want to bash Cleveland. My goal is to make people understand that there is a difference in between Cleveland, Cincinnati and Columbus and people need to if you’re investing in real estate, you need to understand the difference. Right. And and it seems that lack of population has not affected things in the last three to four years. It’s my assertion, and I’m betting everything I’ve got on this, that in the next four years, all people will care about as population growth, they are not going to care about anything else, once they realize just how screwed we are on the demographics. You know, I don’t want to touch political third rail. But immigration did have one massive benefit. It kept us growing much faster as a company with more population growth than most other countries. And as you know, look at the Japanese, they’ve never allowed immigration. Their real estate today costs less than it did in 1989. Wow. Right. And I’m not saying we’re heading for that world. I’m saying it’s a it’s a wake up call that this can happen to a country as rich as Japan. We’re not gods, you know, demographics affects every country in the world the same way. Right. So I think real estate’s going to be patchy in 2023 2425. And it’s going to get increasingly patchy as it becomes obvious that certain parts of the US have simply stopped growing.

george grombacher 19:31
Makes sense. I love it. Well, Neil, appreciate the wisdom. Appreciate the foresight and insight. How can people better connect with you? Where can they learn more about you?

Unknown Speaker 19:45
Well, our two big themes for the year are tokenization and built around. We think that these are the trends that everyone should be getting into with tokenization you’re in 1996 working on the internet. That’s how big it is. It’s much larger than build to rent. Let’s GSA built around a trillion dollar opportunity. tokenization is a $10 trillion opportunity. So as you can imagine, each year we do webinars on these and there is an upcoming webinar on both of these coming up in the next 30 days, you can sign up for them at multifamily you.com That’s multifamily, followed by the letter u.com. You’ll notice there’s 20 other webinars there we do 25, a year, where all kinds of nerds, geeks and dorks gather to talk about the fate of the nation. And we look

george grombacher 20:30
perfect. Well, if you enjoyed as much as I did, show your appreciation and share today’s show with a friend who also appreciates good ideas go to multifamily u.com and check out the come the upcoming schedule of webinars and dive into the world of tokenisation. If you’re like me, you know very, very little about that. And everything else that Neil is is noodling on Thanksgiving meal.

Unknown Speaker 20:57
Thanks so much for having me. On the podcast, you can judge for sure.

george grombacher 21:01
And until next time, keep fighting the good fight. We’re all in this together.

Transcribed by https://otter.ai