Neal Bawa 0:00
So your average syndicator buys 10 properties, right? I think what’s not obvious in the industry is that three or possibly four of those properties are already underwater, because they already had these floating loans. And these floating loans went up, they hit their cap, some of them didn’t have a rate cap, so they still going up. And the ones that have hit the red cap rate caps usually been set to like 8%, or something like that. And so at, so they’re at the rate cap there, they’re still the rate cap companies helping them with their mortgage payment. But still, their portion of mortgage payment means they’re still illiquid. Now. Then there’s the bigger problem. Banks are realizing that your rate cap may be expiring sometime next year, let’s say it’s, or this year, maybe it’s maybe it’s August this year, October this year. So guess what more and more banks are doing at this point, Darren, they’re calling you and saying, Hey, we’re seeing that that rate cap is going to cost you about $700,000 When you get it and we require you to get that rate cap in October unless you’re selling your property. And even if you’re selling your property, even if you have plans to sell your property, look, we can’t do anything about this. We want you to start escrowing 50 to $70,000 a month for you to buy that rate cap when it comes up in October.
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J Darrin Gross 1:35
Welcome to Commercial Real Estate Pro Networks CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
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Today my guest is Neal Bawa. Neal is the founder of Grow Capitus, an online multifamily investor education platform. He’s also an experienced syndicator developer, and his attention to the data has earned him the moniker the Mad Scientist of Multifamily. And in just a minute, we’re going to speak with Neal about the Feds Gambit with rising interest rates and their impact on commercial real estate.
But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network and while you’re there and please subscribe. With that I want to welcome my guests back to CRE PN Radio radio. Neal Bawa, Welcome back.
Neal Bawa 3:31
It’s great to be back Darrin interesting times so interesting conversations.
J Darrin Gross 3:36
No that’s that’s always a guarantee with you. But definitely the the times are a changin before we jump into the conversation if you could take just a minute and share with our listeners a little bit about your background. Sure.
Neal Bawa 3:51
I’m a data science technologist, successful tech career successful tech exit. I work with about 900 A little over 900 fairly nerdy data driven investors a lot of them from Silicon Valley, and I buy and build properties across the US in 10 states and 16 metros portfolio is about a billion dollars. And we are agnostic to any particular asset class, but the largest portion of the portfolio currently is multifamily. both new construction and value add
J Darrin Gross 4:25
Got it. And you said to agnostic, have you how far have you strayed from the multifamily?
Neal Bawa 4:35
In my mind very far and sometimes people don’t quite get this so you know, I’ve I’ve done townhomes for sale. I’ve done for plexes for sale I’ve done for plexes for rent, I’ve done built around communities, which are very different from a standard multifamily community have done other asset classes like industrial self storage, student housing, and I’m still missing one or two
J Darrin Gross 5:00
All right. Well, it’s it’s I think it’s, you know, good to kind of test the other stuff there and and get a feel for how they play and and get to know those different asset classes. That’s great.
Neal Bawa 5:13
Yes. So I certainly don’t suffer from the grass is greener on the other side problem?
J Darrin Gross 5:18
Yeah, you’re, you’re mowing on both sides, I get it. So, Neal, it’s been a little while since we last spoke, you’ve been very kind with your time and coming on the program here, multiple times. And I think the last time we talked this, probably about a year ago, when when we were kind of working through COVID, things were still good, there was kind of the sense that the Fed was working to slow inflation. And there, the expectation was the interest rates were going to be pushed upward. And that that the fear was there was going to be a crash. And here we are, today, we’re we are recording this in February of 2023. We’re clearly feeling the effects of or the interest rates have been pushed up. And inflation has not necessarily been is not under control just yet. The fear of of, you know, a looming recession is still, you know, evidence. And there’s plenty of evidence of that. I mean, and so I guess my my first question to you is, is the the landscape sits before us right now? What is your just immediate sense of things, just with respect to the multifamily marketplace?
Neal Bawa 6:55
What I would say is that the market is not doing a very good job of adjusting to its new reality. So I feel like there is this sense of, you know, we’ve had goods for so long, right, the last eight years have been so good. And every time something bad happens, something changes it, like, for example, COVID was actually a very positive change for the multifamily industry, just when we felt like all the cash flow is getting squeezed out. COVID comes along, and then the Fed, you know, showers all this money and interest rates go to zero. And you know, it’s party time again, actually, the biggest party of all time, and multifamily was in 2021. And so something always comes along and Bails us out. But I feel like there’s no evidence at this point that there is something that is going to bail out the industry. But I still see too much of a party like atmosphere, I don’t see acknowledgement, either of the fact that today, you can’t really buy a value add property with significant cash flow, I mean, 1% 2%, you know, sure, technically, that’s cash flow. But I think that if your property is producing four or 5% cash flow, you’re probably being a little aggressive with your underwriting, because I don’t think that that actually exists. And so when you’re in a situation where you’re buying, you’re a cash flow industry, you’re a cash flow asset class, and you’re cash flowing at one or 2%, or 3%. And 40%, of all buildings purchased in the last four years, are either just breaking even or bleeding, then the sort of attitudes that I see in podcasts and conferences, needs to be adjusted. So my answer to Darren is, the industry is in a process of adjustment and not doing a very good job so far.
J Darrin Gross 8:46
Yeah, no, I have my own mind, I’ve kind of thought that it’s, it’s that transition phase between where we were, and the expectations that things are going to go back, or the kind of the reality, you know, where we really are, and that change in reality. And I think the only thing that, that that, you know, cures at his time, you know, it takes time for people to realize the marketplace to realize that what was is not anymore. This is the new reality. And
Neal Bawa 9:24
Well, I think what helps is having open discussions, because there’s people that are going to listen to this podcast that I think will have a slightly changed point point of view. If there were 90 people or 200 people on 200 podcasts having this conversation, then that pivot to reality would just go faster. It takes time. Yes, but it you know, that takes less time. And I think that that’s why having these kinds of conversations is even more critical than the sort of conversations that we’ve been having on this podcast for the last two or three or four years.
J Darrin Gross 9:55
Ya know, and I wonder to this Does the conversation and the reality accelerate as the the financing that one has in place expires and has to reset? And does that not necessarily, you know, either force a sale or force a refinance or kind of that recalibration happens when we’ve just come out of some very low interest rate terms, those who were looking to refinance probably locked in and a pretty good, pretty good rate. They’ve got some runway to work with. But those that are, are coming up on an expiring term, or you know, are looking to sell or have to refinance. They’re facing a different reality. And wondering if if your thoughts on on as they transfer or transfer, you know, go through that, that transfer. If that doesn’t kind of cement for more people that the new route, what the new reality is,
Neal Bawa 10:58
It’s beginning to cement it. The problem is there’s no education around what to do. Right. So I have yet to see a course. And you know, most indicators today did not go through a college education course, they didn’t go to Utah University’s real estate program. They basically went to a weekend course or a five day course and then signed up for some kind of mentorship and they became syndicators. That’s the standard path, right? So you look at that, and you look at the curriculums of all the gurus and it’s good. I mean, the stuff that’s being taught there, you know, underwriting stuff like that, what to look for in property, excellent stuff. But there’s never any chapter on what happens when debt takes your property underwater, because that scenario really didn’t exist for the last eight years. So nobody ever wrote a chapter. Nobody ever recorded a podcast, nobody ever had a conference session on it. And so the problem isn’t that people don’t understand the issue. The problem is that there are very simple, straightforward, somewhat painful fixes that people are not aware of, because no one has ever provided any kind of education. And this isn’t necessarily true of, you know, people speaking at the NMHC conference, because those folks have gone through 2008. And they understand what what are the things that they need to do? But but the syndication industry, the vast majority of us were doing this, including myself, in 2008 2009 2010. Right? Luckily, in my case, I had a property where I got education, forced education, and but I look at what people are doing today. And I tell them, you know, look, the problem isn’t just what Darren described. So what you described is, there’s a bunch of properties that basically have to be refinanced and made refinance, all of a sudden those properties will go from either breaking even or making some money to just losing money. $50,000 $100,000 a month. Yes, that’s the case. But let’s talk about what is already happening. And that’s, that’s, that’s what I really want to focus on. So if you bought, let’s say you’re a regular syndicator, you know, you have a regular portfolio you like most of us believe that bridge loans or floating loans are better than, you know, being locked into a loan for 10 years, right, nine out of 10, syndicators, were using some kind of floating debt, because they wanted access to, you know, extra money from the bank for rehabbing their property. So you’re like us? Well, then, in the last three years, 2020 2021 and 2022, and maybe a little bit in 2023, these three years, let’s say you bought 10 properties. So your average syndicator buys 10 properties, right? I think what’s not obvious in the industry is that three or possibly four of those properties are already underwater, because they already had these floating loans. And these four floating loans went up, they hit their cap, some of them didn’t have a rate cap, so they’re still going up. And the ones that have hit the rate cap, the rate caps usually been set to like 8%, or something like that. And so at, so they’re at the rate cap there, they’re still the rate cap companies helping them with their mortgage payment. But still, their portion of mortgage payment means they’re still illiquid now. Then there’s the bigger problem. Banks are realizing that your rate cap may be expiring sometime next year, let’s say it’s, or this year, maybe it’s maybe it’s August, this year, October this year. So guess what more and more banks are doing at this point, Darrin, they’re calling you and saying, Hey, we’re seeing that that rate cap is going to cost you about $700,000 When you get it and we require you to get that rate cap in October, unless you’re selling your property. And even if you’re selling your property, even if you have plans to sell your property, look, we can’t do anything about this. We want you to start escrowing, 50 to $70,000 a month for you to buy that rate cap when it comes up in October or August. And so now all of a sudden, you are bleeding already. And now you’re bleeding because you have to put another $50,000 in and we’re not at the peak yet because I at this point, it’s pretty much guaranteed that the Fed will raise interest rates once in March once in May and once in June. So there’s still another point seven five increase He’s. So if you have a $20 million loan point seven 5% is basically $150,000 more a year in interest, which is $12,000 more a month. So guess what’s going to happen? In July, you’re going to be bleeding $12,000, more than you’re bleeding today. But today, if you’re putting that bleed in from your pocket, imagine how you’re going to feel putting in an additional $12,000 a month in July. And you might say, Yeah, but it’ll get better. Here’s the problem. Nobody has spreadsheets on this, I’m looking to create the industry’s first spreadsheet on actually showing syndicators, what their cash flow will look like in the next 24 months based on their own projections based on their own assumptions. I’m telling you that property, if it’s bleeding $100,000 today, and it’s going to be 120 $12,000, in July, is still going to be bleeding $100,000.09 months later, does that mean it needs a million dollars of cash? And that understanding of what to do when you have this kind of situation is completely missing? That’s the problem. You know, you asked this question on your app. Sorry, I’ll get back to you. But you asked this question about risk, right. The number one risk today is not interest rates, and it’s not inflation. The number one risk today is complacency.
J Darrin Gross 16:19
Yeah, no, I think that that’s, that is, you know, you’re spot on. And in the end, I think it’s a necessity that changes the mindset, and you know, the action, or it creates the action. And until you have that, if if, you know, people keep thinking they’re gonna hang on, or they’re going to be able to or things are going to change? Are they telling their investors that, you know, we’re, you know, we’re expecting this to change here? And in the third quarter are mean, how are they? How are they positioning that because eventually there’s, there’s going to be a change, either they either, you know, they lose the property, the the interest rates do do go down, and they’re able to refinance out of it? Or, or, or what else can they do?
Neal Bawa 17:09
It will be very useful if you’re saying those things to investors that interest rates may go down for you to actually project it. So one of the things that we do, and we give this out to anybody that wants it, by the way, we create something called the Grow capitalist interest rate tracker, and it tracks all of the usual stuff. So you know, where Sofer where spreads? You know, where’s the overall number, which is so far plus the spread? Where do we think the inflation is going to be in the next 12 months? Where do you think the Feds gonna be? The truth is, whether you’re Goldman Sachs or Merrill Lynch, or you know, you’re one of the big guys, if you read their stuff, everybody thinks the Fed might cut by 25 basis points, or 50 basis points sometime in November or in December. And if you’re lucky, it might be 25 basis points in November and 25 basis points in December. How much is that going to help you that property? That’s cat that’s bleeding? $100,000, that’s going to be bleeding $112,000, in June or July? Well, that’s still going to be bleeding by $88,000. If those that half point reduction did happen. So in January, how is your situation going to be a lot better than it is in July? Right? And, and then July, August, September, October will all look the same, they will all look more painful? And so my big question is, how can you stay with a straight face to your investors, that things are going to get better with existing properties? When the most basic math and you know you’re a syndicator? You do very complex math and do it quite well. So clearly, you don’t have any shortage of math people. Why? How do you say this? How do you say it with a straight face? I think it’s absurd. And I think that everyone has these properties. I’m one that’s very straightforward saying I have these properties. There’s nothing that I did that in any way changed. My problem, that problem that I’m describing. What I’m saying, though, is I’m extremely proactive, on buffering up cashflow for my properties, extremely proactive, raising more equity, getting more loans, doing everything that’s needed. Because, you know, and I have a monthly meeting with my team. We don’t talk about anything else. We don’t talk about the property. We don’t talk about asset management, we just talk about this property stability. And every month, we open a spreadsheet, we play with it, we tweak it based on what our beliefs are at that point, right of where interest rates are going to be over the next 18 months. And how this property is liquidity is going to get affected if you’re not doing that religiously. And by the way, we were doing it weekly. Eventually you get to the point where monthly is fine. If you’re not doing this, it’s your job right now, for God’s sake to be doing this with an existing property. And here you are underwriting 30 new properties every week, making three offers a week and buying a property every three months and that property has the same exact problem.
J Darrin Gross 19:56
Let me ask you this because you’re the as a data scientist here, the the data that you’ve been kind of referring to and a lot of the syndicators that, that are, you know, relatively new to this asset class, I mean, you know, the 2008 crash created an opportunity for a lot of people to get in and get get some, you know, properties that were that were in distress. And so, if you are looking at your, your current properties and trying to bolster them so that you can, you know, make it through this situation here. Are you looking to other historical points, where the interest rates and you know, the, the investment environment was similar? Or are you basically just taking your, your, what you have now, and seeing what you can do to to, to bolster your, you know, your position so that you can make it through?
Neal Bawa 20:59
Um, it’s a good question, I think it’s a very good question. As I think about it, the answer is, we don’t need to go back and look at history. 2008 was extremely unusual, it was a worldwide equity crash, a worldwide liquidity crash. We have no liquidity problems in the US economy today of any kind that I can think about. There’s massive amounts of debt and massive amounts of equity available, everybody wants to lend everybody wants to invest. The problem is that the interest rates are so high, that you basically effectively can’t make a property cash flow, if you invest, if you put that into it, if you put equity into it. So the our situation is vastly superior to 2009. The problem is complacency. And the problem is because like, you know, I asked this question, I’m gonna not gonna mention names. But a recent conference conference, you know, somebody called the conference, I said, Where’s your sessions on teaching people about all this stuff? Cash calls? recapitalizations, you know, bargaining with lenders? What are the things you say to your investors? You need to be teaching people how to do this, because this is what they need to know. And they said, Yeah, but there’s no distress right now. And my question is, you realize your conference is only held once in a year 12 months from now will be too late to teach people. Because the distress basically effectively starts this quarter. And you might say, why this quarter? Well, the answer is, when did interest rates go up? Right. So you know, in March, it was a quarter point increase, nobody cares. In May, it was a half point, nobody cares. And then after that, we have 475 basis point bombs, right, going to October, and then a 50. basis point bomb in December. So three and a half basis point increases happened in the second half of last year. Well, how could there be distressed in the second half of last year, interest rates were still going up. Now they’ve gotten up to the point where in January, you’re like, Oh, my God, I’m noticing losing a lot of money. And but you have reserves, you can put some money and you can raise some equity. So no distress, q2, same thing will happen. You know, we will put more money in the won’t be any distress, you’ll push something back, you’ll take money from your rehab reserves to three now you’re getting seriously worried because you’re like, Man, this thing gets keeps getting worse. By q4. The whole industry is like, oh my god, bad stuff is happening in q1, I think next year is the peak of when properties are going back to the bank. So if you’re having a conference in February next year, who are you going to help?
J Darrin Gross 23:33
Yeah. Right. The new buyers of the properties have gotten off.
Neal Bawa 23:38
Right. So I mean, I think that’s what’s what it is. I think the distress takes such a long time, because there’s so many steps in the process. But why are there no podcasts about cash calls recapitalisation bank management? What are the sort of things that you can do with banks, and I’m not saying I’m an expert at this, I’m saying I need that education just as much as the next guy. I’m just aware of the problem. And the fact that it’s the next 12 months, not the previous 12 months, all the stuff that’s indicators have been saying about the pain in the last 12 months. There isn’t any pain, all of the pain 100% of it starts now and goes for the next 18 months.
J Darrin Gross 24:18
Right. Right. Now. And again, I think you’re you’re spot on with the in the sense that I think today that at least my experience has been that people keep looking backwards with the expectation they’re going to be able to recognize what’s coming. And to your point is none of the syndicators that are of have no right now I’ve been through that. So how are they going to be of any value for the coming year on on how to weather the storm and how to not lose a property?
Neal Bawa 24:48
Right. And people people have been saying, I said this in a podcast last month and people are like, Why are you saying it Neil? You should just be hiding it and waiting for these people to make mistakes and pick up their properties. No, you don’t really realize I won’t be able to buy their properties in q1 next year if there’s contagion in the industry, because banks will stop lending right now. No, every bank wants to lend, right? They don’t want to lend a 70%, LTV, they want to lend a 55%. Because, you know, the DSCR is the numbers that they care about are not working, right. But otherwise, every bank wants to lend on every project. Well, what if there’s hundreds and hundreds of properties returning to the bank in q1 next year, which bank will be ready to lend to me? How is that going to be helpful to me, as an industry, we either figure out how to get over this bump in the road, because that’s really what it is. By understanding, recognizing and getting stopped for God’s sake buying properties at this point, just focus on the existing ones, so they don’t go back to the bank. That’s all they have to do. This is our job is maybe 1/10 As hard as 2009. But why aren’t we doing it? Why aren’t we having those conversations? Why aren’t you having people actively say, Hey, we’ve got to be talking about this stuff. And let’s get some education. Let’s figure out how to be better. Let’s start calling every frickin lender in the industry and saying give us six months of deferment. You did that as soon as COVID happened, where why aren’t you making those phone calls now?
J Darrin Gross 26:14
It you know, I’m curious. Do you think any of this part or maybe part of the reason why there’s not this conversation and education occurring is that most of the syndicators I mean, the the the business plan is to, you know, buy the property, renovate and sell. And her I guess rented higher ed, you know, get the get the NOI up and then exit. But But how many of the the syndicators business plan really has a whole plan with an operation to weather a storm.
Neal Bawa 26:54
I don’t think that these plans were ever built, because they were unnecessary in the last six or seven years. You know, here’s my plan on my existing properties. Make sure my investors don’t lose money. If I promised you 17 IRR. I’m sorry, that’s not my plan. If I promised you 8% cash flow, I’m sorry, that’s not my plan. Something happened that no one in the industry, not Goldman Sachs, not the Fed itself predicted a massive bomb went off. My focus right now is I want to make sure that I don’t lose your money. That is my only business plan. And if I don’t lose your money for the next 18 months, then I’ll go try and recover whatever portions of the business plan I could on a property by property basis. Don’t think about it 18 months from now?
J Darrin Gross 27:45
No, no, I think that honesty and having that frank conversation with investors, it may not be what they want to hear right now. But, you know, as we get through this, and when they get to the end of it, if you’re successful in, you know, able to do that, you will attract a whole bunch more investors from the standpoint of, you know, the, the honest, reality based conversation that was occurring with your investors, and I think that would, that’ll that’ll bode well, well, I
Neal Bawa 28:21
hope so. Because I think that that’s what is needed today, I obviously have to give up buying buildings today, I can buy buildings, you know, everyone sends emails out saying you buildings are $20,000 a door cheaper right now. $40,000 a door, I’ve got a huge deal compared to 12 months ago, when this building was $40,000 a door more? Well, you’re probably neglecting to mention that you were you know, underwriting you know, 4% interest rates a year ago, and now you’re underwriting at seven or eight or nine or even 10. Right, so that part of it is rarely mentioned. And so, I mean, I look at how I can get pencils up because I desperately want to be pencils up I haven’t been pencils up for a while. And every time I pick up my pencil, I look at data and I put the damn pencil down again.
J Darrin Gross 29:12
Yeah. In let me ask you so the you know, the the Fed sets the interest rates were they kind of the the overnight rate for banks and and, and, you know, as long as I can remember I think was Alan Greenspan back when he was kind of the first Fed chairman of note that really pushed the lower rates and in so it’s been 2020 plus years that we’ve had lower interest rates. But, but as we settle into kind of, like I see settle into, I don’t know if it’s gonna settle but I’ve heard conversations both on both sides or, you know, trying to express it both ways. Do you think that the, you know, if the market plays out like you, you’ve suggested here and that first quarter of 24 properties gone back? Naturally, you would assume that the Fed will then have to do something to kind of, you know, Goose the, the the market, do you think that the interest rates will go down because of that? Or, or do you think they’ll try and hang on to as much rain as they can?
Neal Bawa 30:32
No, I don’t think the Fed will do anything at all to help when the when this occurs, because I want to just explain the size of what will happen 1000s of properties could go back to the bank in q4 this year and q1 next year, q2 next year, right. Please understand the size of the multifamily industry. The syndication industry itself is a very small portion of the multifamily industry, people have been buying multifamily for generations there lots of people that don’t even sell them, they hold on to them for decades. And then there’s the institutional guys that are buying multifamily with hard loans and 10 year fixed loans, and they’re just laughing at the rest of us saying, hey, my property, I’ve owned it for 10 years, it’s got another 10 year fixed loan. So as a portion of the multifamily industry, the syndication industry is fairly small, and as a portion of the syndication industry, that properties that are actually going to be distressed enough to go back to the bank, that’s still very small. And then multifamily itself is a small component of the overall real estate industry, the single family industry is larger. And then the real estate industry is only a small component of the economy. In 2008, it wasn’t a real estate crash, all liquidity dried up in every single part of the economy. So compared to what happened in 2008, what could happen and may not happen, right? I could be wrong, and there may not be that distress next year. But let’s say that there is distressed, we’re looking at dollar numbers that are maybe 1% of what the Fed had to deal with in 2008. Why would they change track, when bad stuff happens in the economy all the time, the Fed didn’t change track when when Twitter laid off, you know, 7000 people or when Facebook laid off 11,000 people, the Fed actually pointed out to people that unemployment in the tech sector has risen in the last four months, even though big companies are laying laying off people, the small ones are hiring them, because they didn’t have access to those people before. So point is, the Fed doesn’t really react to things the way that the market would like them to react, they look at the economy as an overall picture. And within that, if there’s a sector that’s distressed, they’re not going to jump in to help that sector easily.
J Darrin Gross 32:34
Yeah, that’s interesting, as you kind of lay that out, you know, just thinking back about the oh eight. And how big that was. I mean, it wasn’t just, you know, commercial real estate, but, you know, all real
Neal Bawa 32:47
thing. The entire economy was in severe distress because of a complete lack of trust, complete lack of liquidity. We don’t see anything like that today. They just, I don’t see a scenario in which there’s a Fed chairman, that’s going to vote to start dropping interest rates to help 1000 multifamily properties in a in a country that has millions of them.
J Darrin Gross 33:08
Right, right. Do you think this could potentially, you know, reduce this, the the numbers of syndicators just based on, you know, the sexy investment of real estate, non performing, as well,
Neal Bawa 33:26
as there’s 100% chance that there’s going to be less indicators 18 months from now than they are today, there’s 100% chance. The problem is these people don’t know how to speak to their investors. So there’s still people doing sessions where they don’t talk about this stuff. And I’m actually, I’m guilty of that too, myself, right. But I’m planning over the next three months, I feel like I’ve done enough to make sure that my properties are not going back to the bank. But I feel like I need to do more sessions with my investors and just have these straight, toxic straight conversations with them about what’s happening in the marketplace, and how it’s affecting them. I think this stuff is important. And I really don’t feel I lose investors that way. They may not give me money for a property three months or six months from now. But I think that there’s appreciation that I’m right now, pencils down, I’m not looking to buy properties. I’m not looking to my I have staff on payroll that I’m paying from my own pocket, because you know, I’m not buying new properties just focused on their money, because they gave me that money. So I think that if, unless that happens in the syndication industry, I predict that there’s going to be a lot a lot less indicators. I mean, you already see brokers in the US single family brokers have dropped by about 30%. In just the last six months. The bottom dwellers just couldn’t take the fact that homes were not selling. And they went and did something else. Right. The job markets good. They got other jobs. I think we lose. I’m speculating maybe 20 to 40% of the entire syndication industry in the next 18 months. Yeah. Now and again, this isn’t this isn’t blood on the streets, right? There’s at no point have anything that I said represents Blood on the street, it just represents distress for individual properties.
J Darrin Gross 35:06
Right, right. Now just deal by deal challenge as opposed to a systemic.
Neal Bawa 35:14
You know, I don’t see a systemic problem, I do see that if 1000s of properties do go back to the bank 2024 2023, maybe or next year, 2024 may be a difficult year, especially early on in the year to get lending, where the banks are, if they’re worried about properties on their books coming back into them, it’s harder for them to lend at that point of time, because they have to deal with those properties. Today, slow down,
J Darrin Gross 35:38
right? I’m just sitting here thinking is you’re talking about the, you know, the lending environment, and just kind of this education that you’re working now, with your investors, it would seem that part of that education be kind of just more about the cycle, you know, the market cycle itself, and where the opportunities, you know, potentially will come from, or when they will come. And, you know, if you are able to weather the storm, and investors are wanting to get back in or have additional capital they want to put to you to use that that would be kind of the point for them to jump in or for you to go forward. But I’m kind of curious to on just the psychology with investors, you know, if they’re, you know, the aversion to loss, you know, the fear of losing, is so strong. And if they’re in the mindset of where if that’s what this week, your investors are, the hope is that you’re like you said, you’re able to, to not lose their their investment. So let’s say you’re successful in that, and you’re having a good conversation with them. And they feel educated and they feel taken care of by Neil. And as the cycle presents itself, there’s all these other additional properties that are that are turned back to the bank. Do you think you’ll you’ll I mean, I would assume you’ll be in a better position to raise capital from those people hand or anybody else? I mean, the I guess the the flip side is that people that lose money in the deals from the syndicators that aren’t having this conversation that are turning the deals, they’re not going to have the capital nor they’re going to want to get get back in the market, I would assume is that,
Neal Bawa 37:26
Yeah, it’s not read necessarily a good story, right? So 18 months from now, my job actually will be harder to raise money than it is today. Because those investors in my properties or other properties, haven’t seen this play out publicly. At this point of time, as I said, when I go to conferences, tell people, where’s the session on training on this? And they say, well, there’s not enough to stress Yes, for us to be doing this stuff. So stuff is in our future. And because it’s in our future, I think that 18 months from now, there’ll be investors who a have been burned, you know, with the property going back to the bank, or, you know, having to put in cash, or be they’ve been with somebody like me, and, you know, work hard, and maybe our properties are, are skating through this challenge, but they’re still not making money. I mean, I’m even for properties where I’m when I’m quite profitable, just out of an abundance of caution. I’ve told them, I’m sorry, I’m not distributing any cash, I need to just build my operating reserves, it’s your money, it’s not mine. If I don’t use it, it’s yours. I’ll, I’ll distribute it to you. Right. So since it’s not like, I’m going to sit and eat this money, it’s going to go into a bank account, it’s going to sit there for a while, sorry, but that’s what I have to do. Because my job is to manage your money. And know I see potential risks. And if that risk goes away, you’ll get your money. So so there’s people even in my database that are not particularly not happy with Neil Bauer, because they’re like, you know, I’ve this property is doing well, by now, you know, you kind of delayed cash flow during COVID. And then the cash flow came back, and now you’re taking it away from me again, I’m not quite happy. I think they understand. But they’re grumpy about it. And I think so, raising money next year is not going to be easier simply because other syndicators have burned investors. I think there’s a process where the mindset resets 2024 We’ll just muddle through 2025 I think is going to be a fine year. And we’ll do well. You know, you said Alan Greenspan was really the first guy that advocated for lower interest rates. I believe all Fed chairman in the future will advocate for lower interest rates simply because it’s okay for the US to have these high interest rates for one year, maybe even a year and a half. It’s no big deal. We’re a very strong economy. But what Imagine if interest rates were this high for the next 10 years? Do you know what that does to the interest payment on the federal debt? I mean, you have to cut every program, you have to cut military you have to cut Social Security, you have to cut, you know, job entitlement programs or unemployment. Everything’s got to be cut because you’re basically spending $300 billion extra that you weren’t paying thing before. So the political pressure from both Republicans and Democrats to keep interest rates low in the long run is extraordinary. In the short run everyone’s understanding of what the Feds doing, they understand that inflation can prevent them from being elected at the next election. So they’re like, Yeah, go ahead, do your job. Once inflation comes down to a reasonable level, there’s going to be a lot of pressure.
J Darrin Gross 40:21
Yeah. No, I definitely. It’s a interesting dynamic with the Fed. And, and, you know, have some scary times ahead of us. But I think that, you know, the wise syndicators and, you know, investors that understand the situation, the the, you know, preventing a loss is really kind of prevented, you know, prevent defense or whatever, trying to try to prevent losing is really kind of the game right now.
Neal Bawa 40:52
Yeah, and it’s not that hard, right. So if I wanted to sum this whole thing out, I don’t want to use the word scary, because I don’t think it’s scary. I think it’s just neglect. People are just not thinking about this, because they’re like, you know, it’ll get better. No, take a spreadsheet, plan out the next 18 months, and be reasonable, when you think how interest rates are going to fall, and how it’s going to reasonably affect your property, figure out how many dollars you need, and put together a plan, it’s not as many dollars as you think. You just need to look at it. Now. It’s going to be a lot harder a year from now. So you might as well look at it now. So I think this is really all about action there and not panic.
J Darrin Gross 41:32
That’s good. Hey, Neil, if we could like shift gears here for a second, but damn an insurance broker, and to have such worth my clients to assess risk, and try and determine what to do with the risk. And the three strategies we typically consider our first look to see if we can avoid the risk. When that’s not an option, we’ll see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize risk. We look to transfer the risk and that’s what an insurance policy is. And as such, I like to ask my guests, if they can look at their own situation, could be political interest rates, the Fed clients, investors, tenants, however you want to frame the question for the answer for you. But, you know, I’d like ask you Neal Bawa, what is the Biggest Risk?
Neal Bawa 42:30
The biggest Risk is to keep doing what you were doing before. Right now we are at a point where we need to pivot. So you know, you name three things. And so I’ll go through those three and tie them back to the biggest risk. This change right now may not be a good time to buy multifamily. In fact, I don’t want to buy multifamily until about July this year, when something known as the spread, which is a portion above Sofer is likely to to drop it might even just collapse. So I basically want to wait until that time in terms of transferring risk. Yeah, I want to go out and have my distressed fund by not buy properties, but invest money into properties. Because when I invest money into properties that are that are distressed right now have negative cashflow. I’m doing what Darren mentioned, I’m transferring my the risk from my investors to the existing investors of that property. So if they change their mind would allow me to come in as preferential money. I’m coming in ahead of them. And I’m transferring the risk of ownership of the property while I’m getting ownership of it to someone else. It’s somebody else’s risk is the GP and the LPS risk, not my LPs, their LPs. So if I can transfer risk successfully, I’m looking to do it by recapitalizing existing properties that I like nothing wrong with the property, just the interest rates are killing it. One day, the interest rates will go away and the property will do well, again, I want to own this property, but I don’t want to buy it from the market because I think that the price is too high. So when I recapitalize somebody else’s property and put my investors in pole position and transfer the risk.
J Darrin Gross 44:12
That’s an interesting strategy there. Are you finding lots of opportunities that way?
Neal Bawa 44:18
One a day early. That’s, that’s remember the distresses there. Everyone’s ashamed to talk about it.
J Darrin Gross 44:26
Right. Now, that’s, that’s, that’s good stuff. And you’re able to with your investors come in and establish a position and put some capital in and I’m
Neal Bawa 44:42
Looking to do so as I as I said in my commentary, that the peak of the distress starts in q3 this year. So right now it’s time for conversations, understanding those properties, seeing, you know what they’re doing, we’re encouraging them to do cash calls first before they recapitalize. You know, cash because if they can get by with cash calls good for them, I mean, that’s the easiest way that that’s what they should be doing. So we’re providing education at this point of time. But there may be properties where the cash calls are not successful, and they come back to us, they’ve checked off that box. And then their investors are ready for a, you know, change in their position in the equity stack, after an unsuccessful cash flow. So it’s a process. I haven’t done any yet. I’ve got, you know, two dozen properties that I’ve looked at, I think I like four. And I’m monitoring those four to see what happens in the coming months. And I’m also having conversations with my investors. This, you know, I shouldn’t be recapping any property at this point, but six months from now is different.
J Darrin Gross 45:42
Well, I have an interesting conversation for later to hear. Are you? Are you done? That sounds good?
Neal Bawa 45:48
Sure. There’s, there’s more opportunity at a time of distress, not less.
J Darrin Gross 45:53
Yeah, no, absolutely. It’s the old Warren Buffett there, you get a chance to use homeruns shorts on this kind of thing. So I like it. Hey, Neal, where can listeners go if they’d like to learn more connect with you?
Neal Bawa 46:06
Two different ways. One, I’m the only Neal Bawa on the World Wide Web. So you can just type in N e al space B Awa and hit Enter on Google and you’ll find my content and connections to me. The other one which is more formal. We have about 50 75,000 people that are current subscribers of multifamily University, the web URL is multifamily followed by you that letter U so MultifamilyU.com. We do webinars each month on these kinds of thorny topics that no one else wants to touch. We do about 20 of them a year. We just did one we had 2600 people registered about 1200 watched it live. So those kinds of events. I don’t have a podcast so you can’t listen to one but I have been on over 200 podcasts so you can go to pod chaser.com and search for my name and you’ll find a couple 100 of them.
J Darrin Gross 47:00
Awesome. Well, Neal Bawa, I cannot say thanks enough for taking the time to talk. I always enjoyed, learn a lot, and I look forward to doing it again soon.
Neal Bawa 47:11
Awesome. Thanks for having me back Darrin.
J Darrin Gross 47:13
All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.
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