In this episode, we’re joined once again by Neal Bawa, the Mad Scientist of Multifamily and the CEO/Founder of Grocapitus, for an in-depth look at the state of real estate in 2024. Neal shares his data-driven insights on the current challenges of inflation and interest rates, and why now is one of the best times to buy in the multifamily market. We also dive into the misconceptions around market distress, how to navigate distressed investments, and what to expect as we head into 2025. Plus, Neal offers his take on how real estate can be a powerful hedge against inflation and why a shallow recession could be just what the market needs.
Tune in for a masterclass on strategy and opportunity from one of the industry’s leading experts!
HIGHLIGHTS OF THE EPISODE
00:00 – Welcome to the BigMikeFund Podcast | Guest: Neal Bawa
04:02 – Inflation & Interest Rate Challenges
08:03 – Impact on Real Estate & Investment Strategy
09:42 – Multifamily Market Dynamics
15:05 – Why Now is a Strong Buying Opportunity
29:03 – Misconceptions About Market Distress
30:59 – Market Conditions & Distressed Investments
35:50 – The 2026 Outlook & Market Recovery
42:03 – Potential for a Shallow Recession
44:49 – Real Estate as an Inflation Hedge
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Full Transcript:
Intro: Welcome to the BigMikeFund Podcast, where you’ll learn about advanced wealth building strategies from real estate investing to creating massive ROI and secure retirement profits. So pour yourself a cup of coffee, grab a notepad, and lean in. Because Big Mike has got the mic, starting now.
Mike Zlotnik: Welcome to the BigMikeFund Podcast. I’m the Big Mike, Mike Zlotnik, and today it is my pleasure and a privilege to welcome back. My honored guest it’s my pleasure and a privilege to welcome Neal Bawa. Hey, Neal.
Neal Bawa: Thanks for having me on the podcast, Mike. Great to be back.
Mike Zlotnik: Great to have you back. Neal is the CEO and founder of Grocapitus, if I’m pronouncing it correctly, as well as Multifamily University, multifamilyu.com. So that’s the educational platform and Grocapitus is the investment platform, but for getting something, please feel free to chime in. Neal is a frequent speaker at many industry conferences. He’s well regarded, well loved. So it’s so great to have you back on, on the podcast.
Neal Bawa: I’m thrilled to be back.
We are living in interesting times. It’s sort of the beginning of the year. So there’s just a lot going through my head and I’m happy to share thoughts.
Mike Zlotnik: Yeah, I would love to hear it. So let’s start. We were recording this early part of the year in January, early January. So what’s on your mind? Well,
Neal Bawa: you know, obviously the first part of it is this interesting economy, right?
So we we love to bash the economy But boy, this economy has bashed the crap out of everyone in real estate because it has stayed too strong and you take Think about that and say, why is Neal saying the economy has stayed too strong? Well, I mean, third quarter, fourth quarter GDP, we’re in the 3 percent range.
And what’s that allowed the fed to do is even though they cut interest rates, they’re making it very clear that in the future they’re going to be cutting interest rates less. So the fed. In their dot plot, which is basically their way of projecting you know, rate cuts into the future. Six months ago, they had four rate cuts for 2025.
In December, when they cut the rate by a quarter point, they changed the dot plot. Now all of the Fed governors together show only two rate cuts next year, which means that a couple of things have happened. And here’s the good part of the news. The Fed would never. the rate at which they were going to cut rates.
You know that now they’re slowing down. That’s really what it means from four to two unless they were absolutely 100 percent certain that we had passed beyond the point of a recession, right? So there’s always this, you know, the Fed is slowing down the economy. They’re slowing down inflation, and the Fed has nine times slowed down inflation successfully in U.
S. History, at least since the World War Two and only once one time the Fed succeeded in not having a recession. When it was killing inflation, so the Fed has phenomenal tools to kill inflation, but it’s tools, unfortunately, are the kind that also tend to kill growth, right? So when you’re killing inflation, you kill growth.
And very often that means a recession or a shallow recession. So if you go back to World War Two, the Fed’s cut rate nine times, eight times out of that, the U. S. economy went into a recession in the ninth time. It was so close to a recession, Mike, that you might as well call it a recession, right? It just technically didn’t happen.
Growth was teeny tiny. It was just above zero. And so I, I think the Fed has a perfect track record of taking the economy into a recession when the Federal Reserve cut rates. This is unusual. And I think we can talk about why it’s unusual in my mind. It’s simply because, you know, in 2021 and 2022, we don’t know.
basically airdropped trillions of dollars of free money onto people. And those balance sheets are still there, especially for corporations. And secondly, we cut rates to zero. So, so many people have refinanced companies, you know, and, and individuals that the impact of their rate cuts has been lower this, this time than it was in previous cycles where the impact was bigger.
So we have this economy that. Basically is tricking us. It’s not following instructions of the Fed. It’s not slowing down. We’ve had inflation, which was nicely coming down. So it peaked at 9. 1 percent in 2022. And then, you know, 8, and now 3, It’s just sitting there at 9. 1%. roughly three percent, whether it’s, you know, there’s two ways of measuring inflation.
If you look at both of them, they’re both in the, in the low threes. They’re just sitting there. It’s refusing to move. And, and the Fed saying, you know what, if it’s going to just sit there, I can’t keep cutting rates because it might start going up, which is a horror scenario for the Fed. And so the Fed saying, I think, I think we’ve done enough.
We did cut in December. We cut in September. Now we’ve got 100 basis points. Okay, this is it. We’re going to sit here and watch. And we don’t know how long the Fed’s going to sit here and watch. A lot of it depends on where the economy is going, but I’m just astonished at the extraordinary strength of the U.
S. Economy, especially when I compare it to Canada, the U. K. France, Germany, Japan, China, with the exception of India. Every other economy is taking it. You know, it’s doing really poorly, and the United States is just flying.
Mike Zlotnik: I appreciate that great wisdom. It’s a great observation of some of these recent events.
And of course, things don’t repeat exactly the way in the past. These are most definitely interesting times. I’ll add just a couple of comments to your wisdom. First of all, I’ve had this discussion with a number of folks and a few observations. Last year was an election year, so we had an elevated level of government spending as a result of the election.
So we continue to be still high on the COVID helicopter money, plus election year. All that seems to be still rolling forward. The yield curve and un inversion and sort of what’s happening right now is still in my view, a likely indicator of a recession. So we may still hit a recession. So this is just, again, a way of future conversation, but not removing that possibility at all.
Well, but things are doing really hot. No question about labor market still too strong. And I also go back in my head every time you hear strong labor market, I think of the Phillips curve, that you can’t really destroy inflation without higher unemployment. They’re so joint at the hip. So we’re dealing with a change in administration, which is obviously yet another uncertainty that Fed chair has to deal with.
They just don’t know how Trump policies will impact inflation from the terrorist perspective. Sort of dodge, how much they’re going to cut the government, where, when, a lot of uncertainty. All this is making maybe the markets a little bit nervous. Obviously capital markets have stalled on the, you know, on the stocks and some of the other asset classes that have done really well.
But you’re also looking at the, our end of the world where we, we are commercial real estate. We need to see lower rates. What we get. I get voxer messages, voxer is a platform that I use quite a bit from, from another fund manager. Every day, 10 year yield is up, 10 year yield is up. And you know what’s my answer?
Stop freaking out. You gotta give it a little, little bit of time. We might still see a slowdown, just naturally, with new administration, we just don’t know. And when the rates are high, what do you do? You become a buyer, right? That, that’s the good old rule. Because the rates are high, sellers and folks who need to refi, right?
They, they are not in the best part of the, of the, of the their business. So they’re just got to change the hat. You got to change the hat from, Oh my God, when am, when am I going to be able to sell into accepting the reality I may not be able to sell soon. So what do I do? I have to put on a different hat, right?
I’m just kind of changing this conversation to acknowledging everything you’ve said, but thinking about how to respond to exactly that. The fact that the rates are stuck at a high level, they’re going in the wrong direction, we’re all frustrated about that, but there’s nothing we can do about it. So what we can impact versus what we would like to impact is a different conversation.
I would love to hear your thoughts on practically, given what’s going on. What should people do? What actions do they take?
Neal Bawa: Well, I’m going to pick on something that you said and expand on it, right? So, the, the fact that rates aren’t going down as expected, especially because the 10 year Treasury is actually starting to tick up, right?
And, and when you buy a occupied multifamily property, You’re basically paying 10 year treasury plus a little bit over, we call it the spread. It’s about 1. 65%. So if the 10 year treasury is 4 percent or the five year treasury is 4%, then you’re probably going to put that 1. 65 on top and 5. 65 percent is your rate.
That’s a very common description. So firstly, when the 10 year treasury is going up, it’s putting pressure on sellers. So the, I, I had made a forecast about. Five or six months ago where I said, you know, the window to buy multifamily at low prices could close by the end of this year. I’m taking my forecast back.
I think that was wrong because of the continued strength in the economy, the continued strength in inflation and potentially also the inflationary impact of what Trump might do. We can talk about whether he’s actually going to do it or not. I think that the window stays open for 2025. I think that it would have closed in 2024 if rates were going to go down because every time rates drop by a quarter basis point, we see a significant increase in activity on the multifamily side where buyers come into the market saying, okay, we’ve hit the bottom.
We’ve crossed the bottom. I was sitting, you know, dry powder. I was sitting on the sidelines. I think that we’ve hit the bottom. We’re starting to move in an upward direction because institutionals, they don’t try to time the bottom. They have too much money for that. What they want to make sure is that it doesn’t go down after they enter.
Right? They don’t mind that, okay, it got bottomed out and started going up and now we started to put money in that. They’re perfectly fine and their mindset is different from little guys like me that, you know, have a 600 million portfolio. I’m talking about people that have a 6 billion or 60 billion portfolio.
The way they think is they want the market to flatten before they enter. And what’s happening now is they’re not sure. They’re not sure they think that the market might actually scrape along the bottom for the next year. And so we might continue to get lower prices. I’m very active on the buying side.
I’m not having any luck with buying, but I’m very active. We are underwriting more properties than we Have underwritten for years. We’re making more offers than we have made for years. Finding inventory is tough because a lot of sellers who don’t have to sell are saying, I’ll just wait for another year.
So inventory is a problem. And then once you get there, buyer seller expectations are a problem. I’ll, I’ll tell you something very funny. A lot of people think that if interest rates draw interest rates, go up sellers. Expectations and buyer expectations will come close together. This is a myth. It’s a very common myth.
People are like, well, in a good market, the buyers and sellers are far apart. Well, I have news for everybody in a bad markets. The buyers and sellers are just as far apart. Only the price goes down. So if the prices were here in 2022, this is where the the sellers think the price is. This is where the buyers think it is right today.
All that’s happened is the price has gone down 20 percent 25 percent depending on the market. But the gap between the buyers and sellers is the exact same, right? In 2008, when I was trying to buy 300, 000 homes for 90, 000, I was a net buyer. I was buying in cash. I thought that the price should be 190, 000 and the sellers thought that the price should be 100, 000.
So even in 2008, with millions of homes on the market, there was a gap between buyers and sellers. That gap never goes away because the buyers and sellers are both unreasonable in their own way. Okay. Right. So the point is, the first thing that that investors should understand is that gap will never vanish.
If you’re waiting for that, you will never ever buy real estate in your life in a bad time. Good time. Doesn’t matter, right? You have to just understand when you’re getting a good deal and go for it. Today is a good deal when I am looking and there’s reasons for that. I’m https: otter. ai give you the specific reasons for why this is a very good window of time to purchase multifamily much better than a year ago, much better than two years ago, certainly much better than two years ago.
Number one is on average, you’re going to pay between 20 and 25 percent less. And in some markets you might even pay 30% less. So there, there’s some, you know, markets that there’s more pressure, but there’s more, you know, product coming to market. The, the ones that had a lot of bridge loans, so, you know, Phoenix is a perfect example.
Austin, there, there you might get a little more than 25% off, but generally you’ll get 20 to 25% off off the peak of the market. Peak off the peak. And the market peak was March, 2022. So if you look at the peak, March 22 to two peak to today, you’ll get 20% off. You might get 25 on multifamily, on single family.
That’s not true. If you’re buying a single family asset, you’re probably paying a higher price today than March 2022 because there was a peak there. Then it went down a little bit when the rates started to go up and then it went up again. So single family prices in the United States on average are actually higher today by 6 to 12 percent depending upon the market.
Compared to where they were in March 2022. So single family has actually gone the other direction. And it’s in my opinion, a really bad purchase because you’re, you’re paying very inflated prices, right? And, and affordability for single family is at an all time low. It wasn’t even this low in 2007. It’s a very, very bad affordability picture on the single family side, and the only reason the single family market has installed is because builders have been very aggressive with concessions.
So they’ve done a very good job. They’ve kept prices high, and they’ve given a lot of concessions. There’s a lot of liquidity in the market, so you can get debt very easily and most importantly. This massive growth in the stock market valuations, right? If you look at the stock market over the last two years, it’s gone up trillions of dollars.
Mike Zlotnik: That creates a wealth effect. Yeah.
Neal Bawa: Right. So that wealth effect means that people are still continuing to buy homes, even though they’re really pushing their, their, the limits in terms of what they should pay. But on the multifamily side, multifamily is a business, right? Buying a multifamily is really no different from buying a Taco Bell.
You buy a Taco Bell based on its net operating income and a market cap rate. So today what has happened is net operating income really hasn’t changed much from 2022. Rents have gone up maybe a little bit, one, two percent in the last two years, not much. And, you know, expenses have gone up by that much. So NOI or net operating income, the income of the property is pretty much remained the same.
If you look at 2022 now, not much difference. What’s changed is cap rate. Cap rate is the multiple of net operating income that you paid. The multiple, right? So, if you’re paying a 5 cap, that’s a 20x multiple of income. If you’re paying a 4 cap, that’s a 25x multiple. So the multiples have gone down, so you’re paying less.
If the multiples go from, you know, paying 4 cap to 5 cap, well that’s a 20 percent discount. And you’re getting that discount today. So income hasn’t changed. You’re buying the same property with the same income. But you’re getting a 20 percent lower price because of debt. That arbitrage is wonderful to have today.
And it wouldn’t be that wonderful because you’d be like, yeah, but my mortgage is higher. Yes. But there’s something else that people are not considering and it is an incredible wealth generator. It’s a very, very important piece. For the last two years, we’ve had a phenomenal multifamily market and a really bad multifamily market.
Both together, phenomenal and really bad, both together. In the last two years, multifamily has absorbed, absorbed new incomings inventory and that absorption rate has been the highest in history. Some of it has to do with the fact that we needed more apartments for all these, you know, illegal immigrants that are coming in, right, from the southern border, so obviously they need places to stay.
But some of it had to do with the fact that the economy stayed much stronger than anybody projected, than the Fed projected, than you projected, me projected, nobody projected the economy to stay this strong. So obviously, the economy stays strong, there’s more household creation. As a result, Over the last two years, multifamilies performance has been off the charts when it comes to absorbing new units.
What that means is the market is growing everything that’s coming in. It’s absorbing because we had the largest two year delivery of new apartment construction in us history in over two years. And all of it got absorbed. Not, that’s not statement is not quite right. Not all of it got absorbed because if all of it got absorbed, if we were at 95 percent occupancy, we would have stayed at 95.
We’ve dropped from 95 to 94, right? So nationwide occupancy was a little over 95. It’s a little under 94 now. So there was a little bit of a gap there between, you know, supply and demand, but overall the industry, people that have been looking at this for 30 years, their jaws are hanging down. Like how did we absorb?
A million units in two years. That is a stunning, stunningly good news for multifamily. And then on the bad side, we haven’t been able to raise any rents. Why? Because a million new units are coming in and all of them are two months off. So every developer, including me, I’m, I currently have 600 units leasing up.
Everything is two months off. Everything that I, that I’m leasing up is two months off, two months for free, pay 10 months of rent, right? So as a developer, I’m using that mechanism as a way to compete with existing cheaper properties, the class Bs and the class Cs. And so they’re not able to raise the rents.
So we have this bizarre phenomenon. Of extraordinarily high performance when it comes to absorption and demand and terrible performance when it comes to rents and it’s terrible. It rents haven’t gone down. They haven’t gone up. They’ve just, they’re flat. So you might say that doesn’t seem too terrible.
No, look last 50 years, rents always go up. Right? Rents are like the clockwork. If inflation is 2%, rents go up 3. Inflation is 3%, rents go up 4. Just look at 50 year charts tracking rents and inflation. You notice rents either track inflation or stay above it. So, some years they’re above inflation, some years they’re at inflation.
They’re never below inflation! But we’ve had a lot of inflation in the last year.
Mike Zlotnik: So what’s the forward, what’s the wisdom on a forward outlook that, and I think I heard you speak on this, is that 26 is supposed to be a phenomenal year, 25 is a year of sort of buying while you can, and then 26 you run out of new supply completely and your rents start going up, so your NOI is growing, and even if we can’t control the interest rates, but at least from a rental perspective, Yeah, right.
Neal Bawa: We can control rents. So I think the focus of the industry has changed from what they cannot control, which is interest rates. I don’t know what’s going to happen to them. Nobody else does right to what we can control. And we have not had rent control control over our rents for two straight years. We didn’t have control in 2023 too much supply.
We didn’t have control in 2024 too much supply, but in 2025, at some point during the year, every market in the United States, except maybe two or three. Right. There’s about 323 markets in the U S that we track. Maybe half a dozen will be separated out, but every other market at some point in 2025, that supply is gone.
It’s finished in 2026. We delivered 660, 000, 2024 this year, the year that just finished, we delivered 660, 000 units. We’re now delivering 325. And I’m telling you the supply, the demand is way above 325. So if you deliver 3 25 in 2025, we get pricing power back. We get the ability to raise our rents. So the latest forecast from last week are three to 4% rent increase, which is great, not awesome because inflation’s at three.
So in, if you look at the last 50 years, usually you would get 1% more than inflation. That’s four. So we get three to 4%. So it’s still an in-between year and rents are not going to rise enough for values to rise. So you can still lock in low prices, but 2026. At this point, we’re only on track to deliver 230, 000 units.
And here’s the coolest thing. The Fed can change its mind and raise rates. Trump can do something destructive and tank the economy or grow it so fast that inflation goes up. I have no control over any of that, but I do have control over one thing. I know exactly how many units are going to get delivered.
Not exactly, but I know pretty much how many units are going to get delivered in 2026. Why? Because I can just count the construction permits in 2024. It takes two years to build a building. Nobody has figured out how to build multifamily in a year. I haven’t. Nobody else has. It takes two years to build.
So if you didn’t pull a permit in the last quarter, you’re not going to deliver it in the last quarter of 2026. Right. So there’s no way to increase the number of multifamilies that we are going to deliver in 2026. Now, if it was going to increase, it would have happened in 2024. We’re already in 2025. So we know that there is a shortage of multifamily in 2026, and we will see a spike, a very significant spike.
In rents because we have pent up demand. Our insurance costs have gone up. Our payroll call cost has gone up. We’re sitting here absorbing all of that because we don’t have pricing power. Because we’re still waiting for this inventory to come in. But the moment that happens, I promise you every landlord in America will raise rents because we haven’t raised them for two years.
And you’re going to see a wave of that in 2025. Not every market. And then in 2026, every single market in the United States. I think I would be shocked if we don’t get five, 6 percent rent increases. And sometimes your investors might don’t understand five, 6 percent sounds like a very small amount of money.
Guys, if you raise rents by 20%, we double your money. Right? So when you get 6 percent in a year, we’re dancing naked on the street with champagne bottles. Right. That’s three years of rent growth.
Mike Zlotnik: Yeah. And, and I love it. Neal, you, you, you are, what’s it? Math data scientist of multifamily. You’ve got this, this pad down and I’m, I’m very honored to have you speak on this.
The, the wisdom is data speaks, math speaks and the math points towards very likely significant rent growth in 26. So the time to buy is now the prices. are Substantially depressed of the peak and of even without the direction of interest rates Just the rent growth factor is a significant driver of future.
Noi growth
Neal Bawa: and so is the cap rate. Remember mike? There’s one factor that we haven’t talked about There’s three real things that drive things right? So one is interest rates. The other one’s rents But there’s this third thing called cap rates and cap rates Are actually an emotional thing, right? So I’m going to talk about those.
But, but, but I, I also believe that we’re going to see cap rate compression in the coming two years. I don’t know when, but at some point we’ll see that. That’s the third widget that basically changes profitability for us. And it’s in our favor now. For the last two years, cap rates have been Against the industry for the next two years, they’re going to be with the industry.
So, well, we’ve had headwinds and now that’s turning into tailwinds.
Mike Zlotnik: Yeah, I appreciate that. I mean, I guess cap rate is is connected to the level of interest rates. That’s always been sort of a, there is a relationship.
Neal Bawa: Yeah, that’s where I disagree. It’s
Mike Zlotnik: that emotional. Yeah.
Neal Bawa: Yeah, but what I why I can tell you that cap rates are not always tied to interest rates and I’ll tell you why Right, if you think about it cap rates in the united states have been dropping for about 10 12 10 years until 2023 When they start low interest rates, right?
They’ve been dropping
Mike Zlotnik: in relation to the low interest rates and
Neal Bawa: yes And no, if you look at the 10 year chart, you’ll notice that there were times during that time when the federal reserve Reserve You know, started to raise interest rates. Remember they raised interest rates before COVID and then they stopped and they went backwards, right?
So they went up, then they went down. Cap rates continue to drop. So cap rates are a factor of interest rate for sure. When you have interest rates that are lower, you’re going to have cap rates that are lower. No argument in that, but Mike, they’re also a factor of how rich people who buy real estate feel about real estate.
When people feel that the next two to three years are going to be better, they pay lower cap rates. When people feel that the next two or three years are going to be hard, they pay higher cap rates. So there is an emotional component to cap rate, and you must not underestimate it. Yes, interest rates are a big component, and we have no control.
But emotionally, this industry has been hit very hard in the last two years, and so everybody wanted to pay less. I am not hearing that now I’m presenting at conferences and people are like, we’re going out to put more money in. Look at BlackRock. I mean, look at what the big guys are doing, right? Was it BlackRock or Blackstone that just bought a 2 billion portfolio?
That kind of money hasn’t come in for two years. They’re saying, okay, you know what? Enough drop in prices. It’s time for us to enter. Big deals are being done by big guys and they’re the ones that drive price, not us. I’m too small. You’re too small. But the guy that writes a two billion dollar a year check?
They move markets and their belief, their thoughts affect cap rates, just like interest rates do.
Mike Zlotnik: Yeah. I think it’s a great wisdom and I will let this comment. Most of those guys are really not emotional. So what, what you are stating is the state of the market. The general perception, but really they’re driven by the data that you just described.
So that Same thing black rock and
Neal Bawa: blackstone has 60 guys sitting in a room saying, you know What the next two years are looking good.
Mike Zlotnik: So it’s a it’s a forward PE growth. It’s a forward projection of the growth driven by Therefore we can pay lower cap rates because the noi will grow and that’ll compensate for the the cap rates Being a little bit lower than yes.
And again, they’re, they’re buying them at sort of pretty discounted cap rates versus couple of years ago versus the peak. So from that perspective, all these theories got
Neal Bawa: a little bit of room.
Mike Zlotnik: Yeah. Yeah. And the what, what I’m, I’m not surprised, but everything you said is what I’ve, I’ve, you know, seen and observed that these deals are, we’re not seeing massive distress by any means in the industry.
You know, if you distress. Owners with the messed up capital stack liquidity issues. But in general, the industry is not necessarily distressed at all, but at the same time, you’re not finding a lot of great deals as a result of lack of real distress. So finding a great deal is hard, but when you find it, and I’ll tell you this, you know, we have a great deal coming up and almost fell off the chair when this deal was brought to us with the cap rates.
Basically, what I’ll tell you, these numbers, they look staggering. It’s almost like hard to believe how good of a deal it can get. So the deal that we are working on right now, it’s a multifamily, a large multifamily, over a thousand doors in Midwest, with the going in cap rate in the high eights to low nines, depending on how you look at it.
I, it, it, like you, you look, you look at the stuff, it’s like, how is it even possible? So deals like this, when they come across, they feel absolutely phenomenal deals because it’s such a ridiculously good price. And I go back to what you said, there’s a spread between the 10 year treasury yield. And then the cap rates and you are figure referred to the mortgage rate spread, but there’s also cap rate spread and to me, it’s 180 basis points.
It’s a little bit higher than the
Neal Bawa: 165 that I mentioned. Yeah.
Mike Zlotnik: Yeah. Yeah. So you’re talking about fannie freddie mortgage spread versus the So it’s really interesting is that using even the current interest rates the cap rates around six and a half percent. You take the 10 year treasury at four, seven, you had 180 voice basis points at six and a half, more or less.
Neal Bawa: Right.
Mike Zlotnik: So any deals you could pick up above that theoretically is you’re already ahead.
Neal Bawa: Definitely ahead and again, you’re ahead not factoring in future PE growth, right? So you’re already ahead just purely on the cap rate basis if you can get to that six and a half. And that’s really the trick. You know, how do you get these deals?
You know, I wanted to address what you said about distress, though. There’s. A lot of complete and utter nonsense being written in the real estate press about distress or upcoming distress. I think this is a absolute bullshit idea. There is distress and multifamily individual projects are distressed because they’re losing money.
There are projects that are going to be sold at a loss. So investors will lose money. That is not the same as market distress. Multifamily is a very large market. There are over 20 million units being tracked by Yardy matrix and costar of those 20 million units, only about four to 5 percent have loans that have to reset, have to reset in the coming 12 to 18 months, right?
Very, very small percentage. In fact, the largest portion of the multifamily market has fixed debt. So this is what most people don’t they’re just focused on this tiny little piece and they somehow attach it to the whole market. No, a very tiny portion of the market has distressed. Individual syndicators are distressed.
Their investors are distressed. This has no feed, no connection to the market today when we go in and make a best and final offer. Two years, two and a half years after interest rates started rising, Mike, When we go in and make a best and final there are 15 offers on the property Five of them are a hundred thousand two hundred thousand hard money day one site unseen without even Doing due diligence of 30 days.
Oh, what is putting down money
Mike Zlotnik: versus the price a couple of years ago? I think What lower price for sure, right?
Neal Bawa: Better pricing. But what I’m saying is prices have dropped interest has not there Maybe there were 30 offers on it. So maybe it’s dropped a little bit, but there’s still 20 offers There’s people fighting over multifamily properties at cheaper prices.
That is not the definition of distress That is actually the distress definition of a seller’s market today Multifamily is a seller’s market at a 20 percent discount. Sellers have so many choices.
Mike Zlotnik: This comment. So you’re absolutely right on the front. I’ve heard you speak exactly to that point and I agree with you.
In general, overall market is not in distress. But I just want to comment on a couple of quick things. Number one, people who wrote a check in 21, 22 at the peak of the market, plus minus. Their equity position in these deals feels severely distressed. Because the assets are worth less if they can walk away with their original capital, they would be ecstatic.
So essentially, it’s now a battle for them to get their money back in a couple more years with market recovery. Right? So that’s what it feels like. Worse, if these deals have to be, have to be liquidated today or simply run out of cash, then they lose the entire investment. That’s what the feeling is, right?
That we both know that. Another interesting point, which you, you, you just brought up. Only a small percentage of the deals. Need to refinance today, but that continues to roll and I’ll tell you this I refinanced one property in in New York City 70 apartments in 2018 or 19. I’m just going by memory and I had an option of five year fix a ten year fix They took ten year fix Right?
And that, that’s a saving grace. I am good, in really good shape. But I go back and I think, five years would have passed and now I have to refinance the property. Trouble. Because the rate on that mortgage Is four. I’m just going by memory 4. 3%. Right now it’d be approaching seven, right? That’s the problem.
Now you have to refinance. If you look from the owner’s perspective, it’s very, very painful because you can meet the debt service coverage ratio and you’re suddenly in a. You know, precarious position that you got to raise some equity. You got to, you got to pay down the mortgage. You got to deal with the fact that you can’t afford that, that service.
So it’s one of these difficult conversations where the industry is not distressed in general, but the experience of number of investors, equity investors, who’s written checks. Is is is not fun. This experience is difficult. And then if you got to go refinance perfectly good asset It’s painful to do.
Neal Bawa: Well, can I say something that is going to sound horrible and heartless, but maybe also true There are roughly 3 000 distressed properties and a total of 5 000 that are not distributing.
Okay as i’m assuming each property has 200 units So 5 000 properties that we’re talking about if each property has 40 investors You We’re talking about a maximum of 200, 000 investors. Now, many of those investors have invested in multiple properties. So we’re not really talking about 200, 000 people, but let’s just assume every investor only invested one.
There’s 200, 000 unhappy investors and maybe 5, 000 unhappy syndicators, probably less. The total number of accredited investors in the United States is somewhere between 11 and 14 million. The total number of people that invest in real estate is in the millions. So what you’re talking about is the market that I see and you see, Mike.
You talk to your investors, I talk to mine. We are inside a bubble of the tiny, tiny portion of the accredited market in the United States. Out of 14 million, we’re talking about 200, 000 people. They’re unhappy. But the market is driven by the rest.
Mike Zlotnik: Agreed. But we have the experience dealing with existing projects, with existing investors and their concerns.
And it feels way worse than it really is. And then at the end of the day, because of our
Neal Bawa: bubble right there, that that’s our bubble.
Mike Zlotnik: Yeah. And then the, the new deals, that’s the bottom line. The, the, the way I think we both have exactly the same sort of a vision. We got to go find new money who has not been impacted by some of these recent Recency bias, so these difficult equity positions on these deals and this ton of capital just the amount of capital created because of the stock market appreciation, crypto appreciation, gold, precious metals is humongous and the opportunity to go after these new dollars is absolutelytremendous.
Great opportunity. So from a deal perspective, this is, we started this whole conversation. You started with an update. I said, the mindset mindset, it’s the time of opportunity. Great new deals at a historically high cap rate. Well, not historically high on a relative basis. And the reason in the recent,
Neal Bawa: on a relative basis, yeah.
Last 20 years, you
Mike Zlotnik: just got to go find investors who are not hurt, tortured. In a difficult state of mind from a recency bias. You remove that, suddenly this looks an incredibly attractive opportunity to participate. So with that, it’s an abundance and opportunity mindset versus when do we get out of the old deals?
Well, I don’t know, maybe it may be a couple more years. And we do know that 26 will be a better year. We do know that, but we’ve got to get I think
Neal Bawa: if deals can survive until 2026 out of those 5, 000, some portion will be able to sell and break even. Some portion will be able to refinance and some portion will be able to refinance at five years with a small equity injection.
The rest will have to be sold in 2025 and 2026. But if I calculate that 50 percent of them don’t make it, that’s 2, 500 properties across a very large country. When I look at an injection of 2, 500 properties across the next 18 months, it doesn’t scare me at all. That is not a glut. That is not a flood.
That is simply some loosening in the marketplace and some extra opportunity for me as a buyer, I’m looking forward to that, but if it was 10 or 20, 000 properties, I would be very worried.
Mike Zlotnik: So the conclusion is is what is cautiously, very optimistic about the future, taking action today. Don’t worry about recency bias, or at least try to put it aside.
And you have to put it
Neal Bawa: aside because it’s first in our heads, then in our investors heads. I think that we’re, we’re as much of the problem as the investors are, and I honestly, I’ve been able to convince my investors who are in those deals to invest in my new deals. Because I’m telling them, so you invested in my deal, and you bought this property at, you know, with me at 25 million in 2022, and you didn’t have a good time, interest rates changed for you, now I’m buying this property at 19 million.
Same property, same NOI. Put aside what has happened in the last two years and answer this one question. Is this by itself a good deal? Is it a better deal than you were willing to give me a million dollars for in 2022? Yes or no. And every time ask the question in that way, the answer is yes.
Mike Zlotnik: Yeah. It comes down the faith.
You can, you still do well with new money on new deals. And some folks have been concerned. I mean, it does this back again, recency bias, but I, I concur. I mean, the wisdom, the start of 2025, Is mindset, positivity, time of opportunity, even though you’re still, you’re saying it’s a seller’s market, I still think it’s a buyer’s market because the cap rates are low.
So if you ignore, if you’re not looking for professionals, you’re not looking to buy at the absolute bottom of the market. We are somewhere in the, you know, we’re trading, we just don’t know if recovery will start in Q1, Q2, but we are somewhere already at a point where the correction has already taken place and the opportunity ahead should be meaningfully.
Neal Bawa: I know I think I we have a good mark good way to see the numbers and here’s what I’ll say. The United States is broken into three or four major chunks, right? So you’ve got the West, you’ve got the Southeast, which is where a lot of the syndicator money went in. Then you’ve got the Northeast and the Midwest.
I invite anybody to look at rent growth in the last six months in the Northeast and the Midwest. Why those two areas? They didn’t have supply. They didn’t have massive, massive. I agree. We are seeing that. Look at the rent growth there. That rent growth is already there. And the Southeast and the West will join that rent growth in 12 to 18 months when their supply ends.
Right? So, the Midwest and the Northeast are offering you a view of the future.
Mike Zlotnik: Yeah, I concur with you. I’ve had this discussion quite a bit about on the Midwest where we do a lot of investing and that’s exactly the product. There’s no new product. This oversupply problem of Sunbelt, they don’t exist in the Midwest.
All the money went to build the Sunbelt and that’s why it got overbuilt and that’s why it’s dealing with a high absorption. But demographically, a lot of people moved in those states. Texas, Florida, etc. Phoenix because of retirement because better tax environment, et cetera. Nonetheless, affordability is still pretty, pretty strong in Midwest.
The
Neal Bawa: Midwest is doing well now because I think Phoenix and Houston and all these places that used to be cheap 15 years ago, they’re expensive now they’ve gone in a, in a single 15 year timeframe, Phoenix has gone from being a cheap city to an expensive city, right? And that’s happened across the board in the Southwest.
So a lot of the migration that was happening for price reasons, Has slowed down from the Midwest. It’s slowed down from the northeast. People are saying, why the heck would I want to go there? I mean, I went there. I flew there. I looked at the price of homes. It’s crazy. I looked at the price of rents. It’s crazy, right?
I’m just going to stay put. People weren’t doing that 10 years ago, because if you move to Phoenix 10 or 15 years ago, you got a huge discount, right? Your quality of life went up. And that isn’t happening anymore. And so, I think that the Midwest actually has a much more powerful story to tell today than it did 10 or 15 years ago, because from a price comparative basis, the Southeast is not cheaper.
Mike Zlotnik: Yeah, I’ll add one more element, and I think all good things must come to an end, so does this episode, but The one thing that I wanted to add is weather patterns have been changing. So, people used to move south because north was too cold. And I’m in New York, it’s cold, but it’s, today is especially cold day.
But overall, it’s gotten more mild. This is interesting, same thing in Midwest. Used to be terrible, super heavy snow winters, and it’s not as bad. So, the experience of living in those towns and cities is not as bad from that perspective. So the weather, the changing weather patterns making sort of a Midwest, maybe Northeast a little more tolerant to so interesting.
Appreciate your wisdom. It was a great conversation, great wisdom, great sharing. I share your enthusiasm and your cautiously optimistic tone and obviously the mindset and the time will, will show. And for those folks, I’ll add one more, and we’d love to hear your final sort of thoughts and comments.
We don’t know if recession is going to come, and it’s something that we would welcome. We almost need a small, some kind of correction recession. It’s almost not good, not healthy for the U. S. capitalist society not to have some kind of correction. So, nobody wants to see unemployment, and people, you know, Being hungry and but we’re not talking about any of that.
We’re talking about maybe some level of adjustment. Shallow recession. Yeah, shallow recession. I think it’d be absolutely welcome and it’s probably, you know, given what’s been happening with the yield curve and inversion and non inversion, everything else, I still feel that we might see something later part of this year, especially If trump actually does what he says and they start cutting the government, which which may be Something that we’re long overdue the size of the government relative to the size of the economy.
It’s got our control
Neal Bawa: Yeah, I I believe that the federal reserve trying to prevent recessions is problematic I think that they should change their mandate to making recessions shallow I think recessions are part of the business cycle and part of the money cycle and we are trying to eliminate them You I understand why the Fred does it.
There’s a lot of pain associated that, you know, millions of jobs get lost, but I wish that they would change their mandate to accepting shallow recessions.
Mike Zlotnik: Appreciate that, appreciate that wisdom. And another thing that Fed probably needs to change, people have talked about this, their target 2 3 percent inflation may be unrealistic.
Maybe the inflation needs to be reset to 3 4%, and then maybe the, the life for the next 10 years, who knows. Especially in light of the Fed. Well, not the Fed, the, the government spending far above its means and the, the budget deficits continue to to, to grow the amount of treasuries that need to be sold and that will continue the, continue the deflationary pressures.
Neal Bawa: Here’s the good news on that one. The Fed doesn’t control the, you know, inflation rate. The inflation will do whatever the heck it wants to do. It doesn’t care about the Fed. The Fed doesn’t mean anything to inflation. The Fed will have to change its tune when inflation does what it does. The truth is, inflation is its own creature.
The Fed can only influence it slightly in this direction or that, but cannot change the overall trend. We are trending towards higher inflation, and there is nothing that the Federal Reserve can do to prevent it.
Mike Zlotnik: Other than reset their, their policy and reset their, their, their, Normal, they will
Neal Bawa: adjust.
They will adjust. The Fed is actually Thankfully the only data driven quasi government organization that I know that I respect. I I The rest of them are just shills, but the Fed actually looks at the data I think they will adjust the only thing is I find the Fed slow like any other government organization They move slowly.
They change slowly, but at least they’re data driven. They’ll see the writing on the wall I think that that two percent inflation number is going to become a three to four percent range over the next five years You
Mike Zlotnik: And hopefully it’s a great news for real estate because real estate is a hedge against inflation.
As long as rents keep going up, let it be 3%, let it be 4%. So
Neal Bawa: exactly. We, we don’t care. We actually like higher slightly higher inflation. We don’t like high inflation. We like higher inflation.
Mike Zlotnik: Agreed. Thank you, Neal, for your wisdom. Thank you for coming on our podcast. Happy and healthy and prosperous 2025.
Always great to talk with you. And yeah, enjoy the winter and hopefully great year.
Neal Bawa: Sounds good. Hopefully I’ll get to see you. I would love to reach
Mike Zlotnik: out before we
Neal Bawa: So very straightforward. We invite about 14, 000 people a year roughly to our webinars. We hold webinars on all of these topics, like there’s a dozen of them, some about Trump, some about the economy, some about real estate, some about other things like AI.
And they’re all at Multifamily University. So just go to Google, type in Multifamily University, join our community. It’s free. There’s no paid education. It’s free for everyone. 1 percent of the people that are in that community become investors with us. The other 99 enjoy free education forever. That’s the best way.
Multifamily university.
Mike Zlotnik: Thank you, Neal. Appreciate, appreciate your sharing and appreciate you providing service to the community. Education is a, is a very important element of the whole ecosystem. And usually. Free, free education. Be careful what you pay for, and if you get free education it’s dangerous.
But I’ve seen your stuff. Your free education is high quality, great stuff. So, thank you for doing the service.
Neal Bawa: Thanks so much, Mike. Have a good one.
Mike Zlotnik: You too.
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