JF1298: How To Create Over $2 Million In Investor Equity With Apartment Communities with Neal Bawa
Neal does not call himself a real estate investor. Rather, he says he is a technologist. While he does invest in real estate, he does so using the latest technology to be as efficient as possible. By doing this Neal says he is really running a technology company rather than a real estate company. Either way, he has tremendous strategies for increasing value and equity in his projects. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Neal Bawa Real Estate Background:
–President/ COO at Financial Attunement, a commercial real estate investment company
-He speaks at Multifamily events, IRA events & meetups across the country
-He owns and manages a real estate single family and multifamily portfolio in 7 U.S. States
-Based in San Francisco, California
-Say hi to him at www.multifamilyu.com
-Best Ever Book: 4 Hour Work Week
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Neal Bawa. How are you doing, Neal?
Neal Bawa: I’m well, Joe. Thanks for inviting me onto the podcast.
Joe Fairless: Well, my pleasure. Nice to have you on the show. A little bit about Neal – he is the president and COO of Financial Attunement, which is a commercial real estate investment company. He owns and manages real estate properties in both single-family and multifamily properties in five states across the U.S. He’s based in San Francisco, California. With that being said, Neal, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Neal Bawa: Absolutely. I wanna start off by saying I’m not real estate royalty like Joe here, I’m a technologist; I’ve had a successful tech career and a successful tech exit, and got interested in real estate in kind of an odd way. I started with large commercial before I got into residential, which as you know, Joe, is quite unusual (it’s very rare to see that). But my first gig in real estate was to build from scratch a 27,000 square foot campus for the technology college that I was a partner in. That was in late 2003.
My CEO and senior partner basically said “We’re gonna build a campus, and I bought this building. It’s a shell, and you’re going to build it into all these classrooms, and offices and all this other stuff.” I said “But Paul, I know nothing about real estate.” He said, “No, that’s okay. I’m gonna hire a GC and he’s gonna help you, but you’re gonna basically design and do all of this stuff”, and I was terrified. But what really worked for me is that he did hire a good GC and good sub, so they didn’t really take advantage of my lack of knowledge, but it was a fantastic process to go all the way from doing a rezoning process – because it was flex industrial land; it was a flex R&D building and I had to rezone it for school use. Then I had to go through the entire process – the design, the build, and going through all of the approvals. It was [unintelligible [00:04:31].10] process.
Eventually we ended up building six different campuses all over California, and that’s how I got started in real estate, before I got into single-family. So that’s kind of the beginning of my story.
Joe Fairless: That’s a big undertaking. As far as you coming from a technology background – you called yourself a technologist – how do you apply that background to commercial and maybe single-family investing?
Neal Bawa: More so than most people would believe. My sales pitch, if you wanna call it that, is I’m not running a real estate company at all; I’m running a technology company that is masquerading as a real estate company. So far masquerading successfully. We use an incredible amount of technology, and we’re not just using technology in the sense of software, we’re using technology in the sense of process, we’re using technology in the way that we generate an army of leads for our properties, and I’ve taken over many of the property management associated tasks from our PM’s, and we also are very heavy on outsourcing.
I have a large group of virtual assistants that work in the Philippines and in India to optimize our property. So we’re not PM’s, we hire third-party PM’s like everyone else, but we use technology a great deal to optimize the net operating income on our properties and to optimize investor cashflow. So still, in my mind, I’m still running a technology company.
Joe Fairless: What are some tacticals that your VA’s do in order to optimize the NOI on your commercial properties?
Neal Bawa: Well, I’ll give you some straightforward numbers. On a 250-unit, if you increase rents by $25, you created roughly a million dollars in investor equity because of the laws of cap rate. So if you’re working on a 6-cap property, you’ve created nearly a million bucks. And if you increase occupancy in the same property by 2% – let’s say you go from 94% to 96% – you’ve now created slightly over a million dollars in investor equity when you sell.
So you take those two together and you created a little over two million dollars in investor equity before you start your rehab. Obviously, the standard business plan – mine is no different from anybody else’s – is “Let’s take these properties and rehab them.” But on a typical 250-unit property, if investors put in five million dollars, I’m getting to more than two million of that five million before I start my rehab, because my optimization overlay – my team here in the U.S. and in the Philippines and in India essentially allow us to do those two things: increase occupancy on average by 2%, increase rents by $25. The very short answer to how we do it is we create massive mountains of lead flow, and then we process those leads in the Philippines, as opposed to processing them in the U.S., because no property manager that I know in the U.S. would ever agree to take on that mountain of lead flow. It simply wouldn’t work.
Joe Fairless: When you’re rehabbing a property – and I’m making assumptions, so you stop me when the assumption is not correct… With your business model, if you’re rehabbing it, like you stated, then I imagine you’re putting money into the property, interior and exterior, and improving the quality of life, and then increasing rent because you’ve improved the quality of life and the living experience. Is that accurate?
Neal Bawa: So far, so good. Yes.
Joe Fairless: Okay. In that process, I imagine, if it’s like one of our properties, there’s gonna be turnover, because you go from one quality product to another quality product. Is that accurate?
Neal Bawa: Absolutely.
Joe Fairless: So the question is “Why are you increasing occupancy before you do the rehab?”
Neal Bawa: The short answer is — let’s say I didn’t do any rehab; let’s say I just left the property alone. Let’s say the property was at 94% – or is meant to be really a 94% property in that area, okay? Providing an army or a mountain of leads, I can always take that up 2%. I’m not increasing price at this point, I’m simply increasing occupancy. That 2% is really irrespective of the rehab.
Now let’s say I do the rehab, and now the rents are $125 more. Same thing applies – at that new pricing level, if in that market the typical occupancy is 94%, by using my army of VA’s and leads, I can take that up 2% again, regardless of whether it’s rehab or not. So rehab units, non-rehab units – I can increase occupancy of both by 2%. Now, if I happen to be in a market that’s so awesome that none of this is necessary, then of course I don’t do any of these things. But what I’ve found is that in 2017 and 2018, we are seeing a lot of new class A product come in markets that we are in, whether it’s Dallas or Salt Lake City, or any other markets. There’s a lot of class A product coming in, and as more and more of that product comes in, 350,000 units a year, we’re beginning to see discounting happen in that area. I think most of your viewers are aware that class A occupancy in the United States is continuing to fall month-over-month, quarter-over-quarter. So as their occupancy falls, they’re discounting, and that’s having a cascading effect on the B’s and the C’s, and the way to protect against those occupancy declines is to be very efficient at sales and marketing.
Joe Fairless: What are some ways that your VA’s are getting the leads that they’re generating?
Neal Bawa: I think that the process I’ll describe is fairly straightforward; the processes that are connected to that process are much more complex.
Joe Fairless: Okay.
Neal Bawa: So we talk about Craigslist first. We’ll use Craigslist as an example, but this actually applies to a lot of the other pieces. Craigslist – I talk to property managers and I say “Do you guys use Craigslist?” “Oh yeah, we’re awesome at Craigslist. In fact, we post on Craigslist every day.” And actually, when I go in and hire them, I notice that sometimes they post every day, sometimes they post every other day.
Joe Fairless: Sure.
Neal Bawa: But the truth of Craigslist is you only receive leads on Craigslist for between one and two hours after the posting goes up, unless you’re in a very small market. So in a large market like Dallas, you get 90 minutes of visibility at most. Then your ad is on page 4, where no one will ever find it. Have you found that to be the case, Joe?
Joe Fairless: I definitely understand that, yeah. I pretty much agree with that.
Neal Bawa: Right. So the catch is if you post another ad, Craigslist will flag it. Craigslist has a very powerful artificial intelligence algorithm that flags duplicates, and uses a wide variety of methodologies to find and flag duplicates. We don’t leave that posting to our property managers, we post 48 ads on Craigslist per property.
Let’s assume it’s a property that has studios, one-bed, two-bed and three-bed. In that case, we post 48 ads. If it only has studios, one-bed and two-bed, then we’ll post 36 ads over the two-day timeframe. Those ads are posted all the way starting at seven in the morning, then nine, then eleven, then one, then three, then five, every day. Then post it again – the second set is posted the next day.
On the third day, the Craigslist renew button, which appears on the right side of every listing, becomes available, allowing us to roll those listings over. Every 30 days, Craigslist gets rid of our listings, so we recreate all 48 ads for every property. By doing this in a phased manner, ever two hours, we create a massive number of leads from Craigslist.
Now, the same methodology is applied in different ways across nine other engines. Every engine has its own weakness, and you have to exploit it. Craigslist is almost flawless, so we’ve had to spend two hours developing the technology to hack it.
For example, it doesn’t like all those ads coming from one address, it’s gonna flag them, so we use I think 24 different IP addresses in the United States. Even though the listings are all being done in India or the Philippines, it doesn’t like same-sized graphics, so we have 48 different sets of graphics that are different file sizes. It doesn’t like the same titles, it doesn’t like the same descriptions… There’s also some other ways in which Craigslist catches you. Phone numbers…
So it’s an anti-spoofing methodology that we developed. Every quarter we look at what our flag rate is, and based on that, we develop new methodologies, and we do that across ten different engines.
Joe Fairless: Approximately how many people are involved in that process? Let’s say you’ve got the studio, one, two’s and three’s, so you’re doing 48 ads every 48 hours.
Neal Bawa: The sales and marketing team are seven full-time employees.
Joe Fairless: And where are they located?
Neal Bawa: India and the Philippines.
Joe Fairless: And what’s their average compensation?
Neal Bawa: $13,000.
Joe Fairless: $13,000 a year?
Neal Bawa: Yeah.
Joe Fairless: On average 13k/yeah, so you’ve got about–
Neal Bawa: 100k/year.
Joe Fairless: Yeah, about 100k/year.
Neal Bawa: But that’s spread across all of my properties. The standard property is penalized $18,000/year for this service, but the investor value that I just talked about creating was two million bucks, or more. And we must not forget that the value created on sale is 16 times the value you’re creating each year. So the value created each year is over $100,000, correct? So it helps to pay for that $18,000. We don’t skimp on the staff of the property. There’s no difference in staff structure of the property between my properties and yours and Michael’s… They’re all gonna be the same. There’s no optimization to be applied to property staff. It’s really the additional cost of the VA’s and the additional value that’s created for the property there, the investor value.
Joe Fairless: What’s a specific example? You mentioned a 250-unit, 6-cap rate, adding the value there… Can you give a specific example of something that you’ve implemented and how it’s gone?
Neal Bawa: I can’t. I think that that would get me in trouble with my investors. But I think that those numbers that I gave you are quite representative.
Joe Fairless: Got it, okay. With your portfolio – are you in five states?
Neal Bawa: No, that was a while back. Now we’re in seven states, not counting California.
Joe Fairless: Okay, seven states, and you’re based in California… So how do you become familiar with a market?
Neal Bawa: The best way to become familiar with a market is to do a lot of research. Each year, in January, tons of different providers put out their listings of best cities in the U.S., worst cities in the U.S., best neighborhoods, best zip codes… There’s so much data, and that data is not in any one place, so starting in November each year I use Flipboard on my iPad. In Flipboard I plug in ‘real estate’, and I thumb down anything that is not interesting to me, and thumb up anything that has to do with items that are talking about the best and the worst type of stuff.
Flipboard accesses information from a huge number of sources, so eventually I end up with all the best and worst lists in the U.S. by January. Then I pool them together, and as you can imagine, the providers are people that you know – Atom Data, Axiometrics, Costar, Yardi Matrix on the multifamily side; on the single-family side Realtor.com, Trulia, Zillow, and half a dozen other providers like that. Apartments.com, ApartmentList.com…
So I take that data and I spend the month of January massaging it. I then verify it against my paid accounts – Costar and others – and then in February I put it together into various presentations, [unintelligible [00:16:42].05] and I present to my database. Then the rest of the year I execute on the basis of those presentations.
The presentations are stored on multifamilyu.com, my website. You can check that out. It has all the presentations and data. All the data is just given away for free, so people don’t really have to invest with me, and they don’t even have to do multifamily. The data actually applies for single-family and multifamily, so they’re welcome to take it and use it, and then basically the rest of the year is really all about execution. I don’t try to second-guess how a market is doing in the middle of a year, because as you know, the process of creating a team is very time-consuming.
Joe Fairless: Based on your experience, what is your best real estate investing advice ever?
Neal Bawa: Alright, I’m gonna say that that advice changes each year, so can I modify the question to say “My best real estate investing advice–”
Joe Fairless: This year? Absolutely.
Neal Bawa: Okay. In 2018, be cautious. I think that the market has risen so long, so fast and so consistently across the United States that people have simply forgotten that real estate is not magical. I think that we forget that the rules of real estate have not changed. It means that what goes up must come down. I do not see that enough in the behavior of syndicators, I do not see that enough in the behavior of individual single-family investors. So if I can give you one piece of advice to anybody listening, I would say “Be cautious.” This is a time to be cautious, because there’s irrational exuberance everywhere, not just in real estate or in stocks, but everywhere in the economy people are now making bets that simply defy logic.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Neal Bawa: Sure.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Neal, what’s the best ever book you’ve read?
Neal Bawa: The 4-Hour Workweek by Timothy Ferriss.
Joe Fairless: Best ever deal you’ve done?
Neal Bawa: A brand new construction building in Provo, Utah. Just completed and now leasing up. I think the investor will receive 100% of their capital back, therefore making it an unlimited return [unintelligible [00:19:26].23]
Joe Fairless: What’s a mistake you’ve made on a transaction?
Neal Bawa: Ignored red flags and bought a property that I shouldn’t have bought, simply because I was too emotionally and financially vested in it.
Joe Fairless: Best ever way you like to give back?
Neal Bawa: By education. I feel that the best way to empower people to make better decisions is to educate them.
Joe Fairless: And how can the Best Ever listeners get in touch with you?
Neal Bawa: Multifamilyu.com. I don’t believe in hiding. My information is on that website – my phone number is there, my e-mail is there… But what I suggest that you do is simply go through the content that’s on that website. You’ll find that I’m a geek, I’ve got [unintelligible [00:20:04].21] The content is extremely data-driven; if you like that thought process (it’s very unsexy, by the way), then I would love to talk with you, because we are of like mind.
Joe Fairless: Well, Neal, if you appreciate that thought process in other people, that’s another thing… Because certainly, even if we don’t have that thought process, we can appreciate the mind and how it works that way… So thank you for being on the show, Neal, talking about your technology background, how you’re implementing that into real estate investing, and in particular having a VA system that we talked about. You’ve got seven full-time employees, about $100,000/year that you are investing in that approach, and they’re generating significantly more in value as a result of even one of the examples with Craigslist.
Then also the approach that you’re taking with your business now, and being cautious, but yet still looking for deals and being very methodical. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Neal Bawa: Thank you, Joe.