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Passive Investing with Lane Kawaoka


In this episode, we invited Lane Kawaoka from Hawaii. Lane is a Licensed Professional (PE) Civil/Industrial Engineer, entrepreneur, and expert real estate investor. He is the co-owner of MPFE Investments and host of the real estate podcast “Simple Passive Cash Flow Fund.”


  • How he got into real estate
  • The 50% rule
  • What capex is
  • On Return on Equity (ROE)
  • Networking with other investors
  • Investing passively
  • Finding someone you want to invest with
  • Limited partnership
  • Things to look for when looking at a sponsor
  • His deals
  • On assisted living
  • Doing syndication
  • Structuring the returns for their passive investors
  • Accredited and sophisticated investors
  • His advice on how to look for this type of deals
  • Recommended conferences


  • “Get up and fly to a conference.”
  • “Figure out what you have to work with.”



Larry: Welcome to the Brain Pick-A-Pro show live from Lake Wylie, South Carolina, and all the way on the other side of the country even over the ocean… a long, long ways away is my good friend Lane Kawaoka all the way from Hawaii. How you doin’ buddy?

Lane: Hey, Larry. Good morning.

Larry: What’s happening?

Lane: Oh, just woken up. It’s a little early here, but I think we are 6 or 7 hours difference.

Larry: I think we are probably 6 hours difference, I’m guessing. What time is it there?

Lane: It’s like 5 a.m.

Larry: 5, okay. Yeah, it’s 6 hours difference. That’s crazy. Isn’t it?

Lane: But that’s what you gotta do, right? You gotta wake up and get after it.

Larry: That’s right. That’s right. So, why don’t you start out and tell our listeners a little bit about yourself?

Lane: Yeah. So, my story is I’m still working a day job of full-time engineer, but you know, I started out with a lot of, you know, people going to college and with that program inset, you know, go to school, get a good job, work at that job for 50 years and maybe have enough. But my path kinda diverge pretty early and I went to work out of college and went to work as a construction supervisor.

Larry: Right.

Lane: Had a job, you know, traveling the country, you know, I didn’t really like it and it was pretty tough way to make a living, but that was back in 2008-2009, so it was a great time to have a job. So, I saved it. I bought a house and I lived in it by myself for a little while, but I was never at home, so I just start renting it out.

Larry: Yeah.

Lane: So, I’m your typical accidental landlord.

Larry: Oh, wow!

Lane: ‘Cause I never really… and at that time, that was 8-class rental in Seattle, Washington $2200 a month, mortgage was $1600. So, I didn’t know I think about that 50% rule or anything like that, but you know, it cash flow to me and I was like, wow, I need to do more of these things ‘cause this is my way of the rat race.

Larry: There you go. Tell the listeners what is the 50% rule.

Lane: Yeah, so the 50% rule is like you know, shoot from the hip, quick way of determining if you are gonna cash flow or not. There’s two rules that we like to use a lot if that’s 50% rule. So, you take the rents which in this case was $2200 and you essentially divide it by half and that should be your take home pay after you take out the maintenance, the property management, and CapEx and vacancy. It sounds a lot but, hey, you know, this is a very expensive business to run at the end of the day especially if you have an order property.

Larry: Right.

Lane: You know, has a lot of things coming back and forth.

Larry: That’s so true. And just so everybody knows, CapEx is the capital expenditures, the improvements, improving the property, right?

Lane: That’s correct. I think that’s what a lot of newer investors don’t realize that it’s there. I mean, you know, you buy your new property and you know, you’re not gonna have a lot of the big components break on you like the water heater, the HVAC, the roof, the new floors, painting, but sooner or later, it’s gonna come and eat you. I mean I have this CapEx calculator, it’s like a spreadsheet of all like probably 10 or 20 different components out there, you know, like a roof will cost you, you don’t know, 20 grand or something like that, but the roof will ask you 20-25 years possibly, so you divide that out by 20-25 years then you get a per cost a year and you just go down the list, you add them all up and it adds up, you know, usually about 10% to 20% a year of your rent that could possibly be eaten up.

Larry: Yeah. It eats up a lot, doesn’t it?

Lane: It does. It does. And usually at the end of the, you know, 5 to 10 years down the line of ownership, you are like, shoot I just gave up all my profits paying for this one thing. So, it kinda stinks up on you.

Larry: That’s true. That is true. So, what’s going on these days with you? What kinda… that’s how you kinda got started, so what did you… did it kinda morph into?

Lane: Yeah. So, I bought another rental in Seattle and then in Dallas in 2012 and I realized it didn’t really cash flow and I had a lot of equity in those homes. I think as real estate investors, you need to look at something called return on equity. Same that your cash flow is really no indication of a good investment at all, I mean I can have 100% cash into deal with no leverage and be cash flowing, but my return on equity could be very, very low, 1%, 2%, or 3%. At that point, I might as well be on a saving spot or something like that.

Larry: Sure.

Lane: So, I took a lot of that equity and because stuff worse in cash flowing in Seattle’s primary market, I went to a secondary market and I did 1031 and I did 9, I sold 2 properties and I got 9 properties out of state in Birmingham, Atlanta and Indianapolis, so I did that. The turn key rental thing, bought it through a third provider and then I bought the rest using a broker once I kinda figure out what I was doing.

Larry: Right.

Lane: And that got me to double digits in single family homes, but then I realized it just wasn’t really scalable. I mean that a few hundred dollars of cash flow per month on each of these houses, that was only about $3,000 passive a month and that wasn’t gonna reach my goal. My goal is more or like $10,000 a month, a pretty decent cash flowing I think.

Larry: Sure.

Lane: But do the math, I would need three times as many houses or 30 houses and with 10 houses, I was getting an eviction or two every year and three or four big issues that came up like a $4,000 or HVAC or you know, big couple thousand dollar plumbing repair or something would pop up four times a year. So, you do the math, 30 houses, now you’re talking of eviction every other month and a big catastrophe pretty dang often, so it just wasn’t scalable way of investing.

Larry: Right. So, what did you do?

Lane: So, at that time, I started to network with other investors that are kinda same to me, a lot of doctors, lawyers, engineers, but you know, that were 10 or 20 years ahead of me and they were all investing in apartments and syndications as limited partners and yeah the returns weren’t as strong as when you are being the directional operator.

Larry: Right.

Lane: But a lot of that is just kinda trading your time for money or sweat equity. So, what I realized, I was like, well, I got to a point where I was like, well if I can have 15% to 20% of my money every year then I’ll definitely reach my goals. You know, it will take a little while but I’ll get there. Why do I need to be the direct operator and do it myself and at that time I was, you know, kinda studying analyzing these big deals which is totally different than a single family homes, but I just went in to deals as a passive investor and that’s kinda what I’ve been, you know, specializing these last couple of years.

Larry: And you know what Lane, not many people really think about that as being a real estate investor, but it’s a great way if you have a full-time job or you have a career that you are doing that you’re working in and you like what you’re doing but you also want to invest passively, so it’s a great way to be able to get passive income and grow your assets and your net worth because you are not only getting passive return, but there’s a payday at the end of the deal where which bumps that up to the 15% or 20%, you are talking about right?

Lane: Right. Right. I mean what I like about it is you can cash flow, right? A lot of deals out there like development deals, you don’t really get the kicker to the end and then you kinda cross your fingers, right? It’s a spec blood, speculation.

Larry: Right.

Lane: You know, I like these deals where like, you know, apartment building will be 90% occupied, it will qualify for non-recourse debt and you can get into the deal it will cash flow for you because it is a stabilized building. Yeah, you are buying it because the old owner just didn’t run things the best way.

Larry: Right.

Lane: But if a recession should come, at least you cash flow it by up to 10% annually and you have that forced appreciation potential to kinda write it out. Maybe you won’t sell the asset in 5 years, but hey, you’ll be better off than everybody else, you know, sell the asset maybe in 8 years or something but still cash flow in the process.

Larry: Right. Right. That’s really good. That’s really good. So, Lane, how do you go about finding the promotor that you want to invest with?

Lane: Yeah, so I joined different Masterminds and go to conferences, it’s really a good old fashioned way, I think you know, Skype like this is awesome, but it really makes no substitution for in-person meetings.

Larry: Right. I agree.

Lane: And what I also recommend is, you know, it does you no good to talk to the promoters or the sponsors or syndicators.

Larry: Right.

Lane: You know, those three words are kinda the same thing.

Larry: Sure.

Lane: ‘Cause you are gonna get the same data and plenty of speech every single time. What I would suggest folks out there, if you wanna go down the limited partner route is to go and build your network of other limited partners to figure out where people are putting their money into. You know, you can get that on a bias opinion.

Larry: Right. Right.

Lane: That for me, that’s my biggest asset these days is I have so many people where I can go to and, hey you know, did you hear about Bob’s deal, you know, or have you been in Gerry’s deal in the past or something like that.

Larry: Right. That’s good. That’s good. So what are some of the things you look for other than talking to other limited partners? What are some of the things you look for when looking at a sponsor or promoter?

Lane: Yeah, I think when you look at a deal, half of it is the person, right? So, what I always talk about with other people is like what is your track record? Have you got what they said they were gonna give you?

Larry: Right.

Lane: ‘Cause you are always trying to check what integrity they have or character as a person, right? You know, a lot of times a deal go bad or if a deal goes bad, you know, they gonna kind of step in and you know, put their own money in the game or make things right with their investors even though that PPM does not say any. They didn’t necessarily need to, you know, just to protect their brand, it’s a big thing. But the other half is the deal, right? Like do the numbers make sense? Are you getting the P&Ls and the rent rolls and you’re gonna check those numbers yourself or you are just taking it everything in the executive summary which nothing in executive summary tells me if it’s a good deal at all. I don’t understand why they even send it out, but people think that’s a way of analyzing, but there is nothing in there that I think that tells you in.

Larry: It’s all negative.

Lane: Yes it is. I mean it’s all proforma I mean you need the past profit and loss statement from the last 12 months at least, you need the rent rolls and you need to do your own comps and need to ask yourself, hey, what’s the business plan here? Are we gonna put 3, 4, 5,000 dollars of rehab into each unit? What’s the CapEx plan? I wanna see itemize list of what they’re gonna do and what is… is it gonna be a 50-dollar rent increase per unit? 100-dollar rent increase per unit?

Larry: Right.

Lane: And then you got to ask the question, is that gonna absorb and you know, put into your own analyzer to figure it out.

Larry: That’s really good. So most of the deals you are doing sound like they’re multi-family, are you doing any like student housing or senior housing? Any of those? What do you think about those markets?

Lane: Yeah, so I started in apartments and that’s kinda where you know, that’s my comfort zone. I know every little trick in the book to kind of, you know, put up your own deal, so reading those things I know, but I’ve been getting a little heavy into multi-family. I feel multi-family is a little overheated these days.

Larry: Yeah, I agree.

Lane: This is really hard to find deals.

Larry: I agree. Everybody is chasing it right now.

Lane: Yeah. I really like assisted living but then that’s a different beast, you know, the senior housing, you know, that’s more an operator.

Larry: It’s a business instead of an investment.

Lane: Yeah, I mean an apartment building, I mean you can kinda be an idiot in buying the right market and look like a genius in 3 to 5 years.

Larry: Right. Right.

Lane: Assisted living is definitely not like that. It’s more hands on. I haven’t found too many operators. I’ve done more than 2 of those things. I don’t know what happens. If they just gave up or something like that.

Larry: Right. Right.

Lane: But, hey, you mentioned like student housing, you know, I’m not a fan of student housing or you know, military housing, you know, near military bases, I just think it’s a little bit too speculative to base on one type of demographic. I like ones that are a little bit more like general public, you know, just more on the bread and butter industry in the area than to rely on something like that. I mean student housing, I think one thing that… I went to University of Washington and if you look today, I mean they just doubled the student housing around there and it’s all because everything is all fake money, it’s all Sallie Mae I guess.

Larry: Right. Right.

Lane: I mean that could just come in and you know, wipe you out. It goes up and down. So, I’m not a fan of that. I mean maybe I would do a deal or two but you know, I wouldn’t put all my eggs in that basket. I mean that’s a nice thing of being a little pump in there.

Larry: Right.

Lane: You will go into a deal at 50 grand a deal and you can kinda try everything.

Larry: That’s good. That’s good. So, is there a specific number of units that you typically like to see like, you know, 75 to 150 or 100 to 200 units or something like that?

Lane: Well, I think what you are trying to do is you know, two things, you are trying to get above the mom and pop investors ‘cause mom and pop investors aren’t really good. They don’t know what the heck they’re doing and they overpay for everything. So, you need to get above about a million dollar purchase price. So, we usually buy these things at $50,000 a unit.

Larry: Right.

Lane: So, you know, a million dollars divided by 50,000… it’s a little early for me here to… you’ve got to get above that million dollar and that 50,000 unit mark.

Larry: Well, that’s only 20 units but you know, but really you know, what I have seen is most syndicators wanna be at least over about 75 or 80 units over that because it allows them to bring in an outside property manager and be able to pay for them. What do you think about that?

Lane: Right. Right. Yeah, usually that happens around 50 or 60 units so you can get that in-house stuff. I syndicated a couple of deals and from my opinion it just doesn’t make sense to do a syndication with a PPM. That PPM is Private Placement Memorandum that cost $10,000 to $15,000 for a lawyer to drop. Pretty expensive cost and that doesn’t really makes sense until you start raising more than like $600,000.

Larry: Right.

Lane: So, until you do that, it really doesn’t make sense. So, you know, that’s kind of your bottom rank or top rank you wanna stay below the institutional players and there are about 8 to 10 million dollars and they are starting to come in to the picture. So, you know, anywhere from, you know, 1 to 8 million dollars is kinda the sweet zone that you know, more sophisticated. At the end of the day, we are still mom and pop investors but more sophisticated sharp shooters in that area.

Larry: Right. That’s good. So, you’ve actually done a couple syndications yourself where you were the sponsor?

Lane: Yeah. Yeah. You know, I started with a little 52 unit and then you know, going like 114 range.

Larry: Uh-huh.

Lane: But I like those low smaller deals instead of the two 300-unit buildings, I think that that’s good economy, good economy scale and I think it’s to a point where you are not competing with the bigger boys at the 300 units at those levels.

Larry: Right. That makes sense. Tell us a little bit about some typical returns and how a lot of sponsors structure their returns for their passive investors.

Lane: Yes. Everything is backwards engineer to the return at the end. So, you know, if you would ask me a few years ago what the typical terms or the tagline to everybody like to use was double your money in 5 years or 100% total return of investment in 5 years made of cash flow and the refinance or sale at the end. That was kinda how you evaluate it. You know, kinda of like you know, what your… how much distance you travel with 10 seconds kind of a thing in a race car. But you know, these days it’s a lot harder to get. You know, there’s not that many deals out there and the deals aren’t that great. So, I would say you are probably looking at 80% in 5 years is kinda the gold standard.

Larry: Right.

Lane: But it’s really misleading because you can cook the numbers as a syndicator and pull these levers to get that 100% on the piece of paper. One example is like the cap, you know using a different cap rate or version or the exit cap rate on your spreadsheet.

Larry: Right.

Lane: So for example, you should say your building is running at 6 cap in the prevailing market at a 6 cap, you wanna assume that the market in the future when you sell let’s say 5 years later is gonna be a softer market. So, a good general rule of thumb is to pump that up by 1% so they use a 7% reverse in their exit cap rate on their spreadsheet.

Larry: Right.

Lane: Now, if you drop that, you know, get a little aggressive and screw around with your numbers and turn that into a 6.5 cap instead of a 7, you can get that 100% year in 5-year deal but if you underwrite a property with 1% increase, that 100% deal goes down to like 70%. So, you just you know, swank at 30% right there by changing just one number.

Larry: Yeah and you know, if you are talking about 100 units, a half percent in the cap rate could make a huge difference.

Lane: Well, it doesn’t in terms of percentages and that’s what the investors are looking for. Everybody is gonna pick buy in and buy a piece of the pie and the way investors look at it is like, you know, they care more about the percent of what their money goes and how much it goes up.

Larry: Right. Right.

Lane: So, whether they put in 50 grand or 250,000 it really doesn’t make much difference. I mean it’s a same percent increase that they are getting.

Larry: Sure. Sure.

Lane: Of course you can’t just put in 10 bucks, you know, usually the minimum is about $50,000.

Larry: Right and they are usually either accredited or sophisticated investors.

Lane: Right. Right. Accredited can pretty much get into any deal. Sophisticated is you need to build a relationship with the sponsors.

Larry: Right. That’s good. So, how would you suggest people go out and start looking for these types of deals?

Lane: I would say you know, get up and fly to a conference. I wouldn’t say that the local REIs is the good place of going. Usually it’s got a lot of people flipping houses and doing that kind of stuff. I never found the local REI to be a great place to go and I could be wrong and that you know, that’s just my opinion. But I think you’ve got to get to you know, go on the Google and start Googling where these conferences are and, you know, you gotta start to pay for this stuff. I mean this isn’t… if you are bulking over $20 for REI I mean you are not gonna get anywhere. I mean the conferences that you probably wanna go to are about $1,000 for conference and you know, plus your room and your flight over there.

Larry: Right. Right.

Lane: I mean the good ones that go to there are the ones where people have to fly in in my opinion.

Larry: Right.

Lane: As opposed to, oh, I rolled out on my bed and drove here ‘cause I had some time after work.

Larry: That’s a really, really good point. Do you have any conferences in mind off the top of your head that people should look into?

Lane: Yeah, I go to like the Real Estate Guys, you know, they’ve got a podcast Real Estate Guys Radio. They’ve got some good ones, Secrets of Successful Syndication, at least you go to that one. Good group of people but then you also kinda want to go to different apartment ones if you are into apartments or you know, if you are into self-storage or self-storage ones or assisted living ones. I just had Gene Guarino on my podcast recently, he is the assisted living guy.

Larry: Yeah. He is a good friend of mine. I know him. He is a good guy.

Lane: Yeah, you really got a niche down and figure out you know, who are the players and once you get into it, it’s kind of amazing what a small world it is, you know, I mentioned building your limited partner network, I mean I’m kinda to a point where like if I don’t know someone it really does not makes sense to work with them because it’s like there’s so many good people that you know, that everybody knows that is not really worth to go off the beaten path.

Larry: That’s a good point.

Lane: It’s really all the same 3 to 500 people running around and doing deals I mean there’s not too many people doing this.

Larry: That’s true. Given the fact that you either have to be an accredited investor or sophisticated investor and the amount of money involved, it’s not gonna be your average newbie, you know, REI type person that just wants to learn how to wholesale houses. It’s a whole different crowd isn’t it?

Lane: Right. Right. But that’s kind of a shame, right? Like I mean I think like the most like the guys that need these kind of deals the most are probably like the unaccredited guys, you know, $100,000 net worth to a million dollar net worth range. I mean those are the guys that need these kind of the deals the most, just unfortunate that the laws are the way they are. They’re there to protect the little guy from investing his last 50 grand into deal and he only has 100,000 dollars net worth.

Larry: Right.

Lane: It’s a little unfortunate but you know, I think the whole crowdfunding laws are getting to a place where it’s kinda opening things up a little bit more but you know, the rules are kinda there to keep the country club in a way.

Larry: Yeah, you kinda like the girl and boys club.

Lane: Yeah. Yeah. I mean you can go on a crowdfunding website and pick from the menu but you don’t know the person, I mean a lot of times those things are kind of like online dating for guys who can’t find investors anywhere I mean if they could just go on their network and put out their list, they could get it funded, but no they have to go to an intermediary to find their investors.

Larry: That’s so true. That is true. Oh, man this has been some really, really good stuff. Lane if somebody wanted to reach out to you, how would they get up with you?

Lane: Yeah, you know, I’m open to emails, or check on my website, I also have my podcast which I’ve been kinda directing what I have been doing the last few years and that’s also at Simple Passive Cash Flow on iTunes, Google Play and all that sorts. Yeah, thanks for having me Larry.

Larry: That’s awesome man. I really, really appreciate you being on today especially so early in the morning for you.

Lane: Yeah, yeah, thanks.

Larry: That’s good man.

Lane: No problem.

Larry: Any parting words of wisdom for our listeners?

Lane: Yeah, figure out what you guys have to work with, you know, Gary Vaynerchuk, one of these online mentors I follow, he talks about self-awareness. So, I would break that down to 3 components, the 2 of which are the most important, you know, where you in terms of how much time do you have? Do you have full-time job? Do you have no job or got the time of the world and how much money do you have? You know, direct to the point and it is real estate investing. If you don’t have money, you gotta go out to make money either at a job, you know, some people sell drugs, some people do, you know, sell things in the internet, you know, you need money to sort of invest, so you got to figure out, tailor your shoe, real estate strategy to what you have in terms of money, time and also what kind of knowledge or network do you have.

Larry: Right. That’s really good words of wisdom. I appreciate that man. Thanks so much for being on. It’s awesome. It’s been great. It’s a little different than just flipping houses or marketing or doing direct mail, but it’s something that everybody needs to hear. It’s a whole new world out there, isn’t it?

Lane: It is. It is.

Larry: That’s awesome, man. Thanks a lot. I appreciate it. Go get some rest. All right, I’ll see you later.

Lane: All right, see you later Larry.