Usha Investment Group LLC

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Facts over Feelings

It is rightly said – The happiest days of a boat owner are when he buys and sells a boat.

Money is made when you buy. To make the money math work, Neal Bawa, Founder & CEO Grocapitus, ‘The Mad Scientist’, as he is lovingly called in the real estate space, leverages big data & technology to make the money math work in real estate.With the trust of over 700+ investors and $1B multifamily portfolio, Neal joins Rama Krishna, on MultifamilyAP360 to discuss latest trends, investment mindset, and affordability. Check out the full episode here.

Outlook on the economy and its effects on multifamily

“I estimate a 100% chance that the economy will go into a recession.”, Neal says, “But, it might take longer than most people feel.”.  Lately, the news of negative GDP growth in Q1 & Q2 has made people to believe that the economy is in recession. Neal has however, denied this and is firm on his view that, the economy is nowhere close to being in a recession. He stated that within the last three months alone, 1.3 million jobs were produced with the wage inflation being very high at 5.1%.  This makes it the first time in American history that for an unemployment rate of 3.5% there are 11 million jobs open. Despite Fed throwing thunderbolts of interest rate hikes, people are spending, employers are hiring, making it certain that the economy is fighting the Fed.

However, Neal expects recession coming around the corner during Q1 & Q2 next year. “The Fed will keep raising interest rates aggressively until the end of the year, and then the economy goes into a recession to compensate the Fed will later in next year, maybe Q3 and Q4, start cutting interest rates.” Neal added.The Fed brings the economy to its knees, and also pulls it back up & make it us stand again. In the last 61 years, when the Federal Reserve has raised interest rate, nine times, sharp up, sharp down. Neal explicitly highlights, “Don’t ever forget the sharp down part because that’s the Feds job is not to raise interest rates and leave them there.”.

Working on Super Value Add projects

Neal is obsessed with finding deals that have the room for “Super Value Add” as he likes to call it. Super Value Add is the process of buying buildings built in the 1980s or 70s which were built to a lower density. By picking up such a piece of that property and building more units gives a clear pathway to juice the investments wisely.

He also discusses about his investment in the super value add project of 151 unit property in Dalton, Georgia. “The property was zoned for 237 units, but only had 151 units.”- Neal said. He having invested in it as a regular value add property with a year of 8% cash distribution to investors,  and zero delinquencies, he went back to his investors and raised another $3 million to built 29 units, to boost the NOI by 55%. He then sold the property at a massive 50 plus percent profit. He recommends syndicators to look at Super Value Add deals. Though he warns the party not being as fun as in 2018, 2016 or 2014 he believes there’s got to be a way to juice the party by getting cleverer and smarter with our investors.

Lately, Neal has been planning to open a solar company to put solar panels on roofs to reap the benefits of solar credits & incentives proposed in the new solar bill that just passed. Building 3 companies – a construction company, a syndicator company and a solar company, Neal knows sure ways of juicing the returns for investors.

Trends in the multifamily space that could impact investors

“Prices are slashed compared to prices in January when the prices were at the peak”,Neal remarked,” adjustment by eight to 12% is good because if prices don’t adjust, then bubbles burst. Bubbles bursting is 10 times more painful than price adjustments.”. Though Neal agreed to have missed the peak, he is optimistic of another opportunity in the second half of this year. Recessions help adjust the economic cycle. Most importantly, they prevent bubbles. Neal added, “Most importantly, I always know what happens six months after a recession starts, the Fed starts cutting interest rates. And that creates opportunity for us if you know that’s going to happen.”.

The moment interest rates go up lenders lend less money so the bank yields fall, and that basically forces prices to go down. The market self-corrects the multiverse. The price cut of 8-12% hasn’t happened for single family across the board so prices still keep going up when they should be going down. “There’s a lot of trouble coming for the single family market in the coming months.”, Neal warns, “We are now raising more equity than we were before and paying less than we were paying before, so the market is self correcting. Multifamily is more predictable and obeys the rules of money quicker than single family does.” “Nothing can not obey the rails rules of money, but it takes the single family market a while to adjust, which makes it more susceptible to bubbles.” Neal added.

For more insights into such conversations, subscribe to Multifamily AP360 podcast.