Neal Bawa
The Opportunity Zone Expo Podcast
Grocapitus Founder Avoids "Irrational Exuberance" in OZ Investing
Transcription
Announcer: Welcome to the OZExpo Podcast where we talk with the people who really know the Opportunity Zone market. From investors, fund managers and developers to tax experts, politicians and attorneys. The most influential voices in the Opportunity Zone industry are here on the OZExpo Podcast.
Jack: Well, welcome back everyone to the OZExpo Podcast. I'm your host Jack Heald. Joining me for this episode of the podcast is Neal Bawa who is the founder and CEO of Grocapitus a series of names that I really like. Welcome Neal. It's good to have you on the show.
Neal: Thanks for having me on the show, Jack.
Jack: Let's start with just the “get to know you” questions. I like to know who these people are I'm talking to and where they came from.
Neal: Uh huh.
Jack: Tell me who are you, where'd you come from and how did you get here?
Neal: I'm not your typical interviewee haven't done a thousand flips, haven't done a hundred loans, nothing like that. I'm a technologist and I've had a successful tech career, successful tech exit and I fell into real estate by mistake through my day job. Because part of my day job was to build campuses from scratch. Right? These are mixed use campuses. They were 25 or 30 classrooms, administrative space executive and office space. And I started building them in 2003 for a rapidly expanding company that was a partner in. Not a dot com but a Tech Education Company and started learning a lot of real estate by basically just building stuff. It's highly unusual to have a person that has never had a single family rental go out and build a $5 million campus first. But that's how I started out.
Jack: That's a different approach.
Neal: Yeah.
Jack: Do you mind telling us about the technology background?
Neal: Yeah, so I'm from India. I came to the U.S. in'97 as a network engineer and started teaching a network education and technology company. So we were basically teaching people how to build the Internet, right?
Jack: Right.
Neal: The backbone of the Internet. And the company grew fairly rapidly. I became a partner within the first two or three years, got kicked up to management and as we were growing that company, what we decided to do was we understood the power of real estate and we said rather than being a tenant of someone else's, let's just own our own campuses. And that was a fantastic decision that we made in 2002. And it an added $10, $15 million to our exit in 2013. Uh, and we, we still own that, that land, we kind of leased it to the new owners and it was an incredible decision to make, but it was also a scary one because our landlord General Motors, we were in the General Motors building in Fremont, California. The home of Tesla.
Jack: Mmm Hmm.
Neal: And GM didn't like us because we are a whole bunch of students tromping through the place and messing up their carpets. And so they decided not to extend our lease. They said in nine months you either have to be out or as per our contract we will charge you $10,000 a day overage fees. And so we took on the almost in my mind, insane task of buying a shell building and in nine months constructing it and getting it, getting a permit and moving from the old business to the new ones. I must have set a whole bunch of Guinness book records in those nine months because I think I might've slept for nine hours in nine months. So it was terrifying. But the…
Jack: You were young.
Neal:...learning was incredible. Yeah. It was a good thing. I was in my twenties and I could keep up with it, but by the time I was done, that building itself accelerated our business.
It was a marvelous campus. People loved coming there for education. And within two years we sold it out and now we'd ended up in the situation where the building behind us was, was much more expensive, was bigger, and we didn't have enough money to buy it by ourselves, the business didn't want to spend that much money.
We came up with this idea that we thought at the time was very clever of syndicating. And we didn't know that word by the way until three years later we chopped it up into pieces and we sold it. And the plan was we'll sell it to a bunch of doctors and then we would rent the suites back from them for the business. And we were like, well, we're going to go in and pitch this to a bunch of doctors and out of 10 or 15 there's going to be at least one sucker that's going to like this idea.
And we go to the local hospital and we pitch it to some doctors that we know and there's 10 of them around the table and half an hour later all 10 of them have bought a suite. And internally we're like, wow, we're geniuses. And we figure out six months later that we were idiots because on a $9 million project we should have charged the 5% developer fee. So that's $450,000 that they were expecting to be charged. And they kept asking, is there a developer fee?
And we kept saying, no, we don't know what a developer fee was. So like, no, there's no fees. And it was like, oh my God, no wonder we signed up 10 people. They're just all laughing at our stupidity. But we weren't developers and we wanted to build a building for our business.
Jack: Sure. Sure.
Neal: In my mind it still worked out and 13 years later, those people are all happy. Their building is leased by the company that bought our business in 2013 and we discovered we owned our own suites. So we discovered the power of real estate, especially because the depreciation was awesome for people like us that were earning, you know $300,000 $400,000 a year in two in income. And that really got me into real estate. And then I did the typical thing. I bought 10 single families in California.
I still own those about 10 triplexes in Chicago, sold those horrible demographics. And then they'd send passives syndication myself for awhile. I did 13 of those. And I really got addicted to that because I realized the scale there, the efficiency, there was something that was very attractive to somebody like me that was an executive at a 400 or 500-person company. I, I could see this is a better thing to do, this scale is better. And I got addicted to it.
Jack: And fewer headaches.
Neal: I started teaching it, right? So I'm still a technology executive, but what's nice is I have this huge beautiful campus with classrooms that are empty in the evening. So I opened a meetup group and I go, I'm going to start teaching all this awesome stuff that I'm learning about real estate to anybody who cares to listen. And I thought maybe 10 people will show up to listen to me because of who am I? I'm not a real estate guy, I'm a tech guy. But people actually liked it. They, I think I had a flair for it. People liked it. And before I knew it, that group had exploded. And now is the largest multifamily meetup in the United States. We have 5,000 people. So just sort of went supernova and, and then people started inviting me for podcasts.
I now do one podcast a week and then I, one day I had really, I gravitate towards real estate demographics because what I found was, are really the secret sauce of real estate, the demographics of the area. And people spend so much time looking at the building itself and you know, the backyard, the front yard. The foundation that the roof, they forget about the demographics being what really drives prices both in the future and today.
Jack: Right.
Neal: And, I got fascinated by that and started actually to develop a course. So I developed this course for an online portal called udemy.com.
Jack: Yeah.
Neal: Which now is a very big site. And at any given point of time, Jack, there are 1,000 people enrolled on in this course. It's free. I love giving education away for free. And so, a lot of those people started following me and by the time I sold the company and transitioned to full time, I had a huge following.
And those people became my passives syndication investors. So that led to us growing our portfolio. It's currently at $150 million. We be basically half new construction, half existing projects. We got into Opportunity Zones last year mostly to criticize them and then realized that actually there's some good sides to unexpectedly good things about Opportunity Zone that we hadn't initially discovered. Oh really? And then got into it ourselves once we figured that out.
Jack: Okay. So Grocapitus is a single fund?
Neal: Grocapitus is a single purpose fund.
Jack: A single purpose fund. Okay.
Neal: We do not believe in whether we are doing Opportunity Zones or non-Opportunity Zone projects. We ask investors to invest in individual projects. So we currently have 1,200 accredited investors looking at every project. Many, many hundreds of those that are already invested. And we add about a 100 to 150 investors a month.
Jack: Okay. You talked about unexpected benefits from the Opportunity Zone. And I love your description. You've got into it initially to criticize it. I'd love to hear more about that.
Neal: So and a lot of this is I'm expanding on this stuff that I had discussed up on stage yesterday. I have found from the very beginning that Opportunity Zones, the way people talk about them is the definition of irrational exuberance. I find that, and I'm going to say this from a multifamily perspective cause most people can relate to it, but I think it applies for most areas in, in commercial real estate, building a class A building smack dab in the middle of a Class C area is not bad if you can do it. But then holding onto it for the next eight years throughout you know, downturns in the economy is just about the hardest thing you can imagine doing in real estate.
Because what will happen is that the building will do just fine when it's brand new because everybody wants to live there. So it's a classy area. Most people can actually afford to live there, but there's a few people in that area that can and all those people. You'll gather them and stick them in your apartment and then here's what's going to happen. The next downturn a year or two or three years down the line, those people tend to flee that C area because the jobs tend to move away from C areas. As soon as a recession hits. This happens every single recession, every single market. These are almost immutable laws of real estate that jobs pull away from C areas as soon as the recession begins and then those people are gone. Those very few people that actually could afford to live there.
The prices that you need to make money are gone and so now your little building that was leased up is unleashing itself. Over a year. You're going to end up being negative cashflow and have to basically pull money from your investors to go back and lease it up and then then you're going to be fine until the next downturn and then the same thing will repeat itself. This is really the truth of Opportunity Zones because if it wasn't, why would the federal government give you $100 billion?
Jack: There's a reason why they chose these locations.
Neal: So are taking on an extremely tough job and the tough part is not the building.
Jack: Right.
Neal: The tough part is keeping it field for eight straight years. Assuming you took your two years to build it. And I'm finding that at this conference where there's 1,500 people, there isn't one guy talking about how hard this is.
If it's a hotel it's even harder, right? Because building a hotel smack dab in the middle of an area where you're passing through extremely rough areas with graffiti on one side and smashed windows on the other isn't awesome for business. And that's what all these people here are taking on. And I'm finding that there is not enough conversation about it. So initially when I got into it, I, I was doing a webinar and there were like four or 500 people on there for Opportunity Zones and I basically said, look, I'm going to disappoint you. I think this is, this is theoretically the most awesome opportunity around, but for the most part I'm finding it's horrible. And then I got a lot of flack for that in that particular webinar. But what was nice was there was this guy, his name is Matt Ryan.
Young Guy, lives in the area. And Matt Ryan comes to me and said, I would like to dispute what you just said. I think you're only partly right. And I like to do it using data. And I said, oh my kind of guy to your right. I'm an amateur data scientist. I love data. I spent a huge amount of time talking about data. Many of my webinars are about ranking the best and worst cities in the United States. Right. So recently from my perspective, I declared Shreveport, Louisiana to be the worst city in America to invest in real estate. Right? So I do those kinds of things.
Jack: And now the Shreveport Chamber of Commerce called and asked to have you on the cover of their magazine.
Neal: They have a fatwa [MT1] out on me. So yeah. Yeah. No one was going to insure me any longer. So I say, okay, Matt proved me wrong.
And he did. And he said, there are 8,700 Opportunity Zones and the way you're describing these zones appears to apply to the majority of them, but not all of them. And I said, okay, send me some that you don't think are like that. And he sent me a bunch, he sounded like a whole bunch of them and they all appear to match his description, they all appeared to not even represent or resemble what an Opportunity Zones stands for.
A distressed area, low income, low population growth low pump home price growth. And I was like, okay, I've clearly missed something big. So I went back and started looking at the data. So I randomly picked up a hundred census tracts and had my army in the Philippines basically run demographics on those. And what we found was there were roughly 11% of those did not appear to have demographics that any Opportunity Zone should have.
Jack: There’s one that I drive through every day. When I found out it was an Opportunity Zone l just laughed out loud.
Neal: Your like, what the heck? How could this happen? Right? And so here's the answer. It took me many months of research to find the answer to this, right? There's actually two answers. So one was that in an in a very affluent area, it is possible to have an area that has $70,000 or $80,000 in income, which is great to be an Opportunity Zone if on all four sides, the areas that are joining it are at $100,000
Jack: Oh, it's a delta.
Neal: It's a delta.
Jack: All be darned. I thought it was a raw number.
Neal: It's not a raw number. There is no raw number, right? So, he was like, oh, that makes sense. So, so the now you have a perfectly good area surrounded by even better areas. That's an Opportunity Zone. Well, that's a true opportunity.
How the heck do I not know about this? So I started doing more research. Now I'm like telling my team in the Philippines, clearly there's something huge I've missed here. I need you to go profile 500 of these suckers, right? So they go back and basically they, they go to https://censusreporter.org, or do they go to http://www.city-data.com/ they go to https://www.neighborhoodscout.com/. They're pulling paid and free reports for me and I'm, I'm pouring through all of this data. It's like, oh my God, this thing is a freaking gold mine.
But how come I go to all these conferences? Nobody actually talks about the fact that 10% of them don't represent the distressed nature of these zones. And then how, and some of them made no sense. Some of them, did not have those areas around them that were higher income. And here's what I found.
Some of the states understood that logical capital institutional capital is not going to invest in an area that has $30,000 in income. We are not. Right? You couldn't hold a gun to our head. So, what they did, and this is true, I've actually verified this, is for every 10th or 11th they just sneaked in a B area, right?
And to make sure that they didn't get accused later of doing something wrong on that one area. Instead of using 2017 census data, they use 2010 data and by doing so in 2010 everything look bad. Right? I mean it was the end of the world in 2010 and so they were able to designate the corner of Phoenix downtown as an Opportunity Zone by using 2010 data instead of 2017 where everything else in Phoenix was designated using 2017 so it was like clever people.
The Fed should have caught that, but they didn't. So it's too late now. At this point they're already designated. So I was like, I should start to invest and try to find some of these zones because they are insanely profitable basically because I'm not giving anything up. There places that everybody should be building and it's tax free. Right, right. There's no bad news here.
Jack: Pretty good. Pretty good combination.
Neal: Exactly. And so, so then I basically start telling my team, let's start profiling and let's try to figure out if anybody else has actually figured this stuff out. So I start finding companies like InvestReal. I start finding companies like there's this company that I'm representing here today. They're friends of ours now they're in DC and they've got their own profiling system. And GIS planning now has a profiling system.
I am not a data company. I'm not looking to open a data company. I'm just as a power user of data, right? Because I'm a geek. And this stuff is, is awesome for me. I get a hard on from looking at this kind of data.
Jack: I love having a podcast.
Neal: And I'm going, this is, yeah, no, it is. You can see, I can say stuff like this, right? It's not exactly, this isn't network TV. That isn't going to be a bleep.
Jack: There's no FCC censor here.
Neal: That's right. So I'm like, this is great. And so my tone changed on my Opportunity Zone webinars. And there's hundreds of people following and listening and now other people approaching me and saying, oh, I like what you found here. How many of these zones can you find? And I'm like, well, there's so many of them. So I start talking about those zones.
Neal: I start talking about the fact that there's some in Oregon near Hood River with $70,000 in income. There's some in in Provo, half a mile from down downtown Provo that have $65,000 in income. There's even one that's over $100,000 in income. $100,000 in median income is an Opportunity Zone, right? So I look at this and I go, okay, I think, I think I have to get into this.
Jack: Yeah.
Neal: I really think I have to basically start moving into this. And so we've started working on them. And what we found though was so after that, I'm like, okay, well let me attend the conference. Right? That's the next step. So, and that was a total disaster. I show up in Los Angeles at the same conference that this same group put together about three or four months ago. And so I'm like, I want to know how many of these projects are from the good OZs and how many are from OK and bad OZs, right?
I show up at nine o'clock in the morning, I go to the business center and I print a big 8 1/2 by 11 sign that says “I am equity,” right?
Jack: I love that.
Neal: Stick it to my chest and I walk back and forth in the atrium.
Jack: You look like just a relatively normal guy, but there's a little bit of a freak lurking under the surface isn't there.
Neal: I'm a little crazy. Yes. I'm happy being a little crazy, right? So I walk around for four hours in the atrium, never going into the ballroom once because there's all these boring lawyers in there. And I've already done my research. What's nice is all the same boring lawyers that come to these events. Go back and write a blog. I can just read it, right? Or come on my podcast. So I'm walking back and forth and people are pitching me projects and I tell him, I can only give you five minutes.
This is like an elevator pitch, right? After five minutes I'm going to walk away from you and go engage somebody else. And so now I have this big line of people that want to pitch me. And this was like, Oh wow, I feel important. All of a sudden they think that I have hundreds of millions of dollars.
Jack: This is funny. Oh my God, this is great.
Neal: And so they're pitching and a whole bunch of the projects are in Los Angeles and because it's in L.A., but there's projects from all over the U.S. and there's people doing like solar farms and marijuana farms and all kinds of stuff, right? And here's my conclusion and the, I'm going to get flack for saying this. I found in my unique way of measuring these 32 projects, 28 of them were shit. They were just garbage. In my mind, every one of those 28 projects could not have survived if they were not in an Opportunity Zone.
They existed because they were in an Opportunity Zone. Right. And every one of those 28 did say, and this is a token term that I've heard a lot here today, that a project should pencil out independent of being in an Opportunity Zone. This is simultaneously the most popular and the most untrue statement that you're going to hear here. It simply is not true and I can prove that I'm, I'm going to maybe later in this, you know they, I, we can go to get to that. I'm listening to all this stuff going, that's just BS.
I mean this project, you wouldn't be pitching it to me last year if it wasn't an Opportunity Zone, but the good news was out of the 28 projects of the other 32 projects 4 seemed fine. I mean it was like, yeah, they circled projects. I'd love to learn a lot more about these and spend 10 10 or 20 hours underwriting these 4 out of 32 so that's roughly 13% good project ratio, 87% bullshit ratio.
I didn't like that ratio being that high. And I was like, how can I improve my chances? Right? I'd go back and I'm like, well now there'd be know all these good OZs. Right? And, and a lot of those projects were simply in bad Opportunity Zone. Nothing wrong with the project itself.
Jack: It's just the location.
Neal: It's just location, right?
Jack: Just a minor problem with real estate.
Neal: You find there's enough people there with the income to support what you're building. Obviously, you've done a lot of great work on this, doesn't mean you're going to be successful. So now I had this list of good OZs, right? The OZs that have a very strong demographics. And I then have this army of virtual assistants in the Philippines. I basically assign a couple of them and say manually go and find the websites of the cities that these OZs are in.
There's no way to do that in an automated fashion that I'm aware of. Right? So they go and find the sites and they give it to me and I say, okay, now go in these sites and go find the phone number of the economic development officer for these cities. And they do that, and I say, okay, well here's a script. Go and basically call these people with this script basically saying we're extremely developer friendly, non-institutional equity we’re equity without strings and we are looking for local developers that know what they're doing, are not new, and are working on projects that you, the city, likes and underline that last part, you the city likes because we feel that they're less likely to get stuck.
Jack: Obviously
Neal: And, and so we can be a little bit earlier stage with those projects. Then we typically like from a risk perspective and so early on that many of them try to bullshit us and send us silly projects. And then I have the VA call them back and say, no, we mean it has to have a developer attached to it that you like and you have to like this project.
This is a project that you like. So eventually we got better at our pitch and we started receiving projects and what was nice was 40% of those projects were really good. These were good cities. We knew that already cause you know, we'd already done the research and now they were giving us good projects, either part of a city master plan where there's a lot of incentives, not just the federal Opportunity Zone incentive, but internal city level and state level incentives.
And they've got developers. And when we are talking to those developers like holy crap, this developer knows what they're doing. Right? We'd love to work as equity providers with these guys. And so now even improved from 13% you know, rate to 40% rate. Now we were getting somewhere, right? It was really beginning to kind of move along, but not enough cities were responding. So now today we're at the point where we're increasing that outreach because we're finding that the best cities have so much internal demand that they don't want to answer calls from Silicon Valley equity, calling them from 2,000 miles away.
Jack: Right.
Neal: And we are trying other methodologies of actually calling the mayor's office to see if somebody will respond, that sort of thing. And then we're also basically using Costar to call brokers in those markets to look at parcels.
But we always want to develop, we are not interested in being the developer. We want somebody that's the developer there. And so eventually somebody said, look, you should still go to this conference that's happening in Las Vegas. And I was like I don't know if I want to go. But then I got invited to be on a panel and I…
Jack: See, that's how they hook you in.
Neal: And I told him, yeah, I was like, you do realize that I am going to say stuff that people are not going to like? I said five things on that panel and one of them was that the single greatest opportunity in Opportunity Zones is for litigation lawyers. I said that and I did get a huge laugh out of it. And then after that laughter had subsided. I said, “I'm not kidding.” Right. And so people are like, oh he's not really kidding.
I believe that what is really going to happen, based on my data, those 13% of good projects and 87% of projects is that three to four years from now, these developers who really have never gone along for a 10 year ride -- they're always buying, building, selling -- are going to get dragged through the mud by a tenant base that they've never had to deal with previously. And in about three to four years, a significant portion of them will bail on their investors.
Jack: Right.
Neal: And that is going to always end up in a lawsuit. Cause those investors, they were expecting the developers to stay for the 10-year ride. And run the building and do all of that stuff. And now we have a building that we have a ship with no pilot. Yup. And I think there's going to be a lot of this that is going to happen and there's ways to get around this.
But, they're not straight forward ways but why is it that we are the premiere Opportunity Zone conference in the country, and no one says this, shouldn't it be fairly obvious. Developers are not used to holding anything for more than six months and plus every developer here that I see Per Forma assumes that his ramp up in a Class C, the area is going to be at the same speed as his last three projects in the Class A area. How likely is that?
How many people do you think there are in that area that can actually afford the rents you're going to charge? A needle in a haystack means it takes going to take you a lot longer. And I told the OZ organizer, I'm going to say all of this stuff and you know, I'm going to offer solutions. Actually at the conference, we had a white paper on what are the solutions to all these problems because they do have solutions.
You know, you need more due diligence basically.
Jack: Yeah.
Neal: And they were like, oh, that's fine because everybody else on your panel is selling data. You're the only consumer of data. And so I think we need your voice.
Jack: Oh yeah.
Neal: Because you're on the other side because otherwise everybody here a salesperson, right?
Jack: That's exactly right.
Neal: And you're the one buying stuff from these guys. And so, it worked out really well. People really enjoyed it because they were like, we love the fact that you're telling us all this stuff that we're not getting to hear. And one of the statements there that I made was, and I've said this before, is that this whole concept of saying that deals in Opportunity Zones, should pencil out independent of them being Opportunity Zones is theoretically true.
But if you take the last 20 deals that let's say large groups like Fund Rise or Cater have put together already open for investment and received hundreds of millions of dollars and you look at their IRR law, our IRR levels, and compare them to similar groups of similar sizes doing projects last year, you'll notice they’re all lower, I think the truth is projects in Opportunity Zones are likely to have lower IRR than projects in other areas simply because the quality of the area doesn't support the same level of IRR.
Jack: It's the logic is irrefutable.
Neal: But no one says this. Right?
Jack: You know, isn't that interesting, we humans are one of my personal challenges for the year. You and I were talking before we started recording about other personal growth things, but one of my personal growth challenges has been to really see what's in front of my eyes. You know, I have, I've become painfully aware of our ability to only see what we want to see, to not see what's right there, but we don't want to see it. And it's not just me. It's a common human thing.
Neal: And I think it afflicts everybody.
Jack: Oh, it does.
Neal: I recently met an absolutely brilliant woman. Very, very experienced. And she has a project, she's rich. She has investor money. She wanted to build this project for $60 million bucks and she thinks the value is $180 million. And she says, I don't want to take any loans for it. I don't want the hassle. I'm just going to do equity. And I said, even if you could raise $60 million, it's the worst thing that you can do. Because what you're doing is you're creating an inbred project where you're not subjecting your project to the harsh realities that a lender enforces on you, right? These are people that have under it and a thousand projects, including 100 in the city that you're building. And you're basically simply saying, my project is so awesome that I don't need money.
No, what you really need to do is if you, if you have the $60 million and don't want the loan, go through the entire process of getting a loan, get approved for a loan, then invest the $60 million. Now you've made sure that you're not pulling wool over your own eyes. Right? And I think she liked that. She was like, okay, that makes sense. That makes sense. I want to go through that hard process of saying that somebody else agrees with me that, that this project is fully viable. And then if I want, I can invest all equity into it instead of a loan.
Jack: Good stuff, man. This is, this is really enjoyable. I can see why you've, why you drove built the country's biggest multifamily meetup.
Neal: Meetup.
Jack: Yeah. You're just bloody entertaining. I wanna follow up on something we talked about earlier. You're a big fan of Tim Ferris talk about what Tim Ferriss has done for you. What has his stuff has done?
Neal: Well. I used to weigh about 220 pounds, so I'm 175 pounds today. One of the things that he talked about was efficient long-term diets. I'm on a KETO slash low carb diets. So that's been a personal thing where I've dropped 45 pounds in six years thanks to him on a professional side, which has been more profound. His book, the four-hour work week I don't buy into the four-hour work week. I find that I was working 55 hours before. I'm still working about 45 hours now. But what I like was that even if you don't want to work less hours, you can create more time. I frequently tell people I work 200 to 300 hours a day and they say, what does that mean? I mean, nobody can work 200 to 300 hours a day.
And I said, of course you can. You can eventually you can hire my team. My virtual assistant team is in the Philippines. You can eventually hire very high quality people in other countries at a fraction of the price that you pay here. And through a continuous process of training and incentivizing extraordinarily smart actions through money, you can develop them to the point where they're 80% to 90% as good as you and become very trained and actually doing things on your behalf as if you were there. And at that point you can get to 200 hours a day.
And I think that it's taken me six years of training and hiring people in the Philippines to do that. And now I am in that nirvana mode. I'm, our company is, is to one-third U.S. employees, two-thirds Philippines employees. We are in the marvelous position now of having managers in the Philippines who are supervising U.S. non-managerial staff because it made sense.
Wow. Right. I mean, why do they only have to be managed by people in the U.S. are we racially or culturally superior? These are very smart people with 10 or 15 years of experience. They've been at my company longer, they're more senior. They're supervising people in the U.S. and I think that it's working beautifully. I think that it's allowing our company to scale at an incredible level and giving us the flexibility of doing war effort projects. The Opportunity Zone project was a war effort, projects, right?
Jack: Yeah.
Neal: Make thousands of phone calls, research hundreds of Opportunity Zones. We're able to do those kinds of things and create decisive business advantages because we use that methodology. And it is thanks to Tim Ferris. That's cool.
Jack: That's very cool. I watched one of his YouTube videos just here in the last couple of weeks on, on how to be a hyper productive learner. He had, I don’t know, six points or something and it was just, it was very it shone a light on some dark areas of my life where, where I could just be so much better than I am. And I have embraced that kind of improvement. I want to change directions slightly. Here are, there's actually a couple of directions I want to go. We'll start with this one. What are you looking for in in the OZ space right now?
Neal: What we're looking for are developers, hopefully they're listening that have a really good handle on whatever area they're looking in investing in. And they are the sort of people that want to talk to are really the ones that are sick and tired of the chains that institutional equity and family office equity ties you to. And I am known for being blunt. I think that if developers thing that institutional offices and family offices do not tie you in chains. You don't know how to read legal documents. Honestly, you're slightly better off than an indentured servant. When you take money from these people, they are doing nothing wrong. They're being hyper aggressive in protecting their investors.
Jack: Sure.
Neal: But there is no element of fairness when you're taking money from these kinds of institutions. We are unique in that we are true partners with our developers are our structures are designed so that none of those draconian contracts are in there. There's none of that. The “if the project makes less money, you will make nothing at all.” Right. There's none of those “we own you, your children, your grandchildren your nuts aren't in a vice” and none of that stuff. We were very simple and clean. We work for developers also. We try and add value to every project beyond equity cause everybody else, their job is to write you an equity check and then demand these enormous reports every week for the next five or in this case, 10 years.
Jack: Yeah.
Neal: And what we're doing actually is adding value. We have projects where we've made tens of thousands of phone calls from the Philippines on behalf of those operating partners to boost their profits.
And because we find that we have this amazing turnkey infrastructure that can be directed to do everything from reputation management to revenue management, to delinquency management, to selling washer-dryer combos, to selling parking lots to identifying whether there are pets living at a property that are not paying pet rent. And we've done all of these things and we find that we are slightly unique in that. And what we tell our developer partners is we know you'll have control, will come to you, show you some ideas of things that we think can add value to the project. We won't really charge you anything for them.
We might charge a few hundred dollars for our initial cost and we'll run an experiment with you in charge of it and if it works, then we'd like to scale that across the whole project. But still we are only going to charge you cost because we are equity partners and for every dollar of new net operating income that's generated, a good portion is going back into the pockets of our investors. So why charge you anything for it? We're making that money anyway. And at any point, if you feel uncomfortable with it, shut it down. You are in charge. And we've never really, had we been blessed in having operating partners that have never really found that to be a problem. And they've always said, yeah, let's try it out. And we know that some of these will fail and some of them will work. But some of them have been extraordinarily profitable.
Jack: Here's my other completely out of left field question. So, you described yourself as a data nerd. I assume you're using.
Neal: Uber Nerd.
Jack: Uber Nerd.
Neal: Yeah, that's right.
Jack: I assume you're using some sort of machine learning tool.
Neal: It's not so far what I'm finding is that I'm actually lazy in that the world has advanced to the point where not only is data democratized, but artificial intelligence is democratized, right? So there's these billion dollar companies that are making humongous amount of money selling data to banks and institutions and all of those things. But then on the side, they have a consumer product like neighborhoodscout.com that offers 10 times the insight on any neighborhood in the U.S. That was even offered in the 80s by a tool that was $100,000 a year.
Jack: Yeah.
Neal: And so to me, I am, don't think of me as a chef. I'm, I'm just a gourmet. I am gorging myself on these incredible data sources, putting them together for my use, creating custom mashups when necessary and my custom mashups or not some software and a lot of them are just Excel.
The data is so refined when it comes to us that you can immediately start using it. So for Opportunity Zones, we're looking at http://www.city-data.com, https://censusreporter.org/ https://www.neighborhoodscout.com/ we're https://www.housingalerts.com/ https://www.localmarketmonitor.com/, https://www.costar.com/ and a number of other services. So we find if there's one thing that the data industry is not doing well is that big companies like Costar are afraid to hang their hat on conclusions. They'd much rather slap you with five million pieces of data and say, make your own decisions.
Jack: Right.
Neal: Whereas better services like neighborhoods Scout, which are a fraction of what Costar charges are actually giving you data indexes, which in my mind are artificial intelligence, right? I don't want to technically say whether they’re AI or not.
Jack: Right.
Neal: Maybe they're not right. But to me, I think they represent the use of intelligence somewhere. Somebody built an algorithm tested it 2,000 times or 20,000 times and said, you know it works 95% of the time. So instead of just giving you data, I'm going to give you my opinion on what it means. Right?
Jack: Right.
Neal: And I'm so delighted that this stuff is available and I'm even more delighted that 99% of the world doesn't use or doesn't care about these amazing tools, they're groundbreaking world changing tools that nobody gives a damn about. And I'm delighted about that.
Jack: Oh my gosh. I could talk to you all afternoon. Oh, I could listen to you. I guess I've mostly just been laughing at your stories. We're closing in on, yeah, we're at 40 minutes here. I'm having a good time, but I don't want to wear everybody out. Any last words for us before we sign off for the day?
Neal: Yeah. While our primary focus in Opportunity Zones is to look for projects and hopefully developers, if you're listening, please connect with us. We do want investors that share this kind of a data nerd, geek feeling are not put to sleep by this kind of podcast. We'd like to invite you to a very unique education portal. We run a portal called https://multifamilyu.com/.
Now it's not about multifamily. It started out as being a multifamily portal for everything, multifamily, whether it's loans or data or underwriting or property finding projects and you're managing project managers, property managers. But it sort of evolved into an everything commercial real estate, right? We kind of met, went beyond multifamily, never changed the name kept it at https://multifamilyu.com. So now what we do is we do 100 webinars there and 30,000 people sign up for these webinars.
They're always free. We audit the content. So no pitch men are allowed. You never see something like in the next 20 minutes blah, blah blah. So those kinds of things that are disallowed. The content has to be deep. The webinars are often longer than a typical webinar. They might be an hour and a half long, a half an hour of questions because people are really enjoying them. And I think that there's so much incredible learning there because we've been really differentiated ourselves as there has to be meat and potatoes in every event right there and there should be a little bit of gravy there as well.
We want something that is so tangible and immediately actionable that people walk away saying this was a great use of my 60 or 90 minutes. So if you like that kind of a content with no sales pitch, try out https://multifamilyu.com/ I think you'll like our events, especially the one that most people adore is one called real estate trends 2019 we update that every quarter and we basically fly you across the U.S. state-by-state telling you really what's going on and the fact that America is splitting into two there, the cold states are basically losing to the smile of the United States.
Neal: Most of these are sun belt state. And, and why is that happening and how quickly is it happening in which states are avoiding that rain? Uh, and which states are really getting decimated, right? You know, Connecticut is a state where expensive homes are now empty and nobody seems to be buying them and people are still scratching their heads, that the state's losing people and there's none of this stuff is really getting the press that it needs to. And I'm happy about that. But I don't mind. Out of the 320 million people that live in the U.S. For my audience of 25,000 to know this incredible information. And you don't ever have to talk with us. I think our webinars are designed to create “aha” moments that you can run with for the rest of your life without ever calling us.
Jack: I have to ask the question, does your facility with this educational stuff that you've done is, does that come directly out of the work that you did back at the educational company?
Neal: Yes, it does. So that was degree granting education and what we found was from going to all these webinars that talk about cognition and talk about making sure that education is entertaining first. You can't educate if you don't entertain first. And so, we learned that, and we learned about basically preventing death by PowerPoint and things like that. And, and I think it comes across in all of our events and even our partner events because we're not above editing out anything that seems to be just boring. It's like, there's no insights here. This is just a piece of data, please remove it. Right. And they're like, but it's important. It's important to who? Nobody's going to remember this stuff because it's just pages and pages of PowerPoint, just remove it. So I think that definitely does come from our degree granting education background.
When you're creating online degree granting courses, you have to be very careful in not putting people to sleep.
Jack: Yeah, absolutely.
Neal: And so that comes across, but our vision is simply similar to Google. I mean Google gives Gmail away. Gmail is truly free. In our case, we're giving away products to 25,000 people a year that we have no way of monetizing unless they come to us. The good news is roughly 3% of them like our approach are okay with the fact that we're total data nerds and want to invest with us and that's all we need.
Jack: Yeah.
Neal: And good luck to the other 97% we get every once in awhile I get a thank you email from somebody who's seen my “you to me” course on udemy.com/real focus and like, this is, this was amazing. Changed my outlook on real estate and that's it. I mean I just say thank you and we never hear from that person again, but it's okay because there's hundreds and hundreds of other people that approach matters.
Jack: This is great.
Neal: Right. And, and I think that there's a business model there. I think it's a scalable business model and we've been able to grow it so we don't feel the pressure to ever do a sales pitch.
Jack: This may be the easiest podcast I've done yet.
Neal: Okay. That's good.
Jack: That's to be like, I feel like I just kinda, I just kinda tossed you the ball and you took it and entertained for, we're at 46 minutes and 30 seconds right now. This is, this has been spectacular. Neal. Thank you so much Neal Bawa of… pronounce it for me.
Neal: Grocapitus
Jack: Grocapitus. Neal, Bawa Grocapitus thank you for being with us. I am Jack Heald for the OZExpo Podcast. I want to thank you for listening to us. Please be sure to subscribe so you get notified when there's a new episode and we will talk to you next time.
Announcer: This podcast is for informational purposes only and does not constitute legal tax or investment advice. For specific recommendations, please consult with your financial, legal, or tax professional.
Jack: Well, welcome back everyone to the OZExpo Podcast. I'm your host Jack Heald. Joining me for this episode of the podcast is Neal Bawa who is the founder and CEO of Grocapitus a series of names that I really like. Welcome Neal. It's good to have you on the show.
Neal: Thanks for having me on the show, Jack.
Jack: Let's start with just the “get to know you” questions. I like to know who these people are I'm talking to and where they came from.
Neal: Uh huh.
Jack: Tell me who are you, where'd you come from and how did you get here?
Neal: I'm not your typical interviewee haven't done a thousand flips, haven't done a hundred loans, nothing like that. I'm a technologist and I've had a successful tech career, successful tech exit and I fell into real estate by mistake through my day job. Because part of my day job was to build campuses from scratch. Right? These are mixed use campuses. They were 25 or 30 classrooms, administrative space executive and office space. And I started building them in 2003 for a rapidly expanding company that was a partner in. Not a dot com but a Tech Education Company and started learning a lot of real estate by basically just building stuff. It's highly unusual to have a person that has never had a single family rental go out and build a $5 million campus first. But that's how I started out.
Jack: That's a different approach.
Neal: Yeah.
Jack: Do you mind telling us about the technology background?
Neal: Yeah, so I'm from India. I came to the U.S. in'97 as a network engineer and started teaching a network education and technology company. So we were basically teaching people how to build the Internet, right?
Jack: Right.
Neal: The backbone of the Internet. And the company grew fairly rapidly. I became a partner within the first two or three years, got kicked up to management and as we were growing that company, what we decided to do was we understood the power of real estate and we said rather than being a tenant of someone else's, let's just own our own campuses. And that was a fantastic decision that we made in 2002. And it an added $10, $15 million to our exit in 2013. Uh, and we, we still own that, that land, we kind of leased it to the new owners and it was an incredible decision to make, but it was also a scary one because our landlord General Motors, we were in the General Motors building in Fremont, California. The home of Tesla.
Jack: Mmm Hmm.
Neal: And GM didn't like us because we are a whole bunch of students tromping through the place and messing up their carpets. And so they decided not to extend our lease. They said in nine months you either have to be out or as per our contract we will charge you $10,000 a day overage fees. And so we took on the almost in my mind, insane task of buying a shell building and in nine months constructing it and getting it, getting a permit and moving from the old business to the new ones. I must have set a whole bunch of Guinness book records in those nine months because I think I might've slept for nine hours in nine months. So it was terrifying. But the…
Jack: You were young.
Neal:...learning was incredible. Yeah. It was a good thing. I was in my twenties and I could keep up with it, but by the time I was done, that building itself accelerated our business.
It was a marvelous campus. People loved coming there for education. And within two years we sold it out and now we'd ended up in the situation where the building behind us was, was much more expensive, was bigger, and we didn't have enough money to buy it by ourselves, the business didn't want to spend that much money.
We came up with this idea that we thought at the time was very clever of syndicating. And we didn't know that word by the way until three years later we chopped it up into pieces and we sold it. And the plan was we'll sell it to a bunch of doctors and then we would rent the suites back from them for the business. And we were like, well, we're going to go in and pitch this to a bunch of doctors and out of 10 or 15 there's going to be at least one sucker that's going to like this idea.
And we go to the local hospital and we pitch it to some doctors that we know and there's 10 of them around the table and half an hour later all 10 of them have bought a suite. And internally we're like, wow, we're geniuses. And we figure out six months later that we were idiots because on a $9 million project we should have charged the 5% developer fee. So that's $450,000 that they were expecting to be charged. And they kept asking, is there a developer fee?
And we kept saying, no, we don't know what a developer fee was. So like, no, there's no fees. And it was like, oh my God, no wonder we signed up 10 people. They're just all laughing at our stupidity. But we weren't developers and we wanted to build a building for our business.
Jack: Sure. Sure.
Neal: In my mind it still worked out and 13 years later, those people are all happy. Their building is leased by the company that bought our business in 2013 and we discovered we owned our own suites. So we discovered the power of real estate, especially because the depreciation was awesome for people like us that were earning, you know $300,000 $400,000 a year in two in income. And that really got me into real estate. And then I did the typical thing. I bought 10 single families in California.
I still own those about 10 triplexes in Chicago, sold those horrible demographics. And then they'd send passives syndication myself for awhile. I did 13 of those. And I really got addicted to that because I realized the scale there, the efficiency, there was something that was very attractive to somebody like me that was an executive at a 400 or 500-person company. I, I could see this is a better thing to do, this scale is better. And I got addicted to it.
Jack: And fewer headaches.
Neal: I started teaching it, right? So I'm still a technology executive, but what's nice is I have this huge beautiful campus with classrooms that are empty in the evening. So I opened a meetup group and I go, I'm going to start teaching all this awesome stuff that I'm learning about real estate to anybody who cares to listen. And I thought maybe 10 people will show up to listen to me because of who am I? I'm not a real estate guy, I'm a tech guy. But people actually liked it. They, I think I had a flair for it. People liked it. And before I knew it, that group had exploded. And now is the largest multifamily meetup in the United States. We have 5,000 people. So just sort of went supernova and, and then people started inviting me for podcasts.
I now do one podcast a week and then I, one day I had really, I gravitate towards real estate demographics because what I found was, are really the secret sauce of real estate, the demographics of the area. And people spend so much time looking at the building itself and you know, the backyard, the front yard. The foundation that the roof, they forget about the demographics being what really drives prices both in the future and today.
Jack: Right.
Neal: And, I got fascinated by that and started actually to develop a course. So I developed this course for an online portal called udemy.com.
Jack: Yeah.
Neal: Which now is a very big site. And at any given point of time, Jack, there are 1,000 people enrolled on in this course. It's free. I love giving education away for free. And so, a lot of those people started following me and by the time I sold the company and transitioned to full time, I had a huge following.
And those people became my passives syndication investors. So that led to us growing our portfolio. It's currently at $150 million. We be basically half new construction, half existing projects. We got into Opportunity Zones last year mostly to criticize them and then realized that actually there's some good sides to unexpectedly good things about Opportunity Zone that we hadn't initially discovered. Oh really? And then got into it ourselves once we figured that out.
Jack: Okay. So Grocapitus is a single fund?
Neal: Grocapitus is a single purpose fund.
Jack: A single purpose fund. Okay.
Neal: We do not believe in whether we are doing Opportunity Zones or non-Opportunity Zone projects. We ask investors to invest in individual projects. So we currently have 1,200 accredited investors looking at every project. Many, many hundreds of those that are already invested. And we add about a 100 to 150 investors a month.
Jack: Okay. You talked about unexpected benefits from the Opportunity Zone. And I love your description. You've got into it initially to criticize it. I'd love to hear more about that.
Neal: So and a lot of this is I'm expanding on this stuff that I had discussed up on stage yesterday. I have found from the very beginning that Opportunity Zones, the way people talk about them is the definition of irrational exuberance. I find that, and I'm going to say this from a multifamily perspective cause most people can relate to it, but I think it applies for most areas in, in commercial real estate, building a class A building smack dab in the middle of a Class C area is not bad if you can do it. But then holding onto it for the next eight years throughout you know, downturns in the economy is just about the hardest thing you can imagine doing in real estate.
Because what will happen is that the building will do just fine when it's brand new because everybody wants to live there. So it's a classy area. Most people can actually afford to live there, but there's a few people in that area that can and all those people. You'll gather them and stick them in your apartment and then here's what's going to happen. The next downturn a year or two or three years down the line, those people tend to flee that C area because the jobs tend to move away from C areas. As soon as a recession hits. This happens every single recession, every single market. These are almost immutable laws of real estate that jobs pull away from C areas as soon as the recession begins and then those people are gone. Those very few people that actually could afford to live there.
The prices that you need to make money are gone and so now your little building that was leased up is unleashing itself. Over a year. You're going to end up being negative cashflow and have to basically pull money from your investors to go back and lease it up and then then you're going to be fine until the next downturn and then the same thing will repeat itself. This is really the truth of Opportunity Zones because if it wasn't, why would the federal government give you $100 billion?
Jack: There's a reason why they chose these locations.
Neal: So are taking on an extremely tough job and the tough part is not the building.
Jack: Right.
Neal: The tough part is keeping it field for eight straight years. Assuming you took your two years to build it. And I'm finding that at this conference where there's 1,500 people, there isn't one guy talking about how hard this is.
If it's a hotel it's even harder, right? Because building a hotel smack dab in the middle of an area where you're passing through extremely rough areas with graffiti on one side and smashed windows on the other isn't awesome for business. And that's what all these people here are taking on. And I'm finding that there is not enough conversation about it. So initially when I got into it, I, I was doing a webinar and there were like four or 500 people on there for Opportunity Zones and I basically said, look, I'm going to disappoint you. I think this is, this is theoretically the most awesome opportunity around, but for the most part I'm finding it's horrible. And then I got a lot of flack for that in that particular webinar. But what was nice was there was this guy, his name is Matt Ryan.
Young Guy, lives in the area. And Matt Ryan comes to me and said, I would like to dispute what you just said. I think you're only partly right. And I like to do it using data. And I said, oh my kind of guy to your right. I'm an amateur data scientist. I love data. I spent a huge amount of time talking about data. Many of my webinars are about ranking the best and worst cities in the United States. Right. So recently from my perspective, I declared Shreveport, Louisiana to be the worst city in America to invest in real estate. Right? So I do those kinds of things.
Jack: And now the Shreveport Chamber of Commerce called and asked to have you on the cover of their magazine.
Neal: They have a fatwa [MT1] out on me. So yeah. Yeah. No one was going to insure me any longer. So I say, okay, Matt proved me wrong.
And he did. And he said, there are 8,700 Opportunity Zones and the way you're describing these zones appears to apply to the majority of them, but not all of them. And I said, okay, send me some that you don't think are like that. And he sent me a bunch, he sounded like a whole bunch of them and they all appear to match his description, they all appeared to not even represent or resemble what an Opportunity Zones stands for.
A distressed area, low income, low population growth low pump home price growth. And I was like, okay, I've clearly missed something big. So I went back and started looking at the data. So I randomly picked up a hundred census tracts and had my army in the Philippines basically run demographics on those. And what we found was there were roughly 11% of those did not appear to have demographics that any Opportunity Zone should have.
Jack: There’s one that I drive through every day. When I found out it was an Opportunity Zone l just laughed out loud.
Neal: Your like, what the heck? How could this happen? Right? And so here's the answer. It took me many months of research to find the answer to this, right? There's actually two answers. So one was that in an in a very affluent area, it is possible to have an area that has $70,000 or $80,000 in income, which is great to be an Opportunity Zone if on all four sides, the areas that are joining it are at $100,000
Jack: Oh, it's a delta.
Neal: It's a delta.
Jack: All be darned. I thought it was a raw number.
Neal: It's not a raw number. There is no raw number, right? So, he was like, oh, that makes sense. So, so the now you have a perfectly good area surrounded by even better areas. That's an Opportunity Zone. Well, that's a true opportunity.
How the heck do I not know about this? So I started doing more research. Now I'm like telling my team in the Philippines, clearly there's something huge I've missed here. I need you to go profile 500 of these suckers, right? So they go back and basically they, they go to https://censusreporter.org, or do they go to http://www.city-data.com/ they go to https://www.neighborhoodscout.com/. They're pulling paid and free reports for me and I'm, I'm pouring through all of this data. It's like, oh my God, this thing is a freaking gold mine.
But how come I go to all these conferences? Nobody actually talks about the fact that 10% of them don't represent the distressed nature of these zones. And then how, and some of them made no sense. Some of them, did not have those areas around them that were higher income. And here's what I found.
Some of the states understood that logical capital institutional capital is not going to invest in an area that has $30,000 in income. We are not. Right? You couldn't hold a gun to our head. So, what they did, and this is true, I've actually verified this, is for every 10th or 11th they just sneaked in a B area, right?
And to make sure that they didn't get accused later of doing something wrong on that one area. Instead of using 2017 census data, they use 2010 data and by doing so in 2010 everything look bad. Right? I mean it was the end of the world in 2010 and so they were able to designate the corner of Phoenix downtown as an Opportunity Zone by using 2010 data instead of 2017 where everything else in Phoenix was designated using 2017 so it was like clever people.
The Fed should have caught that, but they didn't. So it's too late now. At this point they're already designated. So I was like, I should start to invest and try to find some of these zones because they are insanely profitable basically because I'm not giving anything up. There places that everybody should be building and it's tax free. Right, right. There's no bad news here.
Jack: Pretty good. Pretty good combination.
Neal: Exactly. And so, so then I basically start telling my team, let's start profiling and let's try to figure out if anybody else has actually figured this stuff out. So I start finding companies like InvestReal. I start finding companies like there's this company that I'm representing here today. They're friends of ours now they're in DC and they've got their own profiling system. And GIS planning now has a profiling system.
I am not a data company. I'm not looking to open a data company. I'm just as a power user of data, right? Because I'm a geek. And this stuff is, is awesome for me. I get a hard on from looking at this kind of data.
Jack: I love having a podcast.
Neal: And I'm going, this is, yeah, no, it is. You can see, I can say stuff like this, right? It's not exactly, this isn't network TV. That isn't going to be a bleep.
Jack: There's no FCC censor here.
Neal: That's right. So I'm like, this is great. And so my tone changed on my Opportunity Zone webinars. And there's hundreds of people following and listening and now other people approaching me and saying, oh, I like what you found here. How many of these zones can you find? And I'm like, well, there's so many of them. So I start talking about those zones.
Neal: I start talking about the fact that there's some in Oregon near Hood River with $70,000 in income. There's some in in Provo, half a mile from down downtown Provo that have $65,000 in income. There's even one that's over $100,000 in income. $100,000 in median income is an Opportunity Zone, right? So I look at this and I go, okay, I think, I think I have to get into this.
Jack: Yeah.
Neal: I really think I have to basically start moving into this. And so we've started working on them. And what we found though was so after that, I'm like, okay, well let me attend the conference. Right? That's the next step. So, and that was a total disaster. I show up in Los Angeles at the same conference that this same group put together about three or four months ago. And so I'm like, I want to know how many of these projects are from the good OZs and how many are from OK and bad OZs, right?
I show up at nine o'clock in the morning, I go to the business center and I print a big 8 1/2 by 11 sign that says “I am equity,” right?
Jack: I love that.
Neal: Stick it to my chest and I walk back and forth in the atrium.
Jack: You look like just a relatively normal guy, but there's a little bit of a freak lurking under the surface isn't there.
Neal: I'm a little crazy. Yes. I'm happy being a little crazy, right? So I walk around for four hours in the atrium, never going into the ballroom once because there's all these boring lawyers in there. And I've already done my research. What's nice is all the same boring lawyers that come to these events. Go back and write a blog. I can just read it, right? Or come on my podcast. So I'm walking back and forth and people are pitching me projects and I tell him, I can only give you five minutes.
This is like an elevator pitch, right? After five minutes I'm going to walk away from you and go engage somebody else. And so now I have this big line of people that want to pitch me. And this was like, Oh wow, I feel important. All of a sudden they think that I have hundreds of millions of dollars.
Jack: This is funny. Oh my God, this is great.
Neal: And so they're pitching and a whole bunch of the projects are in Los Angeles and because it's in L.A., but there's projects from all over the U.S. and there's people doing like solar farms and marijuana farms and all kinds of stuff, right? And here's my conclusion and the, I'm going to get flack for saying this. I found in my unique way of measuring these 32 projects, 28 of them were shit. They were just garbage. In my mind, every one of those 28 projects could not have survived if they were not in an Opportunity Zone.
They existed because they were in an Opportunity Zone. Right. And every one of those 28 did say, and this is a token term that I've heard a lot here today, that a project should pencil out independent of being in an Opportunity Zone. This is simultaneously the most popular and the most untrue statement that you're going to hear here. It simply is not true and I can prove that I'm, I'm going to maybe later in this, you know they, I, we can go to get to that. I'm listening to all this stuff going, that's just BS.
I mean this project, you wouldn't be pitching it to me last year if it wasn't an Opportunity Zone, but the good news was out of the 28 projects of the other 32 projects 4 seemed fine. I mean it was like, yeah, they circled projects. I'd love to learn a lot more about these and spend 10 10 or 20 hours underwriting these 4 out of 32 so that's roughly 13% good project ratio, 87% bullshit ratio.
I didn't like that ratio being that high. And I was like, how can I improve my chances? Right? I'd go back and I'm like, well now there'd be know all these good OZs. Right? And, and a lot of those projects were simply in bad Opportunity Zone. Nothing wrong with the project itself.
Jack: It's just the location.
Neal: It's just location, right?
Jack: Just a minor problem with real estate.
Neal: You find there's enough people there with the income to support what you're building. Obviously, you've done a lot of great work on this, doesn't mean you're going to be successful. So now I had this list of good OZs, right? The OZs that have a very strong demographics. And I then have this army of virtual assistants in the Philippines. I basically assign a couple of them and say manually go and find the websites of the cities that these OZs are in.
There's no way to do that in an automated fashion that I'm aware of. Right? So they go and find the sites and they give it to me and I say, okay, now go in these sites and go find the phone number of the economic development officer for these cities. And they do that, and I say, okay, well here's a script. Go and basically call these people with this script basically saying we're extremely developer friendly, non-institutional equity we’re equity without strings and we are looking for local developers that know what they're doing, are not new, and are working on projects that you, the city, likes and underline that last part, you the city likes because we feel that they're less likely to get stuck.
Jack: Obviously
Neal: And, and so we can be a little bit earlier stage with those projects. Then we typically like from a risk perspective and so early on that many of them try to bullshit us and send us silly projects. And then I have the VA call them back and say, no, we mean it has to have a developer attached to it that you like and you have to like this project.
This is a project that you like. So eventually we got better at our pitch and we started receiving projects and what was nice was 40% of those projects were really good. These were good cities. We knew that already cause you know, we'd already done the research and now they were giving us good projects, either part of a city master plan where there's a lot of incentives, not just the federal Opportunity Zone incentive, but internal city level and state level incentives.
And they've got developers. And when we are talking to those developers like holy crap, this developer knows what they're doing. Right? We'd love to work as equity providers with these guys. And so now even improved from 13% you know, rate to 40% rate. Now we were getting somewhere, right? It was really beginning to kind of move along, but not enough cities were responding. So now today we're at the point where we're increasing that outreach because we're finding that the best cities have so much internal demand that they don't want to answer calls from Silicon Valley equity, calling them from 2,000 miles away.
Jack: Right.
Neal: And we are trying other methodologies of actually calling the mayor's office to see if somebody will respond, that sort of thing. And then we're also basically using Costar to call brokers in those markets to look at parcels.
But we always want to develop, we are not interested in being the developer. We want somebody that's the developer there. And so eventually somebody said, look, you should still go to this conference that's happening in Las Vegas. And I was like I don't know if I want to go. But then I got invited to be on a panel and I…
Jack: See, that's how they hook you in.
Neal: And I told him, yeah, I was like, you do realize that I am going to say stuff that people are not going to like? I said five things on that panel and one of them was that the single greatest opportunity in Opportunity Zones is for litigation lawyers. I said that and I did get a huge laugh out of it. And then after that laughter had subsided. I said, “I'm not kidding.” Right. And so people are like, oh he's not really kidding.
I believe that what is really going to happen, based on my data, those 13% of good projects and 87% of projects is that three to four years from now, these developers who really have never gone along for a 10 year ride -- they're always buying, building, selling -- are going to get dragged through the mud by a tenant base that they've never had to deal with previously. And in about three to four years, a significant portion of them will bail on their investors.
Jack: Right.
Neal: And that is going to always end up in a lawsuit. Cause those investors, they were expecting the developers to stay for the 10-year ride. And run the building and do all of that stuff. And now we have a building that we have a ship with no pilot. Yup. And I think there's going to be a lot of this that is going to happen and there's ways to get around this.
But, they're not straight forward ways but why is it that we are the premiere Opportunity Zone conference in the country, and no one says this, shouldn't it be fairly obvious. Developers are not used to holding anything for more than six months and plus every developer here that I see Per Forma assumes that his ramp up in a Class C, the area is going to be at the same speed as his last three projects in the Class A area. How likely is that?
How many people do you think there are in that area that can actually afford the rents you're going to charge? A needle in a haystack means it takes going to take you a lot longer. And I told the OZ organizer, I'm going to say all of this stuff and you know, I'm going to offer solutions. Actually at the conference, we had a white paper on what are the solutions to all these problems because they do have solutions.
You know, you need more due diligence basically.
Jack: Yeah.
Neal: And they were like, oh, that's fine because everybody else on your panel is selling data. You're the only consumer of data. And so I think we need your voice.
Jack: Oh yeah.
Neal: Because you're on the other side because otherwise everybody here a salesperson, right?
Jack: That's exactly right.
Neal: And you're the one buying stuff from these guys. And so, it worked out really well. People really enjoyed it because they were like, we love the fact that you're telling us all this stuff that we're not getting to hear. And one of the statements there that I made was, and I've said this before, is that this whole concept of saying that deals in Opportunity Zones, should pencil out independent of them being Opportunity Zones is theoretically true.
But if you take the last 20 deals that let's say large groups like Fund Rise or Cater have put together already open for investment and received hundreds of millions of dollars and you look at their IRR law, our IRR levels, and compare them to similar groups of similar sizes doing projects last year, you'll notice they’re all lower, I think the truth is projects in Opportunity Zones are likely to have lower IRR than projects in other areas simply because the quality of the area doesn't support the same level of IRR.
Jack: It's the logic is irrefutable.
Neal: But no one says this. Right?
Jack: You know, isn't that interesting, we humans are one of my personal challenges for the year. You and I were talking before we started recording about other personal growth things, but one of my personal growth challenges has been to really see what's in front of my eyes. You know, I have, I've become painfully aware of our ability to only see what we want to see, to not see what's right there, but we don't want to see it. And it's not just me. It's a common human thing.
Neal: And I think it afflicts everybody.
Jack: Oh, it does.
Neal: I recently met an absolutely brilliant woman. Very, very experienced. And she has a project, she's rich. She has investor money. She wanted to build this project for $60 million bucks and she thinks the value is $180 million. And she says, I don't want to take any loans for it. I don't want the hassle. I'm just going to do equity. And I said, even if you could raise $60 million, it's the worst thing that you can do. Because what you're doing is you're creating an inbred project where you're not subjecting your project to the harsh realities that a lender enforces on you, right? These are people that have under it and a thousand projects, including 100 in the city that you're building. And you're basically simply saying, my project is so awesome that I don't need money.
No, what you really need to do is if you, if you have the $60 million and don't want the loan, go through the entire process of getting a loan, get approved for a loan, then invest the $60 million. Now you've made sure that you're not pulling wool over your own eyes. Right? And I think she liked that. She was like, okay, that makes sense. That makes sense. I want to go through that hard process of saying that somebody else agrees with me that, that this project is fully viable. And then if I want, I can invest all equity into it instead of a loan.
Jack: Good stuff, man. This is, this is really enjoyable. I can see why you've, why you drove built the country's biggest multifamily meetup.
Neal: Meetup.
Jack: Yeah. You're just bloody entertaining. I wanna follow up on something we talked about earlier. You're a big fan of Tim Ferris talk about what Tim Ferriss has done for you. What has his stuff has done?
Neal: Well. I used to weigh about 220 pounds, so I'm 175 pounds today. One of the things that he talked about was efficient long-term diets. I'm on a KETO slash low carb diets. So that's been a personal thing where I've dropped 45 pounds in six years thanks to him on a professional side, which has been more profound. His book, the four-hour work week I don't buy into the four-hour work week. I find that I was working 55 hours before. I'm still working about 45 hours now. But what I like was that even if you don't want to work less hours, you can create more time. I frequently tell people I work 200 to 300 hours a day and they say, what does that mean? I mean, nobody can work 200 to 300 hours a day.
And I said, of course you can. You can eventually you can hire my team. My virtual assistant team is in the Philippines. You can eventually hire very high quality people in other countries at a fraction of the price that you pay here. And through a continuous process of training and incentivizing extraordinarily smart actions through money, you can develop them to the point where they're 80% to 90% as good as you and become very trained and actually doing things on your behalf as if you were there. And at that point you can get to 200 hours a day.
And I think that it's taken me six years of training and hiring people in the Philippines to do that. And now I am in that nirvana mode. I'm, our company is, is to one-third U.S. employees, two-thirds Philippines employees. We are in the marvelous position now of having managers in the Philippines who are supervising U.S. non-managerial staff because it made sense.
Wow. Right. I mean, why do they only have to be managed by people in the U.S. are we racially or culturally superior? These are very smart people with 10 or 15 years of experience. They've been at my company longer, they're more senior. They're supervising people in the U.S. and I think that it's working beautifully. I think that it's allowing our company to scale at an incredible level and giving us the flexibility of doing war effort projects. The Opportunity Zone project was a war effort, projects, right?
Jack: Yeah.
Neal: Make thousands of phone calls, research hundreds of Opportunity Zones. We're able to do those kinds of things and create decisive business advantages because we use that methodology. And it is thanks to Tim Ferris. That's cool.
Jack: That's very cool. I watched one of his YouTube videos just here in the last couple of weeks on, on how to be a hyper productive learner. He had, I don’t know, six points or something and it was just, it was very it shone a light on some dark areas of my life where, where I could just be so much better than I am. And I have embraced that kind of improvement. I want to change directions slightly. Here are, there's actually a couple of directions I want to go. We'll start with this one. What are you looking for in in the OZ space right now?
Neal: What we're looking for are developers, hopefully they're listening that have a really good handle on whatever area they're looking in investing in. And they are the sort of people that want to talk to are really the ones that are sick and tired of the chains that institutional equity and family office equity ties you to. And I am known for being blunt. I think that if developers thing that institutional offices and family offices do not tie you in chains. You don't know how to read legal documents. Honestly, you're slightly better off than an indentured servant. When you take money from these people, they are doing nothing wrong. They're being hyper aggressive in protecting their investors.
Jack: Sure.
Neal: But there is no element of fairness when you're taking money from these kinds of institutions. We are unique in that we are true partners with our developers are our structures are designed so that none of those draconian contracts are in there. There's none of that. The “if the project makes less money, you will make nothing at all.” Right. There's none of those “we own you, your children, your grandchildren your nuts aren't in a vice” and none of that stuff. We were very simple and clean. We work for developers also. We try and add value to every project beyond equity cause everybody else, their job is to write you an equity check and then demand these enormous reports every week for the next five or in this case, 10 years.
Jack: Yeah.
Neal: And what we're doing actually is adding value. We have projects where we've made tens of thousands of phone calls from the Philippines on behalf of those operating partners to boost their profits.
And because we find that we have this amazing turnkey infrastructure that can be directed to do everything from reputation management to revenue management, to delinquency management, to selling washer-dryer combos, to selling parking lots to identifying whether there are pets living at a property that are not paying pet rent. And we've done all of these things and we find that we are slightly unique in that. And what we tell our developer partners is we know you'll have control, will come to you, show you some ideas of things that we think can add value to the project. We won't really charge you anything for them.
We might charge a few hundred dollars for our initial cost and we'll run an experiment with you in charge of it and if it works, then we'd like to scale that across the whole project. But still we are only going to charge you cost because we are equity partners and for every dollar of new net operating income that's generated, a good portion is going back into the pockets of our investors. So why charge you anything for it? We're making that money anyway. And at any point, if you feel uncomfortable with it, shut it down. You are in charge. And we've never really, had we been blessed in having operating partners that have never really found that to be a problem. And they've always said, yeah, let's try it out. And we know that some of these will fail and some of them will work. But some of them have been extraordinarily profitable.
Jack: Here's my other completely out of left field question. So, you described yourself as a data nerd. I assume you're using.
Neal: Uber Nerd.
Jack: Uber Nerd.
Neal: Yeah, that's right.
Jack: I assume you're using some sort of machine learning tool.
Neal: It's not so far what I'm finding is that I'm actually lazy in that the world has advanced to the point where not only is data democratized, but artificial intelligence is democratized, right? So there's these billion dollar companies that are making humongous amount of money selling data to banks and institutions and all of those things. But then on the side, they have a consumer product like neighborhoodscout.com that offers 10 times the insight on any neighborhood in the U.S. That was even offered in the 80s by a tool that was $100,000 a year.
Jack: Yeah.
Neal: And so to me, I am, don't think of me as a chef. I'm, I'm just a gourmet. I am gorging myself on these incredible data sources, putting them together for my use, creating custom mashups when necessary and my custom mashups or not some software and a lot of them are just Excel.
The data is so refined when it comes to us that you can immediately start using it. So for Opportunity Zones, we're looking at http://www.city-data.com, https://censusreporter.org/ https://www.neighborhoodscout.com/ we're https://www.housingalerts.com/ https://www.localmarketmonitor.com/, https://www.costar.com/ and a number of other services. So we find if there's one thing that the data industry is not doing well is that big companies like Costar are afraid to hang their hat on conclusions. They'd much rather slap you with five million pieces of data and say, make your own decisions.
Jack: Right.
Neal: Whereas better services like neighborhoods Scout, which are a fraction of what Costar charges are actually giving you data indexes, which in my mind are artificial intelligence, right? I don't want to technically say whether they’re AI or not.
Jack: Right.
Neal: Maybe they're not right. But to me, I think they represent the use of intelligence somewhere. Somebody built an algorithm tested it 2,000 times or 20,000 times and said, you know it works 95% of the time. So instead of just giving you data, I'm going to give you my opinion on what it means. Right?
Jack: Right.
Neal: And I'm so delighted that this stuff is available and I'm even more delighted that 99% of the world doesn't use or doesn't care about these amazing tools, they're groundbreaking world changing tools that nobody gives a damn about. And I'm delighted about that.
Jack: Oh my gosh. I could talk to you all afternoon. Oh, I could listen to you. I guess I've mostly just been laughing at your stories. We're closing in on, yeah, we're at 40 minutes here. I'm having a good time, but I don't want to wear everybody out. Any last words for us before we sign off for the day?
Neal: Yeah. While our primary focus in Opportunity Zones is to look for projects and hopefully developers, if you're listening, please connect with us. We do want investors that share this kind of a data nerd, geek feeling are not put to sleep by this kind of podcast. We'd like to invite you to a very unique education portal. We run a portal called https://multifamilyu.com/.
Now it's not about multifamily. It started out as being a multifamily portal for everything, multifamily, whether it's loans or data or underwriting or property finding projects and you're managing project managers, property managers. But it sort of evolved into an everything commercial real estate, right? We kind of met, went beyond multifamily, never changed the name kept it at https://multifamilyu.com. So now what we do is we do 100 webinars there and 30,000 people sign up for these webinars.
They're always free. We audit the content. So no pitch men are allowed. You never see something like in the next 20 minutes blah, blah blah. So those kinds of things that are disallowed. The content has to be deep. The webinars are often longer than a typical webinar. They might be an hour and a half long, a half an hour of questions because people are really enjoying them. And I think that there's so much incredible learning there because we've been really differentiated ourselves as there has to be meat and potatoes in every event right there and there should be a little bit of gravy there as well.
We want something that is so tangible and immediately actionable that people walk away saying this was a great use of my 60 or 90 minutes. So if you like that kind of a content with no sales pitch, try out https://multifamilyu.com/ I think you'll like our events, especially the one that most people adore is one called real estate trends 2019 we update that every quarter and we basically fly you across the U.S. state-by-state telling you really what's going on and the fact that America is splitting into two there, the cold states are basically losing to the smile of the United States.
Neal: Most of these are sun belt state. And, and why is that happening and how quickly is it happening in which states are avoiding that rain? Uh, and which states are really getting decimated, right? You know, Connecticut is a state where expensive homes are now empty and nobody seems to be buying them and people are still scratching their heads, that the state's losing people and there's none of this stuff is really getting the press that it needs to. And I'm happy about that. But I don't mind. Out of the 320 million people that live in the U.S. For my audience of 25,000 to know this incredible information. And you don't ever have to talk with us. I think our webinars are designed to create “aha” moments that you can run with for the rest of your life without ever calling us.
Jack: I have to ask the question, does your facility with this educational stuff that you've done is, does that come directly out of the work that you did back at the educational company?
Neal: Yes, it does. So that was degree granting education and what we found was from going to all these webinars that talk about cognition and talk about making sure that education is entertaining first. You can't educate if you don't entertain first. And so, we learned that, and we learned about basically preventing death by PowerPoint and things like that. And, and I think it comes across in all of our events and even our partner events because we're not above editing out anything that seems to be just boring. It's like, there's no insights here. This is just a piece of data, please remove it. Right. And they're like, but it's important. It's important to who? Nobody's going to remember this stuff because it's just pages and pages of PowerPoint, just remove it. So I think that definitely does come from our degree granting education background.
When you're creating online degree granting courses, you have to be very careful in not putting people to sleep.
Jack: Yeah, absolutely.
Neal: And so that comes across, but our vision is simply similar to Google. I mean Google gives Gmail away. Gmail is truly free. In our case, we're giving away products to 25,000 people a year that we have no way of monetizing unless they come to us. The good news is roughly 3% of them like our approach are okay with the fact that we're total data nerds and want to invest with us and that's all we need.
Jack: Yeah.
Neal: And good luck to the other 97% we get every once in awhile I get a thank you email from somebody who's seen my “you to me” course on udemy.com/real focus and like, this is, this was amazing. Changed my outlook on real estate and that's it. I mean I just say thank you and we never hear from that person again, but it's okay because there's hundreds and hundreds of other people that approach matters.
Jack: This is great.
Neal: Right. And, and I think that there's a business model there. I think it's a scalable business model and we've been able to grow it so we don't feel the pressure to ever do a sales pitch.
Jack: This may be the easiest podcast I've done yet.
Neal: Okay. That's good.
Jack: That's to be like, I feel like I just kinda, I just kinda tossed you the ball and you took it and entertained for, we're at 46 minutes and 30 seconds right now. This is, this has been spectacular. Neal. Thank you so much Neal Bawa of… pronounce it for me.
Neal: Grocapitus
Jack: Grocapitus. Neal, Bawa Grocapitus thank you for being with us. I am Jack Heald for the OZExpo Podcast. I want to thank you for listening to us. Please be sure to subscribe so you get notified when there's a new episode and we will talk to you next time.
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