Episode Transcript
Frank Hereda (00:02.133)
What's up everybody. Welcome to another episode of focused free fit. It's your favorite business coach, coach Frank. And today we have an amazing guest, Lane Kawaoka. And he is an interesting individual and I can't wait to dive deep into what he's been doing. So, Lane, welcome to the podcast.
Lane Kawaoka (00:26.626)
Hey, thanks for having me. Aloha, everybody.
Frank Hereda (00:29.183)
Yeah, there we go. so what we'll do is I always start with asking everybody about, tell us a little bit about yourself. I'd like to talk about where you grew up and, and, let's see, you know, how that molded and impacted you. And then we'll kind of go from there because there's a lot we want to get, I want to get into today. And I think that the listeners are going to benefit from a lot of what you're doing as well. So please feel free to share us with us a little bit about yourself.
Lane Kawaoka (00:55.95)
Okay. Um, yeah. So currently we syndicate apartment buildings and we buy other private equity deals outside of real estate. Um, over $2 billion of deals, um, and think 10 ,000 plus units, but it didn't always start off like that. Um, my kind of, my story kind of starts off, uh, used to be a W two engineer. And, you know, people always ask me, how did I get into that? And I'm like, well,
I just, when I was in grade school or intermediate school, I think I Googled like what made the highest salary without going to grad school or, you know, getting a doctorate. And it's all those engineering degrees. So I happened to be good at math and science, I suppose. wasn't horrible at it. So I became an engineer. And if you can kind of tell, I call this the linear path where you're kind of sleepwalking through life and just doing what your parents told
You know, my parents kind of taught us to study hard, be frugal with our money and we'll get a good job and just work at that job for 40, 50 years, investing in your Roth IRAs, all that normal stuff. But right after I graduated college in 2007, again, mindlessly saved my money to go buy a house in Seattle, Washington. And then I was working a construction engineering job at the time.
Frank Hereda (02:22.775)
Were you civil engineer?
Lane Kawaoka (02:24.62)
I was industrial. That was my undergrad. And, you I was never really like a, like a design person, right? Like those are actually your good students. I was horrible at that stuff. people who went to engineering school or did physics class, like, you know, that stupid problem where you have the spider web and the winds blowing five kilonewtons to the east. And what's the degrees of the web? I could never figure out how to do that. To be honest, I was just kind of, I don't know
Frank Hereda (02:25.92)
industrial.
Frank Hereda (02:53.003)
That's it. Hey, engineering is, I went to school for engineering as well. In fact, where are you located at now?
Lane Kawaoka (02:53.974)
I don't know.
Lane Kawaoka (03:00.63)
I've been honolulu Hawaii today.
Frank Hereda (03:02.067)
Yeah. My, my roommate in college, I went to an engineering school. roommate in college was from, a Wahoo and, and I'll tell you when I got there and took my first couple of classes in engineering, I realized how smart I wasn't. I was just like, it's just, it's difficult. Anyway, sorry.
Lane Kawaoka (03:19.072)
Yeah. No, you're, you're, had the same experience. Like I knew day one going in, like, I mean, not, yeah, I did, I did AP English or AP, I didn't do AP English. did AP calculus and a few others. So I kind of went in, you know, as a bit of a, supposed to be a bit of a review, but I was like, Whoa, I got rocked. Right. mean, I went to university in Washington, which is a decent school. Probably not the best out there, but it is pretty competitive.
And I learned pretty quick, like, wow, these, these guys around me, they know their stuff and I'm just going to have to try and hang with these guys and just get the damn degree and moving on. Um, but moving off into, you know, actually getting a real job. I was like, what do you do when you're not really super good academically? think I had like a 3 .01 GPA when it was all said and done. Well, you become a project manager, right?
Frank Hereda (04:13.867)
Yep, there you go. Big bucks. Time for the big bucks.
Lane Kawaoka (04:16.206)
Yeah. Well, you don't need to know anything, right? And the project kind of moves itself in most cases. Um, and, you know, I, was, I was fortunate enough to get a good job with a fortune 50 company and they kind of stuck me out in the field. the bad part about this was I was traveling on 100 % of the time for work. Granted, I didn't have kids, family at the time. So it was actually pretty good for me. And this kind of ties in with the real estate investing where
You know, I bought this house to live in 2009. took me a couple of years to save 80 grand from my paycheck. And then was like only home on Saturday because you know, it's a hundred percent travel. had to like come home on Friday night, leave Saturday afternoon. I was like, this is dumb. So I just started to rent it out. Got an old property manager to rent it out. And I didn't know anything about rental real estate, but then I was like, wow, this is kind of cool. And for a thing I was in my early twenties, was like, wow, this is, this is a lot
You know, cool beer money right here. Like I think the rents were 2200 and the mortgage was 1600. I didn't know anything about rent to value ratios, you know, 50 % relative expenses. just thought I was making like 400, 500 bucks every month. And that, that was kind of my big aha moment where I was like, wow, this is, this is a cool thing. This rent of real estate.
Frank Hereda (05:37.813)
Yeah, that's interesting because usually there's, I mean, I guess there's there, I find you fall into two camps. Either someone stumbles into real estate. Like I would consider that or something major takes place where they just have this, my gosh, this is what I need to do. I mean, you had that moment after you stumbled into it. So like for me, it was, read rich dad, poor dad, and it was like click. So it, you know, it was like an eye opening experience for me, but before that I had never.
You couldn't have told, you know, mentioned anything really about real estate. So, on the investing side. So I just think it's interesting, but,
Lane Kawaoka (06:13.9)
Yeah. I mean, you kind of hit it on the head. There's like, you know, I talked to a lot of people when you get into this alternative investing world, you know, my case is like, you know, the younger guys who just kind of haphazardly fall into it and, know, maybe they've had a mentor. They kind of get on this early track and, a lot of their networks are like two, three million by the time they're, you know, in their, their late, their mid forties.
guys like yourself who kind of find it in the mid midway point reading that book or some other podcasts out there is another entry point. What I find for most of the folks I work with, they are usually in their mid forties. Their net worth has surpassed maybe a million and a half net worth. know, see there's some breathing room there. it's like, maybe I should be doing something with it. got all the bases covered. And the other third ingredient is like they, they have.
kids that are like 10 years old, 12 years old. So, I mean, I'm kind of in the thick of it. got a three year old. I'm like, good God, how does any parent try anything like new or have any time to try anything new? Like, like real estate or investing. just go to work and come back home and play with the kids. Um, cause that's all you can, you can stomach at that time of your life. But yeah.
Frank Hereda (07:30.967)
What's the risk factor when you have a family, like you don't take as many risks?
Lane Kawaoka (07:35.342)
Yeah. And that's where I was at a huge advantage in my early twenties. mean, I, I, I just uprooted all my stuff through in a storage room. And then, you know, I went from saving like 30, 40 grand a year for my engineering job to saving a hundred grand every year for I think like four or five years there. didn't actually live anywhere. I lived on the company dime from hotels. So that really, you know, if you just add that up, you know, 400 or 500 grand
plowing right to rental properties. But in reality, it was a lot more because the time value of money, right? The first year, you know, the first rental then. think a couple of years later, I saved up to buy another duplex in Seattle. And that was around 2012. By 2015, I had started to buy properties outside my local area in Seattle because Seattle is a primary market, you know, know, really bad rent to value ratios.
I'm pretty good for appreciation, but I'm not really an appreciation, get lucky kind of guy. So I started to buy these Trinkie rentals in Birmingham, Atlanta, Indianapolis. And that was, had 11 of them in 2015, but that was kind of where I hit a inflection point, you know, with rental properties, they're great to get started or what I call them, like in my new book, the wealth elevator, I call the first floor of the wealth elevator where you're not a credit investor and you're trying to get to that million dollar level.
At that point, time becomes a little bit more important than money. that's where I was personally traded in my rental properties for syndications and private placements and to get more diversification and certainly take my name off of the first line of the guy being sued, right? Little rental properties are a lot more liability. I would probably say 50, a hundred times more liability than a...
a portfolio of syndication deals as a passive investor.
Frank Hereda (09:32.523)
Yeah, you're saying because if it's over five units, it's not coming back to you. It's a commercial loan, that type of stuff. It's not recourse debt.
Lane Kawaoka (09:40.203)
Well, yeah, I I'm just talking about in terms of like slip trips and falls and frivolous injury lawsuits, but yeah, you're exactly right. When you're a syndication LP investor, you're not the person signing on the debt. Those are the loan guarantors and key principles that are signing on the debt on there. And yeah, when you're buying your own little rental properties, you're the person signing up for
Frank Hereda (09:46.439)
gotcha. Yeah.
Lane Kawaoka (10:06.252)
you know, all that recourse that.
Frank Hereda (10:08.375)
Yeah. And you know, it's, I don't know if I want to go there yet, but we, guess we could, uh, you know, we're talking about syndications. I want to get into a bunch of stuff here that you've, you've talked, you know, it looks like you've talked about, you have your books, um, which we'll talk about as well. Um, tell me though, before we get there, tell me how you, so you got this place in 2009, I think you said, right? 2009 ish. Okay. So you get a duplex. that what you said it was?
Lane Kawaoka (10:34.874)
That was just a single family home. mean, it was pretty a nice, place, right? Like my early twenties. That's the stuff I buy when I'm idiot.
Frank Hereda (10:36.853)
Single family, okay.
Frank Hereda (10:42.163)
Okay. Yeah. Well, that's what you, you you do it, you do it, you don't really have a strategy at that point probably. So, but when did you get to, so you, were doing that for a while and how did it go from one Z to Z to something more organized and what made you, and how did you come up with that plan?
Lane Kawaoka (10:59.502)
Yeah. So, I mean, the first one was a single family home in Seattle, 2009. And then I saved my money to go buy a duplex in 2012. So if you, if you kind of follow it, right, like it's taking fricking forever, right? Like I'm limited to how long, how much money I can save for my paycheck. Even with me, you know, living on the road and saving a hundred grand every year, it was like slow, right? So for most people to, you know,
Frank Hereda (11:11.063)
Okay. Yeah.
Lane Kawaoka (11:27.086)
to several units, it's going to take them almost a decade unless they have a phenomenal salary over $250 ,000. But yeah, 2012 things got expensive in Seattle, right? The market started to pick up and that was kind of where I started to buy properties out of state in these more flyover parts of the country. So I traded in those, I did a 1031, traded in those Seattle rentals,
I don't really think 1031s, anybody should be doing those types of things. In reality, we can talk about that later, I got, I mean, I made all the mistakes, you know? Yeah. So, so I traded in those and I had bought 11 out of state, um, by 2015. But that was kind of the point where I started to learn about syndications and private placements. More importantly, like I think that the big thing for me, like up until
Frank Hereda (12:02.229)
That's interesting. want to know. want to, I, yeah, I definitely want to talk about that, but go ahead.
Lane Kawaoka (12:23.832)
point, I was kind of just doing this all by myself. Wasn't talking to anybody. Yeah, sure. I was reading books and, you know, listening to podcasts, but after a while you kind of heard it all. And it wasn't until like, kind of haphazardly ran across other accredited investors, like people who would own rental properties older than myself. And they were all shedding their rental properties and moving, you know, going into transformation from a little caterpillar to a accredited investor butterfly.
you going into these syndicated deals, and, know, for the liability, you know, these deals were more value add, right? Because when I was just buying little rental properties in reality, now looking back, I was just doing the buy, hope and pray strategy. You know, you get some good debt, you get some leverage on it. you know, you're not, if you're not doing any major renovation to the unit, you're not doing a damn thing to bump the net on permanent income. And you're
buy hope and pray. You're just praying that the market appreciation and yeah, real estate typically it goes up. Unless in 2022 and 2023, when you have a correction because a 40 year high interest rates,
Frank Hereda (13:28.543)
Yeah. Well, that's true. Yeah. Long -term it's going to, but nothing like what you would do if you bought a rundown property and added value to it and, you know, fixed it
Lane Kawaoka (13:40.918)
Right, right. But if you notice, I'm kind of lazy, right? And I had a good job. So there's a lot of investors out there that are credit investors that just quite frankly, it's, it's just not worth the risk to dick around with all these renovations and the burst strategy to be the burst strategies for broke guys. If you're under a quarter million dollars net worth, I get it. You got to do that type of stuff. But if you're a working professional, you already make a hundred thousand dollars plus at your job. might make more sense
You know, just get another promotion. And that was kind of the track that I was on. Sure. You may not like your day job, but certainly if you're a high pay professional or a doctor making $300, $400 ,000 a year, that's what you got to do. You got to kind of suck it up, but take all that money in the meantime, four or five, six years and plow it into real estate like how I did. And then you'll get choices.
Frank Hereda (14:32.981)
Yep. So, okay. So you said to yourself, you were talking to these guys, they're accredited investors. What was your next move and how did you get into, sounds like you were, I don't know if this is what you've been doing since then, but it sounds like we're talking syndication, multifamily type stuff. So, with GPLP, you're, you're doing bigger deals. So did that start right off the bat? You said you bought your first, duplex. think you just said.
after a couple of single families, how did that escalate to kind of what you're doing today?
Lane Kawaoka (15:06.734)
Yeah. I mean, I think what I do is I try, I tried things on a small scale and then I move swiftly and I kind of go all in after that test run. Right. Like when I bought my first property in 2000, when I bought my first like remote rental in 2012 or 13 in Birmingham, I bought one. I was like, this works. Right. I don't have to be around that. I I don't need to touch it or see it. Probably better. don't do
Frank Hereda (15:16.023)
Interesting gadget.
Lane Kawaoka (15:34.83)
I sold the Seattle rental properties and I went all in and I bought 11 out of state, right? So no different. I like the proof of concept idea and then I move swiftly. So same thing here, you know, invest, you know, 50 grand as a limited partner, see how it works, see if it's the right fit for me, and then kind of sell everything else and move it all into that type of stuff after was kind of what I did.
but then, you know, I kind of run into problems because when you're first starting out, I mean, at least speaking for myself, I didn't know any other credit investors. My parents weren't wealthy. I didn't have a rich uncle. I didn't have a community other purely passive of credit investors, right? And like the local real estate club is like the worst place to go on network. Everybody's broke there and they're just a bunch of wholesalers and flippers guys who think real estate is a great way to get rich quick.
The investors investing in these more country club deals are wealthy. They don't have time for, you know, screwing around and going to some happy hour with some, with some 30 year olds. And plus a lot of these deals aren't located in your local area. So it took me a while to kind of find the people doing these deals out there. And inevitably the people I find are the guys who just good at marketing.
Frank Hereda (16:38.901)
Yeah.
Lane Kawaoka (16:53.646)
And, know, I think the first 15 deals people I invested with, maybe a few of them turned out to be landmines. Just make it two, make it operators who had under quarter billion or 250 million, 500 million under of under assets of experience. So everybody's good at us building a social media presence out there. All these programs. I know them all. They all teach you more about.
taking selfies and writing internet copy, then actually operating the damn investment. But that's just how it is. know, unfortunately for passive investors, when you don't have a network of purely passive accredited investors, that's the S show that you're going to be stuck with at that point. but that, you know, I'm, I'm, you know, I've lost money resting with the wrong people, but Hey, that's part of the game. Yeah. Yeah.
Frank Hereda (17:47.753)
It always happens. You do enough deals, it happens.
Lane Kawaoka (17:52.726)
And then I started to realize, beat my hand. These guys are a bunch of jokers, right? mean, here I am as a professional engineer, going back and forth with contractors, change orders, and just project management. lot of these guys doing these deals are not, you know, they don't have college degrees, which I don't think is that important. Don't get me
Frank Hereda (18:14.539)
Yeah,
Lane Kawaoka (18:16.43)
But a lot of these guys haven't been working for a fortune 500 company with a professional background. They're just a bunch of like glorified house flippers. And after being burned a couple of these times with a bunch of yo -yos in a suit, um, I was like, yeah, screw these guys. I'm gonna do this myself. They don't trust anybody. And that was kind of where we started to, you know, do our own deals. We would start buying little 50 unit, a hundred unit properties that are class
So class C are a little bit rougher properties where, you know, some of these, remember we had like 168 unit, like only 80 % of the people would actually pay. So 20 % would be dead beats, but that's pretty typical or not typical, but pretty, can be expected for class C properties, especially in the value add stages, right? Where you're kind of taking over the asset.
Frank Hereda (18:57.558)
Yeah.
Lane Kawaoka (19:12.686)
And that was kind of where I was like, yeah, we made some good money doing that, but man, is it a real pain and kind of a headache. And especially when you're working with investors, investors that are like, what's going on? Why are 20 % of people paying? know, it's like, and then, you know, I think on that one, we, we more than doubled in like three years. it's like, people are like, oh, okay. Um, but yeah, we started to step up to larger assets, more class B, which are a little bit nicer, but still
Frank Hereda (19:24.715)
Yeah. Yeah.
Lane Kawaoka (19:41.358)
Apparently people think that they can just go to some weekend guru conference and buy a 400 unit apartment complex. And we, I saw the writing on the wall on this, because. This is like 2018, 2019, like we would go and bid on a property. Every nothing is off market. That's total bull. Everything is on market. This is a very liquid market commercial real estate above 150, a hundred units. Um, everything's out there. Sure. It might be shown to a few.
a few groups, nothing's off market. That's, that's baloney. you, so you start to realize, or you started to realize like a bunch of these like, in totally inexperienced guys were competing with us and just beating the prices up. And it's like, all right, we need to see the writing on the wall and like salmon, we need to swim upstream. Right. So we started to develop properties because that was kind of where we had the professional background and experience.
to kind of just do that because the thing is like, in reality, it's not too hard to get a loan for 200, 300 unit apartment complex. The harder loans is getting it for the construction side to build it from scratch. So in 2020, we started the development projects where, you know, just to add it to kind of the mix, you know, it's pretty rare that we can find maybe 12, 20 acres of land out there.
that's in the path of progress. it's not like, I mean, apartments, 100, 200 unit apartment complexes or 300 unit apartment complexes are out there all the place, right? So it's pretty plentiful. Not as plentiful as like single family homes. That's like huge competition, obviously, but that was kind of the genesis. Around 2020, we went over $1 billion of assets under ownership.
Frank Hereda (21:23.743)
Sure. Yeah.
Lane Kawaoka (21:33.186)
kind of took ourselves out of the business to some extent, started to hire better people that were actually property managers in the early parts of their career that knew a lot more than us, Genki entrepreneurs. And, you know, that was kind of a little bit of the transition, but, yeah, I mean, that's, that was, that's kind of been our path, the latest trajectory.
Frank Hereda (21:56.695)
So you guys timed it about perfect there going in and like early before, you know, 2018, 2019. That's a good, good timing. Um, we won't touch where we're at today with multifamily, but I would like
Lane Kawaoka (22:09.486)
Yeah. Well, I mean, I'll, I'll talk about it. mean, I'll be the first fricking person to tell people like it's tough out there 2020 like interest rates, 40 year high quickest time in history. Um, it brought commercial real estate down to 30 % off the highs. And unfortunately, I mean, it's a great entry point for people now, but I mean, you would have never known that would have happened.
Frank Hereda (22:15.723)
Eddie.
Frank Hereda (22:34.429)
Yes. What about? No, no, no, no.
Frank Hereda (22:42.741)
I want to, I want to go to before I ask my next question, I want to go backwards just for a second. So let's say you got somebody out there and there's a lot of people that are going to listen to this. that are, have a couple of properties, right? They've been in the game. There's some people that haven't been in, they're not in at all. Some that have, but they haven't made the leap to multifamily. Okay. So there might be doing maybe a duplex quad, whatever, but most it's single family, maybe Airbnb,
So what would you recommend for them? How would they, you know, there's a lot of places we're going to touch on today that might help them set up for the money, but it sounds like what I hear in your story is save, save, save. And I'm sure there's a lot of sacrifice on that, on that road. You know, you were shoveling money to the side. had a, were pulling in $600 a month from your place, but that's nothing compared to what you had to save. So what would your advice be for the people that are listening saying, gosh, how do I get, bridge that gap? Cause that's tough.
Lane Kawaoka (23:40.334)
Yeah. mean, I would say it's like, first it's like a self -awareness of where you're at. That's why I wrote the Wealth Elevator book because in there, there's like a pull -out page where there's like a chart and basically it says like which floor of the wealth elevator you are at or what's your cattle grade, right? If you're some guy that only makes $50 ,000 a year at your day job, then yeah, you may have to keep flipping houses, wholesaling houses.
But if you're somebody who's making a professional salary and believes to make more, your highest and best use, it might be at your day job and you invest more passively on the side. And I'll highlight that word, highlighting highest and best use. So what is your hourly rate? Right? If your hourly rate is more than a few hundred dollars at something, you're probably a passive investor, right? Just to give you an extreme example.
The problem is when you're starting to kind of be in that limbo land, but I would say, you know, check out my book and see what floor of the wealth elevator you are at. Right. When I was in my twenties, I was in the first floor of the wealth elevator. My net worth was not quite, yeah, it wasn't quite a million dollars yet in my twenties. And, but as soon as I did, yeah, like
Frank Hereda (24:52.427)
When you were what age? 20s, okay.
Lane Kawaoka (25:02.094)
investing in little rental properties, taking on that leak, that legal liability just didn't make any sense. And I think for me, like when I had 11 rental properties, I mean, yeah, I have my professional property management to deal with all my headaches, but at a few hundred dollars, couple hundred dollars a cashflow per property, that ain't nothing, right? That's like, you know, 11 times 300, that's three grand per month
of profit after expenses. Look, I'm not going to complain about that, but most of my clients need 10 ,000 plus to be set at least. So you're going to need to multiply that 11 rentals by three. But I'll tell you with 11 rental properties, I was having maybe an eviction, you know, once or twice a year and some kind of catastrophe that happened every quarter.
Frank Hereda (25:34.155)
Yeah.
Lane Kawaoka (25:59.128)
Like a flood in the basement or something like that, know, tree fall on the house. And which is fine. I think it's, you that's not that bad. You know, you're working your day job and you're making some phone calls to your PM. But if you were to triple that, now you're talking about an eviction every other month. And you know, that that's what got me. One in every three evictions I had, like turned out to be some type of
I mean, like sheriff shows up to the house, those other crap out on the street. I mean, I'm not there to see this, but I'm just like, I just get these pictures from the PM with like, just the house is just in disarray. 10 to $30 ,000 of repairs for each of those. And again, like one third of the time in my experience, I've must've had almost a dozen of these type of experiences of evictions. And a few of them ended up with this. That's my data set.
Frank Hereda (26:28.971)
Yeah. Yeah.
Lane Kawaoka (26:54.222)
If you haven't had this happen, I know what the comment thread is going to say. Everybody's like a YouTube comment wizard here. They're saying, you're buying properties in the worst of areas. Like, look, man, I'm trying to buy properties and like, you know, not C class areas, like more like B. This is just people and problems. And you're going to have this. Talk to me when you have 10 evictions, what's your run rate and your...
road to recovery after those 10 evictions. Guaranteed, whatever. Not going say nothing's guaranteed, but more than likely, probability -wise, you're going to have one to two of these repair bills that's going to be 520 grand. And you're going be like, first you're going to lose faith in humanity. Like who lives like this? Who leaves like 50 dog poops before they leave? And then you're
Frank Hereda (27:41.599)
It's crazy stuff you see.
Lane Kawaoka (27:45.194)
All right. Where are these syndicated deals where I'm a past investor that I don't sign on the debt myself, that somebody else plays asset manager as skin in the game and has some carried interest to the end game. Okay. Bring it on. And that's kind of where I was
Frank Hereda (27:58.945)
So I hear what you're saying. and I agree with everything you said, there's going to be a big difference between somebody who is a passive investor, unless you're doing things differently, from my experience and limited knowledge of, of syndications, you know, you're putting in money, you might double it in five years on a lot of times, or you might get a payout along the way of small percentage. And so it's good for a lot of people that don't have, they don't want to put the time in their passive.
But there's a big difference between what a GP gets and an LP gets, right? Obviously, because they put in the work, they run the project, they take the risk, everything. So talk to me about that and what do you think about
Lane Kawaoka (28:38.766)
Yeah. mean, most times I'll just speak maybe generally, right? Like, I mean, there's a sliding scale with this. Your newer operators under $1 billion assets under ownership, you're going to have a little bit better fee structure and split structure. They're, you these guys are kind of desperate to get going. I'm looking for investors. Maybe you might get, you know, like an 80 -20 split where that's on the profits generally. And of course.
There's a few ways that people do these things, more complicated waterfalls, but essentially it's like of the profits, say a building is bought for 12 million, sold for 18, and there's four million, what is that? Four million, six million. Yeah, $6 million of profits. Probably should have picked a better example. This is kind of going be difficult math for me in the morning. But yeah, like 80 % of those profits go to passive investors, 20%.
Frank Hereda (29:24.481)
Six gap, six million, yeah.
Frank Hereda (29:30.742)
Yeah.
Lane Kawaoka (29:38.008)
goes to the general partner in that case. But that's for a newer operator. On the other side of the spectrum are institutional operators. These are the guys with billions of assets in their ownership. First of all, as a past investor, they don't want you. They only take check sizes of maybe half a million, million dollars. This is like where we try to collate our folks and get into these higher quality deals and get better economics and splits.
Frank Hereda (30:03.275)
Gotcha. Gotcha.
Lane Kawaoka (30:05.902)
You those split structures might even be like a 50 -50 split. You know, you're not going to double your money in five years with these guys. Normally it's like double your money in 10, but it's very stable. You don't have to worry about like Scheister operators getting started.
Frank Hereda (30:19.007)
Yeah, peace of mind.
Lane Kawaoka (30:21.518)
I would probably call us somewhere in the middle, right? Like we get, like to get our, get to know our investors to some extent. We have events and I like that family atmosphere, you know, but we're not the new guys anymore. Um, in this world, would say like 70, 30 splits are kind of the normal or the standard. So, you know, but at end of the day, you're still trying to hit that, you know, that two X equity multiple by the end of the business plan. Um, developments can get there a little bit faster.
Frank Hereda (30:32.663)
Sure.
Frank Hereda (30:40.001)
Gotcha.
Lane Kawaoka (30:51.438)
You know, that's the appeal for developments. Um, but that's kind of where, I mean, to be transparent, like we were talking about the correction of 2022, 23, right? When things go down 20 or 30%. In reality, when you're in most of these value add plans where you're just essentially putting lipstick on a pig. Yeah, it may be $10 ,000 of rehab per unit, new appliances, new paint job, new flooring.
Um, new HVAC, new trailer system, new playground equipment, you know, enough to bump the rents up maybe 10, 20 % and, you know, add in other income across the property. Certainly enough to, you know, on a perform a double your money in five years. But all you're trying to do in that circumstance is bump the net operating income by 10 to 20%. That's enough to double your money. Um, why will we're using, you know, people will use leverage, right? Number one.
But that's the beauty of commercial properties. The commercial property is worth what the net operating income, which is income minus expenses divided by the prevailing cap rate. So you have control over the income minus expenses. So if you can do things like renovate units and bump up the rents, that's how you bump up the NOI. And that's the business plan in most of these types of projects, 10 to 20 % bump in NOI, which works.
you know, majority of the time. So in the last couple of decades, it's worked 90 something percent of the time. But when you have a correction year, when things go down 30%, even if you implemented the full business plan, you're SOL, you're underwater. And this is kind of where, you know, this is what's nice about development. Like we started development in 2020 in probably the worst of times in, in Lumbergeddon, like when lumber quadrupled in price, we had to like, we had to like put in extra money.
Frank Hereda (32:46.88)
Right? Yeah.
Lane Kawaoka (32:50.446)
to pay for that, but we know that we're creating so much value. not just bumping up 10, 20 % net operator income. It's a lot more value add bump in this case. but we were able to, as interest rates started to creep up, actually not creep up, but initially they went up like half a point, three fourths point if I recall. I can remember where I was November of 2022. Well, everybody's
But was puckered up as these interest rates started to come out and came out and were able to refinance out of our construction loan on that particular development deal. And the reason is because you created so much value from nothing. And you you just, you were able to kind of just get out there and then make a time in this interest rate environment as things got to get really, really bad at that point. but you know, we do both, I mean, we'll continue to do both strategies, right? Come
know, hit the ball where it comes, take the inside pitch, it, take the outside pitch, jacket the right field, right? Is kind of the idea. But that's kind of the issue with the light or the traditional value at play, where you're just kind of doing that 10, 20 % in lifts, which again, on a performance enough to double your money in five years in a flat market. But that's the little bit of exposure you have there.
Frank Hereda (34:07.318)
Mm -hmm.
Frank Hereda (34:15.553)
So talk to me about a little bit of this, a little bit of a sidestep, but I'm interested to know. I think I saw somewhere you were talking about two things, infinite banking, I think, and 401k myths. So I'm just curious because there's a lot of, unless I saw that wrong. So if I am, then just let me know. But I'm curious to know,
for the person that's out there, because a lot of people are thinking, OK, well, I'll do a self -directed, maybe, I don't know, or something like that if they are putting money in a 401k. So was curious to see what your take was on it, and then also the infinite banking concept that I think a lot of people just don't know about. And I'm curious to know what your thoughts are on that.
Lane Kawaoka (35:01.526)
Yeah. So I'll do the easier one first. So yeah, it's two separate topics here. So first, infinite banking is like a method that a lot of people will funnel their money through a whole life insurance. First, put money in that and then build up a cash value and take a loan from yourself and then put it into a real estate deal or an investment or put it into the stock market. So it's sort of an intermediary
Frank Hereda (35:03.191)
There's a lot to go over there, but just high level.
Lane Kawaoka (35:28.95)
And people are like, well, why are you doing the shenanigans? Right? Why do this? Well, if you think of this whole life policy is sort of like, it's an asset, right? It's a, it's a, it's a life insurance contract. It's not a hard asset, but it's actually like, it's with these AAA rated companies, probably a lot safer than putting your money in your local bank in reality. So these life insurance contracts, they're pretty solid.
What you're doing is just like how people, the way to think about it is, know, if you have a house, you, paid down your mortgage, you start to build equity there. There's value there. Just like in a life insurance contract, there's the cash value portion, the HELOC, there's the equity portion. And how do you get the equity out of that? Well, you take the HELOC and you take it out and you go invest in other things. So this is no different than a
on your house or rental property. And we're using it in the same manner. And I think this is kind of gets kind of thrown off a little bit, depending how people talk about this, but the basically is you take your liquidity, you put it into this virtual house or this life insurance contract, you take loans from that. then while you're doing that, well, just like that house who appreciates in value, even if you drained out the equity of your HELOC, it continues to go up in value.
course, real estate, sometimes it doesn't, right? It's more, more variable, but this is where that's nice about putting it in a stable life insurance contract. just, it's more stable, just keeps going up. So this is where the idea, if you're making money in a couple of places, another benefit is it's off the table of litigators. So if people recall how OJ Simpson did all that stuff, I guess we can talk about him because he's dead now. and I guess nobody cares about the controversy that all ensued. We were all over that apparently.
But the guy had all his money in his 401k and it's pretty, pretty protected against litigators and your life insurance contract, especially if you live in certain States is very similar concept to that. So the idea is you have a lot of your net worth kind of hidden here. Um, and it's protected, but also you're getting a tax free, um, usually about four or 5 % normal ranges when the money's in there and, you know, sure you have to take a loan from yourself.
Lane Kawaoka (37:56.256)
that should be taken as a business expense, right? In pursuit of other investments. So you got to talk to your own CPA. If people want a referral, you know, they can reach out, but you know, this is, it's pretty common that people will do this. And this, again, what I started to learn from a lot of these high net worth investors, but the key is like, and this is where things get, people get confused with this type of stuff, right? James Ramsey will like totally say like whole life insurance is a total scam.
Well, the devil's in the details, right? It's all how the stuff is configured. If you're configuring it, how most people will do infinite banking or full life policies, the majority of it is the insurance portion. And that's where the commissions and the fees come out of. The way that, you know, people in our world will structure it is either with a mere 30 % or make it bare bones 10 % insurance. that you minimize those fees and yeah, minimize those fees and commissions as much as possible.
Frank Hereda (38:48.513)
They over fund
Lane Kawaoka (38:53.102)
And then the other 90 % or 70 % can be those paid up additions, the over funding thing that you're kind of referring to. So that's kind of infinite banking in a nutshell. mean, I've got this kind of, it's kind of abstract. get it. Right. And it took me a long, long time to get this concept.
Frank Hereda (39:11.637)
Well, you're, yeah, when it's your first time hearing this, for anybody that's their first time, it's a lot right now,
out your books or anybody else on infinite banking because that would would help.
Lane Kawaoka (39:22.856)
Yeah. Yeah. I mean, I've got this diagram. you know, I think it's at the wealth elevator .com slash bank. people want to check out. but to your next question, the whole, I put money in a retirement plan? Because that's what I was brainwashed to do. Right. and that's what I did. Right. And when I started to work, the Vanguard guy came to our office and he said, like, you know, I think he came for free because he wanted to get assets under management.
the company and that was his job. But this is we're all taught to do, To plow money into these retirement accounts and put it for the future and to essentially create this big pile of money at the end. But you think how flawed that is, right? You don't want to wait till the end. At the end, you're going to have eat at this pile, right? Because you certainly don't want to eat the principal.
You want to, you need to convert it to cashflow at the end. So why not begin with the end of mine and have all these mini streams of income or mini pensions or little rental properties or little syndicated deals all over the place and, eat, be able to eat from that pile of money, the streams. But for a lot of us, you know, who haven't hit several million dollars net worth or four to $5 million is what I define as end game for most of our clients. You're still in growth mode.
And you should keep your day job and you don't have to eat those streams of cashflow and that streams of cashflow can make more cashflow babies for you. But that's esoterically kind of the high level. let's dig into 401ks, Roth IRAs, or all these are called qualified retirement plan money, QRPs for short. So what I'm arguing here is like, you need to fill up your cashflow to date bucket now. So you can eat that or choose to quit your
sooner rather than later. So there's kind of four big reasons why I would probably not put money into these qualified retirement plans. The first would be, well, you want to, you're going to pay taxes on this money at some point. Don't believe all the bull that people say, it's tax free. You're going to have to pay the taxes at some point, either in the beginning, and then you take it to cash and invest it, or at the
Lane Kawaoka (41:45.58)
The first argument is taxes are likely to go up, right? Like, I mean, look at all the government entitlement programs where you're Republican, Democrat, I don't care. Taxes are going to be going up. So in theory, it would make sense to take the tax hit now and then someone has to pay it later when it's higher. Right? So that's the argument for not putting your money into one of these qualifier retirement plans.
Frank Hereda (42:12.129)
Totally agree.
Lane Kawaoka (42:13.806)
Essentially, it's kind of a sneaky way for the government to have like a blank check to hit us up 10, 20 years, 30 years from now for whatever they want at the time. The second thing is for you personally, most people in our world doing this stuff is going to make heck of a lot more money in the future than it is today. Now this might be opposite for the average American, right? Who's in their income generating years and make little bit to nothing.
when they're retiring, unless they greet people at Walmart. At that point, they're still not making that much money doing that. So your tax brackets is more likely to be higher in the future. And of course you combine what I've mentioned, previously mentioned. So if you're kind of following me, the message is take the money out now, pay it at a lower tax rate today, then you would be in the higher tax bracket in the future.
The third thing is, look, I think, I don't know what the rules are cause I don't really plan to, I don't have any retirement plan money. don't have any QRP money anymore personally. So I don't really follow the rules, but like they keep moving the date back when you can actually use the stamp money without penalties and stuff like
Frank Hereda (43:29.527)
Uh, 50 it's 59 and a half. You can start taking distributions. And I think it's, I think it's either 65 or 67 and a half. You have to start taking distributions. Yeah, for sure.
Lane Kawaoka (43:39.13)
Yeah. Whatever it is, it's too damn long, right? Like if you're, if you're doing this stuff for five to 10 years, you're going to start to see the light at the end of the tunnel and you're going to want to pull your money out of this sooner rather than later. Right. You want optionality here. Um, again, for the average American, this stuff is good, right? It's, it's, it also helps them keep their grubby hands off their money, which is the same concept for why I
Most people should buy the house to live in because it becomes a forced piggy bank. But for you and me listening and all the listeners, we're a little bit different than that. The last, the fourth reason why, and I think this might be the biggest, when you invest cash into investments, especially real estate, you get the depreciation and losses, bonus losses, stuff like that. And you can use that to manipulate your taxes to date.
Frank Hereda (44:08.491)
Yes.
Lane Kawaoka (44:31.918)
If you have rep status, real estate professional status, you could possibly drive your income down to zero if you wanted to. Most times we usually say $200 ,000 for a married couple or $380 ,000 because that's kind of the sweet spot. But even if you're not doing rep status, you can use these losses to drive down your passive income to nothing. It's the rep status
Frank Hereda (44:54.901)
A lot of people don't know about that
Lane Kawaoka (44:57.294)
And yeah, this is the game changing thing, right? Like this is where like most people are like playing checkers with their CPA in terms of like just deferring taxes, but then they get hit hard at the end. We're playing chess. We're driving our justly gross income down every year. I don't care what the headlines say that Biden is going to tax the wealthy. It's not the wealthy.
The tax system is based off of what your adjusted gross income is. And if you can legally drive your AGI down, you pay less taxes and you pay less state taxes. Sorry for those of you guys who live in Hawaii and California too, because it's also derived off of that. But when you invest cash, you get these nice passive losses today to use that to drive your income down and to play these different strategies. But when you have your money in a qualified retirement plan, money.
Sure, you can self -direct it. You can do a solo 401k. Those are a couple of options to invest in alternative assets such as real estate, but it stays insulated in that qualify retirement plan. So those losses don't flow to you personally, and you can use it on your taxes today. And I think that's, you know, I mentioned four things here. think that's one of the biggest things, the biggest benefits, especially for higher income earners, over $300 ,000 of income per year. But I just...
I mean, but it flies in the face of everything that we've been taught. Right. And you have to be investing in things that make, you know, give passive losses such as real estate for it to, to get all these benefits. But, but yeah, you know, like, I think that's kind of why you have to surround yourself with the right people. Right. And that's kind of why, you know, the way we've, we have a lot of free stuff on the website and the, you know, the book is out there, but.
We monetize a lot with like our paid mastermind groups and our events, because that's the, that's the hard thing is finding a group of like -minded, accredited asset investors to outsource these types of strategies. Like your CPAs are going to give you this type of stuff. That's why he's still being counter working his job. The best piece of advice somebody gave it to me early on that guided me throughout is never take financial advice from people who's not financially free.
Lane Kawaoka (47:20.032)
And that typically includes your certified financial planner, which just sells you a bunch of financial products and the CPA, unfortunately.
Frank Hereda (47:20.373)
Very good advice.
Yeah, absolutely. I could, we could go down this road for an hour. it's so true. Well, well, you know, there's so, there's so many things I want to talk about, but I know we're, we're tight on time today. So my thing is I think the two, there's so many important things that you said, but one of them being you are essentially, you're the sum of the closest five people around you. And that's, and I would, I would actually tell everyone on here, which I've said many times, seek out a
Lane Kawaoka (47:30.284)
Yeah, I feel like I triggered you, Frank. Sorry.
Frank Hereda (47:54.158)
whether it's yours or a mastermind of qualified individuals that are going to, that are where you want to go and we'll support you. think that's, that's huge.
Lane Kawaoka (48:02.998)
Yeah. you know, I'll add onto that some, some, mean, what's hard is like when you're, when it's just like five guys at the pub, a lot of you guys might be on the same level too, right? Like, that's great, right? I think it's all good to have cheerleaders around us, but none of those four or five guys are going to have the answer right away. There's another side strategy where like, they, you they say, we'll try and find a guy who's five years ahead of
know, like kind of your mentor in a way, and then find a guy who's five years behind you. And then that guy also helps, they help you add value to you. And you, it's kind of the circuitous help everybody kind of a thing, but I think that's the hard thing. Everybody hears find the mastermind, find the mastermind. It's just a of crap out there too, right? In terms of these paid masterminds.
Frank Hereda (48:39.765)
interesting.
Frank Hereda (48:49.857)
There is, there totally is, there absolutely is. And I think it does matter. So where can everybody find you? Cause I know we're coming to an end here. I could go on for a while. This has been a great conversation. Where can everybody find you? Where would you like them to
Lane Kawaoka (49:09.606)
if they like podcasts, they could check out the wealth elevator, podcasts. if you are short on time, just check out the book, the new book wealth, the wealth elevator on Amazon. if you're a credit investor and you're looking for a community reach out lane at the wealth elevator
Frank Hereda (49:28.649)
Awesome. Okay. Good topics. man, there's so we could go so much deeper on all of these. I appreciate it. And I hope that everybody checks you out. We'll put the links to all of that in the descriptions when we put this out. and I appreciate it. Thank you for your time today. I appreciate everybody. Thanks for, thanks for being here and, we'll catch you on the next episode of focused free fit. Take care everybody.
Lane Kawaoka (49:56.6)
Thanks.
INFO:
Frank Hereda (Business Coach): ww.frankhereda.com
Lane Kawaoka: thewealthelevator.com
