Category: Finance Tips
Air Date: 04.13.2021
How To Maximize Profit From Real Estate Investing
We are excited to speak with real estate investing master Neal Bawa. Neal shares his insight into how to maximize profit from real estate investing.
Our guest today is a man who needs no introduction; if you are an avid real estate podcast listener, you’ll definitely know this name. On this episode, we are excited to introduce Neal Bawa. Neal is a technologist who is universally known in real estate circles as the mad scientist in multifamily. He treats his $250 million-plus portfolio as an ongoing experiment of efficiency and optimization. Neal serves as the CEO and founder of Grocapitus, which is an iconic data-driven, commercial real estate investment company, and also serves as a CEO of Multifamily U, an apartment investing education company with over 5,000 students attending his multifamily seminars, and hundreds attending his magical multifamily boot camps each year. Tune in and join us today as we talk to Neal all about numbers, measurements, adapting, and succeeding. Neal shares a lot of key information and tips about using data to your advantage, reinventing and adapting to ensure your success, his opinion on the strongest asset classes, and what investors need to be paying attention to. He also unpacks the five ratios that you should be tracking, so stay tuned for all this and more!
Key Points From This Episode:
- Hear more about who Neal is, his background, and what led him into multifamily.
- Looking at data trends: the goal is to constantly be reinventing yourself because that’s what data tells us to do.
- Neal shares the top strongest asset classes, pre-and post-pandemic: e-commence boom.
- How multifamily has stayed the average most favored class over the last six to seven years.
- Neal talks about how the pandemic has impacted the class C price: old versus new.
- What do investors need to be paying attention to, according to data, a year from now: no bad news in multifamily.
- Neal explains why the next twelve months are gold, even if bad things will happen after.
- Innovations that Neal is implementing now that keep him ahead of the curve: cameras, sell covered-parking, calculating and tracking key ratios.
- The five ratios:
- The number of leads that your property seized each week.
- The number of appointments that were set from those leads.
- The number of people that actually showed up at the property.
- The number of people that signed apps.
- The number of people that became leases.
- What things in his portfolio would he consistently measure: unit turn.
- Neal’s message to passive investors at this point: make sure your syndicator is both excited and afraid.
- The one question that every investor should be asking their deal sponsor: what was their worst deal and how did they deal with it.
- What Neal is most proud of throughout his career, thus far: their employees and how their company has molded itself into an extremely customer-friendly place.
- A book everyone should read: The Miracle Morning.
- Neal’s number one key to success: measure everything, and adapt.
“I tell people, I am not in real estate. I am running a cutting-edge technology company that happens to be using real estate, that is really optimizing.” — @nealbawa [0:02:49]
“I think the key is that we understand the immense and astonishing power of data to create profit.” — @nealbawa [0:03:01]
“Cap rates have only gone down in the last eight years. So, everyone’s been cushioned by that. Yeah, that’s a zero-sum game. It ends at some point, and then it reverses. I think that there are not enough people that have seen that, experienced that, or understood what the kind of impact that would have on them.” — @nealbawa [0:12:40]
“The US is going to experience a historically large growth over the next 12 months. You’re never going to have any year like the next 12 months because the pandemic will be over in 30 days.” — @nealbawa [0:16:11]
“You cannot manage what you cannot measure.” — @nealbawa [0:33:16]
“A key to success: Measure everything and adapt. If you’re not adapting every day, you’re dying. You just don’t know it yet.” — @nealbawa [0:39:03]
Links Mentioned in Today’s Episode:
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—Full Transcript Below—
“NB: So, this explosion in syndication schools has led to there being an enormous number of syndicators. And I don’t think that it’s the number of syndicators, Kent, that is the issue. It’s the number of inexperienced syndicators who have not faced a market where cap rates have gone up. So, cap rates have only gone down in the last eight years. So, everyone’s been cushioned by that. Yeah, that’s a zero-sum game. It ends at some point, and then it reverses. I think that there’s not enough people that have seen that, experienced that, or understood what the kind of impact that that would have on them.”
[00:00:36] KR: Welcome to Ritter on Real Estate, the show about how to passively invest like a pro. On each episode, I interview real estate experts who give their top investing advice, strategies, and tools that break down the insights into practical steps to avoid the pitfalls and make better investments. I want to help you passively invest like a pro. This is Ritter on Real Estate, and I’m your host, Kent Ritter.
[00:00:58] KR: Hello, fellow investors. Welcome to Ritter on Real Estate, where we teach you how to passively invest like a pro. Very excited about our guest today, a man who needs no introduction. If you listen to real estate podcasts, his name is Neal Bawa. Neal is a technologist he is universally known in real estate circles as the mad scientist in multifamily. And he treats his $250 plus million portfolio, as an ongoing experiment and efficiency and optimization. Neal serves as the CEO and founder of Grocapitus, which is an iconic data driven, commercial real estate investment company and also serves as a CEO of Multifamily U, an apartment investing education company with over 5,000 students attending his multifamily seminars, and hundreds attending his magical multifamily boot camps each year.
So, Neal, very excited to have you on the show. Thanks for being here, sir.
[00:01:51] NB: Thanks for having me, Kent. Super excited to get started.
[00:01:55] KR: Yeah, great. Well, for those that that don’t binge real estate podcast, like I do, tell us a little bit about who you are and your background and what led you into multifamily.
[00:02:05] NB: I’m the typical Silicon Valley geek, dork, nerd, whatever you want to call us, had a successful technology career, had a successful technology exit, always looking for optimizing using data and analytics. I’m a very much a numbers guy. I like to say, if there is a God, he must be a mathematician or she must be a mathematician. And so, we’re always looking for trends in the data. So, it’s interesting. A lot of people have a fairly large portfolio, it’s up to about 400 billion now. But I tell people, I am not in real estate. I am running a cutting-edge technology company that happens to be using real estate, that is really optimizing.
Tomorrow, we could be optimizing something different. We could be doing what Elon Musk is doing. I think the key is that we understand the immense and astonishing power of data to maximize profit from real estate investing. We’re always asking ourselves the question of what creates more profit for investors? In a seven-year real estate career, we’ve already pivoted four times because we’re always obsessed with this question, what creates more profit? What is the largest creation of profit? And we pivot cities, we pivot states, we pivot asset classes, we pivot types of assets that we buy, constantly looking to change and modify things.
So, it’s very unusual. The most unusual thing that people say about us is that Neal Bawa never does the same thing for more than a year or two years. That’s not strictly true, because once we get good at something, we keep doing those things, but we’re always moving into whatever is the most profitable because I always like to say, there’s no asset class, that’s always the best. And multifamily, that’s not true of multifamily is not true of any other play, any other asset class. And so, the goal is to basically, constantly be reinventing yourself, because that’s what data tells us to do.
Amazon, for example, is not a bookseller, it’s not an ecommerce company. It’s one of the world’s best analytics companies, and really understands the behavior of its customers and changes with them.
[00:04:09] KR: I love that perspective, because you’re not pigeon holing yourself into an emotional relationship with a single asset class, feeling like you’ve got to make that work, no matter what the market is showing, and no matter where the trends are going, you’re really looking at it from a much broader point of view and say, no matter what you’re going to do, you’re going to optimize. And that’s really what you’re in the business of. So, I think that’s a fantastic perspective.
[00:04:32] NB: Having said that, I think for your listeners, a lot of your listeners are multifamily people, I do have some good news to share. In the last six or seven years, each year, we’ve looked at all of the industry reports, whether they come from Marcus & Millichap or Berkadia or CDRE or 10 other sources, we put them into a grid, because each year, each one of these big companies says this is the asset class that we think is the strongest. And they rank all the different asset classes, good, better, best, that sort of thing. Of all the asset classes, the average winner in the last six years has been multifamily. And it’s actually been in number two position most of those years. So, currently the most favored asset class for the last two years, the pre and post pandemic is industrial, because we’ve had five years of ecommerce growth in 10 months.
So, when you have five years of growth in 10 months, there’s a shortage. So obviously, we were roughly 125 million square feet short on the ecommerce side in terms of space. And I’m sure that pace is not going less, and we’ve had 50 million Americans that really didn’t use the internet for ecommerce that are now using it. And so, it’s going to take a while for that to mitigate. So, industrial number one multifamily again. Number two, now, in the past pre pandemic, before the industrial sort of took over, there was self-storage, there were mobile home parks. For a brief amount of time, there was senior housing, six or seven years back, there was student housing.
So, it’s very rare to see multifamily as the most favored asset class in any given year. But if you average it out over seven years, it’s the winningest class. Usually –
[00:06:15] KR: The consistency.
[00:06:17] NB: The consistency is remarkable and that’s why we’ve had multifamily as our foundation, but then we play in these asset classes that we think are better. We’ve done self-storage, we’ve done industrial, and we also have played beyond these asset classes into something that is very rare, which is townhomes. So, we build townhomes from scratch, because while multifamily, industrial, self-storage are well known asset classes in syndication, which is a process of gathering investor money, none of them are the most profitable for the end investor. The most profitable for the end investor is to basically buy scale townhomes and scale communities and we’ve known that for six or seven years. We just didn’t have a business model where we could get paid for investors to do that, because the whole point there is 100% ownership, 1031 benefits. The question really was like, how do we play in this?
[00:07:08] KR: So, the model you’re talking about is essentially similar to like a single-family rental model, but you’re doing it at scale?
[00:07:14] NB: In scale because the problem with single family rentals is that you have to still deal with a property manager who has 700 more units and you don’t know whether they’re paying attention to you or not. But when you build a 133-unit townhome community, with its own property manager and its own maintenance staff, then you own your own property, you get the 1031 benefits, you get the long-term depreciation, the long-term equity benefits, but you still got all of the multifamily benefits because you’re inside of multifamily.
[00:07:43] KR: You’re selling them off individually, is that right?
[00:07:45] NB: Yeah, it’s a very difficult process. It took us about five years to build the systems to do that. But it’s just an example. Obviously, I’m not saying that that’s the focus and most people should not even try to do that, because you need to reach a very large scale with investors, because these are a million dollars or more each. So, the minimum investment is 250k. So, you’ve got to have an investor database that is enormously large. So, we use technology, we built what we believe is the second largest investor database in the US for syndication people. The largest is Grant Cardone’s database. And so, we eventually got to the point where we could have enough investors that will give us 250 to 300,000, 2 years before these things are built, because there’s a two-year gestation period.
So, bottom line, though, I wasn’t really talking about townhomes. But what I was talking about is that we study asset classes from the perspective of the investor, that’s investing $100,000 in syndication, multifamily is rarely number one, but it’s the foundation, it’s overall, the best. We also study what’s best for the investor and it has been a five-year obsession to come up with that model, where the investor still keeps 100% of the profits, and we still get to make something. And the model was to basically build these enormous communities that where everyone owns their own fourplex. That way, they’re not your partner, you’re not their partner, they still enjoy benefits for 30 years, and that model unquestionably meets every other model in terms of the amount of profit, the post-tax profit that the investor makes.
I’ve never seen anything like it but it took six years to get to that point. And along the way, we made our investors plenty of money and we continue to do syndications simply because, as I said, 1 out of 20 investors in your database will even consider buying a fourplex and putting that kind of money down. Most people want $50,000, $100,000 investments, that’s kind of the middle of the fairway, so we continue to do industrial. We just did an industrial project about a year and a half ago. We did a self-storage project about a year ago. They’re both doing beautifully. We continue to do new construction — multifamily. We continue to do do value-add.
So, I did branch out of value-add. People who’ve been listening or binge-watching podcasts, you guys know this. We all know that the markets really expensive. We know that there’s no historical precedent for the price per door. We know that class C units shouldn’t really sell for $120,000 a unit. Even in good markets, they shouldn’t sell for 120,000 a unit, because you can construct them for 170,000 a unit, and there shouldn’t be just a $50,000 delta between a 40-year-old building and a new building. That delta does not make sense.
There’s no doubt in my mind that there’s a compression that has happened, new construction, prices have gone up. But class C prices have gone up much faster. Therefore, the gap between new construction and class C has closed and continues to close, and that creates risk, that creates substantial amount of risk. Because like a lot of people like right now are forecasting that they’re going to buy this classy, 40-year-old property at 120,000. I’m selling one at 120,000. So, that 120, they are making the assumption that they can sell it for $170,000 or $180,000 a door — in five years. My question is, is there any historical precedent for anyone that has sold – the building is already 40 years old, so five years from now, it’ll be 45 years old. Who is the person that’s going to buy this for $170,000 a door, when construction prices five years from now will be 200? So, now there’ll be just a $30,000 gap between a 45-year-old building a brand-new building.
[00:11:32] KR: Yeah, I mean, it’s a valid point. I think it’s an interesting question and you start to think about capex and what capex on a 50-year-old building looks like. I think those things often get undervalued. So, yeah, I think you make a really good point about just the the type of assets to be in and the dislocation of some markets from reality, for sure. And just the increase in competition has driven a lot of it. There are more syndicators now than there ever have been. There are thousands of groups.
[00:12:03] NB: It’s incredible. So, this explosion in syndication schools has led to there being an enormous number of syndicators. And I don’t think that it’s the number of syndicators, Kent, that is the issue. It’s the number of inexperienced syndicators who have not faced a market where cap rates have gone up. So, cap rates have only gone down in the last eight years. So, everyone’s been cushioned by that. Yeah, that’s a zero-sum game. It ends at some point, and then it reverses. I think that there’s not enough people that have seen that, experienced that, or understood what the kind of impact that that would have on them. If there are going to be such people in this marketplace, and the fed is going to continue to be as benevolent as they have been to us the next three years, then my take ism I’d rather be a seller. I’d love to sell in this market. So, I’m building and selling and people are buying the stuff that I’ve completed construction on at truly hideous prices, but I’m happy because I’m on the seller side.
[00:13:04] KR: Even most of your strategy and sounds like in a new development then. You’re doing ground up work, whether it’s fourplexes, or whether it’s whether it’s larger multifamily.
[00:13:12] NB: So, we do. We have three divisions, 40% of our businesses is townhomes. Those are for the more affluent investors. Funnily enough, those are the investors that make the most amount of money, but still, they have to have plenty of money. About 30% of our business is new development and 30% is value-add. But within that value add, it’s not just multifamily value-add. It’s multifamily and storage. There’s no value add for industrial, right? What is industrial? It’s a big box. Four walls, a loading dock. So, there’s no value out there. So, you can only really build an industrial.
[00:13:42] KR: Being the mad scientist, I’d love to hear what your data is telling you about where are we now and where if we’re looking out a year from now, what do investors need to be paying attention to?
[00:13:54] NB: The next 12 months, there is no bad news in multifamily. Every kind of news you’re going to hear is going to be good news. But what I’m saying is there’s no foreclosures in multifamily. Cap rates will drop in all of the top 50 markets across the US. They will even drop in San Francisco and San Jose, which are the markets that have been hit very, very hard by the pandemic in terms of rent drops. I still believe that they will see cap rate compression, because the interest rates are so low, at this point of time, that once a recovery starts, these prices do not make sense from the perspective of those interest rates. There’s no doubt in my mind that if you have a short-term strategy with a multifamily, you’re going to do really, really well.
So, 12 months from today, I expect to see price per door across the board between $10,000 and $15,000 high –I’d say $10,000 higher. I think price per door in the United States today is about 176 a door, that’s class A, B, and C. So, I expect that to go up very substantially, 6%, 7%, 8% is likely to happen. Cap rates in the US — are today at 5.10. I expect them to compress to 4.9, 12 months from now. I do expect interest rates to slowly pick up. A lot of people are like interest rates can go up because the Fed is said they won’t raise rates. But yeah, I get that. But the Fed doesn’t set interest rates, the Fed sets what is known as the federal funds rate. And the federal funds rate is just an indicator of interest rates, if we start seeing inflation in the marketplace, which is going to happen, because we just created $1.9 trillion out of thin air, money that we didn’t have, we created it and we started sending it out to the states who are going to spend it. The US economy has never spent two trillion extra dollars.
[00:15:43] KR: More like, nine trillion, total, right?
[00:15:46] NB: If you look at the total, it’s an absurdly large amount of money, plus an absurdly large amount of liquidity. When you drop interest rates to zero, and you flood the market with liquidity, there’s also liquidity benefits. So, the US is going to experience a historically large growth over the next 12 months. You’re never going to have any year like the next 12 months, because the pandemic will be over in 30 days. We’re recording this on March 11. By April 11, the pandemic will be over in the United States. It doesn’t mean people won’t die. It doesn’t mean we won’t need face masks, or you won’t need to take vaccines, but its economic impact will be gone. By mid-April, all states in the US, including the western states, including the liberal states will open. By mid-May, the United States will ship 100 million doses of the vaccine, they will gift it to some other lucky country, because we bought a billion of these things, only about 200 million people want them. Even if we keep 150 million in stock, I don’t know why we would keep them, the pandemic, that’s worldwide. What do we do with the other 650 million? It just doesn’t make sense to me. You can’t really store these things for years and years and years.
So, I think in May, Biden is going to be gifting some lucky country 50 or 100 million doses, but our pandemic will be over. We’re going to see a massive boom in the next 12 months, and again, practically nothing will go wrong. And this is coming from me. I’m the permabear. I’m always talking about the bad stuff in the economy. It’s just, we are in this weird window of time where for 12 months, you practically can’t put a foot wrong. Now, after that, lots of things will go wrong. But the next 12 months are gold.
[00:17:23] KR: I was going to say, it seems like there’s a big but after that, after you say that. It’s the next 12 months, but –
[00:17:29] NB: The but is not as bad as you might think it is. So, what happens with interest rates cut is, when you cut interest rates so much, you’re taking a lot of future growth and you’re dragging it to the present. And that’s like an arrow that’s left, it’s gone. You can’t undo it simply because the pandemic didn’t turn out to be as bad as you thought it was. You can’t undo that. So, what we’ve really done is we’ve pulled multiple years of growth and we’re going to have two really strong years. The next 12 months starting from April 2021 to March 2022 are going to be absolutely phenomenal. And then the 12 months after that are going to be pretty good. But that 12 months has both ups and downs. You’re going to see significant interest rate increases in that second group, so you’re not going to be sure on do I lock in by loans? Do I stay floating? Between now and the next 12 months, you’re going to see a very significant increase in price per door. So, then you’re like, “Do I really want to buy at $132,000 a door? But the one that he was talking about at 120, is that worth it, to buy that at 132 or 140 a door?”
So, it’s going to be hard to make that decision a year from today. But today is an easy decision to make, because you definitely are going to ride one year of growth. So, oddly enough, despite my criticism today, it makes sense to buy that apartment at 120 a door, because you’ve got a very high chance that it’s going to go up another $12,000 or $13,000 a door even if you do nothing with it.
[00:18:57] KR: I think that we’re in a very unique time right now and we’ll continue to see that play out. And yeah, it’ll be interesting to see what the next two or three years hold. But yeah, I think as we get, I mean, I’m of the same opinion. Over the next year and really the next two years, the Fed has even said at this point, like they want the long-term rates to run. We need to see some of that inflation. It’s a sign that we’re coming back. We’ve got a healthy economy. So, the great thing about owning real estate or multifamily or assets is that you’re in that environment, you’re seeing asset appreciation. So, yeah, all good news, like you said, and then we’ll we’ll continue to have you back to forecast out in 24 months and see where we’re going from there.
[00:19:35] NB: There may be some bumps along the road. I have not factored in at this point a coronavirus related issue because I find that at least Pfizer and Moderna are effective against the South African variant. I don’t know if there are new variants that are going to show up in the next 12 months, because a pandemic will go on for about a year in the less rich parts of the world. So, there’s plenty of chance for there to be a variant. But if it does happen, I think it will be a short-term shutdown because it’s much easier to take an existing vaccine and adapt it for a variant, than to build one from scratch. Because you’re just just adding one little piece into the vaccine to guard against that.
So, my prediction is, we just get past this thing. Yes, we are going to get vaccinated, and yes, we’re probably going to be wearing masks for a while. But I think from an economic perspective, we’re going to see a very, very strong recovery. And so, I think it’s overpriced, but that’s not going to stop prices from rising.
[00:20:32] KR: Right, exactly. You’re going to be the last one holding the bag.
[00:20:36] NB: That’s the key. That’s why a year from now, people are going to be scratching their heads going, “Do I want to buy?”
[00:20:41] KR: Yeah, the underwriting model becomes much more difficult when you start having to put a ceiling on what your exit price per door is, right? I mean, we’re seeing that now, as we’re underwriting and we’re seeing, because we do that test, and we say, “Okay, well, okay, we’re buying at this to make the model work, what do we need to sell at?” And we’re seeing that and you say, “Wow, could you really sell it that in this market?” I don’t think that’s realistic. So, then you start to temper that down, you say, “Well, okay.” So, the math makes sense on the spreadsheet, but it doesn’t make sense in reality, and those things are going to be even more and more start to separate. And that’s where people are going to get in trouble, is if they’re not grounding their assumptions in reality.
[00:21:21] NB: By the time I’m done building, it’s at seven cap. So, if I sell it for five, it makes money. If I sell it for five and a half, it makes money. Hopefully, I’ll sell it for four and a half.
[00:21:30] KR: Yeah, absolutely. So, let’s dig into a different subject, knowing that you’ve said before that you use your portfolio is kind of this constant incubator, if you will, this optimization experiment. So, what are the things the innovations that you’re implementing now that keep you ahead of the curve?
[00:21:52] NB: There are a few podcasts that have provided examples of these real-life examples. I’m going to briefly mention two of them, and then talk about a third. So, one is use cameras at your properties, use 4k cameras. You will need the extra resolution to catch people that have pets that are not in AppFolio. On a 250-unit property, we ended up making somewhere around $300,000, over five years. So, I’ll just give you those numbers, do the math, once you figure it out, you’ll know what to do there.
Second, if you have a property in an area that’s very hot, or very cold, sell covered parking. But the way to sell covered parking is only call tenants when it’s over 100 degrees, or under 30 degrees. Don’t bother calling the rest of the time, it’s a waste of your time. We can’t sell it. But under 30 degrees and over 100 degrees, covered parking is like freaking gold. So, when you call them at that point of time, they are willing to pay you 30 bucks a month. Thirty bucks a month for 30 slots. Let’s say you have 30 slots of covered parking, that’s about $250,000 on a five cap.
So, those are two standard strategies. But the one that is a favorite of mine, because in my mind, it counts the most and we just continuously optimize it, is this. We’ve seen people with billion-dollar portfolios, $2 billion portfolios. And every once in a while, I’ll go to a conference and I’m teaching or up on stage and I basically sometimes ask people this question, “Do you really know what your ratios are?” And they say, “What ratios?” I say, “All of your sales ratios. All of your leasing ratios.” And they’re like, they’re not sure what to talk about, because software like AppFolio, and Yardi doesn’t really calculate these ratios. And that I find to be absolutely stunning, that in every sales industry that I’ve been in technology, we were always calculating our key ratios.
So, there are really five ratios that are so incredibly important that I have not found a single asset manager to know. I’ll give those to you. The number of leads that your property seized each week, these are tenant leads. The number of appointments that were set from those leads, the number of people that actually showed up at the property, the number of people that signed apps, and then the number of people that became leases. Now, that’s five, but you actually have nine numbers to track because you track these five numbers, and then if you look at my hand here, you track the ratios between each of these two. And that’s four ratios. And we always also track the ratio all the way from lead to sale. So, that’s 10.
So, those 10 numbers, I talked about them very often because I have never come across a scaled industry where people weren’t obsessive about sales ratios, right? And here it is, because, no, I’ve never come across somebody that actually gives me a number that says my property is, this ratio from lead to appointment, is 37.5% or any number, because no one ever knows. I cannot understand how you’re in the business of selling apartments, how could you possibly be measuring yourself performance. So, I put it on my website. I was like, “Okay, here’s the five ratios. Here’s the five numbers. Here’s the four ratios. Here’s an hour’s worth of content. Take it, implement it, and if I’m wrong, come call me out on it.” And it’s actually on my website, multifamilyu.com. It’s really only for syndicators. So, it’s not for people that are new to this business. It’s overkill for you. You got to be managing two or three or four properties before you look at this stuff.
But if you do that, it is going to open your eyes to what is wrong at your property, because lots of times, you’re struggling for your property to hit 95%. And then there’s properties where you’re consistently at 96, but you’re afraid of raising rents because you don’t know what’s going to happen when you raise rents. It’s like, I’m going to raise rents by 30 and the property goes to 92. And it does, it goes to 92. But you’re not sure. You’re not sure why it went there. You know that it was because of the money, but you’re not sure why you’re having trouble now getting it back to 95.
You don’t know, if it’s the leads to appointments, your leasing agent is not calling quickly enough. You don’t know if it’s appointments to shows, which means they’re not calling in and setting reminders and sending text messages and calling on the same day. You don’t know if it’s processing because people come in, but they don’t file an application because – not processing, because the units are constantly dirty. There are dead rats and cockroaches when people go in. And so, people come in, and nobody ever rents the property out. And so that’s really what’s killing you, and you don’t know if it’s processing. People come in and fill out apps, but it takes you a week to process the app, when they filled out another app two days ago, and that place went through finished off, sold them the apartment, they’re gone, and you’ll never get them back.
Just that by itself, the fact that you don’t track any of these, how the heck do you know who’s performing and who’s not? So, we’re really obsessive about this.
[00:26:44] KR: Yeah, and the reason I’m kind of laughing, as you say all this is because in my background, I was a management consultant for a long time focused heavily on metrics like that, worked in call centers and other areas. And so, I agree with you. As I have transitioned into multifamily, I have been extremely surprised, I mean by some of the top systems and the lack of reporting, the lack of benchmarks, and the lack of the KPIs. And so, I appreciate you bringing that up. I think it is something that is really missing, but it’s something that’s critical. I think the one that actually frightens me the most is that on an industry average, as an industry, we miss 50% of our inbound calls.
[00:27:24] NB: Yes, it’s shocking. 50%, what other industry could even survive by missing 50%? Most industries, if you get to 10%, the sales manager’s head comes off. It’s just stunning.
[00:27:37] KR: It fascinated and scared me when I learned that at the same time, as we looked at our own portfolio, we were doing slightly better, but honestly, still about 40%. So, we implemented a call center approach and the results have been astounding. I mean, the calls that we’re picking up now, I mean, we’re at like a 50% call to tour rate.
[00:27:57] NB: Yeah, that’s a pretty good number. But that’s not industry standard. Most people are not getting anywhere near that.
[00:28:01] KR: No, the thing that amazed me is like, okay, 50%, fine. That’s maybe good, maybe bad, but before all those calls are going unanswered. You just pick up the phone, just have a system in place, so that you never miss a call. And in doing that, the results have been incredible. So, I do a local meetup as well and I had a guy on who spoke and he’s a property manager, and he actually sends all of his people through a formal sales training. Similar to what you would do if you were a sales professional. And I thought that was just – I mean, it’s not necessarily innovative, but in this industry, it is innovative, to send your leasing people through a formal sales training process.
[00:28:43] NB: Kind of sad, right? But you can see if it’s working, because if you look at the ratio between the number of people that are showing in the apps, if that ratio is below the rest of your portfolio, there’s a problem with the salespeople. Their sales kill. They think that their customer service where they are sales. Customer service and sales don’t behave the same way. And so, I think that, yeah, that the fact that people are now doing sales training, it’s a very good thing.
The industry is slowly maturing. But I still feel like this five-step system that I invented, it’s called LASAL. So, you can type in Neal Bawa, LASAL, hit enter on Google, and you’ll see it. What’s interesting is, now I show up at conferences where people are talking about the word LASAL, and they credit to me, they’re nice people. And I’m like, “Why wasn’t this there before?” And even now, maybe 1%, 2% of the operators are using it. I think it’s just because multifamily by its nature, is so profitable. And we’ve had eight or nine years of continuous cap compression where everyone looks like a hero no matter what.
[00:29:49] KR: Yeah, 100% complacency. Everything’s been great for 10 years.
[00:29:54] NB: We’re beginning to see change. I’m happy to see that one of my students actually learned LASAL at a boot camp and has opened a call center company. His name is
Shiv, he’s actually doing better than I am. Because he’s doing it on a full-time basis, I got lots of fish to fry. I’m happy and proud to see those sorts of things happen.
[00:30:12] KR: So, is he actually offering it as a third-party service?
[00:30:15] NB: Yeah.
[00:30:17] KR: That’s a great. I think it’s a huge value. So, another one of your mantras is you can only manage what you can measure. So, we talked about LASAL, those are great measurables. But if you could only measure three things in your portfolio, what would those three things be?
[00:30:35] NB: Unit turn. So, let’s say you get LASAL all right, like you understand it, you implement it, now things are going really well, then you should be above 97% but there are so many properties with demand that never get above 95. And what people really don’t get is, you need to be obsessive about how many units are you turning each week. And the biggest flaw that I’ve seen is people do these Monday morning reports, they call them MMRs. But basically, it’s a weekly snapshot. And they forget to put last week’s snapshot in the same Excel or same Google Doc. So, what we do is, we make our property manager copy the entire tab over into a new tab every single week, because guess what we’re doing when we’re in the meeting, when they come in and say, “Oh, we turned over two units this week”, we go back the last three weeks, and we total up the four weeks and divide by four, now we get a four week average of turn. And we’ve got minimum expectations of how many units they have to turn, and those minimum expectations are again, I don’t see people setting them. But the minimum expectations are that in four weeks, you will fully turn this many units.
The way we benchmark you on that is, we know what date the tenant moved out, we know what date the tenant moved in. So, we give you a certain number of days to accomplish that, and if you go 50% higher than that, basically, we count that against you. So, you have a you need to have a certain number of days to turn a unit. Now, obviously, a classic unit turn is going to be quicker than a turn where you’re doing significant rehab. So, we assign value to that. So, what I find there is that most property managers really need to be pushed, very, very hard on getting their unit turns done in time, whether that’s a classic turn in a week, or it’s a rehab in three weeks, and people are just not tracking that. We’ve got a system for tracking it. We’re assigning value to it. We’re telling them, when we hired you, you said, “Okay, I take a week to do this and I take two weeks to do that.” But you’re consistently taking 10 days to do this and you’re consistently taking 25 days to do that.
If you keep repeating it often enough, they figure out whether it’s a bad maintenance person, or their systems are not working, whatever it is. And over time, you might not get to a week, but you will get to eight days. And that’s money on the table, because you have enough people that want to live in this property. You just can’t make the property ready. Imagine a hotel that takes four days to turn a room, well, you have three hours in a hotel to turn a room. It’s about systems. Yes, you can turn something much faster. You’ve got to have the system, you’ve got to have the need, and most importantly, you’ve got to have the accountability. You cannot manage what you cannot measure.
[00:33:15] KR: A metric that I just heard for the first time, similar to that, is called go backs, and essentially what it measures is, how many maintenance tickets have you had in the 60 days from a turn? So, it turns down and then how many maintenance tickets in that first 60 days. I love that idea, because it’s the measurement of what was the quality of that term. And then, same thing, using that to drill back into, “Well, who was the person that worked on it? Who was the maintenance person?” And tracking that back and using it for training purposes. So, that’s one that we’re going to be implementing, because I honestly have not been looking at that. But I thought it was a fascinating metric.
[00:33:53] NB: Never heard of it. It’s awesome. It makes a lot of sense though.
[00:33:58] KR: Yeah. Very cool, Neal. As we’re thinking about the the listeners on the show, a lot of them being investors, a lot of them focusing on investing passively. And as we bring kind of everything around, what’s your message to passive investors at this point? What should they be looking for? What should they be looking out for? Can you share some perspectives with the audience?
[00:34:19] NB: Today, coming out of the pandemic, if you’re a passive investor and you’re talking to syndicators, I think you need to gauge to make sure that your syndicator is both excited and afraid. If you’re a syndicator today, you should be excited. Excited about this runway that I just talked about. And afraid for the fact that there’s a lot of stuff not making sense and has nothing to do with multifamily. There’s a lot of stuff not making sense in everything. I think that if your syndicator, doesn’t have the fear portion, they are not going to be able to adapt very quickly when the pandemic or something like that appears.
On March 4th, I flew to Atlanta to teach a big boot camp, I had lots of students. And on the way there, I began to do the math on the pandemic, and I told my partner who was on the same plane as me, saying, “I need to tell people that by the 20th of March, the entire United States will be on full lockdown.” And she was like, “That’s crazy. It can’t be that quick.” And I said, “Look, I’m a math guy. Exponential math cannot be something that is easily explained. Most people understand linear, they don’t understand exponential.” At that point. There were only a few dozen cases. And she said, “Well, yeah, we’ll do the bootcamp and we’ll come back and do this.” I said, “No, there’s no time left.”
The one day before the boot camp, I was at a property that properties in Fayetteville and so I was there on a visit. I went to the property, I went into the room that the show unit that they had, the demo unit, and I sat down and recorded all of those videos, and I posted them to my YouTube channel on March 5, saying, “In 15 days, this country will be completely shut down. California will probably lead the way and Washington.” And on the 16th of March, 11 days later, California shut down followed four days later by every other state. I think the key is you have to be ready, and you’re not ready if you’re not fearful. I sense that we’ve got so many of these tigers out there that have never really faced an elephant, that they don’t even know what an elephant looks like.
[00:36:20] KR: Interesting. So, that’s a perfect segue into into the the next question I want to ask you, which is part of our keys to success. And that first question is, what is the one question that every investor should be asking their deal sponsor?
[00:36:35] NB: What was your worst deal? Just tell me how you dealt with it.
[00:36:39] KR: It’s kind of like the interview question like, what’s your biggest weakness and it’s like, you care too much. You tried too hard.
[00:36:46] NB: You’re just looking at how they think and how they respond. I think that matters a lot. You’re about to give somebody who you don’t know, $100,000 of your money. You want to know how they think.
[00:36:57] KR: Yeah, how transparent are they. What will they share? I think that’s really interesting. What are you most proud of in your career?
[00:37:02] NB: I’m most proud of our employees and how our company has molded itself into an extremely customer friendly place. We don’t have any employees that bitch about customers. We don’t have anybody that complains about customers being unreasonable. It’s a place where everyone values what we have. We’re very, very lucky to have 500 plus investors and so, what I’m proudest of is our customer service. Not our track record, other people have better track record, longer track records, but the fact that we are very, very responsive to our customers, we’re very friendly, is something that took an enormous amount of work. So, very proud.
[00:37:43] KR: Awesome. What book should everyone read?
[00:37:45] NB: Well, I think I have a straightforward answer for you. There’s only one book that everyone should read, because it gives you the gift of time to read the books that truly will change your life, and that is The Miracle Morning. This book gives you 60 minutes of which 20 minutes are for reading, follow it, and you’ll find your ultimate book. It’s probably not going to be called The Miracle Morning, but I think that this book gives you the gift of reading.
[00:38:08] KR: Yeah, it’s a fantastic process, the process I followed for three years now. And I love The Miracle Morning. Definitely would not have been able to achieve what I’ve achieved without that extra time.
[00:38:18] NB: It’s not a book. It’s a philosophy. It’s a foundation. I have found other books that to me are very, very important. The one thing, the EOS operating system, which we are rolling out in our company, through The Miracle Morning. Before that, I just was always making excuses that I don’t have the time to read. Now, that I have a structured time to read, I’m not supposed to do anything else, everything’s quiet. It’s kind of hard to make excuses.
[00:38:44] KR: My issue was always the feeling that I had to read like multiple chapters. If I was going to read, I had to have like a big chunk of time. And just yeah, allowing yourself to read for 10 minutes, even. Read a page, it makes a big difference. All of a sudden, months goes by and you’re done with a book. You move on the next one. I think, little steps along the way. So, lastly, what is your number one key to success?
[00:39:06] NB: Measure everything. Adapt. I do not see this industry adapting very quickly and that’s what I’m afraid of the most. It’s a very slow-moving industry. As you said, some of the basic stuff you were shocked, the rate of change itself is accelerating. Things that happened in 100 years now happen in 10. Things that happened in 10 happened in 1, and that rate is accelerating. If you’re not adapting every day, you’re dying. You just don’t know it yet.
[00:39:35] KR: Yeah, fantastic advice. Well, Neal, thank you so much for coming on the show today. I think you continue to bring amazing value to the industry in all the episodes that you do, but thanks for coming on and sharing a little time with our listeners. If folks want to want to learn more about what you’re doing to get ahold of you, how can they reach you?
[00:39:54] NB: I happen to be the only Neal Bawa on the world wide web. So, N-E-A-L B-A-W-A, hit enter. If you want to listen to podcasts, add that word in there. If you want to listen to my conferences, add that word in there. If you want to know about virtual assistants, add that word. If you want to know about the LASAL system, plug that in, and you’ll see content come up. And if you’d like to follow me, we do 26 webinars a year on multifamilyu.com. They’re free. About 40,000 people sign up for them. Basically, we share our systems and processes. We believe in abundance. We believe that nothing should be secret. So, we have no trade secrets, no intellectual property, we give everything away. We find that it brings everything back to us. So, we find the more we give away, the more we get.
[00:40:44] KR: Absolutely. Tremendous value in all of those. Well, thank you again, Neal. Thank you so much and hope to have you back soon.
[00:40:51] NB: Thanks so much. Thanks for having me on the show, Kent.
[END OF INTERVIEW]
[00:40:54] KR: Thanks for listening to another great episode of Ritter on Real Estate. Hit the subscribe button and make sure you don’t miss out on the content that will make you a better investor. Also, visit kentritter.com for articles, videos, and tools curated just for passive investors. Until next time, this is Kent Ritter with Ritter on Real Estate. Now, go out and invest like a pro.