How to Find the Next Hot Market & How to Convince Investors

12/14/23 • 17 min

Commercial Real Estate Investing From A-Z

How to find the next market? How to convince investors to invest in something that is new to them? Neal Bawa, CEO of MultifamilyU, shares his knowledge.

Read the entire interview here: http://tinyurl.com/4vj3wyhr

You sold a deal today and you returned a huge amount to the investors. Let's go over the entire process from why were you analyzing that deal and what made you want to buy it.

The name of the deal is Equinox at Night, which is a name that we gave it, it was called Weatherly Walk when we bought it. The property was sold today, which ended December 2023, and was purchased right about this time four years ago. We wanted to buy it in time and close in time for the depreciation benefits in 2019. The journey was one day short of four years.

I wasn't looking for a property in this particular marketplace but back in 2019, I had started feeling that properties were getting too expensive inside city limits and I felt like it was a terrific market to be putting a lot of money into. As I was talking about Atlanta, I started seeing good things and then as the years went on 2017-2018, I found that I was seeing more negative things about Atlanta than positive things because inside of the city, I was starting to see pricing that was just unreasonable for the income levels. What was happening was that the incomes of the people living in Atlanta, were going up 4% a year, and the property prices were going up 20% a year when property prices go up that much, the new owner needs to raise rents, so they're forcing rents higher because everyone's buying at these new prices. And for a while that works but then what happens is that either you start seeing occupancy fall, or even worse, you start seeing delinquency increase, as you start forcing people into 40% of their income, 45% of their income going to rent and almost 50% go into rent, then you're going to see a lot of delinquency, the first time their car breaks down, they can't pay rent.

How do you convince the investors that may have been used to keep investing in MSA itself?

In many of our projects, you just send out an email, and all the shares are taken. We knew that we were buying a better property and were going to make a lot of money on it but first, we had to convince investors (you're not going to make any money if you can't close the property). We did a two-step approach: first, before we put the property in the contract, we were making offers and we had identified three cities not two, that were around. We started holding webinars about the true opportunity in Atlanta, and then another webinar about the true opportunity in Phoenix. "First, I'll tell you about the true opportunity webinars and then I'll tell you about how that transition into getting the property funded", this is something that every syndicator should do instead of telling everybody, "Fayetteville is the greatest city in the Atlanta metro" which never works, what we do is we started to rank some of these outside cities. We started comparing these cities and started talking about these different cities and why we felt that they were better than Atlanta itself, both for single-family and multifamily. We always tell our database, that if you want to buy single-family homes, go do it. You'll be back talking to us in one or two years once you realize you've turned into a landlord, you just wanted to be an investor. We always tell people that the single-family experience is worth it, you learn a lot, and you don't want to do it again.

Neal Bawa

www.multifamilyu.com

How to find the next market? How to convince investors to invest in something that is new to them? Neal Bawa, CEO of MultifamilyU, shares his knowledge.

Read the entire interview here: http://tinyurl.com/4vj3wyhr

You sold a deal today and you returned a huge amount to the investors. Let's go over the entire process from why were you analyzing that deal and what made you want to buy it.

How do you convince the investors that may have been used to keep investing in MSA itself?

Neal Bawa

www.multifamilyu.com

Previous Episode

How to Invest Wisely: Navigating LP Due Diligence & Fund Decisions

How to approach due diligence on a new operator as a limited partner? How should investors decide if they should invest in a fund or not? How should you fundraise for deals that have not been determined what they are yet? When to say no to a potential investor? Dr. Joseph Ryan Smolarz, founder of STOR, shares his insights.

Read the entire interview here: http://tinyurl.com/yph2892p

What are some of the main topics that you want to pass to passive investors and how should they do due diligence?

The basis of the whole interaction is trust, you're trying to build rapport with your investors from a sponsor's point of view. From an investor's point of view, you want to make sure that you're a good fit. You have ways of thinking about things and your risk tolerance needs to fit into the asset class and the investment strategy that you're trying to do because if you're in a very aggressive fund, and you have a low-risk tolerance, regardless of what happens, you're not going to be happy. Those are the questions that I would start with.

When you're starting the due diligence as a sponsor, the number one goal is to make sure you're not in a Ponzi scheme or some sort of fraudulent group. There's a lot of good questions to ask to sort of drill down on that and if you're not comfortable at the beginning, you're probably not going to be comfortable at the middle or the end, as well.

During an up market, how would you recommend doctors doing their best to find out if a sponsor is not legitimate?

Having made several pretty bad mistakes as a limited partner, this is a topic that's near and dear to my heart. When I approach a deal as a limited partner, what I'm trying to do is understand that sponsor in such a way that we can build a 30, 40-year relationship. It's not about the first deal in its entirety, because I'm willing to put in the time, effort, and cost to get to a comfortable place knowing that when these guys or girls have a deal, and they send it to me, that I'm never going to have to go through this first step of due diligence again. I'm comfortable that they're not trying to push one past me, or whatever the case may be. And that's a gigantic step. I would personally say, and I know this is going to be shocking to your audience, but a lot of times, what I'll do is, I will hire a PI to go through and make sure that some of their previous deals have not been fraudulent.

If I had a fund, and I knew that the economy was about to take a turn, for example, in 2024, we all know that it'll be even better for finding deals. However, there is a lot of fear that normal human beings think that that specific time will never end and it'll be doom and gloom for a very long time so they end up not putting the money. From a fund perspective, I would personally prefer to have that cash available right now in case people get cold feet, how would one go about that, in your experience?

There are lots of sponsors out there that will do that, they'll get the capital, and hold on to it. It does add liability to to the fund. If you're going to do that, you would probably want to know how much E&O insurance they have, errors and omissions, and all the things to safeguard. Is there the ability for one person to be able to extract all of the cash and run, or is there a safety mechanism where it takes two people to sign off on it? There are lots of checks and balances, and systems out there that can be put in place for a reasonable cost if the sponsor hasn't thought about that, and what happens in those scenarios, and they very well should. But it's just personal preference.

Dr. Joseph Ryan Smolarz

www.storpartners.com

The Medicine & Money Show

Next Episode

How Much Have Real Estate Prices Declined?

How much have commercial real estate prices declined? Are the properties we are buying today discounted? Neal Bawa, CEO of MultifamilyU, shares his knowledge.

Read the entire interview here: http://tinyurl.com/832h7ak6

How were you investing in 2020, 2021, 2022?

For that property, I must be honest and say there is no horror story to tell. The property did what it was supposed to do, we bumped rents by $175 from the very beginning to the end. On the last day, we had rents $176 dollars higher. So, the property did what it was supposed to, it also stayed highly occupied. You might say, it doesn't sound like a typical property, where are the horror stories? The answer is this, by stepping outside of the metro, we were able to buy the best property in this small market. We didn't have to be stingy; we didn't have to buy a really bad property in a bad area, we just bought a very nice property in a very nice area, it just wasn't in Atlanta. As a result, our process of actually running the property for years was fairly straightforward.

What about today? Things have changed dramatically since COVID. In December 2019, probably three months before COVID, cap rates were low, but they weren't crazy low so we probably bought the property at around 4.7 cap or 4.6 cap but if you fast forward to six months, nine months after COVID, cap rates were completely insane. Many people don't know the answer to this question which is, when do you think cap rates in the United States for multifamily were the lowest, which means the highest prices? The answer is March 2022.

How much have prices declined?

Another question that I think everyone should be asking that I don't see enough is, how much have prices declined? When you ask that question, you have to go back to the first question, which is when was the peak because whenever you measure a decline, you have to always measure it from the peak. First, you have to know where the peak is so that you can say how much of a decline there is. In March or April 2022, the peak is well known because CBRE has published that and a bunch of other people have published articles around that peak. We looked at our underwriting from those days, and we were losing a lot of offers, we were still making offers because you have full-time employees, and their job is to make offers even if they're losing them. We looked at the going-in cap rate in that month for the offers that we made. None of them were offers we won and one can say that we were conservative because we didn't win any offers and we didn't even get into best and final so it's nice to look at that benchmark. And then we looked at the offers that we made in November of 2023 so now the gap between the two is about 20 months and the difference is the offers we are making today are 37% lower than the offers we were making in March. Does that mean that the market is discounted by 37%? No.

What is the right price?

In the absence of crazy interest rates, what is the right price for our properties? The right price is about 15% higher than it is today and at some point, we will return to that price, we are never going to go back to 37% higher, probably not for the next five to 10 years. The only thing banks know how to do when bad things happen is to cut interest rates to zero, so it will happen at some point, but until that next Black Swan event occurs, prices are about 15% above where they are today. What causes them to go to that level is simply interest rates dropping by about 150 basis points from where they are.

Neal Bawa

www.multifamilyu.com