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How to Build Passive Wealth (Episode 48)

Lane Kawaoka is the founder of Simple Passive Cashflow that helps entrepreneurs and professionals grow their wealth.

After 12 years as a Licensed Professional (PE) Civil/Industrial Engineer, he fired the boss and began to focus 100% of his time on investing and helping others with his Passive Investor Accelerator & Mastermind.

Lane began investing in 2009 in rainy Seattle, and being a ramen-eating cheapo he was able to buy a property early right after college.

After discovering the difference between ‘Cashflow Investing’ and ‘Appreciation Investing (gambling/speculating)’… he moved his portfolio into 11 single family rentals in Birmingham, Atlanta, Indianapolis, and Pennsylvania.

Today, he is investing in syndications that invest in Class C & B Multi-Family Apartment, RV Parks, mobile homes, and assisted living facilities because of the USA’s demand for affordable housing – not rich people Class-A assets.

His mission is to help regular people into good deals that were once only accessible to the rich. The passive income from investing in stabilized rental properties made it possible for Lane to move back home to Hawaii where the cost of paradise is 10%+ cost of living and -30% less pay for comparable jobs in the US mainland.

There he could live a lifestyle that allowed him to bike to work. It did not take him long however to finally quit the day job and ditch the e-bike for a Mercedes.

Annoyed by the bogus real estate education programs out there (that take money from people who don’t have it in the first place), he set out to make a free website to help other hard-working professionals. The shrinking middle-class dispel the Wall-Street dogma of traditional wealth-building and offer an alternative to “garbage” investments in the 401K/mutual funds that only make the insiders rich.

He helps the hard-working middle-class build real asset portfolios by providing free investing education, podcasts, and networking plus access to investment opportunities not offered to the general public.

“The true meaning of wealth is having the freedom to do what you want when you want, and with whom you want. Building cash flow via real estate is the simple part. The difficult part occurs after you are free financially to find your calling and fulfillment. But that’s a great problem to have ;)” excerpt from “The One Thing That Changed Everything”

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What you will learn

  • A top recommended book – ‘The Millionaire Real Estate Investor’ by Gary Keller
  • The importance of a 1% rent to value ratio (RV)
  • Why investing for capital gain (or appreciation) is like gambling
  • Why you should look to invest in secondary real estate markets
  • Why you should focus on real estate for the middle class
  • Why Lane moved from a direct ownership model of investing in real estate into more passive “Limited Partner” syndication deals
  • Why a good deal is based 50% on the numbers and 50% on the people involved
  • The importance of doing the research before buying
  • Why savvy real estate investing needs good peer networks
  • The importance of podcasting for building business networks
  • How real learning happens by doing

Transcript

Jeff Bullas: Hi everyone, welcome to The Jeff Bullas Show. Today I have with me Lane Kawaoka. Now Lane is currently living in Hawaii, originally from Seattle where he did his degree, and escaped the big city and went looking for a better lifestyle in Hawaii. So welcome to the show, Lane. It's great to have you here.

Lane Kawaoka: Hey, thanks for having me, Jeff. Hello, everybody.

Jeff Bullas: So today, what we're doing is Lane's got a system for generating passive wealth, especially targeting the real estate market, so we're going to explore that a bit today. We've touched on this and he's wanted to make this accessible to professionals as well as the middle class, not just for the wealthy end of town. And this is what we're trying to do today for our listeners, is making sure they have access to some of the best tools and strategies to create a life of freedom and also be able to grow their wealth through either a business or through investing. So it's great to have you here Lane. I'm look forward to finding out more about your systems. But a little about Lane. You originally trained as an engineer and then you actually did two types of engineering, so tell us about those.

Lane Kawaoka: Yeah, so my story is I followed this linear path my parents taught me to study hard, go to school, get a degree, work for 14, 15 years. So a lot of this I was doing, building up my real estate portfolio to eventually go passive and quit my day job, engineering. This was all a side gig and the way I do it is very passive. Just to outline the talk today, I think when people think of real estate investing they think of the HGTV stuff, flip your house. But quite frankly a lot of that stuff is for lower net worth guys. The stuff we're going to talk about today is more passive investing. If you don't got money and you're bad with your money, you can't save it, this ain't for you, so stop listening. But if you've got a successful business, you've got a good paying job, you can save up your money diligently, this is what passive investors do to build up their passive cash flow and eventually go financially independent.

Jeff Bullas: So what led you to go down this path? You did your degree, you did what mom and dad told you to do, studied hard. What was the a-ha moment for you when you went, "This is not for me anymore"?

Lane Kawaoka: So I graduated college, I saved up my money. Engineers get paid pretty well out of college and I was pretty frugal myself, so I was able to save up the down payment for that first property in a couple years. I think it was like 60 or 70 grand is what I needed. Still had, this whole financial dogma of buying a house to live in, which I don't necessarily agree with, and we can talk about that later. But I had bought this house to live in, because that's what everybody said to do, and because my first job was a lot of traveling, as most young professionals do, I was never home.

Lane Kawaoka: So I was like, "Well, this is dumb, "I'm just going to start renting this thing out." And my mortgage was $1,600 a month, my rents brought in $2,200 a month, and there was obviously a delta there. And to a young 20 something year old kid that was a lot of beer money at the time. Then I started to think to myself, I was like, "Wait a minute, if I just keep doing this a few more times, I'll be able to fire my boss, do whatever I want to do." And that was where I... The rabid education process and focusing on... Still working my day job, right, don't get me wrong, that was how I got the capital and that's how I got the capital to buy additional properties, but that was my a-ha moment.

Jeff Bullas: SO you rented your place out, this is sitting there might as well make some money out of it and going, actually it's renting for more than I'm paying the mortgage. So you're going, "Good beer money, absolutely."

Lane Kawaoka: Yeah, yeah, and this is where the a-ha moment also came, right? When you're making money on a rental property, your tenants pay down your mortgage for you, so you're getting that equity built up there, from them paying your mortgage essentially and getting the principal built up there, you're making cash flow, right? Income minus expenses is positive. Any good business runs like that. You're getting the tax benefits, and we can get into that a lot more, which is better for a higher net worth syndication by replacement investors by the way. Lastly you're getting the appreciation of the property, which you get with when you buy any house that you live in or as a rental.

Lane Kawaoka: But when you add up all these four components how you're making money, you do the math and it's like 30 something percent. And if people don't believe me, think I'm crazy, go to my website I have a video where I do a whiteboard thing with all the numbers, simplepassivecashflow.com/returns, but yeah, 30 something percent on a dinky rental that quite frankly wasn't even that great. Today I pick better places to buy, we can talk about that more. But I look at my stocks and mutual funds like well, how are they making like eight to percent there? WTF. Right? And that's where I started to realize this whole system is engineered to keep hardworking professionals in hardworking America enslaved for 40, 50 years. It's just that we're investing in retail products that just makes Wall Street rich. How else do they have all these large buildings?

Jeff Bullas: So that was your first little investment. Where'd you go to learn from that? Obviously, the a-ha moment happened and you went, "Okay." So where did you learn? Who'd you go to, the people, the books, the resources? Where did Lane go to take it to the next level?

Lane Kawaoka: Yes, I read a book, 'The Millionaire Real Estate Investor' by Gary Keller. I suggest everybody read that book. But I'm not a big fan of academic learning. It's more building your network of other passive investors and also just doing it. The 70-20-10 rule, 70 percent is doing it, 20 percent is your peer network, 10 percent is academics or podcasts, I devoured a lot of podcasts. Today, I have a podcast geared towards passive investing [inaudible 00:07:34]. A great way to get that first starting momentum, but then ultimately you have to pull the trigger, and that was where I bought... I was limited to how much money I had, but after a year and a half I bought another property in Seattle, and at that point I realized this thing called the rent to value ratio which-

Jeff Bullas: Sorry, the what?

Lane Kawaoka: The rent to value ratio, or RV ratio for short. This is the indicator, it's a quick and dirty way of figuring out if they're going to cashflow operate. So to find this number, you take the monthly rent, divided by the purchase price, and we're looking for something one percent or higher. So for example a $100,000 property that rents for $1000. 1000 divided by a hundred grand is 1%. At that point you maybe put it into the analyzer and check your numbers a little bit more but it starts to make sense. So this ratio disqualifies a lot of places that you would think to invest. We do not invest in primary markets, such as Seattle, all of California, [inaudible 00:08:41], Hawaii, Boston, New York, right? Because in all these places if you're lucky to find a place that's 400 grand purchase price, which is probably going to be a dump slump, your rents might be $2,000 a month. That's half a percent, that's not going to work. We're looking for 1% or higher that's going to shake off things.

Jeff Bullas: Is that per month or is that per year?

Lane Kawaoka: Per month. Per month.

Jeff Bullas: Per month.

Lane Kawaoka: So monthly rent divided by the purchase price.

Jeff Bullas: Okay, cool. So you use that ratio... So you learntt that off Gary Keller, was it?

Lane Kawaoka: I actually don't think that that was in that book. That book was a lot of good fundamentals, here are the things to look for in search of the market. Yeah, I think I picked it up just from peer networks, right? And that's just a quick and dirty way of evaluating properties. And like I said, then you have to put it into more of a detailed analyzer. They can go to my website, download my analyzer for free, simplepassivecashflow.com/analyzer. But a tool like that will show you, you have your income, $1000 a month. But then the important thing is to start to drill into all of your expenses, maintenance repairs, capex, and you're going to pay the property manager 10% of the monthly rents, for example. Then you might have to assume that there's some vacancy. So this eats into your income, which is fine, right? That's why you buy cash on properties with a lot of margin in there, and you have to pay your principal interest taxes and insurance, your mortgage payment. Then you should have maybe a little bit of leftover as your cache, as your buffer.

Jeff Bullas: Okay. That sounds like a simple rule of thumb which you use.

Lane Kawaoka: Yes. Simple rule of thumb but most investors do not invest this way. Most people invest for appreciation, which I call it gambling.

Jeff Bullas: And you've got no control over that. Have you? Because capital was going to move up or down, depending on whether like Seattle for example, the capital has gone up there, but you wouldn't have predicted that 25 years ago. So it's whereas adding value to property, just being much more pragmatic, I suppose is the best way to describe it. Isn't it?

Lane Kawaoka: Right. Great word. Great word.

Jeff Bullas: So you bought another property and so it added that to the portfolio. What next?

Lane Kawaoka: Yeah. So that was around 2012. I started investing in 2009, and if people were around back then, they were paying attention that this is how the prices started to come up. And I wasn't cash flowing on properties anymore in Seattle. I started to become aware of the rent evaluational that we just mentioned and a simple rule where you assume that half of your rents are going to go to expenses, which they tend to do if you're an owner you know how things work. So I started to look into different markets. These are more tertiary and secondary markets. So places like Birmingham, Atlanta, Indianapolis, Kansas city, Little Rock, not the sexy places to live in, but the numbers work really well, 1% rental value ratios on good properties with good tenants, not your high end of course. You're not going to be in the places with the best school districts, but not the ghettos. We focus on the workforce housing, the middle-class, the middle. Actually technically there is no middle class these days. It's either rich or the sort of poor, right?

Jeff Bullas: Yeah. You're right.

Lane Kawaoka: That's all we have today. But nevertheless, I started to buy properties in places that I never lived in. We'll call these remote rentals, buy these things called turnkey rentals. So a lot of these places you'll have a local rehab or fix up a property, put in a few major components like electrical plumbing, paint. Some of these guys will even put a tenant in there for you. So it's a great way if you're new and passionate to get started. It's like a rental property training. So that's what I started to do. And around 2015 I had 11 of these rentals, cash flowing, a few thousand dollars per month, things were good. I saw the light at the end of the tunnel that I didn't have to work at this engineering job for the rest of my life. Yeah. That was part way in and that's when I kind of transitioned to being more of an accredited investor and started to transfer my portfolio from a direct ownership model to more of a passive LP investor just indications in private placements.

Jeff Bullas: So what do you mean by LP?

Lane Kawaoka: LP is a short for limited partner. So syndications and private placements are larger deals where a pool of investors, LP, passive investors come in, they bring in their capital and they invest in a larger deal, like maybe a 100 or 300 unit complex. I discovered that this is how the wealthy do things. They go into multiple of these ventures, maybe a few dozen, and this is what their alternative investment portfolio looks.

Jeff Bullas: Okay. So this is like the whole next level. So did you set up your own syndication or did you buy into them? Because in Australia for example, there's a lot of regulation around syndications and you've got to have a license and that can be very complex and hard to get. So how'd you get into that particular arrangement?

Lane Kawaoka: Yeah. So initially I just went in as a passive investor. Here in America, when you're a passive investor the due diligence is on you. It's unregulated from that perspective, but for the person aggregating capital, the general partner, which is what we do today. Yeah, there are a lot of rules that we have to follow that are set forth by our securities exchange commission, we put together a private placement memorandum that sets the terms of the deal and I'll pass the best service I have to read, it's a pretty hefty document. It's like 150 pages, but once passive investors get used to one, they've seen them all and the end of the day you just have to trust the offer. What good is the paperwork if people who are running the deal aren't disciplined.

Jeff Bullas: So you basically invest as passive investor in a current syndication. So how did you do your due diligence on that to make sure they were good bonafides and trustworthy?

Lane Kawaoka: Yeah. So 50% of it is the numbers, 50% is the people, this is how I do my due diligence, but I'm able to underwrite the deals by looking at the profit and loss statements, the rent bills, putting it into my model, seeing first of all, is this a good deal? This is where I think real estate is very different from any other business or startups. Real estate if you buy a good enough asset that's already under value, and you have a good business plan to raise the rent, the asset runs itself. At the end of the day there's a third party property management that's into the ground at the property all the time. That's their job. They're paid like a vendor, a percentage of income. But whereas a startup, it's very dependent on the offer.

Jeff Bullas: Absolutely.

Lane Kawaoka: I do a little bit of it in that vicinity and people say 99% of it is predicated on authority. But in terms of real estate I take a blended approach where I'm going to look at the numbers first, see what numbers and the assumptions that the sponsor's making. And then if they're using a little aggressive underwriting, it's already tipping me off as an investor, then maybe I don't even want to initiate a conversation or use my network to start doing.

Jeff Bullas: So what do you mean by aggressive underwriting? You mean they're doing a big leverage, like a lot of debt?

Lane Kawaoka: Most deals are going to maximize them on average. That's why we do this, right? It's a hard asset, we're using good government loans. But when I mean aggressive underwriting is like assuming for the rents to go up, maybe three, 4% every single year. Now, yes there may be data to back this up. But personally when I am their ideal I don't want to assume that the rents are going to go up more than 2%, which takes into account just the pace of inflation.

Jeff Bullas: Exactly.

Lane Kawaoka: Or if there's another large one that we'll look at is like the reversion cap rate or the exit cap rate, what are assets trading for in the future? We don't know what they're going to trade for in the future. So we want to use a reversion cap rate that is saying that if the market's been weaker, in future. If the market is stronger, which it usually typically is, well awesome. I agree that even that much more money, but let's go in with the assumptions thinking that the future does not suck and we're to sell into that.

Jeff Bullas: Okay. So the other question makes many I have is, so you said you went into secondary and tertiary markets. Okay. Now, as we all know in real estate, they're markets within markets. So the real estate markets, many, many markets, and each city has got its own market. How do you identify which secondary or tertiary? And this is going to be particular to the USA for example, it's going to be different in Australia, which is where I'm based. And in Sydney, so how do you identify these secondary and tertiary markets? And obviously you're not targeting ghettos, you're not targeting the top end, you're targeting the quasi middle-class, good quality homes, how do you discover these secondary and tertiary markets?

Lane Kawaoka: Yeah. So I think once you're... In America we call each market like an MSA, a large market an MSA. Within that market, you may have a few dozen or at least a dozen some markets, right? I'm trying to think of a place we both know like in Seattle, Seattle will have, just in the city of Seattle. Seattle has a large population, high value market, large population there. So you're going to have like Belltown, Northgate, all these sub markets. So first what we're trying to do is, all right, let's go pick a good MSA to invest in. And they're separated, primary, secondary and tertiary markets.

Lane Kawaoka: For the most part, primary markets are the big cities. So now these are like the top 20, 10 cities, right? The secondary markets are more like... I guess the population range is probably the best indicator, but these are your several million population since. Your tertiary cities are more of your half a million to few million in that range, smaller towns, we don't go to little towns of 10,000 to 50,000 population. We stay away from them, because what we're looking for is a place with number one, good rent evaluations so that we cash, that's always a tenant of ours. We want to cashflow day one in this investment, in case there's a recession, something happens. But we want us to want to have a diverse economic profile of jobs around us.

Lane Kawaoka: And when we stay above these tertiary markets or better, you're like, "Well, there's not really one meat packing plant that supplies all the jobs for that one town. We don't invest in towns, towns are small. We invest in cities that have a legitimate size. And from that point, now we're left with maybe a couple hundred markets out there. Right? So how do we dwindle that down? Well, first of all, we're investing in more politically right states that are red states, Republican, in that form, not the same thing politically, but when we're the landlords, we're the landowners. We want the tenant laws on our side. There's another reason why we don't invest in California, which is a socialist.

Lane Kawaoka: A lot of the landlord laws are on the tenant side. That's great if you're the tenant, not good when you're the landlord. So this is why we'll target certain states like Arizona, Texas, Georgia, Florida, Alabama, places like that. Typically at least in America these states have a lot more economic growth with them. So that narrows the field part of that, right? Those four or five States or five or six states, again, Arizona, Texas, Georgia, Alabama, Florida, maybe the Carolinas, still have that in there, I'm willing to bet those six states are going to kick the butt of all the other 44 in [inaudible 00:20:57]. Which is why we target those. And now we're going to look at all right, what are the sub-markets that we're going to tie into?

Jeff Bullas: So tell us more about the sub-markets. How do you discover those sub-markets within that big market like a capital city in a state for example. So how do you go and define that, there's a certain number of bedrooms. It's obviously you're looking for that 1% per month on the capital value, but what's some of the other research and things you're looking for at a top level.

Lane Kawaoka: Yeah, at this point we've already created a pretty narrow band within the search criteria, right? So we just see what comes in in terms of deal flow. And we are deciphering through thousands of deals to get a deal, right? Because we're looking for the property that is undervalued, already has lower than market rents. So we can bump that up. And there has to be some play to implement our business plan, which is to put in some rehab to freshen up the units, maybe new flooring, certainly new appliances, but not really get into the big stuff like [inaudible 00:21:59] and stuff like that. So we can bump the rents up, maybe an additional 10%. So that type of needle in the haystack is already so small that we just target these major MSAs, the red states, certain states and certain cities, and then we're just seeing what comes through the deal flow.

Lane Kawaoka: At that point, once a deal comes up, that lights the spreadsheet brain. Now we're going to go look at that and be like, "Is this where we wouldn't want to invest?" No, this isn't good all right. . This is in the path of progress. It's where we flipped, that's our personal procedure for finding the good investment. But you can do it the other way around, like take a great MSA for investing like Houston, right? Typically the path of progress in the Houston MSA, Houston's like one of the top five largest cities in the United States, huge market, millions of people live there, but we're going to... "All right, we'll be like the Northeast project," right? Or we're like the South project. At that point we've had to narrow in. We could narrow in those particular markets and in that sense, because it's such a big market.

Jeff Bullas: Yeah. So what you do is you do the numbers. So like I said, flip it one way or the other, do the numbers and then apply your own expertise and experience to it being, is this got a general trend towards more, I suppose, prosperity coming in through Amazon moving a factory there or a distribution center or is the army moving in or whatever in terms of a base. Or like you said you can do it the other way around. You can actually go, okay, just do the numbers and then look at it after that. It's very, very interesting.

Jeff Bullas: So really what you're doing in essence is with the numbers and research is you're looking at that 1%, all right, great. But then when you're buying something you're looking at what value add can we do? In other words, the value add could be identified under value. Number two, is it a bit rough because it does need new appliances, new floor coverings without getting into any major innovations, correct. That's two of the places where you can add value. Is there any other ways you can add value to a property?

Lane Kawaoka: Well at the end of the day adding value is defined as improving and offering, right? And people who run businesses, EBITA is another term for this. So you effectively have two goals and you don't need to achieve both of them, but one would be increasing your top line revenue, right? So it's just why most of our business plans are to increase the rent. That's typically what we're going for. The other one would be cutting expenses. But most times we're not really cutting expenses. Most times we're increasing expenses because we're making that much of a better product for our customers who are the tenants. But in some cases you could have a property running at $8,000 per unit per year. That's just too high to be running expenses at. There can be some fat cut out of that, and that could be another business plan that we could see. But I would say that on rare occasions, like I said, we're always trying to improve the product.

Jeff Bullas: Okay. So you've bought the property. Well, you've identified the area, you've identified the sub-areas within that and you bought the property. So for investors that're not maybe in a syndicate, what would you do from that? What's your... For example, interest rates are so low at the moment. So do you have any, I suppose exit strategies if interest rates are going to go up? What's your exit strategy for risk reduction or risk minimization?

Lane Kawaoka: If you're worried about interest rates you probably bought the wrong property, let's say that. Sophisticated investors don't pay much attention to that. It's open all time lows for the last several years.

Jeff Bullas: Okay. So if you identify the right property then it's not a big risk... it's not something you should be really worrying about.

Lane Kawaoka: And the interest rates are pretty existent these days after it's decoupled off of the gold standard. Government's going to try and keep it pretty steady, and that's the function of the Fed. But as investors, our job, actually what we're doing as investors, right, we're borrowing money at X amount of dollars. And the cap rates that the property already forms at, which we intend to improve greatly are always a little bit higher than the interest rates. And if you graph the interest rates and the cap rates over time, what you're going to see this phenomenon is that they'll follow each other, they're dancing up and down, but they're always dancing at the same rate where there's a delta between the cap rate and the interest rates. The delta, because most times like I said, most sophisticated investors are applying for leverage. The delta is multiplied, that's our returns. So in essence, it's always a good time to buy because you're always going to have a delta. Sometimes you can have cap rate impressions where did the delta squeezes between the two.

Jeff Bullas: Okay. Could you explain to our listeners what you mean by delta?

Lane Kawaoka: Yeah. So delta is our engineering term, is the difference between the interest rate and the cap rate. So let's just throw some numbers out there. Right?

Jeff Bullas: Give us an example. Yeah.

Lane Kawaoka: I think today you're probably looking at, you got to get a loan on a several million dollar property, you're probably looking at like a 3% interest rate. The cap rate for A-class rental might be 4%, maybe for B class it's four and a half, but let's just go with a B class. Four and a half minus 3% is one and a half percent delta difference, then we apply leverage at a four to one or five percent. And that is our return, that is our yield as investors. This is what a bank does, right? Banks blend money at a certain yield and the customers pay interest rate and they always build it so their spread is almost to the positive, which is exactly what we're doing as investors. So the concern you brought up, very common concern, right? What if interest rates go up? Well, the delta of the property will also go down.

Jeff Bullas: Okay. That's good to know, I just-

Lane Kawaoka: It's like you and I in a spaceship, right? We're cruising together. Well what happens if it speeds up? Well, we're always kind of relative, right? It's a relative type of thing. There's always a delta between cap rates and interest rates, which investors apply leverage to, that's how we make returns.

Jeff Bullas: Okay. So it's your system which I want to go into a little bit next, is essentially based around syndication. Is that the basis for everything you do in real estate?

Lane Kawaoka: Yeah. Well I guess like my system, so I help out hire working professional investors that have day jobs, high contributor society or entrepreneurs like you guys work with. Guys that want to invest their money passively, but where do they start? Right? Because certainly you don't have time or effort or the risk tolerance to go flip a bunch of houses or wholesale houses. A lot of that is for broke guys, let's be honest.

Jeff Bullas: That's right. Yeah.

Lane Kawaoka: But what we do is passive investing, but where do you get on this escalator? Because if your net worth is under a quarter million, half a million dollars, quite frankly you don't belong in a syndication. Most syndication deals, the minimum investments are $50,000, then your net worth is only a quarter billion that's 20%, 25% of your net worth. No syndicator in their right mind will let you join the syndication, if you're just too low net worth. But for those people what I would recommend is go buy a rental property. This is what I did back in 2007 to 2015. I just bought single family homes. It took a long time as I was often slowed down by how much money I could save, but this is the prudent way to build wealth, cash flowing rental properties. Then once you get to be a certain point, you go through investor adolescence, you go through the investor puberty, you become an accredited investor, that's when you come into this world of syndications and private, for instance we're relying on your network to help you do the diligence on who to work with is more important.

Jeff Bullas: So let's go back to that. You had mentioned in the past. So how do you do your due diligence in the marketplace, do you Google syndicates, is that through your network? Because you remember you had this ratio of 70% doing it, 20% your network, and I think 10%, is that correct? I'm trying to remember what the ratio was.

Lane Kawaoka: Yeah. Yeah. So once you become more of an accredited investor and you're looking into syndication, you're going to have to rely on a peer network, but you're trying to find the right peers, right?

Jeff Bullas: Yes you are, exactly.

Lane Kawaoka: You go to a free website or internet form or you go to the local real, you're just hanging out with broke guys, Right? And this is what makes it so difficult. There are crowdfunding websites out there, but a lot of the operators on there are struggling to find money. If not they would just raise money out of their own five private investible that they have existing. We've tried to use these crowdfunding websites to help us raise capital, but it makes no sense. I don't want to pay them an arm and a leg to pay these guys who just happen to have the eBay upfront funny websites, right?

Lane Kawaoka: I'm not desperate. I'm going to pay them to do that. So that's why I don't invest in crowdfunding websites because I want to know the operator personally, but I also want to have a peer group that has invested with the person in the past. And that is the gold standard of who to work with, right? You know somebody personally, you have an organic relationship with, and they have had good success after really putting in 50 grand of their own money into it. But when you first start out, you're not going to ask, I never had this, which is why I've on a couple occasions went into some bad deals and lost my mind, but chuck it up to experience, that's how you learn, and that's why you diversify.

Jeff Bullas: Exactly. So what was your first experience with identifying that peer network and how'd you build your network because networking is very important. In business as we know it, it produces opportunity, also produces trust and credibility. So how did you develop your peer network?

Lane Kawaoka: Yeah, so I was investing since 2009 I had rental properties. And when you're at the bar hanging out with the credit investors, everybody's affluent, right? You need to add value to other people, and what helps is that you've actually owned some rental property. You got some more stores you can add value to. Then just from there on out, it's just building relationships with people. And which I get it, not everybody's able to do.

Jeff Bullas: Yeah. So I know you run your own podcasts and what I've discovered about podcasts is they're a great way to network, in the essence that you're having a chat for 30 minutes to an hour, and you're asking about what they do and obviously this is what we're doing today right now, is what does Lane do and how does he go about it? And then discussion also is how can we help each other without any agenda, but it's essentially that's what we're trying to do. So how does the podcast work for you in that way? Does that work quite well?

Lane Kawaoka: Yeah, it actually does, so that's probably the number one way I would suggest finding a whole bunch of passive investors, just spend your time making your own podcast, but then again, everybody has podcasts these days, right? I built my podcast for the right reasons to help people get single-family home rentals back in the day in 2016. I personally was going through the transition to be more of a credit investor, but through this journey people could see my progress in real time. And look, for some reason people trust me, see that. It's the real deal. I've been there, I've done that. I know the progression of a passive investor. So a lot of people will book free onboarding calls with me, I try to get on the phone with people for 15 minutes if they're a long-term podcast listener of course.

Lane Kawaoka: And this has allowed me to monetize my podcast where we have a pretty pulled in group of passive high net worth investors that we have Masterminds, we do events from time to time, especially it's hard with the whole pandemic going on, but passive investors need passive investors. They don't need to go to some stupid real estate conference that to me are a bunch of fake gurus out there. They need to find in a close group environment in a virtual country club setting where it's safe, where they can let their guard down and interact with other high net worth passive investors and talk and build relationships to in turn figure out what are the best practices for tax legal, infinite banking, what deals to go onto, who to invest with, who not to invest with. This will never be on a website, if it was, it'd be probably so colluded and so... It's work, right? Only way this works is the smaller guy networks, such as my... For what I've tried to coordinate.

Jeff Bullas: But that's really good to hear. You're adding value to people, which is great to hear one of the metros that came across with Wayne Dwyer, passed away a while back. And he lived in Hawaii by the way, I think he lived in paradise as well. He said, "Teach yourself, teach others and raise the energy of the planet." And that's essentially what you're doing. You're really adding value, which is just great to see. So the way you're adding value, you wrote recently, so you do it through Masterminds, you do it through the podcast, do it through a 15 minute call, would you do it through your website? You do it through an ebook. Any other ways you add value and educate others?

Lane Kawaoka: That's on the coaching and Mastermind side, but my other side of that business is putting together these types of opportunities for ourselves. Or I do my own cooking. I do my own cooking and I keep it to people I trust. Yeah, it's two separate business lines, but at the end of the day, along your line, people build wealth off solving people's problems. So what am I solving? Number one, like I said, how do you become a passive investor and invest with the right people? Well, I need a group, I need a mastermind. I need people that I trust that I can build a relationship. Well, that's what I create.

Lane Kawaoka: And then the next thing, well, I need somebody to lead an investment for me. I need a syndicate to invest in. Heck, I need a lot of syndicates to invest in because I need to diversify my money over a lot of good deals, different partners, different asset classes, spread around the country, and not just one place, and not one deal. So that's what I create. I go out there and I in turn, how do I create money for them? But at essence we buy properties and we treat our tenants right, we improve the communities that they pay us for rent. Right? We're not in a business of buying low, sell high, we're a business of creating value for tenants and customers. Hopefully all the Jim Rohn quotes are right, money will come to us.

Jeff Bullas: There is something you made, a comment you made earlier in the beginning that... And I totally agree with it, is that you said you learn by doing, rather than learn by doing academic studies, even though you've got a master's degree and I think in civil engineering. So let's explore that a little bit before we finish up. So I'm a huge advocate of, you can talk about it, you can read about it, but the real value and the learning is done by the doing, that's it, that's the only way you're really going to learn. You can sit and do a four year degree, go out and then start doing what your degree taught you to do and going, "I actually hate this. So what's your insights about doing versus academic learning?

Lane Kawaoka: Yeah. When investors come to us and they're looking at the large deal, the deal is they usually speak for themselves, right? Their 1% rent to value ratio with opportunity to infuse a little capital to improve the property to bump the rents, right? So I think a lot of people they'll come in at least academic knowledge to be like, "All right. Yeah. I read your... I did your e-course, learnt about the rent to value ratio." Right? I get it. Do the math, right? It's not that hard as you've seen, but there's a difference between that person and the person who's owned rental property, maybe for even three to six months, right? They've seen some month's repair comes up bigger than they thought or a tenant moves out. Now in their heart they understand why the heck they need that 1% rent to value ratio. Because things are going to go wrong.

Lane Kawaoka: So there's a difference between wholistically understanding and by doing it, and this [inaudible 00:38:38], and this helps, when you're a passive investor you're looking at a pitch deck on an opportunity that everybody has a podcast these days, everybody can make the pitch. You just pay the person on Upwork with a digital marketing degree from the Philippines, 25 bucks an hour, you can make whatever. But it's hard enough to figure out what is on this PDF pitch or in the webinar what's real or not. Wholistically understanding this thing as a landlord yourself will really giving you an advantage to deciphering what's a sucker deal and what's genuine.

Jeff Bullas: Yeah, and because the ones that have been there, done that, just like you said, you've got deals that didn't quite work out the way you want and you've lost money, that's a very quick way to learn and obviously don't want to lose everything, but you learn so much quicker when you actually get your hands dirty, dig in and feel the pain and also the opportunity.

Lane Kawaoka: Right. I'm getting a little bit into the world of startup investing. I've never coded before. I've never been in this business, a SaaS business or Amazon FBA business, but I've had a lot of partners. And I know what traits and skills, and I know what works people do where they're totally full of it too. And I think I have a pretty good feeling based on a short conversation on some of these business plans or when I call yes or not. And at that point I don't put it in mind, but that's what makes real estate investing a little bit easier, because you can take a look at my business plan. All right. These guys are changing up the flooring, they're doing new appliances, they're maybe putting a ceiling fan or two and maybe a backsplash, right?

Lane Kawaoka: You can go and look at what the comps are, right? Maybe they're getting $850 a month. Their business plan is to get $950, same unit after it's been done. All right, well that will cost $5,000. Right? And somebody may scratch their head there a little bit. Maybe if you have a little experience, you did some rehab on your rental property and you're like, "Oh yeah, that makes sense." Right, they're doing it at scale. They're getting better prices. They're getting better contractor prices. It makes sense, right? And this is where you're vetting the business plan.

Lane Kawaoka: And it helps if you have some knowledge, but it's not necessary, but this is always with being a passive investor and something, a lot of this there's going to be some intellectual aspects of you're going to have to take a risk on people, right? The business plan sounds good, but not all the cases you don't know what's going on between the years of the offer. This is where you have to take a chance and you're going to have to do some test investments, but that's hopefully the tests go good and you can figure out who's legitimate you want to work a long term relationship in multiple different opportunities.

Jeff Bullas: Right. So you've mentioned on your website that there's a system you use, can you distill that into several pillars or steps for our listeners?

Lane Kawaoka: Yeah, I would say the prescription is, if you're under a quarter million, half a million dollars net worth, go out and go buy a rental property, you'll learn a lot. You'll also get your net worth up to be a respectable amount where you can also be a syndication investor. If you're higher net worth than that, your highest and best use may not be buying a little rental property for a few hundred dollars a month, but it is at your day job, at your business, making a lot of money. Right? And for a lot of my clients that are a high paid doctors, lawyers, entrepreneurs that are successful, the best path for them is to figure out who to work with, give their money to them and get out of the way, but then keep making more money for themselves on the active side of whatever business or trade they're in. At the end of the day it's all about what's your highest and best uses for your time.

Jeff Bullas: Yeah. Okay. That's really great advice. So just to wrap it up here, Lane, what's the best way for people to, I suppose, contact you and get started. What's your best point of entry and contact?

Lane Kawaoka: Yeah, they can check out my podcast Simple Passive Cashflow, it's all about passive investing, check out my website simplepassivecashflow.com. If you're looking to buy a rental property check out the first dozen podcasts. But like I said, my podcast has progressed over the years, as it became more of a credit investor, a lot syndications lately. But yeah, if you guys are more of the credit investor type, feel free to shoot in the mail lane@simplepassivecashflow.com.

Jeff Bullas: Awesome. Fantastic. Thanks Lane for sharing your wisdom and experience. It's been fabulous and a lot of wisdom there. There's been obviously a lot of blood sweat and tears over the last decade plus, and you know your stuff and it's just great to have that wisdom and experience shared with the world. So we're going to put that out there for you. Thank you very much for your time, it's been an absolute pleasure.

Lane Kawaoka: Thanks Jeff. Appreciate it man.

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