FCP 138: Growing A Massive Real Estate Portfolio – Featuring Lane Kawaoka

Jack: Hello everyone, this is Jack Bosch speaking – your host of the Forever Cash Life Real Estate Investing Podcast. I am super excited to host another episode. Today we are going to talk about how to grow from doing turn-key house all the way to a portfolio of 35,000 rental units. Stay tuned – there is going to be lots to learn.
Jack: As mentioned we are going to talk about growing – growing rapidly, growing quickly, growing from smaller deals to larger deals. Our guest today is Lane Kawaoka, from beautiful Hawaii. How are you Lane?
Lane: Aloha, Jack!
Jack: I hope that I pronounced your last name right.
Lane: You got it right.
Jack: So, we love Hawaii, we go there probably about three times a year. We have already been there this year once – and we are probably going there in a few weeks again – and spending a few weeks of the summer there. So – just love you place in the world. Welcome to the show.
Lane: Thanks for having me.
Jack: Let me quickly give everyone a quick update about Lane. Lane has been an investor for a decade and now owns and controls over 3,500 rental units – that’s a big number! He is the co-owner of (or is it owner) of SimplePassiveCashflow.com, aloha.com, and Lane is responsible for finding investment opportunities and analysing markets. He comes from an engineering background, so he is probably very structured. So, we will dive into all of those in just a moment. He has a background in construction management, in managing more than 250 million dollars in construction management projects etc., so there is this vast background in real estate, and I can’t wait to dive in there. Lane welcome to the show, and lets start right away with you – give us a bit of an update about your history and how did you get into that? And more than anything, what made you go from being a construction manager and project manager to doing your own deals?
Lane: I graduated collage back in 2007. At that time, I was just like a lot of people about – go to school, study hard and get a good job – was the path that I was kind of brainwashed into going to. I bought a house to live in, again, just like what everybody says to do. And I rented it out, and the rents were $2,200 per month and the mortgage was $1,600 per month. For a young 22 year old kid, that was a lot of beer money back then. And I realised that I needed to keep doing that, and get out of the rat race, because I didn’t really like being an engineer. It’s not the greatest job – especially when you are the new guy out there in the field early in the morning.
Jack: Right – defiantly, particularly if you are doing field work in engineering and a civil engineer. That defiantly probably not fun stuff – they probably give you the worst jobs. So, then you repeated that with single families first, right?
Lane: Right – I started to invest out of state at the time I bought my first couple rentals in Seattle. One strategy that I follow is that I stick to secondary and tertiary markets and opposed to primary markets like – Seattle, California, New York, Boston, for the rent to value ratios. So I picked up one turnkey rental out of Birmingham and it worked. And so I 1031 exchanged those two Seattle properties for nine properties out of state. A lot of people don’t realise that it took me a while to get up to 11 rental properties.
Jack: And why is that?
Lane: Well, I don’t really do any ‘no money down’ type of activities. For the first five to seven years, I was just saving up my 20% down payment and then buying up property. My biggest thing was that I just ate a whole bunch of ramen noodles and just saved my money – and did it the hard way. That is how I got my network, from zero to 500,000 initially.
Jack: Yeah, that makes a lot of sense. So, single family by single family is a successful way because, if you think about it, thirty years down the road, you have 11 properties. If you keep going at it, you might have like 20-30 properties that are ultimately free and clear – and you own several million dollars and you have a six-figure cash flow coming in. But, it still is a slow way – right? Because for every new one, you have to go and eat ramen noodles and save up the money and then you can afford another one. However, you then propelled yourself forward to a 3,500 unit portfolio. You can’t do that just eating ramen noodles – so what did you do differently? What was the switch in your mind that made you go from one to the other, and how did you transition from that? What was the thinking process to go from adding one or two a year to adding 500 a year?
Lane: Alright, so from 2009 to 2015, I was into that single family homeless space, like you said. Then I realised that with eleven rentals, I had an eviction or two per year, some kind of big issue that happened every quarter with that simple size of eleven. Not too bad, if you have a property manager and they deal with the day-to-day stuff, all that was just $300 per rental, or like $3000 per month. I wasn’t going to be able to retire on that. I needed three times as much. If you do the numbers, now you are talking about an eviction every other month and then some big issues that happens twice a month, and that is just creating another giant job for myself. That is the intellectual switch that you mentioned. I realised that this wasn’t sustainable or scalable. So I had to go into something else. I didn’t know what it was. But I guess I’m kind of a smart guy and I was like if single family homes aren’t working the multi-families must make it multiple – right? So, that’s where I kind of like started to learn and get into it at that point.
Jack: Alright – so, what was the transition then? Did you go for like quadruplex or 20 unit apartment complex, or did you go for a 500 unit apartment complex right away? What was the transition that they did at that point?
Lane: I got myself more into collective genius mastermind groups, for multi-family. That kind of got stuck in the oven there – and that got me in and I started to learn it. But in the meantime, I started to have this idea in my head that I didn’t want to syndicate deals. I wanted to do it all myself because I wanted control and I didn’t really trust anybody – right. So, me and a buddy we were kind of going to go in together and get, you know, like a 20 unit or a 40 unit in a good market. What we realised is that once you start to run deals and put it through the analyser, a lot of those smaller multi’s don’t work. You don’t have a property manager in the unit all of the time as you do with 60 unit or above. And more importantly, something that I am realising lately on some of my smaller deals is that you really need to have that handyman in the apartments all the time, too. So, you need to be above 80-90 units for that to happen. Because it’s nice to have somebody who’s in the office leasing it up – but they are wearing nice clothes throughout the day. You want that handyman in there who’s going to prevent you from getting that $900 third-party plumbing repair, who just knocks that plumbing issue out before midday snack – and that is huge.
Jack: Exactly, I 100% agree with you. We have we went through our learning curve through our multi-families – we only own about 400 units, but we had the same experience. We actually made a mistake. We hired the wrong property management company on the very first property that we bought. And they ran a 90-unit multifamily unit like a single family unit, so every plumbing repair (even though they has a maintenance guy who was able to fix certain things), for a lot of things they brought in outside companies. It cost us a fortune – and then once we got rid of them and replaced them with a proper multi-family management company, all of a sudden our costs just plummeted. So, yes you pay that guy whatever it is, plus that $3000 per month, as well as benefits and so, but if they do their job right, if you have a good one, they will save you $6 grand a month, by just avoiding those $900 charges. Or, if they are certified, they avoid you an air-condition replacement, because you if you bring in an outside company if your air conditioner don’t work – 100% of the time, what is their recommendation?
Lane: You get a guy who has that certification, I think it’s an ACE certification, – I don’t know and I don’t care. It’s the property manager’s staff, right? I mean, they should be getting guys like this and that’s the nice thing about working with those commercial property managers – it’s just a whole different ball game. Their level of sophistication with keeping within a PNL budget and hiring their own staff. Also, with the due diligence process, we could get into later – but it just makes things a whole bunch easier. Even with the more sophisticated residential property managers.
Jack: I 100% agree. So again, again coming to that point, all of a sudden instead of having to replace every AC that is not working, they were repaired, and it saved us fortunes over the course of the year or multiple years. So people ask us ‘Well you have these people hired full time, isn’t that expensive?’ And my response is that I am saving a lot of money, so I am 100% with you.
So, now you went through that process. Now, typically, the first time around when you buy 100 units or so, how did you qualify for those deals? Because, typically the requirements is that your net-worth needs to be equal or higher than the purchase price of the property?
Lane: Right – so we transitioned by going after more non-recourse debt because I realised ‘why are they giving people who … (I thought syndicators where rich back then). I was like why are they giving out these sophisticated business men and syndicators these really good-rate government subsidised loans? That was eventually tipped the scales for me, to just syndicating with other people and getting out of my comfort zone and going down that route.
Jack: So, did you have to bring in a partner that had that net worth in for the first few deals?
Lane: Right, so my net worth was not at a point where I could qualify for a 50 or 100 unit property. If you are buying a $50,000 dollar per unit, you going to have to need another guy who has at least a couple million dollars net worth, because the balance sheet of the key principals need to be greater or equal to the loan. The second thing is that there are some liquidity requirements. People need to have a certain amount of liquidity in their bank accounts, which usually isn’t that hard. Sometimes it can put you in a little pickle. The third big one is that somebody on the principal team needs to have the experience of a past Fannie Mae and Freddie Mac deal. We call that the ‘Fannie’ card or the ‘Freddie’ card. It’s not really a card – you just have done it in the past, which is difficult because if you have never done one, you have never done one! If you have one you have one. So, it kind of a chicken and the egg thing.
Jack: Yeah, exactly. We ran into that too. Luckily, for our first deal we partnered with somebody – and while we brought in the net worth, he had the Fannie Mae and Freddie Mac experience that he had gotten doing previous deals. On the second deal, we were able to get it because we were part of the principals of the partnership of that first deal. Afterward it was no longer a problem. These are interesting things. For everyone that is listening – so for everyone that wants to purchase the larger deals, you can defiantly do it even though you don’t have the net worth for it and you don’t have the experience. You should have some experience in real estate because it’s a completely different ball game, and we will talk about that in a moment. But, you can partner with somebody that has the net worthy that has the liquidity and potentially has the experience in the multi-family [units]. Sometimes, these three pieces come all in one person. So, you might not have to bring in somebody with the net worth and somebody with the experience, but you can just potentially bring in somebody who has all three pieces, and partner with that person. And, YES, you on your first deal you probably have to give up a larger piece of that pie. However, through your association in that deal, the next time around, you now can present your experience in such that you have the Fannie Mae and Freddie Mac experience and you have a bit of proof for such a loan – and then they will give you the next one, without the experience partner. And soon enough – because every deal adds to your net worth, you will have the net worth that you don’t need to partner with others. Is that your path that you went through?
Lane: Yeah, exactly. To go back to the smaller deals that are under 40 – 60 units, to get one of these deals done, that is non-recourse debt, they are looking the lend on properties that are at least $1 million or above.
Jack: Right, it’s sometimes easier to get a multi-million dollar loan than it is to get a few hundred thousand dollar loans, sometimes.
Lane: Right – and part of that is that the ‘Ma’s and Pa’s’ have this sort of mind-set of going for duplex, triplex, quad or eight-plex or 16-unit, 24 or 36 unit – and they are the most unsophisticated. It’s usually an older couple that can’t really use the internet too well or modern-day project management systems and it’s a huge risk. So that is why the banks have such a premium on the rates – and we are like ‘this doesn’t make any sense’ – but it actually does, because it’s the riskiest profile when you are in the under 40 or 60 unit range.
Jack: So, let’s talk about your experience of buying your first large apartment complex and the underwriting process for that, compared to the underwriting process of your rental house.
Lane: From the underwriting side, it’s a totally different spread sheet. I help people get single family homes in my coaching group – and sometimes I have to pause and remember that it’s new to them. I’m just like ‘dude, take the rents, and multiply it by 0.6 or 0.7, and that how much you should probably how much you will be taking home. I say that because, with multi-family, especially when you have like a phased component – you are going to do value-add for the first two or three years, of maybe $5-10$ thousand that we have per unit, and you’re hoarding it for different times frames – it really is so much more complicated than just single family home spread sheet analyser.
Jack: It defiantly is – from every aspect, from the assumptions to the analysis. I always tell people that if you are ready for the complexity, jump right in – that are absolutely cool. If you are not, if somebody had given me a multi-family deal 18 years ago, I would have gone running, screaming the other way, because I didn’t have the experience for it. So, you did a progression on this. Let’s talk about the progression again. You started out in engineering; you got your first rental. You realised that it was nice beer money. You then advanced over the several years, got more of them, and then you realised that if I continue that path, it’s going to take me 30 years to get it to any kind of scale that I need it to get, right?
Lane: Right – and from an underwriting perspective, at that point, the things that I understood intuitively, such as where the rental value should be what I would typically cash flow for, and I had a good feeling of how much money went out for taxes, insurance, expenses, maintenance.
Jack: You understood the cost of repairing something, so you had gotten yourself into real estate, without carrying a multi-million dollar loan and the risk and things like that, but you built your experience in the small playground – right?
Lane: Right – because some of these investors will come in that they will do multi-families – and I’m like ‘Dude, you didn’t even own a single family home. Why are you buying this property that is like $140,000 per unit, and it runs for $1,100? You should know that that doesn’t cash flow!’ If somebody had a single family home for 6 months, they would understand something as basic as that. You get people who listen to a podcast and think that they can buy multi-family, but they don’t have the basics.
Jack: Right – and they run it through some analyser where they set the parameters wrong, it looks like it makes money, but then reality hits and their dream parameters and not living up to reality. All of a sudden, they are bleeding a bunch of money or losing a bunch of money …
Lane: What makes these multi-family deals live or die is that essentially – how much can you bump the rents? If your average rents today are $550, and then [Bozo] over these sees that he can bump the rents to $700 or $800 overnight. That isn’t going to happen – right? That is what an experiences single family home investor will know. You know that you can’t just bump the rents up $150 dollars and that will blow up your whole spread sheet.
Jack: I agree – it’s a slower game. It takes several years to get the rents in. Potentially, you can get them to $700, but it will be two or three years before you get them there. You can completely remodel out and get them there quicker, but it still takes a year. You can’t take somebody who pays $500 in rent and renew them at $700 because they are going to leave – right? You are going to have mass exodus. It takes a while – it takes time to process. That is why the bank wants those liquidity requirements, because those things happen.
Lane: I mean the bank’s looking at it from debt service coverage ratio and a business plan. A little bit of a different way that we finalise a deal, but it is another check-point.
Jack: How fast did you ramp up then?
Lane: So going back to underwriting, I think the first deal I went in as a passive investor. I just got in and I got the multi updates. I just wanted to learn what it felt like to be a passive investor. To just be in the boat, back in coach in the aeroplane, and what kind of communications where coming back at me. Originally, I thought I was just going to be a passive investor, because I was like – I knew how to analyse all these deals. I knew all the people, and I wasn’t too keen on being ‘The Guy.’ At the time I lived in Seattle and now I live in Hawaii. To do these deals – especially to acquire them, you need to be boots on the ground – none of this absentee landlord stuff. So in this case I went in as being an LP, and I thought that that was going to be my path to retirement. It probably was going to be, and it would have taken about 5-10 years. But, because I had the deal flow, and I had all these investors that wanted to follow me into deals, that was my ticket into the general partnership and to getting more involved. In a way, it was kind of like an internship to get involved in more deals. After working with so many different partners, I started to realise that the stuff wasn’t really that difficult. You just needed to get some live practice at the stuff.
Jack: Yeah, you have to have some practice and some cash reserves. That’s beautiful. And then, once you understood that, what happens next?
Lane: Then it’s just wash, rinse, and repeat – right? You focus on the underwriting on the numbers on the front side, so that you don’t run into too many bumps on the operation side. And when you do get into the bumps on the operation side, it’s usually a quick phone call on how do you fix the issue? If you have an insurance issue, a tree falls on your roof or your building burns down, it’s usually just a quick call to one of those insurance adjustors that is a professional, and works your claim on your behalf. You pay him a percentage of the claim, but it’s a big enough property that for a professional doing these individual things. If your occupancy dips down to 60%, you call these leasing specialists that get you right back up there. You role as the operator, is to play project manager. On a monthly basis you have to work with the property manager and decide, what are we rehabbing? What are we doing a make-ready? And then what is coming up – what is the next capital?
Jack: You are managing the manager, which is one of the pieces that I like about this model because on the single family model, you are also managing the manager but you have to decide every little thing that is let say over $300-$500 versus on the multi-family you set a budget and then within that budget, you don’t have to be asked about what they need to spend on.
Lane: and our strategy is a little bit different from other folks. We focus on stabilised property – so property with over 90% occupancy and we don’t do huge value-add. We are doing maybe $3000-$6000 worth of rehab. So a lot of time our property management who we work through does a lot of work for us and we don’t bring in a third-party contractor. A lot of our properties are stabilised already. You hear a lot of guys are doing huge value-adds, $10,000 or$20,000 per unit, and drastically changing over the property with contractors.
Jack: We are doing a very similar thing to you. So, what drove that thinking?
Lane: It’s been like a bull market for like forever, we don’t know what is going to happen and were the top of the market is. Things are still going pretty well, I think, even with all the Coronavirus and stuff like that. I’m not too concerned about it – but apparently the rest of the world is and the stocks and equity markets determine where the markets go. It doesn’t mean that the property markets are going to tumble like it did last time that was an unusual case. Why do we do this strategy? Maybe I’m kind of feint hearted? I don’t need to take risks these days! I’m just about preserving my capital and going after a bunch of singles instead of hitting a home run.
Jack: So, what do you think the market is going to do in the next few years?
Lane: If I were to pull my crystal ball, I would probably say that Trump gets re-elected because the company has been doing well. Should that happen, I would get excited about picking out more deals. I don’t really pay attention to who gets elected. I pay attention to my $600 dollar apartment rental and is it slowly going up to $625? As far as I am concerned – especially in the mid-market – the rents keep coming up. I like real estate because I can see this stuff coming up six to 12 months in advance.
Jack: Again I agree. Even if there is a downturn in the economy, people are still going to need the $600-$900 dollar rent units and people who can’t afford the $1,100 units are going to go down to your units or our units because they are well managed, pretty, clean, affordable units. I see the worst case being that rents are stagnant for a little while.
Let’s wrap this up with a couple of questions, like what is a book that you have read recently that made an impact on you?
Lane: I get a chance to read a lot of books because I don’t have a day-job. For the people listening – I’m not a big fan of books. Get out there and analyse properties. Make it happen. Go out and do it.
Jack: How do you get to analyse properties?
Lane: Get work with brokers, get deal flow, LoopNet is a great place to find junk properties that at least you can analyse. And then you can learn how to analyse deals and give the brokers feedback as opposed to just saying ‘no’ or giving them a low-ball price that you can’t back into considering what their spread sheet says.
Jack: Makes very good sense. So in other words – everything that you consider doing is better to do once you have some practice? So, go out and practice. Go and look at 50 to 100 of them for the next few months and just get yourself a spread sheet and an analyser – there are many on the market. And start learning the terminology and invest passively. You also have a podcast – which is on the screen – the SimplePassiveCashflow.com.
Lane: My email address is lane@simplepassivecashflow.com. Checkout my podcast – ITunes Google Play, all those and if people want they can join my Facebook community. We are passive investors – we are not into whole selling, flipping, and a lot of us make a good salary from rental options. A lot of doctors, dentist, engineers, lawyers, and we are trying to optimise our money.
Jack: Thanks for being on the show. It was a great discussion about economy and about scaling, why to scale. Why it makes sense to go from individual deals that take forever to larger scale and some of the challenges that come with it. Love the honesty and the willingness to talk about some of the challenges too. With that said – thank you very much, Lane. It was wonderful having you on the all and on the show. You know where to get a hold of us, right, landprofitgenerator.com. Go through our Facebook group, Land Profit Generator Real Estate Investing. That’s a wrap, thank you Lane.