How to Select Real Estate Markets Using Data Science - Neal Bawa

0:00 [Music] because there was no time to actually get people to do that it has no credibility with me I couldn't have found a better place for data-driven Real Estate conversations and I was like holy this is like nothing else it might be Q2 might be Q3 so you're going to do it [Music] Hello everybody welcome back to real estate Milestones today we have a very special guest he goes by the mad scientist of multi-family Neil Bawa he's a technologist and data driven

0:46 multi-family investor with over a billion dollars of assets under management and we're going to talk today about how to select markets a little bit about what's going on with the economy and if we're in a recession and I think you guys are going to learn a lot from a stage of an approach to investing so Neil thanks for coming on the show well thanks for having me on the show it's it's uh nice to be here and uh nice to uh you know be connected with the more of Hunter's ecosystem absolutely um so to start what was your first milestone in real estate um it was an odd Milestone so most people considered the purchase of their first single family or their first multi-family my Milestone my first milestone in real estate was when I walked into my boss's office in 2003 he was very upset he said I just talked to

1:33 our landlord they hate us because you know I was running a technology big technology school I said our students are messing up all the carpets and they want us out of here so our our landlord was general motor so they're a big building and they were leasing a part of it and I said great I hate them too um and they're like he's like yeah yes we're not going to buy our own building and I'm like okay and he's going to say he said we're gonna custom build it to our own needs and I was like okay and then he was like and I you can't imagine that the terror that I felt at that very moment but because he was so massively good at lots of things he was a he was a mentor he had lots of real estate experience we sort of held my hand all along the way did a lot of the work and so my first real estate experience was building a

2:19 six and a half million dollar 27 000 square foot campus completely from scratch wow that's amazing that's definitely a unique Milestone I think most people start maybe a single family as you as you mentioned so yeah it's really exciting yeah it was uh it was a lot of fun I was a terrifying the hallway across because we made big mistakes and then I had to go fix those at the last minute I remember one particular day where uh we had to pour concrete the next day and we had moved basically got the walls of the classrooms Wrong by seven inches and so at midnight I remember being in this massive area um uh unscrewing studs and moving them over six inches and screwing them back in using concrete jackhammers wow well that's that's impressive so um you have a background as you kind of mentioned in

3:05 technology and um you know I guess managing companies as well um in the space so definitely that seems to influence your approach to real estate in terms of being very data driven and numbers driven um and in that you also have a very dangerous numbers driven approach to selecting markets so I'm really curious can you kind of walk us through your process for identifying a market and maybe you can get into even um the neighborhoods and how you analyze the uh qualities of a neighborhood absolutely so um what I found um when I started looking into real estate and this was far before I became a real estate professional that happened in 2014 uh this is you know six seven years before that I'm I'm running a technology company and you know you real estate is a curiosity it's a hobby you know this

3:51 is after the building was built and I realized the benefits of depreciation I was a partner so all of a sudden I went from paying 40 in taxes to zero percent in taxes for many years like nothing else in America allows you to pay zero percent in taxes and I became aware of a certain person named Donald Trump that apparently hadn't paid any taxes the previous year because of you know some money lost in a deal and obviously back then he wasn't the president I was like this dude Donald Trump you know is not paying any taxes because of the same thing that I just did with this one building so if he can get to a billion dollars and not pay any taxes I can get to 100 million dollars and not paying taxes that was like really yay and that that got me started because you know technologists I live in Silicon Valley I live in taxifornia we're paying 50 plus percent of our income to State and local a state and federal so we're very motivated by taxes so I'm like okay

4:37 let's look at this real estate thing and surely there must be you know data-driven artificial intelligence driven uh over data science driven companies in the space that should tell me exactly where to go and I was extraordinarily disappointed to find out that there were none right and I'm like how can this possibly be I mean data science is a well-known thing statistics are a well-known thing why isn't there why aren't there tools that I can just pay a thousand bucks a year for that will tell me all of these things and the answer is they were still being built they exist now but we're in 2022 I'm talking about 2007 2008 so I was like well maybe I can just hack a tool myself so I went and hired a team in the Ukraine um I I went and started scraping the Bureau of Labor Statistics website Zillow you know bad thing and you know whatever their predecessors even Craigslist to try and kind of get a data set together that I could experiment with and back test and see what came out

5:24 of it because I was trying to figure out what what made sense my timing was shockingly good incredibly good because by the time I had figured all of this stuff out it was 2009 remember I had a 12 hour day technology job so it wasn't like I was spending six hours a day doing this by the time I get to it it's 2009 and I'm I realize every Market in the US is dropping and like we're in the real estate catastrophe and so most people are telling me you would be the biggest most like knowing what is happening in the marketplace you want to go in on real estate right now and I'm saying my initial data models and they were very rough are showing that this is the best time in all history to go into real estate and people would just look at me and say look like I'm like a one-year-old right that would just stare or just say a stupid thing like you idiot right something stuff like

6:10 that would come out of their mouths and I'm like do you want to take a look at my model and they're like no no you're just an idiot and right and they'd go on go on with their day and I'm just sort of perplexed with what is going on here right then why doesn't this guy want to look at my data model and then I realized that I should stop saying stupid words like data model because that just turns people off So eventually I was like I'm gonna give it like some fancy name right so I started giving it you know fancy names like real Focus or things like that uh Then I then I basically call it location magic the best places in America because I basically figured out a model that takes in a lot of input and by by you know and ranks cities and not well-known cities because you know most people know well-known cities like San Francisco Bay area or Austin or or Dallas they know them fairly well there's really not a

6:57 lot that I'm you know adding in there um but smaller cities than that right and and basically starts ranking them in terms of the the benefits that you could potentially get by investing in in those cities and we were looking at like 323 cities that's what we look at currently then at one point I expanded to over a thousand and and so I'm giving it nice names and now people are actually beginning to pay attention to me and so I'm like there's this concept called Meetup group and so you know meetup groups are new back then and like I'm like I'm running a technology school I have huge conference rooms with 100 seats let me me open a meetup group and start talking about this this location magic technology that I've come up with using data science and and statistical analysis software and I'm like I'm sure that I can find like four or five people in Silicon Valley that'll come in and

7:42 it'll be a very nerdy dorky conversation I'll finally be able to talk to people that understand my language so I post it and um like four people show up the first time men like and I have this nerdy dorky conversation and then I'm like this is going really well I should post it again so I posted like a couple months later and 12 people show up and only four of them are nerdy dorky types the rest are just regular investors that are curious to see what I have to say and they really like what I'm saying a year later Ben the the room is filled I mean there's standing room only there's like 100 people and I realize Silicon Valley couldn't then the middle of Silicon Valley because there's all these people from Google and apple and before I know it people are inviting me to the Apple campus to to you know do this and they they really get what I'm saying and I'm like wow this is pretty cool and and everyone's like so what are you selling

8:28 right where's this software that I'm supposed to buy it's like no white it's free it's like were you really free what about the subscription no that's free what about the premium version there isn't any so at this point people are getting really confused about what the hell is this guy doing the answer is I'm just having a blast I'm a technologist running a tech company that has nothing to do with real estate I just really having fun with this stuff why can't you understand that so it like some people would think that I was trying to put one over them and get pissed off and walk away and other people are like maybe this guy is dumb enough to just do this because he's liking it so I started to gather an ecosystem around me more and more people had started to learn what I was doing and really like the data science and we're having fun with it and the early beneficiaries of the system were not me the other people right because other people had more money than me other

9:14 people had more time than me so they'd go out and find these cities and invest in them and start making a huge amount of money in my case the city that I invested in a dumb decision but you know this is just being honest like I picked the top city in my location magic and I spent all of my money there and not that I didn't do well I made just a sickening amount of money but I should have picked the top five and invested in all of them instead of buying you know 13 properties in with cash in Madeira California which is 144 miles from from Fresno and as you can imagine that story ended really well all of those properties are 4x5 effects you know what I paid for them but I but if I picked the top five cities in my list and some of those cities were like Austin Texas Boise Idaho and and uh Provo Utah boy I would have some of

10:01 those would have been 10 Baggers right 10x or 20x so there was a lot of learning I was just throwing stuff at the wall and seeing what would stick but my my over time things got better and then one day this guy came in and said something that really stuck with me he said why are there only 100 people in here I'm like are you trying to insult me there's a hundred people listening to me I'm a nobody I don't you know nobody in real estate even knows who I am then so I'm really proud of that he says no you're an idiot there should be 10 000 people you know looking at this and I'm like I don't know how to do that I'm not starting a company he says no you don't have to do anything just record yourself and edit it and stick it on a web platform called udemy udemy and it was a small platform back then there weren't a lot of people taking courses and now you'll have people from all over

10:47 the world taking your course and I'm like how are they going to find me and he's like trust me just trust me just go with it you don't understand how this works I'm like okay fine you know I I on I it's the day after Christmas I have nothing to do I basically regurgitate the course to a camera do my edits you know come up with some Excel spreadsheets and things like that and I upload it to this course called call udemy and I go on vacation and I come back and there are like a hundred questions in my mailbox right it's like the mailbox is just filled with people thanking me and asking questions and stuff like that and I go to the website and there's like hundreds and hundreds of people taking the course it's free right so you're taking the course um right now I think as of early 2023 if you go to udemy.com that's that's where this

11:32 technology that I'm talking about is stored there's 11 000 people taking this course right I'm not I don't know who these people are I don't get their email addresses they don't have to ever pay me anything all of the things that they need for the course are there there's no senior version and I tell them once in a year you can come to my website and pick up a new Excel spreadsheet because things change you know covid you know interest rates so those cities change um and it just sort of exploded man it it took on a life of its own and got much bigger than me and now people have actually taken that course and developed it further and I have sent it to me saying here's my version of Neil Bauer's course and that's very flattering for me none of it ever resulted in any Direct Cash to me except for the fact that I was making money first by myself then with

12:18 900 investors but the the concepts the ideas of location magic have spread All Over America absolutely and it's um yeah I mean that's an amazing story and an incredible um Insight um and I'm curious could you uh highlight some of the real focuses that you you um you know you use when you're determining where you want to pick a a location or pick a market yeah so I'll go over cities first right so one of the things is that um what I discovered is that people would go to a party and say hey you should pick cities based on population and job growth and income growth and things like that right so they would state things like that and which are true right the problem was where do you find data for 400 cities

13:04 and also how much of these things matters so if you have two cities that you're comparing and one has two percent population growth and one has three it's really the three percent population growth City much better than the two right how do you tell that well the answer is statistical analysis you go back and you grab data from the Census Bureau from you know investor profits from home prices for years and years and years together for hundreds and hundreds of cities you stick it in the software and you run what if analysis right so you basically go back and say what if this was more important than that you know and you correlate it to profits and how do you get profits you get profits by home price increases and and uh multi-family price increases so you can find that data and you say well if this city had huge population growth did that really lead to all of these things so

13:50 what I found was that the metrics that create profit are fairly straightforward anyone can understand them I'm sure the moment I say them you you'll understand them the key was how much how much and how much of a weightage to give each of these things does that make sense so that was where the secret sauce was right and and so I what I did was I started with about 20 of these things like one of them was school quality so you can obviously Imagine School quality right another one was crime but the ones that finally made it into the five that I use for location Magic were as follows I mean population growth job growth income growth home price growth and crime reduction these are the five that made it and everyone immediately like you don't think schools

14:35 are important no no I think schools are really important my point is that when I use a data set and I use these five things that I just mentioned and then I add in schools I come up with the same list of great cities so what I did was I said if I take the schools out do I come up with the same list yes well in that case why should I torture the people that are going to be using this system to stick schools in because every time I add more things the system becomes more complicated and one of the goals that I started with another very smart guy from Apple who came in and said this is make it so simple that people can do it in 10 minutes otherwise people are so attention deficit that you could be giving away gold and nobody would ever use it so I started with a 10 minute goal in mind and here's the cool thing

15:23 internally we do this every week and we use about 200 metrics okay I have a secret to tell you 95 percent of the cities are the same as the location magic with the five metrics right there are Edge scenarios that companies like us that are doing this you know professionally and we have the staff and the management and and we're paying for software for regular thousands and thousands of dollars of software and still end up investing the same damn cities that's how powerful these big metrics are a big population growth job growth income growth home price and the location of magic course doesn't just tell you about these metrics it says here's where you go to get them here's how much is important here's where to stay away from stuff like that here's when to make exceptions it tells you all of that stuff right that's the power it's never things like job growth it's

16:12 how much when and which you know time frame like for job growth for example we only look at 12 month job growth because we couldn't find any correlation between five-year job growth and profit but we had a insanely High correlation between 12 month job growth and profit yeah yeah that makes a lot of sense that's really interesting I'm sure given how much the uh data science approach has been helpful in location magic and in picking cities and in your business um yeah very incredible maybe a harder case to predict maybe the economy's whole and and whether we're going to be in a recession when the bottom might be I'm just curious if you could kind of illuminate your approach or more than your approach what do you expect to happen over the next maybe one to two

16:57 months or sorry one one year to two years and um just just I want to hear your thoughts especially given that no one has a crystal ball but think you may have something closest than anyone else so yeah I I mean I think that I don't have a crystal ball I think that what I do have is the data the past historical data it isn't as perfect as what we're doing with location magic but because there's too many factors affecting the economy like no one has built a grand model of the economy with millions and millions of pieces of data I bet you we're going to build one in the next five years and it will work um because of what I'm seeing with chat GPT I think all things are now possible um with General AI intelligence but in the meantime my crystal ball basically says look the Federal Reserve is

17:43 extraordinarily good at killing inflation nine last nine times they've tried it since 1962 they've killed it nine times right and also extraordinarily good at causing recessions while killing inflation they are starts at it so the fact that people are saying that this time somehow the FED will not do something that they're really good at the other thing is the yield curve when it didn't works you know it it it foreshadows a recession 100 of the time I know people say in 1965 it didn't come on it was close it was within 0.2 percent of a recession so it really was a great predictor back then as well in 1965. so I think it has a 100 track record but that damn thing's been inverted so the chances that we are not going to go into a recession in my mind are infinitesimally small I think

18:31 that we are going to go into recession the real question that people should be asking is Neil what kind of recession because there's recessions that are long and and dreary and they really drag you through the Mard and you've you know all kinds of bad happens and then there's recessions that are over in six months and then you move forward and I'm the data also suggests that this recession is going to be fairly short I think it's going to be six months long by the way that's the minimum duration for a recession so they can't be three months long has to be six because that's how we Define recessions in the US um and it and I think that it it'll be shallow meaning -1 minus two percent GDP that tends to be not as painful as most people think it's going to be so I think that we're gonna have a recession I think that they're gonna be some downsides to it I think multi-family during the recession

19:16 suffers I think most people that are in multi-family today there's so many young people there that they don't actually remember all the bad things that happen during a recession to multifamily like you can't get debt you can get regular debt that you're used to and yes you might not have been able to get it in the last three or four months trust me you're not in a recession yet there's many that you know sources available today that simply won't be available during that time point is if it doesn't last more than six months then you're in a good position you wait wait it out so I believe a recession is is imminent so right now we're modeling Q3 and Q4 before we are modeling Q2 and Q3 uh the economy has shown so much resilience that we think that it takes quite a bit of work from the FED to put us into a recession so Q3 and Q4 all right great yeah that's interesting

20:03 and I know um you had a really interesting point that you were looking at Freight prices and shipping prices and then also oil prices to kind of determine what inflation may come down as a leading indicator given that you know it takes time for the supply chain to reach from you know manufacturing company or countries to America and I'm curious what what have you seen recently in the inflation data so the data is actually very clean it's very clear it only points in One Direction sometimes it can be muddy you know it like simultaneously points you in two opposite directions I don't see that at all so it's very clear that the supply chain crisis is ending so the price so I look at a website called freitos that's freightos.com so I go in there and I look at Freight prices both to the Western and eastern coast of the United States from China because that gives me

20:49 a sense of two very important things number one supply chain right so the price of the container is going up Supply chains are getting worse if the price of a container is going down they're getting better but it also gives me a sense of demand in the US because you know who knows more about demand than Costco and Target and Walmart because they have real time information on demand that no politician on Earth has right because what the Federal Reserve is looking at is six nine months old data out and at least at least three months old later but Target is looking at what happened on the shelves yesterday and then Target basically then says hey I need to order this many of of these or I should order a lot less of these and then that shows up in shipping Data before it does anywhere else because immediately the next day the cost of shipping will go up if Target

21:34 ordered too many containers because everything's flying off the shelves you see what I mean you realize how real time this data is I mean it really literally what's happening the economy 10 days before it shows up in in Freight data right going upwards or downwards so I look at those containers it's very very clear to me that the supply chain crisis is ending nor I didn't say end it there's some components of it that still are problematic but it's mostly ending right the second part that is very obvious to me is that demand is not cratering in the US but it's going downward so the what the FED is doing is significantly having effect and you're not seeing it in the economy you're not seeing it in jobs why because everything has a three month six month lag so I'm seeing the sort of indicators that I would see six months before a recession in Freight data I'm seeing it in oil oil

22:21 is now cheaper than before Russia attacked Ukraine how can that even be passed possible when we force the Russians to take 2 million barrels of oil off the World Market right using a price cap well the answer simply has to be there's not enough demand well the level of demand that we're seeing today usually you see it six months before a recession wow that's yeah that's really uh pulling your data and I appreciate you sharing and um appreciate all your insights today and a lot to room in on but you ready for the lightning round absolutely great so so what superpower would you choose if you could choose any superpower um I would choose to be to to have chat GPT implanted into my brain wow yeah it's only going to improve itself over time so

23:06 um what's your favorite book or what's the one that's helped you the most um I think the miracle Morning has helped me the most it's not my favorite book but it's helped me the most you asked me two questions and you assume that they would be the same it's not it's not my favorite book but it's the one that's helped me the most because if you follow the miracle morning you will find your favorite book right the what Miracle morning does is it actually allows you to be the best version of yourself and if you are then you'll find your favorite book so it's helped me the most absolutely so what motivates you to continue every day um I've tried to retire and I've realized just how horrifically awful retirement is and that motivates me well yeah so what advice would you give to someone who wants to follow in your footsteps

23:52 um be positive and positivity is great but please don't under please don't somehow take positivity and tie it to um be positive in all circumstances I think you've got to be data driven you're using people's money in the last 10 years the number of very young people that have entered multi-family syndication is up maybe 10x or 100x and that is a real problem because they're these people haven't had taken enough you know hits in their life so you you understand that the people that used to buy buildings 10 years before you did had vast amounts of experience right and they used that experience you don't have it well in in the absence of experiment experience please be data driven great

24:39 and I know you have a incredible quote um but don't touch your gut yes so in my mind you know data beats gut feel by a million miles by a million miles and the other one that I have is is a quote that I wrote and that I'm very proud of so I'll give it to you um the Bible is wrong and it's wrong by one letter it's not the meek that shall inherit the earth it's the geek great so since I put you on the spot I want to give you a chance for Revenge what's one question you have for me um so Ben how many times in a month are you seriously sitting down and saying today I'm just going to spend the next hour looking at the data that affects my

25:25 investors money um well I would say more than just looking at the data I I'm very in a sponge absorb as much as I can mode so I see that that uh that time I allocate might be listening to um one of your your seminars are listening to a podcast with um um with uh Willie Walker I love his uh commentaries he has some really good economists and experts on but um yeah I am constantly trying to observe and collect data in my mind but um I'm really I mean I have I'm yet to learn uh A system that where I can organize it um like I I don't know any coding like r or whatnot um but I am looking at ways to kind of standardize it and rather than just trying to train

26:11 my gut feel I'd rather train a model and I know that this capacity is coming and hopefully one day if I don't learn to code I can learn to tell a computer how to code for me wonderful um I think you're on your way awesome well I appreciate it well Neil thanks for um Coming in the show it's been a pleasure to have you and I've learned a lot and I'm sure everyone listening has learned a lot as well um I know you mentioned one place we could find you where else may people find um your content and find you to learn more about what you have well I think I mean I'm the only Neil Bawa on the internet so make sure that you don't mistype my name but go ahead and type my name in and hit enter if you're interested in predictions that I make you can type in Neil Bauer location magic Neil Bauer best cities um I I use an army of virtual assistants

26:56 21 of them at this point you can type in Neo by virtual assistants and you'll see what we do with the virtual assistants and how we use them to grow our company and then um the if you want to have access to a hundred percent of our content all 21 webinars that we do in a year simply register at multi-family University and we'll invite you to 21 of these geeky webinars some of them have really fun content but they're still geeky they're giggy and fun [Music]