After a strong career as a civil engineer, Hawaiian native, Lane Kawaoka, decided to kiss corporate America goodbye and turn towards a stronger long term wealth plan – investing in single and multifamily units. After purchasing his first property in Seattle, Lane quickly realized what he needed to do to bring better cash flow to his strategy and invested in eleven different single-family units is not as large cities, such as Birmingham, Alabama, and Indianapolis, Indiana. Lane has a different business model where he focuses primarily on getting the money for the deal, and this way he joins on the GP side of the syndication.
In this episode of Multifamily Real Estate Investments with Don and Eden, Lane dives into how he conducts business all over the country – investing in multifamily units in different regions of the United States and more specifically how he anticipates what the markets are like so he can find a good deal. From there he will detail his unique business model of finding deals that no one else is really putting into practice and why it generates such great success for him and his partners. Lane also talks about why he thinks self-storage units and mobile home parks are a great start to investing in real estate and why he is focused on that for his investment future.
At the end of this episode, Don also records an outro that explains how the entire syndication process works.
Highlights:
- Lane’s Beginnings In Real Estate
- His Unusual Business Model
- How He Analyzes Markets Throughout the U.S.A
- Why He Believes Mobile Home Parks Are A Great Investment
- Current Projects And Future Outlook
How to Connect with Lane
Simple Passive Cashflow Podcast with Lane Kawaoka
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TRANSCRIPTION
Hey guys, today I’m going to interview Lane Kawaoka – a real estate investor from Hawaii and he is also syndicating deals. What I like about him is that he’s going to educate us on a different way of making passive income from multi-family and other real estate’s syndications without ever finding the deal, but only finding the money. Now I realize not all of my listeners are really educated as far as the syndication process and how it works. So I decided to add a small part at the end of the interview, at the end of this episode really, to kind of educate you guys about the process so that you would know exactly what we’re talking about because these are some critical advice that he gives and I really want everybody to understand. So I hope you guys are excited and stay tuned.
Welcome to the real estate investing podcast with Don and Eden where we cover all aspects of real estate investing with special attention to multi-family apartment buildings and off-market strategies.
Hey, Lane Welcome to the show. Thanks for having me, Don. Yeah. So how’s the weather in Hawaii?
Perfect as normal little hot, but not complaining.
So I live in Florida and that’s where I want to live. But right now as it’s the summer here it’s not that pleasant, there’s a lot of rain, hurricanes, the Internet is bad. I’m pretty sure you’re having a better time than I am the other day or just in the office all day long looking at deals.
You’re so right about that. So how about you tell us a little bit about yourself. For our audience to be able to get to know you a little bit.
Yes. I used to be an engineer, graduated from college in 2007, but none of my family was in real estate. They thought that the tenants would just rip the house. So I kind of grew up on this linear path that goes to school, study hard, get a good job, yeah engineer of all things and work for 40-50 years and maybe retire, but that kind of changed for me when I started to work as a construction supervisor and my first job out of college. The job kind of sucked. I didn’t like it at all. I was traveling all the time, but I got paid a pretty good salary 80-90 grand a year wasn’t bad. And I was able to buy a primary residence up in Seattle which I’m sure you guys talk a lot about that. That’s not exactly where you want to invest for cash flow, but I didn’t know any better start to rent it out and for a young 20 something-year-old kid. It was a lot of beer money when the monthly rents were twenty-two hundred a month. And the key idea the mortgage payments were sixteen hundred dollars a month. Then at that point, I realized like shoot I gotta keep doing this over and over again and that’s my way out of this crappy job and to get financial freedom.
So, you bought some more single-family units afterward right?
Yes, I bought another one in Seattle, but at that time I was in a bunch of podcasts and kind of learning this concept of yeah you don’t want to buy A class rental. You want to buy more B or C class. And so I bought a nice class rental was a duplex, but at that time it was 2011, 2012 the prices were starting to come out and I was realizing that wasn’t cash-flowing. That’s where I learned the concept of you don’t buy properties and probably markets like Seattle, San Francisco, Los Angeles, New York, Boston you look for more of these secondary markets like Kansas City, Memphis, Indianapolis, Little Rock, Jacksonville, Birmingham kind of those places are. Today tertiary markets so that you can buy more for cash flow as opposed to appreciation which is sort of gambling and a little dangerous in my opinion especially when it looks like we’re sort of getting to the top of the market.
Yes, I agree. So, what was the stage where you decided to move from single families to commercial real estate especially multifamily?
Yeah so after those two rentals – all I bought the other one of these turnkey rentals in Birmingham. So, I think the purchase price is like 80 grand. And the rents were like eight hundred or so. Right at that 1 percent rent to value ratio and I had some pretty good luck with it. So, I sold those two Seattle properties and did a 1031 exchange for nine out-of-state properties and then they picked up another property in Pennsylvania. So in 2015, I found myself having 11 rental properties and at that point, I was operating off of this mindset of hey I’m just going to buy a whole bunch of these single-family homes just get another 20 I’ll be financially free right. Thirty properties cash flying at 300k dollars a piece that’s about 9-10 grand passive. But then I realized with those 10 rentals I was getting an eviction or two every year. So that’s when I kind of walked down this path this logical path of becoming a multi-family investor.
That’s cool. So, I know you have a different business model when it comes to multifamily apartment especially when it comes to syndication. So tell us a little bit about that business model. What’s so special about it and how do you go about it. How do you do it?
Yeah. So, I mean, I started to do this podcast and if at first, it wasn’t very popular. Like most podcasts die. But I kept doing it because my motivation was that in the first like the podcast was about, hey educate people buying a single-family home, turnkey rentals, or buy properties remotely. Just because a lot of my friends were asking me this and I was just so tired of saying the thing over and over again to people and nobody does anything. But throughout that process people kind of got to know me and they realized like alright this is cool and nice you’re going into these multifamilies, these syndications and private equity deals. Can we just copy what you do? So that’s what I do today and every deal I go into I typically bring in about 50 or 60 investors or three million dollars follows along with me.
That’s very cool. So you’re focusing on raising the funds rather than finding the deal or you’re doing both?
So if you’ve kind of back up to 2016 I joined an apartment investing group and you spend like 30 grand to get in and get the training. But I went in this because I wanted to be the operator I want to be the guy who is running this 200-300 unit apartment complex.
So I went and got the training for it. I got the coach and learned how to underwrite deals and for about 18 months I must have analyzed a couple of hundred properties and I realized that absolutely none of them made sense. Most of the garbage is out there especially through brokers and Don you kind of mentioned that most of you guys are looking for properties, not from a broker which I think is a good idea because even me and my partner we had like 30 or 40 units in their name, but nobody cared. If you have a bunch of single-family homes they only want to know if you close big deals. So I wasn’t getting anywhere in terms of traction if there was one saving grace being able to underwrite deals pull the panels or rent rolls do my analysis. It prevented me from buying a lot of deals in that from 2016-2017. And at that point me and my partner were like ‘hey we’re not getting anywhere with these brokers’ which I’m sure a lot of you guys can sympathize with. And because it is super hard and so we’re like well let’s just go as a passive investor into some deals and build our track record and make us look cool on our resumé.
So we went through a few deals and then we had 300 units to our name, but then I realized like ‘hey this is pretty easy just being a limited partner, making 10 to 15 percent on my money and then not doing a thing like this’ is pretty good and my net worth at the time I was getting to a point where hey if I die if I just invest my money at 10 or 15 percent I’ll be financially free in the very near future. Definitely, well before my 40s. So why would I want to take on all this risk putting down all this hard money on these bigger deals and I’m going down that route.
So it’s always the question we always want to do the bigger things. Even though we could make good money by just investing our money inside other people’s deals but we want to be the people that actually operate the deal.
That’s the thing right. I mean but ego aside. Right.
Everybody wants to do big things or whatever, but it comes down to your net worth. Like if you’re under half a million dollars net worth you’re broke. I mean you got to be the guy operating there. You can’t be a passive investor. You got you gotta have money to invest as a passive investor. So it’s just more of a math equation kind of moving past that critical mass point or I could be a passive investor and just sort of these single-family homes and those rentals got me up to that point so I could switch that just instead of talking with brokers and finding my deals. I started to go out and network with other operators and to go in as a big name partner on these deals and just got really good at underwriting those deals because I did it as a sort of pseudo operator for a while.
I could look through all the garbage and all these pitch deck deals because I’ve been in Dallas trying to invest my own money and so it all kind of came together where my investor list wanted to know what I was investing in and I was kind of looking for deals for myself.
So far we’ve closed on about two hundred sixty million dollars worth of properties and 26 units or twenty-eight hundred units I think I don’t really count anymore.
Who counts. Yeah. Yeah, I got six hundred after a thousand, that just sounds a bit ridiculous. I just sound like a jackass.
So you were just getting into these deals that other syndicators had and you were just investing as a passive investor and then you decide that you have the connections with other investors that are looking to invest. So you could get on the GP side of the deal by just being the person who brings the money in the right. Am I getting you?
Right. I mean I’m very valuable when I come into a deal. I bring in three million dollars of investors with my great relationships. It’s a big problem especially being in some deals that don’t go as well.
Investors start to get very whiny and they start to ask a lot of questions and some of them may even sue you. So those relationships are key and I think a lot of newer investors lead investors don’t realize this. So having relationships with all your investors is very important and not to mention that that’s the S.E.C. protocol you need to have your pre-existing relationship with all your investors and you need to know every single one of their financial pictures intimately.
So now I go in as sort of a sub syndication and bring in my investors and my investors want to know that they have somebody on the inside somebody who is pulling the strings on the management team and a lot of times I’ve been in more deals than the operators at this point, almost like 20 something deals. So I bring in my insights I bring in my contacts best practices from other deals. But at the end of the day I don’t I’m not I don’t want to be that person managing the manager on a week to week basis know in my opinion that’s trading time for dollars. That’s not the highest best use for my time.
Ok, so you’re giving some critical advice here which I love. So the first thing that you’re saying is that you’re getting in all the deals that your investors are getting into. So they know that Lane here, that we trust Lane, and he’s got experience and he was involved in 20 deals or so and he’s investing his own money. So we know that we could invest together with him because we’ve made money with him and we have a great rapport with him and we trust him. So that’s the first thing that you do but the other thing you do is you’ve got to screen out all these deals coming from syndicators must have heard about you and your connections because a lot of people are stuck because they don’t have money right? So then you have to screen out the deals between all the syndicators and you’ve got to pick the right one for your investors and yourself. So how do you do that?
Well it’s a simple process of I mean it’s just no different than getting deals from brokers or figuring out deals from wholesalers are good. At the end of the day you grab the pen, you get the rent roll and you put it into the analyzer and you analyze the paper yourself. That’s half of that right. The other half is building up a network of other past the best serves so that the operators because I don’t go into a deal unless I know I have a strong relationship with somebody who has been in their previous deal to bet that expense.
Yeah. So how often do you see syndicators that are involved in bad deals? Ones that don’t have any chance of delivering what they’re promising to their investors.
Well, I mean quite often. I mean it’s kind of like syndication. They’re kind of like airplanes right. When they take off everybody’s all happy, but nobody knows if it’s taking off with a quarter tank of gas. When I go into a deal I want to at least know we have enough fuel to get there.
Yeah, I see so that’s your criteria. Your check to see that the plane is not going to crash.
Well, I don’t know. I don’t know if it’s going to crash or not. Nobody knows, but I want to make sure it has enough gasoline to get there and metaphorically what I’m talking about is it underwritten the right way or are they using these loony projections on rent increases per year, the reversion cap rates are too low, or if the rent increases just too aggressive?
Okay, but let me try to understand something. So when you’re underwriting a deal you also have to get to know the market. So if you’re working with syndicators from all over the United States sometimes they would show you deals from markets that you don’t know you’re not familiar with. So how do you go about getting to know the market so that you could understand that their underwriting is done correctly?
Well, every day where the rubber meets the road is on a few cells on a spreadsheet. Different locations are underwritten a little bit differently. For example, Dallas is a very hot market these days you might underwrite it for more than 90-92 percent occupancy whereas Oklahoma City is not the case and you might underwrite it for a maximum of 88 percent occupancy. Now, of course, there are a lot of other boxes on the spreadsheets that I might play around with based on the market, but those are some of the levers that you pull. And where do I get some of those numbers from? Well I just call up some of my buddies who are in those markets and I ask them what they’re using at the time and they level and normalize based on what other people are using.
So it’s all about networking, you don’t know anything about every market that the people in every market so that you could ask them?
Right. Right. But it’s the same it’s no different than like me asking you well hey what’s the temperature in Florida like I don’t have a clue what the temperature in Florida is, but I know what it is relative right to Hawaii or California. Same thing.
Yeah. That’s a very smart perspective. I like it a lot so I know you’ve been looking at other asset classes recently especially self-storage sites and mobile home parks which I’ve been hearing a lot of people talk about recently. So could you tell us a little bit more about that? What exactly are you looking at and what are some of the opportunities that you see over there.
Yeah. So I mean multifamily don’t get around as a great asset class right. The population is increasing and the whole workforce housing story. And then a lot of people like to get into multi-family because of great financing options. In theory, you could just get a good property manager and they just run the show for you. But those are the exact reasons why you shouldn’t do it because everybody and their mother is syndicating multifamily deals these days and very few people are into the mobile home park space. So from one perspective, you’re kind of looking for an investment that is a good investment. Which mobile home parks and what they found they are but from another viewpoint. You’re looking for which one has less competition and this is where mobile home parks vastly overpower what they found the apartments. If I were a new operator today I would do a mobile home park investing just because there is a lot less competition out there for it. Part of the reason why it’s kind of a dirty asset. Most people have a knee jerk reaction to it like they’re like I don’t want to own a mobile home park, a trailer park trash type of environment and everybody who’s own single-family homes gets the renter mindset of a renter in that environment and they’re like all of this. It’s a logical progression to go to multifamily but not a lot of people have lived in a mobile home park. So again it’s a lack of competition.
So, what are the opportunities or more correctly the value add opportunities that you see in a mobile home park?
Yeah, I mean it’s no different than apartments or says family homes. It’s a little bit nice lipstick on a pig but a lot of it more like management plays. There’s a big increase in the amount of community and that’s where the property manager comes in with the leasing getting more systems in place improving the community because the nice thing about these mobile home parks is yeah you can have one business model where you rehab the existing units but you’re trying to get to a point where the tenants on their own houses. Right. So if a tenant screws up property just like how they screw up a single-family home or they screw up an apartment complex in a mobile home park when it’s their property, well, that’s their problem as a mobile home park owner you want to get to a point where you just on the concrete slabs and people pay you the rent for that lot. It’s really hard to screw up a concrete slab.
Yeah, that makes a lot of sense. So where do you see yourself in the next 10 years as far as real estate investing, what are your goals and dreams for the future? You are still in your 20’s right?
No, I look 20 but I’m a lot older it’s the Asian thing or something.
Thirty-three. Oh, you must be using some good anti-aging then yeah.
Well, it kind of sucks when you’re in corporate America right. Because you look like a little kid. One of the reasons why I quit my job five months ago.
Well, I thought to do somebody that they look younger is always a compliment.
Yeah. I mean, I kind of realized that like five years into my career – probably like seven years into my career and at that time I had like five or eight rental properties and like somebody told me at work to go grab these boxes with the interns. And I was like Man I’ve been here for like five-seven years don’t tell me to go grab some boxes so then I realized at that point this is how companies are it’s how much white hair you have. It’s funny. Yeah. But yeah. So to answer your question, yeah and let’s get back to that.
What’s going to happen in 10 years think in the next I think in the next couple of years. I’m going to write out this mobile home park because I feel like it’s a little bit better cash flow than apartments. It’s not as great appreciation play. But quite frankly I’m not looking for appreciation. I’m looking more for cash flow these days.
I stay away from the development deals and I think I’m going to be doing this mobile home park for the next couple of years of course still like cherry-picking the mobile home parks or the multi-family apartments because there are still big deals out there you just need to know how to analyze them and figure out the good ones from the bad ones. But two years and beyond. I think I might phase-out of real estate and maybe go to something more recession-proof or not correlated asset to the economy such as life settlements or something like that when you buy policies the people who are going to die. I mean there’s nothing more guaranteed than death and taxes right.
Yeah definitely. Ok so now I want to get back to the mobile home parks again just one last question. So when you look at a mobile home park what are you looking for? What are you looking at? How do you have a deal?
Yeah, I mean, I don’t know yet too much. I mean I’m still learning the asset class. That’s why I’m going to go into parks that are already stabilized so eighty-five to ninety-five percent occupied. I’m just going to buy existing lemonade stands that are cash flowing? I learned it from that. I mean that’s it but it’s no different than an apartment. Really. It’s just I think the key difference is property management. They are a lot stronger. The key employee part of this business.
I had a guest maybe like five or six episodes before and he said something about adding a value add to a mobile home park by just cutting some weeds out and just clearing some more space so that you could lease more units or you could do small storage for people to put some stuff they have like boats or cars or stuff like that, so that’s how you could get some more value-add and you could increase your rent.
Then we went over the numbers together and I think it was Paul Moore one of my guests here and we went over the numbers together and I was shocked by how easy it is to increase the value of that park and I was actually starting to look at them myself and asking people what they know about them. So I was looking up I use Reonomy if about it but I use it it’s very the interface is very nice and I started looking up the mobile home parks here in South Florida which I’m not really sure I want to invest in them yet because of the hurricanes and everything you’re people they want to have.
That’s exactly why do you want to own them because that 10 if you if you get to the point where the tenant owns the homes I don’t care if the tornado or hurricane takes the target but you would think but you would think that maybe now when there is a big hurricane make almost every year that people would just maybe prefer not to move their homes here so maybe that the demand is decreasing.
I don’t know. See I don’t know as much as I know about real estate. There are so many things said I don’t know. And so I want to do some more research before and try to understand exactly what’s going on because people are talking about mobile home parks right now and I have to say it is interesting and you’re talking about it and then people say it’s like the next big thing right and apartments are already overheated but they’re still buying apartments and you rarely hear about anybody that’s buying mobile home parks. So it’s kind of confusing. Everybody’s saying different things. Right?
Right. I think I will talk about a lot like psyche. He has a saying there’s two there are three sides to a coin. There are people who are on heads or tails right. What people normally think that you should buy multifamily you shouldn’t buy multi-family, you should buy a mobile home park, you shouldn’t. But there are investors out there that have a spreadsheet and they can put the numbers into the spreadsheet and those are the guys who live on the edge of the coin. Good or bad market. They know what the deals are. And I think that’s the key is figuring out being able to analyze the properties and that’s going to require you to go find a mentor to teach you that too and then go doing that for yourself. Because numbers don’t lie. People do.
I could agree. Numbers don’t lie. People do. So maybe I’m going to make that the headline of this episode. Who knows? So Lane, really it was a pleasure talking to you to do it today you’re so smart and you have such beautiful insights. What are the best ways to connect with you for other people that are listening to that show?
Yeah. My podcast is Simple Passive Cashflow mostly for passive investors, first money podcast about single-family home, turnkeys. But then that’s when the story starts changing to these private equities and we talk about all kinds of stuff like internet banking and that kind of stuff and have a whole bunch of articles on my website simplepassivecash.com.
Wonderful. Ok so thank you very much for coming to the show and I hope you’re going to enjoy the beautiful weather in Hawaii and stay in touch, I’m sure we have a lot more to talk about.
Yeah yeah. Thanks for having me.
You have a great day.
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Syndication Process by Don
So a real estate syndication is essentially the operator of a deal. That’s a person that’s trying to facilitate a deal in real estate typically commercial real estate. It’s usually the bigger deals but it could be any type of deal it could be one million, it could be 10 million, it could be one hundred million. So the syndicator what they’re trying to do is they’re trying to raise the down payment to the purchase of that property. So let’s say that we are buying a property for one million, let’s say this is the purchase price. So the syndicator is going to need at least two hundred thousand to get a loan so that they’re going to get 80 percent of the purchase price from the bank. They still need a down payment so that the 20 percent and that they raise from investors.
Now, what’s in it for the investors? The investors are making a preferred return which is a return that they’re going to make anyway using a PPM, also known as a private placement memorandum. And then they’re going to make that preferred return anyway every year. So if they invested a hundred thousand they’re going to make eight thousand every year. And they’re also the partners of the entire LLC that is purchasing the property and they are known as limited partners which means they’re not taking any decisions of operating the transaction doing the value add plans and all of the above. But they’re just making the money. So they’re just passive investors making the 70 percent, of course, based on the amount of money that they had contributed. But they’re going to make that limited partnership return and also the preferred return that they’re going to make every year.
So the syndicator is going to make 30 percent of the entire LLC but he’s going to be a general partner. So he’s making decisions, he’s implementing the value plans and he’s doing all the work of assembling the deal. And that is what he’s making. So a lot of syndicators they would also make acquisition fees so once the deal is completed then they’re going to take between two to five percent of the entire purchase price of the property and they’re going to take that in a check from the money of the investor. So the money of the down payment which is why you have to raise a little bit more than 20 percent also for a cap-ex and other things but that’s pretty much how it works. Of course, you have to remember that sometimes the numbers change. I’ve seen general partners that are 30 percent and the limited partners would be 70 percent obviously but then I’ve seen general partners that are 25 percent /75 percent limited partners and so it changes. I’ve seen acquisitions fees for one percent and I’ve seen some 4 5 percent. So the numbers are negotiable. Every syndicator has its secret sauce. So what I would say is average is 30 percent, General Partners 70 percent, Limited Partners and a preferred return of 8 percent and then an acquisition fee of 2 percent is what I think is the average. So I hope you guys enjoyed the episode and remember two episodes are coming every week so stay tuned.
Thanks for listening to the real estate investing podcast with Don and Eden. Stay tuned for more episodes. Till next time.
