This Thought Leader Thursday, Matt is joined by Lane Kawaoka, a real estate investor, project engineer and licensed professional civil/industrial engineer, co-owner of MFPE Investments LLC, and podcaster. Today, he shares how he transitioned from a 9-5 mindset to financial freedom, his experience switching from investing in single family homes to multifamily properties, and a common mistake multifamily investors make.
What You Will Learn About Lane Kawaoka and Simple Passive Cashflow:
- How Lane transitioned from a 9-5 mindset to real estate investing
- How some extra beer money inspired Lane to invest
- Why Lane is switching from single family to multifamily investments
- Pros and cons of single family vs. multifamily properties
- How Lane finds multifamily properties
- The main things Lane looking for in a multifamily property
- How Lane determines if a property is underperforming
- A common mistake multifamily investors make
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Speaker 1: This is Theriault Media.
Lane Kawaoka: I didn’t really enjoy my job being an engineer. I was working as a construction supervisor at the time and I was like well, this is the only way I can get out of this, to get that financial freedom.
Matt Theriault: I’m Matt Theriault of Epic Real Estate Investing, and this is Thought Leader Thursday. Today I am joined by a passive income real estate investor who still works as a project engineer and Licensed Professional Civil Industrial Engineer, and in 2009 he was able to [inaudible 00:00:38] for an A Class rental property in Seattle by being a cheap ass … self-proclaimed cheap ass … after discovering the difference between Cash Flow Investing and Appreciation Investing, and so he moved his portfolio from Seattle into a dozen or so single-family rentals in Birmingham, and Atlanta, Indianapolis, and Pennsylvania. Today he is laser-focused on Class C and B multi-family apartments and is syndicating with other investors who like the idea of Real Estate Investing but don’t have the time or the experience to do so.
So, he believes in investing in this nation’s demand for affordable housing as co-owner of MFPE Investments LLC. He currently controls five apartment buildings totalling 626 units in Houston, San Antonio, and Oklahoma City. So, please help me welcome Lane Kawaoka to Epic Real Estate Investing. Lane, welcome to the show.
Lane: Hey, thanks for having me, man.
Matt: Did I pronounce your last name correctly?
Lane: You got it right. You must’ve practiced it last night.
Matt: Sweet. I love Japanese names. They sound exactly like they look. I wish English had so much logic inserted into its language. Not as easy.
All right. Lane, hey, before we get into your business in real estate … what were you doing just prior to getting involved in real estate?
Lane: I was a college student, and I just got my Engineering degree, and I just followed that linear path … go to school, get a good job, and-
Matt: Mm-hmm (affirmative)
Lane: And I worked the 5:00 to 9:00 kind of thing for a while.
Matt: 5:00 to 9:00.
Lane: Bought that first home, and that’s how it’s history, right?
Matt: What was it about real estate that you found so attractive?
Lane: I kind of fell into it as an accidental landlord. I bought that single-family home, because that’s what everybody said to do, right … buy a primary residence, which I don’t quite agree in. I know you don’t agree with that one either, right … but, I rented it out ’cause I was never home, and the rents were $2,200, and the mortgage was $1,600, and for a young 20 year old kid at the time that was a lot of beer money, right? I gotta do this again, and again, and again.
Matt: Mm-hmm (affirmative)
Lane: I didn’t really enjoy my job being an engineer. I was working as a construction supervisor at the time, and I was like well, this is the only way I can get out of this, is to get that financial freedom.
Lane: So, I just kind of read all the books, started to do all the podcasts, and I just kind of escalated from there … buying another and buying another.
Matt: That was about nine years or so ago, right … almost 10?
Lane: Yeah. I even bought one from you guys a long long time ago.
Matt: Did you really?
Lane: Yeah. I came down to Burbank, but I guess you didn’t like working past 5:00, and you weren’t there. You had probably left for the evening.
Matt: Oh, how embarrassing.
Lane: Yeah, a long time ago, but you guys definitely played a big role in getting me to where I’m at.
Matt: Good. Well, that’s fantastic. Have we ever met before?
Lane: No, no, no.
Matt: I’d be really embarrassed if we have. Okay, good.
Lane: That’s how it is when you have a podcast, right? People [crosstalk 00:03:46]
Matt: You just threw me for a loop there. I was about to start re-recording. Let me act like I’ve been there before. So, you worked with [Mercedes 00:03:52], then?
Matt: Okay. Perfect, perfect. After almost 10 years or so, how has your view of real estate changed?
Lane: We bought that first one in Birmingham, and that was kind of proof of concept for me to trade my Seattle rentals … those high-priced appreciation properties that don’t really get any cash flow … and I traded those two properties for nine properties via a 1031 Exchange, which I have my mixed feelings about the 1031 Exchange. I believe you gotta pay your taxes at some point, and you can’t really buy very good assets being distressed buyer doing that, but it got me into the double digits, and got me Fannie Mae’d out. It definitely got me thinking differently … got me out of that scarcity mindset, and I was like, “Wow. I’m really gonna get financially free doing this stuff.” Then, it became more of a business right for me at that point.
Matt: Mm-hmm (affirmative)
Lane: It especially got myself out of the rat race …
Matt: Right? Good.
Lane: … try to make it bigger.
Matt: Mm-hmm (affirmative). So you got these nine or 10 single-families, and then you moved into multi-family is what I’m reading, right?
Lane: Right. Right. I still have ’em today, and I’m trying to sell them off one by one, but it’s slow going, but I realize-
Matt: [inaudible 00:05:14] you’re trying to sell off, right?
Matt: And, you’re moving into multi-
Lane: I realized that the single-families are a great way to get started for a guy … at the time I lived in Seattle, now I live in Hawaii … a lot of people in primary markets … we just have no access to cash flow, and it’s just super risky investing in these appreciation kind of markets. Right now with 10 properties, I usually get one or two evictions a year. It’s not bad, but for big events that happen … like a HVAC goes out, or a plumbing issue … just kind of do the math. You’re gonna need damn near 30 of these things to get yourself financially free.
Matt: There’s pros and cons to both single-family and multi-family, but it’s the maintenance that kind of kills you with the single-families, right?
Matt: That HVAC unit has to be spread over one unit, when in a multi-family could be spread over multiple units.
Lane: Right. That can be modeled, but I think the big thing is the turnovers that kind of kills you.
Matt: Mm-hmm (affirmative)
Lane: I had some bad problems with that.
Matt: It can be … So, you’re in the multi-family now. So, what you’re saying is, you’re not finding that type of turnover in the multi-families?
Lane: It’s just a little different. The turnover costs that I’m thinking are, these guys move out, they either just skip town, and then they just totally trash the property. With single- family homes you’ve got the inside interior … one, two, three, four, five, six walls … and on the ones on the outside, so I don’t know how many walls that is, 10 or 12. But, the apartment space, you’ve only got the interior that they really can screw up, and there’s just a little bit of different mindset between the apartment tenants and the single-family home tenant. The single-family home tenant has a little bit more entitled mindset … even though it’s like dude, you’re still renting … but they just feel a little bit like that’s their home.
Matt: Right … little bit more emotions at play … when things don’t go right.
Matt: I just learned how you found your single-family properties. How are you finding your multi-family?
Lane: Multi-family, I kind of did what everybody else did and just called brokers … ’cause in the single-family world … As you get up to the more distressed assets, the more Value Add Properties, 80% of them are supposed to come non- MLS … but in the multi-family world, it’s kind of the opposite. 80% of the properties come via broker, ’cause in the multi-family world, the brokers actually do their job, which is call sellers and try and talk sellers into selling to buyers.
Matt: Mm-hmm (affirmative)
Lane: It’s mostly through brokers … building relationships with brokers … going out, flying out to these places … taking them out to lunch, and giving them good feedback because everybody’s like, “I want to buy a multi-family. I want to buy an apartment.” Well cool, get in line, right? You’ve gotta distinguish yourself as a buyer.
Matt: When you’re going out and you’re looking at these properties, you’re talking with these brokers, what are the main things you are looking for in a multi-family property?
Lane: I think a lot of people are looking at market. It’s good to buy in a good job market … job growth, yada yada. You hear it all the time, but the things that I mostly look at are undervalued rents … which is an undervalued property because it’s all based on NOI in the commercial … So, as far as I’m concerned that’s usually gonna come from an unsophisticated seller … that maybe they aren’t caught up on the best practices, or they’re undercapitalized … they’re unable to put in that one or $2,000 of minor repairs into each unit … can bump them up 100 bucks a month.
Matt: Mm-hmm (affirmative). So you’re looking for underperforming basically, right?
Lane: Right. Not distressed, but probably not optimized in terms of management.
Matt: Mm-hmm (affirmative) . Okay. So, when you are looking at that, and you’re looking at something that could be bumped up in rent … you just looking at comparables, or what data are you looking at to decide whether or not it’s underperforming?
Lane: That’s kind of the first thing when you get these nice pit sheets from these brokers … these shiny PDFs … That’s the first thing I throw out. [inaudible 00:09:31] the comparable sales. That’s pretty much absolute garbage. You wanna be looking at the price per square foot on a lot of these, and break it down to one bedrooms, two bedrooms, and studios. Some buildings have larger one bedrooms, some have smaller, so you’ve gotta kind of take a look at that, and don’t just look at the numbers on a graph. Then you wanna get into the city and go and tour that next property … that good comp, right? You don’t wanna take a three-star building and compare it to your two-star building. It’s just gonna be different. You want to try and find a property that’s near your area, and that’s very similar make. Go put on a hoodie and jeans, and go pose as a tenant and see what they’re renting that thing at.
Matt: Mm-hmm (affirmative)
Lane: That’s really the best way you’re gonna figure out what these comps are.
Matt: Got it. Got it. Cool. What’s a common mistake … I don’t know if you’ve worked with a lot of other people, maybe this is only your personal experience … but, what’s a common mistake you see people make when they’re investing in multi-family properties?
Lane: I think it’s … a lot of guys … they have this ma and pa investor mentality, where I’ve done single-family, maybe I’ve done a quadplex, and I’m gonna jump up to the eight, 16, 24. A lot of people feel like they do that … and maybe it comes from a mindset of they don’t like to work with others, they don’t trust anybody … but it’s kind of a flawed path to go down, because in that space, you’ve got the worst lending. One of the reasons I went to much larger syndications is ’cause we can take advantage of non-recourse, Fanny Mae, Freddy Mac agency debt, and that’s non-recourse loan … so if anything happens, things do go bad … we just walk away from the property and use our down payment. But, if it’s a recourse loan, no, they come after you for everything that you owe.
Matt: Mm-hmm (affirmative)
Lane: I looked at some of the smaller properties. It just seems like a lot less … a lot worse pricing in that area. Too many ma and pa, unsophisticated buyers just giving stuff up in that area.
Matt: Right, right. [crosstalk 00:11:42] Where do you see the cut-off point being … you won’t go above or below a certain number?
Lane: In the grand scheme of things, we’re still ma and pa investors at the end of the day. We try and stay below the institutional buyers. They’re kind of hovering at that $10,000,000 zone … plus or minus 20-30%, but we try and stay above that $1,000,000 mark to again get that Fanny Mae debt … that non-recourse Fanny Mae debt. A lot of the times their minimums are $1,000,000 loan size. And, then also we try and go 60 units above, because that’s about the time where you would have a property manager on site, on property. Their butt’s in the seat so they’re held accountable, as opposed to they’ve got that good excuse, “Oh, I’m floating around to several properties,” right? Usually about the $1,000,000 price tag and up or 60 units is kind of the cut-off.
Matt: Right. Got it. You know man, I can tell that you’re talking from experience, which is always really clear, so congratulations on your success and the progress that you’ve made. If someone wanted to get in contact with you or learn more about what you’re doing, what would be the best way for them to do that?
Lane: They can check out my podcast Simple Passive Cashflow. It’s on the iTunes, Google Play, all those … got the YouTube channel too. Check me out simplepassivecashflow.com … always looking to get on the phone with people or chat via e-mail.
Matt: So, Simple. Passive. Cash Flow. Dot com.
Matt: Perfect, and the podcast is of the same name.
Lane: Yeah, I was lucky enough to get ’em both.
Matt: That’s good. I know it’s difficult these days. You gotta get-
Lane: There’s a lot of epic things out there, right?
Matt: I got a bunch of those, yeah. Super. Well Lane, thanks. Let’s do this again. It’s been a pleasure. Let’s stay in touch.
Lane: Yeah. Talk to you later, man.
Matt: All right. Cool, you bet.
So, that’s it for the Epic Real Estate Investing show today. I’ll see you next week for another episode of Thought Leader Thursday. Take care.