Becoming a Mad Scientist of Multifamily Investing with Neal Bawa

Becoming a Mad Scientist of Multifamily Investing with Neal Bawa

Neal Bawa is known as the Mad Scientist of Multifamily and one of the most well most in-demand speakers in Commercial Real Estate. He is a data-driven guru, a process freak, and an outsourcing expert. He treats his 300 plus $45 million dollar multifamily portfolio as an ongoing experiment in efficiency and optimization. The Mad Scientist lives by two mantras. His first mantra is that we can only manage what we can measure. And number two is that data beats gut feel by a million miles. These monitors and a dozen other disruptive beliefs drive his profits for himself and his 400 plus investors.

Neal Bawa considers himself a geek, a nerd, or a dork. He is from Silicon Valley, a Technologist Data Scientist. He had a successful Tech career and later on dabbled into real estate. He’s been in the industry for 17 years. His story is similar to that of many other technologists that work 70-80 hours a week, then burn out. Neal was looking for financial freedom and the path to a very low tax level both came through real estate.

 

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Becoming a Mad Scientist of Multifamily Investing with Neal Bawa

 

Brett:

I’m excited about our next guest. He is known as the Mad Scientist of Multifamily and besides being one of the most well most in-demand speakers in Commercial Real Estate, he is a data-driven guru, a process freak, and an outsourcing expert. He treats his 300 plus $45 million dollar multifamily portfolio as an ongoing experiment in efficiency and optimization. The Mad Scientist lives by two mantras. His first mantra is that we can only manage what we can measure. And number two is that data beats gut feel by a million miles. These monitors and a dozen other disruptive beliefs drive his profits for himself and his 400 plus investors. Please welcome to the show with me, Neal Bawa. Neal, how you doing today?

Neal:

Fantastic, Brett. Thanks for having me on the show. Very excited to be here.

Brett:

Absolutely. Well, let’s dive right in. For our listeners to get to know you for the first time, would you give us a little bit more about your background and your current focus?

Neal:

Sure. I am a geek, a nerd, a dork. I’m from Silicon Valley, a technologist data scientist, had a successful tech career, had a successful tech exit, dabbled in real estate since 2003. So I’ve been doing it now for 17 years. And the story is similar to that of many other technologists in that we work 70-80 hours a week, we burn out. And we’re all looking for financial freedom. And for me, the path to financial freedom and the path to a very low tax level both came through real estate.

Brett:

Beautiful. So, I’m originally from the Bay Area, Silicon Valley as well. What’s the number one secret for those who are transitioning from the Tech World into Real Estate, and was the hardest for you to learn?

Neal:

I think the secret is really not much of a secret at all. I think for some reason, a significant portion of the tech industry believes that technology jobs are going to help them retire. And it is not true. It’s not true for the guy that makes 100,000 it’s not true for the gal that makes 200 it’s not true for the guy that makes 300. Because as your income goes up, you’re in California is the highly progressive, very progressive tax system. And as time goes on, more and more of your money is actually getting funneled into the state of California and also into the Federal coffers. I am yet to see any technologist regardless of how much money they make really plan effectively for retirement through the use of technology. I think it’s always other venues with real estate just being one of those menus. So the secret really is, technology is a phenomenal way to plan your retirement and to build a foundation for your retirement. But by itself, it’s terrible.

Brett:

Excellent. We’re gonna dive in that too, here in a minute. And that’s going to kind of be the premise of our show, learning how to become a mad scientist and multifamily investing. But before we go there, Neal, I want you to go back to perhaps your university days or even your high school days. And you know, I believe we’ve all been given certain gifts in this life and these gifts have been given to us to be a blessing to others. Some people call them superpowers, some people call them strengths. I believe they’ve been their God-given gifts, and they’re given to us to be a blessing. So I’m curious, what’s the one or two gifts that you believe you were given? And how does that help how you help bless people today?

Neal:

My gift was very specific, Brett.  I’m glad you asked that. So unlike most people that have certain areas that they’re good at, I was extremely good at one area. So when I was 9 or 10, they diagnosed me as Borderline Autistic. I was very quiet and I have a very kind of effusive outgoing personality. I was very quiet. And so they diagnosed me with Borderline Autism. And I went to my dad, who used to be in the Air Force, there was an Air Force hospital and there was a psychiatrist. They spend time with me and they fixed me. So that issue went away. But as they were doing it, they discovered that I had a talent for numbers. So I would see patterns in numbers. And I would talk to the psychiatrists initially they were taken aback by it and then they realized that was actually a gift. And so they helped me develop that gift. They initially, I was afraid of it and I wouldn’t discuss it with anybody. But then they said no, this is a real gift, Neal, you can actually look at a bunch of numbers and tell the patterns amongst them, you have to develop this. So, so I’m, I’m really glad that that autism thing happened because if it hadn’t, that gift would never have developed. So till today, I can look at a spreadsheet and see patterns. It’s almost like Neal reading the matrix. And you know, that’s the best way to describe it, you see the numbers, the green numbers falling in the ears actually reading the matrix. And you can see what’s happening, the same sort of thing happens with me I can, I can tell patterns. So I look at a large amount of data. And I can tell patterns. And as I look at more and more data in the same area, the patterns become more and more discrete. And that’s really been my gift to the real estate industry. I am not a real estate guy, even though I’ve been in real estate full time now for seven-plus years. And part-time for 10 years before that. I’m a technologist applying my technology and data science. That’s why they call me the mad scientist in this area of real estate and there are about 50,000 people following the data science that I publish, it’s all real estate, data science, and really came out of my ability to read numbers and read a very large amount of data and figure out patterns that may not be obvious to others.

Brett:

Beautiful, an amazing gift. I’ve seen your deals, and I’ve seen your webinars, and I see your level of sophistication and also simplicity with it too. It’s not just taking an understanding of numbers, but it’s able to communicate it in a way that’s digestible. And it’s inspiring and actionable especially as it pertains to multifamily investing. So with that being said, what is the most crucial team members that you’ve built? Because I think it’s one of the most encouraging things that I’ve seen you do is expand and scale in a massive way. So tell us about getting out of your own way and delegating because of how smart you are, and how well you do have done things. Walk us through overcoming perhaps in the beginning, when it was tough to scale on. And by the way, how many employees do you have now? How many team members, I mean?

Neal:

We have 29 full-time employees.

Brett:

So tell us the biggest challenge for overcoming and maybe it wasn’t a challenge, but I am assuming it might have been for someone because I know it’s been for me?

Neal:

It absolutely was. I mean, you hit it on the head, right. So I consider myself a fairly bright person. And for folks like us, it’s very difficult to take something that we’re doing and give it to other people. But I was very lucky that I had a mentor, his name is Paul, he and I were running a company for about 14, 15, 16 years. And Paul used to say, Neal, the biggest challenge you’ll ever have is to learn to delegate because you do so many things well that it becomes very difficult for you to let other people do them. So over the years, I made a very conscious effort to become a better delegator. So there was a time when 50% of the books that I was reading were about building structure and delegating and basically doing company building, not company creation, right, that I felt very comfortable with. But actually, how do you take a company to level up to five levels, right? So that became an obsession, a fixation of mine. And one of the things that I discovered out of it, which certainly wasn’t where I was going with it, right just sort of happened. As I studied the area of the scale, it became obvious to me that, especially for real estate, but also for other areas, the one part of the United States does very poorly, and some parts that some companies in the US do this really well was was that they don’t use virtual assistants. And the ones that do use them in an extremely basic fashion, for example, there’s a virtual assistant that was arranging this podcast, right. And that’s a pretty typical thing that virtual assistants do. What I found was that, in places like India and the Philippines, if you created a system, where you found the top 1% of the virtual assistants there, those were really very high-quality people. So I became obsessed with how do I find the top 1% of virtual assistants in any area and use that to scale my business? Now, to be honest, it never means that you don’t hire people in the US. That’s kind of silly. Because what we do is we use the two to one ratio, we found this over seven or eight years of experimenting, we found that we hire two full-time employees in the Philippines. For every one employee, we hire in the US right now. We’re 10 people in the US, and we’re at 19  in the Philippines. Now, this doesn’t include our 150 employees that are at the property. So we don’t consider them to be part of our company because they’re part of the LLC that we created. They still report to us, right? We can hire them, we can fire them, but they’re not part of our company because they’re part of one of our projects. So there are about 150 people there. So these 29 people, what I found was this, that if there was a methodology that I could invent, and I’m known for constantly inventing things and talking about them on the web, you can google my first name and last name, followed by virtual assistants. And you’ll see that I’m presenting and half a dozen conferences about them are that I become very fixated with the 1% rule, I want to get to the 1% of everything, the 1% of cities in the US that our fastest-growing the 1% of properties in the US that are most unoptimized, the 1% of virtual assistants, and the Philippines actually got very lucky, I was able to use technology to get to the 0.1%. So I was able to get to them so if there were 1000 virtual assistants on a platform, I was able to get to the one person that was better than the other 999. And once I did that, I hired as many of them as I could, at this point 19 of them, obviously, there’s a lot of turnovers. So you’re firing and hiring as you go. Even if they’re very bright, there are lots of reasons why they don’t work out, many of them don’t want to work at night. So one of the things that I learned very early on is that you want them to work your hours. So you know, all of our staff work specific eight to eight to five, we don’t allow any flex time. You know, as far as I’m considered. As far as I’m concerned, all of their jobs are flexible. Why? Because Manila traffic is two hours each way. They’re saving four hours a day, by traveling from their living room to their office to do their job. And that’s their flex, right, but otherwise, they work eight to five, and some of them work at property time. So if it’s an East Coast property, and they’re attached to it, they work the time of that property. But that allowed us to grow our business faster than pretty much any company in our space. We’ve grown 50 to 100% year over year. And I’m simplifying it by saying that these people really accelerated because it is the process that you develop of working with these people to elevate them to that level. Yes, our people do things like Podcast booking. But some of the things that our staff in the Philippines is doing are truly mind-boggling. You’d have trouble finding companies doing it here in the US. And we’re doing it with that kind of staff. Now, obviously, they’re acting as force multiplier or force accelerators for our US staff. And so when you know, there are companies where people are like, I wish I there were three of us. But I know the company can afford it. Well, we’ve solved that problem, because there’s always three of us in every one job.

 

Becoming a Mad Scientist of Multifamily Investing with Neal Bawa

Becoming a Mad Scientist of Multifamily Investing: “Successful people do what unsuccessful people are not willing to do. Don’t wish it were easier; wish you were better.” ― Jim Rohn

 

Brett:

Amazing. Yeah. And I love this part of the mad scientist of what you’re doing, right? Because multifamily investing is the product, is the bones that create the cash flow that goes in and creates the cash flow and the tax efficiencies. But it’s the data, it’s the technology, it’s the systems, it’s the people that are running this entire organization. Is that a fair summary, Neal?

Neal:

It is. And I’ll give you an example of that. So a lot of people are like, so. So what do these people do? Right? I mean, what you’re really doing is you’re buying multifamily properties or building them, right. So how does having this force multiplier really help you? So let me give you a real example. It’s and you’ll see how powerful it is, right? So a while back, we installed 4k for you know, basically high-resolution video cameras at one of our 235 unit properties. So this property has these external gantry walkways, so you can actually see all of the doors in a row, and we install cameras on both ends. And instead of pointing the cameras at the parking lots generally, they point them there so that the cars are not being still you know, broken into and things like that. We pointed them to the gantry of this walkway. And we took one of our army in the Philippines and we said you know, watch these cameras have motion capture, right, so they’re not capturing anything when there’s no motion, we want you to every day, right to spend an hour watching the cameras. And as you’re watching the cameras, we want you to ignore everybody that you see except for people that have dogs or cats, people that are pets. And when those people come up the stairs to this long gantry, follow them to their door, and here’s a 2D chart of the property. Make sure that you know which door they’re going into. And as they’re stopped in front of the door and they’re fishing out their keys, take a picture of them through this high-resolution 4k camera, take a picture and you know now by looking at this 2D chart that the person is walking into the apartment number 123 now go into the property management software at folio login, click on apartment 123 and go to the tab that says pets and see if there are any pets there. And if there aren’t any, then send that picture that you just took to the property manager saying 123 has an unregistered pet now And it will take a very small amount of time to do this because motion capture cameras are only capturing the time when people are there. And they’re just skipping past if they don’t see a pet, skip, skip, skip, skip. So in about 30 minutes of work, the person has basically found a number of people that are living in these apartments without pets. Now, you can’t possibly do this with our staff. I mean, it takes effort and time to build it up. You need the systems and the processes. So a lot of people are like, “How much money does this make?”, “What makes hundreds of 1000s?” And you’re like, really helps make hundreds of 1000s? And the answer is yes, just do the math follow along with what I’m saying. In a 235 unit, we found 30 pets that were unregistered, these people are supposed to be paying pet rent. So we weren’t doing anything shady. Each person each pet was supposed to be paying $30 a month. So we’ve got 30 people that are supposed to be paying $30 a month, that’s $900 a month or $10,800 a year. Okay, so firstly, we’ve now made $10,800 of profit for our investors by using a virtual assistant that costs five bucks an hour for 30 minutes, right? Do you see the 200x, 300x, or 1,000x return there, right? But that’s not it. We weren’t after the 10,800? Because and we make it for five years, right? Because you know, we are owning a property for five years. So that’s about $52,000. And you might say, “Where do hundreds of 1000s come from?” Well, because multifamily properties are sold at five caps, which means that when we raise the income of a property by $11,000, we will receive $11,000, multiplied by 20 when we sell, but to do it, we can’t just do it at the end, we have to keep doing it for a while, because whoever’s coming in is going to make sure that that income was there every single month for the last year to pay you your five caps. So it’s an ongoing activity, which should be done because you’re also making that cash flow. So you’re making 10,800 a year for five years. And then at the end, you’re making 10,800, multiplied by 20, which is about $210,000. So your total aggregate was $260,000. And over five years, you spent about $125. In the manpower, that’s the use of technology, 4k cameras, you have to be 4k, you can’t use standard IP cameras, because the gantry is very long, and you can’t tell which house they’re going into. So you make that initial investment of about $4,000 into cameras. And the cameras are also being used for other things. They’re not just being used for this one purpose. They’re also being you know, used to prevent people from breaking into cars or breaking into people’s homes, because they can see cameras right around the corner.

So the bottom line is, this is magic, this is power, the ability to use outsourcing, come by combined with this kind of technological gizmos creates an enormous amount of profit for investors. I’ll give you another example. I mean, these are very, very powerful. So we have a property in Utah, that gets pretty cold there, and also gets very, very, very hot in Salt Lake City. And so we were trying to fill up the parking the covered parking of this property. And, and the property I think had about 50 covered parking, but only 20 were filled. So he went and talked to the property manager and said what can you do? Let’s fill up this covered parking and sell them for about 30 bucks a month. And they’re like, yeah, we know, whenever people come in be mentioned that newer like this clearly is not going to work. So here’s what we did, we told another one of our armies in the Philippines and we said, make a bunch of phone calls to see if people want to buy these. So they made a bunch of phone calls. And it wasn’t very beneficial maybe one or two parking spots got placed. So we were like, okay, let’s brainstorm on why people get covered parking. And after 20 minutes of brainstorming, we realize that people only buy covered parking on days that are extremely cold or extremely hard. So if it’s extremely cold, and there’s a foot of snow in Utah, then they weren’t covered parking. If it’s 110 degrees in Utah, then they weren’t covered parking. So guess what we created a system where each day a person in the Philippines checks the temperature in Salt Lake City. And on days when the temperature is over 100 degrees, or under 30 degrees. So it’s you know, under 25 degrees, it’s just knowing that’s the only time when we make those phone calls. And so now we filled up 30 parking spots at $30 a month. Once again, the math is very similar. 30 bucks a month, $900 a month, $10,800 a year, $50,000 in five years, and then and then you get that $200,000 pop there. And once again, we’re combining technology, in this case, weather technology with a call center in the Philippines to make that kind of money. Now take these kinds of bizarre things which I cook up all the time, right. That’s why they call me the mad scientist. I’m cooking up one every day. You take that and you apply it to a $400 million portfolio. Imagine how much wealth you create?

Brett:

Amazing. My mind is blown away. And I’m sure listeners are I think of like an inch of effort is worth a mile of return. Right? How are you being creative? In a very competitive world, right? It’s even finding a multifamily property, to underwrite the property, to get the lender, to land on the property, to close on the property, and if you’re not taking advantage of parking, of pet rent, of ratio, utility billing of ways that you can maybe meter certain units to get in so that all the utilities go back to the units, anything that’s going to increase the NOI, guess what, eventually, if you’re not using technology and data to drive those decisions, you’re not going to buy it because you’re not gonna be able to pay for it. And you’re not gonna be able to achieve the returns for your investors. Is that a fair summary, Neal?

Neal:

Absolutely is. The truth is this today, multifamily is a privileged asset class everybody wants in, especially after the pandemic, if you look today, Marcus and Millichap did a survey about two weeks ago, it was a very powerful survey because they surveyed 10s of 1000s of very rich property owners and they said, What do you want to buy today? And what do you want to sell? The answer was, we want to buy multifamily, industrial, those are the two asset classes. multifamily makes all the sense in the world because it performed really well during the pandemic, right, we had delinquency. When we say really well, we mean relatively, we didn’t like the pandemic. But boy, we didn’t suffer compared to the retail guys, the hotel guys. So they asked him, so why industrial again, industrial makes all the sense in the world, because five years of eCommerce growth happened in one year. When eCommerce growth happens, you need industrial space to store it, right? Industrial is the equivalent of retail for e-commerce. And if you just multiply eCommerce at this crazy rate that we’ve seen in the last 12 months, then you’re going to need a lot of warehouses to store it. Right. So that those two made sense. So then Marcus and Millichap said, so what do you want to sell? And the answer is we want to sell retail, we want to sell hotels, we want to sell malls, we want to sell senior housing, senior housing, occupancy has dropped to the mid-80s, which is shocking, right? We in multifamily start to panic when we go from 96% to 95%. Well, imagine being 85%. I mean, you don’t make any money at all, at 85% occupancy. And that’s what it’s dropped to in the last few months and still dropping, by the way, it hasn’t plateaued, it’s still dropping. So the bottom line is multifamily came out of the pandemic as a privileged asset class. And that’s the good news. Here’s the bad news. for 10 years, since 2011, people have been squeezing the profit out, people have been rehabbing. And today, we’re in a situation you’re paying a crazy amount of money. A Class C 40-year-old property is selling for $120,000 a door nationwide, in California, of course, then you just I don’t want to mention the numbers because they make no sense to me. You know, I’m I love California, I live here forever, I’m never going to invest here because there’s no math that makes sense. In California, California must have its own mathematics books that I’ve never managed to find. Therefore, I don’t invest in California and love California. So even for the rest of the US, it doesn’t make sense. You’re paying $120,000 for a class C property that’s 40 years old, it comes with all of its problems, broken pipes, and broken foundations, and old roofs, when you can probably build something brand new for $160,000. That delta is not sufficient, there is a problem. And so today, when you have to make money, you have to pay what you have to pay, if you want to buy a building, you’re gonna have to pay that $120,000. Right. A lot of people say we are going to find buildings that are off-market, blah, blah, blah. You know, my answer is, I haven’t seen anybody do that everybody’s paying market, even the people that are buying off-market are paying maybe they’re getting maybe a 2% discount if they’re lucky. Right and good for them, they got a 2% discount. But 2% is really not going to help you achieve double-digit returns for your investors. What’s going to help you is having a set of strategies that are different from everybody else. And so today to thrive in the marketplace, uniqueness and you know, Brett, company deals with some of those things, but you’ve got to still create the profit, right? You got to create the profit to benefit from all these amazing strategies in real estate. And that’s the hard part today actually creating the profit.

Brett:

Amazing By the way, you can learn more about Neal Bawa at grocapitus.com.

Neal:

I want to point out an easier way so I happen to be the only Neal Bawa on the internet, so when I was picking an American name, I first pick N-e-i-l. I was a huge fan of Neil Armstrong. I still am. And so when I was doing that, I googled and like there were a few people and I was like, maybe I go with the Irish spelling and EA. And how many other Neal Bawa on the internet, none were there. So I picked the Irish name, right. And so now you can just find me and a bunch of you know, stuff about our experiments on the web, just by googling Neal Bawa.

Brett:

Amazing. So much to unpack there. I do want to now focus like a laser on capital gains tax deferral and thinking about strategies that are beyond what the traditional folks have done in the past. You know, we focused on the Deferred Sales Trust, and we believe it’s transformational. It’s a strategy that leads you to get time back and times the one thing that is everyone’s on the same playing field, you can’t get it back. And you got to figure out a way to sell high buy low or just buy deals when they make sense. So we just had Dr. Groupie Pada on and I don’t know if you know him?

Neal:

He is a student of mine. Dr. Groupie Pada is actually a student and an investor of mine. Yes.

Brett:

Excellent. Yeah. And so I can tell right because you guys, the way your guys’ minds work and how smart you are, and articulate all of those things are, are great. But you know, he said the great thing he said you know, time is the one great equalizer and he goes the deferred sales trust, what it gives us is the ability to sell high and buy low, right and not have to overpay and also be able to diversify, right. And so 2006 Neal, I was at Marcus and Millichap. That’s where I started here in Northern California. I grew up in the Bay Area, multifamily in development, and I was doing brokerage, and I was like the height of the market, everything was great. And then something happened, the 2008 crash. And so I went from making a little bit as a new broker to making like nothing overnight. And I saw my friends, family, and clients lose half of their wealth and lost everything. Because in the biggest thing we found was they felt like they were forced to overpay via the 1031 exchange, right. They had built up wealth and had overpaid. So we learned about the deferred sales trust, fast forward, I start to implement this strategy and start to talk about it and it my business starts to grow. And clients start to have some some some relief and some options. Now a lot of people weren’t using it because their values were down. But fast forward, we’re back here again. And we’ve never done more business. And it’s going like gangbusters because people are looking for diversification or looking for liquidity.

Brett:

We learn about the Deferred Sales Trust kind of too little too late because values dropped. But now we’ve never been busier. But could you just talk to us about the importance of time, diversification, liquidity and being out of debt, and being able to buy real estate, whenever you want all tax-deferred. What would that mean for you and for your investors or anyone who’s listened to the show?

Neal:

I think it’s huge. I find that one thing in you know, investors that are active in real estate, one of the things that they consistently don’t seem to do is to weigh different investments based on their post-tax benefits. And also based on the value of time in the industry, we use a methodology called IRR or x IRR to calculate the value of your time and say, You don’t just want to look at you know, whether my buck is becoming two bucks, I want to see whether it’s becoming two bucks over a certain amount of time. Right? And they and how much am I deferring cash flow? Is it giving me two bucks at the very end? Or is it giving me two bucks all along so I can run my life with it? So I think Firstly, understanding that in in real estate, you have to apply a value of time to everything makes an enormous difference, right? And there’s projects out there that we broaden where we don’t give you any liquidity any cash flow until the end. And in my mind, the projects that we have, where we do give you liquidity all along are better. I can’t argue with that. They are absolutely better. So calculating liquidity, looking at the time value is very key and also constantly continuously, especially in California. Calculating your post tax gains is very good, I’d like to challenge you, you investors, let’s say you have you know about five different kinds of investors some investments. So maybe like buying a single-family buying a four Plex investing in a syndication doing private lending, right, let’s find out let’s you know, take any five representative, you know things that you might want to invest in. And I want you to create a thought exercise that I think will really blow your mind, I want you to go into Excel. Hopefully, you know how to play with Excel based on basis level. And I want you to take a 30-year timeframe for each of those investments. Now, some of those investments like private lending, let’s say on average, you’re doing it one time a year, well, then you’re gonna be repeating it a number of times to get to 30 years. Some other investments like the STS you might hold for five years or 10 years. In that case, you’re going to be repeating them less often, right. So some are more repeated, some are less repeated. But every time you exit a project, whether it’s a one-year investment, or a five Investment, Make sure that your calculation includes the taxes that you paid, right. And if it’s if you’re rolling it using 1031, then you’re not paying taxes Good for you, right, so it’s going to go up a little bit faster. So maybe if you’re doing single family, you can do one where you’re selling it one, that you’re rolling it to 1031. And I think if you do an exercise for what happens to your wealth, your long term wealth building in these different situations, I guarantee that even if you have done real estate for 10 years, you’re going to be in for some interesting shots, your you know, there’s going to be things there where you’re like, to this investment, I thought was the worst of them all. But by the time I understood the value of money, by the time I understood that there, and by the way, you also have to account for gaps. You can say silly things like, well, I sold my syndication share or my VST share on this day, and the very next day is really messy, no, that’s not reasonable, there’s going to be a gap in the middle, right. So longer-term investments may have a lower return, but you don’t have gaps in the middle. When you do this thought exercise, it’s going to make you a much better investor because, by definition, you’re going to look at the three or four things that swing the needle a lot that people don’t think about the one-time value of money. Second, the taxation, right, which is such a big deal, especially in California, it’s a huge, huge deal. It changes your mindset, completely. And then overall wealth-building over time, right. So that people asked me, Neal, you’re a multifamily guy, is multifamily the best wealth building strategy over a 30-year time frame? Now notice somebody asked me a very specific question. So I think multifamily is great. But I think that answer to his question, this was a person that asked me this question, very experienced investor, he said over a 30 year time frame, what investment is the best and I said, I happen to have done this thought exercise. So of course, I brag about everything I’ve just said for about five minutes. And then I say in that exercise, the winner was not multifamily. The winner was for plexes that people bought and kept for 30 years and refinanced every six years. And every six years, they took the proceeds. And they reinvested into another four Plex, just like the first one. And I assume that the price is increasing over time. So obviously, when you’re taking that money out, you now the price has gone up. So if I, if I extrapolate that one over 30 years, it beats the shit out of everything else, for one simple reason. You never paid any taxes on that 30 years, you got on a million dollar property, you got a massive amount of depreciation, right? And you use that appreciation over 30 years, I did straight line instead of doing you know, cost segregation. And then the equity that you build up over those 30 years, which you know, in for one four Plex might be three and a half million, roughly, because you’re paying down the mortgage over 30 years, right. So at the end of 30 years properties free and clear. You never pay taxes on that either. Because when you died, your kids, the basis got adjusted for them. So when I look at that, from a 30 year perspective, hit beat the shit out of what I do. But not a lot of people have that level of patience and not a lot of people know that every six years in that strategy or even reinvest, take all of your equity out and rinse repeat. So I think these kinds of thought experiments are incredibly beneficial. And for years people when I will tell them this people say so so are you selling for Plexus? The answer is no. And they’re like, why don’t you sell for Plexus? So it took me five or six years but I finally got to the point where I now build and sell for Plexus to investors as well. It’s not a big part of our business. It’s a smaller part. Not everybody can afford a four Plex right? And why for plexes because single family just doesn’t scale well. So I love the fact that you got four tenants and when you lose one, you know you’re the other three are still paying the mortgage. So I ignore that.

Brett:

Amazing so much there, I absolutely love it. And it’s, it’s, it’s fascinating too to again become a mad scientist on multifamily investing but it’s really becoming a mad scientist of numbers of data of strategy. Right and then applying that to investing in real estate or whatever investments you may be going into. The other thought too, is there’s a couple of things that the 1031 exchange that people may have forgotten about. But it’s been basically limited to just investment real estate, it doesn’t apply to high-end primary homes, we just did an $8.3 million deal in Palo Alto for a primary homeowner helping to for a bunch of tax, we just did a $2.6 million business sell out of Alabama. And what’s cool is now they’ve taken the funds, and one of them is building 72 units of multifamily in Tennessee, all tax-deferred. So the idea of like, instead of like refi needed to go build or buy something else and get more the deferred sales trust, you can sell moving in there and use the funds that you would have paid in tax to go build 72 units.

Neal:

Very powerful strategy. To me, I think that is, in my mind, not a very common use of the DST, but unquestionably the best use of the DST, to be able to put that money in, and then go build something, give yourself time to create an enormous amount of value, which you wouldn’t have created otherwise. Right? Because you didn’t have access to that money. That is incredibly powerful. Because what you’re doing there is a force multiplier, you’re taking that taxation benefit, and truly multiplying it by creating more value with new construction.

Brett:

Exactly. By the way, that’s the reason we started capital gains tax solutions, because of the I called the Monday morning quarterback story right now I’m gonna tell the story, gentlemen, 2006 in Minnesota sell the $20 million assets across the street from the Minnesota Vikings stadium. He’s worth a couple of 100 million bucks. He’s really smart, really sophisticated. And but the first time he’s going like The Big Short the movie in the book, he goes, I don’t think this thing’s gonna turn out too good. In the next year or two, I’m gonna for the first time do a deferred sales trust. So he sells the asset, Parks the funds, okay, and he’s living happily ever after market crashes. Now he’s in conservative stocks and bonds. He’s not in really risky stuff, either. So he’s pretty safe there as well. Now the bank calls him back five years later, Neal says, Hey this property is sold? And he said, Yeah, well, we just foreclose on it from the guy who ever paid for it a couple of years back. I’m just curious, would you like to buy it back? Perhaps things? Well, maybe what’s the price? And he says, Well, 60 cents on the dollar. He says, Yeah, sounds like a good deal. I’ll buy it back. So then he used the funds from the deferred sales trust, he sold out of his stocks and his positions there, put it into an LLC. And then he bought it back at 60 cents on the dollar. And I, my mentor, my business partner told me this and I get, I said, Tell me, again, I’m sitting in my car, and it’s 100 degrees out, and I’m trying to sell some real estate as a real estate professional. And I said, tell me that, again, I hadn’t told you four times in a row, I said, Bob, if what you’re telling me is true, I’m going to burn the ships, and I’m gonna go all in and I’m going to start no capital gains tax solutions, I’m going to become a trustee. And I’m going to roll this out to as many people as I can. Okay. And it’s true, it still works. There are billions under management 25-year trackers, 1000s of closes, but people have this false belief. And so did I until he showed me how to do it and how it actually works, they don’t think you can do it, think it’s only a 1031 exchange. But we’re doing it and then I did with my clients, and we’re doing more so all that being said, Neal, you can go to capitalgainstaxsolutions.com to learn more about that. We are running out of time, and I’m actually gonna have to jam here in a minute. So you ready for the lightning round? We’re gonna ask you like three questions, I’m going to be done.

Neal:

Go for it.

Becoming a Mad Scientist of Multifamily Investing with Neal Bawa

Brett:

All right, knowing what you know now, if you go back to your 25-year-old self, what’s the one book you would tell yourself to read?

Neal:

It would definitely be Miracle Morning. It’s not the best book of all time. If you read this book and follow what it does, it allows you and gives you the time to find your favorite book. It gives me an hour every day to find that X-Factor book.

 

Brett:

Perfect. What’s the one thing that you’re most curious about right now?

Neal:

I’m most curious about the potential of electric vehicles to change real estate, the model of Eevee’s is basically being where people don’t own them is going to be the dominant model within 10 years, and the impact on real estate is going to be absolutely staggering. Imagine 800 million parking lots that are empty.

Brett:

Wow. I like that. That’s, that’s really fascinating, too. Last question, and then we’ll remind listeners where they can find you. How do you stay centered? And maybe it’s the Miracle Morning question, right? And your values after all your success and all the companies you’re running and everything that’s moving forward so fast, how do you stay centered in your values? And how do you stay encouraged to reach for new heights?

Neal:

Um, the first part is simple. Every day I asked myself this one question, what is going to make me happy today? And when I asked myself that, it tweaks my brain away from just running after more money to folk being focused on happiness. So I spent an extraordinary amount of time because I asked myself this question today to kind of shoot for happiness, which is not the same thing. As for shooting for money, what drives me is, is that I, I feel like I’ve changed, I’ve gotten to the point in my life where I’ve achieved what I needed to, from a monetary basis. And what I want now is the pursuit of excellence. And I think that that is not the same thing as money. Because every once in a while, I’ll do something that’s truly excellent and give it away. And 50,000 people are now using it. And you know, some of them come back and say thanks, and many don’t, I know that there’s 50,000 because they’re actively using a system that I created. And that’s excellence. And I think that over time if you do not move to the pursuit of excellence from the pursuit of money, you’re going to lose a part of your soul. 

Brett:

Beautiful. Well, Neal, I want to thank you for being on the show today. Sharing so much knowledge and wisdom and inspiration. I think I’ve become over mad scientists of the underwriting of data of multifamily in just about 30 minutes. For our listeners who want to find you, what’s the best place one more time for them to find you?

Neal:

So the two things that we’re best known for are our cities list, cities that nobody knows about that are very profitable. So if you type in Neal Bawa Location Magic into Google, you’ll see that they’re also known for our strategies of how to use virtual assistants in your business. So you can type in Neal Bawa Virtual Assistants into Google. Those are the best places to start. Our website is multifamilyu.com. We do 26 webinars a year, there are about 40,000 people attend those.

Brett:

Amazing and I have attended those and they are first class and you should if you haven’t connected with Neal, get on those right now because you’re missing a lot. And for our listeners, I want to thank you for listening to another episode of the Capital Gains Tax Solutions Podcast as always, we believe most high net worth individuals and those who help them they struggle with clarifying their capital gains tax deferral options, not having a clear plan is the enemy and using a proven tax deferral strategy such as the deferred sales trust or getting with someone like Neal Bawa to invest into growing your mind with multifamily investing is the best way for you to grow your wealth. Please go to capitalgainstaxsolutions.com if we can help you at all or expertcresecrets.com if you want to be coached on how to use the deferred sales trust to grow your business. Thanks to everyone for listening and Please Rate Review and Subscribe. Thank you. Bye now.

 

 

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About Neal Bawa

Becoming a Mad Scientist of Multifamily Investing with Neal Bawa

Neal Bawa is a technologist who is universally known in the real estate circles as the Mad Scientist of Multifamily and serves as CEO / Founder at Grocapitus Investments, an iconic, data-driven commercial real estate investment company. Besides being one of the most in-demand speakers in commercial real estate, Neal is a data guru, a process freak, and an outsourcing expert. Neal treats his $508 million-dollar portfolio as an ongoing experiment in efficiency and optimization.

The Mad Scientist lives by two mantras. His first mantra is that, “We can only manage what we can measure.” His second mantra is that “Data beats gut feel by a million miles.” These mantras and a dozen other disruptive beliefs drive profit for his 440+ investors.

 

 

 

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