Tertiary Markets and Tokenization with Neal Bawa



Episode 191 of the Diary of an Apartment Investor Podcast with Neal Bawa. Transcript by Otter.ai – please forgive any errors.



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Brian Briscoe 0:00

This is Brian brisco hosts the diary apartment investor, podcast and partner at four oaks capital. So we have something that we've been working on for a really long time we are building and we'll continue to build an educational community that we're calling the tribe of Titans and it's going to be a community of multifamily investors based around education and his house on the mighty networks. What you're gonna find in there is a lot of events that are exclusive to the tribe of Titans members a tonne of educational content and you're gonna find great people so if you're listening to this podcast because you're looking for community or you're looking for education, go no further the tribe of Titans is something you need to look into for the price of about $1 a day you're going to be able to have access to everything that we have an elder content that we continue to produce for years to come. And just so there's no pressure and there's no obligation the first month is free so sign up first month free and give it a test drive if you'd like to keep hanging out and you'll continue to have access to well me and my partners are four oaks capital in a lot of other experience and aspiring investors and where can you find it the tribe of Titans dot info there's a link to that at the bottom of the show notes of every single episode right now so if you're interested type in www dot the tribe of Titans dot info or go down to this bottom in the show notes and just tap the link so


Neal Bawa 1:20

when you look at the age of the true tertiary we are finally here. We are also in the age of the true farflung suburbs. Look at Austin. By the end of this year, Austin will become the most expensive city in the nation outside California. When I look at Austin the only true farflung suburb is the city of Killeen 52 minute drive from North Austin which is of course the part of Austin that's blowing up the most you can have your cake and eat it too. You can live in Killeen, and work in Austin. So I'm talking about two things through tertiaries. Idaho Falls is one example St George's another example. And then far flung suburbs, which are 50 or 60 miles away from a metro these are the the hybrid work phenomenon. I think they are the biggest opportunity in real estate.


Brian Briscoe 2:12

Welcome to the diary of an apartment investor podcast with your host Brian Briscoe. In this podcast we bring some of the top professionals in the apartment investment field to discuss various aspects of the apartment investing journey with the sole purpose of educating listeners to make wise investment decisions. The Diary of an apartment investor podcast is sponsored by four oaks capital bringing you high yield returns through apartment complex investing. Welcome to the diary and apartment investor podcast. I'm your host Brian Briscoe with Four Oaks Capital got a one of a kind you know maybe it's gonna be a future trend show today usually we bring on two different guests and experience an Aspiring Investor. Today we have the one and only Neal Bawa. So Neal, welcome to the show.


Neal Bawa 2:52

Thanks for having me on the show. Brian. Excited to be here.


Brian Briscoe 2:55

Yeah, appreciate your time and very much appreciate you coming on the show today. So we're talking about some things that are I think near and dear to my heart today. But before we do that, let's talk about you can you give us an idea of who you are, where you come from, and you know what got you into multifamily?


Neal Bawa 3:10

Sure I'm a technologist a data scientist I'm based in the San Francisco Bay area so steeped in Silicon Valley culture and style and got into multifamily and diverse most people get in by buying a you know, a single family home for rental or they maybe they do some private lending. In my case, in 2003, my technology company decided to build their own campus, all our apple spaceship campus sort of style, you know, basically build something that was custom designed for their own use. And as chief Operations Officer of this company of hundreds of employees I was put in charge of that by a CEO who was way ahead of me in these matters and really knew what he was doing and so it was a tremendous guide and we built that campus while in in a 12 month crazy timeframe where our company grew 30% so we were working hard on growing the company and that during the day and then basically building the campus at night so like doing all of our action items in the evening and by the time I was done I had a years worth of sleep debt but I also had astonishing chops when it came to you know new construction real estate and that's really what got me into real estate and then from there on I moved on to single family followed by you know, small multifamily followed by very large multifamily and here we are in 20 my company got sold in 2013 so 2021 sorry eight years and we have a $500 million portfolio with 550 investors and its value add multifamily and new construction multifamily for the most part though we have student housing and self storage and industrial in there as well. Yeah,


Brian Briscoe 4:48

so you took the same path as a lot of other people you know, single family to small multifamily to to the large multifamily. Very, very, very interesting. Why did you choose single family upfront


Neal Bawa 4:59

Should have there should have basically had the balls to take my all of the learning from my real estate development and apply that. And so the right path for me I should have gone straight into development if I had I'd been hundreds of millions ahead, but I didn't because simply because you you don't somehow magically connect the fact that you built one or in my case, six different campuses with with competency with taking other people's money. I mean, that was our money that was company's money. And so I didn't connect that and it's like, well, that was the biggest mess of my life that I had competency and I should have just jumped into large multifamily new construction, you know, in 2006 789, whatever that may have been. But because I was insecure, I was like, Okay, I think real estate is a pretty awesome thing. I love these tax benefits. I have the big fat tech salary, and I live in Texas fornia. So I'm working for the man. And so real estate is awesome for these tax benefits. I've never seen anything like it anywhere else. So I want to jump into real estate, well, what can I do? Well, the answer is single family. And and as I started researching and collecting money, I was you know, very conservative, I'm Indian very conservative mindset. And so I'm collecting money and money and money. And by the time I'm like I have enough money 2008 happens. And now everybody's telling me, you would be the greatest idiot of all time to get into real estate. But man, you know, I'm a mathematician, I'm a student statistician. So I'm looking at the statistics, and I'm saying my stats are saying this is the greatest time ever to invest in real estate. Why do you think it's the worst time what because prices are falling? And I'm like, how is that a bad thing? Yeah, so like a sale. Right? So it's like a sale. So nobody would listen to me. My family basically stopped talking with me, because every meeting I would bring up how great it is to invest in real estate. And they would all you know, basically say Real Estate's The worst thing ever, you know, this is 2009, every, every party, every discussion is about bashing real estate. And here I am the only guy on the other side taking it from like six people who are telling me how much of an idiot I am. So eventually, I basically say, I'm going to prove all these people wrong mathematically. And that's how I got into single family real estate and we can tie


Brian Briscoe 7:07

Yeah, yeah. And I like your honesty there. You said, you know, there there was there was you should have gone straight to multifamily you should have but you know, there were things, you know, personal things that held you back. I think a lot of people are dealing with those exact same personal issues. So I appreciate you bringing those up. I bought my first single family investment property in 2007. You know, not knowing the market would crash, you know, and then the market crashed, and I was still cash flowing. And I'm like, wow, I'm gonna buy buy another one. My big mistake is I only bought one more at the time. I didn't, I didn't try to, you know, buy more and more and more and more. But


Neal Bawa 7:41

yeah, so So I mean, the difference there was I'm so steeped in math, and math really helps me do lots of different things. I bought 10 together to prove my point. And and so it's a it's a you know, it's an interesting story of how I bought 10 in a city that had no tenants. And why I bought what no 10 instead of one, but and how I leased them up, but but I think part of it was because statistically, my I felt like my chances were actually better with 10 than one. And they were Yeah,


Brian Briscoe 8:13

yeah. And I I actually have two degrees in math. And you know, mathematically I can make it work. But the risk level for me, that's the reason I didn't I mean, mathematically, you know, back in 2008, I thought, Man, I should buy, you know, 1000 homes right now. And the risk level when I looked at, you know, where I was at, and everything else I it was too big of a risk for me to be honest. But like I said, I wish I could go back and overcome those personal hurdles and have invested, you know, as much as possible, but well, cool. Well, that that said, let's let's start talking about, you know, these disruptive trends. I've seen this very fascinating your webinar that you've given on the top 10 disruptive trends, let's start talking about the things that are disrupting the market right now.


Neal Bawa 8:56

Absolutely. So the one that I like to start with, because it really sets the groundwork for all of the other disruptive trends is hybrid work. So after a lot of research, and after reading hundreds of articles that are coming from different companies, here is our hypotheses. There are 22 million white collar workers in the United States, they work at a desk or they work at a computer Basically, these 22 million people have now become freed from where they work. And you might say, well, the US has 330 million people that doesn't sound like a lot no other live you know, our working population basically is around 200 people. So one in 11 people one in 10 people has completely become freed you know where they can work anywhere right now and you might say well yeah, but there are companies are still wanting them to come in one or two days a week. Yeah, but yes, but the the number of companies willing to accept and be flexible and willing to basically accept the fact that you can live in one city and work in another is somewhere around 50 and 100 times higher than it was 18 months ago, 50 to 100 times more companies are willing to accept employees that completely work remotely. And so those 22 million people, and there's actually, you know, when you talk about white collar workers, they're about 70 million of them. So only a percentage of them have this ability, not every company is willing to do it. Right. So I'm only looking at that percentage that has that ability. Of those 22 million people, only about a million, the early adopters have moved so far. And so all of this talk of the churn that the United States has experienced in the last 18 months of people moving for their jobs, and we're moving to Phoenix and Boise and, you know, a bunch of other metros, Austin, is just the early adopters, just the first million out of 22. And the remaining 21 million haven't moved for a variety of reasons. One is, you know, COVID still here. And the second thing is they've got family. So it takes them a while to make that decision to say, you know, I'm going to move because it's better for me, even though it takes me away from family. We we are forecasting that over the next five years, those 22 million people will move. And when those 22 million people move, it completely changes real estate in the United States. And we call this phenomenon hybrid work. We call this phenomenon, the fact that a percentage of the US population is now going to work remotely. And once again, I keep emphasising this to those of you that are like now Apple wants people to come back, they're only giving them two days off apples one company, right? out of 70 million white collar workers, we're talking about 22 million of which 1 million has moved in, it's already changed real estate so dramatically. So hybrid work is this, this astonishing phenomenon, where something that should have happened over the next 20 years, accelerated so much that is now going to happen over five, because because not because of those 22 million people. So the biggest impact from hybrid work is not the 22 million workers. It's the fact that we have now trained 3 million CEOs on how to manage workforces. So those 3 million Firstly, were resistant to remote work in hybrid work and secondly would not have gone there if this kind of calamity had not happened. But those 3 million companies have now pivoted allowing people to work remotely and giving them all the capabilities to work remotely and a lot of the CEOs discovered holy crap we made more money our net profits are going up when we do remote work so when 3 million CEOs see that and when 3 million advisory boards and boards of directors you know see the profit and loss statement that changes things forever. Hybrid work means that we are now in the first full year to the 2011 is the first full year of the true tertiary market. And the word tertiary was misused in the past because people would consider a place that like Buckeye is 45 miles from Phoenix and they would say but you know Baca is a tertiary market. No, actually, Baca is just a suburb of Phoenix people drive to Phoenix, right especially to Eastern Western Phoenix all the time from Buckeye. It's a suburb it's just a far off or far flung sample. A true tertiary market is a market that's not within 100 miles of anything else St George is a true tertiary market because Las Vegas is 120 miles away in Salt Lake city's 160 miles away. Idaho Falls is a true tertiary because in one direction you have to go Salt Lake City once again that's three hours the other direction you have to go to Boise which is three hours Yeah, right. So when you look at the age of the true tertiary we are finally here. We're also in the age of the true far flung suburbs. My best example is look at Austin, hottest city on the planet. It is by the end of this year, Austin will become the most expensive city in the nation outside California, most expensive city in the country outside California. And yes, I include New York in that by the way, it will surpass New York in terms of how expensive it is to live there, right? It compared to its salaries, which are also going up but they're not going up as fast as the as the home prices and all the other expenses are so Austin will become basically beyond just the San Francisco Bay Area. Los Angeles, San Diego, the most expensive city in the US. Now it has a far flung suburb and I look at Austin, the only true far flung suburb is the city of Killeen. 67 miles north of Austin 52 minute drive from North Austin, which is of course the the part of Austin that's blowing up the most the most expensive part of Austin, the part that with the fancy places that have these these, you know, huge towers, all of that is north Austin, and it's 52 minutes. So Killeen in my mind becomes the new Sacramento to the San Francisco Bay Area. You know, Sacramento is 114 miles away, and more profit has been made in Sacramento in the last year last year and a half then in San Francisco itself. Because people moved, they moved 100 miles, right? Well Killeen 67 miles, you can have your cake and eat it too. You can live in Killeen and work in Austin. And you can come in two days a week or even five days a week, if you're working in North Austin, where the apple campus is being built, and the Google campus is fairly close by. That's hybrid work, it is a massive thing that changes and I could go on and pick every city in the United States and tell you what far off, you know, Metro is going to, you know, become so I'm talking about two things through tertiaries. Idaho Falls is one example, St. George's another example. And then far flung suburbs, which are 50 or 60 miles away from a metro. These are the the hybrid work phenomenon, I think they are the biggest opportunity in real estate.


Brian Briscoe 15:43

Yeah. Now, looking at the hybrid work. I mean, I think for many years in my philosophy was I wanted to live close to work to minimise that commute time, the closer you get to the city centre, the more you pay, I think, yep, you know, what the trend really is, is people are, if they're only going to work twice a week, instead of five times a week. Now that commute doesn't matter as much, they can live a little further away, and they get more bang for their buck. You know, I think that's that's the obvious answer for a lot of people. And I mean, I just moved from DC to Idaho Falls myself. And so I'm, I'm part of that trend, you know, I'm working from home, I'm not quite the the hybrid, but you know, part of that trend, you know, living somewhere where I want to live, and not where I have to live and doing everything remotely. So


Neal Bawa 16:30

I want to clarify something. The word hybrid work implies that you're working in the office two days a week, and you're at home three days a week, that's actually not the definition of hybrid work. Hybrid work is a term that implies that a significant portion of the American white collar population will entirely work from home, while a larger chunk continues to work, you know, two days a week at home and three days a week in the office. So hybrid work doesn't actually imply hybrid work, it implies that the workforce has now split, okay, right, where a smaller portion just works from home because they want that freedom. They're willing to give up some salary and other benefits for that freedom. We've done surveys, we've looked at surveys of those, they are mind blowing, they're willing to give up salaries, they're willing to give up perks, they're willing to give up. salary increases, because COVID brainwash 7 billion people, we think differently. Now, people want that park, that open space. So even the people that are going into work two days a week are now likely to buy homes five or 1015 miles further away than before, because they're chasing open less and low density. We are all trained now that the world needs to be a lower density place than 18 months ago, right? I mean, being next to somebody, people are just uncomfortable standing next to somebody in the front and that alone touching them.


Brian Briscoe 17:52

Yeah, I think I think that trend existed prior to COVID. But COVID just gave it a huge kickstart, you know, it really accelerated the trend, I think, probably accelerated maybe 20 years in an 18 month period where the world was going like that people were moving at high density to low density places already from high cost of living and low cost of living already. But COVID really accelerated the trend, I think was already there.


Neal Bawa 18:17

And then technology is going to accelerate it further. So you know, we know you know, what are the hottest things in technology right now you've got the cloud, you've got AI. Here's my prediction three years from now the hardest category in all of technology hotter than AI hotter than the cloud is going to be enabling remote work more effectively. I am now seeing in the last 18 months, hundreds of startups launch most of them will fail. But some of them will end up becoming 10 billion and 100 billion dollar companies. We're seeing companies like zoom and slack benefit from from this but they were still pre COVID companies in a post COVID world the the the mantras have changed so much that now there's a whole bunch of new startups starting, for example, startups that have multiple cameras, so three dimensional cameras, allowing you to be have a a holographic projection have you in rooms so that when we are all sitting in rooms, we're not seeing each other in 2d, I can see you right now, Brian in 2d. But if there were three cameras on your side, and three on my side, right, or one camera that had three different lenses, I could see you in three dimensions. And we could actually virtually be sitting in a room where I could see everyone in that room. And as they turn on their side, I would see them turn in my virtual camera room, right? Imagine that sitting in a room together. And the computing is doing all the magic in the background to make that that person seem like they're in a room not sitting in their own house. There's 100 companies right now doing this and every one of them is getting funded because of COVID. Yeah, yeah, I


Brian Briscoe 19:57

love that now. I mean, the downside to that I'd have to clean my whole room instead of what's just. But


Neal Bawa 20:03

no, no, no, no. So one of the things that's happening is you need a better graphics card, right? But there's also near 20 different companies basically saying, How do I take Brian's, you know, just Brian and his white shirt with the red, you know, with blue checks, or whatever it is that you're wearing, and his head, and I remove the background. And then I want Brian in 3d. So I need multiple cameras. If I have three cameras, and I can remove the entire background, I can take Brian and I can place them anywhere in the world. So the backgrounds are simply going to cease to exist. And that's, that's a that's kind of the technology side of hybrid work. But what I'm postulating is this, you're going to see these cities like Buckeye, Arizona, they're 45 miles out of Phoenix, explored, you're going to see Maricopa, which is about 40 miles south of Phoenix explored, then then you're going to see through tertiaries, St. George, Utah, you know, Idaho Falls, I could probably give you 20 other examples of 20 different places. Kennewick Washington, I think is going to see explosive growth, right? You're going to see all of these cities in Oregon that are like 100 150 miles away from Portland are going to see explosive growth. That is our postulate. And we are tracking data. And the early data suggests this, for example, I mean, you think about Idaho Falls right? One of them. I'm taking this example because you live there now. You don't ever think of Idaho Falls as a city. This is a city of like a, you know, a metro of less than 200,000 people. You don't ever think of it as home prices there in a year are going to grow out go up. 34%, right? You'd say Well, yeah, it's COVID. So everywhere in the US is going to go up 1015 16%. But this is probably going to be at the lower end of that because it's by itself. There's nothing around it. 34% is the home price growth in Idaho Falls. So it's crushing home price growth in Phoenix, right? The only city that is coming close to is maybe Austin but if you look at what it's what it's crushing, it's crushing San Antonio Houston, Dallas, it's crushing superstar cities. So already in the first year, our postulate of hybrid work has some data to support it. Yeah.


Brian Briscoe 22:06

Now how does I know this is one of the data items that you track you know and one of the things that you say when you're when you're analysing areas look at median home price, price growth, how does it growth in median home price translate to the growth in rents for example,


Neal Bawa 22:23

we'll give you a rule of thumb so the here's our rule of thumb and it's the rule of thumb I said had to be modified a little bit because of COVID so before COVID the rule of thumb was that whatever your home price growth is, in a certain year, the following year you will get about 40% of that as rent growth so 40% So for example, if you had 6% home price growth in a certain market in a certain year, then the following year you'll get 40% of that we just do point 4% as home as rent growth Now usually we found that number actually is between 40 and 50% so in its it's consistently been a little bit over 40% but we were comfortable with our 40% rule of thumb in a post COVID world what we've seen is it doesn't take a year for that to happen. What we're seeing is that that year that it takes for you know home price growth to show up as rental growth has actually been compressed to six months and we are now more consistently seeing a 50% number right so like for example I'll give you the this is the most crazy over the top example anywhere in the US. Boise Idaho had massive home price growth right so 35 40% but it's rent growth depending upon which which you know, provider you take the rent growth from is over 60 or 80% of that home price All right, that's a crazy example because that means ranged in Boise went up between 20 and 30% in a single year. Right and it hasn't even been a whole year it's kind of like like six months after home price growth. And a lot of people like why are these two things connected home price growth, you know rent growth and home price growth? These are not the same? The answer is this. Every time home prices grow faster than inflation. They throw off a large number of people that almost were homeowners almost but they just couldn't get there because home prices went up and now their debt to income ratio just doesn't work they can't get a loan for the kind of home that they want. Now these people because they're so unhappy this like we were almost there. They don't go into low end multifamily they they go find nice upgraded higher end multifamily. You know something that's being rehabbed something that looks like that home that they were going to buy, right so those people are the ones that drive rents up because to drive rents up you need enough people that want upgraded multifamily, yeah, not not traditional multifamily, but the ones that we upgrade, and that's part of our job, and that's what drives rents. So consistently, what you'll notice is if home prices are going up 20% somewhere, you'll get 40% of that rent growth that's 8%. By the way, in our world, 8% is a mind boggling number. And there are dozens of markets in the United States at double digit rent growth for the last 12 months, double digit.


Brian Briscoe 25:13

Yeah, yeah, and as a syndicator, and as somebody who's trying to purchase properties, it almost makes me I get very uneasy putting an 8% rent per drag, you know, rent growth projection on my spreadsheets, just because, you know, it brings a little bit of risk in there. But you know, the, if we're using that rule of thumb correctly, you know, 40%, whatever the single family home growth was new, I think that gives us a lot to get us somewhere where we can, we can justify those numbers, and perhaps pay a little higher price than we normally would. And yeah,


Neal Bawa 25:46

that's a good rule of thumb, we don't even use it ourselves, we tend to use 30%. Because even today, with 30%, if, if a metro has had 20%, home price growth in the last 12 months, 30% of that is still six and 6% rent growth would justify the purchase prices that people are offering today. Now the only catch is, what you can do is to do 6%, two years in a row, you can only do that once and then obviously after that, you have to trim it down, maybe you go six, four, and then two and a half, two and a half, I think is our long term target at this point for rents, because inflation is higher than it was in the past. So we no longer have a 2% trendline we have a two and a half percent trendline for the future.


Brian Briscoe 26:27

Yeah, yeah, I think that that's a good solid way to do it, you know, one year rent growth, you know, you can justify a little higher number on there, second year more moderate and then go back to your your inflation rate. And, you know, the feds looks like they're gonna keep you know, two and a half to 3% as their target it I mean, from what I've heard, you know, read Wall Street Journal, that's, that's where I get most of my information. It looks like they're going to keep, you know, two and a half to 3% as their target for a little bit. But, yeah, we'll see. We'll see how that works. Yeah, right. So we had five 5% last year if you if you believe what the Fed puts out. So um, so let's talk about something else that I think a lot of people are interested in, you know, there's this tokenization effort as well, that you're you talk about, you know, how is that affecting the real estate market?


Neal Bawa 27:15

It's not affecting it yet. But it is the biggest impact in the real estate market in the last 20 years. So the example I like to give is, if you look at 1997, we had this enormous industry of travel agents, every single strip mall had a travel agent. Yeah. Then Six years later, they were gone. Yeah, right, just an entire industry, over 50 years old, just gone in six years, right? That is the kind of impact that tokenisation brings to real estate, but in a good way. And let me explain why. Real estate is many hundreds of times more illiquid than stock, right. So think about it, I want to buy a single family home. Imagine the research, imagine the outreach, I have to talk to lots of brokers, I have to drive for hours to the place that see a property then drive back another time. And even if I buy the property, then I have to rehab that property today, because they're too expensive today to just put on the market, you got to rehab it to get cash positive cash flow, by the time you get to the point where boom, this property is now you know, on autopilot, you have spent many, many hundreds the amount of time that it would take you to pull out your phone and buy 10 shares of Apple or 10 shares of Google. So it's fair to say that real estate is many times more illiquid, sorry about the sun in the side coming in from the blinds real estate as many 100 times more illiquid. And that is why even though all of us love to point out the fact that real estate beats, you know, stock markets and its gains for the last five years, 10 years, 20 years 30 whatever timeframe you pick and beats it. That's why the stock market's more popular because people are addicted to buying stuff on their phones, you know, they get a good idea from somebody, they just want to go on their phone and click and buy. Here's our prediction. Three years from now, somebody watches a podcast that Brian is doing. And he has a guest named Neil and the Neil comes back and says I am saying Idaho Falls is the best place in the universe to buy real estate, right? I'm not saying that. But if I was that, you know, here's what is going to happen. People will take phones out of their pocket, they'll tap on some random app and there's going to be 20 of those apps just like Robin Hood or maybe even it is Robin Hood, maybe it is E trade. And they will type in Idaho Falls and they'll see hundreds of stocks that are basically tokens. They call them tokens in the real estate work, but essentially it's a stock and that stock it has a 50 or $100 fixed value at this point of time. And that stock is connected to a multifamily or a single family home or maybe even a parking lot with a performing parking lot that's been rented out and they will say I owe Idaho Falls. I'm gonna buy $100 worth of this Housing $100 worth of that housing $100 worth of that house, and I'm gonna buy, you know, $100 shares in 10 different houses in Idaho Falls. And now I don't ever have to worry about who's renting this home, which property managers taking care of it, where's the contract? Because tokenization is the process of taking care of all of those things. No one ever worries about the fact that Google or Apple could steal the money that we've just invested in them, right? Because there's a company and a process and a set of laws that apply so that Google can steal our money, and Apple can steal our money. So we never even think about that. Imagine three to five years from now, you're thinking like this is this is you know, there's this intermediary company, it's their job to figure out you know, all of this stuff, no one can steal my home, I own 100% of this home, or $100 worth of this. I'm not 100% that's tokenization it's so incredibly powerful. To be able to simply get a tip about Destin, Florida is an awesome place. And then on my phone, 10 minutes later, I own $10,000 worth of 50 different homes in Destin, Florida. That's the future of real estate, when we get there the stock market better watch out because we think that real estate is going to become the big dog.


Brian Briscoe 31:12

Yeah, yeah, isn't there there's a lot of reasons that you know, real estate, should be the big dog. You know, a lot of people look at real estate and this this is something that I I look at love people look at real estate as an alternative investment. I think real estate is the original investment, you know, in stock markets really kind of the alternative. Be I love the I love the idea, you know, I'm curious what it would take to get there and how everything would be set up. But


Neal Bawa 31:37

what is it let me give you an actual example. So you can basically say this. So there's a company, I'm not part of them. I'm not invested in them in any way. It's called lofty, l o fti.ai. So they're not.lofty.com. But lofty.ai. So you go in, you type lofty.ai into the browser. Right now, there's a property it's in Cleveland, it's four to four or five East 1/77 place in Cleveland. And you can buy pieces have this property for 50 bucks, you know, and they're not getting a loan on it. There's no lending. So it's actually much more secure than our typical investment because we get loans. And what they're forecasting is 6.2% cash on cash 11% appreciation, so a 17% APR with IRR return. I don't know if they're going to hit that return. Yeah. But here's my point. Before if somebody came to you and said, Hey, become a partner with me at 424 or five East 177 plays Cleveland, you would say, Oh, no, I can't because I don't know anything about Cleveland. And if I give you 25 or $50,000, that money is going to be sunk. But today, you don't know anything about lofty AI. But you can know everything about their properties by investing $50. And so what I've been doing is every single time they come up with a property and they're coming up with properties in lots of different places. They had one in Detroit, they had one in St. Louis one in Cleveland, I put 50 bucks in, right because I am interested in gaining intelligence about what it is that they're doing. And as you know, for 50 bucks, I get the same visibility as I would traditionally get in a $50,000 syndication right now, you might think, well this might be bad for syndicators like me because it's commoditization, yes, but commoditization increases prices because the number of buyers increase. So cap rates decrease whenever commoditization occurs. If you look at the stock market, as as E trade and all these other Robinhood made it easier for people to invest in the stock market, stock market stock values went up not down. ratios went down. Yeah, it's Yeah, ratios have gone down across the world, every major market where people are buying, you know, stuff through apps, P e ratios are down so it's a worldwide effect. Imagine that applying to the market and imagine for 50 bucks having all the same intelligence about federal properties performing now imagine 10 different companies like lofty.ai Yeah, that's the world we're about to live in. Yeah, I'm incredibly excited about this because this is a sea change. This is a bigger change than the 2014 JOBS Act.


Brian Briscoe 34:09

Yeah, so I mean, so right now I mean, there there are a lot of companies are doing crowdfunding which allows people to do exactly what you're saying. And you're saying the next step is is taking you this crowdfunding, you know, small, very small chunks of money gets you a pieces of large properties. And you're saying that you're going to turn the industry into a very liquid industry where now those shares are marketable. instead. unmarketable shares like most of them are right now.


Neal Bawa 34:36

Right now I can take the $50 that I spend on the floor to four or five property in Cleveland, and I can sell it immediately. So the difference is when you do crowdfunding, it's an illiquid asset right, but tokenization puts the asset as a token on the on the the Bitcoin basically the back end of Bitcoin, right? And no Anyone can buy it as shares in the real time. So you're now actually transacting your tokens. And so it becomes a liquid asset. So crowdfunding in my mind was a great idea. But it was a precursor, it was a truly powerful technology of tokenization. And we're finally there. This year, I've seen multiple companies like lofty.ai, once again, I don't know if this company is going to perform or not. But hey, Phil, I definitely have 50 bucks to know whether they will or North 50 bucks, right? I'm basically investing whatever the minimum is, across all of these companies that I can find, you know, ropey safe harbour, whatever company I find out, it's like, I'm gonna give you 50 bucks, because right now I need to learn about this stuff. Because this is the most powerful change in real estate technology in 20 years. It wasn't Zillow, it's tokenisation, that completely changes real estate forever, and makes it a liquid asset class, completely liquid.


Brian Briscoe 35:51

Yeah, yeah. And what you said, and I'm just going to, you know, rephrase this, you know, but what that's going to do to prices, and it's going to make prices go up, just like the stock market did once people can, you know, buy and sell in an instant, a lot more people are going to put money into it, which is going to necessarily make prices go up, it's a supply and demand problem all over again. And prices are going to go up cap rates are going to go down, which just basically makes real estate even a more attractive asset to purchase right now. And and the dude


Neal Bawa 36:22

does, absolutely, and we are beginning to see that early impact, and it's not just multifamily people, might they say no, no, people are only going to bother tokenizing? No, this company is only tokenizing. Single Family, right. And the reason why they're able to do it is that they don't need leverage. They're just buying the entire property with your $50 tokens, because they've got 4000 people providing them with $50,000 tokens. So they're completely liquid, they've taken the lenders out of the equation. I think that's a superior model to what we're used to doing, because we still have to pander to everything that the lenders do, these people are going in with 100% equity. Now, of course, when you go in with 100% equity, guess what, it's harder to generate returns because there's no leverage, when it's harder to generate returns, prices go up, cap rates go down, we're going to see that in the marketplace.


Brian Briscoe 37:10

Okay. Yeah. So and I mean, the traditional model with real estate is to take advantage of the leverage. So interesting, yeah, I'm gonna have to chew that over a little bit. But I'm not


Neal Bawa 37:20

saying that's going to go away, I'm saying that our new model will come in, it'll be extremely powerful and extremely liquid. And it will not necessarily need it, if you think about it. There's no leverage to stocks, when you invest a $50 stock, you invest 50 actual dollars, that no one gives that company any lending. But how does a company get lending? A company goes public, and because they trade on the stock exchange, now they can get leverage from banks by simply issuing shares or doing all kinds of other things. So understand, Brian, that the model of lending in this new world changes, there is leverage, but it's a different kind of leverage.


Brian Briscoe 38:01

Interesting, interesting. Yeah, I think I love I love the trend. I love the idea. You know, and my mind spinning right now how to how to take advantage of it with multifamily. I mean, obviously, I think just purchasing multifamily right now is taking advantage of the trend because, you know, cap rates, you know, what you're saying is cap rates are gonna continue to compress prices that continue to go up, you add that to the other disruptive trends that we've talked about where people are moving to the true tertiaries. And the far out suburbs, you know, it makes those those places even a better place to invest right now number for for many reasons, for the two different trends together, you can comfortably buy in an Idaho Falls or a St. George, and know that the assets are going to perform whereas 10 years ago, there was a lot of risk investing in a St. George or an Idaho Falls. And I grew up in Salt Lake City, right between the two. So those are two markets that are that are very familiar to me. I've tracked the growth of both those cities and you know, for the last 2020 or so years, but interesting, very, very interesting phenomenon I, I'm going to undo a lot of a lot of thinking on this one now. So Alright, so any anything else you want to highlight before we we come to a close today?


Neal Bawa 39:16

Yes, fundamentals still matter. So the market is in many different ways, supporting you with these super low interest rates worldwide, that prevent the fed from raising their rates quickly. So we I think we're going to be in a low interest rate environment for several years before rates go up. I want to also remind everybody else, the Fed was started talking about raising rates in 2015. Then they finally raised them a little bit in 2016, and a little bit in 17, and 18 and 19. Overall, they ended up raising rates, I think four or five times please note cap rates went down in all of those years. So if you are not taking action because you're saying well you know as as the Fed starts to raise rates, cap rates are going to To go up, then you're not data driven. Because you haven't analysed that cap rates need that interest rates need to go up 810 1213 times before historically, you actually start to see a flattening effect or a cap rate increase effect, which decreases prices, we're nowhere close to the Fed wanting to do 12 increases in interest rates, because the federal government itself will not be able to pay its its interest back if they raise you know, interest rates 12 times. So that scenario in my mind is completely undoable. And by that time, the next prices comes in and the rates fall again. So we are in this world where rates will go up four times six times. And when they go up for six times, it doesn't appear to have the impact on cap rates that it used to in new paradigm is in effect, and so if you're not taking advantage of that, if you're being paralysed and you're simply not learning from what has happened in the last 10 years,


Brian Briscoe 40:56

yeah, I saw an article last week talking about the spread between you know, interest or the interest rate and the cap rate. And in a lot of cities that spread has gone to zero or even negative in a couple of places just because of the dynamics and get the other the other thing I always look at is I think, I think the national debts at 27 trillion you know and so just just the debt servers the federal government's paying is a large percentage of their tax revenue every year. So the pressure is on the Fed to keep rates low for many many reasons you know,


Neal Bawa 41:27

they had an in their choice before rates could be low or rates could be high. Today they have one choice keep rates low because they the government which now is more and more activist interfering in what the Fed does, you know, Trump kind of set that line of look I'm going to interfere in what the Fed does. And now Biden's like Nah, I'm gonna interfere in what the Fed does do because the other guy did it and so he set a precedent right so now you have presidents and Congress is saying no we're going to interfere in what the Fed does and they all want lower interest rates because lower interest rates mean less debt payment which means that they have more money to spend on everything else and make people happy


Brian Briscoe 42:04

yeah yeah it's it's the they put themselves in they have their backs against the wall where they can't move interest rates up it's it's an unfortunate situation I guess is as citizens in a way you know, because that's where our government is right now but the same time it's good short term for business we'll see how it works long term but it's definitely good short term for multifamily and for businesses but I agree well that said I appreciate very much your time today you know, I know your time is extremely valuable and you know the fact that you'd spend you know an hour with me is is you know I don't miss that so i mean i don't discount that at all so very much appreciate your time and if there anything I can do for you, you know let me know


Neal Bawa 42:47

Sure. I'd love for people to reach out to me if they have thoughts or if they think that I'm you know, smoking good pot. So the best way to reach out to me is simply by googling my name and EA l space bawl I'm the only Neil bow on the World Wide Web so you'll find all the good stuff and the bad stuff there's we do 20 webinars a year that are similar to this kind of content and they're at multifamily you about 30,000 people watch those so you're welcome to come to multifamily you calm and watch those


Brian Briscoe 43:16

Yep. And just just an endorsement you know, you know we've got I've gotten a subscription to multifamily a lot of amazing content on there. You know the webinars are you know, foreign above what you'll see anywhere else so definitely check me Obama out and check grow capitis out you know, some of my partners have invested in several of your deals so your your your name that we trust, and you know, giving, giving the listeners the most glowing endorsement that I can. So once again, Neil, thank you for coming on the show today and very much appreciate your time.


Thank you for listening to the Dave Rubin apartment investor podcast today brought to you by four oaks capital. If you'd like to know more about how to invest in apartment buildings or want to be a guest on our show, visit our website at four oaks capital comm slash podcast or email us directly. If you're still listening, you obviously like the show. So pull out your phone, tap subscribe, and leave us a five star rating on your favourite podcast app. And we'll see you again next week.


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