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Getting Started with Multifamily Deals with Neal Bawa

SHOW SUMMARY:

In today's show, Larry talked with Neal Bawa. Neal has a huge thousand plus units of multifamily portfolio valued at over a hundred million dollars and it covers seven different states. He speaks at multifamily conventions, expos, and REIA events all over the country. He is also the co-founder of the largest multifamily investing meetup in California.

In this episode, Neal will share his knowledge and understanding on multifamily properties. He will also share tips and techniques on what to look for and how to analyze multifamily deals.

SHOW HIGHLIGHTS:

  • Who Neal Bawa is
  • How he started investing in multifamily
  • What his portfolio is composed of
  • How a multifamily deal is put together
  • Having a 5-6 page template
  • Understanding cap rates
  • Type of properties he is looking for
  • Areas he recommends
  • Best markets:
  • - Fix and flip bucket
  • - Price appreciation bucket
  • - Rent appreciation bucket
  • Data sources
  • The key metrics you should be looking at
  • Some areas he considers worst metro areas for 2018
  • Where he finds deals
  • Rundown on what to look at in deals
  • His advice to those interested in multifamily

Quotes:

  • "Spend $6,000 in unit in rehab, raise rent by $150 dollars in unit, and double your investor money in 5 years."
  • "Multifamily isn't about being different. It is about being efficient. This is a mathematical problem. It is not an expression of art."
  • "The numbers don't lie."

RESOURCES AND LINKS FROM THIS SHOW:

SHOW TRANSCRIPT:

Larry: Hey everybody, welcome to the Brain-Pick-A-Pro Show live from Lake Wylie South Carolina and all the way on the other coast in the Bay Area of California one of my favorite places, I love thing place is Neal Bauer. What’s going on buddy?

Neal: Hey how are you Larry? Glad to be on the show.

Larry: I am doing awesome. Thank you so much for being on I really appreciate it. Now a lot of you guys know one of the things that I’ve been talking about a little bit and getting into is multifamily. And Neal he is the man, the legend and the myth. I mean this guy he owns 1,000 plus units. You liked that, didn’t you?

Neal: Man that was great I’ve never been called that I’m going to write that down.

Larry: There you go. He’s got a huge thousand plus unit of multifamily portfolio valued at over $100 million. And it covers seven different states right. He speaks in multifamily conventions, expos, IRA events all over the country. He’s got a couple thousand students that have attended his multifamily events.

So he teaches this stuff as well. And I’m just really excited to have him on. He’s a co-founder guys of the largest multifamily investing meet up in the Bay Area in California. You have like over 3000 members right Neal?

Neal: About 3,600 yes. It’s a big metro so they just keep coming. Our goal was to get to 500 but it just kept growing.

Larry: That’s huge and that’s a meet up group all live in Orlando or do you have live meetings?

Neal: So we do 30 meetings a year there are 36 meetings a year- 24 meetings are live that are in a physical place. And there are 12 meetings a year once a month that are webinars. So total of 36 meetings, plus assorted mixers that we post for local meet up groups that are our partners. So all together like 15 meets.

Larry: That’s awesome. So why don’t you start out and tell our listeners just a little bit about who is Neal Bauer?

Neal: Sure. Well I’m not the typical guy that comes on your show, I’m not real estate royalty. I didn’t start in real estate, I don’t have a brokers’ license I haven’t flipped 100 homes. I’m a technologist. So I’ve had a successful 16 yearlong technology career and while I was doing that, the business that I was involved in was cash flowing like crazy.

And I was using that money and I was investing it passively for myself. So I was investing the money and I knew that I wanted to sell my company. I was a minority partner the majority partner was in his late 60s, he wanted to sell and retire and buy a big fancy ranch.

So we talked about okay we’re going to exit over the next five, six seven years. We have to build it up to this dollar number. We knew it would take five or six years it wasn’t a .com it was a technology business but it was a brick and mortar business.

Larry: Right.

Neal: So we had the vision we knew we were going to exit and he said, “I’m going to retire and I want to invest with you in whatever the hell you want to do next.” And I said, “Well Paul we’ve been building properties for our business, right,” so I got into real estate backwards because I started with large commercial and then went to single family. Because for my business I had to buy and build campuses from scratch.

Larry: Right.

Neal: So with the help of some mentors, some retired general contractors some GCs that helped me, I was able to learn the art of taking a 30,000sqft shell and build it into a full office, classroom sort of setup. It was an educational business. So I was building classrooms, I was building bathroom quarters, I was building offices and cubicle areas.

So I learned a lot about real estate from a construction perspective but I didn’t own anything except for my primary home. So this was kind of backwards. So I did that from 2003 to 2008, always found the single family rental market do not make sense from a mathematical perspective I’m a math guy a statistics guy. But then in 2008 the market crushed.

And then I looked at the numbers and every property made sense. So in a frenzy I bought 10 properties all in the same city Madeira California 20 miles north of Fresno. Bought those properties, rented them out still own them never bothered to sell them. Great properties they were all built in 2005. And then I went to Chicago and bought 10 triplexes in my wife’s name.

And those worked out really well but then I ran out of loans. So my question was okay it’s 2009, I’m running out of loans, I still have money from my business. What do I invest in next? What the heck happens when people run out of loans, right?

So I looked at portfolio loans but they were fairly expensive so I came across multifamily syndications. I realized that people like me that want to passively invest, they put $50,000, $100,000, $250,000 chunks in syndications which a mechanism of gathering money and buying a $20 or $30 million property.

Larry: Right.

Neal: And I fell in love with that. And since then my journey into multifamily started first passively and then more and more actively.

Larry: That’s awesome, that is great. And now you have over 1000 units over seven different states.

Neal: Yeah it’s been fun gathering this portfolio. 70% of them are multifamily, 30% are student housing. One third are new construction properties, two thirds are existing properties that we bought and rehabbed values somewhere around $110 million at this point.

Larry: Right.

Neal: And about 206 active investors are invested through me. So obviously I invest in my own properties but there’s about 206 investors. I’d say about 150 accredited and the rest are non-accredited sophisticated investors that invest with me. So it’s been really nice to kind of build that up and not do it a hurry, it’s taken a while for us to build up the portfolio.

And again been a great journey and really a lot of it demographics based, a lot of it is data based. I could talk about demographics and data and why I consider multifamily to be the place to go over the next 10 years. I could talk about that all day.

Larry: Well you know what, that is awesome. I’m glad you told me that you’re a technologist and you’re a statistics guy you love math. So I want to jump into that in a few minutes and make sure we talk about that. But can you kind of give our listeners an overview because so many people start with residential.

They’re talking about buying a single family they want to wholesale it and make 10 grand, or they want to do a fix and flip and make 50 grand. Give kind of a rundown from start to finish about a multi-family deal because I know a lot of people tell you, “Oh my gosh there’s no way I could buy 100 unit complex because I have no money or no credit or whatever.”

But there’s a lot of people out there that are doing it I mean I know you had money start with after you sold your business and all that. But there’s a lot of people that are doing multifamily that maybe they don’t have the greatest of credit or they’re not an accredited investor. Tell us kind of a rundown, an overview from start to finish how a multifamily deal is put together.

Neal: Sure. I actually teach a webinar on my website multifamilyyou.com that goes into it over an hour but here’s a five minute snapshot. So here’s the good news, number one you don’t need to be an accredited investor to buy a multifamily.

Number two, you don’t need a down payment to buy a multifamily. A number of my students invest zero dollars in the apartment complexes that they’re buying. So most of the time raising money from other people or OPM, Other People’s Money is being raised to buy these properties.

Larry: Right.

Neal: Number three, you can have bad credit even in bankruptcy and still buy properties. My partner John Mark Landau awesome guy he’s been in real estate for about three and a half decades before we partnered. He has a bankruptcy, it shows up every single time we buy a property we’ve never been turned down for a loan because of him.

He’s signed on every single loan besides me because in multifamily, they’re not looking at your credit Larry. They’re looking at the property. The property is the collateral. And if you have the right plan for the property you have the right backers for the property and you’ve got 25% equity, you can actually have bad credit.

They’ll still check your credit, they’ll still ask you about your credit but I have not seen that become an issue. I have not seen that prevent one of my students from buying a property that they put into contract. So that’s the good news. Now on the bad news side, the market is very competitive. It’s just as competitive as single family.

So you’ve got to be quick and you’ve got to be nimble. You’ve got to have a property package together-. What I teach my students is because today you have to close on a property in 75 days, you don’t have a lot of time to raise money. So let’s say you’re buying a property that is two million bucks and you’re raising half a million dollars from other people to close on that property plus maybe $100,000 for your fees.

Remember you want to make fees when you’re being a multifamily syndicator at least 3% upfront. So over two million dollars you’re going to get paid $60,000 on close. Well you’ve got to raise that $60,000 as well. So the key thing to do and I tell my students this, is to have a beautiful five or six page template. And this template shows a property that you bid on in the past and maybe didn’t win, right.

But it shows all of the numbers, it shows your plan, it shows how much are you going to spend on rehab how long is it going to take? What is your plan for this property? How much will the rents go up when you rehab let’s say you put in $6,000 a unit are you going to get $150 pop monthly? Are you going to get $125 pop? Rule of thumb for multifamily is spend $6,000 on rehabbing a unit, raise rents by 150 bucks, double investor money in five years.

Once again; spend $6,000 a unit in rehab, raise rents by $50 a unit and double your investor money in five years. Now the math doesn’t seem to make sense but if you want to know how it makes sense, understand the magic of cap rates. Multifamily is all about something known as cap rates. It’s a number that everyone in the industry knows and understands.

And cap rates vary depending upon how old the building is and where it is. Here in the San Francisco Bay Area cap rates are under four. What that means is for every one dollar that you create a new net operating income, one buck, when you sell you will make 25 times that. That’s what four means, it’s 100 divided by four equals 25.

So that’s awesome. So if I install no water usage toilets, and those toilets saved $10,000 a year in water bills, when I sell the property if it’s in the San Francisco Bay Area I’ll make $10,000 multiplied 25. That’s a staggering dollar number, right, that’s a huge amount of money that I’m going to make. That’s $250,000 by just installing toilets.

The toilets themselves are probably not going to cost me more than $50,000. The return on investment is very high because of cap rates. Now I don’t invest in the San Francisco Bay Area but even in other markets these days, a typical cap rate is 6.5, 6.6. So you’re getting a 15X multiple generate one new dollar and get a 15X multiple on it when you sell.

The magic of cap rates is what allows us to raise rents by $150 a month on a $6,000 rehab and double investor money in five years. So pretty much anyone that follows that methodology to better than double investors’ money. If you look at my website our past projects have had 22% plus annualized returns.

Larry: That’s sweet that is awesome. So you have to do a lot of work upfront to analyze those properties because not every deal is like that. I mean there’s a lot of deals out there that are already they don’t need $6,000 worth of work, they may not even need $2,000 worth of work. So what type of properties are you looking for and explain like ABCD. And what type of properties you’re looking for and what those are called.

Neal: Absolutely. So I’m looking for properties that are eligible for true value add. These properties are either B’s and Cs, I look for properties that were built between 1970 and 1995. Older than that, too much breakage, too much maintenance. Younger than that, they don’t need the rehab at this point. I’m not going to get that $150 rent pop with a newer building I’m probably going to get less.

So my opportunity is those 25 years, 1970 to 1995 and I’m looking for a property that was not rehabbed at all since it was built or it was rehabbed in the 80s, right. So a lot of properties that might have been built in 1969 was rehabbed in 1987, that’s still okay. Because it was rehabbed in 1987, it still looks its age because it’s almost a little over 30 years past this then so it’s now due for a new cosmetic rehab.

Now what I don’t do are extensive rehabs. My rehab the property that I’m looking for is a $6000 rehab and that’s just purely cosmetics. If it’s got carpet I rip that out and replace that with laminate. If it’s got older cabinets either I’m going to resurface them or I’m going to rip them out and replace them. I might depending upon the area replace white or cream appliances with either black appliances or in certain cases with steel appliances or steel-black mix.

Right steel black mix is a lot cheaper than just steel. And countertops I want to resurface the countertops or I want to rebuild the countertops. In a few properties I might go with granite buy most of the time I’m just going to go with countertops that are newer and nicer looking.

Larry: Right.

Neal: And that really adds up to $6000, a few other cosmetic things. I want faucets that are brushed nickel and want backsplashes that are colorful. Right so nice backsplash in the kitchen. Really almost all of them money is eye candy and almost all of it goes into the kitchen or the bathrooms.

Larry: Right.

Neal: So the only other area that we’re touching is paint, right. So just do a fresh coat of paint. That’s $6000 and my rehab is not about- you know how in single family every home is different, right. So because they’re all different some need lighting, some need walls to be knocked down. I don’t want to knock anything down.

I don’t want to knock down a single wall. My rehab is cookie cutter because if I’m buying a 100 or 200 unit property or if you’re buying a 20 unit property, you want to have one rehab specification. And you want to have internal staff that just rotates from property to property to property, from unit to unit to unit and knock it out very quickly, one to two week rehabs. Very quick, very fast that’s the magic.

Larry: Cookie cutter, right.

Neal: It’s all about being cookie cutter, we do not want to express ourselves with multifamily. We do not want to go all out and build stuff that is different from everybody else. Multifamily is not about being different it is about being efficient. This is a mathematical problem, it is not an expression of our time.

Larry: That’s awesome, that’s great. Now you mentioned now you’re in the Bay Area but you mentioned that you don’t buy in the Bay Area. I know there’s a lot of A properties out there and the cap rates are so low and it’s hard to force value because like we said the value is based on the net income. So what areas do you recommend?

Neal: So that varies every year. So what I do is once in a year I switch my areas and I have a fan following not as large as yours. But I have a fan following of three or 4000 people that are following me around as I switch areas. So for 2018 and each year on my website I do a webinar called Real Estate Trends 2018.

So if you go there, it’s a 60 minute rundown or every market in the US and all of the things that at this point are positively or negatively affecting real estate whether that’s single family or multifamily. This webinar is agnostic it has nothing to do with whether you want to buy single families or multifamily. What it does is it all leads to the last 15 minutes where I show you the best markets in my opinion in three buckets.

There’s the fix and flip bucket, there’s the price appreciation bucket and there’s the rent appreciation bucket. Now very often people might think well if the prices are appreciating the rents will also appreciate. And the answer is not really. Very often prices will appreciate for three or four or five years until the market has appreciated so much that people can’t afford to buy anymore and that’s when the rents appreciate.

So rents usually are lagging prices. So it’s very important to understand that because you could go into a market thinking that you’re going to get huge rent increases and you don’t because single family prices are still increasing but still affordable. So I do those three buckets so that people really understand which market to buy for what.

The Bay Area unquestionably the best flip market in the US. At this point if you go back and look at my presentation you’re going to see 20 cities in US are good for flips. Number one in the list San Jose California, San Francisco California. But the Bay Area is a terrible market. Absolutely terrible market today for rental growth. And a slightly less terrible market for appreciation.

We’re still seeing strong appreciation in the Bay Area but the rents have hit that ceiling where poor people, right, middle class blue collar worker people just cannot afford anymore. So that ceiling has been hit and rent are flat in the Bay Area. So those three buckets allow me to look at different areas so if you’re flipping and you’re not in the San Francisco Bay Area, Denver is a great place to flip in.

Seattle is a terrific place to flip in and those are kind of on our side of the pond. Miami is a great place to flip in if you’re on the other side there’s tremendous demand. Flips are really based on how quickly do properties disappear from the market. You want to go into a place where there’s multiple bids within the first 24 hours. That a great place to flip in because your cash is in use for a small amount of time.

Larry: Right.

Neal: Single family appreciation is different. Sacramento’s had a great appreciation, Las Vegas is phenomenal Orlando is phenomenal. Those are great markets. Usually appreciation markets are the ones that recovered last from last time’s bust because they didn’t start new construction until 2016. So they are not competing with a lot of new inventory coming into the marketplace so there’s a lot of room for price appreciation.

So we’re seeing amazing price appreciation in Vegas, we’re seeing amazing absolutely mind blowing appreciation in Orlando and Tampa, those kinds of areas. Great appreciation right. Rental markets are the ones that have already appreciated. So they’re the markets that went crazy over the last four years. Sacramento is a phenomenal rental market today, but it’s not appreciating as fast as it was in 2016 or 2017.

But now the rents are catching up because people can’t afford to buy. So those three buckets are huge and my markets I’m looking in Utah which has been a top state in the US for the last three years. So I’m looking in Ogden Utah, I’m looking in Provo Utah I’m looking in Salt Lake City, those are great markets to look at.

For people that are on the other side of the pond I recommend Grand Rapids Michigan is a tremendous market. You’ll get price and rent appreciation. The two North Carolina markets; Raleigh, Durham , Charlotte these are tremendous markets right now you get both rent appreciation and price appreciation for buy and hold people.

And also Raleigh Durham is a flip market as well. So it’s the trifecta you get rent increase, price increase and flip abilities in those kinds of markets. Orlando is a great market to flip in. so there’s those kinds of markets but they change every year.

And it’s really hard for me to have to rebuild my network each year. It’s the hardest thing that I do but then it allows me to really pick the top markets in the US every year. And I pay for data source which I want to tell your viewers about. I pay for Housing Alerts which is Ken Wade’s website.

Larry: Right.

Neal: I pay for Local Market Monitor which is Ingo Winzer’s website and Ingo actually does a webinar for me every three months. So these are two data website that tell you the best and worst markets in the US. And then I pay for Neighborhood Scout which basically within a market let’s say like Salt Lake City, it ranks all of the neighborhoods.

So there’s great neighborhoods in great cities. Like Orlando is a phenomenal city to buy in but it has some truly awful neighborhoods. I wouldn’t buy stuff for free in those neighborhoods. So Neighborhood Scout gives me that information not just on a zip code level but even smaller than that like five one tenths of a zip code level. And that’s data driven access.

On the big multifamily side we pay $20000 plus a year for Co-Star which is all of these tools combined, but it also has data from apartment.com Co-Star owns apartment.com and also LoopNet Co-Star owns LoopNet. So it basically aggregates all of that data and gives us a dashboard about every area and every property as far as rent growth, price growth cap rates those sorts of things. So yeah I’m a true geek and I love talking about it.

Larry: That’s awesome man. You’ve got this thing down to a science, I love it. And you know what the best thing about it is, is when somebody is going to do a deal with somebody like you or get into multifamily or invest their money in a syndication, you want somebody that knows their numbers.

If they’re just kind of throwing out well we might go over here or might go into South East or we might go into Midwest, but you’ve got it dialed in to very specific things. And that’s important especially when you’re investing other people’s money.

Neal: I think so and I think that here’s a universal lie that I see on documents all the time. There are cities in the US that are doing really poorly. I can make them look really good in five minutes on a PowerPoint. So cities that are doing awful are cities like St. Louis, no growths, population decline really very little price appreciation.

But every city in the US has something good going on. You go and look at an offering memorandum for St. Louis and you see oh St. Louis is doing all these great things, you’d think it’s an amazing market. But there’s always something good going on that you can put on a piece of paper.

So what I tell students is this, not for your investors but for you. Because you can’t make money if your investors don’t make money, right because you’re making a piece of what they make. So if they make zero you make a piece of zero.

Larry: Right.

Neal: The key metrics that you always have to be looking at is and you must know them, you must be able to say them about all of your markets immediately is, what is the rent growth in a particular area? What is the population growth in a particular area? What is the income growth and what is the housing price growth?

You need to know these four numbers for any many market that you’re involved in. you need to be able to have a discussion with your investors because until then you’re just making it up, right. But the moment you have these conversations with every single investor, you will be forced to keep track of it and you will be force to keep track of it and you’ll be able to see when your market starts to dip and decline.

Because either the population growth is going to dip or prices are going to slow down or the rent growth is going to slow down. And then you know that it’s time for you to move on to the next market. So in every single conversation I ask my students to talk about these four metrics because as I said you can make any city look good.

But the moment you start talking about these four metrics you can say stuff like Orlando is many times better than St. Louis. Orlando is four times better than St. Louis because the numbers are very stark for St. Louis and the numbers are awesome for Orlando.

Larry: That’s great and the numbers don’t lie.

Neal: They absolutely don’t lie and I think that obviously there are investors who like the hype, they like the emotion driven investing, they’re not with me and I don’t think they like because I’m very unflashy. I may stuff out in a very structured manner and I say, “I‘m investing because of these four or five reasons and this is how I believe I’m going to exit.

And if they require the flash then they’ve got plenty of other choices.

Larry: Well and that’s why you have 1000plus doors and over $100 million value portfolio, right.

Neal: There are investors that like the fact that I’m not flashy. They like the fact that I’m tied to numbers. They also like the fact that I provide education to them all the time. So I’m teaching webinars every week of the year, so if you go to multifamilyyou.com/Larry, I set that page up for your group because I knew that you’ve got a new group of people.

So I put all my webinars in there and those webinars, there’s no pitch. I pitch nothing at all, they’re about educating people just like you do in these podcasts.

Larry: Right.

Neal: And if people would like to join me either as investors or partners or students they’re welcome to. But it is all about providing high quality data driven education. And that’s what I like. And by the way my previous business was also an education business so that’s really where I get the core concepts, right.

It’s about training people to be successful and then they make a decision, should they do it themselves or should they do it with you. That’s the only decision I ask people to make when they’re attending my events.

Larry: That’s great. Now you’ve talked about some of the great markets out there and I’m assuming that that includes like the secondary markets right outside of those, like right outside or Orlando part of the MSA.

Neal: Yes absolutely.

Larry: What are some areas that you think are probably the worst metro areas for 2018?

Neal: Oh boy, worst is really hard. Worst is very hard I don’t pay much attention to the worst. But in general I fear markets that are losing population. So I want people to use a tool called citydashdata.com. And the first thing that you should be doing is looking at population trends.

Right, because think about this way, you might run in and say, “Oh there’s this property there it’s a 15 cap property and it is in-let me give you one of the ones that I like to bash cities that I like to bash. So Ohio is very interesting because one of my favorite cities Columbus is in Ohio and I tell me students that’s a good city to invest in.

But there’s also a city called Denton Ohio, right. And that’s a city that I like to bash a little bit because there’s all these turnkey providers doing 15 cap properties in Denton. I mean they hype up all the great things that are happening in Denton, they forget to mention the fact that Denton loses 10% of its population every day, right.

So this is a city like Detroit. Detroit used to have a million and a half people back in the late 50s now it’s 400,000. And if you just go to Google and type in Detroit population a graph comes up from Google and I can tell you the graph looks just like this. It’s just one straight continuous downward line for the last four and a half decades.

The question you have to ask yourself is, who cares whether you’re buying a 15 cap property? You have to think about how am I going to sell a property when 10 years from now I’m ready to sell and there’s a heck of a lot less people that live in the city? So the first thing I want people to look at is population and there’s a lot of states that are losing population to other states. In general America is moving from colder states to warmer states, right.

So Texas gains a lot of population so does Georgia. Florida gains a tremendous amount of population. I’m not saying that there aren’t opportunities in the cold states, St. Paul Minneapolis very cold but it is a very robust city and that metro is growing, Grand Rapids Michigan is growing. But when you look at the state of Michigan, you look at the state of Illinois, you look at Ohio these are states losing population.

So my focus is not so much on cities, my focus is you need to educate yourself on the impact of population on job growth, rent growth and on house price growth. And if you’re going into a city that is losing population you need to be very careful. Because what you’re doing is you’re going to Las Vegas and you’re gambling. That’s what you’re doing. That’s not real estate investment.

Larry: Wow. That’s really good I really appreciate you sharing some of those tools that you use like citydashdata.com and Housing Alerts I know Ken Wade very well. That guy’s a genius when it comes to that stuff.

Neal: Absolute genius, right I mean Stanford grad absolute genius.

Larry: Exactly. Yeah that’s awesome. Now Neal where are you finding these properties? And I know it takes a lot of time to analyze a multifamily deal. It’s not just like looking at a single family house and figuring what is the ARV and whatever the amount of repairs and then boom you got your offer amount. You have to spend a lot of time analyzing each multifamily deal, right?

Neal: Correct. And it is many levels more complex than the standard ARV based calculation. So students often will send me a property that they’ve underwritten. So the process of analyzing in multifamily is called Underwriting. And they basically think that for some reason I will know more than them. They send it to me and they say, “Neal could you spend five minutes looking at this property?

I have a very standard answer that I want to give everybody. There is absolutely no magic in multifamily when it comes to underwriting. People like me in five minutes or 50 minutes cannot improve anyone’s chances. All I’m doing is giving you a gut feel answer that’s likely to be nonsensical and really honestly bullshit.

What is necessary for multifamily is four to eight hours of underwriting. There’s a process that you follow, you do an analysis of the property, an analysis of the neighborhoods, an analysis of how fast the rents are rising, and what is the delta that price difference between rehab units and non-rehab old style units?

Because the whole point of multifamily is you want to rehab units. There is no money in multifamily if you’re not going to rehab. There are no properties in 2018 that you can just buy and hold and make eight or 9% cash flow. If they exist I don’t know of them. They may be in dangerous markets like Denton Ohio you might be able to see some of these great places.

But in good markets the only option of making multifamily work it’s just like single family, you got to go that rehab piece. But remember it’s a cosmetic only $6000 per unit rehab. It’s not like single family. And there is no way to do it shorter. On my website there is a one hour webinar that actually walks you through step by step the underwriting process.

Because this is a question that I get constantly from people; how do I underwrite a property for multifamily? What are the things I need to know about? What are the gotchas? What are the top 10 mistakes I’m going to make? So I took all of that and stuck it into a one hour event and it’s recorded on my website. Take a look at that.

I can tell you my events are very interesting but that one is horribly boring but also horribly important. It is necessary for you to learn how to do that. I tell people if you are the kind of person that doesn’t want to spend four hours doing underwriting, just partner with somebody who does.

For every guy that wants to do everything else except underwriting, there’s one guy who just loves living in a spreadsheet. That’s a guy who in another life would have been a programmer and been sitting in a cubicle and programming all day. You go find that dude and he’s going to do all of your underwriting and you can still buy multifamily.

Larry: There you go. That’s great. So just give us a quick rundown as far as- I know you don’t spend four to five hours on every single deal. What’s the first thing you look at and say, “If it passes then I’ll go to the next thing.” And then what’s the next thing you look at if it passes this then I’ll go to the next thing?

Neal: So look for rent growth in that particular zip code. Now in my case obviously I pay for the software and I gave you a list. But you can just go to citydashdata.com, type in the zip code of the particular property and look to make sure that rents are going up. There’s another place to look at rents going up. You can type the name of the city home prices Zillow.

So let’s say it’s Denton Ohio so you type in Denton Ohio Home prices Zillow. Now Zillow will give you a list of home prices in that market which is important to look at but for multifamily less important. Scroll down on the page and near the bottom you’ll see a graph that’s showing rent increases. So the first thing I want to see is consistent 2.5 to 3.5% annual rent increases.

Consistent, not the last year but at least two or three years of rent growth. They’ve been in a huge rent growth cycle so ideally you want to see five years of consistent rent growth. Markets like Provo Utah, Orlando, Salt Lake City have had consistent rent growths like San Jose.

And that consistency is awesome. When I consistent network graph I’m very interested. If I see the last two or three years I’ll still underwrite the property. If I’m seeing growth that is ziggy-zaggy in this market that’s a red flag and I probably will pass on that property and save myself a few hours.

Larry: Right, that’s good. So after you look at the city and you analyze that and you see some rent growth, what’s the next step?

Neal: So as a next step I start looking at comps in the marketplace. So what I do is I look at Craigslist, right. So I’m trying to find units that match this property because how did I find this property? A broker listed it, I have an offering memorandum. And that offering memorandum shows me the size of the property, the level of the rehab.

And I’m trying to match up properties that are on Craigslist on apartments.com, on rent.com that match it. And I want to see is this property at the average rents works marketplace. Sometimes if I find it a little bit below even $25 below I’m very interested. That’s 25 bucks, 25 buck in a multifamily is a lot of money, it’s a huge amount of money.

So I want to see that delta. If it’s at market, I’m still interested then I start looking at okay are there rehab units in this marketplace? Is anybody rehabbing? I don’t want to be the first guy in a zip code to have a rehab unit, I have no example of success to show to my investors. I need to show them rehabbed comps.

So I want to go into a market where there’s already rehab units and I look at that new rehab and I go, “Yeah that’s going to cost me another five or six grand over this one. And let me look at the rents, my units are 710 his rents are 840. So he’s 130 bucks up, okay 130 is not too bad but ideally I want to see 150 pop there so I keep looking.

And if I’m finding that there’s a track record of rehab units that are available for rent at that marketplace and the rent pops are 130, 140, 125, 150 then I’m beginning to get interested. Now I’m like, “Okay this is going to go into the underwriting pile not into the trashcan. So that is giving me an idea and I’m only looking at that zip code.

It’s very important that I’m not looking at the city level at this point in time. I’m looking down at the neighborhood at the immediate area. And there are so many tools, Pad Mapper is a great one. I go to Pad Mapper I plug in an address and now I can draw a circle around it and say, “I just want to look at stuff that’s within a half mile radius of this, right.

And I never cross the freeway. If I’m on one side of the freeway, my circle is actually kind of an odd looking shape circle because it might go like circle and then along the freeway it’s just a line. Because I don’t want to cross freeways because that’s a different neighborhood.

Larry: Right.

Neal: Right, so by looking at that, Pad Mapper tells me that the units are available for rent and whether they match mine or not. Right, and those are some of the things that make me say yes or no. and then remember 1970 to 1995, the broker’s offering memorandum should say stuff like, “Hasn’t rehabbed recently.” If it says, “2016 rehab,” it’s done. I’m not touching it, I can’t make my investors 20%.

Larry: They’ve already pushed it up.

Neal: Somebody else can make five or 6% sitting on it but I’m using other people’s money. So that’s not for me. So there’s a number of things I can do to dump properties in the first kind of 35-40 minutes, and then after that it takes two or three hours before we can say, “Well this is interesting or this is not interesting.”

Larry: Right.

Neal: We also want to plug in that zip code into Housing Alerts and Local Market Monitor and see what their predictions of future rent growth are. So there are zip code that are huge rent growths. Right now St. George Utah has the highest projected rent growth in America.

Larry: Wow.

Neal: And that’s an amazing market.

Larry: I love that city, that’s a beautiful area.

Neal: Amazing area, free standing metro, land around it can keep growing for a long time.

Larry: That’s great. Man this has been awesome I just love this. I loved everything about this. So what would you say to somebody that’s hey I want to do multifamily, I’m interested in getting started. What would you say to somebody that is serious about this and they want to take some action? What can they do to get started to learn more?

Neal: The best way to get started is to go multifamilyyou.com/Larry, or /webinars and watch those webinars. First you got to understand how multifamily is different. Remember our world is completely differently. The lender is not looking at your credit, the lender is looking at the property they’re underwriting the property, loans are based on the property.

You have to first understand our world and figure out if you want to live in it. So that’s the first thing, spend the two hours, watch the webinars, understand the multifamily world. And understand the benefits and the downsides of it. I cover downsides extensively in my events, if you want to proceed beyond that, consider signing up for my boot camp.

When I started learning I would pay thousands of dollars for boot camps and they would turn out to be just sale pitch that you go in there and they were trying to sell some $30,000 product. So I promised myself Larry that I would one day create a multifamily boot camp that had no sales pitch. So the primary sales pitch of my boot camp is there’s no sales pitch.

For less than 1000 bucks you will learn astonishing amount about multifamily and then I’ll put you into a Facebook private ecosystem where you can find lenders, you can find property managers. And that ecosystem is powerful and it’s real. So if you’re interested, come to my boot camp, it is a boot camp that doesn’t run in any physical place. It is an e-boot camp.

Larry: That’s great.

Neal: It runs in the evenings, students take it from all over the US. In fact last boot camp I had 25 students from DC Virginia area. So it doesn’t matter where in the US you are, it’s in the evenings over two weeks. So over two weeks you’re going to learn about the wonderful world of multifamily.

Everything from the best cities in the US, the best neighborhoods in the US, how to analyze properties, how to pick property managers, how to build relationships with brokers and most importantly how to raise money from other people.

Larry: That’s great.

Neal: All of that in two weeks without one second of sales pitch on anything beyond the boot camp.

Larry: That’s great. Now if a person happens to miss one maybe they have an appointment or something, is there a replay they can go back and watch?

Neal: Yes and that is why I teach it as an e-boot camp. So in my mind, I’ve been in traditional degree granting education for two decades. I can tell you this, let’s say you’re the best instructor in the entire universe not even the world. Even then 60% of what you teach them will be gone in the next 60 days. What I like about the fact is I’m recording every event. But just recording is not enough because you’re not going to go back and look at 12 hours of recording nobody ever does that.

Larry: Right.

Neal: But what do is when I give them a 30-day action plan and I tell them, “At this stage when you reach this point and you need to do due diligence well you’re not going to remember stuff that I taught you two months ago. so go back, click on video number seven fast forward to minute number nine and watch between minute number nine and minute number 61.

Larry: Wow.

Neal: When you’re done with minute number 61, stop now you know everything that you need to know about due diligence, go do due diligence only your brand new property that you put under contract. By index linking all of that stuff that I teach to the action plan, people can go and watch snippets when they need them.

And to me that brings a lot more value than an instructor led class that you go to for a weekend because yeah you walk away from the class knowing so much but then you forget most of it. So the e-learning events, the real value is in being able to connect the action plan and go back and watch a little bit of it when you need it.

Because some people get properties under contract in 30 days. I have students that take a year, what are they going to remember? But once they’re in contract, they hit the 30 year action plan and now instantly they have me talking to them about that particular item. Maybe it’s due diligence, maybe it’s about financial due diligence, maybe it’s about finding a property manager, if they know exactly where to go to get that information.

Larry: That is huge. And I’m a firm believer in education and I not only teach this stuff but I also am always learning myself. As you know we just had a conversation I just got back from a weekend event last weekend. I paid $5,000 to go to Detroit for just three days. So sign me up for your e-boot camp I’m in.

Neal: Sounds good.

Larry: I’ll be on your next one. So do you have any parting words for our students Neal?

Neal: Yes. I think this is a time when you need to watch for what’s happening in the marketplace. I teach a webinar that’s about how the financial markets right now are affecting warping the real estate market. Real estate, if it was left alone to itself we would have had a nice real estate down turn already about two years ago. but real estate is not in charge.

Who’s in charge? The federal reserve of the United States, the bankers are in charge. You need to educate yourself on how the financial system is affecting real estate. Now so far in the last six years, the entire impact of what the Federal Reserve has been doing has been positive. So that’s good news for you, right.

Larry: Right.

Neal: But going forward, that impact is negative. You need to learn about multifamily but you also need to learn about interest rate hikes and their impact on cap rates. You need to know what the yield curve is and why you should be afraid when the yield curve starts to flatten in a certain area. So understanding macroeconomics today is actually very important because macroeconomics is affecting real estate in a very direct and obvious fashion.

When you start out, this stuff doesn’t make any sense. But trust me once you read four or five articles you’re going to start reading the tea leaves and you’re going to be ahead of everybody else in real estate. You’re going to know when an area starts to turn because you understand the macroeconomics.

Larry: You know what Neal, I just got to tell you man, we haven’t known each other that long, but every time I ask that question do you have any parting words; it’s usually like stop talking about it and start doing. Take action, if it’s to be it’s up to me.

But man you go into detail, you really are statistical guy, a math guy an analytical guy. And I can see now why you’re so successful. It’s not hype, you’re just laid back, it is what it is and if the numbers don’t work, just move on, right.

Neal: Absolutely move on. So come to the boot camp and you’ll learn about 12 hours of tips and tricks similar to this and an action plan that will actually get you there. My success is not your review after the boot camp, your reviews don’t matter. My success is you buying property that makes your investors money.

Larry: There you go.

Neal: And everything I do is focused towards moving you in that direction.

Larry: That is great and we haven’t even talked about the raising money part of it which is a big deal, the financing part of it, the cashing out, the syndication part of it. We haven’t even got into that.

Neal: That’s next month’s webinar.

Larry: There you go.

Neal: Or podcast, there you go.

Larry: That’s great. Well man I really appreciate you being on, thank you so much it’s been great. I love it and I’m going to be on the e-boot camp I’ll see you there.

Neal: Sounds good. Thank you Larry.

Larry: Awesome thanks a lot everybody. You too.

[End of Recording] [45:04]