How to Build a Multi-Million Dollar Passive Income Stream

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Want to know how to leap you from your first rental to $2 billion in real estate, stick around. These are the secrets most investors never hear. All this and more right now, here we go. 

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[THE GUEST]: Lane Kawaoka is a real estate expert and author with over a decade of experience, managing a portfolio of more than 10,000 units through his company, The Wealth Elevator. His second book, also titled "The Wealth Elevator," provides insights into financial prosperity.

[THE HOST]: Ryan Miller is an Angel investor, former VP of Finance, CFO of an insurance company, and the founder of Fund Raise Capital,  https://www.fundraisecapital.co where his strategies helped emerging fund managers and deal syndicators to report raising over $1B following his strategies.

Transcript

Ryan Miller  

My name is Ryan Miller, and for the past 15 years, I've helped hundreds of people to raise millions of dollars for their funds and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, this show will give you the answers so that you too can enjoy your pursuit of Making Billions. Let's get into it. 

Ryan Miller  

Want to know how to leap you from your first rental to $2 billion in real estate, stick around. These are the secrets most investors never hear. All this and more right now, here we go. 

Ryan Miller  

Lane, welcome to the show, man.

Lane Kawaoka  

Hey, thanks for having me. Hello everybody.

Ryan Miller  

Yeah, it's good to, good to have you, brother, let's jump right into it. Most people think financial freedom is decades away now, you've built multi million dollar passive income streams in a fraction of that time. Before we get into the details. Take me back what's, what was the first critical shift that you would say someone needs to make to even get on that accelerated path? 

Lane Kawaoka  

I mean, it seems esoteric, right? Because they've all kind of read the book, Rich Dad, Poor Dad. But yeah, you do have to just buy assets. But the key there is you need to have capital to buy assets. I don't believe in the no money down, free property type of thing. I mean, when I first started, I would just buy little rental properties 20% down, and it did take a while to build that initial capital.

Ryan Miller  

Yeah. And what's some of the things? So did you self fund it or how did you get going on, getting that initial capital to build you into what you've done now?

Lane Kawaoka  

Yeah. So in a previous life, I used to be an engineer. Didn't really like the job. I had a good pay right out of college. And, you know, kind of grew up on one of these families we were taught to be frugal with our money. You know, never buy soft drinks when you go to a restaurant, because that's just a waste of money because they give you free water. That's where I you know, I think in almost six figures, pretty much right out of college, and I was able to save maybe 30-40, grand of it right off the bat. So, fast forward a couple years, 2009 bought my first house to live in because, again, that's what we're all brainwashed to do, buy a house to live in. And, you know, just a guy in his 20s, big house to himself in Seattle, Washington. And the magical thing there was, I was traveling all over for work as a construction supervisor, never home. Well, why not just rent this thing out and that was when I went on this magic carpet ride and became a landlord and, yeah, I guess the rest is history, right?

Ryan Miller  

Yeah, awesome, man. So you've built it up. Now, if people want to take an active role in doing deals, getting capital, even if it's your own or investors, that's a whole show on its own. But what are some of those tactical things that people can do just to start moving ? If you remember those early days, maybe walk me through some of those tactics that you can do and maybe share that wisdom.

Lane Kawaoka  

Yeah, you know, I think the basics are like, You know what I teach on the first floor of the wealth elevator, just real basic stuff, like, keep a budget. If you're unable to control your income as expenses and have a net savings at the end of the day, you'll never going to get the capital to invest. And the nice thing about real estate for all the things we all know. But the bad thing about real estate is you need capital to play, and you can't just use $5,000, $10,000 to buy a piece of real estate, like you can crypto or stocks, bonds, mutual funds. You need a more substantial amount of money. When I first started, I would buy my house to live in, eventually I would buy these little turnkey rental properties out in Birmingham, Atlanta, Indianapolis, for about $80- $100,000 each, 20% down payment on those. You know, I needed 20-25, grand to get into one of those, those things. But, yeah, that was, that was the name of the game. I think, when you're on that first floor of the wealth elevators, you know, get out of debt by saving money, putting it to assets. And then, you know, I tell people like, look, if you're in credit card debt or your income is less than 50 grand, 100 grand. I'm probably not the guy to follow. 

Ryan Miller  

Got it. And you know, when you're getting into real estate, like we have a lot of investment bankers, family offices, stuff like that, and people who aspire to be as well. Can you talk a little bit about your discovery of Fannie and Freddie and how that ties into doing deals, and really encapsulate a little bit of working with debt and some of the organizations that are tied to that. How did that play into you moving from your first single family to 2 billion in assets? 

Lane Kawaoka  

Yeah, so, so two different worlds, essentially, right? Your residential world where you're buying one to four units. I from 2009 to 2015 I had about 11 rental properties, and I essentially maxed out as many Fannie Mae, Freddie Mac properties that one could get in their own name. I don't know if it's changed. I think it might be the same. But back then, people would always talk about getting 10 in their name, 10 in their spouse's name, getting 20. Obviously, with that many rental properties, it becomes a headache, and especially being an accredited investor with a higher net worth, lower propensity for time sucks and liability. And that was why I made the natural transition away from single family homes and went into more multifamily commercial real estate. And that was kind of where, you know, I would, I kind of kiss the world of commercial or residential lending with Fannie Mae, Freddie Mac, one to four units, and into the commercial world, where more and more the asset is backed by the asset. But one of the big barriers to entry to buying 100 unit apartment complex, for example, is this lending. Fannie Mae, Freddie Mac, they have pretty strict lending requirements from the sponsor team or the loan guarantor team, where your loan guarantors the people signing on the debt or key principles is another word for this. Need to have the net worth greater than or equal to the loan, right? So, if your net worth was 20 million and what mine was 5 best thing that we, you and I could qualify together for with $25 million so that's how that world kind of works. And then the big part of this world is you also need to have the experience, which is, unfortunately, the chicken and the egg quantum that many people might be aware of right now listening or may face in the future, where, if you've never done 100 or 10G an apartment complex, signed on the debt, you know, it doesn't matter if you're LP in the deal, nobody cares about that. That's not experience, but you had to sign on the debt and get on. Get your Fannie Mae, Freddie Mac card, right, that's a big barrier to entry here. 

Ryan Miller  

Brilliant. So there's a lot to learn when jumping into that and expanding and you've expanded on that accelerated Track Man, so I love these dichotomy questions. So I think I know the answer, but for the benefit of those listening to us, would you rather spend 40 years climbing a corporate ladder or four years building passive income streams that let you walk away. I think I know the answer that. But really, what I'm asking is, how did you discover that the second option was not only possible but repeatable for everyone else?

Lane Kawaoka  

Yeah, I know a room I'm in, right? So we all know what the answer is going to be. But you know, to dig in a little bit more into that question. Unfortunately, you know, it's not always black and white or binary, like you mentioned. There's always, you know, at what, what risk level you're willing to take on, yeah, and maybe this somewhat justifies the way that my parents did things, or the the long, you know, professional W2 path that a lot of people are on. If you go down that path, it's going to be long and somewhat hard, but it is reliable, and we kind of know what's going to happen, right? Like, if I would have just bought my house to live in, paid it off, maybe bought a couple rental properties, right, eventually give that to my kids when I pass away, that would probably be a good life, but that would get in the way of a great life, and certainly I wouldn't be living up to my utmost potential. You know, like a lot of people, that may be, that may or may not be your value right to maximize every single resource or God given talent you're given. But I kind of reached a point of somewhat financial freedom very early in my you know, I've been investing since my early 20s, and a big chunk of that time. I mean, I was, you know, I didn't talk about this part of the story. But I was sort of homeless, not like these regular riches stories, but I was living in the company I was working for as an engineer for a company that would put me in hotels. So for like, three, four years, I didn't have any rent payments or any, you know, mortgage, essentially, my tenants were paying down my mortgages for me. So I was able to sock away like six figures for several years there that really, really put me ahead. You know, especially in the beginning, that's a pivotal time for such a liquidity injection like that to to then invest and put into the wheel. For me, it was like, I got to 11 single family homes in 2015. I think I was maybe 30, 29-30 at the time. And then I was like, well, what's next? Well, what kind of logical fella does not think, like, well, let's go into more single family homes. Oh, that's multifamily, right, so that's where I started to discover this world of multifamily investing. And then, like, as you mentioned, the lending standards of having me Freddie Mac and then, you know, playing more the role of asset manager, and kind of getting more ingrained in the syndication and private placement world.

Ryan Miller  

Brilliant. You know, one of the things you told me another time, we've spoken a couple of times here, but you said, what you what you like to do in the early days, is almost think about, at what point in this market, this is the early days, what point of this market does the world cave in and where is that sinkhole? And I'm curious from that, I know the answer to that. But what, what did you find? Where is the place that just sucks in everybody into this endless pit of whoa? What have you found? And how did you turn that around?

Lane Kawaoka  

Yeah, I mean, at the end of the day, these are investments, and there is always risks associated. I do think you get a much better risk adjusted return when you kind of do things on your own and kind of go off the beaten path and get into what they call alternative investments for this alternative world. But I think very early on, I caught on just buying little single family homes, you underwrite the deal. It's very elementary, where you have your income, where you might make $1,000 a month in rents, and $100 goes to the property managers. Another $100 goes to taxes, another 100 goes to insurance, and few others, I'm missing out, right, but, and CAPEX, of course, that comes and bites you every so often. But, yeah, you're left with a surplus there. And it's nice to have surplus, because we all know that things happen and they will, and that's at that point that eats into your sort of you think about like a tooth enamel, right, eats into your buffer. So. So in that instance, right? Like, over many, many years, I kind of got maybe desensitized to it a little bit right. And also, who doesn't like to stack money up and now you get a little bit more of a reserve cushion right to weather those, those ups and downs. More importantly, like, I mean, there were a few times where tenants would just move out because they ran on tough times, and they just trashed the property. You know, I can probably think of a few times where the repair bill is like 20 grand, 25 grand, and that doesn't even include the few months that the property is down changed, and at that point, you know, that's, that's why you have reserves and buffer to pay for that stuff. But at the end of the day, I mean dollars and currency is sort of what you know, are you positive or negative in the long run on a level?

Ryan Miller  

So it sounds like having reserves are one of those sink holes, and then underwriting. Those two seem to be those two areas that investors or asset managers really need to pay attention to, is that right?

Lane Kawaoka  

Yeah, yeah. And then we'll get more defense in that, right? Because, you know, we've established these esoteric ideas, but like, what does that really mean now, when you're getting it more into, like an apartment deal, for example, there's many, many things on the underwriting sheet that will get you. And you know what we do is, we would look at a lot of deals out there, and we've operated many, many properties on our own. And we have sort of insider knowledge on what, what true comparables are, what rents are out there, price per square foot, for example. And we also know what these properties should operate at, what expense ratio they run it because, you know, we can baseline it with our own assets. And we also have our third party property management teams that baseline within their portfolio too and at that point, you know, we have good data. At that point, it's just like, well, what's the risk tolerance that we're willing to take on? Like, how bad can things get before we start to lose money, some people call this sensitivity analysis. Unfortunately, there's, you know, handful of there's many, many factors in it. But, you know, I always say 80/20 analysis, like, what are the top ones that are going to get you? And you know, when we look at deals, it's the what is the reversing cap rate in comparison to the entrance cap rate? What is the full occupancy assumed? Is there any economic vacancy assumed and you know, what are the rent escalators assumed? And you know that it are typically the three biggest drivers of any underwriting specialists in the apartment world. And you know that also kind of flows to any deal you look at, there's always a few cells in the spreadsheet that really, really move the needle, that you know are sometimes notoriously fudged by operators. And as an investor, it's your job to understand what are the major factors and which and and to apply the normal assumptions to normalize the underwriting projections.

Ryan Miller  

So what would you say then that you said some operators, there's some areas that they fudge, we'll say, to put it lightly, what are some of those areas? What are maybe you can give a cautionary tale or some helpful advice when you're when there are investors who are proposed a deal, are there any areas that they should really dig in from your experience, just to be the anti number fudging detective that they are ?

Lane Kawaoka  

First one, the simplest one is like, if you look at the underwriting, what is the assumed occupants, full occupancy of the asset? You know, properties never run 100% occupied, typically, you want to see 92%, 93% most, right? You could, you could run the asset 100% occupancy, but, and that's great and that's great, but that typically, you know, if you're pushing for optimal rents, the highest rents, you know, you don't want to sell out all your seats. So therefore, you know, you want to see the underwriting reflect this. And then you also want to see maybe 3%, 4% in terms of, you know, people, it might be occupied, but people may not be paying more early on our days. You know, we would do more class C properties. So rougher tenant profile this, you know, this would be in a place like Fort Worth, Texas, right, you know, some of the rougher areas. One of the properties that we, you know, we're very successful on, we that said we are only able to get, at best, maybe 80% economic vacancy on. So if you have 100 units, 20% of the people are deadbeats or a combination of partial pays. That's par for the course, you know, sometimes in these class C neighborhoods, your class A may run as high as, you know, 5%, 10% too, especially when you're going through the restabilization period, which is any good value add project goes through, you know, that's, there's always some hair on the deal. And then you're going to the rough patch as you're kicking out the bad tenants and bringing in the new the new regime. Which also kind of ties hand in hand with, you know, you're improving the community too. But, yeah, you know, something like that, can, you know, can throw the numbers off pretty drastically, you know, like, if something is projecting 100% return in five years, normalizing that may drop it down to 80% like a dropping of 20%. I think that's, you know, people may not understand the different aspects of what all these terms mean, I think that's a very understandable one. But the big one, I call it cap rate Gate, is the reversion cap rate. Normally for good underwriting, you want to assume that you're selling it into a worse off market, a softer market, so you increase the reversion cap rate, which in turn means you're getting a worse sales price at the end. So you want to increase the reversion cap rate to assume that you're selling into a software market. So maybe you increase the cap rate by half a percent at the exit. 

Lane Kawaoka  

So for example, the assets for Class V and Dallas may be trading for I'm just throwing these numbers out there today might be like five, but you use a five and a half version cap rate on the exit. Now, some institutional operators may assume that they're selling it. They enter at a five and they're sell at a high, could happen. I would just rather be more conservative in assuming and just writing the numbers at the five and a half, right? So sometimes we see, we see operators, you know, will use an even lower reversing cap rates. So four and a half, you know, we'll just, I mean, won't think much of it, we'll just put it back to what it should be, and then run our numbers on our own. You know, fudging of half a percent seems like small numbers, but that can, I've seen that played with the numbers as, like, maybe 20% one way or the other. So if you were projected 200% return your money, that may mean that when you normalize it, and then the deal actually goes through. Then it runs through, it like 75% return, you know? So that's a big that's a big lever, right there.

Ryan Miller  

Brilliant. So looking at those cap rates and occupancy rates, tends to be a button that might get very aggressively switched on by people pitching deals. And so I think those are from what you're saying, those are some key areas to explore on when you're reviewing an investment.

Lane Kawaoka  

Yeah, it's a starting point. It's a starting point. I mean, I think unfortunately for a lot of retail deals out there, when investors get the decks, there's no talk about, what is the reversion cap rate? What is the cap rate of the market? You know, I think that's where we kind of put an operator hat on. And, you know, we know a lot of this. We're just asking what was in the underwriting and we, you know, but at the end of the day, I think you need to get the P&Ls and the rent rolls and the raw financials to run it yourself.

Ryan Miller  

Brilliant. So you mentioned before that you've been an engineer, so when you first started investing, were some of those mindset shifts that had to happen, or some that had to you had to unlearn. What were some of those things that were helpful or unhelpful when you started out?

Lane Kawaoka  

Yeah, I mean, starting out, I always just had the idea that I was just gonna buy rental properties and just quietly work my day job throughout my career. I mean, I initially was in the public sector, working for a very stressful fortune 50 company. I suppose that's where I learned a lot about leadership, blah, blah, blah, blah, you know, but that was also where I made a lot of money. You know, my salary was highest at that point, and I had this idea that I would replace my income with all these rental properties. And then, you know, just at some point retire, right? You know, today I tell our folks, if you can hit a net worth of 4 to 5 million, you know, you should be able to get that. You know, the people hear about the 4% withdrawal number, you should be able to hit, like 10, $15,000 of passive income a year. You know, investing in easy peasy stuff like life insurance or T bills, right, low risk, low return type of stuff. I'm not saying you would, but I mean, you know, just as a what's in the realm of possibility, right? So the idea is, if you can just accumulate to that point, you know, you can, you can essentially get yourself financially independent at that point. 

Lane Kawaoka  

Now, something changed for me, you know, when I started to get into multifamily syndication, started to become the operator, get more involved in a general partnership side of these deals. And then I kind of realized that, hey, this, there's something to this here. You know, when I know you and I were kind of talking about this behind stage that, you know, it wasn't all sunshine and rainbows, you know, when you're working with operators under, you know, half a billion dollars assets, it's a little hit and miss, they're newbies. You know, somebody with 50 million, $100 million of past acquisitions isn't very much in the real estate world. May mean a huge thing in private equity or angel investing, but you know, real estate, you typically add a couple of zeros onto everything. 

Ryan Miller  

Yeah, it's microscopic, for sure. 

Lane Kawaoka  

Yeah, yeah. But you know, that's sort of where I realized that, like, hey, I could turn this into a my new career, or my vocation, right, finding deals, investing and, you know, operating. And that was kind of where I got out of my head of like, I'm just going to do the status quo that the two engineering job, and then kind of hide and not talk about finances to my coworkers, because then I would be embarrassed or have to pick up the bar tab every time.

Ryan Miller  

Yeah, got it. Now, you started, people started, people are expanding into real estate or maybe different sectors or whatever that might be. A thing that I like to ask a lot of people on the show is, walk me through your first deal. What did it cost? How did you find it? How did you finance it? What did it teach you walk me through that first deal?

Lane Kawaoka  

Yeah, so the first one, it was a very small deal, class C. I mean, that was all we were able to have access to, right? Because we typically will go after more stabilized properties. So that is the find is 90% occupied or better. Don't believe what the gurus tell you, they're like, if somebody owns an apartment of at least 50 units, they're not going to sell it to you, because you sent them a stupid yellow letter, these guys are not idiots. They're going to go through a broker to sell the assets and get the fair market price from the liquid from the market, the market overall. So we had to kind of start at the bottom, buying these classy assets, and obviously smaller, so I think the deal size was like 3 million. All I remember vividly was that we needed to raise about a million dollars to get that deal done and boy, was that difficult.

Ryan Miller  

What made it difficult? I'm curious.

Lane Kawaoka  

No track record, you know, no investors. Also, the numbers were hard to make work. I mean, the rents, there was a big disparity between what the market rents were, and especially once we renovated it. But the problem was in the P&L, when you have such a small unit like that, like we didn't have full time property management on staff, we weren't able to tap into commercial property managers, where you pay salary, plus, you know, 4% of monthly rents, we were in the resident no man's land, where we had to use a residential property manager where, you know, they take sometimes, like half or the full first months, right, you know. And that, you know, that's just one aspect of why you get into larger commercial deals, because of the economies of scale, multiple multiple units per one roof, for example. But yeah, that property just wasn't able to get that economies to scale with that, that one, and it made the expense ratios on it difficult. But you know, that's whether a deal cash flows or not, is, you know, is independent, sometimes independent if you have gonna have a successful deal, right? Like, think of a house flip, house flip. You make no money during the flip, right, but you can sell it at the end, right? In a way, that's what we do, is we kind of do these slow flips where we just let tenants naturally turn in and out over time. Um, a few years go by, you can typically get through most of all the all the tenants and bump rents and renovate, ideally, you know, this is prior 2020, you know, I think there's like 2018 ish, you know, back then things were a lot cheaper. So you could have the best of both worlds in cash flow and have the proper appreciation when you value add and force appreciate it. You know, nowadays you everything is just getting more and more difficult.

Ryan Miller  

Especially raising capital that, that can, that can be a challenge right now. And you know, what I'm seeing is it's harder to do smaller deals. It's which tells me, it gives me the theory that a lot of capital is being held by institutional investors. Could be wrong and leave your comments below if you think I'm if I'm misled. But seems like the larger deals are the ones that getting funded, and sometimes these smaller deals, unless you got a good personal network, that might be better. But smaller deals right now are a bit of a challenge, so, so I always say time, times your whatever your number it is. Let's say it's a million bucks, times it by two and add a zero. So that's it shifts your thinking and walking up to that. Now that is a different story. So raising the capital is one thing, but actually being able to do, find and manage and exit deals like that, that's an entirely different one. Now, one of the things that doesn't really show up directly in the line item on your P&L is partnerships. What have you found, maybe you've had all good ones, maybe you've had all bad ones, maybe a blend of both, like me. What have you found to be helpful when building those partnerships and how that helps to close deals?

Lane Kawaoka  

Yeah. I mean, it's a blend, like you said, right? Unfortunately, we've learned through attrition, like the people that stick around, you know, you go through ups and downs, and the people that you are still around, that you work with, have good integrity to do what they say they're going to do, is, you know, people you stick around with. I think this is where it's difficult, and maybe it's just like romantic partners to it, right? You don't know how things are, you know, like the first date, you know, or even first deal, you everything's great, right, there's great energy. But you don't really learn how people are until there's some adversity, you know, or as simple as, like, hey, you gotta sit down at a computer and do a job request and, you know, for a couple hours and crank out these, uh, these attachments, right? So, these reimbursements, right? Like sometimes people you thought you knew, well, just can't do it, and at that point, you know, I don't really have a good criteria. I do think that is a little bit more randomized, but yeah, you know, I like to see partners with fortune 50 or fortune 500 corporate background would be nice, right? At least a director level. You know, surely holding down a job for 5 to 10 years, right? Is all I could ask for net worth. You know, at least an accredited investor, right? Not saying that, you know, they couldn't have made parents given it to them, right, but you know, most operators are typically first generation multi millionaires. If not, then they're more on a passive role, more of an institutional investor role by the time they hit their second, third generation. Look, I went to the ringer, had some good ones, had some bad ones, and the ones that I got now, you know, like the relationships are even tighter. You know, yeah, you and I were talking about this earlier. Like a lot of people run through this problem of the. They have to partner up. And I think you do right, especially when you're taking down a big, big deal, not it's a team sport, and a lot of people will they, they feel like they need the motivation or the camaraderie of another person there, and so just on that accord alone, they go out and find a partner, but they don't, two things. They don't know what they're good at, like they they don't know their own affinities, even if they've worked a corporate background like background, like some of my partners, they've, you know, maybe been in sales, but now they're on the operation side, and then it's vice versa, right? You don't know what your affinity is in terms of your own skill sets, and also, you don't know if your skill sets and affinities are complementary to that of the partner. You don't want a situation where both y'all do the same exact thing, that's just you don't need one of you guys.

Ryan Miller  

Yeah, one of the things that I've found, if I can chime in on that, because I'm like you, I've had a mixed blend. Some are phenomenal, and they're still in my life, and some didn't work out, just different priorities, we'll say. Couple of things. A framework that I utilize, and I've used it a lot. I call it the UVE framework stands for umpires, vampires and empires, and so umpires are people that keep you on the straight and narrow. They may not be like you, like a wild man doing deals and all that, but they're really good, and they make sure they know your goal, they stand up when you win. They're just like what it's like your best friend. They may not be on the same path, but they just, they just want to see you win, and they're not going to let you. They're going to call out your BS, if you're tired and you want to do something stupid, they'll call you out, now that's also lawyers, accountants, all that stuff. Vampires needs no introduction anything you're doing or people or partners just drain. You probably not a good fit for a partner or someone in your company at all. Then empire builders are those people who not only can they do the job, but they want to. This is part of their goal, they really don't like they they are terrified of dying in a cubicle after 40 years of a you know, and just worked for someone else's goals and so you have these empire builders. That's number one, but more specific, so that's more of an energetic framework. 

Ryan Miller  

But specifically, if I could chime in, since we're on the topic of picking partners and avoiding some that that may not take you where you want to go. I've boiled it down to really three distinct roles, and this is more on the investing side, but it's the three roles that I think any good deal would need is a capital raiser, someone who knows the mark, they love it, they don't mind going to dinners and hustling and flying around the world and meeting and turning dinners into dynasties. Great, you need a capital raiser. Second one is a fund manager or an ops person, someone who's comfortable in the ops. They have experience in the operations, be it real estate, venture capital, private equity, whatever that is, you need an ops person. And then finally, you you just need an expert investor, someone who you give them a stack of deals, they'll share list that stuff fast. And so maybe you fit into one of those, this is just my framework, maybe not yours, but you have a framework where you say, okay, like, for me, I love being a capital raiser, right? I love going out there, I don't mind getting rejected and kicked in the teeth and getting back up and trying one more time. I think that's fun. Some people are like, that is a total nightmare. They would never in a million years want to do that, right, just keep me in the office, put me on a computer. I'm happy to run this whole thing. So having a capital raiser, an expert investor and an actual operator, those are some key roles. And then once you know the roles, how you fit into those roles, then you can start seizing it with the energetic framework to say, is this person an umpire? Are they a vampire, or are they trying to build an empire and if they're two, at least of those three, then maybe we can partner up. So that's kind of that cross reference matrix that I put together and really analyze any partnerships, anything you can add to that. 

Lane Kawaoka  

That last one kind of sounds like the analyzer, the underwriter. I would probably say that's the least important of them all, like, that's the one that, you know, we kind of kicked to the curb and hired out first, right, because it's not unique. And, you know, people may be in different circles, but you always find, like a geek that likes to play in the numbers, that can't talk to people, right? Like it's very, very commodity. 

Ryan Miller  

Yeah, for sure.

Lane Kawaoka  

Person of a person, the operator is important, and then the capital raiser, I would expand that to biz dev too, right? Because sometimes you know, you're you're working with brokers to find deals, or maybe you have some colleagues that you just met, some competitors, maybe, and they, you know, they are passing on a project  or, you know, the Biz Dev is an important one, but the skill sets on each of those three are very mutually exclusive, that's the word, right? Like, one's more of an introverted, analytical type, one's more of an extroverted type, one's more focused project management type of vampires. Like, I yeah, I get you've you need to figure out what that is, but I don't think you're gonna figure out that what that is in the beginning. I mean, unless it's over, you know, we've been, we've been through fires, right? Like, commercial real estate has been absolutely up and down the last several years. The analogy I use is like, you know, house pitches on fire until the house catches on fire. You don't know if a person is going to run in there and, you know, start saving the things and people inside, they're gonna freeze, or they're gonna run the opposite direction. You know, I know, actually, you're right, you're right. Like, in the beginning, you can tell which of those three are, but you don't know what they're going to do when a fire happens. 

Ryan Miller  

That's right, yeah. And so pricing that in and making sure, and just being committed to that framework is to say, I don't want to partner with people that drain me. I want to partner with people that keep me on the path, help me to prevent this crazy train from rolling off the tracks. But also people who are trying to build their own empire like and like they have the hunger, the fire, whatever it is you want to call it, these are people who not only do they have the skills, but the the temperament, the drive, the goals, the vision of their life. And then we can utilize that in my firm and yours might be different. Now we can utilize that to say, okay, maybe this guy might be a good fit. We'll still price things in probation periods, all that stuff, pulling out an easy exit, just in case. Because, like we said, you don't know, you don't know until the thing's on fire how are people going to react? This is the one rule that I have, well, the main rule is to say, if there's ever an issue with a partner, just remember it's me and you versus the problem, not you versus me. And as long as we maintain that to say, if the house is on fire, how do we come together to put it out, rather than arguing who started it? If that's I'm just using that as an example,

Lane Kawaoka  

If the guy is still there, right if he hasn't run away.

Ryan Miller  

If he hasn't run away. And so it's just saying, like, hey, if you want to lock arms and really figure this out, this can be great times, maybe a few fires we got to put out. But as long as you maintain that unity and you've got those skills, then I think we've got a good partnership. So we're going really deep on partnership models and things that we do to really vet that out, so.

Lane Kawaoka  

Well, let's go deeper here, I got a couple other things.

Ryan Miller  

I'd love to hear it. 

Lane Kawaoka  

One mistake I see people make is that they need motivation. And these are the guys who go to your Tony Robbins seminars, because they just need motivation, they can't motivate themselves. So they find a cheerleader partner, we don't know if they're vampires, I guess they'd be a kind of a cheerleader too, right? But they just get somebody, just to get somebody, right, this is the person who gets into a relationship because they're lonely, romantic relationship.

Ryan Miller  

Yeah, what could go wrong?

Lane Kawaoka  

Yeah, I don't know. I guess there's people listening, or probably, I mean, maybe we've been, all been guilty of it, right? Maybe my self included right. So we all know that is, but you know that's if you haven't yet jumped into bed with a partner on a business side, maybe take a pause a little bit, because it's really hard to undo these things once you're in it. And then the second thing about partnerships, just going back to, you just don't know how they're going to jive with you and then there's going to, there needs to be a personality mix, and also skill set mix. I mean, I just, we just did this. We had a coach give this training to us recently where, I think it was Stephen Covey, like, it's like six gears, something like that. But like, each, each partner needs to take, you know, this is a moral this. It kind of people call these, like, personality tech tests, but it's just more how you more how you tackle problems and issues or new concepts. But, you know, in those gears, like, there's always one person that is the quick start they they have, they have a lot of ideas, some good ones, some really bad ones that waste a lot of time. And then it goes to the second gear, you know, your judgmental person, right, they say, no, that's a waste of time or to basically somebody who does the 80/20. And that's  what I do. I'm kind of that person in our group, right and then the next is your implementer creates a system. And then I'm missing a gear in here, maybe because I lack that gear myself, but I know that the last gear is like, at some point you have to hand it off to a team and motivate your team. So it's the galvanizer with people. So, like, that's, there's so many ways to layer on top of, you know, picking a partner. But then I think once you get to that level, you're kind of, you know, just like a old married couple who's been married for 10 years or more, right? You're just, you just got to figure out what works. 

Ryan Miller  

Yeah, that's right. You know, a big thing that I like to look at are forcing functions and force multipliers. Now, you've gone from one single rental unit to managing over 2 billion in assets. What were some of those force multipliers that made that type of scale possible for you?

Lane Kawaoka  

We got ourselves out of the business as soon as possible, right, like in the early days. I mean, I can remember getting on those property management weekly calls and could do it, you know? I mean, I been doing real estate since 2009 with a property manager telling them what to do, and then the next week, telling asking them why they didn't do it, and trying to get a plan to hold them accountable. But I, I'll be honest, I never, I was an engineer. I was not a property manager standing at the desk of the leasing office for a decade, you know, and that was kind of where, when went over a billion dollars of assets, that was kind of where we started to realize, or we had, we had the, that's why we take asset management fees right so we can hire the right staff to pay these real operators, these asset management teams, to kind of manage this stuff. I can remember, you know, very, you know, early on in a transition. There were things that they caught on to that we would just never know. So there's a big difference between somebody running an apartment complex who still works his IT job on the side, that he cares a lot, and he's at the property every day, you know, but they just don't have the pedigree, right? Like, you know, I'm not going to tell somebody that they can be an engineer by just reading a book and doing it right, it takes years of experience and mentorship. And same thing with being a doctor and I, I certainly think the same thing about being that core leasing agent in the office trying to lease people out.

Ryan Miller  

So it sounds like people getting the right people. We were kind of going on that theme of the right partners, but also the people under that management fees, you can hire the right people. But I think even higher than that, I don't want to miss that, is to say, get out of the business as soon as possible. Hire those right people so that you don't have to keep stepping in and that's the scale.

Lane Kawaoka  

Yeah, like, like, like, I'm pretty transparent with, you know, my investors and our group, and I've always said, like, look, I'm just a dumb real estate guy. We're just sort of the kooky entrepreneurs who started this, right, like the risky years were in the beginning, right, when we didn't, you know what the heck we were doing, like a lot of operation, you know, they don't teach operation, you just kind of learn by doing after a while. When we started to hire it out, I think that's when we really started to realize, well, what we're missing, because then we we got the pro in there and were able to watch over their shoulder. And, of course, you know, takes, takes a little bit learning curve to manage the professional manager too, that, yeah, that was where we really started to, you know, started to build a, like, more of a business over this.

Ryan Miller  

And how did brokers tie into that? Did getting into broker networks, I've had other folks on the show that talk about the importance of that. Did you find just getting close to that deal flow and getting into that broker network was a really a force multiplier for your skill? 

Lane Kawaoka  

You know, once the brokers know that you're a serious contender, the deals start to kind of go to you. We got lucky that in 2020 they had that pandemic thing, right, that really threw a wrench in everybody's wheelhouse, including institutions that typically buy a lot of stuff, so they pulled back right because there was a lot of uncertainty. We kept powering forward and, you know, we for a while there, we were kind of getting fed the best deals because there was no competition. And that, I think, for us in our, in our growth journey, that was very pivotal time to get established. But, you know, brokers are motivated by people who can close and they're going to go, they're going to keep feeding the hot hand. For a guy listening getting started, that's not really useful, practical advice, it's kind of like, you know, look at me, nana nana boo boo, in a way. But yeah, that's, if anything, that's a motivation, right, you got to just keep at it.

Ryan Miller  

It is.

Lane Kawaoka  

Business Development, you know, talking to brokers before you have a track record, let them know that you're serious and not just another like unsophisticated investor from California who is remotely investing in these properties out in Texas. Not even visiting the properties, not even going on the tours. Like a lot of these brokers, they'll filter a lot of looky-loos, like, you know, hey, Ryan, are you gonna go? Are you gonna be at the property tour this week, if they're not, yeah, and I mean look at their offer.

Ryan Miller  

Yeah, yeah. So you got you really got to get in with them, build that relationship, and show them that you're a contender like you said, I love that, that phrase. So what's one hidden cash flow tactic that you like to use that most people don't really hear about? 

Lane Kawaoka  

I mean, I think when people like follow me, you look at like, the apartment investing and now like private equity, I think you might be seeing like, sort of the tip of the iceberg. You know, before, like the, you know, the recent correction, I was maybe, personally, 80 to 90% of my net worth in commercial real estate, which, apparently, you're not supposed to do that, right, you're supposed to have some diversification. Of course, everybody's different, right, but, you know, I think what you know, just me learning, I'm sort of a student of the game myself, you know, learning that, you know, what is it that the wealthy, how they're structured, their asset allocation mixes, you know? And what I'm keep coming back to is this concept of barbell strategy. I inherently do a lot of more risky things, right, that's what alternative investments are, they're riskier. I do think that it's good risk adjusted returns, and that's why I do it, right? And the fact that, you know, I can sort of somewhat control my own destiny, you know, with renovating units, that type of stuff. But make no mistake, I am balancing this out as a barbell is with it evenly with, you know, much more safer things, like life insurance, you know, I would consider things like T bills like that too, right? So, like a lot of and some of my investors, they really like closed end funds, you know, there's a whole topic on that world. So that's where I would say, you know, maybe learn about, like the two sides of the, you know, the more stable, secure stuff, maybe even debt products, right, debt funds, private credit to sort of complement the more alternative investing side.

Ryan Miller  

Now, you mentioned something I never heard of when we were talking offline, is something called a Lazy 1031 Exchange. Maybe you can walk me through a little bit on that cash flow tactic. 

Lane Kawaoka  

Yeah, so a very common situation that we see. In fact, it happened to me, right? Like when I was coming into this world, I was going into these syndications, and they invest in real estate, but they're not like kind of exchanges, right, you're not going from real estate. I had my 11 single family homes. You're going from, you know, it's not going real estate to real estate. You know, you're investing more with a security fund kind of format. So you can't do a 1031 Exchange. I mean, you can, but nobody's, nobody's going to do it, allow you in, unless you do what's called a tenant in common or check and really get more than, like, a million dollars just not worth. The legal headache, just using myself as an example, I think one year, I sold seven single family homes, and I had a quarter million dollar capital gain. But that year prior to that, and that year, I was investing in all these deals where you do cost savings, you get bonus depreciation, and you kind of stock up your passive activity losses. If people are kind of curious how much they have, especially if they've owned past real estate. I think that's the 8582 Form, you know, passive activity loss. I honestly don't know how to read it today, you know, maybe just throw it into chat GPT and ask how many suspended passive losses I have. But, you know, that's what you pull up as an investor if you don't use it, right? I know some investors like to do real estate professional status and use it to drive down other income. But if you don't do that, you know, your passive losses from real estate just sort of go unused until you activate it and use it for other capital gains. So yeah, that's what I did, I, you know, sold my properties had a capital or gain of and depreciation recapture of 250 but I must have had like, 300- $400,000 of suspended passive losses. So I used that to offset it that year and that's what we kind of loosely called, it's not an official term, but we kind of call that the Lazy 1031 Exchange, you know, being able to front load some investments, get some passive losses, and use that, you know, in the same calendar year to offset the gains.

Ryan Miller  

Brilliant, you know, speaking of losses, those can happen right, even if you do everything right. What's one of those things that you do to stress test your portfolio for, for those downturns or black swan events, what are, what are some of those, those things that you do? 

Lane Kawaoka  

Yeah, so going back to those, you know, those two, all three things I was mentioning at the top right, like the reversion cap rate. You don't know, you have no control over the market. Multifamily real estate, just high level trades, usually trades between like a four and a six cap. When you have good prices and the market's down, it's trading at a six cap. When things are hot, frothy, and probably a good time to sell is when things are trading at a four cap. You know, you try and add value to properties in that time right to, you know, make money on the value add that you're doing. But essentially, markets, just like stock markets, go up and down in a market cycle. Some would say anywhere from six years to this past market cycle is very long, I think it's like almost a dozen years. So, you know, you when you underwrite properties, you try and account for the market to be either straight line or get worse, to try and account for this. Yeah, and that's where you can if you do it right, you can come out ahead, you know, blow projections out of the water. But when things don't go to plan, I think that's when you're a little safer, right and you know, going to the occupancy, right? You don't know, right, right now there's a lot of new supply hitting the market from a lot of new properties being bought built a couple years ago. So occupancy isn't as strong as it was a couple years ago, and that's why rents are stagnant to some places down a percent or two. That'll normalize out, right, as most things do is there's a that's a market cycle too, but that's why you don't underwrite your property to home along at 95% occupancy, and everybody paying too.

Ryan Miller  

Okay, you know one of the things, and I'm curious if you've done this as well, in, say, private equity, real estate, anything with assets, you're acquiring things, not just paper, but some strategies that people will do is will say, well, well actually, we will push a lumpy acquisition cycle. So it's not a smooth, sometimes the smooth acquisition cycle is right, three homes a year, three companies a year, or 30, whatever that is, other ones are saying, we're going to stagger that so we'll say we're going to raise a bunch of money, we're going to go buy 20 properties, and we're going to rinse and repeat every four to seven years. So sometimes a stress test is to say it's what I call, like a modified dollar cost averaging, dollar cost averaging, obviously, you just keep purchasing every paycheck you get, throw some money in the stock market, it's typically where you learn that principle. But you can do that to say, every four years, we're going to buy eight companies in this sector or 12 certain properties in this particular region. Do you do anything like that, as far as helping to protect investors, stress test your portfolio? Do you do any of that dollar cost averaging or staggering acquisitions?

Lane Kawaoka  

Yeah, I mean, we always try to be investing, you know, and we try to, I've kind of succumbed to feel that I don't know when the top or the bottom of the market is. I just, I just know that at any one time, like trying to try and do acquisition every quarter right, and just trying to find the best one possible. Now you may, unfortunately invest at the peak of the market, and you can't do that right. And sometimes people shoot themselves in the foot, right, and they never get involved, and they they lose out like, I mean, in apartment investing that was 2016 and 2018, and 2020, to 2021, that was a great time to have the exposure. And most people talk about negative exposure, but if you're constantly like finding a way to shoot yourself out of a deal, you're losing out on that positive exposure. So all that to say again, I don't know when the top or the bottom of the market is. I just want to be going into the best deals that I'm sourcing at that time, and we roll with that and have to, you know, to what you're saying earlier, try to diversify over a four to seven year period knowing, maybe pessimistically, that I will have losses. There will be a point that I will be investing at the top, but have a confidence that if I do diversify over four to seven year period, you know that one or two years will be, will be a word of pain, but my other you know what, 4 or 5, 6 years will be good winners end of the day. 

Lane Kawaoka  

No different than when I owned single family homes, right? Sometimes I would, you know, a lot of times I would lose money on one out of every three house because of something happening at that one property. But you have a big enough portfolio where you can hit some steady state in there, you'll be positive. Won't be as, you know, substantial is what you thought it was, or what you think it's going to be, but that's how we're going for is, like, you know, dollar cost, average, the ups and downs and, you know, sometimes you run into this, like, I mean, when I was in single family homes, and that was probably what made me get out of it, it was like, man I just lost somebody, just stole my HVAC, like, five grand right there. And I'm like, Well, that was the cash flow for like, one and a half properties for an entire year. And I'm like, somebody like, you know, somebody ransacked my property as, like, 10, 15, grand, right, like, that's and I'm like, okay, I'm not even gonna do the math in my head,that's just gonna make me depressed. You ask the question, like, what are we doing this for again, like, but, yeah, you just stay the course, right? Have that stoic attitude that you know across your large portfolio, especially again highlighting again along that longer time horizon, you should come out ahead. No guarantees, you know, nothing is guaranteed investing, but you should come out ahead if you diversify yourself enough in good deals.

Ryan Miller  

Brilliant. You know, you we talked about the wealth elevator early on, and that's a bit of your framework, and a lot of what you do to help people and we're kindred spirits that way is we just, we just like to help. What's one thing that people can start to focus on if they want to move up just one floor on that wealth elevator, what would you recommend they start doing today?

Lane Kawaoka  

If you're a guy who doesn't even make $50,000 a year as Grant Cardone says you got to work on your income. You know you're not gonna, you're not gonna, like, save $5 per latte and get your net up that way. So in the book, we define the basement level, first floor, second floor, just now you're getting into a credit investor status. Third for fourth floor. First step is figuring out what you are at and then kind of concentrating on what's the tasks before you. When I graduated college, the name in the game was just buying little rental properties, building my net worth. Building my net worth, I eventually graduated the second floor, which is syndication private placements, and then I got into this world of other credit investors and started to learn what the heck people did after the third floor and 50 million, 100 million dollar net worth from the family office land. I do think that exposure is important for people, even on the first floor, but again, I think it's maybe all too often people put the cart in front of the horse, I guess. I mean, go read the book, right, understand what's beyond the third floor. But I think the task at hand is figure out where you're at today and focus on that.

Ryan Miller  

Brilliant, you know, that comes into a framework of just a little self awareness. And a big part of this is understanding where you're at and just for my own journey, if I can and add a candle to your bonfire, is I come up with the three most valuable assets in your possession, or your reputation, your relationships and your results. And so a great place to focus on that is building out those things, your reputation, your relationships and your results. Then once you have that, it becomes a lot easier when you're ready to go out to market, start building, do your first deal, your first fund, for your first partnership, whatever that might be is, if you have a decent amount of reputation, relationships and results, you don't have to be perfect, but focusing on those helps money and deals come to you. And so starting out a lot of times, like you said, is just know where you're at and focus on those big we'll call it. You didn't use these words, but big rocks, right? Instead of trying to save $5 for a latte, it's fine, like, I get it, maybe that's more mindset than actual impact, but you really want to be looking at what are some of the biggest gaps. And we've talked about that before, is just understanding, like, where does this where is this not matching for me, I want to be an investor. I want to invest in real estate, I want to be like Lane when I grow up, how do I do that? The answer is, you really need to focus on some maybe better reputation, right, you're a guy that studies his butt off. He works hard. He knows how to finish, he knows how to close. Maybe it's get out there and start introducing yourself to people who are in the game and maybe get some results. Show people you know how to get things over the line, right, even as an engineer, there was some some powerful things that you were able to, I'm sure, to bring forward into a lot of your real estate career. So my, my final question for you, before we wrap things up, is, what's one myth about passive income that you wish you could erase from everyone's mind?

Lane Kawaoka  

Yes, people think passive income, you do a bunch of stuff and you take rolls in, you know, I always say, easy, come easy, go. You know, sometimes these passive income sources are fleeting. You know, I know you, you worked a lot in the oil fields, right, you get a Gusher, but it doesn't last forever it ain't forever. Real estate is, is the closest thing that keeps going on in perpetuity, in a way but, right, that's, it's just a, there's a spectrum to this, right? You're, you make a referral for in a, like a digital marketing agency format, right? Like, for all we know, your referral compensation could only last for six months. Get a oil, oil well that those things will usually, what, 4-6 years, or something like that, right? And then it kind of dissipates itself the first year or two. You know, certain, certainly, like you are going after this esoteric idea of passive income, but it requires capital if you really want lasting things, you know.

Ryan Miller  

Okay, so, so capital is, is the, the main one.

Lane Kawaoka  

And you, how do you get capital? Well, you create value in the world, right? Like we, we rinse, wash, repeat, renovating units or developing units, or value adding businesses, right, that's how we create value. That's how wealth comes those people who create value in the world, and then that will make you give you a boatload of capital to then for you to convert it into passive income. So some people, I mean, some I mean, when I was first working as an engineer, all I wanted was passive income, because my short term goal was to quit my day job right replace my income. What I, when I started to get to the third floor of the wealth elevator and greater and started to interact with cats like that, I realized that they didn't care what money came out on a quarterly, or, you know, monthly basis. They got away from that cash flow focus. Why, because they had a lot of money eat it, and they had all that cash flow too, right? So they're abundant in it anyway. What the emphasis was was the growing their damn net worth, that capital portion, because they knew that they could convert back to cash flow very easily. You know, you asked me, what would I rather have, $200 a month, or $2,500 right now? I mean, of course you gotta do the math, with the interest rate, right? But I would take $2,500 right now, all day, every day. I would take two grand right now, all day, any day, right? 

Ryan Miller  

Yeah, brilliant. So cash up front. I love it. So before we wrap things up, where should people go if they want to follow the blueprint that you've built, where can they go to get more information and learn more.

Lane Kawaoka  

Yeah, they can go on Amazon, the book is called, The Wealth Elevator. If they pick it up and then shoot us an email, we'll hook them up with the audio book version, just in case they're like me and can't read too well and like to listen to things and then or the PDF if they're a Kindle person team@thewealthelevator.com, let us know you picked up the book. If any accredited investors are out there wanna jump on a call, get to know each other a little bit better, my email is Lane@thewealthelevator.com.

Ryan Miller  

Great. So mention Making Billions. You mentioned that, go on that email, and then they can get some of that audio book as well. So I love that man. So just to wrap things up, make sure that you understand building the right team, the right partnership, it matters, find those frameworks. Make sure you understand debt and leverage, and also seek better understanding of underwriting. You do these things, and you too will be well on your way in your pursuit of Making Billions. 

Ryan Miller  

Wow, what a show, I hope you enjoyed this episode as much as I did. Now, if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better. And make sure to come back for our next episode where we dive even deeper into the people, the process and the perspectives of both investors and founders. Until then, my friends, stay hungry, focus on your goals and keep grinding towards your dream of Making Billions.