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Episode #27: Real Estate Syndication with Lane Kawaoka of Simple Passive Cash Flow

In this episode, Millionacres editor Deidre Woollard talks with Lane Kawaoka about his work in real estate syndication and how he built a real estate empire that allowed him to give up his career as an engineer.

Lane is a former civil and industrial engineer. His investing career began with single family rentals around the United States. He now invests in syndications which invest in Class C & B Multi-Family Apartment, RV Parks, mobile homes, and assisted living facilities. He shares the Millionacres passion of making real estate investing understandable for everyone. Learn more at https://simplepassivecashflow.com.

Transcript

Deidre Woollard: Hello. I'm Deidre Woollard, an editor at Millionacres, and thank you so much for tuning into the Millionacres podcast. We're diving into rental properties again. It's one of our favorite topics. But this time, we're going to take it from a little bit of a different perspective and talk about syndication. Today, my guest is Lane Kawaoka. Lane is a former civil and industrial engineer. His investing career began with single-family rentals around the United States. He now invests in syndication deals including class C and B multi-family, RV parks, mobile homes, assisted living, really runs the spectrum. He shares our passion for making real estate investing really understandable and accessible for everyone. Thank you for joining me today.

Lane Kawaoka: Yeah. Thanks for having me.

Deidre Woollard: Tell me a little bit about your journey because I believe were you in Seattle when you were an engineer and now you're living the dream in Hawaii?

Lane Kawaoka: Yeah. I walk this linear path, is what I call it. I was told to go to school, study hard. For some reason, I was good at math and science when I was nine or 10 so I became an engineer in college. My parents pushed me in this go to school, study hard, work, get a job for 40, 50 years and then buy a house along the way. A lot of this mainstream financial advice which I don't necessarily agree with for some people, but I bought a house to live in because I got paid a good professional salary, saved my money up. But I was working on the road all the time as a lot of young professionals do so I just started to rent out that house that I bought because I was only there on Saturdays. It was in Seattle, 2,200 bucks a month for rent. The mortgage, PITI, was 1,600. To a young 20-something-year-old kid, that was a lot of beer money. But then I got to thinking and I was like, "Wow, if I just keep doing this, I'll be out of the rat race. I'll be able to fire my boss, do whatever I want." That was the start of it all.

Deidre Woollard: I was looking at your bio. It said that you had 11 single-family properties and somewhere along the way, you made that leap from having a bunch of rentals and it seemed like they were all over the place to syndication. What was that process like?

Lane Kawaoka: Yeah. I bought those first few properties in Seattle and then I realized sophisticated cash-flow investors don't buy in primary markets like California, Hawaii, New York. They buy in these more secondary, tertiary markets like Birmingham, Atlanta, Indianapolis, Kansas City, Memphis, Little Rock. These are the places you're going to find rent-to-value ratio is higher than one percent. You take the monthly rent divide it by the purchase price, and you're looking for something one percent or higher to be able to cash flow, to be insulated from prices going up and down. At the end of the day, the end goal is the income. That's what I tried to do. I still worked in my profession job, pretty frugal guy. I was able to save 50-100 grand a year to go buy properties. Around 2015, I had 11 of these rentals. Five in Atlanta, four in Birmingham, one in Indianapolis, and one little one in Newcastle, Pennsylvania. But then I realized as I started to pay for different mastermind groups, get around other accredited, high net-worth investors, other doctors, lawyers, engineers about 10, 20 years further along the path of myself that, yeah, running properties is a great way to get started. But most of credit investors graduate to these private placements and syndications and some people refer to these as the country club deals. A group of investors will get together and pool together their money so they can go after a better asset, a better deal. A lot of these deals are out of the reach of mom-and-pop investors that just bid on properties, and then also below the institutional players, buying those 400, 500 unit apartment complexes, the A class type of stuff. There's a void between above two million dollars, below 10-20 million dollars, or this private equity space of private placements and syndications. I had my 11 rentals, and on those 11 rentals, I had an eviction or two every year, some big catastrophe every quarter. Those would be like a chief follow-on my house or some tenant move-out. I've had a few times where I've had to pay $5,000-20,000 on a tenant or because a tenant just trashed the place, which is very disheartening. But 10 rentals, each rental you get maybe a few hundred bucks of cash-flow. Ten rentals is $3,000 a month, which is, hey, I'm not complaining. When I started out back in 2009, that was the dream to me. But I don't know what American family can survive off $3,000 passive a month. Most of us have that goal of $10,000 a month. To get up to that ledge, and now you're looking at 30 rentals, and so three times all those numbers. Now that's an eviction every other month, some big catastrophe every few weeks. As you can see, it's not very scalable.

Deidre Woollard: That is a really good point. I want to circle back to something that you mentioned that I think is pretty interesting, which is, you were saving a lot of money to put towards your real estate investments. I think a lot of people wonder how you could do something like that. What were your tips for being really frugal as you started off early on?

Lane Kawaoka: I was just born pretty frugal. That's just how we were brought up. You don't go to a restaurant and buy a soft drink. I didn't know that we're allowed to do that until I went to college and went out on my own. I just was really good at saving money. There's definitely a minority of people out there like myself, that max-out our 401Ks, do all of that. But there's two camps in the personal finance blocks here. You have the frugal camp, the lean fire, "Don't get your latte, [laughs] it will turn into $50,000 in 30 years." Then there's people in my camp. Where you go into good debt to acquire assets. You loosen the belt, if you're investing in the right things, if you're fully leveraging yourself, fit into good deals and good assets. But everybody starts out. When I graduated college, I didn't have any money so I just started from zero. Luckily, I didn't have too much student debt. But I was able to save at least $40,000-50,000 out of my salary and I didn't get paid six figures at the gate. This is back in 2009. Civil engineers don't get paid that much money. But I was able to save a lot of it because like I said, when I started to buy that first rental property, and started to rent it out, I moved out of it and people were like, "Well, where did you live?" I'm like, well, I just lived off the company dollar [laughs] for three years. They put me in hotels so I just did that. I'm a big fan of people sucking it up for a little bit so you can live like how people dream.

Deidre Woollard: Yeah and sometimes when you're working toward that goal, you have to build the sacrifice. It's like working out or anything else that you have to anticipate that there might be a little pain if you want the big rewards. I was wondering too, you mentioned good debt and I was looking at your bio and I know you had some bad luck with one of your first syndications. I wanted to dive into that, tell us what happened, and really what it taught you.

Lane Kawaoka: Yeah. These syndication deals, typically they're way better than buying a rental property, especially if you're buying one of these turnkey rentals, that you're paying a retail price for. Yeah, it's a good cash-flowing stream property and the property will tend to appreciate over time, but syndication deals have forced appreciation. We're going in, we're changing out the flooring, new appliances, giving the property a face-lift, increasing non-operating income which in terms force appreciates the asset and increases the price, the value of the property. That's the big difference between syndication deals and just people doing it on their own. It's a much more scalable asset. But the problem with syndication deals is you're relying on the operator. You really have to work with honest and truthful people that have good business sense and are competent. It's not hard to find these people. Really, it isn't. But there are landmines out there. Make no mistake. For someone who's never owned a rental property, you're looking at a pitch deck. Everybody has a podcast these days, everybody can create a webinar. Everybody looks solid. It's real estate, it's marketing. Just like real estate agents, navy pants and brown shoes. Everybody has got the uniforms down path, but how do you figure out who's legit and who is just an Internet marketer? You have to build up your network of other pure, passive accredited investors, and get around other people. I didn't have that when I first started. My parents didn't own rental property, I didn't know too many people over a million dollars net worth. I didn't know anybody really investing in this stuff. But I jumped into the game and I eventually stayed in the ethos and expanded my network. The podcasts that I do today really helps attract those types of people to me, so that's my competitive advantage. But it's going to take most people a few years to build up a Rolodex of pure passive investors to then disseminate who do I want to place money with?

Deidre Woollard: In one of those first deals, did you end up losing money because you put your faith in the wrong person?

Lane Kawaoka: Pretty much. Yeah. [laughs] I actually found out the guy was a [inaudible 00:10:14] three months later, and I was like, "Well, I hope he doesn't take my money." [laughs] But he end up dead, two years later, I found out. They send out a letter saying, "Yeah we're going bankrupt." I was like, well, lesson learned. I didn't fight it. Most people will get a lawyer and then burn up $20,000 of legal fees. But that's why you diversify. I don't advocate any of my investors to put in more than five or 10 percent of their net worth into any one deal. Because you want to be diversified over different partners, different asset classes in geographic areas. This is what accredited investors do. They don't take chances.

Deidre Woollard: How important do you think ethics are in real estate investing as a whole, especially when you're dealing with these large sums?

Lane Kawaoka: It's funny, we'll go to the bank and just wearing regular clothes and we've got like nine million dollars of investor capital there, it's crazy. The bank teller just looks at us like we're crazy. You do a lot of bad with that, and people have. The way I look at, most people are good, and they want to create sustainable businesses where happy customers come back. Most investors diversify, like I said. They may be putting in $50,000 of their one or two million dollars net worth. We'd like to get a whole lot, eventually. How do you do that? We'll you make people happy? You give them consistent returns and you do what you say you're going to do and don't take people's money. Things are going to go good and bad within the deal, but at least the sponsors are acting responsive with fiduciary responsibility. That's why in a syndication, there's a lot of documents in there, but essentially, the sponsor are signing up for fiduciary responsibility to do what's best interest of the passive investors.

Deidre Woollard: Let's talk a little bit about that due diligence, because that's one of the things for both syndication and crowdfunding. You are looking at this massive pile of documents. If you're not someone who really understands what they're doing, especially if it's a ground-up development, that can be really complicated. What does your due diligence look like?

Lane Kawaoka: Yeah. There's a lot of documents. A private placement memorandum can be 100, 150 pages. Every other paragraph has capital letters [laughs] saying that there could be aliens or pandemics coming down or floods. But it does two things. It signs the sponsor up for fiduciary responsibility. Do not lie, cheat steal, act in the best interest of LPs. But it also signs the passive investors up to say, "Yeah, we understand that there is risk involved with this." Because there are some passive investors out there, which is why we vet the right people, that if they're not happy or even if they get the returns they are looking for, they'll sue. This is just how things are out there. That's why this document, the private placement memorandum sets the rules of engagement to keep things fair for both sides. But like I said, you can have all the right paperwork, and all the legal documents in order. But if you're sponsors are dishonest, the paper means nothing at the end of the day. But your due diligence from a passive investor's perspective is twofold. First, the people component and then the numbers. People is track record. Do you know anybody personally that you trust that doesn't have a dog in the fight? That's not going to get any referral fee or actually he's put 50 grand with this person or a substantial amount of money and got in a good habit and something happened. I've seen a lot of people say, "Oh yeah, Angie is really good," When you come to find out, they didn't even invest with the guys [laughs] so how do they know? Only Facebook likes the guy has? That's the gold standard of investing via proxy. You know somebody personally, and they've actually invested money with the person. But like I said, when you're starting out, likely you're not going to have that, so you're going to have to go off, just loose referrals at first. But yeah, you're trying to verify character, track record, competence. Next is the numbers. Most passive investors don't know how to underwrite deals. Even if we gave investors the profit and loss statements, the rent rolls, to be honest, 95 percent of them will only know how to deal with them. It will just confuse them use them and they just won't invest, and which is why most pitch decks you don't have had in there. You have things like what were the sales comps which to me as a sophisticated investor I don't really look at that because you don't know what the story is of all those comparable. It's useless to me, but it's put in there. There's a lot of red herrings in a pitch deck that you as a passive investor just are constantly bombarded with and you have to make the right decision. Unfortunately, like I said, most passive investors do not have the knowledge to underwrite deals themselves, so they have to rely on the first one, which is the people. But like I said, once you find the right people you work with good success, stick to them.

Deidre Woollard: Really good point. I think it also brings up something else is you're using the term passive investing. That's one of the things that I believe is that passive investing isn't really ever truly passive because you are responsible for do your own due diligence, you are responsible for keeping track of the project, and especially because syndications and these deals take a lot of time sometimes, you don't really get your returns back for 3, 4 years, or even longer depending on what's going on. Do you think that there is a little bit that passive investing is a misnomer and that it can suck people into thinking like, "I just hand over a check and then money comes back to me magically."

Lane Kawaoka: It's certainly easier than a turnkey rental. That is semi-active for sure, but I'm big into the minimum affected dose. What is the very least that a passive investor can do and where can they focus their very sparse time, and focus and energy into doing due diligence the right way? Most passive investors or accredited investors are busy people. These guys have families. To me, if you're spending more than a few hours a month being a passive investor, you're paying [laughs] too long, you're just looking at the wrong things. You're just going down a lot of rabbit holes. Again, I will focus on building relationships with passive investors to help co-source your due diligence for you. But really like what are you looking at? Like I said, in the pitch deck, there's not much that really tells if it's a good deal in there. That's why I'm emphasizing build your network. Your network is your net worth eventually. A lot of this is predicated on the [inaudible 00:17:22] . You're doing a due diligence wiring over your funds and that's it. You're hands-off. You've major decision, you're already on the boat, you're already on the plane. The plane has taken off. Now let whatever happens in that little mini experiment dictate on what you do in the future. Most passive syndication investors that are accredited have ventured again into a few dozen investments. I don't know. I guess there's always a handful of guys, the propeller hat guys, who read every little P&L that gets sent out with the quarterly financials. But that's not in the scope of a passive investor, in my opinion, and there are more better ways you can be using your time.

Deidre Woollard: So in terms of syndication and setting things up as a limited partner, how do you do that in general? Do you build a separate LLC for each deal or is it something that you do from different accounts? I think that's something that beginning investors are often concerned about. How do they get started?

Lane Kawaoka: On the partnership level, we're the sponsors, so we set up an LLC or an LP to encapsulate the asset and the deal. So you're going to have that protection right there. But I'm giving the disclaimer now. I'm not a lawyer. But I'm just telling you from my experience of having over 400, 500 investors, that normally, I would say most people, the vast majority just invest in their personal name. I'm also the same guy, if you own a rental property, you probably should have an LLC because there's a heck of a lot more liability in owning a rental property than a passive LP position. Let's talk about there is some risk there, but it's essentially zero because you're not managing member, you're not making calls, and you are a passive LP Investor. There's very little liability in there. If anything, the liability is with you maybe going out driving and hitting grandma, and then them coming after your assets. At that point, it would be good for you to put assets in the LLC to protect it from you. But most investors that start out, if you're investing less than half-a-million dollars, start up maybe in your personal name. But as you start to grow your holdings, maybe start to silo them in different types of things. Maybe half-a-million dollars per LLC. Of course, everything is different. I'm not giving any legal advice here, but I'm just telling you what I see. Whatever you do, definitely do not comingle the LP holdings with active businesses or rental properties because those are more lightning rods for liability and you don't want to comingle these lower risk holdings with those.

Deidre Woollard: Yeah. That can be a tax mess as well. So your path was, you started with single-family homes and then you went to syndication. Do you believe that everyone should do that because there's lessons that you learned or do you think it's possible to leapfrog directly into syndication if you're already an accredited investor and you have that net worth ?

Lane Kawaoka: Yeah. If you're an accredited investor, you probably could leapfrog this stuff and go straight to the NBA, as they say. But there's a couple of reasons why I like to see people having rental properties, especially as a sponsor, because I know people have rental properties, they understand that you don't always make money every month, things happen, and I like to have nice investors who understand this and don't have unreasonable expectations. But for the passive investor listening right now, by owning a rental property, you understand certain things holistically. You may already understand, academically, the rent-to-value ratio, which you referred to earlier. Looking for something one percent or higher so that you're able to cash flow on a monthly basis. People, if you've never owned rental property, you may academically nod your head, shake your head, "Yeah, I get it." Simple. It is simple. But people who have actually owned rental property before understand in their heart, "Oh, man, the HVAC went off, that's 3,000 bucks I have to pay. Now I know what that CapEx item Lane was talking about was for." Then secondly, I think this is the big thing, when you're a syndication accredited investor, the name of the game is building your network of other pure passive investors. Everybody's rich. You have to add some value to other people and if you've never owned rental property, it's hard to get into a good rapport and conversation with another sophisticated accredited investor. You don't have war stories. You're not in the in the cool kids club. You've never owned rental properties before. Now, I'm not saying it's impossible to transition to syndications. But I would say I try not to use rules. But if you're net worth is under a quarter million for sure, start up with single-family homes. You have no business being in syndications, because at $50,000 a piece, you're probably going to be pushing 20 percentage of your net worth and that's just too much for you. People will let you in though. There are desperate people looking for money that would love to take in 25 grand from anybody. I would really caution about going into those deals in the first place. But yes, general rule, a quarter-million or less, look, you've got to build up your track record and that's what I did from 2009-2015. It took me almost a decade to get my net worth to be 700,000 and that's just how it is. That's life. This is not a get-rich-quick thing, but it's a get-rich-surely thing.

Deidre Woollard: I love that because I think that you and I have both seen real estate investing gurus out there who are trying to do that get-rich-quick thing and anyone who's been in real estate investing knows it's not get-rich-quick, it's get-rich-over-time. Having those wars stories certainly on our team on Millionacres, we've got a bunch of landlords, so we definitely have some war stories on our crew. I wanted to ask you about how you evaluate deals at because at Millionacres, we have this premium services couple Mogul that I mentioned before and our analysts are looking at the crowd funded deals that are on a lot of the popular platforms and there are a lot of them coming through. There is a lot of work. Are you also looking at that high volume of deals and have you developed a process to get through that a little faster?

Lane Kawaoka: I am able to cheat a little bit these days. I only look at the cream of the crop and I can usually outsource it to our lenders to do the initial running for us, the numbers running. But I used to. That's where you start off. That's how you learn how to underwrite deals. I think my first six months doing this stuff in apartments, I underwrote maybe a 100 deals that takes 15, 20 minutes, especially in the beginning, because you've got to get the P&Ls. There's always inconsistency in the P&Ls. You have to take the rent rules. You're always looking for inconsistency. They just throw people in the last second, and you're ultimately trying to put it into your model. Everybody's model is a little bit different. What is a model? It's essentially a complicated spreadsheet that you put in the profit and loss statements, like the T12, the T3. You throw in your assumptions, and when I teach my guys how to analyze deals, it's not how to put this into the spreadsheet. That's at more advanced level. But what are the assumptions that you're looking at to double-check the sponsors using responsible assumptions? The top three are like reversion cap rate. What are they assuming that the market is trading these assets for in the next 3-5 years? The next one is rent increases per year. I don't want to see the sponsor assuming the rents are going to go up three, two-a-half percent every year. I want to see two percent or less. I want it to be conservative. Then the last one is what is the full occupancy? Are they assuming for economic vacancy in there? Those are the big things that drive the numbers and then ultimately the number at the bottom of the spreadsheet. One hundred percent return in five-years can quickly turn into 40 percent return in five-years if you're using the wrong assumption. That's the due diligence that I personally do and I just run it myself. I don't trust the syndicator. I'm just going to run it myself and see when the number I get at the bottom of the spreadsheet. I'm able to cheat. I'm able to run the numbers. I can pretty much tell if the sponsor is using what assumptions and if they're being a little overzealous, I just won't even interact with the guy and I move on. But most passive investors aren't able to do this. So they're going to have to rely on their network.

Deidre Woollard: Good point. I do feel that sometimes you see sponsors being a little too optimistic about rent increases and things like that. But you mentioned a term that I want to go back to because I don't think a lot of people understand it, and that's economic vacancy. Because I think people don't understand that there's a difference between physical vacancy and an economic vacancy. Can you explain that?

Lane Kawaoka: Yeah. Physical vacancy is like, let's say we have 100 unit property. Ten percent of the units, 10 units are not filled with people. Well, then you have a 90 percent physical occupancy. But by the way, we didn't tell you, but 10 of those people that are in there of 90 are deadbeats not paying. Now we have an 80 percent economic vacancy. On the pitch dig, I might say "We're 95 percent occupied. Well when you look through the financials and you look at the bank statements, well, these 20 people that came in at the end are just warm bodies and they're not paying [laughs]. It doesn't happen very often, but there's always some element to it to some degree. The sponsor needs to understand that this needs to be accounted for. Normally across my 4,200 rental property portfolio, we usually run it like 97 percent collections. Normally the properties are low 90s to mid 90s occupancy. We don't want to run this thing 95 or higher, despite what people think because if you're running at 95 percent or higher, your rents are too low. You need to bump up your rents, you hit that optimal set point 92-95 percent. But even if you're running at 92-95 percent physical occupancy, you're not going to collect all your rents and which is defined as collections or in this case, economic vacancy. So 97 percent is what we usually hit across our portfolio. It's usually an economic vacancy of three percent plus maybe a physical occupancy of five percent. This isn't a good stabilized asset. More of a C-class property, might run a little bit higher, maybe 6-8 percent physical occupancy and four percent non collections for economic vacancy. But I'm going down a rabbit hole here. This is a constant cup-and-ball game, hiding the ball with syndicator and passive investor. [laughs] If only as if it was easy, but it's not. It's not easy, but it's simple. But as you can see why most investors will just like, "I'm confused. I'm just going to go give my money to XYZ big company who's going to take a third or half of my returns anyway," and that frustrates me.

Deidre Woollard: [laughs] I can understand that. I think that's maybe I'm guessing that's one of the reasons that you develop your own real estate investors club. I think the investor clubs are real resource for people. Tell me a little bit about yours and how it works.

Lane Kawaoka: Yeah. Most investor clubs are free and they attract everybody coming in the front door. I did not find much value going to that when I was first starting out. When you go to a local REIC club, it's a bunch of guys who, let's face it, they don't have too much money. They hear real estate is a way to get rich quick. These are your wholesalers, your flippers. We didn't say it in the beginning, but I'm in the passive investing camp. I was able to save a lot of money and I had a good-paying salary. I think there's a big community like that. But they go to the local REIC or they go to the free Internet forms and it's just more active people and it's very different stuff than what the passive investor is doing. It's discouraging for the passive investor. You're trying to find your try, but there's so much noise out everywhere. You don't know who to trust. There's a lot of sharks in these free forms and these free clubs. So I've tried and start out a closed circle. I call it a little bat-cave of pure passive investors, where we can let lose a little bit and build relationships with peers, like-minded peers in this group and that's ultimately where you're going to find the best strategies for taxes, infinite banking. A lot of people get fixated on the deals. To me, the deals is a third of it. The deals allow you to get passive activity losses to cost segregations. But then that allows you to play with your taxes. The government creates the tax code to allow us, who invest to pay little to no taxes. The passive activity losses offset passive income. But if you're able to employ a real estate professional status strategy, you're able to knock out your ordinary income. So for a lot of my doctor clients, they are able to get out of that 500,000, $600,000 tax bracket. Everybody is worried up in arms. Biden is going to kill people over $500,000. You have the ability to lower your AGI to what you want. When you get these passive losses and you start to employ the strategies of the wealthy and a lot of the stuff, it's not that complicated. It's very simple, but it's very counterintuitive to what your parents taught you or what's been talked around at your workplace. Same thing like infinite banking, is another tactic that we'd like to use to shelter wealth growth tax-free, and more importantly, shield it from creditors and litigators.

Deidre Woollard: Can you define that for me?

Lane Kawaoka: Yeah. Infinite banking is like a marketing term, but essentially what it's using is whole life insurance. But very different from the whole life insurance that you are along last college buddy calls you up for lunch and tries to sell you. [laughs] Life insurance you can configure it different ways. To make it for this infinite banking type of method, we decreased the amount of returns that we get from it, which people think we're crazy. Why would you ever want to do that? We decrease it further on, a debt payout we get, which again, people think we're crazy, but why do we do that? So we optimize them on liquidity. What we're doing is we're overfunding this life insurance policy only to be able to take it out via loan to ourselves, which we're paying tax-free and we're making money tax-free in there. It's the general people like to flush this out. That's where that infinite concept, that term comes around because it just cycles through there and you bank from yourself.

Deidre Woollard: Interesting. You've talked about a lot of different things. I'm wondering, you're not working as an engineer anymore. How much time are you spending every day in your businesses?

Lane Kawaoka: I am very active in my business. I'm probably spending 12-15 hours a day, either running apartments or on my family office consulting, beside working with clients on these types of stuff. I feel like it's pretty fun. A lot more fun than my engineering job, that's for sure.

Deidre Woollard: You're in Hawaii. Are you dealing with time zone and distance issues? Do you go and check on your deals? Do you do trips every so often or how does that work for you?

Lane Kawaoka: Yeah. Before COVID, I was probably popping up there every other month, at least. Through COVID it's a little bit different, obviously. But we pay third-party professional property management to do the day-to-day. As asset managers, it's just really up to us to manage our property managers, our foot soldiers most effectively. I do have partners and we take team on operations. But it's nicer when you can work with more professional property management and vendors. I guess, it's probably no surprise to a lot of people, but as you climb the ladder, you get to work with more professionals. It gets easier. Like this is a lot easier than working with my single-family homes back in the day. The professionalism, their capabilities are so much better. To be a mom-and-pop landlord is so difficult comparing to be a passive investor and even what I do these days as the asset manager.

Deidre Woollard: Do you ever invest in Hawaii, on the islands themselves, or are you still mostly doing mainland investing?

Lane Kawaoka: I'm against investing in primary markets. For me the biggest thing is cash flow. That's why it's called simple passive cash flow for a reason. If they don't cash flow, I'm not too interested. But I'll be honest, I don't really need the cash flow anymore. I definitely do see why people invest in development deals and things like that. But as a first-generation wealth person, we have to build our wealth with holding onto the end of the pool really or having cash to put food on the table for us. We don't have all this money to just go and hit bunch of home runs. If we strike out, we don't care. We need to have a high reliability, high hit rate, or cash flow in our investments. But once people get up to a certain level, hit that critical mass point or escape velocity, how do you want to visualize it? Now you start to go after higher risk deals with much more higher return. That's, I think where more sexy projects developments. Maybe I might buy something in Hawaii. It's like frugal people are always frugal even when they have money. I don't know if I'm ever going to go exclusively and start to buy things like that. But I rent here in Hawaii. To me, it makes no sense to buy. Buying makes sense for most people though, because I feel like it's a force savings account. But like I said, the people, myself and in my tribe, we're good with our money. If we have an extra $500 lying around, we don't go to spend it, we put it to investments. For those people who are like that, I would urge not to buy a house to live in, especially if you live in a primary market and invest it. Just do the numbers yourself. Numbers don't lie. It's going to grow your net worth so much faster and so much more safely too.

Deidre Woollard: Well, that's a really good point too, because you're investing in Class B and C. One of the things that everyone's talking about these days is workforce housing and how there just isn't enough of it pretty much anywhere in the United States. There's really that growing demand that's not going anywhere anytime soon.

Lane Kawaoka: Yeah, look at the pandemic. The prices stayed absolutely the same in this workforce housing sector. If there's any kind of testing the business plan, what we just went through, that's it. I'm a little worried that now people invest in other asset classes are going to find safe haven in multi-family and play in our world, which I'm sure will happen. But I also invest in other asset classes because sophisticated investors, they diversify. Majority of my stuff, 70-80 percent of my portfolio is in residential workforce housing, but that's not everything.

Deidre Woollard: Well, I know that you've said in your bio that you do mobile homes, I noticed, like Blackstone now is getting into the mobile home business. There might be a lot of competition as this market shifts.

Lane Kawaoka: Yeah. Mobile home parks is still within the workforce housing realm. But office space, when people hear that where they probably should cringe. But you go after good deals that transcend the asset class, what's happening. I still probably won't do a retail shopping center, shops or strip malls, something like that. [laughs] I don't know. I'm not a big fan of that, but maybe now is the time to go on a boutique hotel. If it's cash flowing, how much worse can it be? This is when you get the best prices on the stuff. This is how the wealthy, the people who think long-term think. This is not how the mom-and-pop investor thinks, who just goes after what's been performing the best the last 12-24 months.

Deidre Woollard: There's going to be a lot of hotel distressed assets from what we're seeing. As we wrap up, just want to ask you, right now your business's looking pretty great. But what is the most challenging part that you face on a day-to-day basis?

Lane Kawaoka: Just spending less time doing it. Trying to create your business to get it all done in eight hours or less. Things are going pretty well and that's the hard part. As most people who are successful will say, you had to get it well again, it's good. I feel like this is potentially like the NFLs, they're not for long league. We don't know if multi-family is going to be the hot commodity or become overcrowded at some point. While we have the broker relationships now and we're at the top of the heap, we're going to try and capitalize on that now.

Deidre Woollard: If you could have any real estate investors career besides your own, is there anyone that you really admire out there?

Lane Kawaoka: I don't know. There's honestly not too many models that I have. There's a lot of Internet gurus and teachers, but they don't operate apartment, they don't operate stuff, to be honest, they're just educators and they're just Internet figures. I guess as far as our operators, a lot of these guys will swim upstream and go to create more institutional funds and start working with the average doctor or lawyer, engineer. They'll go to easier money as they start to swim upstream. My vision was always to work with cool people, to have a boutique syndication company and still help people get out of their rat race with good splits, good fee structures until probably maybe I'll get lazy and stop doing that. But most people, they'll go to the institutional people and crossover to the dark side where they're taking huge fees [laughs] and splits and become more of a institutional operator on Wall Street.

Deidre Woollard: [laughs] I like that you're not going to go over to the dark side yet.

Lane Kawaoka: I'm pretty young and there's a lot of time. I probably will at some point. [laughs]

Deidre Woollard: Well, thank you so much for your time today. Just to remind listeners, you can find out more about Lane and what he does at simplepassivecashflow.com. Stay well and stay invested.