The Data-Driven Investor: Neal Bawa on Multifamily & Market Trends

[00:00:00] Hey, welcome listeners today. I have the distinct honor and privilege of having Neal Bawa on the show today. Many of you are investing in multifamily. Many of you come to me and want to buy all kinds of investments. You're looking to expand your wealth. And always the first question I get from people is, hey, Paul, is this a good deal? Well, if you ever have had that question at all, then you're listening to the right episode today because Neal has been called the mad scientist of multifamily. He's not limited to multifamily, but

[00:00:29] he's the mad scientist because his perspective is a data-driven approach. And the numbers are the numbers are the numbers, regardless of how you feel about it or what you even think about it. What do the numbers say about the investment? He's the founder and CEO of GrowCapitus and MultifamilyU speaks at conferences nationally every single month and probably internationally too. And anyway, we're just excited to have him on the show today. So Neal, welcome today.

[00:00:57] Welcome to the Brick and Mortar Money Show.

[00:01:00] The podcast dedicated to helping business owners and professionals achieve wealth, autonomy, and control through commercial property ownership. Join us as we unlock the power of real estate to transform your business and investment strategies. Whether you're seeking to expand, invest, or gain more freedom in your entrepreneurial journey, this is your destination for insightful stories, expert advice, and actionable strategies.

[00:01:30] Welcome.

[00:01:33] Well, thanks for having me on the show. It's fun to talk about numbers, especially at a very interesting time like this.

[00:01:41] Yeah, yeah, absolutely. Well, glad to have you on, Neal. Well, I don't want to really dive too much into your background. We can get there through the conversation, but you already have said something interesting. Okay, you've defined the context here. An interesting time is this. So let's unpack that a little bit.

[00:01:58] Sure. So it's an interesting time, both from the perspective of people that are active and people that are sort of passive, looking to make investments in other people's projects.

[00:02:11] The way I see it is, the market is, it's a bizarre market today. So to March 2022 was the peak for, let's say, multifamily assets. Why? Because beyond that point, March 2022 was the first time that the Fed basically started increasing interest rates.

[00:02:31] And since then, we've gone a little bit over two years and rates have been going up, though they haven't gone up for the last nine months.

[00:02:38] And what's interesting is, you know, as immediately, as soon as rates started to go up, multifamily prices, first they stabilized for a few months and then they started to drop, right?

[00:02:48] Which makes a lot of sense because with multifamily, you're buying a business, right? So if that business now has a much higher debt service coverage or mortgage, then you have less profit left over.

[00:02:59] Therefore, that business is worth less because it has less profit. And so the value of multifamily started to fall.

[00:03:04] But at the same time, the values of single family continued to plateau and then started to go up.

[00:03:11] So in the last 12 months, and this is sort of, you know, we're at the end of May, you know, beginning of June in 2024.

[00:03:17] In the last 12 months, single family prices have gone up six and a half percent and multifamily prices are now down 25 percent from their March 2022 peak.

[00:03:27] So we are seeing a divergence in the market that is, if I go back the last 50 years, I have not seen.

[00:03:34] And my job is to go back the last 50 years. So I've been tracking what the Federal Reserve does, you know, since the World War, since World War II.

[00:03:41] There's really good data on that. And this is the 14th time that the Federal Reserve has started a rate hiking cycle.

[00:03:48] Nine of those were major cycles and eight of those times they put us into a recession.

[00:03:52] The ninth time they survived, the economy sort of survived by the, you know, by one hair.

[00:03:57] I mean, it was pretty much practically in recession.

[00:03:59] So the Fed is phenomenally good and has a hundred percent track record of killing inflation whenever it raises rates.

[00:04:07] Phenomenally good. Nine times out of nine.

[00:04:09] They are also phenomenally good at putting the U.S. economy into a recession while they're doing so.

[00:04:14] Right. So they haven't found a way to achieve that end goal of killing inflation without putting the economy into a recession.

[00:04:20] So, you know, the jury is still out on whether we we survive this particular recession or not.

[00:04:25] We might. Our chances are a little bit better this time than previous times because of all the helicopter money that the government rained on us in 2022,

[00:04:33] which means that corporate balance sheets and individual balance sheets are actually in a pretty good place at this point of time,

[00:04:40] even though I'm beginning to see individual credit card debt sort of start to become concerning again.

[00:04:46] But apart from credit card debt, you know, balance sheets are in a good place.

[00:04:50] So bottom line is this is the first time in history where I've seen a divergence between the two biggest real estate asset classes.

[00:04:58] The two biggest real estate asset classes by far are single family, which is by far the biggest.

[00:05:02] So more than 50, 60 percent of all real estate is single family.

[00:05:05] And then you've got on the rest of the pie, the biggest piece is obviously unquestionably multifamily.

[00:05:11] Nothing comes close. And you see this incredible divergence where multifamily has behaved just like any business does.

[00:05:17] The higher the interest rates go up, the lower the price. It's been very smooth decline.

[00:05:21] Single family has behaved just like it's supposed to behave in emotional, non-logical investment that people make because they want to live in a particular house.

[00:05:29] And so it makes no sense today that the average mortgage is up one hundred and eleven percent over the last 24 months.

[00:05:39] So in two years, the average mortgage now, sorry, in four years, the average mortgage has gone up one hundred and eleven percent.

[00:05:45] So look at it one day before covid. OK, and look at it today.

[00:05:49] And that increase is one hundred and eleven percent. Now, that increase, half of that increase, Paul, is roughly, you know, increase in prices.

[00:05:58] So home prices in the U.S. are now 44 to 46 percent, depending upon which data I look at, higher than they were the day before covid.

[00:06:06] And then the remaining is interest rates, which have gone from, you know, three ish percent, three and a half percent to seven and a half percent today.

[00:06:13] So they've more than more than doubled. So you see this astonishing increase, one hundred and eleven percent increase in mortgage.

[00:06:19] And then you compare it to how much have salaries in the United States gone up by?

[00:06:25] Well, they've gone up by 19.6 percent. So so your your income's gone up by 19.6 percent.

[00:06:31] Your mortgage gone up one hundred and eleven percent. But we've still seen zero decline in single family prices in the United States.

[00:06:39] Now, what's very interesting, Paul, is if you look at multifamily, how much has multifamily rents gone up by?

[00:06:46] Well, 19.4 percent. So if incomes went up 19.6 and multifamily rents went up 19.4, then the multifamily market is in balance.

[00:06:56] Also, because prices have dropped 25 percent simply because the mortgage went up, it's also in balance from that perspective.

[00:07:02] So from both perspectives, I see a multifamily market that finally is in balance, not going to stay in balance very long.

[00:07:08] Prices will go back up in a year or two. But actually, for now, this is the most balanced multifamily market that I have seen in my 20 years of real estate investing.

[00:07:18] On the other hand, this single family market is by far the most unbalanced that I've ever seen in all these years because you mean one hundred and eleven percent, 19.7.

[00:07:28] That math makes no sense. And if it wasn't for this astonishing lock in effect, and we can talk about what that means.

[00:07:35] If it wasn't for the lock in effect, I think, you know, home prices would be declining, not going up, not going up six and a half percent.

[00:07:41] And what's amazing is they they haven't dropped even in the most expensive markets in the U.S.

[00:07:46] I live in the most expensive market in the U.S. and that's the San Francisco Bay Area.

[00:07:49] And in this area, I mean, a home in Mountain View still costs between one and a half and two and a half million dollars and really hasn't changed.

[00:07:58] And I'm still seeing about a third of the homes go over bidding asking price and only about 20 percent go below asking price.

[00:08:08] So it is a bizarre time. I haven't seen anything like this before.

[00:08:12] Or and a lot of this is firstly because of covid and then because of all that helicopter money after covid.

[00:08:19] Yeah. Yeah. Well, that that is fascinating. I definitely want to go deeper in both these these these topics, this whole idea.

[00:08:24] But the lock in, I assume when you're mentioning the lock in effect, you're talking about people buying mortgages at two and a half to three and a half percent.

[00:08:31] And now the cost of that is so low and the cost to move somewhere else and get a new loan is so expensive.

[00:08:36] Yeah, yeah, exactly. I mean, here's an extreme example. Right. This is this is extreme for sure.

[00:08:40] I have a one point seven five percent locked in 15 year mortgage on this home.

[00:08:46] And my mortgage is five thousand dollars because my property taxes and insurance are pretty high.

[00:08:51] If I was to buy this home tomorrow and sell and sell it back to myself at the same price, I would then be instead of five thousand dollars a month would be paying twenty thousand dollars a month.

[00:09:01] This means I can't move because I would quadruple my mortgage basically buying the same home.

[00:09:06] And so there are roughly twenty eight million American homes that are locked in below four percent.

[00:09:13] And they have no interest in selling anything because the moment they sell it, they're giving up a four percent mortgage for a seven and a half percent mortgage.

[00:09:19] And the lock in effect means that the total amount of inventory available to buy in the market is depending on the market is somewhere between twenty five and fifty percent lower than it normally is.

[00:09:31] And that's what's keeping, you know, basically it's keeping a plateau under prices.

[00:09:36] It's not letting the prices go down even as interest rates go up.

[00:09:40] There's just not enough inventory.

[00:09:43] And what about the growth of demographic shifts, too, in terms of more and more people in the in the market?

[00:09:49] You know, that that family formations and now we can we can afford a home now or maybe a stretch because because they're so much more expensive, but more people in the markets.

[00:09:58] You have more people chasing less inventory than we typically see.

[00:10:03] Well, correct.

[00:10:04] And we're also beginning to see people putting in more down payments.

[00:10:07] So before, if people were putting in, you know, 20 percent down payment, now people are putting in twenty five or thirty where they're getting that money from.

[00:10:14] I don't know. They're begging.

[00:10:15] They're borrowing. They're asking their mom.

[00:10:16] I you know, it's coming from somewhere.

[00:10:19] And that's sort of helping with the process of getting approved for loans.

[00:10:23] The other thing that has happened and I feel really bad about saying this because I think that this is, you know, you hear, you know, all kinds of, you know, right topics and left topics, you know, whether it's the border on the right or on the left.

[00:10:36] It's, you know, all the the woke stuff that they're, you know, constantly after or, you know, abortion.

[00:10:41] But the way I look at it is the number one topic that should be on the agenda for the 2024 presidential elections is the fact that since the day before COVID to now in four years, Paul, roughly 18 million American families, 18 million American families.

[00:11:01] Have become forever renters.

[00:11:04] America used to be the shining example of how you could work hard, you know, have a single income and be a homeowner today.

[00:11:14] America is a shining example of how you can work really hard, have two jobs, have two incomes and never, ever be close to being able to afford a starter home.

[00:11:23] Right. So the gap between those 18 million American families, you know, annual incomes and what it takes to buy a home is now $40,000 a year, which means they can't just call.

[00:11:35] They just can't qualify. Right.

[00:11:37] If interest rates drop by by 2 percent, so they're, you know, 7 ish percent now, if they drop to five, well, we've only covered up half of that gap.

[00:11:45] So it still means that they can't qualify. So 18 million American families are now forever renters.

[00:11:51] This is a nation of a high homeownership rate. Our homeownership rate usually fluctuates between 60 and 65 percent.

[00:11:58] And the rest of the people are renters. And usually the people that are renters are in that 55K income level, you know, sort of 45 to 65K income level.

[00:12:08] That's where the renters used to live. But, Paul, now renters are living all the way to 90K in income.

[00:12:14] Right. And that is a tremendous crisis, because if you look at America's wealth that we built over the last 50 years, the single greatest portion of that is homeowner equity.

[00:12:25] And we're not going to be building that anymore for these 18 million families.

[00:12:29] And this is an absolute tragedy and no one is talking about it.

[00:12:35] So so what's the solution? I mean, you know, our price is going to somehow come down.

[00:12:41] I mean, you know, if interest rates do come down to the let's say the low fives, then you're going to have more people competing for the inventory.

[00:12:51] Right. Because now it becomes a little more affordable.

[00:12:54] And investors come back into the market. Right.

[00:12:56] Which they haven't been in the market for the last 12 months.

[00:12:58] They come back because they're allowing 5 percent.

[00:13:01] They're like, OK, it's a good time to come in.

[00:13:02] And so there is no solution unless the government wants to create large scale solutions.

[00:13:09] If we have a trillion dollars to put in towards climate change and, you know, I believe in climate change.

[00:13:15] I don't don't necessarily believe that we should put a trillion dollars into it.

[00:13:18] But if we can put a trillion dollars into climate change, why can't we put money into housing?

[00:13:25] They just seems to be how housing has just become this pariah where nobody discusses it.

[00:13:32] And I think the reason for that is until covid, that's 35 percent of Americans that were living in a rental community.

[00:13:41] Those 35 percent were the ones that made very little money.

[00:13:45] They were basically the bottom 10 percent or 20 percent of Americans.

[00:13:48] Right. Or bottom 35 percent.

[00:13:51] Now we've got a middle class that that is is not going to be able to to to to buy basically just like Europe.

[00:14:00] Right. If you look at the European middle class, they live in these townhomes and they're always rented.

[00:14:05] Somebody owns these townhomes. And even the people that own townhomes themselves live in a townhome.

[00:14:09] Right. Because that's all that is affordable.

[00:14:11] And I think that we're basically turning into Europe and sooner or later, we're going to see a backlash, backlash against this.

[00:14:17] But I don't see a solution. So the only possible solution and I have a possible solution.

[00:14:22] I like this solution. Right. It's not the perfect solution.

[00:14:25] I don't believe that there's anybody in the United States that can today build homes at a reasonable price.

[00:14:31] But these 18 million Americans, they can build them at it for people with higher income.

[00:14:35] But, you know, if your income is, let's say, 60 to 85 K, you're nowhere close to the price of a starter home.

[00:14:42] Right. Also, most companies like the R.

[00:14:45] Horton or KBB, you know, not KBB, KB Homes, they don't want to build for the starter home because the apparently their profits are less than half for a starter home compared to a home that's two hundred thousand dollars more.

[00:14:58] It's harder for them to sell those homes. But the margins are much higher.

[00:15:01] So everybody nobody wants to basically make a Kia or a Corolla.

[00:15:05] Everybody wants to make a Camry or a Honda Ford.

[00:15:08] And that's the problem. That's the challenge.

[00:15:11] So I think the only solution that exists is called Build to Rent.

[00:15:16] Build to Rent is a solution where developers build townhomes.

[00:15:20] And I'm specifically being specific about townhomes because Build to Rent actually, as defined, is both single families for rent and townhomes for rent.

[00:15:28] Right. And created in bulk.

[00:15:30] So it's not like one or two or ten, but 100 or 200 at a time.

[00:15:34] Right. But you're from the very beginning building them for rentals.

[00:15:37] Well, now what's happened in the last couple of years, that single family for rent also doesn't pencil.

[00:15:43] You know, developers are not able to make the math work.

[00:15:45] The only thing that pencils is townhomes for rent.

[00:15:48] Right. Because why with townhomes, you're it's a one car garage.

[00:15:52] So you're saving that on your construction budget.

[00:15:54] It's a smaller yard. So the yard's not 30 feet deep.

[00:15:57] It's only 10 feet deep.

[00:15:59] And then, you know, the the townhome is probably twelve, thirteen hundred square feet instead of fifteen, eighteen hundred square feet.

[00:16:05] So you're shrinking it down a little bit. But still, people are living in their own home.

[00:16:09] They have no neighbors above and below.

[00:16:11] They do have a garage.

[00:16:11] They do have a backyard.

[00:16:12] Those are the three things that people want when they're looking at apartments that they don't get.

[00:16:17] These are the three.

[00:16:18] And privacy, right?

[00:16:19] You don't have privacy in, you know, in apartments.

[00:16:23] You do have a privacy in a townhome.

[00:16:24] So I believe the solution is that America will start to now build somewhere between 30 and 60 thousand townhome built to rent units every year for the next 20 years.

[00:16:37] And that's a million two families that we'll take care of.

[00:16:40] Right. Is it going to?

[00:16:42] So it makes a dent towards that, you know, 18 million families.

[00:16:49] But, you know, what we need to do is essentially find a way to subsidize these.

[00:16:53] And I'm not waiting for it.

[00:16:54] Like I'm creating my own subsidies.

[00:16:56] I recently went to a hospital in Liberty, Missouri, and I said to them, I bought the piece of land that's directly opposite your hospital.

[00:17:04] I am not able to make my numbers work.

[00:17:06] So I have 30 days before I have to walk away from this property.

[00:17:12] Would you like to contribute the land?

[00:17:14] And if you do, then my numbers immediately work and I can start construction in three months and I'll give your staff, your doctor's priority.

[00:17:20] The hospital immediately agreed.

[00:17:22] I think that's the kind of, you know, private, private partnership that we have to come up with because the government is doing nothing.

[00:17:30] Yeah.

[00:17:31] Yeah.

[00:17:31] Well, you're in that scenario, you're working at the local point of need.

[00:17:38] Right.

[00:17:38] And we talk about government.

[00:17:41] I mean, you know, government is at best a necessary evil.

[00:17:44] Right.

[00:17:44] And you have to have some of it.

[00:17:46] But the most important government is the local government because local government is directly connected to the needs of that local people.

[00:17:53] And then taking it down further, like you said, the hospital.

[00:17:56] Hey, they have a they have a direct impact.

[00:17:58] Right.

[00:17:58] They've got employees.

[00:17:59] They've got staff.

[00:17:59] They've got families.

[00:18:00] They've got employees.

[00:18:01] Every employer in America wants to have a workforce that's happy and productive and has a place to live because then they're going to be more productive on the job to help the business operate more effectively.

[00:18:14] Interestingly enough, I had I had a gentleman who is in Toronto and they're doing larger scale developments here in the U.S.

[00:18:22] And it's a similar philosophy where they just bought a very large piece of land, about 1500 acres outside of one of the military bases somewhere in Colorado.

[00:18:31] And he went to the base and basically said, hey, we'll help develop this.

[00:18:36] We have the land.

[00:18:38] It was essentially worthless land at that point.

[00:18:41] It was just undeveloped, barren land.

[00:18:43] We'll put the money in it.

[00:18:44] We'll put the infrastructure in it.

[00:18:46] And if we can work together, we can we can do homes.

[00:18:50] We can do multifamily.

[00:18:52] We can do retail.

[00:18:53] We can provide all the services that your employees need that don't have.

[00:18:56] And they were able to work out an amazing arrangement because it was a win win, really a win win win.

[00:19:02] Right.

[00:19:02] A win for everybody involved.

[00:19:03] The employer, the developer and ultimately the the the people that were going to live there.

[00:19:09] Yeah.

[00:19:10] Yeah.

[00:19:10] Yeah.

[00:19:11] I think I think that's what's needed.

[00:19:13] Unfortunately, I knew I do know that the government could spend five percent of what they spent on the Inflation Reduction Act.

[00:19:19] And with 50 billion dollars, we could get so much further on the housing crisis because it affects everybody.

[00:19:25] You know, I can tell you this, that while I have done an incredible amount of research just because I'm interested in climate change, the impact of climate change on the United States.

[00:19:37] And I'm being specific to the US.

[00:19:39] You know, there's bigger impacts elsewhere is primarily parts of California and parts of Florida.

[00:19:45] But the housing crisis is now affecting every American.

[00:19:48] It's affecting everyone.

[00:19:49] It is a universal issue.

[00:19:51] And I just don't see Congress acting on it.

[00:19:54] And I'm going to be skeptical for a moment and say I'm cynical for a moment and say, I think it's because.

[00:20:01] If you look at the net worth of congressmen and senators, congressmen and women and senators,

[00:20:07] a very significant portion of it is is, you know, their their home equity and they don't want to do anything to damage it.

[00:20:14] And any kind of subsidy might actually make that make me make homes more affordable, you know, would reduce their net net worth.

[00:20:22] Yeah. Yeah.

[00:20:24] Yeah. Well, yeah, I don't want to go down that rabbit hole.

[00:20:27] There's a lot of competing competing.

[00:20:30] We'll just say causes for the senators and the congressmen and people that.

[00:20:36] But, yeah, many of them go in there without a lot of net worth and they end up leaving with if they ever leave with a lot of net worth, interestingly enough.

[00:20:42] But let's talk about.

[00:20:46] OK, so let's let's roll back to this idea of this divergence in the market.

[00:20:51] And we've talked a lot about the challenges for the lower end of the of the economic spectrum, which is obviously going up.

[00:20:58] It gets more and more expensive.

[00:21:00] But you talk about multifamily now as a place that's in balance.

[00:21:04] And we have a lot of multifamily investors and you think multifamily is going to be more expensive in the future.

[00:21:12] Talk a little about that and talk, if you would, about the way you would analyze a multifamily investment for someone that says, OK, I maybe I do have a capital and I have a heart.

[00:21:24] I want to I want to maybe buy a place or build a multifamily that's going to provide value for people.

[00:21:30] Hopefully that will eventually move on and get their own home.

[00:21:32] But but but how do you look at it?

[00:21:36] How do you analyze it?

[00:21:37] The first thing I want to say this is that in 2009, I had this meetup group and we were publishing data about real estate.

[00:21:46] And our data was telling us that this was the best time in 100 years to buy homes.

[00:21:51] We couldn't get anybody to listen to us like there were just four of us.

[00:21:54] You know, I was publishing the data and then I had this meetup group and there were other people that were joining in that were data scientists like like I am.

[00:22:00] I'm a computer science graduate.

[00:22:02] The data science is my major.

[00:22:04] And we we couldn't it was so difficult to convince people.

[00:22:08] But so because we had no competition, we would keep throwing lowball offers at, you know, at banks and, you know, and other entities like that.

[00:22:18] And I was buying a home for $90,000 a month every single month in 2009 and in 2010.

[00:22:24] Not just buying for myself, but buying for my extended family.

[00:22:26] And all of those are worth $400,000 today.

[00:22:29] And I've already pulled out three to four hundred thousand dollars in profits in rentals in the last 15 years.

[00:22:34] Right. So incredible opportunity.

[00:22:37] But we couldn't convince people even when after they looked at our data that they should be buying.

[00:22:41] The truth is, Paul, that investors don't exist.

[00:22:47] I find that a thousand people listening to this podcast that think that they're investors of them.

[00:22:53] Roughly one percent are investors.

[00:22:54] The remaining 99 are in a class called speculators.

[00:22:58] Speculators, right. And speculators like to buy when things are going up and they get fearful when things are going down.

[00:23:06] Whereas the exact opposite is true for wealth building.

[00:23:10] Right. So most of my wealth was built by the work that I did in 2008, 9 and 10.

[00:23:15] And I've been, you know, sort of I cruised for a while on that because I made so much money.

[00:23:19] Right. I didn't just, you know, get an equity gain, which was gigantic.

[00:23:23] I refinanced. I pulled 100 percent of my money out, but I still own, you know, six, seven million dollars of homes that I bought back then.

[00:23:30] Bottom line is that we we see an opportunity today in multifamily and multifamily has done exactly what it was supposed to do.

[00:23:38] We've always said, you know, cap rates are basically tied to interest rates.

[00:23:43] If interest rates go up, cap rates go up.

[00:23:45] When cap rates go up, prices go down. Right.

[00:23:47] So the cap rates going up is it means prices go down.

[00:23:50] And so multifamily has done exactly what it was supposed to do.

[00:23:53] It hasn't done anything unusual, has done anything weird.

[00:23:56] And because there was a huge amount of incoming supply in late 2023 and all of 2024 were midway through 2024.

[00:24:04] Rents have been slow to move, even though if you look at a 50 year chart, there's lots of them available on the Web or you can ask chat GBT and say,

[00:24:12] show me the chart of inflation and rent together for the last 50 years or even from World War Two.

[00:24:20] You'll notice you'll notice that throughout that time, more than 95 percent of the time, rents are above inflation and they track inflation.

[00:24:29] So if you look at inflation at two percent, rents are two and a half.

[00:24:31] Inflation is at six.

[00:24:33] Rents are at six and a half.

[00:24:34] So rents stay above inflation and they track inflation.

[00:24:37] This hasn't happened in the last 18 months because we had such a huge amount of inventory.

[00:24:41] Rents have actually been negative when you are just for inflation.

[00:24:44] Now, that can't last.

[00:24:45] We're already seeing a beginning of an uptick here.

[00:24:48] Q2 of this year is actually the year where rents are starting to turn around.

[00:24:51] So we have this extraordinary situation where all kinds of bad things have happened in multifamily.

[00:24:57] Prices down by 25 percent.

[00:24:59] Interest rates up.

[00:25:00] Rents that haven't grown in the last year, call it one percent.

[00:25:04] And multifamily is used to rents growing at three and four or 15 percent.

[00:25:08] That happened in one year, 2021.

[00:25:11] Bottom line is all this bad news is what is leading to today's prices.

[00:25:15] But all this bad news is time inhibited.

[00:25:19] Right.

[00:25:19] We know that the U.S. economy cannot tolerate interest rates this high for more than, you know, six to nine months.

[00:25:25] It's been about seven or eight months since we sort of, you know, hit that peak level and we've been sitting there for the last eight months.

[00:25:31] And now we're beginning to see the impact of that.

[00:25:34] You know, money M2, money supply is slowing.

[00:25:37] It's slowing drastically.

[00:25:38] Jobs were at over 300,000 a month.

[00:25:41] And last month they came in at 175K.

[00:25:43] Right.

[00:25:43] 200K is replacement.

[00:25:45] So if that number stays at 175, the economy is really going into a recession because at 200K, you're just flat.

[00:25:51] Right.

[00:25:52] Right.

[00:25:52] That's that's how many jobs you need to replace because you have, you know, a growing population.

[00:25:57] So bottom line is there's this belief amongst investors.

[00:26:01] Firstly, they have these crazy, irrational beliefs in 2022.

[00:26:04] When I wasn't buying in 2022, I was telling my students, I was telling everyone else, don't buy, don't buy.

[00:26:08] It's really expensive.

[00:26:10] Nobody was listening.

[00:26:11] Right.

[00:26:11] Because prices were going up and up and up.

[00:26:13] And so investors back then, they had this highly irrational belief, which is multifamily can only ever go up.

[00:26:19] No, there's nothing special about multifamily.

[00:26:20] It's a privileged asset class from the perspective of lending.

[00:26:24] Fannie Mae and Freddie Mac were created just to make sure that the market's liquid.

[00:26:27] So, yes, it has that privilege.

[00:26:29] But otherwise, it's just an asset class.

[00:26:30] Right.

[00:26:31] It is very sensitive to interest rates.

[00:26:34] So firstly, there's nothing special about multifamily.

[00:26:37] It reacts to the market.

[00:26:38] It reacts to the marketplace.

[00:26:40] So back then, no investors were listening to that.

[00:26:42] And today, you can't convince any investors that interest rates will ever go down.

[00:26:48] So when I tell people that interest rates have to go down, they're like, no, but what if they don't go down?

[00:26:55] Okay, fine.

[00:26:56] Let's talk about why they won't go down.

[00:26:58] So I spend 10 minutes in explaining why interest rates eventually have to go down, even though it may take longer than I think or they think for them to go down.

[00:27:07] But eventually, they have to.

[00:27:08] And I finish this explanation.

[00:27:10] I provide the data points and things like that.

[00:27:12] And at the end of that process, I get the same question again.

[00:27:16] Yes, but what if they don't go down?

[00:27:18] Well, sure, you can just ignore all kinds of data and you can basically make your decision based on fear, in which case you wouldn't buy anything at this point of time.

[00:27:27] And you'll miss out a wonderful opportunity.

[00:27:30] I can say that today's opportunity in multifamily is not like 2008.

[00:27:34] It's 2008.

[00:27:35] We were basically getting 50, 60% discounts on single family.

[00:27:38] Right.

[00:27:39] Today, we're getting a 25% discount on multifamily easily.

[00:27:42] 25 to 27%.

[00:27:44] And so it's a time, it's a great time, not comparable to 2008, but it's a great time.

[00:27:49] But I can't convince investors of that because of this one fundamental fear.

[00:27:54] It's not a belief.

[00:27:54] It's a fear that what if interest rates don't go down at all?

[00:27:58] I think that the reason for that is you don't understand macroeconomics.

[00:28:02] I mean, world population growth is slowing everywhere.

[00:28:07] Everywhere, right?

[00:28:07] So, I mean, most westernized countries and even the bigger development economies are not even at replacement value.

[00:28:16] One of the biggest reasons why we've had upward pressure on inflation is because populations were growing.

[00:28:23] Well, now population growth everywhere in the world is crashing.

[00:28:27] It's not slowing.

[00:28:28] It's crashing.

[00:28:28] So China is at basically replacement values, 2.2 children.

[00:28:32] So every couple needs to have 2.2 children for the population to stay the same.

[00:28:37] China's at 1.6.

[00:28:38] Korea's at 1.2.

[00:28:40] Japan's at 1.1.

[00:28:41] The United States, still a little bit above.

[00:28:43] We're still around that 2.1 number.

[00:28:45] But the rate at which it's going down, we're going to be at 1.5 in just five years.

[00:28:50] Right.

[00:28:50] It's going down very fast.

[00:28:52] We used to have a pretty good rate at 2.6, 2.7.

[00:28:55] I don't know why my Mormon friends stopped making babies.

[00:28:58] Shame on them.

[00:28:59] You know, because they were part of our, you know, we have the Mormons will be good.

[00:29:02] Right.

[00:29:03] But that isn't working well anymore.

[00:29:05] So I have six Mormon partners that have 29 children, but they're from the last generation

[00:29:10] and their kids are not having enough kids.

[00:29:13] Bottom line is everywhere in the world, we are seeing populations arrest and decline and

[00:29:18] slow down.

[00:29:19] And that is going to have a long-term impact on inflation.

[00:29:24] The other thing is this.

[00:29:25] There is an irrational belief amongst investors that as you print more money, it leads to inflation.

[00:29:34] In certain cases, it does.

[00:29:35] If you print too much, COVID is a perfect example.

[00:29:37] You print too much, you throw it all into the market at the same time, you're going to get

[00:29:40] an inflationary spike.

[00:29:42] But in general, if you combine the amount of money that the world has printed in just the

[00:29:48] last two decades, that amount is in excess of $100 trillion, right?

[00:29:56] Which is $100,000 billion, right?

[00:30:00] And world growth has slowed.

[00:30:04] Debt itself slows growth.

[00:30:06] Why?

[00:30:07] Because you cannot put money towards productive things like building new factories, building

[00:30:11] new roads, building infrastructure, and you have to put it towards interest.

[00:30:15] As productivity slows, growth slows.

[00:30:19] So worldwide, we are seeing slower and slower growth.

[00:30:21] The perfect example of this is China, who basically routinely used to have 7% to 10% annual growth

[00:30:27] and now has to do all kinds of creative financing just to get to 5%, right?

[00:30:32] So they're getting to the point where they're seeing those slowdowns because they've created

[00:30:36] much more debt than we have.

[00:30:38] And they're not creating enough babies because of their one-child rule that was in effect

[00:30:42] until 2015.

[00:30:43] I mean, bottom line is when I look forward, the chances of extraordinary inflations for

[00:30:49] short periods exist.

[00:30:51] But over time, over a longer period, that's a truly nonsensical idea from the perspective

[00:30:57] of macroeconomics.

[00:30:58] Short term, yes.

[00:30:59] If you have another thing like COVID and we throw 10 trillion into the market, we'll create

[00:31:03] surges.

[00:31:04] But actually, what's much more likely to see is that the world will struggle for any GDP

[00:31:08] growth over the next 10 years.

[00:31:09] And when there's no GDP growth, there's no demand.

[00:31:13] And demand is what creates inflation, right?

[00:31:17] So I worry more about, in the next decade, about deflation in the world economy than I worry

[00:31:23] about inflation.

[00:31:27] So, and obviously, when you have no inflation or deflation, then you're going to have interest

[00:31:32] rates are going to go down because there's no demand for money.

[00:31:35] And that's just the price of money, right?

[00:31:37] I mean, the more demand for that, the higher the price, which is reflected in interest rates.

[00:31:42] And the Fed bumps that rate to try to put the brakes on the demand because, oh, it's a little

[00:31:47] bit too expensive.

[00:31:47] Now it's way too expensive.

[00:31:49] I'll just wait.

[00:31:50] But then as enough people start waiting.

[00:31:52] And you're describing Japan.

[00:31:53] Japan.

[00:31:54] So the Japanese economy was the largest it ever was in 1989.

[00:32:00] And so since then, in the last however many years, I mean, we're talking about 35 years,

[00:32:06] the Japanese economy has been smaller and smaller and smaller all the time because it's a shrinking

[00:32:11] economy.

[00:32:11] There's less and less people.

[00:32:12] And there's less and less working age people.

[00:32:14] It's mostly a, you know, a, you know, adult diaper economy.

[00:32:18] And when you look at the economy, you'd go, yeah, but they keep racking up debt.

[00:32:23] And shouldn't their interest rates be going up?

[00:32:25] No, I mean, Japan has some of the lowest interest rates in the world because there's no demand.

[00:32:30] And the lack of demand creates a lack of inflation.

[00:32:33] Most of the time, the Japanese are struggling to get their inflation up to 1%.

[00:32:37] And they struggle with that because it's constantly tends to, you know, dip under zero and go

[00:32:42] into deflation.

[00:32:42] And then they try to push it up again.

[00:32:44] So I think there's a fundamental misunderstanding amongst investors of what inflation is and why

[00:32:50] it's good or bad.

[00:32:52] The bottom line, though, is if you look at the last 100 years and you look at a chart that

[00:32:57] shows inflation and you show rents.

[00:32:59] And again, you can ask Chad GPD to create a custom one for you.

[00:33:01] You notice that rents are above inflation.

[00:33:04] So if there is an inflationary scenario, it's pretty good for us.

[00:33:07] If there's a deflationary scenario, it's actually not very good for us.

[00:33:10] It's harder to raise rents, but you do end up with very low interest rates.

[00:33:15] Right, right.

[00:33:16] Right.

[00:33:16] So you get something to refinance for property, right?

[00:33:19] I'd still take the inflation.

[00:33:20] I'd still take 3% inflation every year over the next 10 years.

[00:33:23] I'd say that's the one that I want rather than half a percent inflation over the next 10

[00:33:28] years and have access to the low interest rates.

[00:33:30] I still want growth because I still want to be able to raise rents.

[00:33:33] So to me, this concept that we're currently at 3.2% inflation, according to the last month's

[00:33:39] numbers, that's not really inflation.

[00:33:42] Inflation is what Argentina is seeing at 150% a year, Turkey, 80% a year.

[00:33:47] You know, Nigeria, 120% a year.

[00:33:51] That's inflation.

[00:33:52] When we get 3% inflation and we're worried about it, that's just social media.

[00:33:56] Okay.

[00:33:58] Well, it is relative.

[00:33:59] It is relative for sure.

[00:34:01] And, you know, you're also dealing with a group of investors or you might call 99% of

[00:34:07] them speculators that many of them are younger and less experienced and didn't live through

[00:34:12] 2008.

[00:34:13] Right.

[00:34:14] I lived through 2008.

[00:34:15] You did.

[00:34:15] I was in the finance world.

[00:34:16] I saw what happened.

[00:34:18] I felt that I was on the bleeding edge.

[00:34:19] But you have so many people that went through COVID and they experienced these, you know,

[00:34:24] 2% interest rates, 3% interest rates.

[00:34:26] And then they see the rates go up and people live there.

[00:34:30] Our version of history is very short, right?

[00:34:33] It's what we can remember barely what happened last week.

[00:34:36] And so you have a lot of that emotion driving these decisions.

[00:34:40] But to your point, they're unwarranted emotions.

[00:34:44] They're not grounded in reality and what's likely to happen.

[00:34:49] But nevertheless, it's out there.

[00:34:51] So which communicates to me, Neil, that it's even more of an opportunity because you have

[00:34:57] more people sitting on the sidelines, right?

[00:34:59] And until they figure it out, there's opportunity for those of us that understand that, wow,

[00:35:05] this is a great time to buy because you're going to get multifamily at a 25% discount,

[00:35:08] maybe 30.

[00:35:10] And when everyone else figures out the game, then, you know, we're already in place.

[00:35:15] We're already seeing that.

[00:35:16] So cap rates were decompressing, meaning increasing, which means prices were decreasing for the last

[00:35:23] nine quarters.

[00:35:25] But in Q1 of this year, the numbers just came in.

[00:35:28] We're in Q2.

[00:35:29] Cap rates in the United States were stable because more and more people are realizing,

[00:35:34] OK, this may be the bottom.

[00:35:35] And it's very important for investors to remember the bottom comes earlier than most people think.

[00:35:40] When I ask people this question, sometimes I'm in a conference and I'm sitting on stage

[00:35:45] and I'm like, I'm going to ask the audience, right?

[00:35:47] When do you think the market bottomed out in the 2008 crash?

[00:35:51] Inevitably, the response that I get is 2010, 2011.

[00:35:54] The stock market bottomed only five and a half months after Lehman Brothers went out of business.

[00:36:00] March 2009 was the bottom of the stock market, right?

[00:36:04] Because all markets where people are investing equity are predictive in nature, right?

[00:36:11] They're not investing based on what is.

[00:36:13] They're investing on what they believe is going to be.

[00:36:16] And so markets tend to bottom often during the middle of recessions, right?

[00:36:21] So, for example, the recession didn't actually end many months later, but the stock market bottomed

[00:36:26] out in March 2009 because it's predicting the future, the post-recession economy.

[00:36:32] I think the same thing is beginning to happen in real estate where we're beginning to see

[00:36:36] a flattening of prices.

[00:36:38] And I hope they stay flat for the next three or four quarters because I'm very excited.

[00:36:41] I'm going to go ahead and buy.

[00:36:42] My investors fully understand what I'm saying.

[00:36:45] And so they're looking to be acquisitive and make purchases at this point in time.

[00:36:51] So we're in a good place.

[00:36:53] And I warned them, look, I'm not going to see much rent growth this year.

[00:36:56] Why?

[00:36:56] Because that 2022 peak in construction means we have a 2024 peak in supply.

[00:37:02] And that supply is going to continue in through all of this year and maybe even the first

[00:37:05] quarter of next year, second quarter of next year.

[00:37:07] And then the market rebalances.

[00:37:09] And then you start having from that point onwards, you start having shortages.

[00:37:12] Why?

[00:37:13] Because in 2023, we built less.

[00:37:15] And in 2024, we're starting, I mean, we're down in certain markets, 50 to 70% down in

[00:37:21] terms of new starts.

[00:37:22] And that means at the end of 2026, you get a lot less units coming in.

[00:37:27] And so the market all of a sudden is short.

[00:37:29] And then all of a sudden you get price increases or rent increases of five, six, seven, 10%

[00:37:35] in a single year.

[00:37:36] Which is again an effect.

[00:37:38] It's again an effect of the Fed raising the interest rates.

[00:37:42] Well, developers are at this point, well, I've got to finish the projects I started, but

[00:37:45] I don't have to start a new project right now with rates so high.

[00:37:49] I can wait.

[00:37:50] So then you get this oversupply, undersupply, right?

[00:37:52] It's a roller coaster thing.

[00:37:54] And it's just fascinating how all of these various factors influence the market.

[00:38:02] And it is something that you can look back on and learn.

[00:38:06] And with your data-driven perspective, I think it's fascinating because you're really looking

[00:38:11] at literally the big picture and understanding from a macroscope, you know, what's going

[00:38:16] on in the opportunity and you can see it.

[00:38:18] But also the thing, my big takeaway here too, Neil, is that it is what it is, what it is.

[00:38:24] The numbers are the numbers are the numbers.

[00:38:26] And it's not an emotional decision, right?

[00:38:28] There can be, you can have a, there's no guarantee in life about anything, but you can make

[00:38:34] very intelligent decisions based upon analysis of what has happened and make predictions based

[00:38:41] on what's going forward.

[00:38:42] And again, timing of everything you can't, you can't tell today or tomorrow because we

[00:38:45] can't have a black swan effect or whatever, like COVID, but over, over time you can win.

[00:38:52] And that's my take on it.

[00:38:54] You certainly can.

[00:38:54] And we publish a lot of our data.

[00:38:56] If you go to udemy.com, that's U-D-E-M-Y.com and type in Neil Bawa, you'll see one of my

[00:39:02] courses.

[00:39:03] You'll notice that there are 13,000 people taking that course right now.

[00:39:06] It's the most popular, highest rated course in real estate.

[00:39:10] And basically it's called Location Magic.

[00:39:12] It is a course about the math of real estate simplified into a 10 minute process.

[00:39:18] So you can take any five cities in the United States, you know, you went to a party

[00:39:22] yesterday, they were talking about some five cities.

[00:39:24] You've never heard of them.

[00:39:25] You can go in, take my course.

[00:39:27] It's a 90 minute course.

[00:39:28] And then in 10 minutes, you can rank those cities in terms of potential profits in 10

[00:39:33] minutes.

[00:39:34] That the beauty of the world that we live in this chat GPT world that we live in is we

[00:39:40] have access to astonishing amounts of information.

[00:39:42] This course is free.

[00:39:43] It's always meant to be free.

[00:39:45] But in the 1980s, I would have been charging $25,000 per person.

[00:39:48] So we live in an extremely data rich and analytics rich world.

[00:39:53] And I don't think people take advantage of it.

[00:39:56] So feel free to do that.

[00:39:57] There's no subscription.

[00:39:58] There's no upside.

[00:39:59] There's no senior package.

[00:40:01] There's no pro package.

[00:40:02] It's just a free course.

[00:40:03] It sits there.

[00:40:04] And you can read the reviews.

[00:40:06] There's over a thousand five star reviews of people that have taken these.

[00:40:10] You'll see reviews of people that have made millions of dollars and they've thanked me

[00:40:14] in their reviews.

[00:40:15] Wow.

[00:40:16] That's fascinating.

[00:40:17] I don't know who these people are because Udemy doesn't give me the list.

[00:40:22] Udemy.com and we go, we look for you, Neil Bawa and Location Magic is the name of the

[00:40:27] course.

[00:40:27] So, all right.

[00:40:29] Well, in closing, then how else if someone is, I mean, this has been a fascinating conversation

[00:40:34] and they want more of what you offer.

[00:40:36] I know you've got multifamily you and you've got an investment company and all that.

[00:40:40] So talk briefly about how they can get in contact with you there and what's available.

[00:40:43] I think the best way to coordinate to work with us is to go to multifamilyu.com.

[00:40:48] So that's multifamily followed by the letter u.com.

[00:40:51] About 25,000 people sign up for our webinars.

[00:40:53] We do webinars on all kinds of things.

[00:40:55] Single family, multifamily, self-storage, student housing.

[00:40:58] We do them for things that catch our attention.

[00:41:00] I did one for how artificial intelligence is the greatest change in humanity's history.

[00:41:04] I did one on the impact of climate change on real estate.

[00:41:08] And I also did one on how to 10X your business using virtual assistants.

[00:41:11] I used, you know, 30 plus of them.

[00:41:13] You know, the one that reached out to you to schedule this podcast was also a virtual assistant.

[00:41:18] So there's lots of very interesting courses.

[00:41:20] They're all free.

[00:41:21] There is no subscription.

[00:41:22] There's no upsell.

[00:41:23] So connect with us that way.

[00:41:25] And once you're connected in our communities three to four times a year, you might hear about

[00:41:28] our projects.

[00:41:29] If that's interesting, do that.

[00:41:31] But don't be in a hurry.

[00:41:32] Just spend your money.

[00:41:34] Wow.

[00:41:35] That's wonderful to hear.

[00:41:36] People hear the opposite quite frequently, right?

[00:41:40] You really have to feel comfortable with the people that you're investing in, because

[00:41:44] I like to tell people, yes, you're investing in data.

[00:41:47] But most importantly, you're investing in people.

[00:41:49] You're investing in the beliefs of people.

[00:41:52] And so wouldn't it be better for you to take some time to understand their core beliefs?

[00:41:56] See if you agree.

[00:41:58] Yeah.

[00:41:59] Absolutely.

[00:42:00] I agree completely.

[00:42:01] Fascinating.

[00:42:02] Neil, thanks for your time today.

[00:42:03] This has been a fantastic conversation.

[00:42:07] I've learned a lot and hopefully our listeners do too.

[00:42:10] Awesome.

[00:42:11] Thanks for having me.

[00:42:12] Hey, gang.

[00:42:13] Just winding down here today.

[00:42:14] Thanks for listening to the show.

[00:42:15] And as always, if you need capital to grow your business, you're looking to purchase commercial

[00:42:22] real estate or build a building or invest in commercial real estate, or you're looking to

[00:42:27] acquire a business or a competitor or just need growth capital, we'd love to talk to you.

[00:42:32] We fund businesses all day long.

[00:42:34] Our mission is to help entrepreneurs win and to fund their businesses and fund their dreams

[00:42:39] so that they can make an impact in their community.

[00:42:42] Reach out to me today.

[00:42:43] Go to our website.

[00:42:44] Click the button to schedule a 20-minute conversation, discovery call.

[00:42:47] We'll have a quick conversation.

[00:42:49] See if there's a need.

[00:42:50] See if there's a fit.

[00:42:51] And we can take it from there.

[00:42:52] The website is vpcvictorpaulcharlie.capital.

[00:42:59] That's vpc.capital.

[00:43:02] All right.

[00:43:03] There's no .com on that.

[00:43:04] It's vpc.capital.

[00:43:06] As always, keep crushing it and hope to see you soon around here.

[00:43:11] Take care.