Are you interested in investing in real estate but don’t know where to start? Then this is the episode for you. We invited Lane Kawaoka to join us in discussing valuable insights and strategies that will assist you in uncovering the fundamental keys to passive investing success. Tune in now!

Key takeaways to listen for

• [03:28] An engineer's unique approach to real estate investing
• [08:32] Which investment strategy is right for investors with less than a million net worth?
• [16:25] The importance of building a powerful investment community
• [25:06] How to identify the right people to invest your money in
• [35:20] Biggest advantages of being a real estate operator

Resources mentioned in this episode

• [19:10] The Family Office Ohana Mastermind
• [43:09] The Journey to Simple Passive Cashflow by Lane Kawaoka | Paperback

About Lane Kawaoka

Lane Kawaoka's mission is to help regular people into good deals that were once only accessible to the rich. With over $2.1+ Billion in AUM spread over 10,000+ total units and a decade of successful investing, Lane also hosts the Top-50 Investing Podcast Simple Passive Cashflow and is a member of the Forbes Business Council & Fast Company Executive Board.

Today, Lane is investing in syndications in Class C & B Multi-family apartments, RV Parks, mobile homes, and assisted living facilities because of this Nation's demand for affordable housing – not rich people's Class-A assets. After 12 years as a Licensed Professional (PE) Civil/Industrial Engineer, Lane fired the boss in 2018 to focus 100% of his time on investing and helping others reach the same financial freedom he has.

Connect with Lane 

• Website: Simple Passive Cashflow | The Wealth Elevator
• Podcast: Passive Real Estate Investing via Simple Passive Cashflow Podcast
• LinkedIn: Lane Kawaoka, PE
• Email: lane@thewealthelevator.com

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Instagram: @truly_passive_income

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Twitter: @trulypassive

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Mentioned in this episode:

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Lane Kawaoka: 00:00:41

If you have a high quality product and you have true conviction to follow it out in three years and keep doing it day after week after week, then maybe things will stick. That's part of being an entrepreneur, is that you may not get traction.

Neil Henderson: 00:00:55

From raising over $135 million with 650 investors to hosting the Simple Passive Income podcast and guiding others on their investment journeys, our guest today has left an indelible mark in the real estate world world. Here to share his insights, experiences and tips for passive income, please join us in welcoming Lane Kawaoka.

Welcome to the Truly Passive Income podcast. I'm Neil Henderson.

Clint Harris: 00:01:18

And I'm Clint Harris.

Neil Henderson: 00:01:19

Our guest today is Lane Kawaoka. He's a real syndicator, family office advisor, coach and mentor. He currently owns over 8,000 units and over $1.2 billion in assets under management.

He's raised over $135 million with 650 investors. And he's also the host of the Simple Passive Cash flow podcast. Lane, welcome to the Truly Passive Income podcast.

Lane Kawaoka: 00:01:41

Hey, thanks for having me, guys. Aloha, everybody.

Neil Henderson: 00:01:44

Absolutely, aloha. Well, first of all, you're in Hawaii. Obviously not in Maui, but the fires in Lahaina impact you at all. Or any of your family.

Lane Kawaoka: 00:01:53

Thankfully not here on the island of Oahu. If anybody's been to Waikiki or Honolulu, that's where I reside.

Neil Henderson: 00:02:00

Okay, gotcha. Good. So in the past you've talked about the importance of networking and finding a community.

As you build wealth, can you expand more on how you went about building your network and finding the right groups of people to connect with?

Lane Kawaoka: 00:02:16

y a little rental property in: 2009

me stuff. And it wasn't until: 2015

And then my mind was kind of putting this all together, right? Sure, the investment side, I sort of had that as a new non accredited investor.

But seeing the path forward of syndications, private placements, how to use the passive losses from investments that negate your taxes, and then accredited investor banking, which we call it, using life insurance as your private vault, these strategies, I wasn't really a privy to this type of stuff. But more importantly, by Finding a tribe of people. I was like, super motivated because prior to this I thought it was crazy, right?

Like, I didn't know people were like e buying than two properties and quickly on the road to financial independence. Going to leave my engineering job. But yeah, that's how I initially started to do it. It's just through my travels, right?

You just have little conversations with people, you resonate with some people, and then those people know more people. That was kind of the organic stages of me kind of building my network of other purely passive accredited investors.

Clint Harris: 00:03:46

So with your background as an engineer, I'm sure that you have the ability to kind of oftentimes the whole is greater than the sum of its parts. But you've been able to take this and kind of break it down to a lot of different levels.

And you're playing offense, you're playing defense, the tax strategies, the people involved.

Do you think your background as an engineer had anything to do with that, or is that just naturally the way that your brain works to be able to kind of take apart and rebuild that machinery for yourself?

Lane Kawaoka: 00:04:10

Yeah, you know, I think maybe that part is. I mean, engineers were pretty halfway decent at the old spreadsheet game.

I know I wasted all that time when I was supposed to be working in my day job playing around my little spreadsheet analyzing properties or just kind of projecting my own net worth and cash flow into the future.

So definitely, I think that there is some sort of like baseline competency level that I think a lot of engineers have, but it's nothing like super high level. I went to school as an industrial engineer, and a lot of that is trying to do things as efficiently as possible.

What is, you know, doing a root cause analysis and figuring out what is that specific improving my net worth. And I think that net worth is. That's the score, right. That we're talking about here. Cash flow is sort of an indicator of that.

But at the end of the day, what is it that's growing your net worth? Of course, you have to do it safely. That is kind of what you need to focus on. That's kind of what I've kind of distilled down everything I do. Right.

Throwing spaghetti on the wall. What is increasing my net worth. And that's kind of been what I see with other engineers too. Right.

And when I meet other people, especially engineers that kind of think the same way that tools the same thing, buy rental properties, go into syndication deals, it's been sort of confirming this kind of belief, this hypothesis that I have, and that People logically are coming to the same sort of conclusion that I have. And then you start to meet more and more people, right? Especially a credit investor.

You start to realize a lot of these people might have come from different places.

They might invest in stock market day traded, do all these different strategies, option trading, but they sort of gravitate towards real estate at the end of the day, most likely because of the taxes and how passive it can be.

Neil Henderson: 00:05:50

So interesting what you're saying there.

I'm going to dig into that analogy a little bit because I think that the way engineers think is you're starting with a problem that you're trying to solve with engineering. You've got a device that you need to do this, how do we get it to do that?

And then you work backwards from there to then figure out how to get to that end goal. And that very much to me with some of the smartest passive investors I know is that's where they're starting. Where do I want my income to be?

Where do I need it to get? All right, now how do I get there in the time frame that I've allowed myself or given myself to get there? Is that sort of what you're referring to?

Lane Kawaoka: 00:06:32

Yeah, exactly. I would also say that like the second aspect to this is just pragmatically like engineers aren't very wealthy.

If you're a good engineer, you maybe cap out 150,000, then you gotta go to the more the sales guy. But a lot of engineers just don't have great personal skills that kind of transcend and climbing the ladder.

As far as an engineer goes, I have a lot of clients that are doctors, dentists, other medical professionals and other more business owners who make a lot more than engineers. And something I kind of notice is there needs to be a level of pain.

If there's no pain, then why deviate off of the comfortable path of 401ks traditional investments? And why bang your head against the wall trying to get your inflexible CPA to do it all the ways that we will do. So I think that's the big thing.

Engineers, when you kind of stack up all the pay salaries of all these white collar professionals if there's some kind of like statistic where you take like the amount of pay is the least divided by the mental aptitude. I think engineers are like really high on the scale that I'm saying, right. And it's something I think about a lot, right.

Because the next generation, the third generation, like what is it that keeps propelling people to have an interest in this stuff, unfortunately, you need to have some aspect of scarcity and pain and motivation.

Clint Harris: 00:07:55

That's really interesting. It's kind of funny, your journey through saving up money into an individual properties and then moving on from that to other strategies.

I see a lot of my own journey in that my wife and I had a small portfolio of nine bad single family properties before we moved on to multifamily and kind of went on from there. I think the timeline of which you were sped through that process is a lot faster than mine.

I think you did a really good job of, I guess, listening to the market and moving through that timeline. We see a lot of investors that do that, right?

People that start off having an interest in single family homes and it might be a 20, 25, 30 year journey for a lot of those people to find syndication or get into larger projects and eventually get to the point where their time is worth more than anything else and they become passive investors. So I feel like you move through that process pretty quickly, especially with all the different types of assets that you have.

850 rental units, I know you got what, 1.2 billion assets under management. Like this has been a pretty speedy process for you. And one of the things that you just mentioned is it's something we haven't talked about yet.

And it's probably if that's where you landed up, that's probably the next logical step for a lot of people on that journey. Talk to me and just give me the brief overview of the infinite banking using life insurance as an investment vehicle.

Lane Kawaoka: 00:09:14

Yeah, I mean, I'll put it in its place. Right. Like, I mean what we teach is kind of this trifecta of investing in good alternative investments deals, right?

se are the rocks. This is the: 8020

Now the third strategy is infinite banking is what people call it, we call it a credit investor banking because we do it a little bit differently where you're able to flash fund your policy and not have to be stricken with a six, seven year payment plan.

But essentially what it is is you're using whole life insurance configured in a way where the commissions are pulled way back and the insurance is very, very small. So you absolutely maximize the amount of paid up additions. That way you're able to build up this sort of vault.

And the way it Sort of works like is like your heloc, you may pay down your mortgage, although that's not in our world. You don't want to do that, right? You want to keep your margin.

But you could throw your money into it just like how you do, you throw money into your paid up additions and that money is there to be able to pull out for a loan.

So when you're in your growth, you know, years under 4 or $5 million net worth and you're just trying to grow your net worth, the idea is you put money into your paid up additions, your life insurance, then you take a loan from yourself and then you go out and invest in rental properties or syndication deals and you kind of create this double dipping effect where your money is obviously making money in your investments, but it's also making a small yield tax free off the table litigators in your life insurance too. At the same time.

Neil Henderson: 00:10:59

What little I know about infinite banking Lane, my understanding is often that it's most useful for someone who has perhaps maxed out the other tax advantaged accounts like a Roth or if they're still a W2 employee that's getting a 401k match. I could be wrong, but is it the kind of thing that you'd recommend for the average investor earning less than $75,000 a year?

Lane Kawaoka: 00:11:29

I think it's parallel strategy has nothing to really do with taxes per se. Even though that's like the sales pitch for the stuff, it's tax free.

The idea is that if you're under maybe a million dollars net worth, I don't think you should really waste your time with an infinite banking policy. Certainly not a policy where you're putting in more than 25, 50 grand a year.

Anything less is kind of a waste of time I think based on what we're doing here. Sure, you can put a little bit 10 grand, 20 grand a year in there and kind of practice for now.

But when you're under that million dollar net worth threshold, or certainly under half a million dollar net worth threshold, all your money should be going straight to investments. Make no mistake, there's a little bit of a drag factor in terms of fees that you pay to the insurance salesman who puts this together.

You know, if people want a referral, they can reach out to us. We have kind of a lot of information about this, trying to build your policy. But these policies are somewhat of a commodity, right?

They are put together by the same insurance companies. And essentially how much does your agent want to charge you in commissions? Is the way you do this stuff.

So there's not too much of a shopping around kind of concept on this stuff. But as opposed to like you mentioned taxes, right? So taxes.

I normally the way I teach things is like I call it three bucket system or two bucket system.

Like the idea is you don't want to start to fill up your IRAs, 401ks, that type of tax advantage, supposedly tax advantage stuff until you filled up the first bucket, which is your cash flow today bucket. The cash flow today bucket. The goal is to get 10 to $25,000 of passive income every single month.

Until you have done that, don't add any Money to your 401k TSPS 403bs. The whole goal or the way we teach it is get yourself retired, get yourself financially independent. Filling up that cash flow today bucket.

Now then concentrate your efforts on filling up that second bucket which is like I mentioned, the qualified retirement plan money because that's legacy money. That's money that you're probably not going to be using certainly until retirement age or ever. Right? But it's, everybody's got this backwards, right?

We're all taught to fill up that second bucket first which is why people never get to the first bucket because there's too busy filling up that 401ks. And that's kind of where we're all duped into kind of going down that path.

And this is kind of where when you start to really understand by investing cash or non qualified retirement plan money or in this bucket one money first you're getting the tax benefits. You know, when you invest in a real estate deal you get the passive losses. And now this is allowing you to play different games with your taxes.

That's how you save taxes. Not the way we're all taught to put money in 401ks.

Clint Harris: 00:14:14

I love that. That is huge. That's the first person to come on here and that's a core value that I have.

And I think it's just ingrained in people to save in those long term buckets. And frankly like I just don't think we can get there anymore.

I think our generation has lost the ability or my generation has lost the ability to save their way to retirement. You have to get aggressive. The value of that dollar is going down faster than you can add more to it. I love the way that you phrased that.

Lane Kawaoka: 00:14:40

I mean most of our investors are able to save like 50, 100 grand a year. And these are the guys that are pretty frugal with their money. As frugal as you can be with a couple of kids, right?

But if you look at the income for these guys, they're usually in the $300,000, $400,000 range. So pretty damn good salaries, right? But still only able to save 50, 100 grand a year. But once you get up to that, I call that velocity, right?

How much do you save at the end of the year? If you're around 50 to $100,000, you're doing pretty dang good, right? At least for our subset of our investors.

And at that point you're going to get to financial independence maybe within a decade if you play your cards right and you invest non retirement money and you get the tax advantage from investing cash.

But like you said, most people don't have that type of firepower, at least when I started as a younger engineer, I barely got paid six figures and wasn't able to save that much, which is why in my new book, the Wealth Elevator, I kind of talk about these different floors to wealth building. Most people start off, or I think people listening to this podcast have good paying jobs.

You'll start off in that first level where you may be forced to buy rental properties to start off. Right. You don't have the firepower to go after dropping fifty hundred grand willy nilly every few times a year. Right.

You're not to that level, but certainly we're past that basement level. Right. We're not in credit card debt. We're not done with our money buying things that we can't afford. We make over six figures.

That's the hard part, I think for us, right? We get stuck with all the Dave Ramsey, Suze Orman financial advice out there. But there really isn't much stuff that how you guys teach, right?

Which are more predicated towards higher paid, maybe not wealthy multimillionaires.

Clint Harris: 00:16:25

So I want to dig in on something a little bit. You talk about if that's your avatar, your average investor that can put away and save that kind of cash. Like that's a great community.

And you talk about the importance of networking. So you've raised over 135 million from 650 investors for 1.2 billion in assets under management over 8,500 doors.

So you did this in a fairly short period of time. And I'm asking this selfishly, honestly, he's like, how do you engage and either create or engage with that community?

Where did those 650 investors come from? And just how did that transform and how did you kind of, I'm going to steal your Word.

But in terms of the velocity of getting investors to take on projects of that magnitude, like, how did that happen so quickly for you?

Lane Kawaoka: 00:17:07

I started my podcast back in: 2016

At that time, I was still buying little rental properties, transitioning to syndications and private placements.

So it wasn't like a podcast, a normal podcast out there that I think a lot of people are know when they go on the itunes feed, kind of the same thing over and over again, right? Like, you have multifamily podcast. Tell me about your story. How'd you start? You know, it's kind of boring. And the same thing over and over again.

I'm pretty big on, like, transparency and just tell it, like, how it is, mistakes and all. So people saw that genesis of me buying these 11 rental properties, banging my head against the wall.

You know, I still have, like, all these videos on my YouTube channel of, like, when these idiots, like, messed up my property and had to pay like 15, 20 grand to repair it. And they saw, like, the writing on the wall. They saw, like, me kind of trying to do syndications and private placements.

And we built up that community.

And in fact, in the very early stages, I would actually teach people how to buy, like, the turnkey rentals until I realized, man, this is just not working with this stuff.

And we transition, and most of our investors at that point, or accredited investors, kind of just looking for an easier way than buying little remote rental properties and going to turnkey providers. But a lot of it was timing. And you look today and it's just luck, right? Like, starting a podcast after 20, 20 ain't going to work.

I mean, unless you already got a network, ain't going to work.

Now, if you have a high quality product and you have true conviction to follow it out in three years and keep doing it day after week after week, then maybe things will stick, right? That's part of being an entrepreneur, is that you may not get traction.

But I was lucky enough to get traction pretty early on, and I kept pushing the pedal on it. And I think what you guys are kind of asking, we got a little traction, but then we did community events.

I'm big on, like, doing things behind closed doors and really, like, face to face, as opposed to, like, who wants another Facebook group, right? Or a form, right? Those are just kind of faceless people in those things, just typing stuff to sound cool.

Or really those people never are getting past the investment stuff, right? Like when we have events, I tell my guys like, don't freaking talk about investments. Don't come in, say who's a good syndicator, who's your cpa?

All this like taking surface level stuff, right? Let's get together and let's build real relationships. That's the whole premise behind our family office group, right?

Like it's a, we call it the family office ohana mastermind. It's a mastermind of many family offices. And why?

Well, one reason I tell my guys too, like, well, in case you died, what would your spouse do, your kids do, right? This is our ohana, right?

A family of families where we come in and the basis is, you know, sure, we, you know, you'll learn where to invest and strategies like that. But it's more like people that you create climb the ladder together and you don't get this without the in person.

And I think this is what I enjoy is like facilitating those types of events, doing the structured networking events where we have structured times for table topics. We transition to a speaker or a lecture, then we kind of huddle back in our small groups and talk about it again.

It's kind of in my ways that I've kind of learned when I kind of go to different events, I pick up these great networking or you know, these team building types of activities to bring back to my group. But I think a lot of it is like just building that culture over time.

Neil Henderson: 00:20:50

What sounds a lot sort of what you're talking about is the idea of people invest in why you do something, not what you do. I think that's a mistake that so many people often make is they're constantly talking about what we do.

Well, we invest in this, we invest in this, we work with this, use this tax strategy, things like that. But ultimately what people really get excited about is the why we're doing it and who we're doing it for.

We're doing it in order to have more time to do the things that we want to do with the people that we love rather than trading our time for money doing the things that we don't love all that much.

That's where the community happens and getting around a group of like minded people who think that way because there are plenty of people who are perfectly happy working their W2 job and they don't have to stress out their gray matter between their ears about what they're going to do after they get off work. I love that. That's Very powerful.

Lane Kawaoka: 00:21:47

Yeah. I mean, I think at the end of the day, I think of my why for that this group a little bit different.

Like, I just wanted a bunch of buddies who kind of in my corner that we could huddle around in more secret and bounce investment ideas off of. And in essence, that's kind of where like a lot of our events come from.

Like we'll do wine events, but everybody who comes is pre vetted, no random randos coming. Everybody's gotta pay to come, so everybody's in it to win it.

I would say the complete opposite of a Internet form where people are kind of hiding behind an avatar. And plus, you don't never know today, like a lot of these like forms are all fake. People putting reviews in on themselves.

Clint Harris: 00:22:27

I can only imagine the conversation when you get a group of people like that together. That community is incredible.

I mean, that's one of the reasons that I really enjoy doing this podcast with Neil, is because we get people like you that are willing to come on here and give us your condensed life experience, good and bad. But you'll cram it all down into a 30 minute segment. It's wildly valuable and I appreciate your willingness to share that.

When you get a group of people together, number one, especially when they're paying to be there, you know, they're taking it seriously, they're legit, they're in it for the right reasons. And everybody has a willingness to share and a willingness to listen. Those can be really impactful in really big ways.

I can only imagine the conversations that your group is having and like the nuggets that people walk away with, like, that's powerful, that's amazing. Congratulations for doing that.

Lane Kawaoka: 00:23:13

And it's just like even outside of like investing, right? Like, I'm sure you guys have done it before, right?

When you have two different groups of friends and you do a little dinner party, say with just like five or eight people, those two people that you have, or two couples you have coming in don't know each other, but you are that internal tie, right? That's that trust factor. And you seen the path where these. You can bridge that gap of the new people coming in.

That's kind of the whole premise of what I do. It's not super scalable, right?

Like, we don't have these big events, we don't have these big faceless Internet forums with a bunch of random people who are just. When you have those, you just ultimately get messed up by all the marketers. That's the kind of the running joke, right?

Marketers screw up everything, right, because they find it a watering hole and they just ruin it all. But in essence, that's the whole idea, right?

Like how can we bridge and set people up so they can meet each other and then kind of blossom those relationships on their own? Because like when I first started to get into this world, like I didn't know anybody who was an accredited investor. I didn't have a rich uncle.

And I think that's the people that we attract are all first generation millionaires. You know, people who've gotten to million dollars before their 50th birthday and did it themselves, did it the right way.

And it's a very strange dichotomy, I think, of people who worked hard, followed that linear path, got a good job, worked and saved and invested the right way and then what do you do from there, right?

But that said, similar value sets of people who get to this point, maybe the launch point, you just call it, quite frankly one to $2 million net worth and then these are your people. But without that kind of that light source that kind of attracts the people. I know most of my friends are broke, right?

Probably the same for you guys, right? Like you guys are good buddies, but financially speaking, maybe not the same wavelength.

And I think that's what I notice a lot of people that come in and that's why there's so much value, is because we attract not only the people that are on the same wavelength in terms of values, but also net worth to.

Neil Henderson: 00:25:21

All right, Glenn, did you have something? You look like that catalog marine is working.

Clint Harris: 00:25:25

Oh yeah, my head's about to explode. But no, I don't have a question. I just a lot to process. I'm excited to go back and listen to this.

Neil Henderson: 00:25:30

This is great. Let me ask some tactical questions.

Lane, what do you think separates the good sponsors and operators from the fake it till you make it ones when it comes to vetting real estate deals? And what are some warning signs that accredited investors should look out for?

Lane Kawaoka: 00:25:48

I mean, that's a hard one to answer, right? I mean, maybe I'll start off here, right?

Like when people look at a general partner, operator, sponsor, there's a spectrum of experience where on one end you have institutional operators, you know, guys who've been in this business for more than a decade with 3, 4, 5 billion dollars of assets under ownership. Now, they can be reliable.

However, you're not going to get the returns there that you're going to get going with more of a middle market or newer operator.

Namely, you're not going to have the LP GP splits that are desirable and you're going to have huge, huge acquisition fees, sometimes higher than 5, 6% on the front load. But for some of my clients that are like 4 or 5 million net worth and above, that makes sense.

Now the hard thing is a lot of people are going to be talking about these names just like the turnkey investor world, very similarly.

There are a couple of turnkey providers people talk about a lot, but it's like very clear as day that the turnkeys that they're selling are like 20 grand, 30 grand over what they should be selling for, right. I don't know how investors make money with that, but at least it's reliable. So whenever you look at a sponsor, you need to kind of be sizing them up.

It's like, are they institution or on the other side of the spectrum, are they a fake it? Do they make it a group under half a billion or 500 million or less?

We're kind of in this world of like we got $2.1 billion of assets under ownership over 60 plus deals. Like we're not the new guys, we're more in the middle. I would probably urge that's the people you're trying to find, right?

People you're still trying to get those good returns with because the fees are lower, the splits are better.

But I think that's what's really hard because from the surface, there really isn't that differentiating factor between determining somebody who's starting out, who just joined the guru boot camp, went on the weekend and somebody's an institution because from a website perspective, it all looked dark and little like cool and sleek, right? It's just, there's nothing much on it. There's. So it's really easy for somebody to fake it till they make it.

And maybe the best way is just understanding the assets and their ownership, right? How many assets they're not LP on but GP on. That's a good starting point. But this is where could just be lying to, right?

This is the world that we live in and this is where I say, well hey Mr. Investor, this is where you need to find a tribe of other purely passive investors to figure out where to invest in.

al. I went to as a passive In: 2012

And he just pretty much Stole the money slowly over time.

And the person who referred me over was this young sales kid from one of these self directed IRA companies who didn't know what the hell he was talking about. Probably just maybe had peers with this guy or something. I don't know.

It wasn't that gold level standard of referral, which is somebody who's actually invested with this money and had good success with them. And that's where kind of tying in with that stuff we're talking about earlier.

Unless you have a real relationship with another purely passive investor, I don't think you deserve the right to that information.

Neil Henderson: 00:29:02

So it sounds, you know, one of the things we've had conversations with people that are experienced passive investors and they're talking about the very problem that you're talking about was do I invest with that big, long term experienced institutional syndicator or try and find that new sort of up and coming operator who's not faking it till they make it. But maybe they're just new. If I understand what you're talking about, you have two issues.

One is a lot of times their fees are going to be a lot higher. They know they're good. So their acquisition fee is going to be not 3%, but it's going to be 5, 6%.

The other one is that they've also spent a huge amount of time building up a base of passive investors that have worked with them, that have made a lot of money with them. A lot of times they're not out there looking for new investors.

And if you're somebody coming in that's new and you haven't already built a relationship with that institutional group, it's very unlikely that you're going to basically get that call from them in order to invest. That's what I'm saying.

Lane Kawaoka: 00:30:01

And to add onto that, thirdly, ideally you want to invest with a group that has taken these acquisition fees and these past exit deals and invest it back into the company.

billion assets in: 2020

But you can't really replace the experience of property managers who've been in the field for a decade. There's things that they know that I would have never picked up on, just like how I don't go to a doctor's office and just start to play doctor.

I don't think it's right for some, somebody like me to come in and just start to play property manager or asset manager right away. Right. Like there's things that you pick up by hiring people who are better than you and that's kind of getting that started, right.

As a private equity company, more institutional company. But that's where the money should go and that's kind of, you know, you pay for what you get.

Clint Harris: 00:31:03

Sometimes you've gone full circle through a lot of different asset classes. At this point you're predominantly doing multifamily residential, is that right?

Lane Kawaoka: 00:31:10

Yeah, like I said, I mean a lot of mistakes along the way, especially like picking partners. I mean to give myself grace. Like you never know how somebody is until you get into bed with them.

Whether from a perspective of I've had it happen too, where, you know, I've had partners that just operate, steal money and had to remove them from the gp. You know, just nefarious action. And most times it's just good people, but they're just incompetent, they don't do what they say they're going to do.

Either way, it's not good.

I would probably rather have the second, if anything, but I go through these experiences and a lot of it is just unless I'm able to have control over operations and kind of be in there, I don't really have the transparency oversight to do my fiduciary responsibility. Right. So I did get involved in some assets that I wasn't really the full operator. Right.

Things outside of my area expertise, which is multifamily apartments. And every time I've done that, it hasn't gotten the best way because, you know, that's just not my forte. Right.

So this is kind of why we've kind of maybe over the last several years we've progressed back to going back to the basics, which is focusing on multifamily apartments. Today what we're doing is more developing more in the future. That's really what we're building the pipeline.

We can build something for 190,000 a unit where a lot of these multifamily younger operators are buying 40, 50 year old class B properties for the same price per unit, which a big renovation budget, which is why they're buying the dang thing. Right. Where I can build something brand new and have it be fresh and new for 30 years. Maybe it's up to those guys at the end. Right.

But we're just trying to swim upstream as an Operator group as a sponsor group to find better deals, better opportunities for the ultimate value add, which is development. And also get away from tenants too. Right. Because Dennis are the variable.

I mean, when we first started to do this, we buy a lot of these class C50 unit, which the way you get started when you're a younger syndicator and it's a lot of headache. You can make a lot of money, don't get me wrong, but it's a lot of headache.

I mean delinquency and a lot of these properties will be 20% or 1 out of 5 people just won't pay every month, which is why cash flow is pretty up and down. And chasing these people is kind of the name of the game.

And this is something where we just didn't, you know, going through the pandemic eviction moratoriums as we kind of find maybe we're getting late to these operators, but maybe it's if we don't see it as a good way to spend our time and energy to chase people down for rent and as opposed to just gravitating towards development where it's kind of a higher level of tenants, even if it is still workforce housing.

Clint Harris: 00:33:52

And you also don't have capital expenditures for at least the first few years in a major way. I love that. What does the landscape look like in terms of developing with the high interest rate environment that we're currently in?

I know a lot of people are struggling out there with bridge debt and adjustable rate, but that's typically. It's like what you talked about.

The smaller operators that are buying B and C class properties and trying to increase the noi and increase the value of the property so they can offload it from a development standpoint, are there strong headwinds that you guys are facing or what does that look like in that market for the next few years?

Lane Kawaoka: 00:34:22

Well, that's the exact reason why we're heading down development. I mean like with interest rates, how they are. I mean, I can't make multifamily value add deals work.

plug on that as of summer of: 2022

So those interest rates really have a huge factor on the numbers of the deal, whereas the development is less so. And maybe I'll use extreme example, like, you know, some people were house flippers.

You buy a distressed property, you put money into it, you have some holding Costs to your private money lender, if you recall, you don't really care what those interest rates are. Right. Because you're going to create so much value and it's just a holding cost at the end of the day, similarly to the developments. Right.

So the impact to interest rates is kind of one of the reasons why we're doing it this way. And then also, you know, as multifamily operators, and I think everybody's dealing with this, taxes and insurance and expenses have skyrocketed.

Taxes and insurance probably tripled in a lot of the places.

We sold a couple of our apartments in Mississippi in the Gulf where you get things are getting beat up with these hurricanes all the time because insurance like more than quadrupled down there now with developments too less of impact because we're not in it for the long game. Once we build it, we ideally sell it and then have that be the next guy's problem.

Neil Henderson: 00:35:50

All right, so how do you anticipate the real estate market will adapt to the challenges of the rising interest rates over the next five years? I'm not going to make it planned 10 years out.

Lane Kawaoka: 00:36:02

Well, I mean the longer time rise it goes, the better. I mean, the easier it gets. I can't tell you what's going to happen in three months, six months, one year, maybe two years.

But long term, I mean, just like my investment thesis is not rocket science, you know, people need a place to live, especially the lower middle class, which is why we kind of target the workforce, housing, it's just demographics.

And especially when you pick more emerging markets, ideally when you have the landlord laws on your side in, you know, where there's good population growth, then you're kind of shooting the right side of the cow here. And like I said, it's just not rocket science with this stuff. In the long term, people are going to need a place to live.

And supply and demand, there's a lot of old aging infrastructure that's going to need to be replaced so that people can rent $900 to $1,500 a month for a family or a couple or single. Right. Like that's what's happening in the future.

And I think this also plays into the whole, you know, the rich are getting richer and the poor are getting poorer and the shrinking middle class, the people who probably should be investing will probably be downgraded into that lower middle class at some point and will need to live in a value based class B apartment or a new workforce housing.

Neil Henderson: 00:37:20

So for passive investors, I've heard you often Suggest targeting to double their money every five years. What returns and timelines do you typically aim for with deals and assets that you're investing in or operating?

Lane Kawaoka: 00:37:33

Well, I mean, think about what the business plan is, right?

Like if we're talking about a value add project, most cases you're in a project where you're not really kicking out tenants, you're letting the natural turnover happen.

And I think a lot of investors who've maybe lived in apartments or moved around when they were in college understand this transitory kind of timeline of a tenant.

Normally a tenant will stay in there a couple years, some will move out every year, but you'll have some that will stay longer, three, four years plus.

But on average, I would probably say you get through, majority of the tenants recycle out and you're able to get in there, renovate the unit, put in a new tenant that pays more in a couple of years. Now you add on a year or two of fluff on that also to stabilize the P Ls too.

But I think that's where you get into how you kind of backwards engineer into a holding pattern of a few years or to five years in that range. That's a value add process.

But on the developments, you know, we've built properties within a couple of years and at that point that's probably the first point to sell. So it's a lot quicker velocity of money.

And what I've realized, a lot more sophisticated investors, they don't care about the little penny cash flow that you get in multifamily value add, 4%, 6% plus. That cash flow ain't around these days, right? With taxes and insurance tripling, it's non existent.

, $: 1500

Therefore the developments where they're shorter time horizon or quicker velocity of money coming back is a little bit more ideal when you stop to think about it. The developments may be able to get out in a couple years once you're able to build the asset.

Something happened to us like on our last development in Huntsville, Alabama, we completed construction late last year, but if people recall, that was when as the interest rates started to tick up, really started to damper the market and we didn't want to sell at that point. So we just refinanced, leased it up. That's kind of one of our advantages being operators.

Most developers out there are distressed spot, distressed sellers. Once they finish buying or constructing it, you know, we're perfectly happy kind of just putting it into the portfolio and leasing it up.

And now we're 90% fully stabilized on that asset. So that's actually the second best time to sell the asset. So we're kind of in this holding pattern right now. We sell it, they refinance it long term.

I think that's a little trick that I think the institutional investors do. They have this marketing term called infinite returns. All it is is this fancy way of hiding up the fact that we just refinance your money.

And now your returns go way down to like 10% a year. But what you really want to do is sell that thing at the peak and sell that thing.

Neil Henderson: 00:40:30

Gotcha. And a lot of what you're talking about here is the velocity of money.

And when people think about the average investor, you know, when you're first starting out, you're buying single family rentals, turnkey rentals, whatever it is. That line of growth kind of looks like this long, slow ski slope like this.

And you know, you're getting a little bit of cash flow, you're getting some appreciation. As the debt pay down goes down, it starts ramping up because you're paying off the principal and the loan faster.

But with value add investing, it looks like a hockey stick. You've got that initial bump like that, and then it kind of goes up like that.

And the smart value add investors are looking to cram multiple hockey sticks in as fast as they can. Because every time you do that, you can see how bigger that nest egg is growing. You just keep plugging hockey sticks on top of hockey sticks.

And now you're really cooking with gasoline.

Lane Kawaoka: 00:41:23

Yeah, I mean, to use an engineering term or calculus or physics, I don't know, I don't remember. But it's like the area under the curve. Right.

When you have a graph, at the end of the day, it doesn't matter how high you go, it's more area under the curve.

So if you're able to compile those C curve growth patterns on top of each other, you're going to make more money than just growing it, than it's straight lining across the graph for you.

Clint Harris: 00:41:45

Question about your strategy, I was surprised to hear. So in terms of timeline, you guys are doing a project, you're doing a development, and then you're selling it at certificate of occupancy.

A lot it sounds like instead of Stabilizing the asset and then offloading it. Is that right?

Lane Kawaoka: 00:41:58

Selling a certificate occupancy will maximize your return divided by your time because your time, depending on denominator, is the smallest portion. The next best time would be to selling it after you've leased it up, right? The third best time would be to sell it after.

And part of it is you're going to sell it for more fully stabilized than just certificate occupancy, non occupied. But the key component is it's going to take you more time.

So if you compare how much money did I make divided by the time component, which is what all investors should be doing on all these investments, you're going to make the most selling it earlier in that time. But depends on where the market's at, right? You take what you get. It's like a baseball, right?

You get the outside pitch, you shoot it to right field, you get the inside one and get to left field. You take what you can get. You don't try to force everything. Of course, ideally you do this multiple, multiple times, right?

So it's banning practice in a way.

Neil Henderson: 00:42:54

All right, Clint, ask our last question.

Clint Harris: 00:42:56

All right, Lane, so question that we have is if you had $100,000 right now to invest, what, what are you doing with it?

Lane Kawaoka: 00:43:03

Well, that depends on what floor of the wealth elevated you're at. If you're somebody who's under accredited investor status, go buy a few rental properties like I did and get your net worth up.

If you're somebody within one to $5 million net worth, go into some equity based deals, either a value add or development, which is the ultimate value add because you got to grow your equity.

If your net worth is over 5, $10 million, if you're past what I call end game, where you just need to roll your money at 5, 10%, heck, go put it in T bills, get 4%. Right? Depends on where you're at, right? And that's kind of what I talk about in the Wealth Elevator book.

It's like where you are and we have like a chart based on where your net worth is and your income is. It's basically everybody's situation is different here. There's not one size fit.

Neil Henderson: 00:43:46

All right, Lane, I love it.

Clint Harris: 00:43:48

I already downloaded your other book, the Journey to Simple Passive Cash Flow, before this call. And now you just sold me another book. So I got to go buy the Wealth Elevator. So thanks for that.

Neil Henderson: 00:43:57

Is that book, is it out yet?

Lane Kawaoka: 00:43:59

Careful, don't get too much books. Then you won't do anything.

Neil Henderson: 00:44:02

Is the Wealth Elevator out.

Lane Kawaoka: 00:44:04

It's out in a couple of months.

Neil Henderson: 00:44:05

Here, so by the time this will probably be four weeks at least before this gets released. So hopefully it'll be about out when people are listening to this.

So aside from the wealth elevator.com Is there any other place that you would like people to go to learn more about you?

Lane Kawaoka: 00:44:21

Lane yeah, I mean if they want to continue to follow my journey as I try different things out, they can go to the podcast. The Wealth Elevator email address is Lane at the wealth elevator.com and yeah, thanks for having me guys.

Neil Henderson: 00:44:34

Absolutely. It's been great chatting with you. Thank you so much for listening and watching the Truly Passive Income podcast.

If you liked the show, if you think it would be useful for someone else, the greatest compliment that you could give us would be to share the episode. Leave a comment down below or leave us an honest review. If you have any questions, don't hesitate to let us know down below.

And remember, with Truly Passive Income comes freedom of time, place, and the freedom to pursue your higher purpose.

Clint Harris: 00:45:13

Sam.