Neal Bawa is an expert in the multifamily industry and he sees “Build To Rent” as the hottest part of real estate right now. He believes that population demographic shifts are not only important, but they're all that matters when selecting markets to invest in. Neal also believes that blockchain and smart contracts will bring Syndication 2.0, which will make it easier than ever for people to invest in real estate. Listen and learn!

Table of Contents:

• Where To Listen To The Podcast
• Build to Rent
• The Bitcoin Factor of Build to Rent
• Fair Market Value
• The Largest Asset Class
• Build to Rent Projects
• The Build to Rent Units That Are Going Obsolete
• Build to Rent Is Astonishing
• How to Reach Neal Bawa

Build to Rent

Darin: Neal Bawa has been involved in over 30 projects and 3,300 units valued at over $900 million, of which $400 million is under development. Neal is known for being a guy who invests in markets based on the data, specifically demographic data. Neal shares his views on which markets to invest in, build to rent, as well as how blockchain technology and smart contracts will effectively create syndication 2.0.

This is the first time that we're actually going to be talking to each other, but Neal is all over social media. Anybody that is in multifamily knows about Neal. I'm very excited about this conversation and get to know and pick his brain a little bit. To start with, how many properties and how many units are you currently invested in?

Neal: 30 projects, 3,300 units, about $900 million of which 400 million are in construction.

Darin: So you have a nickname, The Mad Scientist. How did you get that nickname?

Neal: I teach a lot of data analytics courses about figuring out the best cities in the United States to invest in. These courses are a bit geeky. I try to make them as fun as I can, but they're still geeky. And so I was teaching at a conference in Denver, it's called The Best Ever Conference. There were 500 people listening. After I finish my presentation, I come off the stage, and as usual presenters have a bunch of people around them.

Darin: Waiting for you as you come down.

Neal: I get surrounded by people. One of them says, "This was an amazing presentation. I felt like you were The Mad Scientist of Multifamily explaining everything to me."

The Mad Scientist of Multifamily

Neal: I’m like, "Oh, thank you." There was a person just like you, who was standing next to the other person who didn't say anything. As it happened, three days later, I was on his podcast. He said, "Three days ago I met so and so, and he said he was The Mad Scientist of Multifamily. So he used that term and then two months later, I went to a podcast. Someone else's referring to this guy.

Eventually, they started calling me The Mad Scientist. I'm like, "I think I agree with this." I try to take crazy concepts that have nothing to do with real estate, like demographics and then apply them to real estate. Basically, I measure to see if they work or not. The Mad Scientist moniker made sense, so I adopted it.

Darin: You're a big data guy from what I hear. You love to crunch numbers and then use other data to apply to real estate and multifamily, and I think that's fantastic. There’s one thing I'm very interested to hear. When you think of the stock market versus real estate and talk about having people diversify and get into real estate, there's a lot of people that are fearful of doing that.

One of the big disadvantages is that you lose liquidity. You invest in one of these syndications and it's 3, 4, 5, 6 years, you could be invested in that deal. There's talk about using tokens, using crypto to do tokenization where the passives would have the ability to have some liquidity. So I don't know how that works. I know that you've talked about it a little bit, so I wanted to get your take.

Tokenization

Neal: Tokenization is syndication 2.0. We‘re moving from Web 2.0 to Web 3, so you hear that term Web 3 a lot these days. Web 3 is essentially a version of the internet that is built on something known as the blockchain. The blockchain was invented in 2009, when Bitcoin was invented. Bitcoin is a cryptocurrency that runs on a platform called the blockchain. While people have made lots of money on Bitcoin, it's clear that lots of investors are uncomfortable with the nature of crypto. The fact that it's not really backed by anything, the fact that all governments hate it.

But something bigger that came out of the whole crypto Bitcoin revolution was this concept of having a platform on the internet that would be distributed. Meaning it's not on this Google web server or that Amazon web server, it's actually distributed across millions of computers on the Web. Those computers get some benefit for allowing that distribution to continue.

It's basically a transaction register, a glorified transaction register. By registering those transactions, and simply no one having access to change existing entries in the register, people found a new way of doing things. Now this concept of blockchain has become vastly superior and bigger to the concept of cryptocurrency. In fact, today, almost 90% of the reason why cryptocurrencies have such high prices is because of blockchain.

People are not really thinking about cryptocurrencies. They're thinking about which cryptocurrency can support blockchains and smart contracts. Smart contracts are a way to take any physical object. It could be real estate, stock, it could be anything. Well, stocks are digital anyway, but take a physical object and sell it, or fractionalize it on the blockchain using a lot of clauses in the smart contract.

How Build to Rent and Tokenization Works

Neal: For example, one of the clauses that people in multifamily are thinking, okay, so I buy this $10 million multifamily. I decided to basically fractionalize 5% of my equity raise. So I was going to raise $3 million, I'm raising $2.9 million and I have $100,000 and I sell these tokens on the web. Then I don't know who the hell these people are because that's how tokenization works.

If I sell the building, what happens then? The answer is, Darin, when you create the token, you're going to have a smart contract attached to it. That smart contract says that even though this is a securitized token offering, or STO, another fancy name, you have the right to sell the building. When you do, all you basically have to do is give people their portion, the profits, their portion of the returns. That's it. You're not obligated to do anything else.

By the way, this is not like Bitcoin. You've heard with lots of people who had Bitcoin, their wallets got stolen, their hacking is happening all the time. That's not how STOs work.

Darin: There's still a lot of the fear related to that.

Neal: Here, the issuer has control over the token. In case there's a wallet that's for an investor that's hacked. You can just basically go in and replace their tokens with new ones and invalidate the ones on the web. People might be like, so far, this sounds like syndication. The answer is, it's syndication version 2.0 for a lot of different reasons. Number one, no syndicator in the US can make a credible claim that their syndications are liquid.

Cryptonaires of Build to Rent

Neal: A few people have made some few interesting measures, but as a whole one would say that if 100,000 syndication shares are sold, 100,000 syndication shares are illiquid. But tokenization is powerful because of the fact that it's on the blockchain. Because of the fact that there is $2 trillion worth of cryptocurrency, essentially on the same blockchain. Now there's all these cryptonaires there. Cryptonaires stand for people who became millionaires using cryptos.

All these cryptonaires, most of them are very young people. The average age of a cryptonaires is like 25, 26, something like that. All these people are cryptonaires. They're all over the world because of the nature of Bitcoin mining and Ethereum mining. Most of their governments absolutely hate what they're doing. They're constantly threatening to shut down Bitcoin and shut down Ethereum and prevent mining, and all these kinds of things. You hear more and more about this stuff.

Governments are getting threatened by digital currency, which I don't think is a fad, by the way. I think digital currency is here to stay. The governments will simply have to adapt to it, but they're going to try their damnedest best to kill these things before they adapt to them. What's happening is all these cryptonaires, what's the one thing that they want? They want something tangible because they don't know if their millions of dollars in Bitcoin can vanish overnight.

Exchanges get hacked almost on a daily basis. I would say there's at least one, big, major multimillion dollar hack somewhere. So these people are scared. They want tangible access to something. What's more tangible than multifamily real estate in the number one market in the world, the United States.

The Bitcoin Factor of Build to Rent

Neal: I could sell my syndication shares outside the United States, I could do that before. The answer is, yes, but how many of us do it? It’s a huge hassle. Where are you going to find the investors? How do you figure out if they have the money? You have to deal with all of the SEC regulations. Nobody really on a practical basis does it.

I've heard of this one syndicator who had this one guy from Kuwait invest $4 million. Then it got stuck for six months and all bad stuff happened. But on a practical basis, if there's a 100,000 syndication shares in American multifamily, I'd say 99.9% of those are people that live here.

We haven't actually ever been able to explore markets outside the United States. It wouldn't work for tokenization either, except for the Bitcoin factor. There are exchanges throughout the world with millions of daily eyeballs of people buying angry monkey pictures or NFTs for $175,000 each. Why? Because they have a very filthy amount of money.

The newly rich don't know how to spend their money. But what if we could give them something that actually has tangible value in cash flow? That's what tokenization does. It basically extends a pretty stable US market of syndication to the worldwide market. Eventually, and here's the key part that most people don't know. Do you know that it's legal for you to issue a syndication share, and then tokenize it subsequently? Then one year later, that share, that token that you've created, this digital version of your syndication can be sold to a non-accredited investor in the US.

True Liquidity in Build to Rent

Neal: You can sell it all day long. A year after the original syndication was created, the SEC allows you to basically sell it to non-accredited investors, one year later. That's true liquidity. This is not a new rule, by the way, you could do it with syndications from before. But why do people not do it? The answer is simple: liquidity has to have eyeballs. A syndicator doesn't make money by simply giving liquidity to their investors. They're not spending hundreds or thousands of dollars, or millions of dollars on these exchanges to list their assets.

But here's the beautiful thing. Now, those exchanges exist and they were not created for syndication shares. They were created to trade crypto. All of a sudden there's hundreds of millions of people with crypto wallets, with huge amounts of money in them. There were 1,000 people that registered for a single family home that was sold in Florida a few weeks ago. $634,000 I think was the selling price. A thousand people registered. Each one of those people had to show that they had $634,000 worth of crypto in their wallet before they were allowed to register.

All of those people had three-quarters of a million dollars. On a practical basis, this is nothing new. You're not doing anything new, you're simply taking a concept that already existed. That really didn't have any scalability whatsoever in addressing a non-US market and addressing a non-accredited market. Now you're addressing it because of some other phenomenon called cryptocurrency. That's the power of tokenization right there.

Today’s Build to Rent Syndication

Darin:  Let me ask a few follow-up questions related to that. In today's syndication, say somebody was going to change the entity that they had the ownership in. They would do an assignment of a legal document. With the blockchain you wouldn't have to do that anymore. Is that correct?

Neal: The beautiful thing about the blockchain is this, the blockchain makes mistakes very difficult. The blockchain makes fraud very difficult. It's already documented that when a bricks and mortar real estate business moves to the blockchain, fraud falls by more than 95%. Because if the two lawyers are talking with each other, they can bring a technologist into the room, pull the register from the web and one can immediately see who owns the asset. No one can change that register, not even a government.

Fraud falls precipitously because we are seeing fraud. I come from India, where people basically are suing somebody. They go on a vacation, they come back, their home is in somebody else's name. Somebody has created a fake claim deed, filed it with the registrar and now says, "Well, I own this house." Then you fight them in court for 20 years. That happens all the time.

How do you manage to do that with the blockchain? It's almost impossible to fake these things. I'm not saying it is impossible. It's practically impossible. Fraud goes down when you take those assets there. A lot of transactions can be real-time. You can sell your shares in real-time. You can buy your shares in real-time.

The Tipping Point

Neal: Once again, I want to keep saying this. Every time I talk about this, people are like, yes, but I could create a platform. On that platform, I could do this. This technology already exists. It's nothing new. You're absolutely right. It's existed for 10 years. In fact, syndication technology has existed a lot longer than that, but it's the tipping point.

It's the hundreds of millions of wallets with money in them, that's the value here, not the technology. That's what we are looking at. Once you get to the point where Darin's syndication investors, and by the way, every syndication investor can choose. Isn't that cool? You can have 100 investors in a project and 70 of them can choose to tokenize, and 30 of them can choose to not.

The fact is that all 100 of them are unlikely to transact for a year. There are some very strict rules where you don't want to transact these tokens in the first year. You literally can only transact with the other investors in the same project or some accredited investor. There's this one year gap that the SEC has built into it. Beyond which you can plug it on an online exchange and say, this token was $1,000. I bought it a year ago, now the property's doing well, here's more information it's worth $150.

You might say, well, it's worth $1500. So it was worth $1,000, it's worth $1500. And you might say, why would people buy into this? Well, these are the same people that are buying into cryptocurrencies and NFTs, which are grumpy monkey pictures.

Darin: Grumpy monkey pictures. That's hilarious.

Neal: I mean, the whole NFT.

Will Build to Rent Be Tokenized

Darin: How long do you think it's going to take to move from syndication 1.0 to 2.0?

Neal: I'm predicting that in 10 years, 99% of all syndications will be tokenized. It’s simply because the syndicators don't have much of a choice here. This is just going to become the thing. Anyone who thinks, well, this is not going to happen.

Darin: Investors are going to demand it.

Neal: They're going to demand it. Think about it 10 years ago, the number of mid-market syndicators that had investor portals like Juniper Square, or Investor Deal Room. This is about less than 1%. There was only one company in that space 10 years ago. Today, if you have a $500 million portfolio, the chances that you don't pay for that are extraordinarily low. But in the end, all that portal gives you is just an investor can see their K-1s. They can see their shares, and they can see their distributions in one place, highly convenient.

Darin: It makes the signing of the docs easier.

Neal: There's a lot of convenience and safety assurance pieces to this, but still 100% of syndicators today that are at a certain level do it. But this is at a different level because it gives liquidity and true liquidity and unreasonable profits to investors. The investor gets to make that decision. It's going to get crammed down our throats, whether we like it or not.

Darin: So, valuation. In a syndication, you've got distributions that may be monthly or quarterly, or, every six months, whatever it is per the project.

Fair Market Value

Darin: Then at the end of the year, the syndicator has to provide fair market value only to the investors that invested in a self-directed IRA, to the custodian. That fair market value number is once a year. It's only really sent to the ones that have that self-directed. Now, if you have that liquidity, who is creating that fair market value on a daily basis?

Neal: No one's creating it on a daily basis. Firstly, since we all calculate it once in a year anyway. We're probably going to calculate it twice a year and everyone's going to have a page on a portal. For example, I don't own eBay, but I can sell stuff on eBay. I don't own Amazon, but I can sell stuff on Amazon.

Part of the job of a syndicator, let's say, Darin’s a syndicator he has six projects. Part of his job will become that. There's a web page on that Amazon-like website where he displays information about his projects, provides updates. Those updates basically could be four times a year. Some syndicators will do it twice a year, some will still do it once a year.

The syndicators that provide more detail and provide more upside, visible upside to their projects, their tokens are probably going to be worth more. But very few tokens are going to be less than face value because real estate, unlike Bitcoin, is tangible. It's unlikely that if the property is doing even okay, that the existing investors will not buy it if it falls below $1, because the existing investors know a ton about the property. Remember, before this stuff is all listed a year has already passed.

The Downside of Build to Rent

Neal: The downside isn't much of tokenization because, if tokens fall to 80 cents, somebody's going to pick him up. It's like, oh, they're on sale. Why would anybody sell them at a buck? Just stay with your syndication. If the project's not doing well, you're illiquid. But if the project's doing well, now you are liquid.

There's a speculative element. In any asset, we've seen speculative elements, these kindred spirits where people basically just make mistakes. We look at GameStop. The company, in my opinion, is a very s*** company, doing poorly, which stock went up, 6X, 8X, 10X, just because of speculation.

Whenever speculation enters into a space, there tends to be an upward momentum in general. Though obviously, there'll be periods of downward momentum as well. It's generally an upward momentum. What we found is any asset that becomes liquid is now worth more simply because it is liquid, no other reason. That effect will happen to real estate over the next few years.

There are many other things, very complex, where you can get, for example, if Darin has $100,000 dollars syndication in a share in Neal Bawa's project, it's illiquid. But did you know that if you had $100,000 worth of tokens, you could actually stake those tokens on the web and get $100,000 back? 100% leverage on an illiquid asset.

Darin: You can still own your share in this syndication, but then you can take leverage on that.

Neal: Stake it. You can lever it to 100%.

Darin: I know we're going to go through the phase-out period, but bonus appreciation.

What the Law Says About Build to Rent Syndication

Darin: If you ended up levering it up and then invested in another syndication with those funds, would you get the depreciation on that as well?

Neal: There's no easy way to answer that question. You have to understand the specific timeframe of when the sale was made, when the tokens were actually sold. The truth is that the token holders should be entitled to every benefit in the project. That's really what the law says. Now, as to whether that law gets implemented, I don't know. This stuff is going to be non-compliant for a while.

When syndication started, it was non-compliant for years. People are doing all kinds of 506(b) stuff that we know is bad, and eventually the SEC came down on it. They issued guidance, see the SEC plays a good role. Everybody loves to hate the SEC, I love to hate the SEC. But eventually the SEC will beat up the first guy and put them out of business, beat up the second guy. But by the third guy, they issue guidance. Then more people start following that guidance, and that's how progress works. Everything, every business in the US is out of compliance until they're in compliance. I don't think that this is going to be any different.

Darin: I think that that concept is huge for real estate. The difference between the stock market and real estate, that liquidity piece could be changed. I also like that you said that investors can choose whether they want to have it be tokenized or not.

Neal: Or tokenize it later. So all of those options are available to them.

Investors Who Are Driving up the Build to Rent Costs

Neal: You could have some investors playing with those tokens and driving up the costs. The syndicator could send an email to the investors saying, "Do you know today that the dollar token is at a dollar 51 on tZERO,? So syndicators will keep track of this. It's a little bit of extra work for us, but it also is something that we'll feel good about if the tokens are going up.

It's a natural market, there's always fear. What if my token drops to 90 cents on the dollar? Have I lost 10%? No, because a token is not money unless you sell it, it's only proof of ownership. It's only money on the day you sell it. Well, don't sell it. You know that the property's doing okay. How could you have lost 10 cents? All you've lost is 10 cents if you have a liquidity crunch. In all this syndication that you invested in the last 15 years, whenever you had a liquidity crunch, you never had any choice, but to stick it all the way through.

There's going to be certain examples where the property's not doing well, and where you still are illiquid. But there's going to be many more examples where you actually have the ability to trade your tokens, like an asset, like a tradable asset, and you're going to have fun doing it. You're going to have arbitrage, you're going to have short selling. All kinds of crazy stuff will happen.

Darin: Thank you for sharing that because I did not fully understand it.

Picking Out Build to Rent Markets

Darin: I've heard it talked about, and it makes a lot of sense at a 30,000 foot level, that there should be a way to use that to provide liquidity. But you're a data guy and you're also known for picking out markets. So going into 2022, what do you see as being the strong markets, and why?

Neal: For the first half of 2022, just pick a market, it's going to be strong. Multifamily has come into 2022.

Darin: Any market?

Neal: Practically, any markets in the US. You could take the bottom 5% of markets in the US they're going to do well. I'll explain why. Multifamily is starting 2022 with the greatest tailwind of all time. Every multifamily record that I have ever tracked was crushed in 2021. I don't mean broken, I mean, crushed, destroyed. So lowest cap rates of all time in dozens of cities, highest rents of all time, highest rent increases of all time, highest price per unit. The list is endless.

Obviously, there's a massive tailwind there. There's an incredible amount of liquidity in the marketplace since the last two years, because of COVID attitudes of superstar investors that were invested in office, retail, and hotels have changed. Just so you know, most office investors, three years, five years, ten years ago, you couldn't hold a gun to their head, to invest in multifamily. Think about what an office investment is. There's a $10 million multifamily, it has 100 residents. Then there's a $10 million office building, it has four residents.

The Largest Asset Class

Neal: Those four residents on average have 1000X the money in the bank that the residents in the multifamily do. They sign 5 to 10-year leases and very rarely default.

Darin: Multi-year contract.

Neal: Why would any office guy want to do multifamily? With all the delinquencies and the drama and the gunshots and all of those kinds of things that happened with multifamily, all of that changed. Because with those folks, the office folks, especially the office, was the largest asset class in the US until 2006. Then it became multifamily.

Those guys now see the point. They see how in an environment in a black swan event, this asset class does much better than hotels, much better than office, much better than retail. Currently the hunger, the amount of assets that are allocated to purchase multifamily in 2022 are the highest that we've ever started in any year. Obviously, I think most assets will do well. Now, get back to your question.

Darin: The second half of the year.

Neal: Obviously, as interest rates go up and there's three Fed meetings in the first half of the year, all of them will have quarter-point increases. There's going to be a little bit of bubbliness. Markets that are going to do well, I think Tampa is going to do phenomenally well. Jacksonville is going to do really well. Miami might do well, but it's a very expensive market, so be careful. Most Floridian markets, especially smaller markets are set up to do really well. I'll name a few for you and you can figure out if this makes sense for you.

Build to Rent Markets That Are Going to Do Well

Neal: Winter Haven, Saint Petersburg, Bradenton, Sarasota, Cape Coral, Fort Myers. These are all markets that I think are going to do really well. North Carolinian markets are going to do well. We hear a lot about Raleigh and Charlotte. Those are the two big cities. But then, let's talk about Chapel Hill. Let's talk about Durham, let's talk about Winston-Salem and Asheville. One of my personal favorites, Asheville, because Asheville has a high quality of life and is a good-looking city. I think those cities are going to do really well.

Atlanta will continue doing well. The big stars, at this point, are Austin and San Antonio. San Antonio benefits from the incredible Austin halo. Austin home prices last year rose by 41%. No market in the US was close and a lot of it is because Austin is the most expensive market in Texas. You'll chuckle at this. Austin is the cheapest Texan market in California, so Austin is now a Californian market. It has all forms of Californian market characteristics, it just happens to be in Texas.

When you compare it with Los Angeles, San Diego, and the San Francisco Bay Area, it's really cheap. That's why it can go up 41% in a year and 20 plus percent in rents. It's projected to go up again by another 32% this year. It has the largest inbound movement of companies, especially technology companies on a per capita basis compared to any other market in the US. Recently, I read that it may actually be any other market in the world, but I'm not 100% sure on that one.

America’s Place for Rich People to Buy Build to Rent

Neal: It also has now become America's favorite place for rich people to buy second homes. So it has the highest percentage of second-home buyers. All of that leads to San Antonio becoming really expensive because it's a much larger city than Austin. It's commutable, you can live in north San Antonio and commute to South Austin. The Tesla factories in the middle. You've got the $17 billion Samsung factory. You've got the $10 billion Apple campus.

A lot of people are like Amazon. It's like, "I don't give a sh** about Amazon because they build something everywhere." They have a million campuses, so I don't care what Amazon does. But Apple only builds one to two campuses per country, and they're building a massive one in Austin. That's what I care about, that matters. Their average salaries are three times the Amazon. They create wealth effects, which are extremely strong and demographers like me are following wealth effects. And so not all companies are the same.

Darin: Do you focus on the cities around the major markets?

Neal: Yes, I tend to do that. I'm obsessed with finding these small cities. Let me tell you where I'm invested in. I have one investment in Austin, even though I've been following it for a long time. Just one, just a single investment, and maybe another one that I'm baking.

Darin: Working on.

Neal: But my major investments are in the Austin, San Antonio corridor. I have basically surrounded Austin with my armies. So north of Austin, 55 miles north of Austin is the city of Killeen. It has a large armed forces base.

The Richest Part of Austin

Neal: It's commutable to the richest part of Austin, which is north Austin. That's where Apple is, that's where the domain is. Really rich people live there. All the little cities around Austin that are expensive cities are on the north side, this is commutable.

Darin: The one thing that people talk about with Killeen is it’s such a military focus place. If there is something where everybody goes on duty and has to be shipped out, they could break their leases. People are afraid of Killeen from that perspective, from investor's standpoint.

Neal: People are afraid of every city from some perspective. The question is demographers like me, we studied to see how often has that happened to Killeen. And the answer is, never, because of what goes on in that base. What you have to do is basically understand that it's a training base. People come, they stay for a certain amount of time, usually a year or two, and then they leave. It's a training base for all parts of the US.

Training bases very rarely have this kind of content happen. They're transitional in nature anyway to begin with all the time. So it's very rare that would happen in Killeen. But let me just say, some people are just not comfortable with it but that's only north of Austin. So west is Fredericksburg where I have a large project. Killeen, I just bought a property for 138 units. East is the tiny city of Manor. It's only 15 miles away. It's only 12 minutes from Tesla. Take a look at Manor and then south, of course, is the biggest number of choices. So 30 miles south is San Marcos.

Build to Rent Projects

Neal: That's where the university is, there is a big student crowd. It's completely commutable to any part of Austin, as long as you're willing to commute for 30 to 60 minutes. Then 49 miles south is a very hip trendy city of New Braunfels. I have a project in San Marcos, a project in New Braunfels, and I have five projects in San Antonio, which is 70 miles south. My core belief is this, focus and learn more about these kinds of Austin effects. Austin, according to Elon Musk, is the biggest boomtown that Americans had in 50 years. I think he's absolutely right.

Austin is the next San Francisco Bay Area. You can say that the San Francisco Bay Area was not the biggest boomtown in the last 50 years. Clearly it was, and that's where people are going from San Francisco to Austin. I typically don't make large investments in the boomtowns, I make large investments around the boomtowns. So I have surrounded Austin in four directions.

Darin: I remember, it was maybe two or three months ago, seeing a presentation you did about New Braunfels. It was your number one market.

Neal: That's because it's a faster growing market than Austin or San Antonio. In fact, some of its growth statistics are so high that you can take Austin's growth and San Antonio's growth, put it together and New Braunfels will beat it. Why? Because it's inside a corridor. One of the key things is, I've always said this in all of my presentations.

The Effect of Corridors

Neal: It's not the cities that matter, it's the corridor. There's a number of corridors that I've personally benefited from over the years. The one that is the oldest corridor that I talked about, about four to five years ago, is the one in Florida. It starts from Deltona through Orlando, then goes through Lakeland, then it goes to Tampa. Then it goes south through Sarasota and ends at Cape Coral, Fort Myers.

That still is one of the most powerful corridors in the US, but it's not number one anymore. It was also the corridor from north of Salt Lake City to south of Provo. That was a very powerful corridor and that has become a crazy low cap, three and a half cap market. But when I started talking about that corridor in 2017, you could easily pick up a six cap property. Today, you're going to fight 15, 16 people to buy something at three and a half cap.

Imagine the wealth effect in that corridor. The one in Austin, San Antonio one is the most powerful. It is the only corridor that I track where both cities are extremely large, and both are commutable. Every other corridor is not commutable. For example, from north of Salt Lake, let's say Ogden, you can't commute to Provo. But you can definitely live in north San Antonio and commute to south Austin, and San Antonio is a larger city than Austin. This is the unusual effect where the city on fire is smaller than the city that benefits from it. That's a very unusual scenario.

Why Dallas Is a Great Place for Build to Rent Investments

Neal: Those cities I think will do well, but enough of Texas I think Dallas is a great place to invest in. Once again, look at places that are 30 or 40 or 50 miles away from Dallas rather than Dallas itself, because Dallas is very expensive for its income. One could say Austin's more expensive. Yes, but look at the incomes. You can't compare. That's not a way to look at this. Then Phoenix is incredible, so is Tucson. I think Tucson's a better deal than Phoenix.

Darin: Phoenix's been on fire.

Neal: Those are great markets. Vegas is a great market. I personally don't like Vegas very much, but one has to acknowledge that the market has all the right fundamentals. I'm not investing in Vegas at this point of time, but I've invested as a limited partner in Vegas.

Darin: From the listener's perspective, you've heard other guests and myself talk about markets. Look for population growth, look for income growth, look for job growth, that's what Neal's talking about here. In all these places, they have population growth and job growth, and income growth. It's going to continue, not just in the major cities but surrounding it.

Neal: I want to add something to that. There's a course on udemy.com, so you just type in Udemy Neal Bawa, or udemy.com/realfocus. You'll see about 10,000 people are taking the course right now. That course focuses on everything you just mentioned, job growth, income growth, home price growth. How do you calculate it for every city and how do you compare cities to each other?

Sharp Slowdowns in Population Growth

Neal: Until 2020 or 2019, that mattered. But there were other things that mattered as well. Now I'm saying that's all that matters because the United States has had extremely sharp slowdowns in population growth. We have always been a country until 2016, '17. We've been a country that has pretty strong population growth 0.6, 0.7, 0.8%. Last year, a country of 332 million people added 330,000 people. That's 0.1%.

I know that there's COVID deaths et cetera, so obviously there's some pieces there. But if I account for COVID deaths last year was the slowest growth in a century. At this point of time, demographics are not just becoming the 800 pound gorilla in the room. They're becoming the only thing in the room.

Darin: The demographics shift from one state to another, from one location to another, within the US.

Neal: Obviously, they haven't changed much in the last five years. The same cities are continuing to get population growth. Phoenix, Austin, San Antonio, Dallas, Nashville, you've got Tampa, Miami, these cities have been winning for five years. But since March, 2020, when COVID started, it's accelerated very dramatically. Also, it's about higher dollar people who are moving now since COVID.

Darin: My thoughts is that, even in a downturn, if there's a downturn, a lot of these areas are still going to have demographic shifts. Because if you have a downturn and you're living on the coast, and you're out of a job, the cost of living is so high. My thought is you're going to move to where there's new jobs and where there's a cheaper cost of living. What's your take on that?

A Very Weird Recession

Neal: Yes, I agree with that. I want to provide more context though. 2008 was a very weird recession. It just hit everything because it was the housing market. The housing market was hot everywhere. And so, was it across the board recession. It had every state, but even out of that, look at how some states return. They bounce back very quickly.

I'll give you a state that bounced back very quickly. Look at the numbers for Utah and how fast it recovered from the great recession. Then look at Dallas as a city and how fast Dallas recovered. Not only was the drop, not as precipitous, it was pretty shallow, but the bounce back was very rapid. Before you knew it, you were out of it.

This recession, whenever the next recession comes, if it's not broad-based like COVID, what we've seen in most recessions in US history is that the weak cities, and the weak states tend to take the longest. They go down the most, and they take the longest to come back. That's a typical recession. That didn't happen in 2008, because that was broad-based on the US economy, the housing market.

It didn't happen in 2020, but even in those cases, which was a 50 state recession, even then some states recovered way faster than others. Now, in an environment where the US net population growth is almost, I don't want to say zero because I feel bad about saying that, is close to zero. This is all that matters. How do you justify the continued construction of real estate in an area where the population is dropping?

The Build to Rent Units That Are Going Obsolete

Neal: I don't understand how. You can do it for a short amount of time because there's some gap there. There are units being obsoleted, but in the long run, how do you make it work? I just feel like a lot of these cities, especially in the Midwest that have no population growth are basically built on, these are all Lego blocks and they're not very good Lego blocks. Maybe, and maybe that's not.

It's cards, it's easy for those economies to get knocked down. First, they're low income and second they're low population growth. But there's jewels too. Columbus, Ohio is incredible. Kansas City, Indianapolis, these are cities that have significant continuous population growth. There's a lot there. But what I find that I get shocked by is that I am being told by people that somehow cap rates in Cleveland can be as low as cap rates in Columbus or Indianapolis or Kansas City. That makes no sense to me whatsoever.

That simply tells me that the people that are investing in Cleveland don't understand the difference between an economy that's been losing population for 40 years and an economy like Columbus. It has been gaining population at a high speed for 40 years. There's a massive difference between those two. So there's a mispricing of risk there. That's shocking.

Darin: Another area that you have talked about and has become more of a discussion point, and more people are shifting to is build to rent, BTR. Talk about what your thoughts are for that segment. First of all, from the listener's perspective, what is built to rent and why are people shifting in that direction?

High-Density Apartments Can’t Be Build to Rent

Neal: Anything short of apartments, that new construction is built to rent. Single family homes built specifically to be rented, and duplexes, town homes that were built from the very beginning to be rented. Another way of saying it is, it's some sort of low-density rental housing. Which means that, no apartment can be considered build to rent because they're high density. Multiple stories, people above you, people next to you.

So the BTR revolution, which is by far the hottest part of real estate, anywhere in the US, but specifically in Texas and Arizona. But anywhere in the US, BTR is still the hottest part of all forms of real estate. It started off with single family and it started off in Phoenix where there's a company that did it for a while. What they learned was very interesting. When we are in multifamily, we look at rents first.

Yes, you should, but there are expenses. Part of the biggest expense is churn, how often do people leave? If people are leaving every 18 months, you're not going to make a huge amount of money. And if people are leaving every 36 months, you're going to make a lot more money. All of your transition costs, your marketing costs, your loss to lease is pretty much gone.

Because you can keep raising rents now for three years, instead of having to basically start from scratch every 18 months. The people that are above our level, we're talking about people with $10 billion portfolios. They studied the early build to rent communities that were built in the 2014, '15, '16, '17, '18 timeframe.

The Typical Single Family in Build to Rent Communities

Neal: What happened is by 2018, these single family communities, and they're not large single families by the way. The typical single family in these build to rent communities, the typical rental unit is like 800 square feet. So they have the size of apartments.

Darin: It's almost like they're apartments.

Neal: There's the size of apartments, but they're individual free-standing units. They have a postage stamp size backyard and a postage stamp size front yard. But you are in a home, and they have great amenities. They've got better amenities than an average apartment complex, slightly bigger pool and things like that. More dog runs. They're more built for families because people want to live in single family homes and have that nice backyard with the ability to grill and stuff like that.

When the stuff started in 2015, '16, a lot of industry people were watching and saying, "It looks interesting." But they're not using land efficiently. Now, they were actually using them pretty efficiently. A lot of these build to rent communities have 12, 13, 14 single family homes per acre, a subdivision only has six. They were actually cramming them in with the postage stamp size backyards and front yards.

They’re getting pretty good value, but not as much as apartments, because you can get 25 to 30 apartments per acre. So people are like, "Ah, this is not very efficient." But then in 2017, '18, these properties started to sell for the first time after they were built, and people started to buy them. When they came on the market, people realized they got a chance to actually read the numbers and look at the profits.

Churn Is Nonexistent

Neal: That's when it blew up because what people realized is the churn is nonexistent. People live in these like it's their home, nobody's leaving. And so you can raise rents three, four years in a row. By the time you own it for three or four years, your profit per unit is 50% higher than multifamily. People were not looking at this correctly. The '18, '19 is when people started to realize this sucker is more profitable than multifamily.

It's more resilient, people will not leave. They want to live there. It still is multifamily because it's only 800 square feet. It's not a 2000 square foot mega mansion. People are still making huge amounts of money. Like, Blackstone bought 80,000 single family homes and then had to deal with all the headaches of maintenance. Here, it's in one community. It's inside one community. You've got centralized maintenance. You've got centralized leasing and it's brand new, so you don't have maintenance costs. It's so much better.

Blackstone made a humongous amount of money from those 80,000 homes, despite all of the problems that they have. BTR doesn't have any of those problems. Remember 40 to 50% more in net profit per unit. This became very obvious by 2019. More people started to look at creating funds, then COVID happened. The cost of money fell to zero in April, 2020. So between April, 2020 and today, which is not even two years. But, we're in February, 2022. In those 20 months, $76 billion has been raised for build to rent and that's unlevered. So you leverage it, you're going to get more than $200 billion. It's the largest phenomenon in US real estate history.

Build to Rent Townhomes

Darin: I'm glad that you shared that because  I didn't realize that they were that small. I thought that they probably were going to be like 1500 square feet.

Neal: The math doesn't work. What makes the mathematics work is the small size. Some of them are 700 square feet. Two bedrooms are 850, three bedrooms are 1000. Basically they're the same size as an apartment. There's no difference in size, but there's a difference in height. A lot of them are 10 feet high, a lot of them are 11 feet high. The ones I build are 10 feet high on the first floor, and then they're 16 feet high on the second floor, penthouses.

I built a stacked build to rent. There are four units in one building, as opposed to one unit at a time. That's also considered built to rent townhomes. Now, if I built them at a very high density, if they were just like long rows of town homes that wouldn't be considered build to rent. But here it's four units, everyone's got windows on two to three sides. It's a different kind of feel. They're taller, they've got some features that apartments don't have. But if they were as big as single family, the mathematics wouldn't work.

Darin: So what is your next big stretch goal?

Neal: I want to tokenize my assets. We talked about that.

Darin: You might be one of the first guys out there to really do that.

Neal: At scale, yes. We're looking to tokenize $70 million in equity. People have done it already. I'm not a pioneer there, I actually wouldn't be interested in doing it if I was the first.

Build to Rent Is Astonishing

Neal: Four years ago, the first multifamily in the US was tokenized in New York. It was a dismal failure, they never raised the money. So we learned from that process. Then in 2019, a student housing property in South Carolina was done and they had some challenges. Now we have four years of understanding what the heck this stuff is. I can't call myself a pioneer, I'll just say I'm an early adopter.

Tokenization is big. Build to rent, I think, is absolutely astonishing. It's a better way of being a tenant. If you had the choice between an 800 square foot apartment, and an 800 square foot single family home, if there was a woman involved, it's no contest. She will absolutely never pick the apartment.

Darin: You're absolutely right. What do you like to do outside of work for fun?

Neal: Play cricket, grow tomatoes. I obsess about having the highest tomato yield. I'm a tomato farmer.

Darin: Are you really? So cricket, that can last days.

Neal: That's the older version. Obviously over time, cricket has been democratized. The version that I like the most is about three hours long. Maybe it's half an hour longer than a baseball game. The older version. Yes, I still read about it. I don't have time to play.

Darin: I'm like, I don't know how you get the family to agree for you to go out for three days to play a game.

Neal: I don't know how that five days of cricket even lasted today, it should just be gone. I like the short version.

Darin Batchelder: So tomatoes, and was there something else? Cricket and tomatoes.

It’s All About Balance

Neal: I also strive for balance in my life, I think that's very key. I find that people become so addicted to success that they want to succeed for the sake of success. They want to succeed simply because they've been succeeding and that high gets to them. I'm very obsessed with the idea of creating balance in my life. I spend a great deal of time working on that and thinking about that.

For example, I don't work Fridays, I play golf. I think about stuff. If there are things I'm trying to solve, that's all on my calendar. I take two hour long massages, I get professionally stretched, I do a bunch of things in my life, and I take six vacations a year. There are people who are like, "I work 80 hours a week." I'm like, "I never work 80 hours a week. I try to work 35 hours a week and have 16 assistants that basically do the remaining 40 hours. Balance is very important to me.

Darin: If you think of investments, what we're mostly talking about here is investments in different real estate. You invest financially, but in your life, you really need to invest in experiences, with your family and for yourself. That's what life is all about. Those memories that you're going to make if you just work, just to get a bigger number than you don’t have the balance.

Neal: Then, I'm willing to take risks for it. From December 17th to January 3rd, I was on three continents with my family. We had six COVID tests. Nobody got COVID, but we had contingency planned cases.

What’s the Worst That Can Happen

Neal: We started off in İstanbul, we went to Cairo, and then we ended up celebrating new year's in Dubai, very over the top. I'm vaccinated now. I have lost my fear of COVID. What's the worst that can happen? Somebody has to stay behind, fine, it'll cost some money, and we'll do things.

But the statistics are that there is a one in 25 chance that somebody will get COVID during a vacation. We were careful, we weren't stupid. I'm fine with taking that chance since. Even on a vacation that spans three continents. I think too many people are afraid and there was a reason to be afraid. I'm 50 years old, so I was afraid until I got my first shot. Beyond that, it's like, "I'm going to just live my life."

Darin: If somebody wants to reach out to you or get to know you better, what's the best way for them to do that?

Neal: Just type in Neal Bawa into Google. You'll see a few hundred podcasts, a few hundred webinars and seminars, and some courses. The website way, if you want everything in one place is www.multifamilyu.com. That's where all of our webinars are stored. The webinar you talked about, Real Estate Trends. I talk about 100 cities in it and that was just done last month. It's on the website, take a look.

Darin: I really appreciate you coming on. Listeners, that was a treat. This guy, he's in the know, and he's got some great advice. So listen up and get to know him. Check him out on the web and I appreciate you guys listening, until next week. Signing off.

How to Reach Neal Bawa

• Grocapitus Investment Website
• Multifamily University