[00:02:36] Robert Leonard: Do you think it can be done with other properties other than just fourplex?

[00:02:40] Neal Bawa: Technically, I mean, we’ve been doing it with duplexes, triplex, and fourplexes. We find that the, while it can be done with single family, there’s a variety of challenges with that. From a construction perspective, we, we simply haven’t been able to offer discounts when we do smaller number of units.

[00:02:55] Neal Bawa: When you’re building duplexes, triplexes, fourplexes, it’s easier to offer a discount to a buyer because the buyer’s buying. 12 months before it’s delivered, and it’s easier to offer that discount on a fourplex than it is to offer on a single family home.

[00:03:11] Robert Leonard: And you’re on, you’re doing these as all new development, correct? You’re not buying existing properties?

[00:03:16] Neal Bawa: Yeah. We just finished a 66 unit project in Idaho Falls, basically 17 fourplexes, and we sold 11 of those and then we kept the remaining six for ourselves. It wasn’t a syndication. Everyone was a buyer. Nobody was an investor. We came in a good $150 ahead on the rent, so that really, really helped with the increase in interest rate because all of the investors were still hitting proforma because rents were a lot higher.

[00:03:44] Neal Bawa: Interest rates were a lot higher, so when they refinance in two years, they’ll be way ahead.

[00:03:49] Robert Leonard: How does that work from a zoning perspective? You just buy a plot of land and make sure that it’s sub dividable. Is that how that works?

[00:03:55] Neal Bawa: Yeah, it adds an extra step to the zoning and permitting process because now instead of doing a single piece of land for 66 units, you are dividing that land into pieces.

[00:04:06] Neal Bawa: So usually adds four to eight weeks to the construction process. The timeline, does it add a lot of cost? Not really, no. Not from a cost perspective. Maybe a couple thousand dollars per four Blacks. It’s, no, it’s not a cost component. It’s just a time c.

[00:04:24] Robert Leonard: You also have a what? What is the, UGro Texas build to.

[00:04:29] Neal Bawa: UGro is both a fund and a company. We gathered 200 of our best investors a while back and gave them a vision. I’m not at liberty to discuss the entire vision, but the goal was to build a very, very large number of build to rent Fourplex projects for these are, you know, could be 200 unit projects.

[00:04:49] Neal Bawa: Some of them are 270 units, but they’re individual fourplex. Multiplied by, you know, so if it’s 280 units, it’s a, you know, 74 plexes inside of an institutional grade community with swimming pools and CrossFit gyms and all kinds of other amazing amenities. And, uh, the goal was to build 2,500 of them per year.

[00:05:10] Neal Bawa: It required more funding than just a fund. So they gave us, the fund that you just mentioned was fully subscribed, but then they also gave us a great deal of money, a very large amount of money to create a company around it. And that company is fully functional now and has gone ahead and is implementing the plan.

[00:05:26] Neal Bawa: So they, we did not have a public’s syndication on that one. It was just our premier investors.

[00:05:33] Robert Leonard: So is that kinda like an apartment complex except the people own the fourplexes themselves and they’re still in a community?

[00:05:39] Neal Bawa: No, that one. So the, the, the plan doesn’t involve selling fourplexes. It’s, it’s an institutional product that is meant to be sold to an institutional buyer.

[00:05:50] Robert Leonard: Gotcha. Okay, so stepping up to those, those bigger assets a little bit specifically to commercial real estate, how is the Fed’s gambit with interest rates impacting commercial real estate as an asset class, and how is it impacting your syndication business? We heard how it’s impacting the fourplex business, but how is it impacting your syndication business?

[00:06:08] Neal Bawa: There’s nothing good to report. Obviously, the impact is fantastic, especially given what the Fed did last week. So we’re recording this at the end of September last week. The Fed raised interest rates by 75 basis points, so the Fed funds rate is now 3%. They also gave forward guidance that they’re gonna end up somewhere around 4.4%.

[00:06:26] Neal Bawa: This is catastrophic for real estate. It’s absolutely shocking and I’m, I’m very disappointed to see very few people actually being honest about this, but it means substantial increases in cap rates. And I’ll explain why. Normally the reason why institutional, commercial real estate is so lucrative is because of a yield gap Until 12 months ago, 10 year treasuries were one.

[00:06:52] Neal Bawa: So you, if you put your money into a 10 year treasury, you got 1% today, 10 year treasuries are 4%, right? It used to be that, you know, if you were buying a property at a four cap, which has been pretty common, people buying properties at a four cap, if you didn’t use leverage, if you didn’t use loans, you would make 4%, right?

[00:07:12] Neal Bawa: That’s what four cap means if you don’t use leverage. So you would make 4% on real estate and 1% on treasure. That yield gap of 3% is why commercial real estate was so priced today. The gap does not exist. Anyone can make risk less money by buying 10 year treasuries. You could do it within 10 me 10 minutes of finishing this podcast.

[00:07:34] Neal Bawa: When riskless is 4% risk cannot be at 4%. It simply cannot be at 4%. That makes absolutely zero sense. And yes, I, I know we get, you know, higher increases by using leverage, but for the last five or six decades, smart people have been basically comparing the no leverage number in real estate to the treasuries.

[00:07:56] Neal Bawa: Today with no gap there, there will be a significant and aggressive increase in cap rates for every kind of commercial product, multifamily storage. Mobile, home parks, office, hotels, all of them have to see a significant cap increase. Now, I do believe that this cap increase may be temporary, and two years from now we could come back down.

[00:08:18] Neal Bawa: But for the moment we are seeing the worst case scenario. Where the Fed initially said, hey, we may have to go up to four and a half percent. Nobody believed them. I didn’t believe them. Most people felt that the Fed would park itself right around where we are today, around the 3% mark That I think is no longer a possibility.

[00:08:35] Neal Bawa: So we are definitely into the worst case scenario for real estate. So real estate is now going to go into a very significant.

[00:08:44] Robert Leonard: And the reason for everybody listening that cap rates increasing is so important is because there’s an inverse relationship between the property’s value and a cap rate. If cap re goes up, the property’s value goes down, so that’s why it going up is such a big deal.

[00:08:57] Neal Bawa: That’s right. Yes. Going up from four cap to five cap is a 25% decrease in the property’s value. That represents a huge problem for people that are holding properties and represents a huge opportunity for people that are. You know, this isn’t good or bad. It depends upon which side of the coin are you.

[00:09:15] Neal Bawa: Because if you are on the five cap side of the coin where you haven’t bought properties, well now you’ll get a chance to buy them much cheaper and you couldn’t have possibly, if I had told you that in January of this year, or maybe like late last year, a year ago, Robert, if I told you in 18 months you’ll be able to buy properties at 20% less than you’re buying them now.

[00:09:36] Neal Bawa: Even with the rent growth that we have, you’d laugh. You would laugh at me, right? But I think that that scenario is not just possible, but probable. I’m not saying there’s a hundred percent chance it happens over the next five or six months, but I’m saying that its chances of happening are higher than 50%.

[00:09:54] Robert Leonard: Do you only think it’s gonna go to 5%? Like let’s just say there’s a property with a cap rate of 4%. You think it’s only going to five or maybe higher?

[00:10:00] Neal Bawa: Most people believe that when interest rates go up by 1%, cap rates go up by 1%. That’s simply not true and has never ever happened. The actual ratio is around 0.4%.

[00:10:14] Neal Bawa: So when interest rates go up by 1%, cap rates go up by 0.4%. So if interest rates go up by two and a half percent, cap rates go up by 1%. Does that make sense? We were seeing cap rates in January when interest rates were very, We were seeing cap rates in January at right around under four caps, so pretty much every property that I know of that was a Class C, class B class A, everything was selling under four cap and so we should see that under four cap to become five cap by about February, and that should pretty much take us to where we need to go.

[00:10:49] Neal Bawa: It could it, could it go higher than five cap? Yes. We are seeing anecdotal evidence that it could go. I’m not so sure because there’s a lot of demand, there’s a lot of money sitting on the sidelines. Keep in mind that the stock market has suffered, the s and p 500 is down 25%, NASDAQ’s down 30%, and as a result, there’s a lot of money sitting on the sidelines that can rush into real estate once we hit five cap.

[00:11:10] Neal Bawa: So it may be hard for the number to go up above five cap, even though by u using sheer mathematics it should, but there’s resistance just like the stock market. Once the price of an asset, uh, a, a stock falls to a certain. There tends to be resistance because new buyers come in and so that resistance breaking it is not easy.

[00:11:30] Neal Bawa: So I think five cap is the point of resistance.

[00:11:33] Robert Leonard: So how does this actually work in practice? Let’s say it does go to five cap people that have been sitting on the sidelines. They’re like, Okay, this is exactly the moment I’ve been waiting for. I have cash, I’m ready to buy. Now they’re buying, yes, they’re buying at a discounted price, but they’re also buying at higher interest rates.

[00:11:46] Robert Leonard: So on a cap rate basis and a why basis, it looks good. But on a profitability or cash flow basis, it’s, you know, mostly a wash probably, cuz your interest costs are much higher. So it’s even worse or even worse.

[00:11:56] Neal Bawa: It’s not even wash, right? It’s, it’s worse. So in February, If interest rates, uh, let’s say the Fed funds rate settles today, it’s at 3%, right?

[00:12:05] Neal Bawa: So they’ve just raised it last week to 3%. Let’s say it settles at 4.25%. That’s what I am banking on now. 75 Bs increase on November 1st, and then I think December 6th is when they meet again. So another 50 Bs. And then the Fed says, Okay, alright, Enough, you know, 4.25, Let’s now see how the economy reacts.

[00:12:24] Neal Bawa: We know we’re gonna go into a recession. Let’s just hold for. At 4.25, when you are, you are buying a property in February at five Cap with the Fed funds rate at 4.25. Your interest rate will be higher than that. Remember, the Fed funds rate is the base rate, it’s the foundation rate and interest rates are built on top of it, right?

[00:12:42] Neal Bawa: So there’s a, a margin there that banks attach, and that’s what, that’s the money that they make. So when you add that margin on top, even at five Cap, your cash flow is gonna be really poor, Robert. It’s gonna be really poor, maybe even poorer than today. It really depends on a number of things. But once the Fed says we’re not raising anymore, then we do tend to see some improvement in mortgage rates because a lot of the times when the Fed’s raising, nobody knows how far they’ll go.

[00:13:08] Neal Bawa: So everyone’s very conserv. Once the Fed says, Okay, we’ve raised a 4.25, we’re gonna just sit here and wait, WA wait for inflation to come down. You can’t see an a slight improvement in mortgage rates. So assuming that slight improvement, your cash flow is gonna be just as it is today. People who are buying, they’re gonna be two kinds of people buying.

[00:13:26] Neal Bawa: Number one is the 10 year buyer who says, I don’t worry about interest rates, I just want discounted product. I may not get this discount again for 10 years, and they’d be right. I. They’re basically buying a discounted product. They don’t worry about one year cash flow, but what they worry about it is, Hey, I got it at a huge discount.

[00:13:44] Neal Bawa: If a 20 million building, I got it at a 3 million discount. That’s pretty amazing. I’m just gonna basically buy it. I’m going to bring in extra equity to make sure that you know, I’m not negative cash flow, and then I’m going to refinance in 18 to 24. That group is the group that is going to jump in and buy, and that tends to be the rich money, the big money, the rich money.

[00:14:05] Neal Bawa: They don’t really worry about what their cash flow is, uh, in the first year of ownership or even in the second year of ownership. Syndicators are typically not in that group, but there’s now a number of syndicators that are convincing their investors that it’s a great time to buy. Look, in my mind, nothing fundamentally has changed about multifamily or multifamily fundamentals.

[00:14:24] Neal Bawa: So if I can buy multifamily at five cap in February, I’m all in. I wanna buy as much as possible. I just want to be very clear with my investors that, look, it’s for the first two years, it’s not a cash flow play at all. That this is about being greedy and buying cheap assets and then waiting for the market to turn.

[00:14:44] Robert Leonard: So is that kind of your plan now?

[00:14:45] Neal Bawa: Greedy, right? Is that, are you waiting till February? As of last week, we stopped underwriting, so we were underwriting about 60 properties a week. Now we don’t fully underwrite all 60, but we would underwrite about six or seven of them that we would pick amongst the 60 that come in, we get about 60 properties a week.

[00:15:01] Neal Bawa: That’s our average. So we would look at all 60 and underwrite about six of them in detail and then make about one offer a week. That’s our standard. We gotta make an offer a week to win one every three. We are pencils down. We have simply stopped underwriting properties. We’ve simply stopped looking at properties because we do not believe, We do not believe that there is a buyer that has fully adjusted to their new real, a seller that’s adjusted to their new reality.

[00:15:29] Neal Bawa: There are zero sellers in the market that understand that five cap is going to happen in February. They are all trying to sell their properties at four and a half cap 4.6. It takes a while for the market to adjust and given that that 75 basis point increase just happened, I think the market is not going to adjust this year.

[00:15:47] Neal Bawa: So we’re not gonna see five cap until next year. So we are hard pencils down.

[00:15:53] Robert Leonard: You’re at a much bigger scale than myself and most of our listeners. You’re in the hundreds of units with your properties. How would you approach this differently? Or maybe the same as you just mentioned, if you were in the early days of your career, go back to those properties that I remember we talked about last time, that were these small single families, duplexes that you had in the neighborhoods.

[00:16:12] Robert Leonard: How would you approach those and that type of strategy today with maybe duplexes, strip plexus for smaller investors?

[00:16:18] Neal Bawa: One of the things that I’ve learned is that fundamentally interest rates are affecting a single family buyer, a duplex buyer, a fourplex buyer, and a 200 unit buyers the same way. Now, it hasn’t always this been this way, So in, in many cases we saw divergence between interest rate impacts in in the smaller side, the 10 unit buyer and the 200 unit.

[00:16:41] Neal Bawa: I am not seeing that this time. I am seeing the entire market having the same impact. So every comment that I just made about my 200 unit purchases applies to a 10 unit purchase today as well. I am simply not seeing much of a diversions there. There may be rent growth differences between those two items, but when it comes to impact of interest rates and loans, I’m not seeing anything different.

[00:17:05] Robert Leonard: If you are a smaller investor, are you still, uh, pencils down or are you still looking for deal?

[00:17:10] Neal Bawa: I don’t see any reason why. So the short answer is if you can afford to be pencils down, you should be pencils down. If you cannot afford to be pencils down the, there is another way to look at it, which is for sure you are getting a 10 to 12% discount from January.

[00:17:27] Neal Bawa: Prices, right from Jan of this year we’re in, we’re in end of September. In nine months, you should be getting a 10% discount. If you’re not getting that 10% discount, you don’t know how to underwrite, so you should be getting 10%. I’m interested in another 10%, maybe 8%, 7%. So it may not be 20% from January prices, but it might be 16, 17, 18%.

[00:17:48] Neal Bawa: I’m interested in a bigger discount. I can afford to wait some waiting, but you’ve, you’ve already got a discount from January and obviously your cash flow is much lower than January because you know your interest rate is much higher. But once again, the way to look at it today, the way to convince your investors is cash flow is lower, but value is.

[00:18:07] Neal Bawa: I am buying the same exact asset, which now has higher rent than it did in January because in the last nine months rents, rents on average are up 5%. In nine months, it should be worth more money, but I’m paying 10% less. Fundamentally, my cash flow is hit because of interest rates, but my belief, and you, this is you saying it to your investors, is my belief is that interest rates cannot stay high as long as they are saying they will.

[00:18:31] Neal Bawa: Interest rates will come down by the end of next year. That’s kind of our projection at this point, that they’ll come down by the end of next year. And at that point in time, and they don’t have to come down to the covid rates. Those we will never see again in our lifetime, I believe, unless another similar pandemic strikes or even worse than this one.

[00:18:46] Neal Bawa: But I think that what we will see is the fed equilibrium rate, which is usually two to two and a half percent of their rate, which usually means four and a half percent bridge loans, which we often take for four, four and a half percent bridge loans could be seen again by the end of next. So if for 15 months I can take the pain of no, or you know, low cash flow and in return receive a 10% or higher discount in the value of a property, which is seeing increased rents, that’s not a bad deal.

[00:19:15] Neal Bawa: That’s how a lot of business is done.

[00:19:17] Robert Leonard: I wanna talk a bit about PropTech. I’ve had a few different companies in the PropTech space in real estate here on the show. Some of them have really interested me and even impressed me. So as a technologist turned real estate investor, what are you seeing with PropTech companies disrupting the real estate industry and why do investors need to start taking notice?

[00:19:36] Neal Bawa: The goal of PropTech is to disrupt, right? They’re here to make our life uncomfortable in every way imaginable. And they wouldn’t like me saying this, but it’s the truth. It’s the blunt. They want to come in and disrupt the insurance industry. They wanna come in and disrupt the solar industry. They wanna come in and disrupt the construction industry.

[00:19:59] Neal Bawa: They wanna come in and disrupt the way that we lease, the way that we rent, the way that we amenitize their job is to to disrupt. And so, If you’re not paying attention to someone who is trying to disrupt the way that you do business, then you are just, you know, you’ve got your head in the sand. And so I pay a great deal of attention to PropTech companies and what they’re doing.

[00:20:21] Neal Bawa: I’m very heavily involved in the PropTech revolutions in many different ways. I’m also looking at legislation, especially the recent Inflation Protection Act and how it affects prop tech businesses in real estate, and I think the impact is pretty significant for some of. And so I, I think the key is they’re out to disrupt.

[00:20:39] Neal Bawa: 90 plus percent of them will fail or just be absorbed by regular businesses. But the remaining 10% that do become, you know, big companies will change things for the rest of us. I mean, Tesla’s a perfect example. There have been about a dozen electric car companies formed. Only one is profit. Right, but that one has changed.

[00:20:59] Neal Bawa: The EV changed the entire car industry worldwide, and it’s been extremely painful. If you’re General Motors, Ford, or a Chrysler, the pain today is enormous for you because someone came in and disrupted your entire business model.

[00:21:13] Robert Leonard: Are you investing in any of these prop tech companies, or are you solely only in real?

[00:21:18] Neal Bawa: I continue to invest in PropTech companies and I’m willing to invest more in, in some of them. Uh, one or two of my favorites are Delos, which basically is a healthy home company. If I get a chance, I, I think I soon will get a chance to invest in Delos. I would definitely invest in them. D E L O S. If you don’t know what Delos is, look up the well building seal or the well building standard.

[00:21:38] Neal Bawa: I think that’s a very big thing post covid. The other one that I’m interested in is tokenization. The tokenization company that I like is called STO Box. They’re a European company, S D OBO X. I’ve already made an investment and I think I’m likely to increase my investment as they sort of move upwards.

[00:21:55] Neal Bawa: Fractionalization, which is very different from tokenization. I call it the mini IPO O technology is very interesting. If a startup or prop company starts to make progress in the mini IPO segment, I would love to invest money in them.

[00:22:10] Robert Leonard: When you say mini IPO segment, what does that look?

[00:22:11] Neal Bawa: Many of your, you know, people, you’ve had people on your show talk about the concept of tokenization, where you basically use blockchain, you take a multifamily building, you turn it into thousand dollars tokens, and you sell those tokens on the blockchain.

[00:22:26] Neal Bawa: The challenge with that is you are still subject to all SCC regulations and at this point the SCC is so made it bluntly clear that issuing tokens, unless you’re doing it as part of 5 0 6 C, you are committing a crime and they will come get. As a result, when I do this tokenization via 5 0 6 c, I still can’t work with non-accredited investors, so 90% of the investing universe is basically outside of my control, and that sucks.

[00:22:54] Neal Bawa: Fractionalization does not have any such issues because they take a building and they do a mini i p o. Essentially, they list the building on the stock exchange, that there’s a, a streamlined process for doing that. It’s not as long as taking a company ipo. It takes a few. Once you do that mini ipo though, you are then able to sell tokens to anyone.

[00:23:17] Neal Bawa: Like Robert doesn’t have to be accredited to buy stock in Google. Anyone can buy stock in Google. Right. So there’s no restrictions there because it’s an s e C offering. Well, there’s a company called Arrived Homes, which is backed by Jeff Bezos that is doing fractionalization. They do not tokenize, they fractionalize, so they, they take an individual single family home and then they do a mini IPO on that individual single family home.

[00:23:46] Neal Bawa: I think that that’s the way to go, and I think that any prop tech company that goes into the route of making that fractionalization process more smooth arrived is only doing it for itself, not for other people, but there will be companies that will emerge in that space. I’d love to invest in every single one of ’em.

[00:24:03] Robert Leonard: We’ve actually had, I actually chatted with the founder of Arrived. He’s been here on the show, and there’s another company that I had on the show, I, I can’t think of their name right this second, but they were, they were doing something kind of similar. They actually call themselves, uh, basically stock, It’s like stock trading for ownership within their commercial assets.

[00:24:21] Robert Leonard: It was a really interesting model. I don’t think they’re doing anything with, on the actual stock market. I think they’re kind of making their own market, so they might have some issues with what you mentioned. But yeah, it was a, it was an interesting model.

[00:24:32] Neal Bawa: Yeah. I’m unsure of the regulatory requirements of anyone that wants to trade any kind of token.

[00:24:39] Neal Bawa: I think that the SEC has now basically said the following, Failure to listen is not failure to understand. We’ve been telling you for years that tokens are subject to SEC approval. You keep saying the SEC will issue new guidelines. Our guideline is they are subject. That’s our guideline. We are not going to issue new guidelines.

[00:25:05] Robert Leonard: Are there any other blockchain technologies that are kind of coming into real estate that are gonna really hit this generation, are gonna really change the real estate industry?

[00:25:14] Neal Bawa: Not yet. I, I mean, I haven’t done enough research to basically answer the question in a practical way, so I’ll answer it in a theoretical.

[00:25:22] Neal Bawa: I think that there’s gonna be blockchain lending companies in the future that will increase lending options. These are not equity companies, these are lending companies, because I think that the amount of money that is being invested into blockchain is still a trillion dollars. That’s a lot of dollars.

[00:25:39] Neal Bawa: Before they were all chasing 20% returns with companies like Celsius. Those companies went outta business. So now they’re like, Well, I, I want to stake my coins, but I wanna stake them for real things. Well, the number one real thing they can stake their coin on is real. So I think that there’s a business there for people to stake their coins into debt funds that then become accessible to people like Robert and Neal for financing our projects.

[00:26:06] Neal Bawa: So I think that that’s gonna be a big move. I don’t know who the winners are going to be yet. As far as I know, there are no regulatory issues because you are not buying equity. You’re simply a lender. And as a lender, as long as you follow the much easier rules of lending, you should be.

[00:26:23] Robert Leonard: You are probably the number one person that has impacted how I find real estate markets myself.

[00:26:28] Robert Leonard: So I always enjoy discussing this with you and how you’re finding markets and learning if there are any new ways to see if I can expand my markets anymore. And you’re now, last I checked, you’re now in Idaho Falls, Buffalo, New York, Greenville, South Carolina, Texas, many more. Originally, I learned from you that there are six demographic data points that we wanna look at for cities.

[00:26:50] Robert Leonard: Are those still applicable to this day? And how are you analyzing the markets that you’ve expanded?

[00:26:56] Neal Bawa: All of them are still applicable. None of them have changed, but none of them changed. The fact that right now we’re still pencils down on all of those amazing cities, every city that you mentioned, one of them, Idaho Falls is my favorite because of two reasons.

[00:27:10] Neal Bawa: One is it has extraordinary population growth, which is one of those six metrics that you just mentioned. Let’s second, because I am highly, highly bullish on nuclear, making a big comeback. Russia has proven that the world oil and gas supply is extraordinarily fickle. Currently, gas costs in Europe are up three to 10 x, not 30 to percent, 300%.

[00:27:35] Neal Bawa: Not a hundred percent, but 1000%. When you get, When you have that happening, certain technologies come back. There’s nothing wrong with nuclear. There’s never been anything wrong with nuclear except old nuclear plants were expensive to build. We now have smaller, cheaper plants. Idaho Falls happens to be the center of the nuclear revolution in the United States through Idaho National Labs.

[00:27:57] Neal Bawa: Terra scales, reactors are being built there reactors for new, new, uh, battle cruisers are being built there for aircraft carriers. I believe very strongly that nuclear will is about to make a phenomenal comeback. So I invest in, in Idaho Falls, but even there, I’m pencils down. I think the interest rate phenomenal is affecting all of these cities.

[00:28:18] Neal Bawa: So I, I, I believe that the US military will see a lot more action in the coming 10 or 15 years. So those kinds of markets that have exposure to either nuclear reactors or army bases are, are good investments to make in the future.

[00:28:31] Robert Leonard: How are you also utilizing sales trends to determine markets to invest in?

[00:28:36] Neal Bawa: At the current time, it makes no sense to look at sales trends. So we’ve stopped looking for the simple reason that we are unaware of any major market in the United States that is not seeing a downward sales trend. So every market that we have surveyed, and I can’t say that we are looking at all 400 markets because we typically tend to look at the top hundred, but I am unaware of any market in the top hundred that does not have negative sales trend.

[00:29:00] Neal Bawa: So it seems like sales trending is useful when some markets go up and some go down. So you can differentiate between markets. How do you use sales trending when every market in the United States is going downwards?

[00:29:12] Robert Leonard: I wanna specifically dive into Killeen, Texas a bit because this city has been on my radar for years now.

[00:29:18] Robert Leonard: When you, because when you taught me this the first time we met, that it came up on my radar back then, and it’s always been rated really well, but I just never pulled the trigger. I did end up investing in a couple cities based on that analysis that we did, and it’s done really well. But for some reason, Killeen was just something that I just, I couldn’t pull the trigger on.

[00:29:38] Robert Leonard: So I’m curious, what is your investment thesis with Killeen specifically?

[00:29:43] Neal Bawa: So the first investment thesis is exactly what you mentioned. It does really well on the metrics. The second thesis, which sometimes can be stronger, is that I like investing in very reasonably priced cities that are near a Super Nova city.

[00:29:58] Neal Bawa: Super Nova Austin. So Austin is the hardest super nova in America. No city comes close in terms of the amount of investor interest that this particular city has and the amount of ridiculous amount of money that is going into it, not just from real estate perspective, but from the perspective of technology.

[00:30:15] Neal Bawa: Like Samsung alone is investing $17 billion in a plant near Taylor, which is north of Austin. I see. Because of challenges with construction and land. A lot of the development going north of Austin, Killeen is 52 miles away from North Austin. North North Austin is a richer part of Austin. There’s a bunch of cities beyond, or Austin on the north side that are also pretty rich, and so you can probably live in Killeen and drive to those cities in 35 to 40.

[00:30:44] Neal Bawa: When I look at rents in Killeen, they are such a tiny fraction of the rents in North Austin that it’s inevitable that people will flee North Austin to go towards Killeen. So I keep an eye on U-Haul data of people that are leaving. Austin Killeen always shows up in the top three, so usually the top three for people leaving Austin are killing San Antonio and San Marcos.

[00:31:08] Neal Bawa: But both San Marcos and San Antonio are more expensive than kill. It can’t be number one in UL’s list forever it, but it’s always in the top three, so that’s why I have an apartment complex there. I’m also next to that apartment complex, negotiating on an eight acre piece of land to build another apartment complex.

[00:31:26] Neal Bawa: The one that I’ve purchased is doing really well.

[00:31:28] Robert Leonard: Killeen is also in between another major city, Isn’t there? Another major city, not too far north of Killeen as.

[00:31:35] Neal Bawa: Not that I’m aware of. I mean, you, you’ve, you’ve gotta go quite far. Once it’s beyond the 50 mile radius, it’s not drivable, so I tend not to look at it.

[00:31:44] Robert Leonard: Well, we have Waco. That’s the one I was thinking of. So it’s not, I guess it’s not massive.

[00:31:47] Neal Bawa: I mean, to me, I think Waco’s not big enough to impact Kaen. To me, I think Waco’s actually seeing more impact from the Dallas side because it’s, it’s not terribly far from the Dallas. It’s not part of my investment thesis.

[00:32:00] Neal Bawa: I think that Killeen is close enough. Any city that is drivable to a supernova is an amazing investment. One that I’ve tried and failed in is in called Buckeye, which is 45 minutes from Phoenix. And I tried, I made a lot of offers. They didn’t quite work, and amazingly then I subsequently found out who I was competing.

[00:32:20] Neal Bawa: Bill Gates’ Company basically bought out all of that land in Buckeye. They own miles of land in Buckeye. So Buckeye Phoenix is obviously the other supernova to look at, so I’m interested in that. The third one to me is Tampa. Tampa Metro, I think is going to do really, really well for a variety of reasons.

[00:32:38] Neal Bawa: The list is very long, and so I actually am investing like 90 minutes from Tampa in a city called Port Charlotte. But in our current metrics, There are four out of the top five cities are in that Tampa area south of Tampa. So cities like Cape Coral, Fort Myers, Port Charlotte, Punta Goda, all come up at the top of our metrics.

[00:33:02] Robert Leonard: You mentioned U-Haul data, but what other data are you using both for market research, but also going back to our conversation about all the economic data that we talked about earlier? What are some of the resources and sources for your data that you use?

[00:33:13] Neal Bawa: In addition to the free ones, which you can find out, anyone can go and look at our free market data.

[00:33:18] Neal Bawa: The five data sources that are free, they’re part of a course that we offer. It’s, it’s a free course. There’s no subscription. It’s on multifamily u.com. So go to multifamilyu.com. I think it’s called Real Estate Secrets, or something like that. Take that course, it’ll walk you through the five metrics and give you an Excel spreadsheet.

[00:33:34] Neal Bawa: So apart from those five, everything that we have is paid data and it comes in two varieties. The somewhat expensive and the very expensive. The very expensive data that we use is a company called CoStar. I’ll just leave it at that because most people can’t afford to buy Core Star license. This somewhat expensive data, which actually in many ways is better than CoStar, comes from two sources.

[00:33:56] Neal Bawa: One is called Local Market Monitor, so local market monitor.com, and the other one is called housing alerts.com. These are roughly $2,000 for each, for national licenses and cheaper for regional licenses. So if you’re focused on a region, you, you’re gonna end up paying very little the amount of money that you are going to save and the amount of money that you’re going to make is going to be at least a hundred x, maybe a thousand x.

[00:34:24] Neal Bawa: What do you pay for these two software? So we pay for subscriptions for both. We really like. One of ’em actually, we bring their CEO in on our platform to do webinars every year. Uh, his name’s Ingle Windsor. He is the winner of the Crystal Ball Award in real estate, which basically means that his projections are the most accurate.

[00:34:43] Robert Leonard: Does it make sense for somebody who’s buying smaller multifamily single, uh, like duplexes? Triplex is fourplexes to maybe buy a subscription to one of these tools for a, a really small market if they know that’s the only area they’re investing.

[00:34:57] Neal Bawa: If you’re buying a single unit of real estate, you should get a subscription one unit.

[00:35:04] Robert Leonard: All right. Well, I, I think that’s, uh, pretty convincing.

[00:35:08] Neal Bawa: I want to, and again, I’m not, I’m not invested in these companies. I have no stake. I just think that we are very lucky. Software like this used to cost $30,000 a year. In the, in the 1980s and the Internet’s, you know, distribution method is so efficient that now you can spend a few hundred.

[00:35:28] Robert Leonard: Everything that I’ve seen from you up until this point has been about multifamily. You’re even dub the mad scientist of multifamily, but I did see on your site mm-hmm. That you’ve done a self storage deal, and I’ve also seen that you’re getting heavily involved into some student housing. And I know student housing is technically kind of multifamily still, but I’m curious, how are you, are you expanding into other asset classes outside of just multi-family and how are you thinking about different asset classes at this?

[00:35:56] Neal Bawa: I am in five different asset. We have four different asset classes, so multifamily student housing, self storage, and industrial. I do projects in them to learn, to understand, to figure out what I should do more. So for me, it is all about learning for my investors, it is about diversification. After investing in four asset classes, I’ve definitely found multifamily is superior to student housing, and you have to have very specific reasons for why you would wanna do student housing.

[00:36:25] Neal Bawa: Over multifamily, self storage and industrial can be both superior to multifamily in certain windows. We are not in one of those windows at this point in time. I think that industrial and self storage are about to see higher cap rates, which means declining prices in the next six months, just like multi-family.

[00:36:44] Neal Bawa: If I see any evidence of blood on the streets in either of those two asset classes, I will not hesitate to buy. But I’m not seeing any evidence of that yet. Those are my four asset classes. I also am a developer, which obviously is not about asset classes. It’s about making things by yourself as opposed to to buying them.

[00:37:04] Robert Leonard: I do wanna talk about development, but before we do, what window does self storage and industrial do better than multi?

[00:37:10] Neal Bawa: The short answer is as cap rates have been declining, there were times when multifamily cap rates declined a lot faster than storage and industrial, and what that means is prices increased a lot faster.

[00:37:24] Neal Bawa: So windows were created where self storage and industrial had a cap rate difference from multifamily of up to 1%. Over time they, you know, there was a compression that happened there and pretty much everything ended up being, you know, similar cap rates with only about a half cap difference from multifamily.

[00:37:41] Neal Bawa: So at a half cap, you know, those assets are not very interested, but when the gap is one, one and a half cap, it makes a lot of sense to buy those assets.

[00:37:50] Robert Leonard: As you mentioned, you’re doing a lot of development instead of just buying, you know, already prebuilt assets. What’s your thesis there? And are you pencils down with development as well, or are you kind of throttle on with, with, uh, develop.

[00:38:05] Neal Bawa: No, we are pencils up for development because with development we’re not delivering anything for two to three years. So we believe that this current, extremely challenging market will be over in 18 to 24 months. So anything that we can deliver in 18 to 24 months is simply not subject to the cap rate decompression that we are seeing today.

[00:38:26] Neal Bawa: And you’ll come back out at the time when cap rates are going to be compressing. Because it’s a cycle, right? We’ve seen these cycles before, and by now I think most of you understand that real estate goes in cycles. There was this feeling that this cycle would never end, which I found to be laughable.

[00:38:41] Neal Bawa: Cycles always end, but they don’t really end. They end and then they restart. My core beliefs are based on the fact that the United States, let alone every other country in the world, they’re all worse than us, but the United States cannot afford to pay its debt back. If we raise the treasuries to 4%, so I’ll, Let me give you an example.

[00:39:02] Neal Bawa: Our current debt is 30 trillion. 30 trillion with a T. This means that if treasuries go from 1% to 4%, which has happened, then that’s a a 3% difference. On 30 trillion, you realize that’s $900 billion more every year in interest, our tax receipts are only 3 trillion. We can’t sustain this. We can sustain it probably for a year.

[00:39:30] Neal Bawa: It’s no big deal. But if you sustain it for longer than that, obviously we’d, we’d need to double our taxes. And there’s no evidence that politicians would allow that. So I think that sooner or later, politicians, right now, the politicians are more on the side of inflation, is hurting everybody. So Fed, keep doing what you’re doing.

[00:39:49] Neal Bawa: Well a few months later, the politicians basically, now they, their budget people come to them and say, You do realize that all this inflation stuff that the Fed is doing has raised our interest by two or $300 billion? And it takes a while for that to happen because you already sold a bunch of treasuries and they’re at the lower.

[00:40:06] Neal Bawa: But when those treasuries come up for renewal early next year, now you’re gonna have to sell treasuries at higher rates. So now if they, if the federal government is selling treasuries at 4%, all of a sudden the federal government breaks its own budget, and then the politicians are going to basically call the Fed and say, What the f are you doing?

[00:40:23] Neal Bawa: You’ve gotta get these rates back down. So my premise is that in the long run, we have to bring rates back down to under 2% for the Fed funds. And if that’s the case, then we should all be buying assets because there will be another cycle in the future when it happens. I don’t know. My guess right now, and it’s just a guess, is by the end of next year, such a cycle starts and it takes a while to get going.

[00:40:46] Neal Bawa: And so because of that, development’s an awesome option right now, as long as I don’t deliver anything before early 2024. So I’m, I’m very heavily involved in development right now. 19 projects, 700 million in.

[00:41:00] Robert Leonard: A lot of what we’ve talked about today has more or less pointed to a recession being pretty much imminent, and I would say that all of your properties are really nice.

[00:41:08] Robert Leonard: Everything that I’ve seen, they’re all a class properties or, or at least really nice B class. Are you worried about really nice properties being hurt during a recession because people not being able to afford their rental rates?

[00:41:20] Neal Bawa: Yeah, and I think that, again, I’m, I, I wouldn’t say that there’s something magical about these properties.

[00:41:26] Neal Bawa: All properties will be hurt during a recession. In my mind, we we’re penciling in a 100% chance of a US recession, either beginning in q4, you know, which is basically in a few days, or beginning in Q1 of next year, which may be a little more likely. And we think, this is not a two quarter recession, it’s, it might actually be a three quarter recession.

[00:41:45] Neal Bawa: So pretty bad in our mindset. Every kind of asset class will hurt this time. A and B, and C, for one simple reason, rents on all of those have been skyrocketing, right? If anyone’s thinking rents can’t go down, I simply offer Exhibit A. Look at home prices in every awesome market in the United States, they’re all falling.

[00:42:07] Neal Bawa: Why? Because they rose a great deal since Covid, they went up from 34 to 42% in just two years, two and a half years since Covid, when something goes up that fast. Then it has to adjust and come down. So that adjustment is now underway, 10%, 15%. Rents usually don’t adjust as much as home prices do at the end of a, you know, cycle.

[00:42:27] Neal Bawa: But I do expect them to either flatten or go slightly negative, maybe go down three or 4%. And I expect that to be across the board because of the nature of the fact that Class A ranks in Class B rents in this cycle. The last two years have risen more than Class C normally. So in in 2013, 14, Class C was leading recovery all the way up to 20 19, 20 20.

[00:42:49] Neal Bawa: Class C, rent growth was higher than Class A, class B, but in the last two years, A and B have been higher than C. So I think all three will suffer.

[00:42:57] Robert Leonard: Neal, as we wrap up the show, I wanna give you a chance to tell the audience where they can go to connect

[00:43:02] Neal Bawa: with you. Well, I’m lucky enough to be the only Neal Bawa on the worldwide web, so simply type in N E A L B A W A, and you’ll find a lot of my content.

[00:43:11] Neal Bawa: A better way to engage with us is to go to multifamily u.com and sign up for any webinar, and then you’ll get invites to our webinars. We do 20 webinars a year. Eight of them are designed to basically provide folks like you data on the way real estate is going. So those eight webinars are absolutely must attend.

[00:43:30] Neal Bawa: Two of them are specifically about the market interest rates and trends. One at, towards the end of the year. One towards, you know, in the, in the middle of the year. So check those out by going to multifamily u.com.

[00:43:43] Robert Leonard: I’ll be sure to put links to the data sources that Neal mentioned earlier, Neal’s website, Multifamily U, some of the webinars and the previous episodes we’ve done together in the show notes below for anybody that is interested in checking ’em out.

[00:43:55] Robert Leonard: Neal, thanks so much for your time. I really appreciate you joining me. Thanks, Robert. All right, guys. That’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next.

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