How to Analyze Data to Invest in the Best Markets with Neal Bawa

What you’re doing is you’re investing in future cap growth by looking at superior demographics. It’s a bet. But if you go to let’s say Detroit, Michigan and buy something that’s 14 cap, you’re making an even bigger bet. That is that Detroit will stop losing population and some day turnaround. People have been investing in Detroit for the last four decades with that premise. Not one year out of the last 40 has Detroit not lost population. And those cap rates which started around 6% in the year 1960 are now in certain pockets of Detroit up to 15 cap, which means that the prices are way lower than they were a long time ago. So everyone makes a bet. The data analytics guys, they make a bet too. But the bet that we make has a much better chance of coming true than the bet that people in Detroit, Michigan are making.

Hey everyone, and welcome to another episode of the Everything Real Estate Investing Show with Sean Pan. Today, we have Neal Bawa. Neal is a multi-family syndicator, meetup group leader, and the creator of the multifamily education company, Multifamily You. Today Neal will go over the key metrics to look for when deciding on a market to invest in and will give us excellent tips on how we can become better asset managers. If you enjoyed this episode subscribe to the show and leave a review. We release episodes every Wednesday and Sunday and we release the show notes with a full transcription on our site EverythingREI.com. Enjoy!

Sean: [00:01:50] So Neal, thanks so much for being on our show today. I’m really really excited to have you on. Go ahead and introduce yourself and let everyone know who you are and how you got into real estate.

Neal: [00:01:58] Sounds good. I’m a recovering technologist. So somebody that was in tech, had a successful tech career, successful tech exit. Got into real estate in reverse. Basically, my boss asked me to build a 27,000 square foot campus from scratch with his help. And and that sort of started the ball rolling. Built one campus; 27,000 square feet nine and a half months. Insane amount of work, no sleep for basically a year, but incredible learning. Loved every moment of it. And then two years later ran out of space and had to do the whole thing over again. But this time 33,000 square feet, 7 million dollar campus, and had to involve a bunch of other people because we didn’t have enough equity. Had to involve a bunch of other people and sell shares; something that we realized many years later is known as a syndication. So I didn’t actually realize that we’ve done a syndication in 2006, but that’s really effectively what we did. And then went on to do single family. I’ve 10 single families in California. I have 10 triplexes in Chicago and a very disastrous experience that we can talk about. And then started passively investing in syndications, invested in 13 multifamily syndications. And eventually in right around the 2013-14 marked moved full-time into real estate after selling my technology company. And been growing my database and connections ever since. Current portfolio’s somewhere around a 150 million dollars. Have about 1200 investors investing with me and about 2,000 units of multifamily and student housing in nine states.

Sean: [00:03:43] That’s amazing. And so crazy to see your tremendous growth. Five years to have 2,000 units, 1,200 investors, hundred fifty million dollars in assets under management.

Neal: [00:03:54] Well, I think that it’s been a little bit of a hockey puck curve. So a lot of them have come in the last two years and I think part of that is because in real estate it definitely takes a lot of time to get going. It’s initially you feel like you’re stuck in molasses right? Just every move is hard and then as you move forward it tends to get easier and easier. So at least that’s been my experience.

Sean: [00:04:20] What has been the reason why you suddenly got all this growth in the past two years?

Neal: [00:04:24] I think it is related to the pain that I inflicted on myself in Chicago. So, you know when I bought those 10 homes in California in 2009 things went wonderfully. I still own those ten homes, they cash flow like crazy. My wife won’t let me sell them. I should sell them but they have so much equity trapped in them, but she loves them. So I got cocky. I got completely overconfident and I went to Chicago and paid cash to buy 10 duplexes, triplexes, you know, mix of duplexes and triplexes. Firstly I shouldn’t have paid cash because a lot of lenders would have stopped me from from buying them and and secondly, Shouldn’t have bought so many at one time. I should have basically just waited and understood the conditions. I didn’t do that. I made a huge mistake and trapped more than a million dollars my equity in there five years. And when I realized what had happened I had invested in one of the worst markets in America. One of the worst sub markets in America with high crime, low income, low income growth, zero population growth, actually negative population growth and no home price growth and no rent growth, right? So this is a market that just you couldn’t have asked for a worse market if you researched it. And when I realize all of these things I realized how many investors like me, technologists, were basically just focused on “How much rent do the tenants paying and what is the property look like that?” Those are the two things that everybody cares about. What they don’t realize is that their destiny is actually being driven by external demographic factors and these five demographic factors really drive your success or failure in real estate and nobody tracks them. So those factors are population growth, job growth, income growth, home price growth, and crime reduction. Once I realized that these factors were what had caused me to go so wrong in Chicago, I started writing courses about them. I started writing courses, I started presenting at meetup groups. And remember, I’m not a real estate guy at this point. So I’m just doing what I’m doing and kind of throwing out what I’m learning. And it started to get popular. People started to really react to it. And then I said, “Okay, why don’t I develop this into a formal course? I want to make this a high-quality course. So I then basically made a very structured, proper course with labs at Udemy.com. And that course is at Udemy.com/realfocus. And I believe that this year 10,000 investors will take that course. And if you go to Udemy.com/realfocus, you’ll notice that it is the highest ranked real estate course in all of Udemy.com; there’s hundreds of courses. That’s because people love it, people enjoy the fact that there’s no pitch. I’m not trying to sell them anything. There’s no offer at the end that says, “but today for the next hour if you buy for 99 bucks”, nothing like that. It’s just here’s what I learned, have at it. And here’s the spreadsheets and methods that I follow to figure out what are the best cities and what are the best neighborhoods in the US to invest in. So people love that. If you go there now, there’s probably twelve hundred people enrolled right now there who are taking the course. And so giving that away with no incentive, no hook, there’s nothing in this course that says, “well this one last best piece, if you want it you have to do this or buy that”. Nothing like that. We just gave it away. And I think that act of selflessness really resonated with people. People started inviting me to podcast like like you did. And I do about 50 podcasts a year. This is my second podcast this week talking about the use of analytics and data. I’m an amateur data scientist. So when I talk about that, people like it because it’s different from the typical real estate guys, right? So a lot, there’s a lot of real estate guys. I’m not saying that their stuff doesn’t work. I’m sure it works fabulously, but for me, there’s a differentiation in that I am a geek. I’m not afraid of it. In fact, I think that that’s my secret sauce. Being a geek and talking in those geek words, and if you don’t get it, that’s fine. And there’s a certain percentage of people that gravitate towards that. And what’s lucky for me is that the largest single percentage of those people happen to be in the San Francisco Bay area where I live right? This is like geek heaven. And so people just gravitate towards me. It’s very difficult to get anywhere close to even a hundred investors and I’m proud to have more than a thousand.

Sean: [00:08:57] Wow, that’s an amazing story. And actually that’s the reason why I wanted to have you on the show because I saw you speak at Brenda’s meetup up in San Francisco last month. And your presentation was mostly about the market and all the data behind it. And asked you I said, “hey, there is a lot of data out there. How do you like look at it? How do you interpret it?” I feel like people can be shown the same data and they can interpret it many different ways. So you mentioned it briefly earlier. Can you go over it again one more time and just say what are your absolute key metrics that you look at and how do you interpret that?

Neal: [00:09:34] Sure. So I’m going to answer your questions about interpretation last. Let’s go over the key metrics first because that will make my answer easier. So the 5 key metrics, I call them real focuses, right? There are five metrics. The first one is population growth. Okay, never invest in a city where population is not growing no matter how much the cash flow is. Why? Because you’re going to make money now and you’re going to lose it when you sell. So let’s say you buy something for $100,000 and you hold it for ten years. Inflation is roughly two and a half percent actual right? Not what the Federal Reserve reports but what we really experience; the one that includes food and gas and all the important stuff. So what that means is that if I bought something for $100,000, that two and a half percent compounded inflation means that after 10 years I should exit for a hundred and thirty-five thousand dollars just to be in the same place. Because that $135,000 10 years from now is the same as $100,000 today. Does that make sense? So if you exit for a hundred and twenty thousand or exit at 130,000, you have lost money. Does that make sense? Now, once you understand this you have to realize that places where population doesn’t grow you are not going to get that that $35,000 in 10-year. You’re going to get maybe 15 or 10 or 20, right? And so now you’re losing money when you leave even though you’re making it in cash flow. Therefore never ever invest in a city or a market that is losing population. Now it’s not just important to understand that you should invest in a place that’s gaining population.It’s important to understand how much. When I started learning about this I started applying a certain number of hypotheses of population growth. How much population growth really drives the rent growth and really drives home price growth. Is it half a percent a year? Is it one percent, is it 2%? Is it even 3%? What is that magic number? Right? And here’s the number that I found and that’s the number that all of those 10,000 students will use this year. The number is between the year 2000 and now, or maybe a couple years before this because numbers are not really available for 2019 and 18, but they’re available for 2017. Between those two time frames you want the city that you’re investing in to grow by 20%. Okay, so it’s roughly 16-17 years you wanted to grow by 20%. Another way of saying it is the city that you’re investing in should roughly grow by one and a quarter percent in population each year. Because if it grows by that number what will inevitably happen is that that population growth is going to drive income growth. And that is my second real focus. Second real focus is the median household income of the city, of the people, in the city that you’re investing in should, over that same time frame roughly the 16-17 years, should grow by 30%. Now, let me go back for a second and tell you where do you find the population growth numbers; very very simple. Go to Google, type in population, space, the city that you’re investing in. So let’s say it’s Orlando, type in population space Orlando space Florida into Google and it will give you a very nice chart. One chart shows you the population today or the the newest population they measured; the other one shows you the population in 2000. Just use the mouse and go over 2000. Look at the two numbers, the difference between the two, that should be 20 percent or higher right?Now, let’s go back to the second real focus which was increase in income, right? So what I found was if population is increasing by about 20 percent over that time frame, incomes increase by 30%. because that what’s happening is incomes, our income is increasing because of two reasons: one inflation, right? So the inflation causes income to increase. But that population growth creates pressure on employers. The population growth puts pressure on employers to give you raises, right? And because of that pressure, their incomes go up faster than 20%, they go up 30%. Now, where do you find this data? Well you find it on a website called city-data.com. So city-data.com. So go to city-data.com and simply plug in your city. Once again, if it’s Orlando, Florida, city-data.com homepage, Orlando Florida, enter. And right there you have to scroll down just a little bit and you’ll see median household income. You’ll see a statistic and you’ll notice it gives you two numbers. It’s going to give you the most recent number it has which is a few years old, but that’s okay. It’ll give you two numbers, the most recent number and It’ll give you the number for the year 2000. Make sure that the difference between those two numbers is either thirty percent or higher. When you do that, you’re in the right city. And that leads me to real focus number three. Real focus number three says if population growth is right around 20%, maybe a little more, maybe a little less, and median household income is 30%, maybe a little more, maybe little less, well home prices will go up by 40%. 20 leads to 30 and 30 leads to 40. And so look at cities where on city-data the two numbers the 2000 number and the most recent number, are roughly 40% apart, right? Where’s that number? Well the same page that just showed you the median household income, right below that like two lines below that you’ll see median house or condo value. Look at the two numbers, make sure that the gap between them is at least 40 percent. This is telling you that you’re in the right cities to invest in. And remember you don’t just have to do this with cities. You can do it with zip codes. If you think that there’s a great city, instead of plugging in the city name you can plug in the zip code inside of that city and will still give you the same data. So it’s very very powerful and you’re doubling or tripling or quadrupling your return by doing just these simple things. So that’s real focus one, two, and three. 20% 30% 40%. Now the fourth real focus is crime or reduction in crime. You’re trying to reduce crime or well you’re trying to make sure that crime is reducing in the city that you’re investing in. Where’s the data? Same page in city-data.com. You already plug it in right? So now scroll down for awhile scroll scroll scroll scroll and you’ll come to a blue color table and that table is the crime table. It’ll show you murders and rapes and robberies and all kinds of burglaries all of that stuff. Ignore it all. But the bottom line which is dark or light blue in color, the bottom line shows you one aggregate crime number for the city that you’re looking at. The number on the far right, make sure it’s lower than 500. The number on the far left. Make sure it’s a lot higher. What does that mean? The number on the far right is the newest. If it’s lower than 500, the city’s crime is within a decent limit. The number on the left, let’s say it’s far higher. Let’s say it’s 800. What does that tell you? The city’s crime used to be 800,now it’s 500. So it’s reducing, it’s going down. That’s what you want to see because once there’s a decline in crime, there tends to be an increase in education at the same time. An increase in incomes at the same time. And so that tends to continue on for decades at a time. So when you’re going to exit 10 years from now, if today it’s 500 well it might be 400 in the future. And if it’s 400 10 years from now, your home is going to be worth a lot more money because home prices go up as crime goes down. So that fourth statistic is so powerful and so key. Also remember cities that have lower crime have lower delinquencies. They have lower evictions. They have lower everything that you do not want to see as a landlord that is buying a single family or duplex or triplex or even a hundred unit in those particular cities. So those are my four metrics. The fifth metric is simply jobs. Jobs are such a powerful powerful driver of your profits. Both your rent profit and the final selling price is determined by jobs. Now city-data doesn’t give you job data. So I’m going to give you the exact URL that you’re going to use. I’m going to plug it in to chat so you can give it to all of your viewers and I’m also going to say it while I’m typing it in so www.deptofnumbers.com. That’s deptofnumbers.com / employment / metros. What this page shows you is every metro in the United States and its job growth. It has lots and lots of data. You can ignore all of it and simply look at the one column that says one year job percent change. One year job percent change and you want to sort this right? And what you’ll notice is that when you sort it, you will find the cities that are losing the most jobs. Click on it again, and now you’re going to look at the city that are gaining the most job. What city in America has gained the most jobs in the last 12 months? Well, it’s Reno, Nevada. What was it a month ago? Reno, Nevada. Two months ago, Reno, Nevada. Why? Tesla. Tesla started something in Reno and whatever they started has now started to develop. So now there’s people doing all kinds of industrial and all kinds of other logistics related stuff. Reno’s very close to California, but doesn’t have any of California’s taxation and owner laws. So it’s becoming sort of a California City. That’s tax free right or state tax free. So that’s why Reno is very fast growing. But again and again and again in that list I see the same sort of cities. Here’s five or six that show up every single month: St. George, Utah, Boise City, Idaho. Icy Cape Coral Florida. I see Provo Utah, I see Orlando Florida. I see Phoenix,Arizona. these cities just continuously show up. They continuously have high job growth. Does the San Francisco Bay Area show up. Unfortunately not. It’s been years since I see it because big metros, major metros are slowing. This is the ninth year of the cycle and the big metros, their job flow recovered sooner and now the jobs are basically flowing into secondary metros like Boise, Idaho and Orlando, Florida. So that’s where you’re going to see the growth. So what’s really nice is this particular page shows you not just the jobs but gives you a feel for what’s really going on in the economy. You’ll notice that the state of Florida is represented very often. The state of Idaho, the state of Utah, is represented extremely often. Texas of course is represented. But then you’re going to notice that roughly two-thirds of the state in America don’t show up. They’re either the midwest state or their the manufacturing state, right? It’s sad that these states basically are missing out on all of the job growth in America, but your job as a real estate investor is to be cautious. You’re not a speculator. You don’t go in there saying, “oh they don’t show up in the list anymore. So everything’s cheap.”, because that’s the absolute worst thing that you can do. Go where the jobs are and you’ll get, you know, whenever the jobs get boosted just a little bit more you’re going to see a huge gain in your rents. And that huge rent gain will eventually translate into a huge home price gain.

Sean: [00:21:31] Amazing. Thank you so much for going through everything you just said. I have a couple of follow-up questions I like to go through one at a time with you. So first of all, I’d be going to a meeting for about two or three years now. And you have been saying the same cities over and over again, especially Provo, Utah and Orlando, Florida. Since that time. Have you seen your predictions come true? Has Provo and Orlando been doing pretty well these past two to three years?

Neal: [00:21:53] They’ve been doing astonishingly well. The simplest way to look at it is go to Google and type in “Zillow Home Values” then “Provo Utah” or type in “Zillow home values, Orlando, Florida”. And you’re going to see some amazing numbers. People in the San Francisco Bay Area think that this is the center of the world and values only go up very fast here. No, It’s much more profitable to be in Provo, Utah or Orlando because over there, not only do you get the insane home price growth, just check out the graph that I’m asking you to check out, but you also get rents, right? You also get eight, nine, ten percent rental income. So the aggregate number is absolutely spectacular compared to the San Francisco Bay area. So what’s nice is yes, it has been happening and keep in mind that you yourself been validated that you’ve been hearing me talk about Provo, Utah for two years, correct? Maybe three years even, right? Well today if you go to that job growth link that I just gave you, this is the government’s data, not Neal Bawa’s data, you’ll notice that it’s in the top 2% of the United States. Right? That is independent validation. Orlando in the top 5% in the United States. You can never really be the number one city in the U.S. because that changes every single month, right? You know one employer like Amazon bring in 500 jobs can move a city to the top. But what’s important is that this link that I gave you, it changes every single month because it’s trailing 12 months and you’ll see that Provo and Orlando are always going to be in the top 5% and many months of the year they’re going to be the top 2%. There’s no validation of a city’s growth greater than its job growth.

Sean: [00:23:35] Yeah, I mean like I was going to ask you, I do see those numbers change month-over-month, year-over-year. Those cities I see it in one report it would be the number one, another report it will be number 50 because things have changed. So we’re just looking at the aggregate.

Neal: [00:23:52] We are and what you want to see is, you’re absolutely right, cities bounce up and down in the rankings, which is why when I do my Real Estate Trends webinar each year, I aggregate all of the rankings. What I’m trying to do is to read the patterns, right? So if a city is number 1 in one ranking and number 7 in another, number 5 in another, that’s a really great city. But if a city is number 4 in one ranking and doesn’t appear in any of the other rankings, maybe that’s not such a good city. You want consistency, you want the same city showing up in multiple different rankings, right? Maybe not at number 1 or number 5, but even top 10, even top 20 is a very good ranking for a country that has thousands of cities.

Sean: [00:24:36] Do you only invest in areas where all four of those metrics are great? I mean if it was jobs, but you know, all four metrics are great? Or do you let some slide and let’s say some metrics aren’t as important as the other one?

Neal: [00:24:48] So sometimes I will. And one of the reasons to let it slide is if you have a great team if you have a really powerful team in an area. But what you really shouldn’t do is shortchange yourself by going too far beyond the metrics. Okay to go 10% down on any of the top 4 metrics. On jobs you want to look at simply job growth higher than 2%. That’s the bottom line. Job growth higher than 2%, you’re good to go. Job growth lower than 2%, that’s to a city is just not going to give you the kind of profit that you can get from other cities. So yeah, I do cheat on them, but my long-term goal is to stay as close to those metrics as possible. So that’s your benchmark. I see people investing in places that have had none of those four benchmarks and I think that those are not investors. They are speculators.

Sean: [00:25:35] Is there any non-negotiables where you’re like, “I will not invest in a place past certain crime rate or job growth rate” or something like that?

Neal: [00:25:42] So the typical answer is job growth rate below 1% is an absolute no-no for me and any city or state that has no population growth is a no-no, I absolutely won’t invest.

Sean: [00:25:55] And that’s pop growth since 2000?

Neal: [00:25:58] As population growth since the year 2000, correct. So basically the city has remained stable. One example of a city like that is Cincinnati. So it’s stable. There’s nothing wrong with it. It’s not going up. It’s not going down. I just don’t want to deal with it.

Sean: [00:26:13] Another question I had is that you know, Provo and Orlando are great markers to be in, even Sacramento. When I have personally tried to look at properties there, the cap rates are pretty low because it is a popular area. So how do you go around buying something at a good value while still make a profit?

Neal: [00:26:29] So the answer is you have to have the Bay Area mindset, right? So when you’re looking at stuff in the Bay Area, it’s insanely expensive, so your cap rate might be three or two or even zero. 0 cap rates are are common in the Bay Area. These markets are expensive, there 5, 6, 7 cap markets. You’re never going to find anything higher than seven cap in any of these markets, but the point is this: Sean they’re only seven cap today. If they continue to grow at the rate that they’re growing, your property will end up becoming 9 cap in about three years, right? And then will continue basically to go up from there. What you’re doing is you’re investing in future cap growth by looking at superior demographics. It’s a bet. But if you go to let’s say, Detroit, Michigan and buy something that’s 14 cap. you’re making an even bigger bet that is that Detroit will stop losing population and someday turn around people have been investing in Detroit for the last four decades with that premise. Not one year out of the last 40 has Detroit not lost population and those cap rates which started around six percent in the year 1960 are now in certain pockets of Detroit up to 15 cap, which means that the prices are way lower than they were a long time ago. So everyone makes a bet. The data analytics guys, they make a bet too, but the bet that we make has a much better chance of coming true than the bet that people in Detroit, Michigan are making.

Sean: [00:28:12] I love that answer. A problem I’ve had personally is when I try to purchase a property that is 6 cap, 7 cap, and you try to put the minimum amount down at 25%, your loans at 5% or 5.25%, it doesn’t cash flow and the DSCR doesn’t work out. What is your strategy on acquiring properties so that you can get those loans?

Neal: [00:28:32] Well, I’m going to give you an answer for the typical people that are listening to this particular podcast because to be honest, I am buying 20 million-dollar properties. And this may be the answer for somebody who’s looking to buy a half million dollar property or $100,000 property,it’s probably going to be different. The answer is to look at the BRRR strategy. The best way to increase your property is basically, you know, the buy-rehab-rent-repeat sort of strategy. But do it in the best metros that you can find. Now, you’re solving your cash flow problem because you’re investing in a high-quality metro like, you know Provo and Orlando, there’s so many of them, Atlanta. There’s so many great metros in the U.S that you can invest in but by doing the BRRR strategy you are creating that cash flow. You’ve already picked the best metro. Now you’ve got the best of both worlds. You’ve got the cash flow and you’ve got the the city and neighborhood quality that you desire. So if you don’t know what the BRRR strategy is, simply type BRRR strategy in to Google and you’ll learn what it is. There’s some upfront work that you have to do but it’s worth doing that work and to be honest if you want to invest this late in the real estate cycle, you’ve got to do some heavy lifting. Otherwise once again, you’re back to being a speculator.

Sean: [00:29:50] Yeah, it’s true. And you know about acquiring your data for the cities you like in the first place, there are thousands and thousands of cities in the United States and I’ve been on city-data.com and it’s not quite user-friendly. You have to type in the city and then scroll down and you get one number. I don’t expect to do that thousands of times. I don’t expect any of my listeners to do that too. Is there a way to aggregate all that data into a CSV or export it to excel?

Neal: [00:30:17] Not for free. The short answer is there are two websites that do a very good job of ranking cities. None of them are free. But if you wait for a little while they do these, you know, for example, we recently had a Memorial Day holiday and both of the sites were running extensive discounts just to get people on board. So the two sites are housing alerts, with an s, dot net. housingalerts.net. It’s a site run by Ken Way, a Stanford guy that is very very sharp. And then the other one is called local market monitor dot com. You have to make sure you put the www in front of it. www.localmarketmonitor.com. I’m shocked that it doesn’t work when you don’t plug in the www. But they’re not a technologist. They’re geeks. They’re data geeks. These two sites for a few hundred dollars a year will do everything that city-data does and much more. But obviously now you’re paying for it. A lot of people are hesitant to pay $500 a year for data. I only have one message for you. You’re crazy. This data 30 years ago, one generation ago, people used to charge $50,000 a year for it. The internet has now commoditized that data so it costs one percent of what it used to cost. But home prices are now double. If you use this data and move your gains by 1% which is a ridiculously low number, 1% ,that’s going to happen all the time, you’ve paid for it, right? You more than paid for it. You know what is likely to happen? You’re going to move the needle by 20 or 30% over the lifetime of an investment. Many people have done 200% or 300% by paying for this data. I’m not affiliated with these websites. I don’t make any money when you go in and do this, but it’s crazy not to do it. Because when you don’t you’re a speculator not an investor. And if you’re a speculator, why would you want to speculate in real estate. Las Vegas is way more fun.

Sean: [00:32:29] It definitely is and it’s summertime right?

Neal: [00:32:31] That’s right.

Sean: [00:32:32] Okay, that’s funny because I was actually going to ask if you use virtual assistants to help you pour through and mine that data, but I guess having something like Housing Alerts or localmarketmonitor.com is much simpler.

Neal: [00:32:44] It is. That doesn’t mean that I don’t use my virtual assistants to do this. I continuously use virtual assistants in a wide variety of ways including data mining. But in my mind virtual assistants are so magnificently useful for so many things. I wouldn’t think that this is their most core competency. Somebody like me that is buying, you know, my portfolio is a hundred and fifty million dollars. So for me to pay a thousand dollars for Local Market Monitor or a thousand dollars for Housing Alerts is just you know, you have to do it, right?And we don’t charge our investors for it. That’s just a cost that we have to bear, the cost of doing business and a cost of knowing where to go and what to buy. But for anybody I think it’s worth it. I mean, what is amazing is that we live in this amazing transformational Information Age where people are basically just packing suitcases filled with data gold and saying here’s a suitcase. It’s probably worth $100,000 to you. Can I have 500 for it? And we still have people resisting that 500.

Sean: [00:33:47] It’s great advice. So another thing I want to talk to you about is you have been on so many podcasts before and I wanted to see if we can talk about something unique. Let’s talk about the effective use of property managers.

Neal: [00:33:57] One of the things that I love saying is that there are no bad property managers. There are only bad asset managers, right? When you buy a single-family property and you give it to your property manager, you put yourself into a position and that position is known in our industry as asset manager. You’re buying an asset and you’re managing that asset and part of managing that asset is managing your property manager. You will find that most property managers are okay if you’re a good asset manager. So the discipline really doesn’t apply to them, it applies to you. The problem is too many investors think that it is the property manager’s job to take care of the property. And the truth is it is your job to take care of the property manager so he can take care of the property. And so that piece, that asset management piece is something that you need to understand. And you know, we’ll talk a little bit about you know, managing a 20 million dollar property. But let’s talk about first managing a single family rental that your property manager’s managing, right? What’s the biggest single reason that people don’t want to invest out-of-state? They’re afraid that the property manager won’t manage their property. Right. So each month, even the worst property manager sends you basically a big document and this document has lots of different sections, right? So there’s a rent roll, there’s general ledger, a balance sheet, a P & L statement, you know, those kinds of things. How many of you are really taking time to look through all of that and then match it back up to your pro forma? Because this is not something that the property manager does. You didn’t even share the pro forma that you made, that little Excel spreadsheet that you made of how much money you’re going to make. You never shared it with him. He has no idea right? And to be honest he wasn’t the property manager when you did this anyway, so it’s not his fault if you can’t get those numbers, right? The key is that every month… so obviously 99% of people I know built an Excel spreadsheet before they bought this property, correct? All right, your job as an asset manager, in that same spreadsheet you now need to add a column for each month Jan, Feb, March, April, May, June, July blah blah blah. Actually you want to add 2 columns and one of those columns is the actuals, and the other column is the budgeted. Let’s say that in your pro forma, you budgeted $1000 for electric bills. Okay, a thousand bucks. Doesn’t that mean that it’s 80 bucks a month more or less? Right? So now you have to put $80 in that budget column. And now you have to go back to that statement that your property manager sent you and spend 10 minutes. This is not going to take a long time, it’s quick. Go in there, take that electric bill out, and plug it in. Because the first thing that you have to do is train yourself to be an asset manager. No property manager in the world will ever train you to be a better asset manager because that is going to shoot him in the foot. Right? So you’ve got the first train yourself. So stop thinking about property managers when you’re trying to train property managers. Start thinking about being an asset manager. That’s the best advice I can give you. Go in there plug in those numbers. For the next six months don’t do anything except simply look at the line that says “actual”, and look at the line that says “budget”. Just plug it in. Now after six months when you’ve done this five or six times, you are going to start noticing patterns, right? So some of the lines are going to be fairly close to where you projected. Some of the lines are going to be wildly off. They’re going to be like a 100% off or 200% off. And some of the lines are going to be pretty much the same as what you came up with wild spikes that go back down the next month, right? Now that your next job is to make sure that what you do is after you’ve done this, you write all the questions regarding all of those rows that look odd, and 99% of the time, unfortunately, the expenses are going to be higher and the income is going to be lower. So look at each row and write down a question next to that or type it down in Excel. And then send those questions all in one sheet, numbered, back to the property manager and say, “This is what I noticed in this month’s Property Management Report. Could you please respond to each one of these? And by the way when you’re responding, could you please not write one long response? Go into each one of these and then respond below that.” Okay, because he wants to write you a story. Property managers job is to tell you stories. Your job is to tell them, “Your the story guy, I don’t want to listen to it. I just want you to answer the numbered questions.” If he starts telling a story that a dog bit a tenant, tell him, “Okay, that’s very interesting. But could you please answer the question about this number?” If he starts saying a tree fell on the roof?, “Could you please answer this question?” Your focus is to not let your property manager distract you in any way. Most of the time I prefer to actually have this communication by email because the moment you get on the phone, he’s got a new story, right?Because every property manager knows that it’s very easy to distract Sean with another story right? With sometimes the good story, sometimes the bad story, and Sean just forgets the question that he was going to ask and starts listening to the story. So it’s really easy to do this on email. Start asking for the answers to those questions. When you do that you get a bunch of benefits. Number one. Your property manager knows that this guy is watching everything that I’m doing and is less likely to steal from. Because every other guy that he steals from is not watching so it’s easy for him to steal from them. It’s hard for him to steal from you because you’re going to be demanding all of these numbers, right? Secondly, even if he isn’t stealing from you, you are now the squeaky wheel, right? And the truth is even if you’ve got the most ethical manner property manager in the world, they’re always underpaid. Just so you know, every property manager in America is underpaid. Okay, and I don’t know why. It’s just an industry where they don’t charge you enough money and investors are always complaining about how much property managers charge. The answer is they don’t charge enough, right? They are underpaid people which means that someone has to be shortchanged. Make sure it’s not you, that is the nature of property management. And even if he’s having a really good month always ask those questions. Consistently be a squeaky wheel and you’ll make sure your staff arrives on time. He’s looking at your property all the time. He’s raising the rents all the time. So that’s the second benefit that you get. You know what the third benefit is? You’re going to learn a lot about property management based on his answers. So you’re going to start learning a bunch of new things. You’re going to learn how to question them better based on the answers you gave you three to six months ago. “Oh, you told me this in April. How come in August this is something different?” Right?The last advice I have for you and this one takes a little bit of work is, let’s say the guy says, “you know, it costs us $831 last month because a tree fell on the roof.” Right? “And so, you know, we basically have to fix the roof and and there’s a bill.” Right? And so if you look at your property management statements, you will see a bill. You’ll see a bill from some company for $831. Okay. So here’s what I want you to do. It’s very sneaky, but it’s very important that you do this exactly. That bill, that invoice is going to have a phone number of some roofing company, correct? I want you to call that roofing company and verify that they actually charge $831. Number one, so I’m calling, I’m the customer. This is my home, you did this work. When did you do this work? Did you charge $831? Yes. Is any percentage of this going to my property manager. Can you please tell me truthfully if that’s the case, yes, or no? Right? Sometimes they say yes. In which case you know, your property manager is skimming from you, be careful because that’s not in your contract. Number two, if he says no, fine, at least, you know that the work are done. And now find an excuse to write back to your property manager some sort of question and in that question use the following statement. You know, let’s say it was Consetti Construction that did the work. Write back to your property manager and say, “you know, I had a call with Consetti Construction because I wanted to understand more about this $831 bill and he mentioned so and so. Why is that?” What you’re saying doesn’t matter. The message is I am independently talking with your vendors to check everything. This property manager will never steal anything from you because he knows that you’re watching him. And do this every six months. Whether you find anything or not is irrelevant, but you are now the squeakiest wheel out of the 700 wheels that he’s gotten. And any property manager is now going to do a much better job for you.

Sean: [00:43:17] That’s some amazing advice. Is that what you’re currently doing with your property managers?

Neal: [00:43:21] I think I’m doing a hundred X of that, obviously. The metrics, we have 55 metric dashboard. I think it’s overkill for this podcast. But obviously when you get into it professionally and you have 250 units, you’re looking at capex, you’re looking at every line of expense. You’re looking at taxes. You’re looking to dispute your taxes, fight those in court. There’s a lot that goes into it. But obviously we have more time. We are full time real estate professionals. It’s our job to manage these properties, right? But what I just told you should take no more than one hour a month. And as you as you move forward, it shouldn’t even take more than half an hour a month. If you’re unwilling to spend those six hours you have no right to bitch about your property manager.

Sean: [00:44:07] So the key I guess is that don’t worry about your property manager; worry about yourself. Be a better asset manager and the property manager will take care of itself.

Neal: [00:44:15] Exactly

Sean: [00:44:16] Great advice. I was wondering what are the current challenges that you have in your business? You seem to have a lot of things under control. You seem to know a lot. So yeah, what are your what are your challenges? What are your pain points?

Neal: [00:44:28] My two big pain points are something that I can do nothing about. So the first pain point is that unemployment in the US has fallen to the point that cost of labor is extremely high and even at high cost, labor is not available. That makes all of my projects, whether they’re value-add or new construction, very difficult to pencil out. The second problem is related to the first one. Real estate has become so expensive over the last four to five years that people like me are wondering whether we should be buying something or just selling everything we have, right? That’s a question I ask myself every day. And I don’t really have a good answer. So I’m becoming more and more cautious about buying. I’m also telling my investors “Look you can choose to sit on the sidelines. Obviously you make no money that way and you’re losing to inflation. Or you can work with me. I’m taking less and less risk as I go which means that I’m making less and less money for you, but it’s still you know, 10 times what you’re going to make by putting your money in the bank, or 20 times what you’re going to make by putting your money in the bank.” So far, people seem to understand that and so I’m continuing forwards but I’m just one inch away from wishing for a recession so that we get some balance in this market.

Sean: [00:45:42] I think the same mentality is felt throughout a lot of the people I talked to. Market is very high; scary, scary times. Sometimes you don’t know should we go or not?

Neal: [00:45:53] It’s more challenging for you folks in the San Francisco Bay Area. Obviously other markets are still at, you know, fourth or fifth inning of the ballgame. Whereas the San Francisco Bay Area I think is over time, you know, it’s in the 10th inning of a nine-inning baseball game. So it’s an easier decision to make in other places, but it’s still something that we worry about every day. I wish I had a crystal ball, but my mind’s been malfunctioning for a few years.

Sean: [00:46:19] So do you have any last words of advice you’d like to give to our listeners?

Neal: [00:46:21] Yeah, I think that what we can do is either we can take action or we can educate ourselves and both of these are good things. If you’d like to educate yourselves on numbers driven strategies, numbers driven strategies in an entertaining format, check out multifamilyu.com, multifamilyu.com. We have incredible tools. We have lists of cities that you should be investing in and list of cities that you should be staying away from. We have PDFs, we have articles, we have case studies that everyone that is looking to become an investor, and not be a speculator, can benefit from. And we have 50 very entertaining webinars every year that 20,000 people sign up for. So check it out, multifamilyu.com. Nobody’s going to try and sell you anything. It is an education portal that we are developing into a Google-like portal for multifamily.

Sean: [00:47:13] I actually took the live version of this two years ago when we had it in Santa Clara. It was so much information for one day. It was it was amazing.

Neal: [00:47:22] Okay, good, now I teach it as a three day. Hopefully with three times the information, but you know, that’s really not what I’m pitching. You know, to me the webinars that are on the website that are free are incredible. And that’s what everyone should be going there for because the knowledge there is stunning.

Sean: [00:47:40] Yeah amazing. So how can people get in contact with you?

Neal: [00:47:43] You know, I’m very accessible. So remember multifamilyu.com. Multifamily followed by the letter u .com. My email is Neal@multifamilyu.com. I connect with people on Facebook all the time. I also connect with people on LinkedIn. It’s kind of easier to connect through Linkedin because Linkedin has a limit of 30 thousand friends. Whereas I’ve already hit my Facebook 5,000 limit, so it’s kind of hard to connect to more people. But if you kind of want to connect with me on Linkedin, I’d be happy to do that. And then you can chat with me over the Linkedin messaging system.

Sean: [00:48:15] Great! Well Neal thank you so much for sharing your information. And thanks so much for your time.

Neal: [00:48:20] Awesome. Thanks for having me on the show.

Sean: [00:48:22] Take care.

Here are some of the key takeaways I got from speaking to Neal. There are some key metrics such as population growth and job growth that will ultimately determine how valuable your properties will be in the future. Get good at looking at and analyzing data. Sometimes you have to make a trade-off between buying a cheap property with a high cap rate in a bad area versus buying a property with a lower cap rate in a better area. And in the day you’re making a bet, what bet do you want to make? Another thing I got was that it’s not about finding a great property manager. It’s about being a great asset manager. Be responsible for your assets and they will perform well. You can find the show notes and the full transcription on our site everythingrei.com. Hope you all learned a lot. Thanks and have a great day.