Devin (00:00)
Neil Baumann, welcome to the show. How are you, sir?

Neal Bawa (00:04)
Fantastic, thanks for having me on the show.

Devin (00:07)
Yeah, yeah. Thanks for making some time. Look forward to diving in, talk and shop on real estate. For the benefit of the audience here, you're out there, you're everywhere, but if folks haven't met you or seen you, what's your background? How'd you get into real estate?

Neal Bawa (00:21)
I'm a technologist, computer science degree, data science is my background. And I fell into real estate by accident when the founder of my technology company asked me to build a campus from scratch in 2003. And that's when I discovered the wonderful benefits of real estate depreciation. And then went all in in the 2008 timeframe when I was buying a home every 30 days.

Devin (00:40)
Yes.

Nice, these long -term rentals, flips, what were you doing back then?

Neal Bawa (00:50)
Those were long -term rentals back then, and I still own about 70 % of them because my wife fell in love with them. And with the wife, logic often doesn't work. So she still manages dozens of those rentals that I bought for pennies on the dollar back in 2008, 2009, and 2010. I've moved on. Professionally, I got into real estate in the 2013, 2014 time frame. We sold our company. I had a massive, massive, gigantic tax bill.

And the only way to defray that tax bill was not just to invest money into real estate, but to become a general partner so I could benefit not just from the depreciation from my own investments, but also from the benefit from the depreciations from the limited partners investments. And so I've been a general partner ever since.

Devin (01:38)
I like it. I like it solving problems there. Just for context here, these houses, what market were they in? And just ballpark, you know, 2008, 2009, that was a while ago now. What was your basis and what do you think those houses are worth? Just for snapshot here.

Neal Bawa (01:54)
Sure, sure. So, you know, after I built a bunch of campuses for my technology company, no investors, no banks, it was just, you know, cash that we were putting in and building them. My, because my tax basis was going down each year, my, you know, the cash that I had in the bank was going up. All of a sudden I'd gone from making money to keeping money, right? And that was the big change in my life and it happened between 2004 and 2008.

Devin (02:18)
Right.

Neal Bawa (02:22)
So by the time 2008 kind of came around, I had a lot of money in the bank and I was ready to deploy. I started doing research and because I'm a data scientist, I basically look at everything from a perspective of numbers. So I started looking at various avenues to deploy my money, whether that was the stock market, real estate, timber, or all kinds of other things. And my data science was showing me that in 2008, this was the greatest time to invest in real estate in a century. 2009 was even better as prices continued to fall.

And so I would go to my family events and I would tell them, hey, I think this is the greatest time of a hundred years. Look, this is what my statistical analysis software is saying. And I would be screamed at, yelled. I was told that I was infecting other people in my family with stupid beliefs and everyone would lose their money. And so then I was banned from family gatherings for 18 months. I wasn't invited. And as a result, and this made me extremely angry,

Devin (03:09)
wow, that's serious.

Neal Bawa (03:16)
I decided that I would basically go and implement what my statistical analysis software was saying. But I was also afraid that if I got it wrong, then I would be the laughing stock of my family for the rest of my life. So I really wanted to do a good job. So I decided to hire a Ukrainian hacker. And that Ukrainian hacker spidered dozens of different websites for me, Zillow, Trulia, Redfin, Bureau of Labor Statistics, and a bunch of other sites like that, to gather information. Because I was...

I wanted to answer one question, Devin, and I'll come back to what you said, but it's really the key part of the story is I wanted to answer one question. What city in the United States is the best for real estate investing for a novice? For a novice, right? So if you know your market, you're probably doing a better job than me, but I didn't know much about real estate. So for a novice, what is the best city in America to invest in? And so we...

Devin (03:59)
Alright.

Neal Bawa (04:11)
we put an absolutely massive amount of data into a database called R. It's a statistical analysis software that data scientists use and churned through it. And basically the answer it came up with, and I don't want to get technical, so I'll just say, here's what it came up with. The single greatest metric that matters during a crash is peak value versus current value. So just calculate the difference between peak value and current value, and whichever city has the greatest number is likely to be the safest to invest in.

Devin (04:33)
Hmm.

Neal Bawa (04:41)
I'm sure there's a million other ways to be successful, but this made sense to me. And so I went out and spidered that information for all 323 metros in the United States. And I went in and invested millions of dollars into the city that came up at number one. I didn't know anything else about that city. I didn't know if it was a good city or bad city to invest in. My software was saying, this is great. So I made the investment into Madera, California, which is 144 miles from the Bay Area, San Francisco Bay Area, and 20 miles north of Fresno.

Devin (05:03)
Yeah.

Neal Bawa (05:11)
And I went out there and bought homes for $90 ,000 to $100 ,000 each. They're currently between $350 ,000 and $400 ,000 each. But in the intervening 15 years, I've probably monetized them to a 10x or 15x level because even on day one, they already were making $1 ,000 in rents. Those rents are currently at $2 ,800 on average. So I've been able to make a lot of money.

Devin (05:34)
Right.

Neal Bawa (05:38)
You know, there's been no point where I haven't made back my investment. I've already made it back. I've already refinanced. I don't have much cash in them anymore, but they're still worth three and a half, four X. So if I look at my total return over that timeframe, it's probably 10 X to 20 X. I was buying one a month for every month of 2008 and every month of 2009. And then I stopped in 2010, which is the biggest mistake of my life because what I didn't know,

is that after you hit 10 loans and you're forced to stop, I was doing 10 loans, then I started buying in my mother -in -law's name. But eventually I ran out of loans for her as well. She didn't make as much money, so I didn't get all the way to 10. What I didn't know is you can take these 10 loans and wrap them into a single commercial loan and then start on your 10 again. If I'd known that, I probably would have several hundred of them today.

Devin (06:19)
Right. Yep.

Yeah, but maybe it was a blessing, right? At some point, these things are hard to manage, hard to scale. What was the tipping point for you getting into larger commercial deals?

Neal Bawa (06:36)
2013 in July, the technology company that I'd run from 1999 to 2013 was sold. We were sold at a class leading multiple. It was not a dot com. It was a technology company. It had lots of customers, 400 employees. I'm still under NDA, so I can't tell you how much it was, but it was a very large amount of money. And so I went to my CP and I said, if I take these millions of dollars and I just invest them all in real estate, let's call it multifamily.

Will I have a zero tax bill? And he said, not even close, Neil, you're not going to get to a zero tax bill because remember there wasn't bonus depreciation back then. We've had bonus depreciation in the last few years. That was just regular depreciation. So millions of dollars didn't equate to millions of dollars of depreciation. It was a lot less. So he said, but if you could invest this money together with a bunch of investors and be a general partner, maybe you buy a building where the equity check is 5 million and you put in a million.

Devin (07:16)
Right.

Neal Bawa (07:35)
and the other investors put in 4 million, you realize you would still get 30 % of their depreciation as the general partner. So now your depreciation has more than doubled for the same million dollars, right? And I was like, okay, this is really great. How can I be a GP? And then I thought about this. I've been preparing to be a GP for five years because starting 2009, because of my family banning me,

I decided that I wanted to share what I was learning from data science with other people to make sure that I wasn't missing something. Once again, didn't want to be humiliated in front of my family. So I basically created a meetup group inside of my business. So I had these large conference rooms with seating capacity for 100 and projectors. And I was like, instead of me fighting through San Francisco barrier traffic, how about I create the meetup in my building, and then I org.

invite other meetup group owners to come in and use my space for free. Right? It's my space. I can do whatever I like with it. And then this way I can walk from my corner office into a big conference room, 250 feet. And that's my commute for my meetup group. Right? So I started that 2009, really got into it 2010, 11, 12. And what was happening is initially I gave it some really stupid name, like real estate data analytics for, you know, for data science and some, I can't even remember what it was, but it was horrible. It was terrible.

And even then a whole bunch of geeks showed up because hey, I'm in Silicon Valley, right? I mean, if you throw a rock, you're gonna hit a geek and it's gonna bounce off and hit another geek, right? This is like the home of all the geeks in the US. So I was still getting a bunch of people coming to my meetup, but it was like four people in this meetup and 10 or 15. And then somebody comes in and says, what you're teaching here, what you're showing is so revolutionary compared to other meetup groups.

why don't you have a hundred people and standing room only? And I said, I don't know. And he said, you know, I'm a marketing guy. It's because you have the worst possible name and the worst possible description. Let me write your description. So he basically changed the name of my group to location magic, how to find the best cities for investment, real estate investment in the U S and then he wrote a description and then he gave me a bunch of graphics. And basically he stuck all of those into the meetup group and 12 months later, Devon standing room only, right? We weren't even providing food or.

or water, it's just people were just showing up in droves. And then somebody suggested, hey, the system that you have that you're showing off, you're giving us the output of this system. You're saying, hey, Madeira, California is a great place, Provo, Utah is a great place. These all these cities, you're giving us the output. We want to be able to do this ourselves. And I'm like, no, this is really complex. I mean, there's so much configuration that goes in. He says, don't bother with that. Why don't you?

find a simpler version of this, basically a light version of this and pack it into a toolkit and give it away for free. And then also you can continue telling people about the hard version if they wanna do that one. And I was like, no, why wouldn't anybody wanna do the hard version if it's better? And he said, how much better? I said, well, the version that is the hard one that I'm doing has a 96 % correlation to profit, which is in my world, the world of data science. I know I'm being geeky here.

It's a very high correlation. One is the maximum correlation. So 96 % is almost at 100 % correlation. And then this toolkit that you're talking about probably have a 90 % correlation. He said, fine, just build it anyway. So I locked myself away Christmas 2010 or 11, I don't remember which year it was, and created this toolkit. I called it the Location Magic Toolkit. And I reduced the number of variables from hundreds of variables to five, the five that made the biggest difference. I already knew which five they were because I had,

all the variables so I can tell which ones were affecting the profits the most. And so I take these five variables, I stick it into a simple toolkit and I create a court. I launch it the next week. The meetup group audience loves it. Everybody's just, you know, I'm like, yeah, but I have this harder version and people are like, I don't care about your harder version because your easier one allows me to compare any city in America with any city in America in 10 minutes. And that's all I care about. 90 % is good enough for me. Right. So I learned a big lesson there at Evan that a lot of times people want what's fast,

cheap, quick, they don't necessarily want the best of everything. And so I stopped really at that point, more or less working on the more complex one. I still work on a more complex one than the five parameter location magic course, which has now become very popular. So my internal parameters are maybe 30 or 40 parameters, used to be hundreds. So I've actually simplified inside as well because I learned a valuable lesson there. So.

Devin (11:56)
Right.

Neal Bawa (12:18)
By 2012, 2013, there was this community using location magic in the Bay Area, lots of people working with me, offering to give me money. And I'm like, no, no, no, I'm running a technology company. I'm working 12 hours a day. I'm investing. I'm a landlord. I don't have time to take your money. You just put your name on this list and maybe one day in the future we'll talk. So over time, Devon, thousands of people were getting added to the list. And that really liked me and trusted me because they knew that I had nothing to offer, nothing to pitch. I had no course. I had no.

you know, product, we were just in a meetup group sharing stuff, right? Other people were going out there, buying these homes, making millions of dollars and sending me thank you notes, right? I even got like a really fancy gift from somebody that made a million dollars work for Apple and apparently invested millions of dollars based on what I said. So it was wonderful, but it was just a pastime and, you know, a great place to meet friends and talk. And then in 2013, when this thing happened with the company, I'm like,

I could be a GP. And so what I did was I did three months of immersion into multifamily, learned a lot of multifamilies, met up with other people that knew a lot more, went to courses, spent some money. And then I came back and put buildings in contract. And I thought it would take me six months to raise the money. It took six days because I'd really been raising that money in a weird sort of way for the last four years by building my brand. And so when it actually happened, I went from zero to a hundred in the world of general partnership.

Devin (13:27)
Sure.

Neal Bawa (13:46)
Overnight?

Devin (13:47)
Overnight, what was that first deal?

Neal Bawa (13:49)
So it was a 237 unit apartment complex. And we basically, it was a very standard deal. There was nothing special, nothing sexy about it. And I think we were putting back then, the LTVs are pretty high. So I think the, I was a four and a half million in equity that was raised. A significant portion was mine. I also put money into other deals because even that one property didn't get me to zero for taxation. And so I was doing other properties.

Devin (14:14)
Sure.

Neal Bawa (14:18)
buying in Dallas, buying in Chicago, Atlanta, Provo, Utah, Salt Lake City, a lot of the usual places that people were going to, only my data science was giving me an 18 to 24 month advantage before those, 24 months after I would publish a list of cities, Devin, they would start showing up with all of the syndicator tutors. Because those syndicator tutors, the people that were teaching people how to syndicate and how to,

be general partners, they knew more than I did about buying buildings. They knew more than I did about managing buildings, but they weren't data scientists. So it was taking a while for them to figure out cities and I was buying before them.

Devin (14:59)
How was that first project, that's a big change, right? You got single family, you're looking at the data, but then jumping in, were you guys the primary general partner operator on that, or did you have some local boots on the ground? How did you structure that?

Neal Bawa (15:13)
I had partners. Early on, Devon, I just feel like I didn't know enough. I don't even think my partners knew enough. So I had partners in many of my, I think all of my initial projects, maybe for three or four years, had partners and some did well, some didn't do well. There's just a lot of learning that went through that whole process. And so we sort of muddled through it, right? And, you know,

That wasn't necessarily as good of a time as 2017, 18, 19, 20 were in terms of cap compression, in terms of rent growth, because there were still millions and millions of homes in the US that were empty at that point in time. So we sort of had to muddle through it.

Devin (15:55)
Right. Yeah. Yeah. No, it makes sense. Yeah. Quite a run there kind of 2012 to 2020 with cap rate compression and rent growth and all the things you mentioned. What, let's talk about the last, the last. Yeah. I was going to say the last four years have been pretty wild. You know, we're talking in May, 2024, obviously COVID and the aftermath and.

Neal Bawa (16:09)
Yeah, and then starting 2020, a different world that we live in.

Devin (16:22)
and inflation and rate hikes and all that stuff. How has your approach changed? I guess, let's talk more about since the rate hikes. COVID was one thing, but it was pretty sharp V, right? Once all the liquidity got ejected, that was just kind of a wild thing. But then for operators at that time, you kind of had some liquidity come in. You had tenants getting maybe help from federal or local municipalities with rent and everything.

So it wasn't as impactful, at least it wasn't for us, but then the rate hikes certainly have been. So how's the last two years been for you guys and how are you approaching that?

Neal Bawa (17:01)
So once COVID struck, we started to slow down buying because interestingly enough, once COVID struck in April or March 2020, within five or six months of that, prices of properties were going crazy because the rates had abruptly dropped to zero and the institutional partners knew that this was not normal and so they started to buy. And so we were thinking, well, prices would stay low until all of the...

the rent abatements were lifted, but that didn't happen. Prices started to rise in the fourth quarter of 2020. And then 2021 was a completely wild year for prices, the most insane increase in prices that you could see. So our math showed us that this was not a great time to buy, it was a great time to sell. So all of 2021 and 2022, we just focused on maximizing our assets, getting them to a peak, you know, NOI and just selling them.

So nine assets were, well, seven assets were sold during that timeframe and then two were sold subsequently. So nine assets were exited. So we had a lot of exits. In terms of purchases between the, between maybe mid 2020 and mid 2022, two years, we only bought two assets. One of which was our own asset. We just bought out some partners that just wanted out and we didn't want out.

Devin (17:56)
Nice.

Neal Bawa (18:22)
So one of them was our own asset, but there was one freestanding asset that we bought. So for two years, we basically didn't buy anything. And I, in hindsight, am extraordinarily grateful that we didn't buy anything during that timeframe, because those assets would be causing nightmares for us right now. So we started to buy again in 2023 when rates had already increased, cap rates had already dropped, we started to get discounts. So I think mid 2023, we bought an asset, which is probably a 15 % discount from peak.

Devin (18:23)
Yep.

Neal Bawa (18:52)
And then beginning of 2024, we bought an asset which is probably 20 to 25 % discount from peak. And now we're out and about looking for more assets because we think it's an incredible time to buy right now. We can't seem to convince investors of that. I think that they are having the same sort of phobia that they had in 2008. And I can't blame that. I mean, investors are not investors. The vast majority of our investors are speculators who like to believe that they're investors. So what we've done is,

Devin (19:17)
Right.

Neal Bawa (19:20)
We hold a lot of programs showing people the data on why this is a much better time to buy than 24 months ago when everyone and their mother was investing. And we managed to convince maybe 25 % of our investors of that. And those 25 % are helping us buy properties. The remaining 75 % will regret that they didn't listen to us three years from now.

Devin (19:41)
Yeah, no, it's a sentiment I hear a lot of. Let's talk about asset classes. I mean, the focus on multifamily, we've done single family. Have you guys branched out into any other different types of asset classes over this time and why?

Neal Bawa (19:51)
yeah.

We have a ridiculously high number of asset classes. So here are the different asset classes that we worked on. So there's multifamily. There's multifamily new construction. So we do both value add and new construction. We have 600 units delivering in just the next 12 months. We do built to rent, which is basically not apartments. It's townhomes. So large townhome communities. And we built many built to rent communities and we're building many more communities. We've done self -storage.

Devin (20:08)
Mm -hmm.

Neal Bawa (20:22)
We've done office and flex together with industrial, and then we've done student housing. So these are all the different asset classes that we've sort of had our hands in over the last six or seven years. We've also done stuff outside of real estate. So we've had investments in oil and gas. We've had investments in companies like Delos, which is a technology company. So we've done a few of those sorts of things. They're not core to our mission, but we've done them.

Our core mission is to build 10 ,000 rental townhomes and we spun that off as a separate company. So my company Grow Capitus spun off a company called Mission 10K that only builds townhomes for rent.

Devin (21:05)
Is that multiple markets?

Neal Bawa (21:08)
Mission 10K currently is building in five markets around the US. So Mission 10K builds in what are known as high NOI markets. This is a term that I coined. Over the last four years, due to massive increases in prices of properties and insurance, many of the best markets in the United States that used to be best before, for example, all of Texas, most of Florida, have become low NOI markets. What has happened is their expense ratios have spiked.

Devin (21:11)
Right.

Neal Bawa (21:38)
so much that these markets are low NOI compared to other markets. So Mission 10K focuses on markets where the following things are cheap. Cheap land, cheap construction cost, low insurance, low property tax, which means that we have to go away from some of the highest growth markets in the US.

Devin (21:58)
Sure, sure. Yeah, some of the tax stuff you take Houston, I mean, or insurance rather, some of the, I mean, I hear there's assets in Houston that like are uninsurable or we'll see stuff.

Neal Bawa (22:10)
You can't even insure them. Yeah. So I think that what you have to understand is that these markets are extraordinary, but a solution has to be found to the double whammy of insurance and property taxes in markets like Texas. So, you know, we love Texas. We think it's an absolutely amazing market over the next 20 years. It might even be the best market in the U .S., all things considered. But if I can't give my investors any cash flow for five full years, then is that the definition of best?

Devin (22:37)
Yeah, it's a tough sell, a tough sell, especially with LP Capital. What's the team look like? You're doing a lot of deals, a lot of asset classes, a lot of markets. What's your team look like today?

Neal Bawa (22:48)
We're very lean. We use an incredible amount of software and an incredible number of people in the Philippines. So we have a company that I own in the Philippines that has 21 employees. They're all full -time. They all work Pacific Standard Time. They have their own managers, directors, supervisors in the Philippines that do their own training and recruiting, hiring, firing. We simply receive services from them. And so 21 of them, including their director. And so that team supplements everything.

The US staff is pretty lean. There are two full -time people in the acquisition side. There are four full -time people, five full -time people in the development side. And then the operations team is an ops director, two ops directors, and then everyone else is in the Philippines. So altogether, we've got, and then we've got a pretty large marketing team, so that altogether there's more than a dozen employees in sort of investor marketing, but only the director, the deck,

creator and the copywriter are in the US and then there's about nine employees in the Philippines. So altogether, 34 employees, 36 employees full time and then dozens of contractors. And then of course, we have hundreds of people that work for us at the property location.

Devin (24:05)
Of course, yeah, on site. With that kind of a team, and that's tremendous, and I love the technology leverage there and the overseas leverage, what kind of deal flow are you guys looking at across all the asset classes? And you said multifamily, you know, it's been a little slower the last year, but do you have targets there, or are you just saying, hey, we've got a buy box for these asset classes. When one lands in there, we're going to jump on it. How do you approach the deal flow, and what does that pipeline look like?

Neal Bawa (24:32)
We have no targets, just buy boxes. If the buy box is empty, then we buy nothing. Remember, for two years, we bought two assets or one and a half because the buy box was empty. The buy box is more filled up now than it was before. So there's no point in having these targets because it leads you in the wrong direction. You end up buying assets that you shouldn't be buying. So we don't set targets like that. So on the acquisition side, which is primarily multifamily, though we look at other assets like self -storage and industrial as well.

Devin (24:42)
Yes.

Yep.

Neal Bawa (25:02)
Our goal is that to have 100 new properties in our funnel every week, so 5 ,000 a year. And then on the land side for the development group, it's the same goal. It's 100 on the... And right now we're hitting about 75 % of the goal for both. So we're underwriting or looking at about 3 ,500 properties a year on the acquisition side. And a little more than that, maybe 4 ,000 pieces of land.

Because these are two discrete teams. They don't overlap. So that basically, if we can get to three projects on each side out of those 6 ,000 prospects, then we're pretty happy.

Devin (25:33)
Mm -hmm.

Yeah, yeah, it makes sense. Big team, distributed, different asset classes. What does your week look like? Where does your time best spend? What do you enjoy doing the most?

Neal Bawa (25:53)
What I enjoyed in the most is podcasts and I do two podcasts a week. So, you know, two hours. I don't have a podcast of my own. I've never really thought about launching one, but I've appeared on about three or 400 of them. This is my favorite time of the week because I also create content. So a lot of people say content is king. Well, when I'm here with you for an hour every week, I'm talking about different things. My team takes that content and puts it up both long form and short form on YouTube and sends it out to our, you know, our...

76 ,000 accredited investors. And so that allows me to create content without writing things, which I hate doing. I get writer's block. This is much easier because you're asking a question, and all I'm doing is simply responding and reacting. And so that's the most fun part of my job. The second most fun part would be Groundbreaker Summit. Groundbreaker Summit is a 75 -minute event that I do every Wednesday. My team pitches five.

Devin (26:30)
True.

Sure.

Neal Bawa (26:51)
four to five pieces of land and we go through those pieces of land. We learn about new markets. And then the acquisition summit is the following day. It's 60 minutes and usually we go through four properties that my acquisitions team has underwritten. Those are really the most fun part of the job because you learn about new properties, new markets, you know, you get to be the shark in shark tank and say yes or thumbs down or, you know, things like that. So it's very fun. The rest of the...

Devin (27:12)
Sure.

Neal Bawa (27:17)
The time I spend a lot of my time with technology and optimization asking questions of my my staff I have a Chief Operations Officer. She really runs the company. Her name's Anna I mean, it's her job to run the company everyone the company except for my executive assistants report to her So she runs it, you know, my VP of marketing obviously is off doing their own thing same VP of marketing I've had for eight or nine years so they know their job

Devin (27:33)
Mm -hmm.

Great.

Neal Bawa (27:42)
And then a director of operations that is responsible for all the PPMs and the K1s and all of these other things that you need to keep the company going. We don't have any onsite legal staff, but we've been working with the same lawyers for five years. And so they know us, we know them. The structure works fairly well. I spend about five to six hours a week talking with investors. Most of my investor communication is through webinars and podcasts, but one -on -one.

We have 1 ,016 investors as of yesterday, and all of them have access to me directly. So they talk with my investor relations director a lot, but sometimes they just like to talk with me. So I haven't reached the point in my life where I say, sorry, I can't do that. So maybe five, six half hour conversations with investors.

Devin (28:16)
sure.

Yeah, yeah, that's perfect setup. Mid 2024, we've kind of seen what's happened so far this year. We got an election year, but he's watching the Fed. How are you guys looking at the back half of 2024?

Neal Bawa (28:44)
We believe that the economy will weaken. There's a lot of disbelief in that because people have been saying that for a while and it hasn't happened. And I understand that there's disbelief, but please understand that the way that the Federal Reserve works is additive, meaning when they have these extraordinary high rates, and by the way, currently inflation is running at 3 .5 % in May 2024. We do not need rates this high for inflation at 3 .5%.

we needed rates this high for inflation at six or seven or eight or nine. So there is absolutely no doubt in my mind and I'm a numbers guy, I look at math and I say, there is no way we need rates to be this high for three and a half percent. What that means is that three and a half percent inflation will decline. Now, I don't know the speed at which it declines. And I also know based on the Fed raising rates 14 times since World War II, that the downward,

Devin (29:31)
Mm -hmm.

Neal Bawa (29:39)
slope of inflation and they've succeeded 100 % of the time, by the way, the Fed has killed inflation 14 times since World War II and has never failed. Once they had a partial failure when they bought rates down, but they cut them too soon, rates went back up and then they had to cut them again. So they had one of these instances and that was in the mid 80s, but otherwise they've always been successful 100 % of the time. And that's because they can just keep raising rates until they basically destroy enough demand.

Devin (30:02)
Right.

Neal Bawa (30:07)
to bring inflation down below zero. And they're not even trying that. But what eventually ends up happening, right? Out of those 14 times, some were very minor. So I'll just take the 10 that were major. Nine times out of those 10, they put the economy in recession. So the Fed always wins. But almost inevitably, it wins by causing a recession because they don't have tools fine -tuned enough to be able to say, I want to bring demand down.

to almost 0%, but I don't want the economy to go into recession. They don't have any such tools because every move that the Fed makes, it impacts the economy six to nine months after they make that move. When the Fed cuts rate in July last year, the impact happens in March this year. And they can't foresee that impact or know how much of an impact there is. So they're guessing, they know that everything will happen nine months in the future. What I'm seeing very clearly is that the US economy is weakening. Payrolls last year, last month were at 175 ,000.

Devin (30:49)
Mm -hmm.

Neal Bawa (31:03)
inflation readings came in muted, the latest ones in May this year. And then I'm also looking at jobless claims, they're rising. What the Fed said would happen is happening. What hasn't happened is the schedule. The Fed felt we may be able to start dropping rates by December last year, maybe February this year. And well, obviously none of those things have happened. In May, they're not dropping rates. We think that they might drop rates in September. We think they might drop in December.

Devin (31:27)
Sure.

Neal Bawa (31:33)
What we have clearly seen though is it's bringing inflation down. It's just not in a straight line. The last 14 times that they succeeded, it wasn't straight either. It was generally a downward direction, but there were times when inflation went right back up. So they waited a few more months and it went back down. Imagine these, the current interest rates are so high that what the Fed has done is placed a thousand pound weight on the chest of the economy. So the Fed does nothing, doesn't raise rates.

It's still a thousand pounds. It's still pushing the economy down every day. This is why I laugh at people who think that the Fed needs to raise rates again. They've already got a thousand pound weight on the chest of the economy. There is no documented evidence that any economy in history has ever tolerated these rates forever. You can tolerate for a year. You can tolerate for months. You cannot tolerate it forever. These rates are absurdly high. So,

Devin (32:21)
Right.

Neal Bawa (32:28)
This is why the Fed has made very clear statements that we don't consider, despite the spike in inflation in the last six months, we don't consider that we will need to raise rates further. What we are saying is we might need to hold them where they are for longer than we forecast eventually. And because we're data -driven, we're simply going to say we're data -driven. Longer? Who knows?

So to us, one rate hike is almost a certainty to this year, but when in the year it happens, I don't know. Could two happen? Sure, I'm data -driven too. We'll see what payrolls look like next month and the month after. But for the moment, it could be one rate hike this year, two rate hikes this year, but there's 0 % chance the Fed will hike rates. Sorry, one rate drop this year, two rate drops this year, but no rate hikes. So to us,

Devin (32:51)
That's great insider. Yep.

Neal Bawa (33:19)
There's a normalizing of the real estate market that is happening already and will continue to happen. We expect that the lowest prices that you'll get for multifamily on a cap rate basis will come in Q3 or Q4 of this year, but we fully expect that prices in 2025 will be higher because what we've seen before is that the multifamily market is predictive in nature. You do not actually need interest rates to go down for prices to go up, right? So every single quarter,

from the second quarter of 2022, cap rates were increasing, right? Which means prices were falling. So second quarter of 2022, third quarter, they fell, sorry, they increased, the cap rates increased. Third quarter, fourth quarter, first quarter of this year, second quarter of this year. But second quarter of this year is where cap rates didn't decompress. They stayed where they are. So the market has come to the conclusion, okay,

we're either at bottom or close enough to bottom, we'll start making investments. So there's a lot of money that has been sitting on the sidelines for the last year and a half that is now beginning to come into the marketplace. It's cautious money, but it's coming in. And so it's putting a, basically it's putting a ceiling under cap rates so they can't go any higher. So I expect that we might see some increase in cap rates in Q3 or Q4 of this year, but they're going to be small increases than expected in 2025.

I expect that cap rates will start to go down again and prices will start to rise again because all of these things are predictive. And I want to give you one example so people really understand how predictive markets are. When I ask people this question in the 2008 to 2012 debacle, when do you think the stock market bottomed? Usually people tell me, probably 2010, probably 2019. No, the stock market bottomed only five months from the time that Lehman Brothers went out of business.

Lehman went out of business in September, October of 2008. The stock market bottomed on March 12th, 2009. That's how predictive the market is. It took years for real estate to bounce back. It took years for businesses to bounce back, but the market bottoms quicker.

Devin (35:10)
Yeah.

Right, right. Are you guys seeing a lot of distress out there in multifamily? You know, when we're looking at deals, we're only looking really in our market, but we're seeing basis on stuff that, you know, you would kill for a couple of years ago. Obviously, you're trying to make a pencil with the debt, but the basis is incredible. What are you guys seeing out there nationally?

Neal Bawa (35:48)
The same thing that you're seeing there, we just look at it differently. So let me define distress. I think one of the problems is the word distress means different things to different people. So I wanna define it specifically. Distress to me in real estate is when an asset is being sold at well below its value. This obviously happened in 2008. We are seeing absolutely zero distress.

Devin (35:59)
Perfect.

Neal Bawa (36:15)
In occupied 90 % plus occupied multifamily in the United States, in any market in the United States, none of them qualify as distressed prices. Prices have come down in certain places by 15%, others 20%, some places 25%. But these prices are down simply because of the fact that interest rates are higher. And on a debt coverage ratio, these are the right prices. We are not seeing any market in the US where somebody puts a property out and one offer comes in.

Devin (36:38)
Mm -hmm.

Neal Bawa (36:43)
Right now we're still seeing 10 offers, 15 offers, 20 offers. These offers may be 25 % lower than they were in 2022. But the definition of distress is that the price is being driven down by a lack of demand, which is what we saw in 2008, nine and 10, where I was the only bidder on properties that cost $250 ,000 to build that I was buying for $90 ,000. Nobody else was interested. That level of distress does not exist in any multifamily market in the United States.

Devin (36:50)
sure.

Right. Right.

Neal Bawa (37:13)
has not existed for any asset that is occupied. Therefore, there is no distress in the multifamily market. What is there is distress for investors. There are 20 million apartment units in the United States. Let's assume all of these properties are 200 units. They're not, but let's assume that. Well, that's 100 ,000 properties. The number of properties that are debt distressed, because all the distress is related to debt, right, is roughly 2 ,500 to 3 ,000 in the next 12 months.

Devin (37:30)
Sure.

finance.

Neal Bawa (37:42)
And then there will be more after that, but let's just talk about the next 12 months. 2 ,500 to 3 ,000 properties are in distress. Let's assume each property had $8 million in investor equity, right? So now you're basically looking at, you know, whatever that number comes out to $20 billion in investor money that is in distress. Investor money is in distress, right? So if you have 2 ,500 properties and 50 investors in each, those 75 ,000 investors, their money is in distress.

because the value of their properties have dropped so much that if they're sold today, they can be sold like this. Like in five seconds, you can sell your property, but the price it sells at will wipe out a hundred percent of their equity. So the word distress is being used incorrectly, Devin. There is only distress for 75 ,000 investors. There is no distress in the multifamily space because everything is liquid and everything sells.

Devin (38:23)
sure.

That's a great point. I appreciate that. Your feedback for two groups of people. One is somebody, and you talk to these people all the time, they're an aspiring or prospective investor, high income earner, whatever, just dipping their toe in. What do you tell that person that's just starting to look at this real estate game, alternative investing, maybe becoming an LP investor? What do you tell that person?

Neal Bawa (39:03)
You lucky bastard. You're starting at the bottom of the cycle. And I don't really know if this is the bottom, Devin, but I listened to Warren Buffett and Warren Buffett says, in my long career, I have never managed to once call a bottom correctly, but I've made hundreds of billions of dollars. So what I know is that we are approaching the bottom. And for any prospective investor to start when a market that is one of the most powerful and most reliable markets in the world is close to a bottom,

Devin (39:15)
Right.

Neal Bawa (39:33)
You lucky bastard.

Devin (39:34)
I love it. How about for the aspiring operator, maybe somebody that's a little further along, but they want to go out and be the Neil Bawa. They want to be the GP. They want to do the depreciation. They want to make this full time and they're starting to explore that. What do you tell that person?

Neal Bawa (39:49)
best time to start, but I don't resent you because you're going to find it hard to raise equity. So ironically, the deals are there. The stuff that you're buying today will be worth more, right? The industry right now is bearish. So the way we look at cap rates, rent increases, we're bearish, right? And so everyone's very conservative. I think that in two or three years, you'll see that the properties you bought now are doing actually a lot better than the ones you bought in 2021 or 2022. So wonderful time.

Devin (40:06)
Right.

Neal Bawa (40:19)
for you to buy properties, the assets are priced really well. I don't envy the job that you have of convincing investors. And that's really the key part of your job.

Devin (40:30)
Sure, sure, it makes sense. Well, Neil, you've been a wealth of knowledge. I really appreciate your time and I love following you. If somebody listening wants to connect, you've got resources that you can share with them, etc. Where do we send them?

Neal Bawa (40:45)
So roughly 25 ,000 people come to multifamilyu .com to get access to knowledge around all forms of real estate, but also other things that we're interested in, climate change, artificial intelligence, and anything else that catches our fancy, by the way. A lot of economics, a lot of macroeconomics. Multifamily U is a completely free portal. Not only are there no subscriptions, no upsell, and no paid education packages, there's a guarantee that there never will be.

Devin (41:15)
I love it. Yeah.

Neal Bawa (41:15)
So it's basically meant to be a Wikipedia of real estate analytics and a bunch of other things. Like we have a course there that's extremely popular. Ironically, it's the most popular program there, course there. They're all free. It's called 10x Your Business by Using Virtual Assistance. I use 30 different demos to tell people exactly how I use my virtual assistants in the Philippines. And a bunch of other things are in there. So that's probably the best place to start because many of you are not even sure if you want to invest in multifamily.

So join a community that's there for education, that's there for discussions, and then go from there. Four times a year, if you're in that community, you'll probably get invitations to our properties. You can just ignore them if you don't want to invest, but you'll learn a lot.

Devin (41:45)
sure.

Fantastic. Well, we'll link to that in the show notes. If you're listening, you can scroll down and connect with Neil and team through the link we'll have there. Neil, really appreciate it. It was great to see you, great to connect, and I'm looking forward to the next couple of years here and continuing to follow you guys. So thank you.

Neal Bawa (42:22)
Sounds good, thanks for having me on.

Devin (42:24)
All right, see you.