J Darrin Gross Podcasts

Neal Bawa  0:00  

And what blockchain does is from the very beginning, it’s designed to be both extremely secure and extremely visible at the same time, and no one can manipulate it. It’s not a walled garden. It’s actually an underworld garden. It’s designed to never be walled. So now you have the capability of a property, basically, that has been sold. Once it’s sold, its title is on the blockchain. And because it’s on the blockchain, if you and I are disagreeing about who owns this property, our lawyers can spend 15 minutes in a room, go look it up on the blockchain and say sorry, Darren, it steals property. It’s very clear. That’s that’s what’s on there. That’s just a very tiny example of how blockchain can be used. But there are hundreds of discrete advantages that a future world where real estate is hosted on the blockchain compared to today’s world. And one of the biggest pieces the quickest pieces is tokenization.

Announcer  0:57  

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountants, we are here to learn from the experts.

J Darrin Gross  1:16  

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the 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. 

Today, my guest is Neal Bawa, Neal is a technologist who is universally known as in real estate circles as the mad scientist of multifamily. Besides one of the most in demand speakers in commercial real estate, Neal is also a data guru process freak and announced an outsourcing expert. Neal treats his $1 billion multifamily portfolio as an ongoing experiment in efficiency and optimization. And in just a minute, we’re gonna speak with Neal about real estate, disruptive trends tokenization and property or prop tech. 

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 with add on welcome, I guest. Neal Bawa Welcome back to CRE PN Radio.

Neal Bawa  2:47  

Thanks, Darrin good to be back on the show.

J Darrin Gross  2:49  

So glad that we’re able to make this happen. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Neal Bawa  2:59  

Sure, I’m a tech geek that is obsessed with the idea of disrupting real estate, using big data using analytics, using systems and processes that the industry typically doesn’t support. And also using an army in the Philippines. So using business process outsourcing, to create better, more powerful, more scalable systems. I am not running a real estate company, I run a technology firm that currently is interested in real estate, who knows maybe tomorrow will be interested in something different. So it’s a tech company that believes in scale, it believes in behaving just like any other Silicon Valley company. And big data is our holy grail. It’s our Bible. It’s what we go by, it forces us to do things that we wish it didn’t force us to do like moving from one city to another every goddamn year because the data points to a new city every every single year. And that means that we have to unlike most indicators that you interview, we have to rebuild our connections and networks every 12 months.

J Darrin Gross  4:07  

I appreciate you sharing that the I was looking in my notes here and the last time or one of the last time we spoke was the beginning of the pandemic. And I think we kind of did a little little talk on, you know, what do you expect to happen? And in just listening to your introduction, are you kind of you know, sharing with listeners a little bit about your background, commenting on moving to the different cities. I’m curious, has that always been the case? Or is that more prevalent now? Post pandemic?

Neal Bawa  4:44  

It’s more prevalent for the industry. For me it hasn’t changed at all. So, pre pandemic I was already in 13 metros, in the US. I had properties in 13 metros in the US opposed endemic I’ve only added four cities to that list. So I’ve always been following cities I’ve never bought the argument that small metros in the US especially the ultra small metros are far riskier, because while in itself, that argument makes sense, a metro that has 150,000 people is not as diverse as a metro that has a million people. So that makes sense, right? But the problem is that argument is made in a vacuum. And whenever you make arguments in a vacuum there, they end up being wrong. But here’s the other half of the argument that nobody’s talking about. Well, that 1 million person Metro, we’ll call it Phoenix, we can call it Austin, you can call it lots of different metros, those 1 million person metros have seen massive increases in prices, massive declines in cap rates that do not match the rent increases. So when people are paying 50% More for a property that where rents are only 15% Higher. There’s this risk that has been created there, that delta between 50 15% and 50%, that 35% You know what that delta is risk. And so as these these cities, as the risk is increasing, as you keep paying up and up and up and up, you have to compare that risk with paying a lot less in a smaller Metro. So what has happened over time is that, you know, starting the 80s 90s, when real estate made more sense, all of those smaller cities were far riskier. But today, the risks have adjusted, and the bigger cities have become riskier, and the smaller cities are still risky, they just haven’t gotten any riskier, right. So when I buy when I go to Idaho Falls, and I make a building from scratch that cost me $170,000 A unit. And it’s a townhome, and a family of three will live there for five years. I see that as less risk than paying $400,000 A unit for a value add apartment complex in Saratoga, Florida. I’m not talking about Los Angeles, right? I just saw a $406,000 dollar property built in the 1980s sold in Saratoga in Sarasota, Florida, right. So when you can see $400,000 unit prices in Sarasota and in Atlanta and Dallas. My question is, what does it cost to build that asset? And the answer is a lot less. But we were always taught to say, Never buy an existing asset at you know, more than 60 or 70% of its replacement cost. Because that gap, that replacement cost gap is the value that you’re creating. And it gives some headroom for the price to go up. But today, people are actually buying value adds at higher than the cost of replacing them. And that risk is not being factored in. So the answer to your question, Darren is I’ve always been more interested in smaller metros, I’ve just been more validated by by the pandemic, where Cap rates and all of those smaller metros have, you know, gone down

J Darrin Gross  8:09  

Right now and just the the migration, you know, the the work from home used to be like the exception, whereas now I find it? I don’t know, that’s the rule. But I’d say you know, by and large, the majority are the number of people able to work remotely is, you know, exploded compared to what it was in 2019.

Neal Bawa  8:31  

Yes. And that’s very fascinating, right, because everyone thinks they understand this work from home piece. And I don’t think people really do. One of the data providers that I love to track, right since the pandemic started is this company that basically measures key swipes, key swipes at offices. So this is a company that provides some kind of a keen key, you know, swiping digital application. And so what they do is just like U haul does a report of who’s moving and what state are they moving to this company does a report of what percentage of people who were in the office one day before COVID struck have come back? And the answer is in Texas, which you know, really, I’ve you would think everybody would be back in Austin 43% of the people that swipe their key the day before the pandemic swiped it last week. Only 43% in Texas in a red state or deep red state, right. So what most people don’t realize is that the office market in the US is going to undergo a very powerful but very slow meltdown. Now why are very slow because luckily a lot of their leases were five year and 10 year leases. So they’re seeing a massive meltdown happening they’re very nervous, because as leases are coming up for renewal, only 70 or 80% of those leases are getting renewed. Well office is not really set up to have 70% occupancy, I mean office set up to be a 90% occupancy market, and that’s what the prices were based on. So if they are indeed going to end up But 70% occupancy compared to where they were before, there’s going to be an enormous and massive meltdown there. And that should tell you how big this movement this remote work movement is. And maybe that 43% example is excessive, but I think it makes the point that we do not think two years after the pandemic, when, you know, people are vaccinated people have boosters, there’s even, you know, there’s drugs available, like Pax COVID that you can take, if you get COVID. Why are today not 90 or 100% of the people back? Because something has fundamentally changed in the psyche of both managers and employees. We don’t go back to that world anymore. And if you don’t go back to that world, yes, you are right there in the smaller metros are the ones that are gaining, I’m looking, I’m tracking population gain. And, you know, there’s a small Metro that I’m very active in called called Idaho Falls, it’s the second largest metro in Idaho. It’s, uh, you know, about a third of the size of Boise. And everyone that I talked to over there says, I’ve always wanted to come back to Idaho Falls, but I didn’t have the choice. The people that are going to Idaho Falls are coming basically from two directions. They’re coming from Salt Lake City, right? Because a lot of Idahoans are Mormons, and so they come from that Salt Lake City area. And then they come from Boise, which is getting very, very expensive. It’s the most overpriced city in the United States at this point of time. So they’re coming from those two directions. And they’re still seeing very reasonable price. And I’ll tell you what reasonable means, right? So, of course, prices in Idaho Falls are going crazy, right rents have gone up, you know, some crazy number, home prices have gone up 31%, but they’re starting from a low base. So I’m renting beautiful, brand new three bedroom, two and a half bath units that I just finished building in Idaho Falls, so they’re done. And I’m renting them for 6095. Awesome. So for 6095 Somebody can basically get into a beautiful townhome that no one has ever lived in before. It’s amenitized. It’s got dog parks, it’s got, you know, barbecue pits, it’s got a backyard, but it’s still at 1695 You see how much headroom there is?

J Darrin Gross  12:06  

Ya know, no, and just again, you know, one of the primary reasons that that market is growing is just this, this fundamental shift and like, I love the fact that you found it or a different source, because I think, you know, most of most of the time, the source that’s quoted or cited is the moving the the U haul, kind of thing. And, you know, pre pandemic, I think the focus was always a metro area with jobs, metro area with jobs, jobs, jobs, jobs, right, that was kind of the needed to have X number of people X number of employers growth, you know, some sort of those are kind of some of the the measurements that that I think people, you know, typically use to determine whether or not you were in a grow population or a or a non grow. And, but just this this fundamental shift, where it’s not even, like you cited, we’ve got the vaccinations, we have everything we needed to get back in the office, but we’re not going back to the office, and people are finding these new places that, you know, whether it be for cost or just the place they wanted to live, you know, but it’s really, I feel like the, you know, where is the population going to, it’s not as predictable as it once was based on just large metros, lots of employers, lots of jobs kind of thing.

Neal Bawa  13:23  

And I disagree on that a little bit Darrin. And so I’m going to come back to you and say my data doesn’t suggest that here’s what my data suggests, the big metros are still very important, the big jobs, that Job Centers are very important. What has changed, according to my data, is the radius around those. So in the past, the radius around the big metros was basically an hour right. You know, that’s how far you can basically Drive for Work. What we are seeing now is that the radius has gone from being one hour to two and a half hours. Because people are coming into the office twice a week. And so that radius is very expanded. I mean, imagine two and a half hours, right? That’s a very, very large change in radius. So for example, somebody can actually work in Salt Lake City and live in Idaho Falls, right? That’s massive. That is huge. People can live in Tucson and work in Phoenix. And before that, this that was not even conceivable. So I still think that the big metros are important I still think Phoenix and Austin and you know all these superstar metros are very important. But the radius has expanded tremendously. And so what we’re doing is we’re now only exclusively looking at value adds between the one hour radius and the two hour radius. Right so this morning’s meeting, you know, we have full time staff for on the value add side and then we have full time staff on the development side. And so I do a one hour development meeting where I look at all the properties they are looking to all the land that they’re looking to buy and then I have another meeting with with the the value add people on what they’re looking to buy. And I was struck by the fact that today in the meeting ever any property that was discussed, was attached to a metro. But it was in every case at least an hour away from that Metro. So we had a property that was an hour from Knoxville from Nashville, an hour from Atlanta, and then an hour and a half from Phoenix. Right? Those are the sorts of properties I’m looking at and people go, so why aren’t you just looking in Phoenix? What’s wrong with Atlanta and Phoenix? My answer is, I don’t want to pay $300,000 a door, I’m still able to find properties at 130,000. A door. I have just purchased two properties this year. Okay, one of them. I paid 129,000 a door, one of them, I paid 130,000 door. Okay. And obviously, the rents there are lower, I get it. I mean, obviously, I’m not suggesting that these properties are cash flowing at 20 or 30%, nothing like that. My point is, I have headroom for further growth from 130,000, when the cost of construction has become so inflated, that I can’t even build new construction for less than 300,000 a door. Right? So my argument is, and maybe I’m wrong. I mean, who knows? Right? This is just This is what my my what data science shows. Today, when you buy an 80s property at $130,000 a door practically anywhere in the US that has growth. So you know, this argument only works if the this small city that we’re talking about that nobody’s ever heard of actually has growth, population growth, job growth, income growth, all those factors need to be present. And it’s not very hard to find those because I’m talking about 1000 small cities, right? You can eliminate 700 of them, 800 of them and just work with the 20%. That’s still 200 cities that no one else in Darrin Gross is ecosystem is looking at. Right? Right. So I can afford to basically reject a bunch of them. Well, when you buy an 80s property there, they especially if it’s brick property 430, my data shows that you’ve already got 20 or 30,000 in equity, because the syndication industry hasn’t figured out that the cost of construction in the last 18 months has gone from 200,000 a door to 300,000 a door. So that $100,000 door increase means that no one can ever build a property anywhere close to $200,000, even in that tertiary market, which means that there’s no construction possible at all in tertiary markets, these remote markets at all. And so that means that I can keep increasing my rents because I’m not going to have any incoming supply whatsoever. For years. For years. Yeah,

J Darrin Gross  17:30  

No, and I think the you know, there was the I forget the name of the book was Sam Zell book, but one of the his mantras that I grabbed onto was exactly that if you can buy it for less than you can build it. You know, you’ve got some you got some value there. You’ve you’ve got a built in equity, like you’re saying,

Neal Bawa  17:48  

Right. And to expand on that. What if you can make that gap bigger and bigger and bigger? That’s huge, right? So today 50, no one can build an apartment complex anywhere in the US for less than 250,000 a door. Even in a like remote market. I’m not even talking tertiary I’m talking remote. 250 is your starting point. If I can buy a property at 130 That’s only a 5053 54% of replacement cost. I think that’s to me, that’s looks less risky than buying the same property 100 miles closer to Phoenix at 250 a door, right? Because now you have a new construction property that can come in at 300 a door and completely outshine your 250 a door price.

J Darrin Gross  18:31  

Well and even add to that what you’re seeing is this is the ring or the radius gets larger, those people in that metro area, they’re looking outside that area so that at some point, you’re going to have that, you know, the demand will shift because the you know, the overbilled or whatever that whatever that will be. That I mean, not, not that it will happen. But there’s there’s more likely that you could have more towers, more cranes, more more construction in that metro area. And like you said, if everybody’s having to pay $300,000 a door to build the rent, they have to charge just to make that work. Eventually, people are gonna say, you know, we don’t have to go to the office every day, if we only go like once a week, twice a week or whatever it is, what if we looked at IRL you know, and also now you’re Neil’s neighborhood, and

Neal Bawa  19:16  

And you’re in a nicer area with nicer weather, right? Like, for example, Asheville has become one of these trendy new places. So I talk about these trendy new places Bend Oregon has become the kind of place where people have moved from San Francisco, there’s a plane that leaves bend at 620 in the morning, it gets to San Francisco at you know 745 The entire plane is filled with commuters. And they go on Monday and they come back on Tuesday and then they work from their home Wednesday, Thursday and Friday. And they have Ben’s gorgeous climate amazing, you know, amenities and homes in Bend are going completely insane. Same things happening with Asheville which has great quality of life. So what’s happening is each month some More and more people are coming to that conclusion. So it’s a triple it’s not a flood at this point in time. But each month there’s a trickle and that trickle is in favor of these remote locations.

J Darrin Gross  20:12  

So you’ve identified the markets, which you you always have. You, you mentioned, and we’ve talked a little bit before we started recording how you’ve shifted some of your your work most of your your work from value add to now you’re you’re developing in these markets, were you finding these opportunities? Are you can you describe the percentage of of projects you have that are build new versus value add multifamily?

Neal Bawa  20:47  

Right now, I think it’s about 70/30. So 70% of the time we build and 30% of the time to hold for value add. And some of it is, is also because, you know, our investors do not want 100% new development, they still want the tax benefits that come with value add property, they want the negative K ones, they want the cost, you know, segregation, and so to eat, to shelter, our own income. So I don’t think that that that ratio is ever going to go below 30% for value add, but I think the optimum ratio today is build in 70% of the cases and buy in 30% of the cases. And one of the things that we’re doing that people really like is that as some of these value add properties are selling, we’re actually transferring we’re 1030 wanting the money into new construction properties. So what’s happening is that we are going from a short term, okay, we did this, you know, we did the rehab, and in two or three years, we made you a certain amount of money. Now we want to put that money into a legacy property that we can hold for 10 years. And if we do new construction, that cash flow is high enough, so that for 10 years, we can hold it and take the cash flow to 8% 9% 10% 11%. And just hold that property for seven or eight years, as opposed to doing the typical two and a half year flip that we’ve been seeing in the marketplace. And so we have a lot of investors, the more let’s just call him investors with more white hair that really like that concept of I’ll start with value add and then move into new construction with my profits.

J Darrin Gross  22:16  

Well, a new construction to your your capex is zero for those years. And when we want to have it fully developed there. I mean, that’s that’s kind of a beautiful, I mean, when,

Neal Bawa  22:27  

Zero Cap X,  low maintenance so that the first two to three years, the maintenance cost is very low. Most of the maintenance that happens in year one is basically just build back to the builder because it’s the property is under warranty. So we tend not to have much of a maintenance budget in year one year or two onwards, it starts to trickle up, but it takes a good 10 to 15 years for it to reach the level of a value add in terms of maintenance costs, right, because so many items in the property are under warranty. So and again, I’m not a huge fan of new construction. I’m not a huge fan of new construction, I’m a huge fan of value add, the question is is value add becoming an oxymoron, right? So why are people today buying a 60s property? That is, you know, completely, you know, in my mind that property is redundant and needs to be torn down, people are paying $200,000 a door for them. And I have a hard time trying to, you know, understand the value add story there, it’s it’s very difficult for me to wrap my head around it. So there’s, it seems that that price only works if cap rates continue to compress and they are decompressing, they are they are decompressing and rents continue to increase which they are so on the one side of the story is good we are you know, I just looked at the numbers for last month for for April 2022. And they looked very good. You know, it’s not like we’re gonna get the kind of rent increases we saw last year, but this year on its own looks very strong. So on the one side, the wrench story is very good. But on the cap rate side, I challenge anyone to come to me and say they have not seen a difference between, you know, today’s may 11. And what they were seeing on March 11. The answer is that if they’re saying that they’re lying, we are seeing more and more properties being rejected, especially the 70s and 80s product. Lenders that were at 75% LTV are now at 65 or 70%. LTV. We’re also seeing that people who are buying under cap for the lenders are simply not playing. They’re not playing and the cost of rate caps has gone through the roof. I mean a year ago, a $35,000 rate cap today costs $400,000. That’s 11 times the rate cap cost. So if your interest rates.

J Darrin Gross  24:47  

Okay, gotcha, gotcha. Cap your interest rate there.

Neal Bawa  24:49  

Right.  So if you’re looking to cap your interest rate, it’s going to cost you basically a half a million bucks today compared to 35 or $40,000. Before so obviously that’s a cost that has To get added on, and everything goes towards the cost of the project. So my I’m very grateful that I am currently not engaged in the process of buying a value add property because this is a very, very difficult time, it’s a very sticky time to, to be there I am engaged in selling them. So I’m on needles and pennants and hoping that the sales go through.

J Darrin Gross  25:21  

Right. No the other side of the coin there. So let’s talk a little bit about property. Tech, prop tech. I know you’ve you’ve been, you know, the technologist and and our big big proponent of remote virtual assistants and systems and and that and, you know, when we talked and I know that your your story from the standpoint of integrating that to increasing the occupancy and the follow through with the respective tenants and that, how do you see prop tech? Has it changed as a grown since that kind of a base? Are you? Are you using it in more in different ways? Or?

Neal Bawa  26:09  

So I’ll give you an answer there that may not sound like a positive answer. So I am not seeing the industry use outsourcing substantially more than I was four years ago. So I’m kind of the unicorn in terms of how aggressively I use outsourcing. So I for every every one person full time that I hire in the United States, I hire two people in the Philippines, usually on the same day. And, and that, you know, one person in the US or two in the Philippines ratio has been consistent now for five years. So we haven’t changed that ratio. They haven’t seen any need to change it. And people ask us, you know, so what are those two people in the Philippines doing? The answer is everything they do, you know, operations, they do investor management, they call investors, they they help us, you know, build websites, they help us manage our properties, they make delinquency calls, and you might say, oh, so are you a property manager? The answer is no, we pay a regular property manager, we just basically build an efficiency layer on top of them. And that gets us a lot of noi, when I’m paying $6 to a trained Filipino who makes 10,000 delinquency calls across a portfolio of a billion dollars. That is a huge accelerator that no property manager in the US has ever been able to achieve. Not once, not a single property manager, I you know, take the biggest property manager in the United States, they still don’t have a call center like we do, right. So we’ve managed to do amazing things. And obviously, if you’re wondering, in terms of what have that has done to our returns, all you have to do is go to the end of the day, look at the logo behind me grow capitis.com Scroll down. And right there, you’ll see a track record. And I’m pretty sure you will see some amazing numbers there. So it has incredible benefits. But I haven’t seen anyone else in the industry build call centers the way that I have. I have obsessive belief in business process outsourcing and how it can completely revitalize a business or give you give you a advantage that nobody else can catch up to. I believe in that. And it’s been I’ve been validated by doing it over five years. But I haven’t seen the industry do it much I have not seen you know, I see people hiring virtual assistants to do basic work, but not the way we’ve integrated them into our into our flow. I mean, as far as we’re concerned, even right and yesterday, I was picking Employee of the Year awards, we just basically have two sets of them Employee of the Year in the Philippines employee of the year in the US Rookie of the Year in the Philippines Rookie of the Year in the in the in the US. We do as many summits in the Philippines as we do in the US. So we’ve integrated them so well that from our perspective, there really isn’t much of a difference between a person working in the Philippines or not. They have their own managers, their own directors, their own, you know, staffing people, they hire and fire on their own. So it’s a large service organization. I think it gives us tremendous, tremendous advantages. I have not at this point seen enough people in the industry do that. They’re doing it, they’re doing it a very surface level. So that part of technology. It hasn’t disrupted, you know what people are doing in real estate. Sure. There’s a few disruptors like me out there, the mad scientists that are out there, but we’re not having a big impact. I think the bigger impact of technology that we’re about to feel is in that tokenization realm that I also like to talk about, I think that one is far more disruptive and coming at a far greater speed than most people can.

J Darrin Gross  29:30  

You say tokenization is kind of like the blockchain technology being applied for fractional ownership, or how are you? How do you see that?

Neal Bawa  29:40  

That’s exactly right. I mean, so you think about real estate. Real estate is the largest industry in the world. So if you look at the total amount of real estate in the world is three times the size of the world stock market, right 326 billion. How is it that the largest market in the world is today you know? 50 years after the iPhone was invented, still can’t be purchased on a phone, you can go tap, tap, tap and basically do something. I mean, today I talked about Idaho Falls being a really good market, you’ve probably never heard of Idaho Falls, shouldn’t you be able to just whip out your phone and go to some app and go in there and say, you know, I want to buy $5,000 worth of multifamily in Idaho Falls $5,000 of single family, tap, tap, tap, tap, tap, right? Just like you do with stocks, because somebody gives you a tip when you’re at a party, and you whip out your phone and say, Okay, I’m gonna buy 50 shares or 100 shares of so and so stock because somebody just gave me a tip. That doesn’t happen. Real estate is simply not a digital economy. And yes, we’ve we’ve digitized pieces of it. But overall, we’re still buying real estate in much the same way as we were buying before. And one of the reasons was that the the the way real estate is bought and sold, the the counties are very involved, right. So there’s all this escrow and title and all these other processes that make real estate less efficient. And for the longest time, there was this need for a technology that would create transparency. So you would know who owns a property, you know, and all of the escrow and title pieces and make it transparent. Well, somebody built that technology back in 2009, for purposes that had nothing to do with real estate it blockchain was built to host Bitcoin. And as time went on, Blockchain became something much bigger than Bitcoin, it became much bigger than cryptocurrency because people realize that the the back end technology of blockchain was simply superior to the web technology we use today. Because if we are doing something with Gmail, we’re on a Google server. If we’re doing something with Outlook, we’re on a Microsoft server. It’s all walled gardens. And what blockchain does is from the very beginning, it’s designed to be both extremely secure, and extremely visible, at the same time, and no one can manipulate it. It’s not a walled garden. It’s actually an underworld garden. It’s designed to never be walled. So now you have the capability of a property, basically, that has been sold. Once it’s sold, its title is on the blockchain. And because it’s on the blockchain, if you and I are disagreeing about who owns this property, our lawyers can spend 15 minutes in a room, go look it up on the blockchain and say sorry, Darren, it steals property. It’s very clear. That’s that’s what’s on there. That’s just a very tiny example of how blockchain can be used. But there are hundreds of discrete advantages. There a future world where real estate is hosted on the blockchain, compared to today’s world. And one of the biggest pieces that quickness to pieces is tokenization. You can take a multifamily property that you bought for $30 million. And you can break it up into $100 tokens. And you can sell those tokens on the blockchain, on websites such as t zero, you might say, you know, how would I know where to sell it? You don’t? I mean, listen, when you buy an Airbnb property, you don’t go and build a website you just hosted on airbnb.com. Right? So people find you on airbnb.com. Well, the same sort of thing is going to happen for blockchain. T zero is currently the world’s number one website for this kind of product. So you can go to T zero and you can buy tokens of real estate right now. And this movement, just beginning, I mean, t zero just started hosting six months ago, started hosting multifamily property tokens. And a lot of people are thinking, but this is like Bitcoin and the price of Bitcoin went down 40% or 50%. Yeah, but Bitcoin doesn’t have an underlying asset, right? It is an underlying asset, its price, why would it change if the price goes down? 30% people are going to rush in and buy this property because it’s still the same property as six months ago when it was worth 30%. More. Right, right. So that’s why it’s actually far superior to buying cryptocurrency which can decline to half of its value, which is what we’ve seen in the last six or seven weeks. But that real estate is still there. So you’re never ever actually investing in a token, you’re investing in a property and rental properties ownership is held in a token on the right

J Darrin Gross  34:17  

now, I think the whole tokenization thing and just the blockchain is just a I mean, it’s an amazing technology to be able to track you know, fractional and for you, Neil to make an independent transaction, irrespective of the sponsor of the deal, your your token, you can then fractionalize That token, can you not, if?

Neal Bawa  34:38  

You can, but in practice, you can I think that it you do need the syndicator you do need the sponsor to host their property on a on an engine such as t zero. So, while while technically you could go and sell your shares on the web, I don’t think that’s going to happen for a decade. I think what is is going to happen is over the next two to three years. If you’re a major syndicator, and you’re, you know, selling or buying a $30 million property, you’re not going to be able to get money from investors unless you say, Yes, I am going to host a small number of my shares as tokens on P zero. And so if you need to sell your shares, you can go to T zero and you can transact independently, you can go to the property, and you can sell your tokens there, right. And maybe you can make extra money there. But for the moment, it’s primarily liquidity in the long run, I think that we will actually see values going up, we, you know, the stock market, when we got to the point where anyone could transact in the stock market, especially millennials with the Robin Hood app, we saw prices go up. And I think that will happen with real estate over the next three to four years as it becomes a truly liquid transactional asset class. Today, you cannot sell real estate in a day or a week or even a month. Yeah, but you’re about to enter a world where you cannot imagine not being able to sell it in an hour. And that’s tokenization. That’s it? That’s a sea change. That’s a enormous change.

J Darrin Gross  36:08  

No, and if I just wanna make sure I understand, right, because I mean, what I what I vision and kind of heard you say, and then you said no, wait a second. So the having a property. So the syndicator lists the property on the t zero site. So that’s basically the host of the blockchain for that property. You have 100 tokens for a property, say and and you have one. And if you wanted to sell a portion of that, or or all of it, you could sell that that token independent of the syndicator. Could you not? Or do you have to wait for the syndicator. To sell the,

Neal Bawa  36:46  

You definitely need the syndicator to do the listing on t zero for right because I mean, less expensive, right? So I think the listing is done, then you can go there and you can transact, right, so you can go to T zero and you can transact and, and to be honest, t zero is still evolving this process. So right now you can’t, you have to go to your syndicator. And this indicator has to be listed there. But that’s just it’s just software, it’s all going to get written out in the next year where you can basically go in there, you can get a key from the syndicator. And you can say this is your unique key, plug this key in. And now t zero knows that you actually own these tokens. And you can basically go through the process of you know, selling your tokens there. And I think right now the the location where the tokens are held, it’s, you know, called a digital wallet, it’s actually not on t zero. But in the long run, you’re going to be able to host the digital wallet in t zero itself, in which case, you just basically log into the t zero interface, just like you log in today to you know, get your que one, right, so you’re gonna be able to log in and go in there and click and sell just like you do for E trade or Robin Hood. So we’re moving in that in that direction. But I think that if there’s a number of steps that take 234 years, to get us to the final goal of liquidity where you can basically you just log into an interface and say, I want to sell half of my shares today, click List. And then you look at, you know, the offers that come in from people and just like you sell shares, and you can set a stop limit and say, I don’t want to shell them sell my shares below this number. That’s the kind of liquidity that people are looking for. And I think we’re going to get it and we would have never gotten to this point. If cryptocurrencies and blockchain hadn’t happened independent of real estate, because what that has done is it’s built the infrastructure, there are now hundreds of millions of digital wallets that are in existence with cryptocurrency in them. So people have become comfortable with this concept of blockchain being the backend that is moving all this money around. So now you basically created hundreds of millions of ready consumers.

J Darrin Gross  38:49  

Somebody I was talking with earlier was talking about how even I think Visa and MasterCard or her now kind of greenlighted blockchain and the countries, right, I don’t know what the platform is, but it’s just because I was always wondering about, you know, from Bitcoin, I mean, this just a speculative type thing. If, I mean, if there’s no additional money, I don’t know how you can manipulate the currency like in, you know, the US dollar. I mean, that’s all about, you know, manipulating the currency, which is, as far as the, you know, the government that 

Neal Bawa  39:24  

We are seeing manipulation happened in the cryptocurrency market, we certainly are seeing evidence of that, you know, Bitcoin fell about 50% In the last four or five weeks. So I think that it has become a speculative asset, just like any stock, and, you know, big whales can move the numbers up, they can move the numbers down. So there’s a lot of, you know, challenges there. But keep in mind, one of the biggest reasons why it’s so speculative, why it’s so volatile, is there’s no underlying value. The only underlying value of Bitcoin is that other people believe it has value. And some there are days when people really believe that and there’s the is when they’re not so sure. And so you know, but with with real estate, the beautiful thing about tokenization is your your money is always going into a physical cash flowing property, that token is simply proof of ownership. So you’re just transferring ownership of the asset. So the underlying strength of the acid is truly what makes me believe that tokenization of real estate is, in the long run actually much more compelling than either cryptocurrencies, or these monkey NF T’s that I see on the web there that NFT stuff, in my opinion, is just bullshit.

J Darrin Gross  40:37  

Yeah, I’m still having a hard time understanding exactly the value in that other than that it’s a novelty kind of thing. But I’ve always been in the slow ski kind of lanes. So hey, Neil, if we could I want to shift gears here just real quick. By day, I’m an insurance broker. And we tried to assess risk and, and determine what to do with the risk for our clients. And there’s a couple different strategies we typically consider. First, we look to see if we can avoid the risk. And if we cannot avoid the risk risk, then we look to see if we can minimize the risk. And then if we can’t minimize the risk, but let’s see if we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests if they can take a look at their own situation. frame the question, however you like with regards to whether it be you the market? You know, whatever situation you’d like to frame it. But answer the question, what is the biggest risk? And again, just to be clear, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. So with that, Neal Bawa, what is the biggest risk,

Neal Bawa  41:49  

The biggest risk to the commercial real estate market. So I’ll stay away from single family. The biggest risk to commercial real estate family is that the jobs back in 2014, made it very easy to raise money raise have syndicators raise money. And what has happened today is syndicators have become such a massive percentage of the overall multifamily market, that they are inflating the market far, far beyond its fundamentals, not just beyond its fundamental fundamentals, but far far beyond, because their ability to raise money has accelerated far beyond, and far quicker than the property’s ability to raise rents. And so that has created a situation where there’s a very, very aggressive, all ships raising effect, that is making these properties go far beyond their fundamentals. And that is a very risky situation. We’re all in it. I’m in it, even though I’m doing new construction, I’m still in it. And so it’s something that we have to really watch very, very closely. I do not believe that it’s possible for this bubble to deflate, it has to burst. And so I’m, I’m just being very cautiously watching this to see if there’s any evidence of it bursting. And it probably isn’t ready to burst yet simply because rents are rising so fast. So to me, the point at which the bubble could burst is, you know, the Feds raising interest rates very, very quickly, they have to do their job because inflation is under control, which means and the Fed is only once out of 10 times succeeded in engineering a soft landing, which means that there’s only a 10% chance that we’ll have a soft landing, this time, there’s a 90% chance we’ll end up in a recession. So when that happens, rents could fall. And that I think is the point of greatest risk for the commercial multifamily market that has been flooded by syndicators including myself since 2014. So we’ve had eight years of crowdfunding and the syndicator flood, we have not seen the bubble bursts, all bubbles by their nature must first. I don’t believe in bubbles deflating. It happens sometimes I don’t think this one will deflate. So I’m curious to see what happens when rents drop a bit in a recession. And luckily, they don’t tend to go down a lot in recessions. Sometimes they won’t even go down at all in recessions, right? So most US recessions, rents haven’t decline. But if they do start declining, I’m, I wonder what happens to the industry at that point.

J Darrin Gross  44:23  

Sounds like a recipe for keeping some powder dry. Just in case, right. That’s great. Well, Neil, thanks for sharing that. And, again, thanks for making the time to do this. Where can the listeners go if you’d like to learn more connect with you?

Neal Bawa  44:41  

Well, I happen to be the only Neal Bawa on the World Wide Web. So Neal Bawa, hit Enter. If you’re interested in some of the typical topics I talked about talked about, you can type in Neal Bawa interest rates or Neal Bawa virtual assistants, or Neal Bawa, best cities in the US. We’re best known and there’s about 30 5000 people following us for publishing a list of never heard of cities that are astonishingly profitable. And we publish that list in January each year. We’ve already published it for this year, we picked dark horses. Some of those have done incredibly well, like San Antonio was picked as a dark horse three years ago. And now is the lowest cap rate market in the United States who had ever thought of San Antonio being the lowest cap rate market in the US, but check out the latest CBRE Market report. We said three years ago, this market is going to be extraordinarily low cap, and now it’s happened. So we pick markets like that every year. So check out you know, our website is multifamily u.com That’s multifamily, followed by the letter u.com. There you can see our 20 Plus webinars, I’d like to invite everybody to my latest webinar, which is on the 25th of May, which says what is the impact of inflation and interest rates on all of real estate, not just commercial real estate. And I believe there’ll be about 3000 attendees there. So the best way to interact with us is through our webinars.

J Darrin Gross  46:04  

Awesome. Well, they all can’t say thanks enough. Always enjoy it. Look forward to doing it again soon.

Neal Bawa  46:11  

Awesome. Thanks for having me on the show. Again, Darrin, thank you. All right.

J Darrin Gross  46:15  

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 got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer  46:31  

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