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Lane owns 4,500+ rental units and is the leader of “Hui Deal Pipeline Club” which has acquired over $500 Million dollars of real estate by syndicating over $60 Million Dollars of private equity since 2016. Lane uses his Engineering degree to reverse engineer the wealth-building strategies that the rich use in the Top-50 Investing Podcast, SimplePassiveCashflow.com.
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The Right Way to Invest in Real Estate | Lane Kawaoka
Crypto, stock market, Tesla and everything, everyone wants to know where to put their money and my guest is going to tell you exactly where to put their money. He’s a podcaster and real estate investor. He owns 4,500 rental units and is the leader of the Hui Deal Pipeline Club. He’s an anti-guru. We are going to talk about what that means with the host of the top 50 investing podcasts, Amazon bestseller and writer for Forbes. My guest is Lane Kawaoka. How are you doing?
I’m Good. Thanks for having me. We are going to drop some knowledge bombs on folks.
I hope so. We always do it on the show and I know you are going to bring it, too because your Simple Passive Cashflow is from real estate?
My story started after I went to college and became an engineer for some strange reason. I don’t know why. Also, being good at Math and Science when I was 9 or 10. I’m Asian, so what else are we good for than to do something Math and Sciencey? I never liked my job. I followed this dogma of buying a house to live in. Everybody says, “Buy a house to live in,” so that’s what I did, along with your retirement accounts, 401(k), which I don’t believe in. I was never home. I’m living in that big house that I bought and I started to rent it out. The monthly rent is $2,200. The mortgage is $1,600. For a young, twenty-something-year-old kid, that was a lot of beer money every month. That was Simple Passive Cashflow and that’s where this all began. I realized that I kept doing this again and again. I would be able to quit my day job and I eventually did. Let’s talk about how people can do that.
We were talking a little bit about the audience, the twenty-year-olds, for example. I wasn’t thinking about this when I was twenty. Exactly what you were thinking is, “Where do I put my money right now? Where do I want to be twenty years from now financially?” Those weren’t my thoughts because when I was twenty, it was all like, “How do I go work a job? How do I get to the point where I can buy a house?” That’s what we were supposed to do, find a “stable place” to live and have something that’s ours. You saw that the mortgage was $1,600 a month for the place you were looking at but yet it was renting out for $2,200. That difference is what you saw. That $600 a month of profit or passive cashflow, which is incredible to me. There’s even a concept I’m hearing a lot about, rent your primary residence but go own assets that are going to produce you more cash.
That’s what I do. I live here in Hawaii. I invest where the numbers make sense and live where you want. I own 4,500 rental units. I still rent. I haven’t made a YouTube video on this yet, but I feel like you shouldn’t buy a house. The price of your house that you live in should be no more than 50% of your net worth, so you shouldn’t buy a $500,000 house unless your net worth is $1 million.
You said you are an engineer and you are decent at Math. How did you come to that rule of thumb to where it’s like, “Your house should not be worth or cost any more than 50% of your net worth”?
It’s going to sound messed up to a lot of people but if your net worth is under $1 million, you can’t be making bad decisions like buying a house to live in. Buying a house is like running your Ferrari with your hand brakes on it. It’s not a good financial decision and it’s frustrating. That’s why I did my whole podcast. There’s so much bad financial advice. I go to school and you put your money blindly in these retirement accounts, self-directed IRAs, Roths. It’s not what the wealthy do. They buy hard assets. They have cashflow streams and they live off of that.
They don’t dump their cash into a hard asset just to live inside of it and not make money off of it. You are dropping value bombs already. There are a lot of mic drop moments with this. I was like, “Whoa,” when you said if your net worth is under $1 million, you should not be buying a home.
Let’s step back a little bit. Most people in this world should follow this financial advice from Suze Orman and Dave Ramsey to don’t go into that because most people are bad with their money. These are the people who can’t save any money. They just buy stupid stuff. SimplePassiveCashflow.com, myself, I was a good saver. A lot of my folks maxed out their 401(k)s. If you are not like that, maybe you shouldn’t be listening to me. If you are bad with your money, maybe you should go buy your house to live in because it ultimately becomes a forced savings account. If you are financially immature, you need that. If you are financially mature and able to save at least $10,000 to $20,000-plus a year, there’s a different way of doing this. Buying rental properties and growing your network faster that way.
We are going to be talking about that paradigm. Before we started, everything was real estate. It’s like flipping houses. We don’t do any of that stuff. That’s all for broke guys. Flipping houses and wholesaling houses are for guys who don’t make a good professional salary. That’s what you have to do when you don’t have money but you need to have money to invest in real estate to get on this escalator. This is the way to do it. Buying cashflowing properties that on a month-to-month basis, good or bad times still make a profit.
How did you start? How big was your first multiunit investment?
I bought eleven rentals, single-family homes that get started. My first few are in Seattle, Washington, where we tell people do not to buy properties in places like that. Do not buy properties in primary markets, the whole freaking State of California, Seattle, Portland, Hawaii, New York and Boston. In these places, you don’t have what’s called the rent-to-value ratio above 1%. This is critical. You need that rent-to-value ratio of over 1%. How do you find the rent-to-value ratio? You go to the monthly rent divided by the purchase price.
A lot of the places will have new investors. They will buy a $100,000 house out in the Midwest, places like Birmingham, Atlanta, Indianapolis, Kansas City, Memphis, Little Rock, Jacksonville, Florida, Huntsville and Alabama. You are going to find 1% or better properties, so $1,000 a month will be about $100,000 or less. If you take a place like California, you are going to find a place in the ghetto, which you don’t buy places in the ghetto. That’s $400,000 that rents for $2,000, so $2,000 divided by $400,000, 0.5%. No bueno. That’s not going to work. That’s the first thing, buy properties at 1% or higher.
That’s a good rule of thumb, too. I’m still stuck on this, “If your net worth is under $1 million, you shouldn’t be buying a house.” That’s most of America. That’s most of the world’s problem. That’s what’s keeping me stuck on that thing. That’s everybody.
There are so much financial dogma trying to get people to do the wrong things like the National Association of Realtors. They want everybody involved. George Bush was the one back in the day when they had this idea where everybody should own their house. We all saw how that worked out. 2008 led up to that. Also, the 401(k) and all these mutual fund products, these retail products are there to make Wall Street rich with all these hidden fees.
When I bought my first handful of properties, I was making a 20% to 30% return on my money every year. If people don’t believe me, I have a YouTube video where I do a whiteboard exercise where we break down that you are making money with appreciation, tax benefits, cashflow and then the tenant is paying down your mortgage for you. That’s the key differential routine. You pay down, you own your own house and you are the sucker who’s paying your mortgage and getting equity built up. In these cases, you are having your tenant’s hard sweat and tears paying that for you. That’s how you are getting that higher return.
I was like, “How am I making 20% to 30% in a simple rental property and only my stocks or mutual funds are making 8% to 10%?” This is where I started to realize, “This is what the system wants. The system wants good boys and girls to go to jobs, work for 50 to 60 years and give almost half of their money to Wall Street companies to pay for buildings and executive salaries. Ultimately, they were making it off hardworking people’s backs.”
I see you with George Ross in a photo. I met him at Harvard a few years ago. He’s a funny guy.
Donald Trump’s ex-lawyer.
You’ve got it. He was his guy in all the deals that he did. It’s another good example of what you are talking about. When you are saying, “My mutual funds only made 8% and I’m making 20% to 30% of real estate,” the different classes of assets, A, B or C assets, can you break that down for everybody, please?
Class A are your new builds or luxury less than 10 to 15 years old. This is what most people would like to own. It’s not where the money is up the sweet spot. The sweet spot is more of a B and C asset. This is more of your blue-collar type of housing. Maybe it’s not where you guys would like to live and maybe it’s not the safest place to be at night. These are not in the best school districts, but this is where you are going to get the most rent-to-value ratio and get the most return bang for your buck. You want to stay out of the war zone Class D assets because these are dangerous areas. You can have bad collections on rents and stay with the highest. There’s a sweet spot in the middle. This is where we focus on what we call workforce housing, $700, $1,400 a month. This is where most of America’s population is. They need more of this housing. The lower middle class is a growing population.
You were only talking about somebody who’s investing right away or just getting into this. You are only talking about a $75,000 to $150,000 home.
In a lot of these places. You are correct. We were under $100,000 and you guys need a 20% down payment. If you don’t have $20,000, you can’t do this. This is not for broke guys. This is the get rich surely type of thing, not get a rich quick thing.
That was great how you explained. I was going to ask, what are the differences and why do they matter? You explained all that already. You do need the 20% to put down on these homes because they are investment properties. This isn’t something for those that are getting started, which are most that are reading. It’s a younger demographic and it’s not something that you can do an FHA on to get the mortgage on and then to rent it out to where you have 3.5% or 3% or whatever it is for FHA. There’s a new trend. Have you seen this? It’s called a piggyback mortgage. It’s the 1st and 2nd mortgage from a primary lender that will get you down to 10% down payments from the same one and you can get approved for the primary and the secondary mortgage immediately at the same time. It’s something coming out of COVID that’s interesting. Have you been keeping track of that?
I don’t care about that stuff. Just get a 20% down payment. If you don’t have that money, you probably shouldn’t be doing this in the first place.
It’s not a bad place to start either because even if it’s just $75,000 for this, what would you consider that, A, B or C class asset or something like that?
You need a $20,000 down payment and you should have some extra $5,000 to $10,000 cash reserves in case your tenants use it up, which they will. It’s a passive business. We always employ third-party property managers. They take 10% of the rents but that’s how you are able to scale. You don’t want to be like the mom-and-pop landlord who goes in there and fixes the plumbing themselves. You want professionals to do it and you want to pay third-party professionals to fix it up should something go wrong.
You are laying out a structure here already. I’m assuming a lot of this is at SimplePassiveCashflow.com.
A lot of our clients are a little bit higher net worth, so they have the money to do this. if your readers are a little bit younger, I don’t do this and I don’t advocate this but they call it to house hacking. You buy a duplex and you live on one side, then you can get the lower percent down payment, 5% to 10%, and get an FHA loan but that’s ghetto. Who wants to live with the tenant?
You don’t want them knocking out the door for sure.
You could go live outside on the streets and not pay rent but I’m not going to do that. That’s another option. If people don’t have that much money and they were trying to get on this escalator, try the house hack method. For most people who are with a significant other, it’s not going to fly. It’s not going to happen. Let’s be realistic. I’m a personal finance blogger but I’m different from most personal finance bloggers first, who are telling you, “Don’t have your latte because it will equate to $50,000 in your lifetime.” I’m prescribed to more within your means lifestyle. Live within your means but don’t spend too much time. Time is more valuable than money at some point.
You were talking a little bit about how you hate 401(k)s. I’m with you on that a little bit because I haven’t provided 401(k)s to the people that worked for me. It’s something that’s there and it helps attract good employees as well as we are bringing them on board because it’s something. It’s like what you were talking about buying a house as a savings account for a lot of people. That makes sense because you can appreciate some value that’s there and it makes sense. I have moved a little bit of property in my life as the primary residence before I finally realized, “Maybe I want to rent my primary residence and then put everything else that I have, the free cashflow, into something else that’s an investment.” Taking a look at those possibilities, how much money does a typical American that you know put into a 401(k) every single month?
It’s probably nothing. My guys are usually saving anywhere from $30,000 to $50,000 at the very least every year. We are at 0.5% of the 0.5% of the 1%. People who make less than $50,000 to $60,000 a year and less than $20,000 cash savings should not go to SimplePassiveCashflow.com. They should not follow me. You need to go and read how to save your money and get your little envelopes together because that’s what I did out of college. That’s the basics of personal finance. You guys need to figure that out. Most people take their whole twenties to figure that out, they were scrambling in the 30s and finally getting their stuff together in their 40s.
It could be the early twenties where you want to work a second job. If you’ve got a full-time job that’s paying your bills, assuming you were not living at home still, then you could go get another job as a barista at Starbucks or something like that. Put in another $15,000 a year from doing a part-time job, and then in a year, you have your down payment for one of these properties.
Go live with your mom and dad and suck it up. Get that extra $10,000 a year so you can go buy that rental and then you can get that in this escalator financial freedom.
Is that what you see a lot of your people starting? What level do they come to SimplePassiveCashflow.com? Do they already have funds aside?
People that come to Simple Passive Cashflow are making $60,000 to $70,000 out of college in their professional jobs and they were usually good savers. I used to do some cheapo things, eating ramen, and washing my car in the rain. I was able to put away a lot of money. For some people, that’s how we were growing up. I would go to restaurants if we went to restaurants. I won’t get soft drinks. Get some water with ice if you are lucky.
We are going to Beau Jo’s night for pizza.
You’ve got to go eat up because you are not going to eat. You were intermittent fast to your next mortgage.
Give me that down payment, you are going to intermittent fast.
Most people aren’t like that but most of the people in my group were good at saving money. What a lot of people realize is they wake up and they have $50,000 or $100,000 in their 401(k). They get the sense of it could be something better and there’s something better. Unless you get that $20,000 down payment to go buy a house, to rent it out or go into syndication deals and private placements, you don’t get on that escalator. You are locked in what I call retail investments and this is the big problem I have with the 401(k)s. It’s like when you are in high school. You’ve got the high school cafeteria and there are a bunch of garbage. It’s expensive. As soon as you get the off-campus pass, you were out of there. You were getting Burger King or taco, better food and cheaper. This is outside of the cafeteria. That is the 401(k) with all the Fidelity and Vanguard. It’s not garbage. It’s fee-laden products. It’s investing for the clueless.
We were talking a little bit about crypto and that’s the latest craze. I’m not saying that it’s bad. There has been a lot of different investments that have come up over the past years, all the latest trends and everything. Crypto could be different because I have had a lot of crypto experts on the show. How do you feel about that compared to real estate?
I like it but for younger people, stick to the basics. I have three big rules for investing. The first rule is cashflow. Give off a monthly stream of income. Crypto doesn’t do that. Gold doesn’t do that. Next, it has to be a hard asset. You can make an argument that is hard to currency in a way but it’s not like real estate. The real estate’s a diversified commodity of lumber, wood and land. Lastly, it has got to be leverageable. There’s a futures market for crypto. Real estate is one of those things where you get these government-subsidized loans because the government still wants us to own houses. Where else in this world like the United States where you get these sweet Fannie Mae and Freddie Mac? You still need 20% down payments and then the tax benefits, too.
Why would you not do real estate? I understand where young people are coming from. Real estate is a little boring. You were not going to get rich quickly. It took me 6 or 7 years to get up to eleven rental properties and I was a diligent saver. I get it. A lot of people aren’t into the whole waiting game. They want it now and that’s fine. “I’m going to Vegas and out all in black,” if you want to gamble. If you want something that’s a sure thing that happens to take a lot of time, then that’s what cashflowing real estate is.
Your first eleven homes are single-families?
Right. I went into syndications and private placements. As I started to get around other accredited investors and higher net worth investors, I started to realize that they will go into these more country club deals and go into a better and bigger asset. The key is it’s not retail. You’ve got to know people who are doing this. There are fewer fees and better deals. Unless you start off buying some rentals, you were not going to get into those circles.
That’s how you got to 4,500-plus doors, too. When you are talking about private placement, to break it down, what does that mean getting into those? It’s investors in order to get you to buy the larger properties and then they get a piece of the investment, too.
In the syndication deal, I use the analogy of a plane. In the cockpit of the plane, you have the general partners. Use the guys who source the deal to get all the investors. They operate the deal, send out the checks and do everything. Passive investors are people that come and coach. They pay their minimum investment and get on, get some sleep and cash some checks. Passive investors like to do this. They diversified over dozens of these types of ventures. The general partners and passive investors are aligned. In the analogy, if the plane goes down, everybody goes down. Some could probably take their parachute to dive off but that doesn’t happen.
It’s next to impossible a little bit when you are talking about hard assets. That was a good analogy because I have known a lot of the syndicated deals that exist. I have a lot of friends who are in those types of deals but it’s never been explained clearly like that, where you have the investors. It’s not a bad scenario to get involved in. How do you feel about a younger generation getting involved as one of those passive investors in those deals? I’m assuming at your level you are playing out in those deals and you are the general partner level. You are the one that’s flying the plane.
We were the ones putting it together. I will say for younger people, go out and buy around a property so you know what you were looking at. Anybody can put together a syndicated deal. You can go on Upwork and pay someone $20 to make a nice pitch deck. Everybody has a podcast these days. Everybody can make it seem like they have a lot of friends. The biggest thing about going into syndication deals is knowing who you are working with and who to trust. How do you do that? You need to develop a network around you of other high net worth passive investors to get referrals from, which requires building real relationships with real people, which is not going to happen if you are some newbie. I always recommend people going into their own deals. First, getting a rental so they understand it. We have a fighting chance to analyze what’s on the pitch deck. At the same time, building their network of other high net worth passive investors to build up a list of referrals.
You’ve got to shake more hands. That’s the only way that it works. What are some of the common mistakes that you see people who are getting into this make?
Most people will go into house flipping where it’s predicated on the appreciation. Buying those so high makes sense. If a recession comes, you are screwed. With cashflow investing, when the recession comes, the price of the property will drop but you are buying an income stream. You are buying that monthly recurring revenue. As long as you can keep it occupied or maybe you have to jump the rents by $50 to keep it occupied but you are still holding on to the asset and you are still cashflowing and that’s the key. That’s why when you are a cashflow investor, it doesn’t matter what the economy does up and down. It’s always the time to be buying.
It’s interesting when the economy fluctuates. I have seen this in the past and I would love your take on this, too. When you see house values drop a bit, it’s almost like the rents go the opposite direction. They tend to go up.
If there’s one thing that doesn’t drop, it’s the rents. I’m not saying it can’t happen.
It still costs what it costs to live someplace. That’s the thing. It’s awesome because you are insulating yourself. When you are buying something that produces passive cash, you are buying an asset, you are using cash to buy an asset that produces cash. That’s what it comes down to. I love it because even though the house value can drop, why does it matter? You still have the same payment on the debt load that you have. That hasn’t changed, even though the house value dropped and you still have rent coming. You still have the same amount of passive income coming in. You are still in the same financial position that you were before the house value drops. That’s phenomenal. During the COVID-19 pandemic, have your views of real estate changed at all with everything dropping and fluctuating so much?
Not really. We were cashflow guys. The only thing that happened to that pandemic is maybe collections became a little bit of an issue. Normally, we collect 97% of the rents across the portfolio. You are always going to have a few deadbeats set of 100 and not pay. Maybe in the worst, COVID dropped to the mid-90%. If we can stay above 60% or something on average, we are still making money.
You only dropped to mid-90%?
That’s incredible. It’s the same scenario. In cybersecurity, which is my primary line of work, everybody has to pay for two things. They pay the rent for their office space and business because they need a place to operate the business if that’s still their thing. That might have changed a bit after 2020 because there are more remote workers who work from home and all that. The second thing that always pays is the rental on their computer systems or the people that keep them running. We did not see anything dropped from our collections’ perspective that much at all, either. People need a place to live and from a business perspective, they need computers to be able to do their work. It’s the two things that are constant.
One notable thing with that is there were a lot of headlines, “People are paying their rents.” You get a free rent hashtag. That’s why we don’t invest in blue states. Not to say anything politically. We won’t buy places in California. We are in Texas, Arizona, Alabama, Florida, places that are red states. People seem to have more honor out there. If you can’t pay, you can’t stay. We invest in places with good landlord laws on our side.
Has your mindset in investing changed at all? How has it changed since you started this whole gig and to the point where you are at now?
This stuff is a no-brainer. Your returns are higher. It is the more recession-proof asset. Why would you not do it? It’s made me get more frustrated with what’s the normal financial advice out there that was confusing. They make it so complicated, all the stocks and mutual funds. It isn’t but they make it like it is to confuse the hell out of you so you can go into their mutual fund. They are leading a bunch of cattle down into the slaughterhouse essentially. That’s why it frustrates me so much.
There are so many higher-power working professionals out there. These are the people in the shrinking middle class who are paying their fair share of taxes and working for 40, 50, 60 years. For most people, if they are able to save maybe $30,000 to $50,000 a year, they can be financially free in ten years by doing it this way. Not everybody can do that because we would get our coffee, we build our bridges and we would create our infrastructure for the internet. Society would crumble if everybody did that.
You were talking about red states a bit. How do you feel about Midwestern states? There are a lot of states that are typically red in the Midwest. Let’s say Dakota or Oklahoma. I know you mentioned Texas but a lot of the states that you mentioned are Coastal states. What about the Central country?
More of the sunbelt is where the population growth is happening. I have some properties in Des Moines and up there. Typically, the trend is going on to the southern temperatures. That’s the trend. The rent to value ratio worked out there in Kansas City, Iowa, Minnesota. You are going to have good landlord-friendly laws out there because there are more red states but population growth is stronger in those other states to the South.
I’m tracking with you. That’s a factor that you look for them because there are not a lot. I live outside of Chicago. Illinois is a blue state but, at the same time, there are so many people that are exiting the state.
I like Gary, Indiana for the reason that everybody is getting out of Chicago.
That’s probably more a C or D class asset. I’m sure you have looked at that area.
There are A, B and Cs in every single state. D classes are ghettos. That’s what we defined as. I wouldn’t be out there even in the daytime. After 4:00 PM, I’m out of there. We don’t buy in places like that, but every market has generally A, B, C. The key is finding where those big pockets areas are.
You’ve got 4,500 doors now. What are your next moves?
Keep doing the same old boring investing, buying something that cashflows day one. We go in with the light value add strategy so we normally put $4,000 to $6,000 of upgrades into every unit so new flooring, new appliances, new paint job and maybe some new playground equipment, but we are not tearing down houses. We are not dramatic like HGTV type of stuff. It’s putting in prudent improvements to pump the rents of $100 to $150. That’s a game plan.
How long do you hold on to these?
It’s like 3 to 7 years. That’s where there are multiple exit strategies. If somebody wants to pay a stupid price, we will sell. Ideally, we want to refinance people’s money back out so it’s tax-free that way and keep holding and maybe do some more refinances. That’s where you get the infinite return strategy.
Have you seen more demand between single-family homes or multi-unit homes, apartment styles over the last couple of months or years?
Generally, the long-term trend is going to apartments because people can’t afford single-family homes. The population is growing. There are more immigrants. Jobs aren’t increasing. Overall, the salaries are improving. If we all look closely, it’s binary. Your high-end stuff is getting better. Your level up of America is getting worse. Look at this last pandemic. Most of the white-collar professionals are unscathed and their lives improve. Their bank accounts are even bigger.
Their commuting costs went down. A lot of their daily expenses that they have had are gone now.
They couldn’t go on vacation. They couldn’t spend their $5,000 tickets to go to the football games. It’s the divergence of middle-class America. These things separate, the haves and have nots. The gap is getting bigger.
I appreciate you because you have given people a lot of good places to start and where to go from there. For anybody that’s there, if you got $20,000, go to SimplePassiveCashflow.com. If you don’t have $20,000, take what Lane’s saying and live with your mom or your dad. Do whatever you can and suck it up for the next few years or so and you can do your first property then you’ve got passive cashflow that is going to rocket. It took you 6 to 7 years to get to eleven properties or something like that. This isn’t an overnight thing. It’s not a get-rich-quick thing but do what Lane does. That’s SimplePassiveCashflow.com. Lane, thanks for being on.
Thanks for having me.
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