Podcast host and real estate investor, Lane Kawaoka, talks about how he went from engineer to real estate investor. Lane lets us in on his method of creating passive cash flow through rental properties and shares some tips on how to get started.
John Meese 0:24
Layne, thank you so much for joining me today. How are you doing?
Lane Kawaoka 0:26
Hey, thanks for having me, john. Hello.
John Meese 0:28
It's my pleasure. Well, we got to chat just a bit. And we're really connected because this podcast, which I think is just a wonderful way that podcasts bring people together. But I would love to hear from you a little bit about for our listeners, who are you and what gets you out of bed in the morning.
Lane Kawaoka 0:42
Yeah, so I currently own 4500 rental property units. And it's pretty lucrative, so I just keep getting up out of bed. It just keeps throwing the football, right. But yeah, we're gonna talk about passive real estate investing how I got started while working my engineering job, can I help folks get started?
John Meese 1:01
So let's back up for a second, I'm sure we'll unpack that a little bit more, but 4500 rental properties. I mean, I know you know, I have friends who have like a rental property or two, my wife's 101 year old grandmother owns three rental properties. But 4500. And change is quite a few. So that's a little unusual, which I think is one of the reasons why when you reached out, I was excited for us to talk and learn more about this. But I'd love to know how at first how you got started in rental properties as a business, because you mentioned briefly that you had an engineering job, right?
Lane Kawaoka 1:31
Yeah. And you know, for the first decade doing this, I was doing it alongside my day job, kind of my origin story is a lot like a lot of hard work, or professionals, we walk this linear life of our parents taught us to go to school, study hard, get a good job. I just happen to be good at math and science when I was eight or nine. So that's why I became an engineer for no good reason other than that, but you know, a lot of people are engineers, and you don't work with people. So it's kind of boring. And just it is what it is. It's a great living. But, um, you'll never be super rich, right? By just working an engineering job. But that's what I did. You know, I kind of followed all this financial dogma, which was, you know, to also buy a house to live in, which I don't necessarily think is a good idea. So I bought a house to live in after saving my money for a few years, I was really good at saving my money was brought up in a very frugal household. And because I was traveling around for work all the time, as most young professionals are, I thought it was silly that I was only at home, like on Saturday to enjoy this nice house. So I just started renting it out. The mortgage was 1600 bucks a month, the rents are $2,200 a month, I knew nothing about rent to value ratios, primary markets, secondary markets, we can talk about that. All I knew as a 20 something year old kid, that was a lot of beer money that I made every month. And I was like, shoot, if I just do this, again and again, and again, I'll be able to fire my boss and go go financially free. So that was kind of the start of it all.
John Meese 3:03
Wow, so you were you know, your first thought was your you have a house and it's kind of just wasted. It's empty. It's sitting there. And so running out. That's how you got started there. But how did you get from there to go from one to 4500 rental properties? I mean, obviously, there was a journey along the way. So I'm curious kind of early on kind of what inspired you to do a couple more of those. And when you were able to replace your full time income with your rental properties.
Lane Kawaoka 3:27
Yeah, I mean, let's let's not focus on like the 1000 plus rentals, right? That's just vanity metrics. Sure, it's the hardest is getting your first one. And then the second. And third. I mean, after that you've kind of hit her nursery point where it just gets easier and easier. And today, you know, we pick up apartment buildings, and we have more commercial property management staff. So that makes our job a lot easier. So it's kind of like riding a bike once you go faster. It's easier and easier and easier. But yeah, after I bought that first one, I was like, that's when I really start to educate myself, right, like learn what, what how do you buy what numbers to look for? You know, like, so the first thing we always follow? I mean, I guess we'll back up a little bit, you know, like I'm in the real estate investing world. You know, there's a lot of stuff in real estate, wholesaling houses, flipping houses, we don't do any of that stuff, right? That's more active real estate stuff. I'm more of passive a real estate investor, you need some money to passively invest, you need to be a successful entrepreneur or have a good day job. So you know, we put down 20% down payments. And we just buy and hold. Right. That's our that's our stick. So first thing first is we invest for cash flow, right? We don't bet on appreciation, don't gamble on that type of stuff. So you figure that out.
John Meese 4:42
Yeah, I want to get back to that and talk about that in a second. But first I want to back up for something you said a few minutes ago. You mentioned that. You did what a lot of people do which is you bought a house to live in. Now. I myself also bought a house to live in. I don't travel a lot. In fact, I walked to and from my office in my home but still, you know, you kind of implied in passing that you don't think people should buy a house to live in. So I'm curious, you know, why is that?
Lane Kawaoka 5:07
Yeah, I mean, I can make my money grow a lot faster than it that equity in my house, right? When you got your money in your house, it's basically just growing with the pace of inflation. And as you get a larger equity positions even more lazier, right? With a rental property, you're making the same, you know, boat boosts on your appreciation side, but you're also getting the more tax benefits, cash flow and the fact that you have tenants paying your mortgage for you. So appreciate that equity build up that way. But I will Cabot saying this, like, most people should buy their house. Why? Because most people are really horrible at saving money and being financially responsible. Right? We have an extra $500 in our budget goes away. Right? But who I'm talking to out there is if you know, these are the people who are like putting money in their 401k potentially even maxing it out every year, right, those crazy people out there that do this? And that's what I was. Right? That's you, you can you know, we'll have the dual sided sharp blade, right, and take on that and buy rental properties. But for everybody else houses just simply forced savings accounts, which, you know, financially young people should probably do.
John Meese 6:31
So, I'm curious about that. I mean, I'm following with you, but I'm just thinking, you got to live somewhere. So I get the concept of like the fact that having a rental property, you know, obviously the cash flow is better than having a house where you're the both the landlord and the renter, but in that situation, I mean, do you recommend then that you go out and rent a house from another investor?
Lane Kawaoka 6:54
Yeah. Yeah. I mean, that's what I do. Right? I mean, yeah, I mean, here in Hawaii, houses are pretty expensive. I would need 200 grand at least as a down payment on a house here. And I can buy 1, 2, 3, 4 probably six, seven houses, that all cash flow for me. And it's all appreciating, give me better texts, better tax benefits. And those six tenants are paying down my mortgage. Right. So you've seen it's just an arbitrage game?
John Meese 7:23
Yeah. That's interesting. So you, despite the fact that you own all those rentals yourself, you actually rent your house? Yeah, you don't.
Lane Kawaoka 7:31
And people say it all the time, right, like food is renting is throwing money down the tomb like, dude, that's not what the affluent people say. Right? Would you get that from? Well, the guy at work or my mom, right? Like, don't take financial advice from people who are not financially free like this number one rule.
John Meese 7:48
That's a good rule. Yeah. So but let's move forward a little bit. Because, you know, I'm fascinated real estate. I mean, we could talk about that, but also just kind of when we're talking about investment in general, I mean, but you know, we could look at this, we could think about real estate as a business category or as an investment strategy. It's kind of both, but you mentioned something about the fact that you really pursue cash flow investing, rather than appreciate investing. Would you talk a little about the difference between those?
Lane Kawaoka 8:11
Yeah, so appreciation is, you know, you buying low sell high, kind of logical, right, that seems like you what you should be doing. But you know, we're in the business. You know, Warren Buffett says, Don't lose money, right? in investing? Well, how do you ensure that, but you buy something that the rents are the income far exceed all the expenses? Every on a monthly basis? Yeah, certain months might come up where there's a big repair bill here or there. But overall, you want to be cash flowing, because in a recession, and you never know, when our session can happen. You want to just kind of button down the hatches and cash flow, right. I mean, we're buying income streams. And this is the difference between mainstream financial building, which I think is I don't know, it kind of helps out a lot Wall Street, right, because Wall Street's Their job is to get everybody's money into their fee laden products, right? At the expense ratio is .01, Whatever it is, that's nonsense, right? There's all these hidden fees that are taking a third to half of everybody's returns. But we'll leave it at that. But yeah, like, you know, they, they preach this accumulation theory, right, save up 2-4 million dollars, and then you can retire and you live off of that pile in retirement. But in that tournament, you need what cash flow to put food on the table. cash flows, the important thing here. So why not begin with the end in mind and create mini streams of income today are mini pensions and that's what these rental properties are. We'll talk about syndications later. But you know, see what you're doing right. Each of these these properties, these income streams support themselves in exceed a surplus of cash flow, which, when you have a day job, or you have some income stream, like you're putting food on the table. So the beauty of this stuff is this stuff can create more money for you to go buy even more cash flow streams. And this is how I went from 2009. I bought my first property. And 2015 I had 11. Right. So it took a while, you know, this is not a get rich quick thing.
John Meese 10:14
Right. Okay, so that's interesting. So you're what you're saying then is, and I know that I'm familiar with this term, but I want to make sure we're clear here. We're talking about cash flow. I mean, the the shortest way to think about it is essentially that you've got more money coming in on a monthly basis, then you've got going out for each of these investments. Is that fair to say?
Lane Kawaoka 10:31
Right? Seems simple, super simple and logical, right? But most investors invest for appreciation.
John Meese 10:37
your net worth on your balance sheet. Yeah, yeah.
Lane Kawaoka 10:40
They're hoping and praying that this asset will go up in value, which happens most of the time, but I don't gamble, right? I just don't take chances. And so did you buy stock and GameStop? I haven't owned stocks and like years. I don't even know about that stuff.
John Meese 10:55
I think that the timing of our conversation is interesting, just with the recent GameStop. And kind of like, I mean, really just it was a gamble. You know, are you familiar with this? The recent, you know, GameStop and Reddit situation?
Lane Kawaoka 11:06
Yeah. I mean, basically, the masses kind of pulled the tricks that wall street uses against them on them, right? I mean
John Meese 11:13
And so people just like random stock up, and they were betting and all this kind of stuff. And, you know, but at the end of the day, maybe GameStop will continue to go up in value the stock, maybe not. Right, but the only way you can actually make money, not not like money that appears on your balance sheet, but actual, like money that you can spend, the only way you can make money from an investment like that, from an appreciating investment like that is to sell right is to get rid of it. Otherwise, it's just a number on your balance sheet. Yeah, I mean, so you Yeah,
Lane Kawaoka 11:41
That'd be a good like, Can I just interject like my three rules of investing? First, it has to be a hard asset. GameStop all this stuff is not a real asset. Right? President at Lulu Lemon says stupid. Your stock price goes down. That makes no sense to me, right? Yeah. Number two, it's got to provide cash flow, right? Be an income stream. Maybe some dividend stocks provide that right? Like a Johnson and Johnson or Philip Morris, right. But they don't still don't borrow as much right. And they're kind of considered like bonds. And then the last one, why real estate? Well, it gives us these great tax benefits. And the government's kind of begging us do, which is why they give these great Fannie Mae, Freddie Mac government subsidized loans.
John Meese 12:23
Well, let's talk about that for a minute. Because I know one of the things that you recommend is that as business owners, because I mean, the reality is if we're talking about in business, for most entrepreneurs, their number one expense in their career is going to be their taxes, their tax bill. And so but you're recommending don't pay taxes. So can you talk a little bit about how the heck we can do that? Without? I mean, obviously, there's there are certain islands where maybe we can escape to you know, and avoid the tax game. But I don't think that's what you're talking about.
Lane Kawaoka 13:31
Yeah, I mean, the the United States government gives us real estate owners, hello, tax rates, whatever the people in Congress, they have real estate too. So they know what's up. And they're kind of giving it to themselves, but it is what it is, right? The tax code is a huge book, to have. Basically, they're trying to incentivize people to do what they want to do. They want you to buy real estate, they want you to house people, this country needs more workforce housing, and good people to run it such as ourselves, which is why they the current system is set up in a way to have us paid little to no taxes. How is that done? Well, I mean, not to get too technical, but you know, as business owners, you're able to write off expenses, right? I mean, we something breaks, we write it off, it's an expense. But with real estate, you can deduct the asset value over the life of the asset. And this is sort of like a phantom loss in a way. You know. So a lot of times you can make be making money and cash flowing on investment, but because you're taking the depreciation loss, you're negative at the end of the year, and some people are able to take this loss even on their W2 ordinary income.
John Meese 14:49
Interesting, okay, so let me just see if I can simplify this. So without either of us pretending to be a tax attorney, then you know, essentially essentially what you're saying is that you can you know, buy property. And then as an investment, you have money coming in, in the form of rent, which is, you know, pay, it's offsetting your mortgage and your, you know, rent maintenance expenses. So it there's profit in there. So you're actually making money on a regular basis. But when it comes time to file taxes, because you're filing, you know, essentially that the house is an asset, and it depreciates over time. So you're reporting the kind of like decreased value of that asset each year, that you can dramatically reduce or potentially eliminate your tax liability on that profit, because of the depreciation of the asset. Is that fair to say?
Lane Kawaoka 15:33
Right, right. on single family homes, you can take 1/27 of the value of the home every year.
John Meese 15:39
Oh, wow. So after 27 years, the home's worth nothing when the tax books, yes, that how that works.
Lane Kawaoka 15:44
Yeah. And you're taking that loss over 27 years, but with current bonus depreciation laws that you can get do a cost segregation. On our larger assets, we do this, we're able to run off a third of the building all in the first year, a third of the building.
John Meese 16:00
Okay, so tell us a little bit more about that. Because I think that there it is, like I'm falling in, I think the average person listening to this is like, okay, so like I get it, like I'm thinking about a single family home, I could, you know, I saw a for sale sign down the street, I could buy a house and rent it out. But you at some point crossed into a little more of the what I would consider probably the advanced side of the real estate industry, not the average person with a little extra money putting a down payment on a rental property. But how do you invest in real estate today?
Lane Kawaoka 16:28
I focus in on workforce housing apartments class. Okay. See? That's your question.
John Meese 16:34
Yeah, yeah. So you So right now you you focus on in terms of investment, the asset itself, you use workforce, you focus on work, workforce housing in apartments, but you you mentioned like cost segregation, and kind of in like, I know that you actually have like an investment club. So it's not just you go into a bank at this point. It's, there's other things going on. So, you know, how do you when you think right now, either you or your team investing in more real estate, how do you how do you approach that as a business?
Lane Kawaoka 16:59
We go out and find a larger asset, right, we try and stay above the mom and pop investors buying, you know, under one or $2 million properties, and we stay below the large institutions just investing people's retirement funds and wanting 5% return, you know, so we're buying 100 units to 350 unit apartment buildings. And that's kind of a sweet spot that we play in this is called the private equity space. And we put together large syndications, aka Country Club deals, where we go out and you know, buy a 200 unit apartment, your entire, you know, apartment, and yeah, they're all kind of like mini business ventures.
John Meese 17:35
Okay, and with each one, so you're taking on not just you, but actually, like, members of your investment club are investing alongside of you
Lane Kawaoka 17:42
yeah, that is correct. So I, you know, I think this kind of more applies to accredited investors, right? I mean, when I started out, and kind of tying it to the listener, right, like, this stuff will come later, right? Get your guy's net worth at least half a million bucks, guys. And the way you're gonna do that, is with buying simple single family homes and look how I did, it took me like, six, seven years, just chugging away saving my money buying property, right, one by one by one. But like I said, as you keep buying these things, they put more money into your pocket. So you can accelerate this so much faster, as when you start it. So around 2015, I had 11 these rental properties. And this is where I started to pay for different masterminds get around higher net worth accredited investors. And I discovered that you know, all these secrets of the wealthy, right? Like, they don't invest in rental properties, right? I mean, granted, again, first, a listing stay with single family homes. But once your network gets to a certain threshold, you start to invest more of a passive investor in syndications and private placements. And then you get into these better deals with better tax benefits. You pay little to no taxes, and you do some other wealth building strategies such as infinite banking, using life insurance to pay no taxes. It's a it's a beautiful thing. But unfortunately, it's very different than what mainstream financial advice out there. It's not what your mom told you.
John Meese 19:03
Hmm, interesting. Okay, so you're thinking that you? So I guess that kind of leads to my next question, which is when you think someone is ready to start investing in real estate and you mentioned that when it comes to accredited investing the more complex Secrets of the wealthy as it were, that that's probably about the half a million dollar net worth mile marker, is that right?
Lane Kawaoka 19:20
Probably should start thinking about that with accredited investors defined as a million dollar net worth or greater. Okay, over 200 $250,000 single married. But, I mean, most deals are available to non accredited investors, you just have to be in the network. So real estate is big network game. It's who you know.
John Meese 19:39
Okay. so let's say we've got someone listening to this that says, All right, maybe I don't have an extra million dollars sitting around, but maybe I've got some extra income, you know, that I'm currently putting into an IRA or 401k or something, and you're telling me that I should invest in real estate. Where do I begin?
Lane Kawaoka 19:56
Yeah, so buy a single family home, buddy, you know, so you need 20% downpayment because not owner occupied. And so most of the properties we'll buy are like in $100,000 range, right? Or a lot of my clients will start off with that type of stuff. So 20 grand, right, and maybe some closing costs, maybe some cash reserves. So $25-30,000 is kind of the bare minimum, right? If you don't have that, sorry, I can't help you. Right? Like this is for, like,
John Meese 20:23
You gotta start somewhere.
Lane Kawaoka 20:24
You gotta you gotta start, you got to get yourself off the ground, right? If not, maybe this isn't for you. Right? You don't maybe don't have the financial sense, or the basic level business sense. Right. And, and you said it earlier, this real estate stuff is kind of a business. But it's about the most simplest businesses out there.
John Meese 20:44
Yeah. Well, so on that note, so let's just so as you think about it as a business for you, I'd love to know and for, you know, for your clients, how does your business fuel your life? I mean, how does it because that's really the kind of what and, you know, in my mind, I always want to talk more about not just how your business makes money or sells products or cash flow, but what does that make possible for you? I mean, how does that business really fuel your life does it?
Lane Kawaoka 21:11
I mean, I've kind of created more of a lifestyle business where we kind of, you know, it's, it's fun to do big deals, right? It's an ego boost, not gonna lie. And, you know, I kind of my mission is to kind of help people get out of Wall Street type of garbage, where I mean, that's my parents did, right? My parents, highly educated, Dr. Masters degree, super hard working, but they worked 40/50 years, and they had a crappy retirement, in my opinion, right? Maybe, you know, they own their own home outright, at some point. But, I mean, a lot of a lot of people can hit financial freedom in under 10 years, if they're making a pretty good salary by doing it this different way. You know, there's so much bad financial advice out there, right. And a lot of this is predicated on the big Wall Street firms, they want to usher people into their Wall Street products. Like, you know, we don't do retirement accounts, we don't do Roth IRAs. Like we don't do that type of stuff. But that's part of all the major the Wall Street main street dogs out there, that there's a different way guys, that doesn't benefit large companies and make these big buildings for these guys.
John Meese 22:22
Great. Well, thank you so much for sharing that. One more question asked us about the business of rental properties, because you mentioned it is one of the simplest, you know, business models to get involved in. But on the other side, other hand of things, I mean, it's a very emotionally charged, right, because you've got someone who's literally like a, you know, a family or you know, a single mom with kids, it's literally living in a house that you own, that is your asset, that is your cash flow. So
Lane Kawaoka 22:47
And we don't interact with that, right, we hire third party property managers to be insulate us from all that type of stuff.
John Meese 22:54
Okay, so that was gonna be my next question was, was do you recommend working with a property manager? And is in is that from the beginning? Or is there a certain point where that becomes necessary?
Lane Kawaoka 23:02
Always from the start. And you know, maybe we'll kind of back up here a little bit like the first thing we always do is make sure the property cash flows, right? This is where you can pay for people to do that. Right? And you should, right look for this thing called the 1%. rent to value ratio. So you take the monthly rent divided by the purchase price. Okay, not 1% or higher. Don't buy it. Period.
John Meese 23:25
Okay, so walk me through an example of that. Could you with a for that?
Lane Kawaoka 23:27
Yeah. So 100 $100,000 house $1,000 a month rent? That's the 1%. Right? Okay, you look a lot of places like California, you'll be lucky to find a house that's 400 grand in the ghetto, right? We don't buy properties in the ghetto, by the way, but that'll rent for like two grand. So to that 1000 divided by 400,000 is half a percent at a while not going to work, don't buy it.
John Meese 23:53
Right. So does that so that's the total purchase price, pay respect, irrespective of the down payment, right? Let's you're not calculated based on the mortgage you're calculating based on the total per house,
Lane Kawaoka 24:02
This is the quick and dirty way of doing it right. And then the next step is, you know, once you find something that's in the black or 1%, rent to value ratio, then you put it into the analyzer. I mean, people can go on my website, download it for free, and they can kind of play around with you know, you're going to have the top line rents, but then you really want to key in on like, what is the repairs? What is the the the how much you're going to pay my property manager? How much fvac- Should I need to assume some vacancy, you know, my tenants are going to move out every so often write or I need to put some money away for the roof and the plumbing to go wrong, right? Yeah. So that's how you kind of bolster your budget to make sure you cash flow with your normal amount of variances and exceptions through operation.
John Meese 24:45
Okay. Now, that's super helpful. So you know, so look for that 1% rent to value ratio when you're just getting started. And, you know, is this something that you know, in your case, you know, your real estate is your primary business, but you now you have a podcast of your own right.
Lane Kawaoka 24:59
Yeah. So in 2016, a lot of my friends were asking me, Well, how do I buy all these properties? and Birmingham, Atlanta, Indianapolis, and you'd never even seen the property? So nobody would listen to me. So I just recorded it. So a lot of the first, you know, dozen podcasts are about, where do I buy a lot about the numbers, right? You know, on these remote rentals, because a lot of us live in. I live in Hawaii, you live in Seattle, or a lot of people in California, right? You're not going to buy a property in our state, you're going to be a remote investor. And that's if you want cash flow, right? But if you want to gamble on appreciation, this is not simple, passive cash flow to me, right.
John Meese 25:40
And is that the name of your podcast? Simple, passive cash flow?
Lane Kawaoka 25:42
Yeah, simple passive cash flow calm is a website to Yeah, iTunes, Google Play, etc.
John Meese 25:48
Okay, excellent. Well, Layne, thank you so much for this has been immensely helpful. I'd love to know if there's, well, I mean, you mentioned this just now it's a simplepassivecashflow.com, you know, is where we can find you online. If we were to go to your website. If I was to go to your website or someone listening to this, where to go to your website, what's one thing that you'd like us to do you know, to download or read? That would be helpful.
Lane Kawaoka 26:09
Yeah. If you're kind of under a quarter million dollar net worth by rental property, right. So start off at simplepassivecashflow.com/turnkey, or and then go download the analyzer and play numbers with yourself right simplepassivecashflow.com/analyzer is the free download there. If you're more of an accredited investor, it's simplepassivecashflow.com/syndication is kind of the place to start on that thing, but check out the podcast.
John Meese 26:37
Okay, great. Thank you, lane. Keep up the good work.
Lane Kawaoka 26:39
Well, thanks, John.
John Meese 0:03
You are listening to survive and thrive. I'm your host, John Meese. And I want to help you navigate the path towards building a thriving business in any economy, including this one. With that in mind, I've asked some of the best and brightest minds in business to share their experience and insight with me. And with you. Without further ado, let's dive right into today's interview.
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