Intro speaker: 00:03
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Intro speaker: 00:21
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Trent Werner: 00:40
Welcome back to another episode of the Deal Deep Dive segment on the Westside Investors Network podcast. I'm your host, Trent Werner. In this segment, our featured guests will share their unique stories on a specific deal they've invested in. We will dive deep into finding the deal, financing the deal, writing an offer, and the due diligence. Do us a solid and smash that subscribe button, leave us a rating, and share this episode.
Trent Werner: 01:04
And now, let's dive deep. Welcome back to the Westside Investors Network podcast. I'm your host, Trent Warner. On today's deal deep dive episode, we're joined by the one and only Neil Bawa with Grow Capitis and Mission 10 k. Neil is very well known across the real estate multifamily syndication space and presents across the country at different conferences and classes and boot camps.
Trent Werner: 01:29
Today, Neil is gonna share his insights and opinions on where multifamily real estate is going to be over the next 24 months and beyond, as well as you're going to hear about a super value add deal that Neil and Brokapadis did just outside of Chattanooga. Now let's welcome Neil Bawa. Alright. Westside Investors Network podcast. We got a huge guest today, Neil Bawa with Grow Capitis.
Trent Werner: 01:55
Neil, thanks for joining us.
Neal Bawa: 01:57
Well, thanks for having me on the show. I'm very excited to be here.
Trent Werner: 02:00
I was, I was fanboying Neil a little bit before we started recording. I've heard him talk at the best ever conference, I think 3 years in a row now. It'll be 4 this upcoming year. Neil is I mean, can I call you a genius when it comes to real estate? Are you okay with that?
Neal Bawa: 02:15
I prefer mad scientist because I that really is an accurate description.
Trent Werner: 02:19
And, yes, Neil is the mad scientist of real estate. Very insightful, very knowledgeable, plenty of experience. How long have you been doing it now?
Neal Bawa: 02:27
10 years for a technology company that I was running and then 10 years with investor money. So 20.
Trent Werner: 02:34
Very nice. And Grow Capitis, that means Grow Capitis is 10 years old?
Neal Bawa: 02:37
So this is my second company. I used to, work with a partner and then eventually decided to do it in my own. Grow Capitis is 6 years old, and then Mission 10 k is about 3 and a half years old. And then before that was 5 years with financial attunement. And then 10 years, I was building I was building campuses from scratch for my technology company because we were you know, we just had a huge amount of cash coming in, and we didn't wanna pay taxes on it.
Neal Bawa: 03:01
So we would build our own campuses. So instead of being you know, having a landlord, we'd basically be our own landlords. And so I built 7 campuses in 10 years. It was a it was it was a lot of fun, but also a lot of stress because, you know, you you had a company that was growing at 30% year over year with 100 of employees all reporting up to me. Our our CEO was sort of partly part partly retired.
Neal Bawa: 03:22
And in the evenings, like, at, you know, 3 o'clock, we'd finish our meetings. And then from 3 to 9, we'd be building campuses and doing architectural and design work and going out and, you know, meeting the city because, you know, typically, the city closes at 5. So it was, it was like having this other job, which was both stressful and very exciting.
Trent Werner: 03:41
And that that experience, I guess, kind of correlates with Mission 10 k. Right?
Neal Bawa: 03:46
It does, to with both companies. So Growcapitus has built thousands of units of apartments. Mission 10 k builds only townhomes. So mission 10 k is a very specific mission to build 10,000 rental townhomes, so it does not build apartments. Grow Capitalist currently actually is in a sweet spot right now where we have a 184 unit close to the end of lease up in Provo.
Neal Bawa: 04:09
We have a 240 unit halfway through lease up and a 320 unit going into lease up. So we're in all phases of lease up right now. We've been doing very heavy construction in the past. Now we're sort of more on the on the lease up side for for apartments. So Grow Capital is buys and builds apartments.
Neal Bawa: 04:28
You know, of our 9 exits, 7 are are value add to our new construction.
Trent Werner: 04:34
And what do you I mean, what do you focus on more? Do you focus on development or stuff that's already existing and and go in and do the value add for it?
Neal Bawa: 04:41
It's 2 different companies. There's different teams. So we have an acquisition team and we have a development team. They don't really overlap with each other. So think of it as 2 separate companies.
Neal Bawa: 04:50
So I can say that me and my partner are the only people that are on both sides. But other than that, they function as independent companies. Development is more challenging, especially in the last 2 years. But, on the value add side, we've seen a decline in value. I mean, obviously, you know, properties are 25 to 30% cheaper than they were in at the peak in 2022.
Neal Bawa: 05:10
And so one has to create a lot of value when we are working. Like, for example, I have a property in Texas in Killeen, which is north of Austin, where we've applied for what is known as PFC, you know, where once we qualify, our property taxes will go down about $50,000 a year. And that $50,000 a year basically creates a $1,000,000 more in NOI value and helps us with our refinance because the property, as you can imagine, is quite challenged at this point of today at this point today because we bought it in 2022.
Trent Werner: 05:39
And you said so 7 of the 9 exits you said were value add. Of the the 2, are those ones that, you know, that you started way back in the day? Are you holding those for 7, 10 years? Or how long are you holding these ones that you're developing?
Neal Bawa: 05:53
It's a it's a mix. You know, so one of them, we we actually started building it 2 months after COVID started, and we sold it in 20 late 22, late early 23. So it was a quick development, quick exit. The other one, yeah, it took a while. It it took a while to do, and so it's from it's it's a pre COVID property that we exited, last year or year year before.
Trent Werner: 06:13
And the ones that you were mix. The ones that you were talking about that are, you know, in that lease up or pre lease up phase, how long have you had those ones on your books?
Neal Bawa: 06:21
Somewhere 2019, somewhere 2020, somewhere 2021. So so those are the sort of the 3 years where we did a lot of, you know, let's do new projects, bring in equity. You know? But there was one project had 27,000,000 equity, one had 17, and another one, I think, was 12. So different project sizes.
Neal Bawa: 06:40
So we obviously, that was very easy to raise equity back then, and so we did a lot of these projects. Now we're like, oh, let's slow down. Let's just focus on getting these projects completed and getting them leased up. So we're very much in implementation mode right now, optimization mode where we're basically optimizing our properties. There's a lot more asset management meetings and a lot more, you know, delinquency meetings.
Neal Bawa: 07:01
There's a lot more meetings about, you know, what what are we going to do to bring up NOI than there were in the past.
Trent Werner: 07:08
And with these, I guess, with the challenges that some of the interest rate increases have caused, I know I think it was in 2023, the the kind of mantra for best ever conference was survive to 25, which it sounds like, you know, optimization, asset management is the focus, which, you know, falls in line with that. Where do you see the market and grow cap at Mission 10 ks going from, you know, the beginning of 2024 through 2025 now with rates starting to come down a little bit?
Neal Bawa: 07:38
So I think we're still in that optimization mode. I I don't I think survive to 2025 works. I think I've added a piece, and you'll thrive in 2026. Right? So 2026 is turning out to be, for a variety of years, a phenomenal year for multifamily.
Neal Bawa: 07:55
I think it will be one of the best years we've had. Not as good as 2022 because that was a little crazy and bublish. But I think that we will we will see rates 5 year fixed rates under 4% sometime in 2026. Not maybe throughout the year, but, you know, we'll see under 4. Just for reference, today, if I wanted to get a 5 year Fannie Mae or Freddie Mac locked loan, right, that's fixed rate, I'm right around 5.2%.
Neal Bawa: 08:23
So we'll see a 100 basis point reduction in 2025. We'll see another 50 basis point this year. So that's a 150 basis points. So if I take that 5 point to apply the 150, we could be as, you know, as little as 3.7, but it the math doesn't exactly work that way. So I think it's possible that at some point in 2026, we could see 3.99 percent for a 5 year fixed loan.
Neal Bawa: 08:47
And if that happens, the industry will do really well. What I'm more excited about is not the lowering interest rates. What I'm much more excited about is what will happen with rents in 2026. So in 2024, we've had the largest delivery of new apartment units since 1972. 700,000 units have been delivered this year.
Neal Bawa: 09:10
The market has absorbed almost all of them, and to be honest, there's been slight negative absorption, but overall absorption has been phenomenal. A lot of it is because of, new immigrants coming in into southern markets. And so the absorption rates have been incredible, but still we haven't managed to absorb 700 units without some discounts and some lot you know, reduction in occupancy. So we've seen occupancy fall by roughly about 1% this year from above 95 to below 95%. And the the the thing that's very exciting is a lot of times, you know, I make predictions, but there are really guesses.
Neal Bawa: 09:43
Right? You look at the data and you make what you think is the appropriate guess. But there are certain areas where it's fair to say that I'm not really guessing. I I really know. And one of the way one of the areas that I feel the strongest about when I make a guess is about what would be the supply for any, what would be the supply of apartments 2 years in the future?
Neal Bawa: 10:05
Now you might say, how is your crystal ball so good? The answer is, in the United States, it takes 2 years to build apartments. While it's possible that somebody can build 1 in 18 months, it's also possible that some projects will get delayed and be built in 30 months. So that 24 month sweet spot means that if I wanna make a prediction of how many apartment units will deliver in the second half of twenty twenty six, 2 years from now, all I have to do is look at permits that are being pulled today. Permits are expensive.
Neal Bawa: 10:33
So when a developer goes out and pulls permits today and pays 300,000, 500,000, a $1,000,000 for permits, They only do that when the construction loan is signed because they wouldn't pull the permits unless their construction loan signed. So if the construction loan signed, you're gonna be in construction within 30 days. Right? Because what's the point? You're you're now paying for equity.
Neal Bawa: 10:53
You're paying for debt. So if they're starting today, I know that they're gonna complete 24 months from now. And so when I'm looking at the total number of permits that is being pulled in 2024 on an annualized basis, that number is somewhere around 238,000, annualized. Our demand is 450,000 units a year. Right?
Neal Bawa: 11:15
This year, demand was much higher because of the immigration boost that we got from the from the southern border. So demand was more like 5.50, 600,000, and we delivered 700,000 units, which is why occupancy came down. We saw that rent growth this year was, you know, 1%, 1 a half percent, somewhere in that range. So it wasn't very good. Next year, we that number, that 700,000 delivery shrinks and goes down to maybe 450, 500,000.
Neal Bawa: 11:40
And our, you know, and that's so that's our delivery. That's our supply. Our demand is right around that 500,000. So next year looks like a good equilibrium year, year. But 2026 looks like a year where we will only deliver 2238, 248,000 units in a year where there's 4 50, 500 k units of supply needed, right, for an equilibrium.
Neal Bawa: 12:02
So now you have the reverse problem that we have this year where there's too little supply and too much demand. And so we could see rent growth in the United States in 2026 as a nation be over 5%, and individual markets could easily be 6, 7, 8, 9, 10, 11%. That's what I'm most excited about. So I I tell people, now is a great time to buy, and you need to target to sell it in at the end of 2026. So, you know, get a bridge loan.
Neal Bawa: 12:30
If you're getting a fixed loan, that's fine as long as you go with a lender that will give you a supplemental loan because at the end of 2026, you should be able to get a supplemental loan and cash out your investors. If you do that, that's almost as good as selling the property. Not quite. I prefer to sell it, but almost as good. So so that's sort of my view of where we are for the next 2 2 years.
Neal Bawa: 12:50
One of the key things is I I hear a lot of people coming on these shows, and they don't fully understand that the £800 gorilla is supply. There's a lot of conversations about asset management. I think that's really great. There's a lot of conversations about, you know, cap rates, but the 800 pound gorilla is supply. And supply is the one thing where you can be sure about the future because permits today means supply 2 years from now.
Neal Bawa: 13:18
Right? Right. And there's not enough supply in 2026. So I'm I'm very excited about being in that market. Pricing power should start to return next year because in the second half of next year, in most markets in the US, and when I say most markets, I mean sort of the hotter markets, you know, the Phoenix, Dallas, you know, Houston, Austin, San Antonio, Nashville, you know, and and the Florida markets.
Neal Bawa: 13:40
By the second half of next year, supply will be slightly lower than demand, so pricing power will return. Right now, the multifamily industry in these southern markets doesn't have pricing power. Why? Because there's a lot of incoming supply coming in, and that supply is 1 month off, 2 months off. And so it gives the people that have class b and class c very little pricing power to raise their their rents.
Neal Bawa: 14:03
So rents are, you know, mostly flat with the exception of the Midwest, which is doing really well in the Northeast because the Midwest and the Northeast don't have much supply coming in. Most of the supply is West and, Southwest and and Southeast. So so the the Southwest is really suffering. And and on average, I'd say if I look at the top 10 Southwest markets, rent growth for the last, you know, year has been 0.
Trent Werner: 14:27
Right. Well, and that's I've had some conversation recently with, you know, other professionals in the industry and they they've talked about Arizona, Texas maybe having negative, you know, rent decreases over the last 12 months where Florida maybe hasn't seen that quite yet?
Neal Bawa: 14:45
Not quite, but I think Florida is a trailing market. So we are now seeing rents fall in Florida. So it's Florida just sort of avoided it for a while, and and there's a variety of reasons Miami was doing well. So as a state, one can say that Florida rents are not falling yet. But though I I think in the last quarter, they started to fall.
Neal Bawa: 15:02
So the same story that we've seen in Texas and Arizona is being repeated there. Keep in mind that Arizona as a state has not lost it's not negative rent growth, but Phoenix is negative rent growth, where, you know, Tucson's okay, maybe just slight negative rent growth. Fair you know, the the other smaller markets are actually doing okay. So it it's it's you know, you know, when you sort of roll it up to a to a state level, sometimes you miss the fact that different markets are actually reacting differently. But Phoenix is negative rent growth.
Neal Bawa: 15:31
Phoenix, Austin are significant right negative rent growth, San Antonio. And we've seen a little bit of negative rent growth in the last quarter in Dallas, a little bit in Nashville, and a little bit in Tampa. So, overall, it's not a lot of negative rent growth. You know, the the US still had roughly 1 and a half percent rent growth in the last 12 months. The next 12 months, I'm anticipating more like 2 and a half, per perhaps 3, And then we get a bonanza year in 2026.
Trent Werner: 15:58
Right. So what I I mean, based on what you were just talking about with deliver number of units that are gonna be delivered, it sounds like this interest rate conversation that everyone's having that, you know, everyone normally talks about you can't make a deal pencil right now. But the more important piece that people should be talking about related to this huge spike in interest rates was what it did to development.
Neal Bawa: 16:23
Yep. Yep. And I think that's the story. Right? That's the that's the story.
Neal Bawa: 16:28
The the catch is it's a 2 year lag.
Trent Werner: 16:30
Right.
Neal Bawa: 16:30
Right? So this this development is really hitting our rents hard right now. It's hitting our cap rates really hard because there's, you know, class a properties that you can buy at 5a half cap. So it's really hitting us hard now, but we get the benefit of it 24 months from now. Right?
Neal Bawa: 16:48
When development does the opposite, it becomes a a a beneficiary to value add as opposed to right now being the biggest the the the evil Sauron that's affecting, you know, the the market.
Trent Werner: 17:00
Yeah. And you and you talked about a 150 point or basis point reduction in interest rates, give or take. And is that strictly based on what the Fed is is saying that they project is gonna be the interest rate?
Neal Bawa: 17:13
Yep. The Fed is currently projecting that in addition to the 50 basis point rate cut that we've already gotten, they are projecting a 150 basis points by the end of next year. I think they're right on track. So, I mean, so far, I have to say this. I can't say anything negative about the Fed except for the fact that they were late to this party.
Neal Bawa: 17:33
Right? So they they should have started cutting rates or raising rates about 6 months before they did. So their mistake and and I have to say, unlike our politicians who never take any responsibility, the Fed has repeatedly taken responsibility for its mistakes and said, we were late. We thought it was transitory. We misread the marketplace.
Neal Bawa: 17:53
Now we wanna make sure that we we get ahead of it. Well, right now, the Fed's ahead. At this point, the Fed I mean, 3 month inflation is running at 1 a half percent. So there's no pressure on the Fed. The Fed they can even cut 50 basis points in November they if they want to.
Neal Bawa: 18:07
They probably won't because the Fed really likes to say and they opened with a 50 basis point surprise, a a really good surprise, And now they're they're gonna go 25, 25, 50. The Fed basically says, we look at the market every month. We'll you look at what we see. It might be a 50 basis point cut, a 25 basis point cut, or 0. We might just hold for a meeting and say, okay.
Neal Bawa: 18:27
We'll just let it go to the next meeting. So they're very, very data driven, and I really like that. The and the other thing is that, you know, as far as I know, neither Donald Trump nor Joe Biden have been able to influence the Fed, which is great because both of these guys are boneheads when it comes to actually understanding monetary and fiscal policy. The Fed actually knows what they're talking about and should be left alone. And so I I like that, and I think the Fed's right on track.
Neal Bawa: 18:52
150 basis points by the end of, 2025.
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Trent Werner: 19:29
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Trent Werner: 20:05
Do you have any opinion on that?
Neal Bawa: 20:07
I I do. And I think that the answer is yes. So 7 or 8 times out of 10, when a fed cuts 50 basis points, you will have a recession, but it's not guaranteed. Also, it's clear that the Federal Reserve over time has been getting better at slowing the economy just enough. Keep in mind, their job is very, very difficult.
Neal Bawa: 20:28
What is the job? What is the Fed doing? The Fed's job is to bring the economy to a near halt without tipping it into a recession. Right? Near halt.
Neal Bawa: 20:38
Right? So in an ideal scenario, the economy basically slows to a GDP of roughly 1%, and then, basically, they pick it up again by doing rate cuts. That's extremely difficult to do because because you're actually trying to predict what will happen in the next 6 months. Right? The Fed obviously can look at, it can't look at past data because it has to make decisions based on what happened in the last 30 to 60 days and extrapolate that 6 months out.
Neal Bawa: 21:04
So, yeah, there's a pretty high chance of, you know, that that it could happen at this point in time. They have an advantage, though. One of the things is we can say well, one of the things that I like to say and you've you've heard it in in in my YouTube videos is the Federal Reserve, out of the 9 rate cutting cycles that they've been part of since World War 2, 8 of those went into recession. And the 9th was so close that it wasn't called a technical recession. It wasn't called a technical recession, but, really, you could have called it a recession because the the economy basically fell to 0, but just didn't dip long enough below 0 for it to be called a recession.
Neal Bawa: 21:38
So, basically, 9 times at at a time, the fed put us in a in a recession, which is an acceptable compromise for them as long as they kill inflation. Right? But none of those 9 times was the Fed at did the Fed have the benefit that it has right now where unemployment is at 4.2%, and they're already cutting. They're already cutting. Right?
Neal Bawa: 22:02
So inflation's down to 2 a half percent or a little bit less on a 3 month basis. It's actually down to 1 a half percent. And so they're down, but they've only affected employment to the 4.2% level, where if you look at the last 9 times, by this time, unemployment was already at 5%, 6%, or even 7%. And that's how much work they had to put in to get the inflation down to this level. So this time, they definitely have an extraordinary advantage.
Neal Bawa: 22:28
I don't know if that means we avoid a recession or not, but there's it's very important to acknowledge that the Fed has done a much better job than it they did in previous cycles, and maybe there's external factors helping them. One of the big factors that's helping the Fed right now is this extraordinary infusion of people from the southern border. While I'm not at all a fan of what is happening with immigration, not at all a fan, there'd be obviously, the the data scientist side of me, the logical side of me says, when you inject 6a half 1000000 people into your economy, you will get a boost. It may not be permanent, but what we needed was a temporary boost at the right time, and we got it at the right time. And it basically kept the economy humming, which kept the unemployment rate low.
Neal Bawa: 23:10
In the future, obviously, there's there's negative consequences. But by that time, the inflation rate settles and we may may not get a recession this time. So there's an advantage there. Again, I am not a fan of what's happening with immigration, but the mathematical impact on unemployment is the opposite of what politicians like to say. You know, mass immigration doesn't reduce employment.
Neal Bawa: 23:35
It increases it. And that's anybody who is a not a politically biased person will tell you.
Trent Werner: 23:42
Right. Well, we've we've talked about the economy. We've talked about your, insights and your opinions on what's gonna happen here in the next couple of years. Quickly, I wanna talk about a deal in, Chattanooga, I believe. Sure.
Trent Werner: 23:54
Yeah. You said you just sold that one how long ago?
Neal Bawa: 23:57
Well, actually, sold a couple years ago, but I I thought I would highlight it because it's so unique. And and, you know, we talk about value add, and this deal is what we call a super value add. So it's a super value add deal. And so it's a 151 unit deal. It's called Park Canyon.
Neal Bawa: 24:16
It's in a suburb of Chattanooga. Chattanooga has Chattanooga has about a half 1000000 people, and this suburb is about 37,000 people. It's called Dalton. Dalton is the carpet and laminate capital of America, and so they have a lot of factories there. So we bought this property, and we bought the property.
Neal Bawa: 24:33
It was very lush. It's on the side of a hill, very rolling hills, and it was built in the eighties. And, you know, I was roaming around at the property, and I realized there's a lot of trees. And there's also this massive tennis court. And and next to the tennis court, there's this area where clearly something used to be there because there's no trees there.
Neal Bawa: 24:56
It's just like there's dirt. And so I go there, and I sort of use my boot to dig around, and I realized that I'm as, you know, as soon as I dig down 3 or 4 inches, there's concrete. So I'm like, what is what is this? What is this? So I go back, and I talked to the property manager.
Neal Bawa: 25:12
She'd been there for 20 years. She said, yeah. Yeah. You know, about 10 years ago, there were there were 20 units. There was a building there, and it burned down.
Neal Bawa: 25:19
And, we just decided to keep the insurance money, And we had this guy come in with a bulldozer, and he just bulldozed it. So you have a full foundation there. Right? Oh, this is really interesting. We had no idea.
Neal Bawa: 25:30
I mean right? Because it I mean, the freeze were sort of covering the top of that area. Like, that this is super interesting. So we have a you know, we call our lender friendly lender, and we say, hey. You know, there's just 20 units, so we'd like to build it.
Neal Bawa: 25:42
And they're like, no. No. No. No. No.
Neal Bawa: 25:44
I own this property. I ain't letting you get another lender in here. So we're like, oh, that that sucks. So we go to the city, and we say, hey. Is there enough parking for this?
Neal Bawa: 25:54
And so, of course, there's enough parking because you already had 20 units there. And we're like, yeah. But we we don't wanna build 20. We wanna build more. So we huddle with the city for a few weeks, and eventually, the city says, fine.
Neal Bawa: 26:04
You know, we're looking at all the parking, you know, requirements. You can build 29 units. So we're like, okay. But we don't wanna we don't wanna reuse the found we we wanna reuse the foundation. I said, like, well, if you reuse the foundation, there's a catch.
Neal Bawa: 26:17
Because you wanna build 10 more units, now you'll have to add an extra floor. And if you add the extra floor, you have to add an elevator. And we're like, no. No. Elevators are really expensive.
Neal Bawa: 26:25
All that concrete. No. No. No. We don't wanna do that.
Neal Bawa: 26:28
So we're, like, thinking about this thing. You know, if it's 20 units, it it doesn't really work. If it's 20, 30 units, then we have this elevator issue, and we don't wanna, you know, have the elevator. So we come up with a solution that the city accepts, and this is a very unique solution. So imagine a property that is sloped.
Neal Bawa: 26:45
Okay? So this property is sloped, and we're building by the side of the property. So what we did was, on one side, the property on the on the side that the stairs are, the property is actually, you know, there's there's, it's so it's it's 10 units, 10 units, and 10 units. It's 30 units. Right?
Neal Bawa: 27:05
On the other side, because the the the there's a slope, it's only 2 floors. And so we go back to the property to the city and say, well, if you think about it, you can either count the stairs on this side or stairs on that side. And this side, the stairs are only 2 floors, so we don't need an elevator. Right? And they're like, oh, we see what you're doing, you sneaky bastard.
Neal Bawa: 27:25
You know? So they're like, okay. We'll we'll come. We'll do a site visit. They come and do a site visit, and everyone's sort of laughing about it.
Neal Bawa: 27:32
Eventually, the city says, that's fine. We'll just count it on the right side. So now you have 2 floors, so you don't need an elevator. So now now we're like, okay. Great.
Neal Bawa: 27:38
We can build 29 units, but where's the equity going to come from? Because the bank told us you can't get another loan for this because it's inside of bank's property. Right? Property is really owned by the bank, and the bank's like, we we won't do it. So we go back to our investors, and we say, look.
Neal Bawa: 27:51
The look. We're looking at this. The math is really compelling. We got this quote for $2,900,000 to build 29 units, 100,000 a unit. And there's no way these units are worth less than a 150, 160,000.
Neal Bawa: 28:03
Because it's a nice property. It has a lake and, you know, fountains and greenery, and it's fully amenitized. It's pretty. It's pretty. It's nice look.
Neal Bawa: 28:10
Nice look. And and we we had the highest rents in the submarket. Nobody else had rents anywhere close to us. So we're like and and if we can get those rents for 8 foot ceilings, we can definitely get better rents for 9 foot ceilings granite countertops, but we're only building these at a 100,000 a door. So we go back to our investors, and we say our bank is refusing to give us a loan.
Neal Bawa: 28:31
We would like you guys to give us $2,900,000 in equity to build it, right, from our database. And we'll put in 250 ourselves just to get us started. So we go, we talk to the investors, we beg, borrow, steal, and eventually, we ended up with $2,900,000. Now we didn't quite get to 2.9 from the investor, so we did have some money that came in from the outside. And the whole thing basically took about 14 months.
Neal Bawa: 28:56
And because there there was no debt, there was no lender, we we showed the lender basically, okay. We have $2,000,000 in in equity. The total is 3,000,000. We're gonna continue raising. Could you just let us start?
Neal Bawa: 29:06
And the bank's like, yeah. Go ahead. You know, you're you're making my property more more profitable and bigger. So without increasing my loan, so why do I care? Go ahead.
Neal Bawa: 29:15
They they made us, like, get builders insurance and things like that. And so we go build this, and it's beautiful. Right? So 29 beautiful units, about a 1000 square foot, mostly 3 bedrooms, some 2 bedrooms as well. And I think we leased up the 29 units in about 3 or 4 months because there was already a wait list.
Neal Bawa: 29:34
And a lot of people are like, what is this 29 units? What is the big deal here? Right? What is the big deal? Okay?
Neal Bawa: 29:41
29 units doesn't sound like a lot. How much could it possibly affect the property's value? Let me do the math for you. Right? Keep in mind that the the expense ratio at the property didn't change.
Neal Bawa: 29:53
We had the same employees, 4 151 units versus 1 80. Right? The property taxes didn't change because the property already had 20 units. So it changed by a tiny little bit for the extra 9 units. We didn't build any parking.
Neal Bawa: 30:06
Property already had plenty of parking. We just built the vertical, and we didn't have any cost for the foundation because we already reused an existing foundation. No, amenities either because the property was already amenitized. Right? So can you imagine when you have 29 units at a $1100 each, your rents are gonna go up by about $33,000 a month, but your expenses are only going up by about 5,000 a month because you're paying a little more in property taxes and a little more in property management fees.
Neal Bawa: 30:39
Mhmm. But everything else is already counted. Right? So you have a $28,000 growth in your net operating income on a monthly basis. Multiply by 12, and you're looking at a $330,000 growth in NOI, net operating income.
Neal Bawa: 30:59
It was more like 300, so we'll just use that number. $300,000. When you sell a property for 5 cap, 300,000 multiplied by 20. 5 cap basically means you divide take 100, divide by 5, that becomes 20. So you get 20 x for every additional dollar of NOI, and we have created 300,000 additional dollars.
Neal Bawa: 31:18
300,000 multiplied by 20, $6,000,000 of profit. Yeah. Additional on top of what the property was going to make anyway. Right? So we we had to just this is a disgusting IRR.
Neal Bawa: 31:31
I don't remember what it was. Right? Was it just a ridiculous IRR? Because we'd created $6,000,000 of new value. And the value add, you know, plan that we had the property worked anyway.
Neal Bawa: 31:40
It was fine that, you know, we we, you know, added value, raised rents by 1.50 on existing units. And when we sold it, to spike juice it a little bit, We actually created there was this one other tennis court where you could build another, you know, 26 units. So we sold it with the plans for those 26 units. Now as I know, the new owner wasn't able to build it because the market changed, but we got premium value. We had 23 offers, and we still had 6 offers in best and final because the buyers were like, if these people can do it, we can do it.
Neal Bawa: 32:15
What they don't understand is we have in house development team, and you should never really try to do development without having development staff, but they didn't know that. Right? And so somebody says, oh, wow. I can buy this 180 unit property and make it a 210 unit property. Well, good luck to you for that, but we got out.
Trent Werner: 32:32
So what I mean, is would you say that this deal is one of the I wanna call it lucky, but the fact that you were walking around and happened to find concrete, it's almost like you struck gold with your boot when you were doing that. Right?
Neal Bawa: 32:44
Yeah. I I think that, you know, again, we created our own luck, and we came up with lots and lots of obstacles. I haven't told you the whole story. I mean, the city basically made us drive you know, pull in a 170 yard sewer line because they said, you're building new additional units. The the sewer line doesn't support it.
Neal Bawa: 33:02
So we had to get around that. It cost us an extra 50, $60,000. But when you're making $6,000,000, you can pay the extra $60,000. And I had to put that money up at the end myself because I didn't wanna go back to my investors again. So there were challenges.
Neal Bawa: 33:14
I think the key is a lot of times you find opportunity, but you have to be able to follow through and solve challenges. Like, if if the city had forced us to make the elevator, it would have made the building wider. We'd have to shore up the the foundation. Elevators cost a $150,000, you know, and construction goes on much longer. We may not have even done it.
Neal Bawa: 33:36
So you you're constantly trying to look for solutions to every problem. Right? And that's really the value that we created there, not the fact that we found that there were additional units to be built. The truth is many buildings built in the United States in the seventies eighties land was so cheap in the United States back in the seventies eighties that there were many, many buildings in the US where you have the capability of building more, meaning they're zoned for a higher, you know, units per acre than the building currently has. And in the seventies eighties, we were also building more parking than we are building today.
Neal Bawa: 34:10
Today, the parking ratios are lower. You can get away with a lot less parking. So those properties had extra parking. So when you build additional units, you don't need that. But people have to that's not enough.
Neal Bawa: 34:21
You have to follow-up. You have to do the work. You have to establish a team and and work with, you know, a builder to get it done. So it's a it's a huge amount of work. I mean, I it was probably not even worth the extra work for us, for the GPs, because we took on a massive amount of extra work.
Neal Bawa: 34:36
But it was just fun to do. It was, it was interesting. It was new, and so we really enjoyed it.
Trent Werner: 34:41
And I'm sure your investors were glad that you guys decided to do that.
Neal Bawa: 34:45
Yeah. It was, again, it was it was nice that we got more than 2 of the $2,900,000 out from our existing investors. They believed in what we were doing and were willing to put more money in. Nobody was forcing them to put money in.
Trent Werner: 34:57
When and you said that the development took 14 months. It took 3 or 4 months to get it leased out. How long did you guys have it before you started adding the additional 29 units?
Neal Bawa: 35:08
Little over a year. I think the 1st year was obviously our value add program, and so we were focused on that. The 2nd year is when we started looking at this. Maybe maybe towards the end of the 2nd year because it took us about 18 months to implement our value add program, and then we were like, okay. So we're done.
Neal Bawa: 35:23
You know, is there anything else we can do?
Trent Werner: 35:25
And the total hold time was what? 4 years? Little over 4 years. Yeah. That's not not a bad return in 4 years then.
Neal Bawa: 35:32
Not a bad return at all. So I think that those kinds of, you know, pivots really help. Obviously, all of us know how to do the, you know, typical value add. But sometimes you get lucky and do super value add. Right?
Neal Bawa: 35:47
We we did we went on to do super value add again at a at a property in Memphis and had an even higher return. But in that case, we did not. It was a self storage property, and the value that we the super value that we added was we built more RVs parking spots. And to pay for the RVs parking spots, we put solar on top, which was which is in Tennessee, you get a huge kickback from the government to put solar. And so we had EV charging spots, and we were charging 40¢ per kilowatt hour, and we were generating at 6¢.
Neal Bawa: 36:22
So generating at 6, selling at 40.
Trent Werner: 36:25
Also not a bad return.
Neal Bawa: 36:27
It worked out well for us. And that one, we actually sold in only 3 years, a little over 3 years, because, you know, building RV parking spots takes a lot less time than building an entire building.
Trent Werner: 36:37
And I guess last question before, you know, before we wrap this up. You mentioned storage. I know your, I guess primary focus is multifamily or, you know, residential. Do you, and self storage has been a big topic of conversation over the last 5, 7 years. Where do you see Growcapitus getting more into self storage, or are you gonna keep it at a minimum?
Neal Bawa: 37:01
No. I think we've missed the boat on that. You know, we obviously did this one property. It was a pretty large self storage property. But I think that we could could have gotten the self storage 5 or 6 years ago, but we were busy with townhomes and other things.
Neal Bawa: 37:12
So I think we've missed the boat at this point in time. Self storage cap rates have compressed. Now, of course, they've decompressed in the last 12 months like every other asset class, but they haven't decompressed as much as multifamily as multifamily cap rates have changed more than self storage has. So I I just think that there's less money in self storage today than than there was in the past. The good operators are in there.
Neal Bawa: 37:33
They're making offers. They're doing their job. You know? It's it's just the the mathematics is not as compelling for self storage as it as it was about 5 years ago.
Trent Werner: 37:42
And based on what we talked about earlier, 2026, you know, multifamily should see an increase again. So it sounds like multifamily is where you wanna be right now.
Neal Bawa: 37:52
Absolutely. And I I I also I'm making the bet that the you know, I think that Kamala Harris will tweak out a win. I don't think that they get to a a some, you know, absurd number of seats in the house or in the senate. But I think that as long as we have a Republican president, we should get a healthy amount of immigration, and that definitely helps us from a perspective of rent growth.
Trent Werner: 38:14
Absolutely. Well, Neil, where can
Neal Bawa: 38:16
people I don't think it'll be crazy like what they did in 2022 or 2023. I get the feeling that Democrats figured out, oops. You made a huge mistake. Let's not ever do something as stupid as this again. But but I think we'll get a healthy rate of immigration.
Trent Werner: 38:29
And I I mean, I I would tend to agree with you. We can we can talk politics when when we're at best ever conference 2025.
Neal Bawa: 38:38
Sounds good.
Trent Werner: 38:38
Neil, where can people hear more from you? I know you got a YouTube channel. Where can they find you on online? Best thing
Neal Bawa: 38:44
to do is to either Google my name. I'm the only Neil Bauer on the world wide web. And so all everything good and bad is about me. Or just type in Multifamily University into Google. Click on that link.
Neal Bawa: 38:55
We publish 10 webinars a year. About 20,000 people sign up for those webinars. I just did one for Airbnb. So short term rentals is something that I'm interested in, and we had 1400 people sign up for that webinar. So these are free webinars.
Neal Bawa: 39:11
We do them on all kinds of different things. My next webinar is the impact of artificial intelligence on industrial real estate, and that is at the end of October, beginning of November. So there are all kinds of webinars on things that I'm interested in, impact of climate change on real estate. So I do research for about 30 days. My research assistant, Chad GPT, is heavily involved.
Neal Bawa: 39:31
And then we do beautiful decks, and we present them 10 times a year. Obviously, as you can imagine, 3 or 4 of the presentations every year are about multifamily or single family, but others are about other asset classes in real estate. So that's how we scratch our our, you know, research itch, and anyone can, check those out at Multifamily University. It it's free. It's always free.
Neal Bawa: 39:51
We don't have an educational program. So it's meant to be given away forever.
Trent Werner: 39:55
Awesome. Well, thank you so much for joining us today, Neil. I appreciate you sharing all your, vast knowledge and expertise with us.
Neal Bawa: 40:03
Thanks for having me.
Intro speaker: 40:04
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