Interview with Passive Investor Lane Kawaoka of SimplePassiveCashflow.com
Welcome back to the Passive Mobile Home Park Investing Podcast, hosted by Andrew Keel. On this episode of the Passive Mobile Home Park Investing Podcast, Andrew talks with Lane Kawaoka of SimplePassiveCashflow.com. Lane shares his take on passive real estate investing as someone who invests mostly in multi-family rentals. From that standpoint, Lane talks about advice for LP’s (limited partners), his tips on vetting general partner operators (coming from an operator), and LP tax benefits. He also shares how his investing practices have changed after some big life events recently.
Andrew and Lane also go over some of the most common questions that are asked of them, such as:
When does the cashflow start?
What happens when a natural disaster strikes your mobile home park?
They also share their opinions on the future of the economy and how mobile home parks and affordable housing in general will fair during a down economy (recession).
Lane Kawaoka has been investing in real estate for over a decade and is the owner of CrowdfundAloha.com, SimplePassiveCashflow.com, ReiAloha.com, and controls over 4,200 rental units. He uses his expertise in civil engineering, construction management, and industrial engineering to reverse engineer the wealth building strategies that have gotten him to where he is now. He shares that knowledge in his Top-50 Investing Podcast which can be found at https://simplepassivecashflow.com/.
Andrew Keel is the owner of Keel Team, LLC, a Top 100 Owner of Manufactured Housing Communities with over 1,500 lots under management. His team currently manages over 20 manufactured housing communities across over ten states. His expertise is in turning around under-managed manufactured housing communities by utilizing proven systems to maximize the occupancy while reducing operating costs. He specializes in bringing in homes to fill vacant lots, implementing utility bill back programs, and improving overall management and operating efficiencies, all of which significantly boost the asset value and net operating income of the communities.
Andrew has been featured on some of the Top Podcasts in the manufactured housing space, click here to listen to his most recent interviews: https://www.keelteam.com/podcast-links. In order to successfully implement his management strategy Andrew's team usually moves on location during the first several months of ownership. Find out more about Andrew's story at AndrewKeel.com.
Are you getting value out of this show? If so, please head over to iTunes and leave the show a quick five-star review. I have a goal of hitting over 100 total 5-star reviews by the end of 2021, and it would mean the absolute world to me if you could help contribute to that. Thanks ahead of time for making my day with your five-star review of the show.
00:21 - Welcome to the Passive Mobile Home Park Investing Podcast
01:27 - Lane’s story and his journey into passive real estate investing.
02:29 - Lane’s gateway into other asset classes
04:16 - Lane’s current asset class investments
05:55 - Most important things LP's should look out for when investing in mobile home parks
14:27 - Lane’s portfolio allocation, cash flow, and best practices
17:48 - The current state of the economy with the new administration
18:45 - When does the cash flow start?
19:50 - Worst case scenario
21:45 - $15 minimum wage
23:20 - What happens when the tornado comes through and rips open a mobile home park?
26:51 - Simple Passive Cashflow
28:10 - The most expensive pothole
29:30 - Investing after big life events
29:50 - One final tip for LP’s
30:42 - Getting a hold of Lane
31:12 - Conclusion
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Links & Mentions from This Episode:
Lane’s email: Lane@simplepassivecashflow.com
Passive Real Estate Investing via Simple Passive Cashflow Podcast: https://podcasts.apple.com/us/podcast/passive-real-estate-investing-via-simple-passive-cashflow/id1118795347
Keel Team's official website: https://www.keelteam.com/
Andrew Keel's official website: https://www.andrewkeel.com/
Andrew Keel LinkedIn: https://www.linkedin.com/in/andrewkeel
Andrew Keel Facebook page: https://www.facebook.com/PassiveMHPin...
Andrew Keel Instagram page: https://www.instagram.com/passivemhpi...
Andrew: Welcome to the Passive Mobile Home Park Investing Podcast. This is your host Andrew Keel. Today, we have an amazing guest in Mr. Lane Kawaoka of SimplePassiveCashflow.com. Before we dive in, I want to ask you a real quick favor, would you mind, please taking an extra 30 seconds and heading over to iTunes to rate this podcast with 5 stars? Thank you so much for taking the time to do that. It means a lot.
All right, let's dive in. Lane owns forty-two hundred plus rental units and is the leader of the Hui Deal Pipeline Club, which has acquired over $350 million of real estate by syndicating over $40 million of private equity since 2016. Lane uses his engineering degree to reverse engineer the wealth-building strategies that the rich use in the top 50 investing podcasts, SimplePassiveCashflow.com.
Lane, welcome to the show.
Lane: Hey, thanks for having me, Andrew. Aloha, everybody.
Andrew: Aloha. I love it. Lane, would you mind starting out by telling us your story and how you came to start investing passively in manufactured housing?
Lane: I grew up on this linear path. My parents taught me to study hard, go to school, eventually became an engineer, and started to work at that job. Again, follow this linear path of, buy a house to live in, invest your money in this 401(k) system. I bought that house to live in shortly after college. Because I was never home and was working on the road all the time, I just decided to rent it out. Back in 2009, the rent was worth $200 a month in Seattle and the mortgage was $1600. To a young twenty-something-year-old kid, that was a lot of beer money back then. I was like, shoot, if I just hit this a bunch more times, I'll be able to escape the rat race faster than my boss. That was where things started.
Andrew: Wow, that's awesome. After your first rental, did you add on more single-family rentals? How did you get into multi-family and other asset classes?
Lane: I got keen on the fact that sophisticated investors invest for cash flow, not necessarily appreciation, which I considered gambling these days. I started to invest in these tertiary markets, secondary markets. I bought some rentals in Birmingham, Atlanta, Indianapolis, Pennsylvania remotely. In 2015, I had a portfolio of 11 rentals which was cool, but it's just not scalable. A lot of our accredited investors said that there was sort of a wall.
With 11 rentals, I maybe had an eviction, or two every year. It’s a big issue that happens every quarter. There's no problem because we have property management to take care of all that nonsense. For 11 rentals, that is just $3000 of passive cash flow a month, and that's nowhere near what a family needs, in my opinion. You're going to need like 30 houses, multiply all debt exception rates by three, and you quickly realize that single-family home rentals or small direct investment rentals on your own are just not scalable. This is where I started to move more towards the accredited investor mindset investing in private placements and syndications.
I luckily stumbled upon some groups with other high-paid doctors, lawyers, engineers. I found my tribe, people who used to own rentals. They said, to hell with that. They're looking towards this path of being an LP in larger deals. That's where I transitioned to be in these syndicated deals.
Andrew: Very Cool. What asset classes do you invest in now outside of multi-family?
Lane: I would say mainly multi-family because a lot of people move to multi-family because they used to own rental properties. There's pretty much a direct correlation between single-family homes and multi-family. There are some differences, of course. Everybody lived in apartments at one time and you understand it. It's a very similar business plan.
Look what happened like this pandemic. You’ll never know what's going to happen. A lot of us will still agree that the thesis of people moving down from the luxury stuff having to go to more of class B or class C type of housing, that didn't really happen in this pandemic. In this pandemic, the A-class people are just totally fine. Yes, they had to get Grubhub more often.
A lot of the white color professionals were pretty unaffected one bit. A lot of the lower-end people were impacted by this type of stuff. Still, normally you would think in a recession the As move to Bs, the Bs move to Cs. That's where mobile home parks really come into play, not making any more of an endangered species. I have a part of my portfolio set aside to mobile home park investing in addition to some other asset classes that cater towards workforce housing, the average American. It’s a thesis.
Andrew: I love that. When it comes to mobile home parks, specifically, what have you found to be the most important things that passive investors or LPs need to look out for?
Lane: I operate apartment buildings and I understand that. I don't have to write that, but I'll be honest. I don't really know how to do it for mobile home parks. I can jam it into my multi-family analyzer but I don't definitely don't know as much as you do. I don't know all the little nuances that I do with apartments. We know how the expenses work for landscaping, this, that kind of expense. I don't know that for mobile home parks.
I recognize that I am going outside my area of expertise. My due diligence is more heavily relying on the operator, the operator’s track record. I'm relying on my network—who my network has invested with in the past, or maybe just do a test investment with somebody and if they meet my expectations in terms of communication and more importantly, are they giving me the results I want, the money in my bank account, I’ll invest more in the future.
Unfortunately, there's no website for this stuff. If there was, it’ll be heavily skewed and corrupt. In a lot of these private placements like the country club, you have to build your own network or take your chances and put on test investments.
Andrew: Definitely. I guess the follow-up question would be, how do you vet operators before you invest them?
Lane: On the apartment side, my process there is because I can underwrite deals, take the profit-loss statement, do my own rent comps, take the rent rules, put it into my analyzer, and spot check with the operator, going in terms of assumptions. At that point, then I'm going to waste my time and talk to the operator. If the person is just being totally irresponsible in terms of underwriting—I don't like what the present cap rates they're using, I don’t like it what full occupancy or rent [...] they’re using—I just want tops with that.
Maybe if my network has invested with them in the past, and has a good experience, I might find an exception for that. Like I said, in mobile home park land, I don't know. I can look at a pitch deck and spot-check certain assumptions that are being made such as rent increases per year and what is the occupancy. I have to learn to calibrate. As I understand, full occupancy for mobile home parks, it's not the same for occupancy in apartments. I would say in apartments, full occupancy is maybe 92%, 94% on a good day. What would you say for full occupancy in mobile home parks? Is it a little less? They tend to run with a little bit higher vacancy, or maybe not in your parks.
Andrew: It really depends on the market and on the location. We have some that have been occupied 100% for three years, and then we have some that are closer to 92%-95%. A 40-lot park that has one tenant turnover is going to have a higher vacancy versus a 100-lot park that has one unit turnover. It really varies per park.
Lane: Right. Those are the things that I just do spot-checking. At least, Andy, I can have the conversation if you like. For example, in apartments, we usually assume that even if we do have full occupancy, we're going to have 3% of the tenants that are not paying, deadbeats. What's that number for a mobile home park?
Andrew: Five percent.
Lane: A little bit more delinquent than your average apartment.
Andrew: Yes, I would say, again, market-specific. Through COVID and everything, 95% was our number. Maybe you can also share some of the benefits to LPs from a tax standpoint. How your investments in mobile home parks compare with your investments in multi-family?
Lane: In both asset classes, most operators will do cost segregation to extract all the book appreciation, which apparently a lot of this goes away or starts to titrate down in the year 2020-2024 or 2025, I believe. Instead of depreciating an asset over 27 years like a single-family home with bonus depreciation, with cost segregation, you’re able to write off a lot of times on the 1/3 of the building value in the first year. Whether it's an apartment complex, or mobile home park, or an industrial project, it should be that heavy first-year loss. That now arms the passive investor with passive activity losses which offset passive income.
This is where we get into the higher level of wealth-building strategies. Some of my clients are doctors that make over $300,000-$500,000 a year. Now, they try and implement real estate professional status taxes. They're able to use these build-up passive activity losses, assets earning more income. This is where you're able to net huge at the end of the year with that.
Andrew: Tremendously. Maybe you could dig in a little bit on how they would do that, how they would achieve that? I know that some investors have a spouse that would be a real estate professional. Do you have another strategy that may work?
Lane: Yes. Of course, I'm not a tax lawyer or CPA.
Lane: But I tend to know all these more than most CPAs on there. After all, they have jobs. There's a reason why they have a GOP and they haven’t figured this stuff out. I’ll just tell you that a lot of my folks will do it. If you're under $300,000 of AGI, adjusted gross income, it won't impact you very much. You don't pay too much taxes as it is. We're talking to the high-income earners, over $330,000 AGI. The reason why I picked that number out of the sky, if you go look at your tax brackets for this year, that's where you really jump from 24%-32%. This is a moving target if somebody's listening to this podcast later.
If you're above that, in my opinion, it really makes sense to take a look at your family structure. Can one of you, if you’re a couple, one of the people go to part-time employment or quit their day job? A lot of times, this is an amazing thing. If one spouse doesn't make as much money and they may not like their job, they can just quit and become a real estate professional. We’ll talk a little bit about that. Now, they can stay home with the kids. That's what this is all about—time, freedom, and doing what you want. At the end of the day, the household nets more money because they're able to use these passive activity losses and also earn more income.
Andrew: Isn't that such a crazy thought, that you work less and make more?
Lane: Yes, so why doesn't everybody do it? I know why they don't want people to do it because if everybody did this and if everybody bought a handful of properties, who would build the bridges, who would get you coffee? Society will crumble. What’s important is there's a little bit of ramp-up to learn that stuff, and this stuff changes over time. These best practices change. A lot of the time, it's your job, Mr. Passive Investor, to arm yourself and get educated so you can have an informed conversation with your CPA, who likely wants to do things the conservative way. This may not be in your best interest, but it definitely gets your tax return in and out of their drawer quicker.
Andrew: Definitely. Lane, maybe you could share a little bit about your portfolio allocation, and cash flow, and best practices.
Lane: A lot of people ask me that question. I'm heavily in apartments because that's what I operate. I was a passive investor, not an operator. I like to spread it around a lot. I don't really have a great percentage allocation in my team like self-storage, mobile home parks, apartments. I mean goal, I would say spread around in the beginning very slowly and see if it performs and start to invest with the good operators that are giving you the best performance. You start to slowly move your money from your traditional paper asset. You can take all of that type of garbage [...] The key is to do it slowly as you’re testing out the waters.
In terms of another way I look at my portfolio is like on one side I look at A-class versus C-class. I still advocate for a little bit of a blend between that, not just staying in the B-class area. I still think that there is some benefit to being diversified. Like I said, in a pandemic, the A-class would do fine, but traditionally in recession, the A-class gets hammered.
I've been trying to get away from class C deals these days, because of the worst collections. That's just mostly me as an operator being selfish. As an LP, I don't care because that mobile home park is Andy's problem, or that apartment is the other operator’s problem. For you as an LP, it doesn't matter. In fact, you should probably want to go into the hairiest deals for the most returns, even though it's the most headache for your affair. That's what we’re getting paid for.
Another way I look at it is, heavy value adds versus cash flow. That's another spectrum. In the beginning, when I started off in the passive investing world, I did a lot more cash flow-based stuff because I still need to put food on the table. It is technically more of a conservative way of investing. As my network has grown and I have enough food on the table, I let it ride. You don't make money unless you take on some rest.
I've been going forward towards heavier medium, heavy value adds, maybe some developments. That’s how the second generation of families invest. I know this doesn't apply to you and me. I knew we weren't born with this money, but I'm sure you and I have some rich friends and invest very differently. They just go up there and they try to hit home runs every time because if they totally strike out, they’re still rich. Poor-working stud out there, trying to get your network, $1 million-$3 million can't really sustain that strikeout. You still have to hold on to the side of the pool as you’re investing in more cash flow deals.
Andrew: Definitely, yes, that makes a lot of sense. What do you think about the current state of the economy, Lane? With the new administration, tell us the future.
Lane: I don't care about the future. I think Biden provides some stability. Some people would think that Republicans are a little bit more pro-economy, if you look at the stock market there's no correlation, one way or the other. I am excited that the Democrats should like to spend a lot of money. At the end of the day, my assumption is that money comes back to helping our regular people, which also make passes through that to us, the investors. Heads I win, tails I win.
Andrew: People with the assets.
Andrew: It flows back. Yes, I agree with you there. Okay, one thing we talked about before we started recording was the top questions that investors ask me before investing in a deal. I thought that was a really good question. I have a couple here that I've written down. One of them that investors ask me is when does the cash flow start? As you mentioned based on a diversified approach, some deals start sooner than others. Some that are more stabilized, with maybe 75% occupancy, we're able to payout starting at months six. But others that are 50% vacant, that we’re doing a major infill project, it takes quite a bit longer. It just depends on the deal set up and how the project progresses. Another question I get is, what's the worst-case scenario, have you been asked this question, Lane? Maybe about some of your multi-family properties. What do you say when you're asked that question?
Lane: The nice thing about real estate is if you pick the right asset that's actually a good deal—under-market rents, cash flowing today. You can have a monkey running this thing if you go right. Your biggest risk in this whole thing is, is the operator an honest person? Do they have some business sense? How do you mitigate that?
Try not to be the first stubborn person into someone’s deal. How do you do that? You have to build up your network of passive investors that actually puts in 50Gs with somebody and seeing results. Likely, you don’t have those people in your network. I never had it when I first started. I had to be that sucker to put in some money with some people.
Now I know who to work with. I’m not going to share with you because you’re not helping me out. This is how it works. I have never seen it happen where you meet somebody, a passive investor, and you just go, let me give you a spreadsheet, everybody I’ve worked with, how much I’ve got, and how much I’ve got every quarter. It doesn’t work like this. You have to build organically through relationships in this world. It's hard work. People put capital risk to get that list. You're not going to get it that easily.
For some of those people who are really bad at doing relationships, maybe go buy a rental property on your own. Just chug away at that. It's been a long and a hard race out there, but it's different. Different skills are what you need to be this passive investor.
Andrew: Being a landlord is definitely not for everybody. There's a lot of moving pieces. Lane, what do you think about the $15 an hour minimum wage and how that would affect some of your apartment multi-family investments and then mobile home park investments?
Lane: Oh my. This is a very politically loaded question. I don't know man. I don't think about it too much. I don't follow politics very much, but isn't it like whatever they get paid is what they can pay. Landlords or businesses will just charge more. It's just a constant like a dog chasing its tail type of thing. Again, it comes down to heads, I win, tails I win. If they get paid more, then you can charge more rent.
Andrew: Yeah, in theory, I think that's a benefit to being invested in real assets versus other mediums of investment.
Lane: I think that's where it really helps to be investing with a more nimble operator because things will always be changing but being a nimble operator, you can change a little bit quicker as opposed to more of an institutional operator who has to get so many checks and balances or they're working off 3-year plans, 5-year plans, 10-year plans. Whereas more nimble operators are not tied to shareholders. They have [...] responsibility, and know what things are changing, and how to make a business plan in 30-60 days.
Andrew: That's a good point. Lane, I have another question that investors always ask me and you may be curious as well, is what happens when the tornado comes through and rips apart a mobile home park? That's what a lot of the LP seems to think is the worst-case scenario in a mobile home park. Have you heard of that question from any of your investments?
Lane: Yeah. Actually, it just happened to my single-family home the other day.
Andrew: Oh my goodness. Seriously.
Lane: In Birmingham. I know I'm screwed because when you're a single-family home landlord your insurance sucks. You have the stinky, residential retail type of policy. But when you're in a mobile home park as a passive investor or apartment deal, you get much more beef in your commercial policy. And luckily it’s your operator who's making the calls. We've had trees fall on our apartments that had taken down 12 units.
Andrew: That’s a big tree.
Lane: We were out for like five months, but we had red coverage. It doesn't matter. We had buildings catch on fire. If your operator’s sophisticated, oftentimes, it's like a penalty flag in football. When the quarterback sees that flag, what does he do? He takes a chunk down the field because it's like a free down. It's like a tornado, tail coming in is actually a good one that happened because it gets fixed, and possibly, you can get brand new roofs in the process.
The hurricanes are a little bit harder because the hurricanes and floods take all your city services. It's going to take a while for you to get back online. You better have your cap cash reserves and your apartment working capital to hold out that time when the insurance company gets your payment back out to be able to pay for the repairs and reimbursements. That's why you're riding it like Noah's Ark as opposed to rowing your little boat by yourself, better insurance coverages and somebody works for your claim.
Every time we get an insurance claim of more than $100,000, we get a third-party claims adjuster to fight it on your behalf. It maybe gets two or three times what the insurance company's first offer is.
Andrew: Wow. That's a great tip, and that's for claims over $100,000.
Lane: Yeah. I'm just not thinking anything less. It's always been less than $30,000, $40,000. In the last Texas freeze, we had some busted pipes. It's just $10,000-$20,000 for a 120-unit apartment. It's either going to be smaller than that or much bigger. Those bigger claims, like an apartment getting on fire or a tornado, in your case, I would say get that to a claims adjuster on board, especially if you're not going to get you one.
Andrew: Totally. Yeah, I would say with the tornado event, we do carry loss of rent insurance like you said. On single-family rentals, it's more of a retail policy. It's not a big commercial policy. You don't get some of those add-ins. Lane, would you mind telling us a little bit about your podcast and Simple Passive Cashflow?
Lane: Yeah. Initially, it started back in 2016 as a way to teach folks how to get to promote single-family home renters. But eventually, as I became more of an accredited investor myself, investing in syndicated deals, obviously, the topics have changed. It’s more like getting rid of your annoying single-family home rentals to become a more accredited sophisticated investor world network. And then really open up this world of passive activity losses, real estate professional status, taxes, and then I get into the legal world and then create infinite banking policies and collect insurance.
All these secrets of the wealthy are very simple but who the heck talks about this stuff. Surely, my parents don’t know anything about it and the guy at work doesn't know anything about it and the cubicle dwellers nearby. It is very simple right for high net worth investors, but it's very common to what is said out there in mainstream financial advice.
Andrew: Yeah, I remember a few years ago when we met up for dinner when you were in Orlando here. You were still working as an engineer. I think it was the most expensive pothole in the history of Hawaii in the airport, remember that? How many millions of dollars was that pothole?
Lane: I don't know if that damn thing ever got fixed. But yeah, if people have ever been to Maui, I was working for the airports as an engineer and that was one of my projects. That one runway, there was like a big pothole. But it was like, I don't know how much it was to fix that damn thing. It was at least a $5 million to maybe $20 million hole.
Andrew: Yeah, that's what I think you thought.
Lane: We’re in some of the study mode, where government workers just get a bunch of studies to delay the project and like, make sure you're spending government money wisely.
Andrew: Yeah, taxpayer dollars.
Lane: We don't want to waste money. We have to study the heck out of it.
Andrew: Yeah, unbelievable. But I’m really happy for you. Are you married now? Engaged? Have a baby on the way?
Andrew: Has your investing changed since these new life events have come about?
Lane: Not really. I mean, it's been working. My network had been growing. Like I said, maybe get a little bit more aggressive now because I can. Open it up.
Andrew: That's great. Lane, what is your one last tip if an LP investor has listened to all the way to the end of this podcast. What is your one final tip that you would tell them that would be like the best takeaway they could get?
Lane: Only listen to people who are financially free. There’s a whole bunch of people out there that don't have a clue. If you don't have people like that, you need to find people like that. I own rentals from 2009-2015, doing it all by myself. I thought I was hot stuff. I listen to a bunch of podcasts. I'm a smart guy. I know spreadsheets. I'm a freaking engineer. But until I got around other accredited investors, I didn't really go anywhere.
Andrew: That's a great tip. Lane, how can listeners get ahold of you if they would like to do so?
Lane: They can check out my website, simplepassivecashflow.com. Check out the Simple Passive Cash Flow podcast and email address is email@example.com
Andrew: Lane, thank you so much for coming on the show. Really appreciate you coming on and sharing your wisdom with us. Make sure to check out Lane’s podcast. That's it for today, folks. Thank you all so much for tuning in.