How to find the real estate next market? How to convince investors to invest into something that they're not used to? Neal Bawa, CEO of MultifamilyU, shares his knowledge.

Tell us a little bit about you.
I am a technologist, I have a computer science degree, I've had a successful tech career and a successful tech exit. I got into real estate because I live in Taxafonia and had the big fat tech salary. I was paying 50% of my income to the man and got into real estate just for tax reasons, and then found out that it was a wonderful way to build wealth. I live in the San Francisco Bay area, we have about 25,000 geeky, nerdy investors that follow us and we've used $300 million of their money to buy and build a billion dollars in assets.

You sold a deal today and you returned a large amount to the investors. Let's go over the entire process from why you were analyzing that deal, what made you want to buy it, and how you added value to it and exited.
The property was sold today, December 2023, and was purchased about this time four years ago. We wanted to buy it in time and close in time for the depreciation benefits in 2019. The entire journey was one day short of four years.

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

People started asking me in podcasts, what is the way around this? Because the problem that you're talking about in Atlanta, it's also in Dallas, in Phoenix, and so my answer was, we need to be very careful, and we need to go outside of the metro area 20, 30, 35 minutes outside of the metro for a more reasonable pricing. And immediately there were a lot of objections to this because people would say, "We've been taught that you want to be inside of the circle, you want to be close to jobs and now what you're telling us is to step away from the jobs, get further away from the jobs and have to go buy properties where someone has to commute to the jobs and it might be a significant commute like 30, 40, 50 minutes. This is not what you used to say, Neal." And my feedback to that was, I think I was right when I was saying it but today what's happening is that people have two alternatives: either they can stay where the jobs are and pay for that convenience. But even if they're willing to pay for that convenience, should we be doing that because we know that delinquencies are going to spike as you start pricing the properties beyond people's incomes, you're going to start seeing delinquency issues, you're going to start seeing occupancy issues. And the alternative, which I consider to be a reasonable alternative is, let's go to markets that are 20 or 30 minutes away. People started asking me what are such markets? Where should we go? A lot of these external markets are not as good as other external markets, because there are peripheral towns around these big markets and some of them are just not places that you want to go to. There's no growth there at all.

We're a data science team and we track lots of cities, over 1000 cities or 323 metros, we track them and publish data on them which is why most of my investors are very geeky, they're either software programmers, or they're doctors. They like the fact that I come from the software world, they connect with me. We started looking at our list of cities, and we started building lists of high-quality peripheral cities around major markets. We started building lists around Atlanta, Phoenix, Dallas, Austin, and San Antonio and we started publishing those. This list was published even more than four years ago, because the property was purchased four years ago, which means the list had probably been out five years ago, because you have to look for properties and it takes a while to close.

And so, five years ago, I had published two markets in Atlanta that I said, "Hey, these two markets are going to be interesting." The first market was a city called Fayetteville in Atlanta, Georgia, I liked it, and I felt that this is a terrific market and this is not just doing well now but it's going to continue to do well. I look for nice markets but I also look for an X factor. I also will not go for things such as "they want to build a television studio", I don't consider that to be an X factor because a lot of these things either get canceled, or they take forever to get done. There was a major television studio that was being expanded. But the studio had already existed, it was already there and already had 1000s of people working there, but they were expanding it. And they weren't expanding it because of something that they were doing locally. The governor of the state of Georgia started getting into a very public fight with the governor of California over building a television series. And he started saying, in Georgia, we're going to do it better. As it turned out they were right, they were able to steal a bunch of TV series away. The studio was next to Fayetteville. They were going through a very major expansion, they already had very big shows, these are all Blockbuster shows that were being shot there and they were looking to add another 3000 jobs. I loved the city as it was but now 3000 more jobs are coming in, I think that the quality, the people living there, and their income levels are going to go up faster than normal, so I started looking at Fayetteville.

The property had 184 units. That was the premise for buying a property not in Atlanta, but outside of Atlanta, serving the bottom half that serves the airport, which is the largest airport in America. It has a massive number of people working there but it's also serving the southern half of Atlanta.

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

We went through that process and said, maybe that's not enough to convince people that we need to step out of cities. So we did a series of them with Phoenix. We looked at a city called Maricopa and a couple of others that are basically outside of the Phoenix metro but are still easily commutable: Avondale, Maricopa, these kinds of cities. Then we did one for Texas and we said for Dallas, there's a city called Denton on to the north of Dallas that we should be looking at, this is all 2018-2019. There was also a city called McKinney and both of them were on the north side of Dallas and neither were part of the metro. Then we said, for Austin, you need to go to a city called San Marcos if you're going south, Killeen if you're going north. If you want to pick an inexpensive city, go to Killeen, and you still get that that amazing benefit. And then we said for San Antonio, there's a city called New Braunfels.

We did a series of webinars featuring metros throughout the United States that were hot and we found the alternative cities inside of those metros and we did this over a six-month timeframe. I'm very proud to say that today all of these metros are very hot for investment like Smyrna. I think every property in Smyrna has been bought by a syndicator. Mableton is insanely hard. I have a property in Killeen that I bought, I bought a property in New Braunfels, and people have gone out and bought these properties. Of course, Denton and McKinney have become superstar hubs and people have bought dozens and dozens of properties there.

So, the concept of doing this, of exiting the city and going one city over, two cities over became extremely popular and our audience became convinced, after watching multiple webinars of the Phoenix outskirts and the Dallas, the San Antonio, and Atlanta, they became comfortable with the thesis. And now, when we are ready to do a raise, we can say remember that thesis that we had about Atlanta? Well, this is a jewel city, it's going to do well, and here are all the benefits. And then, it was easier but I say the word "easier" relatively, it was still a hard raise. It was about 8 million, we bought the property for 23.2 million, the sale price was 39.6. The bottom line was once people were convinced, they came in, we did close the property without having the entire raise done and we had to continue pushing it. It was a heavy lift, so to speak. Our business plan was tweaked and modified. The bottom line was that it wasn't the business plan that was fundamentally different, in this case, it was the first property where we started stepping out of metros and since then we've stepped out of metros about seven or eight times.

My takeaway here is to show the data multiple times over and over again, and give people choices.

Neal Bawa