Welcome Back! Today we are joined by Lane Kawaoka, Lane is a licensed Profesional Civil/Industrial Engineer, He now focused 100% of his time on his investments and helping others in his Passive Investor Accelerator & Mastermind program. He began investing in 2009 in Seattle and was able to buy early right after college. He has now 1.2 Billion worth of assets under management including multifamily housing developments and hotels.
[00:00 - 06:09] Opening Segment
- Lane Kawaoka started out as an engineer, buying rental properties and starting to syndicate them into larger projects
- He has 1.2 billion in assets under management, including multifamily housing developments and hotels
- He has a decisive moment where he realized that he was just the entrepreneur in the real estate game and started to hire out property management professionals
[06:09 - 11:37] Homes in the Multi-Family Market Remain Available
- Lane believes that there is always an opportunity for acquisition but cautions that interest rates are rising and this could impact debt service coverage ratios and holding costs.
- Lane adds that the current market conditions are indicative of a soft landing, rather than a buyer's market.
[11:37 - 17:24] Multifamily Market is a Vacuum
- The market is a little vacuum buyer's market, with sellers' market conditions.
- The trend for Lane’s company was to get into larger projects while buying smaller properties as well.
- Debt surface coverage ratios are not where they need to be and the prices being paid for multifamily properties are not justified.
- Lane shares that development is a good option for those who have the expertise and the budget to do it, but it is difficult to find land at a good price.
[16:30- 16:57] Closing Segment
- Reach out to Lane Kawaoka
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- Links Below
- Final Words
Tweetable Quotes
“ It's just a matter of bringing in the right professionals and getting to a large scale to be able to pay the right professionals to do it. But it's actually the construction element part, getting the architect, getting the construction management, putting it all together, managing it, and fighting every day with the contractors to get it built on time, on the schedule of budget. Now that's the hard.”- Lane Kawaoka
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Connect with Lane Kawaoka visit his website at www.simplepassivecashflow.com
Or email him through Lane@simplepassivecashflow.com
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Email me → sam@brickeninvestmentgroup.com
Want to read the full show notes of the episode? Check it out below:
[00:00:44] Sam Wilson: Lane Kawaoka. Welcome to the show.
[00:00:47] Lane Kawaoka: Hey, thanks for having me, Sam Aloha, everybody.
[00:00:50] Sam Wilson: Pleasure to have you, man. Welcome. Welcome to the show from Hawaii. I'm certainly jealous of your location. Sounds like a great place to be here today on this hot day in June, but land, I've got three questions for you that I ask every guys who comes in the show in 90 seconds or last, can you tell me, where did you start?
[00:01:04] Sam Wilson: Where are you now? And how did you get there?
[00:01:07] Lane Kawaoka: Where did I start while I was a lowly engineer that didn't really like my job that graduated college in 2007. And I bought a little rental property and bought a bunch of turnkeys after that. And then I started syndications back in 2016 where I'm at today.
[00:01:23] Lane Kawaoka: We currently own over 8,000 rental units. 1.2 billion in assets under ownership, multifamily, or workforce multifamily. so hotels developments but all under the real real estate space, that kind of goes under the so the recession proof theory, right? That at the end of the day, this is a commodity, especially if you cater towards the workforce housing sector.
[00:01:48] Lane Kawaoka: Which is the col of the American population that, the, the need isn't getting any smaller for that. And then what was the third question? How'd you get there? How'd I get there? Well, it all kind of starts with the first one, right? Buying that first rental property, then saving your money and for down payments to buy the next one, I eventually got 11 rentals in 2015, and that was when I started to realize, although little rental properties are a great way to get your net worth out of the ground to half a million, million dollars.
[00:02:18] Lane Kawaoka: It's just not scalable for credit investors. And that was when I started to get into these larger multi-family syndicated projects.
[00:02:27] Sam Wilson: That's fantastic. How, how did you, I mean, having 11 units in 2015, where that's seven years ago, I mean, that's pretty meteoric growth in seven years ago, from 11 rental units to 1.2 billion in assets, under management.
[00:02:41] Sam Wilson: What, what were, there were some very decisive steps that I feel like you had to take. In, in that seven year run, what do you feel like were some of those key key decisions you made in that process?
[00:02:56] Lane Kawaoka: Well, I mean, part of it's vanity metrics, right? Like we say, you own over 8,000 yet. I don't personally own 'em all 100%.
[00:03:03] Lane Kawaoka: I own a fraction of it cuz we syndicated out would bring investors in. But if you probably do look at the equity, it probably has been an exponential growth. A part of it was just, telling folks what we did. And, we started with buying little class C crappy properties with that were kind of a pain in the butt with difficult tenants.
[00:03:21] Lane Kawaoka: Eventually moved more into buying class B assets. I still think that's a nice little sweet spot, especially if you buy in the emerging markets such as like, Phoenix, Houston, Dallas, Huntsville, Then we started to realize that we were just the entrepreneurs in this game and we started to hire it out to, property management professionals.
[00:03:41] Lane Kawaoka: Who've been in the industry over a decade and started to expand the team. And that's how we were able to kind of get, deal done every other month and scale pass, 5,000 units or, definitely get over. Like, I would say $500 million of assets of their ownership is kind of a big.
[00:03:58] Sam Wilson: Yeah. Was there, was there a point in time when you said, okay, the, the machine can now kind of self replicate its own success?
[00:04:07] Lane Kawaoka: I think there was maybe a big aha moment when you start to hire people under you that. Know, a lot better than you and will always know a lot better than you as the, the owner or founder.
[00:04:19] Lane Kawaoka: And, but, I guess that's like not to be, not, not a surprise. Right. But, for some strange reason, I think people in real estate think that, oh, anybody can do this. And on one level they are. Right. Right. It's not that difficult, but. Just like how, if I just tease one of my doctor friends, Hey, I'm gonna be a doctor tomorrow.
[00:04:39] Lane Kawaoka: So just to laugh at me, just like, if when I was an engineer, Hey, I'm just being an engineer, good luck buddy. You go to school for it and, work as sort of a semi white collar journey, man. No different than property management, right? Like, I mean, you wanna hire people that have been doing it for decade.
[00:04:55] Lane Kawaoka: Plus sat at the leasing table. Who's lived that life for five, 10 years and can look at a set of financials and know what's really going on. Where. Somebody like myself. I mean, I guess I'm kind of smart with numbers, I can follow patterns. That's just not, you're not, I'm not gonna have the holistics that somebody who's been in the industry, just like, construction engineer or project manager.
[00:05:19] Lane Kawaoka: I mean, that was kind of the world I came from. There are things that I know about, building contracts, holding contractors, accountable that, I, I kind of laugh and joke. You see these house slippers. There's some, Joe who doesn't have a professional job, number one, Or maybe they're an accountant and they know numbers well, but they don't know the side of managing contracts, managing scope, scheduled budget, playing the game with contractors.
[00:05:42] Lane Kawaoka: And there's a reason why there's the word con and the contractors name . But you know, I mean, I think some things you can learn, but some things I think you have to go through. Going, living, learning it on the job and that takes decade and, I'm not a big fan of college, but I think college prepares people for this type of stuff.
[00:05:59] Lane Kawaoka: I'm, I'm a big fan of, if I had kids I'd like to have, 'em go work for BlackRock or something like that, or property management from for six months, not forever. But I think that a lot of that insight is invaluable. Yeah,
[00:06:12] Sam Wilson: absolutely. And I think, I think what you, what you said there was that your aha moment came when you realized that people were coming on board as team members that knew a whole lot more about the industry than you.
[00:06:23] Lane Kawaoka: Yeah. That's that's correct. That's correct.
[00:06:26] Sam Wilson: Yeah. I think that's a fun, that's a fun place to be. And somewhere, I think that, maybe, maybe all of us as we're scaling our portfolios and growing our companies, that's something that that's, that's somewhere we should be consistently shooting for is bringing people on.
[00:06:39] Sam Wilson: Around us that are better better at what, better at this than we are. And I think it's a common myth. I think even myself at times, I find it hard to believe that somebody else would wanna come work with me that maybe is better, better at a certain section of this business than I am. And it's, it's just, it's just not
[00:06:55] Lane Kawaoka: true.
[00:06:56] Lane Kawaoka: Yeah. Well, I mean, there's a lot of people out there that are good number twos and number threes. They don't wanna do all the marketing nonsense and the business develop. There's also a lot of people who think that they can do that, but they're not, and they're good number twos and cos and operators.
[00:07:12] Lane Kawaoka: But I think the people who realize what, where they're good at most times, the entrepreneur, the founder is kind of just the good BS talker and the, the idea visionary. And they can't really put stuff together. But, those, I think it, at the end of the day, you need to kind of realize where you're at.
[00:07:29] Lane Kawaoka: I mean, the emit is kind of a great book for that. They kind of understand working in your business, not on it, but know, I mean, no different than like, the model that we use is just like a lot of, institutional, private equity firms, guys with 10, 20 billion of assets on their ownership, this is you look at their, their rosters of employees and that's kind of the B.
[00:07:50] Lane Kawaoka: Right.
[00:07:50] Sam Wilson: Yeah, absolutely. Absolutely. We talked about this off air, before we started, recording here. And you said that you guys have kind of taken a pause on acquisitions for the moment. Can you give some, give some insight as to that as to why that is?
[00:08:06] Lane Kawaoka: Yeah, I mean, I think no secret the interest rates have kind of jumped up a little bit.
[00:08:10] Lane Kawaoka: And, that will change your debt, service coverage ratios a little bit, definitely change your, your holding costs and how much you cash flow. Although I would, I, I tell investors all the time, like in this type of investing, we're not doing the buy hope and pre model, the buy hope and pre model, people own little rental properties or, don't really do value add to their projects.
[00:08:31] Lane Kawaoka: The interest rate matters a heck of a lot. Even half of a point can take a huge chunk of your cash flow. I mean, we're, we're in the value add game, so it doesn't really matter too much, but, I think there's a lot of uncertainty. I haven't seen it jump up this. I mean, I've seen it jump up this much, but not like two to three, months in a row.
[00:08:51] Lane Kawaoka: Right. I think next month they're saying they're gonna be a half a point. It all makes sense. Right? They're they're using the, these quantitative, I think tightening is the right word to ease off the inflation. It's a war on inflation right now, to me, this is exactly what the fed is supposed to do to ensure that we don't go into a hard landing recession.
[00:09:13] Lane Kawaoka: And we stated this soft landing and off to the races for another five to 10 years, right after this. But you know, this, this is all intended. And what I look at is the unemployment at the unemployment's pretty much at, semi all time lows right now, as long as that stays pretty healthy and. We'll be fine and we'll come right out of it.
[00:09:33] Lane Kawaoka: But from our perspective, I mean, things are changing a little bit. So we decided to take a little bit of a break and we've been pretty heavy buying stuff since the year 2020 in the pandemic. And I think that year really set us apart. We're, we're when a lot of people just like fell off the map cause they couldn't close deals.
[00:09:52] Lane Kawaoka: I think that's what really established us, empowered us through 2021 and 2022. Where we are, we were making acquisitions, I would say every other month some kind of a deal. And that really got us up to the top of the list with a lot of brokers because we're active during those times. So part of it is we just, I mean, personally, wanna take a little bit of a break a little bit for maybe a month or several months, and to see how this, sloshes through the system.
[00:10:19] Lane Kawaoka: Although right now there is a little bit of a buying opportunity. A lot of the larger institutions the guys, who own over $5 billion in assets, in their ownership, the big sharks that can show most of the money and most of the, the markets they've kind of pulled back just like, how will we have, and part of it is, I was kind of copying what they were doing too.
[00:10:39] Lane Kawaoka: But They will they'll eventually come back because they have to, right. That's how these big institutions make money by just placing the money, which should make most people sick to their stomach, hearing that. But that's the reality. but they'll, they'll come back in maybe in the next month or two. And then that will put things right back into the cell, the general seller's market that we are it.
[00:10:58] Lane Kawaoka: I still believe we are still. But there is a little bit of buying opportunity, but that's, that's kind of where my head's at with the whole multi family market.
[00:11:06] Sam Wilson: Yeah. I like, I like that. And, and yeah, I do. I do see that there's a slight, I mean, I think anytime there's, it's like, I don't know. It's like coming up for air.
[00:11:14] Sam Wilson: It's like, oh, Hey, any, any air is good air. And so people, when they see a slight softening in the market, like, oh, maybe it's becoming a buyer's market. Well, Maybe, but we've got a long way to go before, before this becomes a real, yes, there may be buying opportunities, but I don't, I don't think we're anywhere near a buyer's market yet.
[00:11:31] Sam Wilson: I think we got a lot of places or a lot of a lot. It's gotta get a lot worse before this becomes a buyer's market.
[00:11:37] Lane Kawaoka: Tell me about it's a little, a little vacuum buyer's market vacuum within the sellers market, essentially.
[00:11:43] Sam Wilson: Yeah, I think that's, that's, that's actually a great way to put that. I really like that you guys are focusing, I know you, you, you said you're not doing anything necessarily on the, on the value add multifamily.
[00:11:53] Sam Wilson: Are you guys doing development? Are you guys doing, I mean, what else are you working on then? If, if you're not buying multifamily properties right now?
[00:11:59] Lane Kawaoka: Yeah, I mean, our, our general trend was to kind of get into larger projects. As I mentioned, we started to do a lot of smaller class CS, 50 units, a hundred units.
[00:12:08] Lane Kawaoka: When we first started a lot of those tenants. I mean, you can make a lot of money in that type of stuff, but it's, it's a real headache, cuz your collection are way worse than their class B or eight tenant. And that ultimately is, for passive investor and passive investors perspective, they don't give a rip right about that.
[00:12:26] Lane Kawaoka: That's my problem. But I care a lot, the Jesus is not worth the squeeze. I don't really wanna do it. I'd rather just do class B and, have it be a little bit smoother process and have distributions come out a little bit more inconsistently which is why we've tried to, fight towards, larger class B assets larger deals.
[00:12:45] Lane Kawaoka: And then now, especially where, things are kind of going these last several months. I would say like late last year we bought like a deal for like 89 grand and now it's worth like one 20 for no good reason. I mean, it's just market appreciation and it just seems a little silly to be buying it at that price.
[00:13:03] Lane Kawaoka: And it's starting to get to a point. I mean, it has been getting to a point where like the debt surface coverage ratios aren't making, aren't where it was. We don't have as much. Fat there. Right? So this is just the whole tides. All tides are rising on boats. So from my perspective, if it makes sense to get on the train of more heavier value ad where you have more deeper margins, you have to buy, you have to build the thing, which is an expertise that a lot of people don't have.
[00:13:32] Lane Kawaoka: I mean, that's what I went to school for as a construction management, civil engineer. It's just a matter of bringing in the right professionals and getting to a large scale to be able to pay the right professionals to do it. So I think that's what one of a misnomer, a lot of people have is, development and, development just pulling the deal together.
[00:13:50] Lane Kawaoka: But it's actually the construction element part, getting the architect, getting the construction management, putting it all together, managing it and fighting every day with the contractors to get it built on time, on schedule of budget. Now that's the hard part, but if you hire the right professionals and you have enough budget, right?
[00:14:08] Lane Kawaoka: That's the other key thing. I mean, usually a capital raise of over five to 20 million in that range is what you need to have adequate budget to go after it. So you're not building a little 50 unit property, usually gotta go bigger over 200, 300 units. And then you can go to this certain scale and that's kind of that, that shelf.
[00:14:29] Lane Kawaoka: So it's always like this kind of constant swimming upstream to find locations or areas where there's less competition as people doing it in larger margins. So that whole concept where, you know, the, the air's nicer up at the top of the mountain, cuz there's less competition around. And the nice thing about development is.
[00:14:50] Lane Kawaoka: You don't really have to worry about little undulations in the market, bumps along the road. You just build it. You, you just raise all the capital up front, you build it. And you're kind of in a vacuum for two to three years that you're building it. And even if you, come out in a horrible time, I mean, in theory, you should have enough, you should be building it for such a price where it's just you're you.
[00:15:16] Lane Kawaoka: You would like have so much margin and another thought too was, like the price that you're paying for these class B units. I mean, like you could build that stuff brand new, right? You just have to go through the headache of building it. And then now you have a brand new property that is like 30, 40, maybe even 50 years, you have that much length and run time.
[00:15:41] Lane Kawaoka: So that thing degrades to a class B for that same damn price. Right. I mean it just, when you look at it from that perspective, I mean, it just kind of make it's a no brainer, but the hard part with this whole model is the land. The land to buy this stuff in the right places is very difficult, much more difficult to find that amazing deal, a hundred unit class, B, C property still harder.
[00:16:03] Lane Kawaoka: And then you have to kind of, a lot of times the general partners have to put up all the money for the land purchase. There's a little bit, your general partners need to be a little bit more higher network to be able to cover that. but , that's another, basically, we've kind of opened things up, right.
[00:16:16] Lane Kawaoka: To hit other pitches instead of just swinging at class B multifamily and B plus areas in the sun spell, it's like if you're only waiting for that inside pitch, right above the belt, You, you, you there are other good pitches that you might be able to do something with. Right. It's the baseball analogy,
[00:16:33] Sam Wilson: right?
[00:16:33] Sam Wilson: No, I love that. And, and, and development is certainly yeah, I mean, I've heard that from a lot of people who come on the show that our developers are like, Hey, this is why we play here. And they've said the same thing you've said, which is that the reason we develop is we can, we can build for less than what we can buy.
[00:16:49] Sam Wilson: 20 or 30 year old stock for even after we value add, it's still, we can still develop it for less than that. One of the things we saw in 2007, eight was that you, I remember just, just driving by project, up for project to project half built, they ran outta funding, the credit lines dried up half built projects.
[00:17:07] Sam Wilson: Do you see any fear of that? Same scenario repeating itself. If we do go into a deep
[00:17:12] Lane Kawaoka: recession, So good observation. So what's happening there is these BOS aren't going in fully capitalized for the entire build, which is a common practice of larger institutions. They run very lean. I think too much at risk type of their, their cash flow model.
[00:17:30] Lane Kawaoka: So we actually have like next to one of our in progress builds, we have like another institutional run they're hell of a lot slower, but what they do too is like they, they start to open up their facility in phases. Ah, they won't build the other half or, Until the first half is opened, created cash flow.
[00:17:50] Lane Kawaoka: They use that cash flow to buy materials for the other one. It makes sense from like a large, institution point of view, you, you don't have these huge overlays of cash and it's not sitting for three, four years, but I mean, as the general partner, I mean, I don't want my ass hanging out there.
[00:18:07] Lane Kawaoka: And not have something built because I guess he was going to have to take the recourse for that. Cuz as sure as heck it could be the passive investors, right. right. They, they ain't gonna pitch in and do capital calls for that kind of stuff. Right. And that's why, it just, I mean, selfishly and I, but I think this is more conservative, you go in with all the money you need up front for the build, you get your bank loan for the whole thing and then you, you build it.
[00:18:33] Lane Kawaoka: It's a very rare circumstance that the construction loans will be frozen, which happened to some people in 2008. Yep. But majority of, I know what you're talking about, cuz there are, they're all over the place to me. I mean every situation is different, but most of those was a byproduct of, they just didn't have all the capital raised up front and that was, it's not, it's a common practice.
[00:19:00] Lane Kawaoka: Sure.
[00:19:01] Sam Wilson: It, it sounds like your way of getting over that is just raising the capital upfront and just acknowledging that, Hey, we're gonna raise it all up front and that cash might be sitting idle until you need it, but you're it's for you. It's it is it's almost its own insurance policy. So if you look at it, the cost of capital sitting idle, it's like, well, that's not really just that, that you're just paying insurance so that you have the money when you need.
[00:19:24] Lane Kawaoka: I mean, if people wanna go do their own deals and. Do it, I'm sure you can pump your IRS up by not having that capital, just sitting there, but good luck do it yourself. Then .Right yeah to me, to me, even if you raise all the capital up front, I mean, for a development deal, I mean, for, for the sort of perceived more risk than going into a stabilized asset.
[00:19:47] Lane Kawaoka: I mean, you better be doubling tripling your money in that time or better. Right. but I'm sure the way these other guys do it, where they raise their money in adjusted time format. , I'm sure they're, they're technically hitting like. IRS of the forties to 50% plus slam, but like really do you need that?
[00:20:06] Lane Kawaoka: If you need that, go invest, go gamble. And some outgoing crypto, , I mean, the reason why we invest in real estate, cuz it's a hard asset at the end of the day provides income and it's stable, right? I mean, this is not like a get rich quick skiing. This is a, , have your money get your money on the table and have it work for you.
[00:20:26] Lane Kawaoka: But you don't have to worry about the damn thing, losing money.
[00:20:29] Sam Wilson: Right, right. You said it, man. You said it laying. I've enjoyed having you on the show today. Thank you for taking the time to come on and share with us your insights on the market. What you guys have been buying, how you guys are doing things differently, how you are, dealing or, or doing some developments and things right now that maybe are a little bit different.
[00:20:46] Sam Wilson: And even then also on how to protect yourself in, in a develop. In a, in a changing financing environment. So it's been been a lot of fun to have you on. Certainly appreciate it and have enjoyed it. Tell me this, if our listeners wanna get in touch with you or learn more about you, what is the best way to do
[00:21:01] Lane Kawaoka: that?
[00:21:02] Lane Kawaoka: Yeah, they can check out my website, simple passive cash flow.com. And then they're interested in connecting. My email is lane simple cashflow.com. Awesome
[00:21:12] Sam Wilson: lane. Thank you again. Certainly appreciate it.
