Understanding Diversified Portfolio In Real Estate Investing With Lane Kawaoka

MLM 316 | Investing


There will come a time when you need to give up everything you’ve been doing to shift your attention, time, and energy into something much better. In the real estate industry, you need to learn how to start building your own portfolio. Lane Kawaoka, a professional engineer with an MS in Civil Engineering & Construction Management and a BS in Industrial Engineering, left the engineering field and went into the real estate business. He now owns 4,500+ units across the US. Listen and find out what made him decide to give up engineering for real estate and how he managed to start and excel in this business venture.

Looking for some help? Jen is seeking individuals who would like to be featured as a panelist on the show for her Mortgage Lending Mastery Mastermind Series.

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Understanding Diversified Portfolio In Real Estate Investing With Lane Kawaoka

In this episode, as I do so often, I bring on investors because it’s important for you to understand, as mortgage loan officers, real estate agents, and entrepreneurs who are reading as well, the importance of using this vehicle called mortgage lending or the real estate sales industry as a vehicle to create passive income for yourself in the future. We don’t want to be doing short-term gain for long-term pain. Instead, we want to look at the long game that we have, and that’s exactly what our guest has done. Lane, thank you for being on the show. I appreciate it. It’s good to have you here.

Thanks for having me.

Lane is joining us from Hawaii and has been investing for many years and controls a little over 4,800 units. He does crowdfunding. The biggest thing you do is simple passive cashflow. That is one of the biggest things that you focus on. Tell us a little bit about your history. I know you were in engineering. That’s close to my heart. What compelled you to make this transition to begin? We’re looking at passive income as opposed to trading time for money and then we’ll talk a little bit about investing in how others can read in on some new ideas and ways of investing.

My path was the linear path. I was told to study hard, go to school, become an engineer, and start working out in the field as a construction supervisor. Again, falling this dogma of buying a house to live in, working at a job, investing in your 401(k), and maxing up that stupid thing out. I bought this house to live in Seattle and was never home because most young professionals, you’re on the road a lot of times. I started decided to rent it out. I was like, “This is pretty cool. Passive income coming in. Why don’t I do this such a few more times and be able to quit my job and fire my boss?” I didn’t like my first job, and who does? You’re the new guy.

I got more sophisticated by listening to a lot of podcasts and books. I started to learn more about the difference between gambling on appreciation in places like Seattle, California, investing more for cashflow, eventually building a portfolio of eleven rental properties. I’m sure people have heard turnkey rentals, these little $100,000 houses out in the Midwest. I bought 4 in Birmingham, 5 in Atlanta, 1 in Indy, and 1 in Pennsylvania. That was my portfolio around 2015. As you become more of a credit investor, it’s more of a tax game, infinite banking and getting your legal systems in place. That was the startup, simple passive cashflow.

To go from $100,000 little houses plucked here and there. We all know it’s the monopoly game to go from these little houses and trade them in for hotels, the big houses, and the multifamily. How do you go from owning 4 or 5 of them here there and yonder to managing 4,800? I know you control 4,800. Do you own all 4,800 or do you own percentages of each one of these units? How do you go make that transition? How did you make that transition into that higher echelon?

I’m a general partner or sponsor syndicator of apartment complexes, but 99.9% of the readers here, unless they’re duped into paying $30,000 to $50,000 to go into some group coaching program, are going to be passive investors. Why wouldn’t you want to be? The returns are such where you can be financial. Most of the clients are financially free in 4 to 7 years if they’re already accredited investors. You don’t get the debt in your name. You don’t get any of those management headaches, and the legal liability is pretty much nothing. You get to diversify over different projects, geographic locations and it’s a beautiful thing.

You can syndicate anything out there. Click To Tweet

That’s where I started first. I had eleven rentals. I started to realize single-family homes aren’t scalable. If people want to know, I have property management to do all my dirty work for me. I have to let them know and prove expenses here or there. With eleven rentals, I had maybe an eviction or two every year, some bigger catastrophe that happened every quarter like a chief along in the house or flooded the basement, something like that. No problem. At a few hundred bucks per property, that’s $3,000 a month. That’s nothing. I don’t know if a married family can survive of that.

Granted, that was a lot at the time. You start to realize, especially as the property is appreciating, you have more equity, and you all are mortgage loan brokers that like to get people to churn these loans. It’s hard for the clients to get at the equity efficiently without paying the mortgage brokers or a big loan origination fee if you guys are on the other side of that.

As an investor, you start to realize owning these properties is very efficient with a lot of friction costs best. Once you become more of an accredited investor to invest more of as an LP partner into many projects, dozens of deals, that was where I started to join different masterminds, groups, get other high net worth accredited investors. I started to move more towards investing in this type of direction instead of being a small buck on investing.

There are a couple of other things that you said maybe didn’t say, but I’m going to bring out a little bit here as to when you’re investing one after another. That’s fine if you’re going to get started that way. The key is to get started and do something. My husband and I did invest over a period of years. We would buy a house and then we start saving again, and so on. The market went up or the market went down and the rates went up and down, and our income fluctuated because we were mortgage people.

All of those crazy things played a role where we missed opportunities left, right, and sideways because we didn’t have enough for a downpayment. We hadn’t saved enough to do a downpayment. When we did, we maybe couldn’t find the right house because it was too competitive and all these opportunities went by.

One of the things I love about what you’re doing, working with multifamily and doing these syndications, is that when I have the money, I reach out and say, “Who’s got one? Let’s make some more money.” I love that you said you want to fire your boss. I want to go back to that as well. For those that don’t understand, can you explain in simple terms the difference between accredited and non-accredited investors?

Accredited investors, people can Google this on the SEC website, but essentially, it’s not a super affluent person, but it’s somebody who has got some money to play around with. They make over $250,000, maybe a little bit more if they’re married or they have a net worth of over $1 million, not including their primary residence. A little trick is to take a key lockout, you’ve got dollars, and you’re accredited. The truth is most deals out there, I would probably argue maybe 90% take non-accredited investors.

You aren’t in the company of a syndicator sponsor that has access to this, but where most people will look at crowdfunding websites, which to me, aren’t a great source for deal flow. They’re marketing the deal. They’re playing appropriate dealer and therefore, they’ve already triggered that general solicitation and they’ve marketed a deal.

MLM 316 | Investing

Investing: Once you get around half a million dollars, you need to start thinking more as a passive investor, limited partner, and searching, expanding your deal flow with your community to find other pure passive investors and sponsors to invest your money with.


Therefore, they could only do what’s called a 560 offering, which only takes in accredited investors. Their credit status doesn’t mean much, but there is a progression to this. When you started and I started, we bought little rental properties. We were breaking back then. If you’re under a $1 million network, you’re broke and you’re starting out, and you buy rental properties to build your net worth up.

When you get to be about $250,000, it’s the hardest money to make, and then it comes easier. Once you get around $500,000 to $1 million, you need to start thinking more as a passive investor, limited partner and expand your deal flow with your community to find other pure passive investors and sponsor instant operators to invest your money with and start to invest with the pros.

Tell us a little bit about equity growth in this type of investing as opposed to cashflow because as an investor, you either buy for cashflow or equity or both, if you’re lucky. These days, I’m all about cashflow. I want to make sure everybody understands that. Financial freedom is not having $1 million or $5 million. Financial freedom is when your passive income exceeds your expenses. Now, you’re financially free.

That is the definition from Sharon Lechter, who wrote Rich Dad Poor Dad. That’s financial freedom. It could be $60,000. It doesn’t have to be millions, but helping us understand what happens in this situation when you invest in something for the cashflow, but then there is an equity gain. Where does that come into play for investing in these syndicates?

You can syndicate anything out there. You can syndicate a pizza parlor, burger franchise, real estate development, or a stabilized cashflowing apartment with value add opportunities. The world is always true. You can do anything. Let’s start with a turnkey rental. With a turnkey rental, there is no value-add in it. It’s a little rowboat out there in the ocean sloshing around. If it’s a good market, you’re making money. If it’s a bad market, you’re losing money in terms of the value, but it’s still cool because you’re still cashflowing and it’s still anything better than you’re getting in the stock market.

My clients are high-paid doctors, lawyers, engineers, or business entrepreneurs, which a lot of your readers. We’re not broke guys. We’re not the guys that work for under $50,000 or $60,000 a year. A lot of people that are reading make work with a lot of these more active types of real estate investors. They’re the guys who don’t have good-paying professional jobs or businesses. They have to get their hands dirty or that might be their main thing. Maybe they’re good at flipping houses and that’s cool for them.

I liked those guys because they paid all my taxes for me. We can talk more about that later. In the whole world of real estate investing, you have active people and passive people. The difference between the active people is they’re putting their sweat either finding good deals. I talk a lot about turnkey rentals for people getting started. Maybe people could say, “You could find a better deal with more value add opportunities.” The highest and best use of my clients and probably the people reading is to go churn more mortgage clients, screwing around getting a contractor to do $50,000 upgrades in a single-family home.

If it's a good market, you're making money. If it's a bad market, you're losing money in terms of value. Click To Tweet

It’s not your highest, best use. Some of my doctor clients go into the weekend, do an extra surgery and make way more money to pay, buy a turnkey property or put your money into syndication, which is the best of both worlds. Going back to the analogy of a turnkey being a little rowboat, a syndication deal is like a cruise ship in a couple of ways. First, it’s very robust. You may have major expenses pass me, but if you’re sitting on a cruise ship, you don’t feel any of the rocking in the ocean. There are no capital calls unless there is a catastrophic failure.

The other thing is cruise ships have engines where the little rowboat doesn’t even have it or older. Even if the economy goes this way, you can power through the currents. If you’re doing things like value-add or what’s value-add? It might be as simple as changing out the flooring, the new countertops, new appliances, a paint job, and increasing the rents up to what they should be. Easy X seller is value add or lowering expenses that is what the magic of commercial real estate properties as opposed to residential properties, which is basic comps.

It fluctuates more with the market, the market is more sensitive to it than the others. It’s not fail-proof, but it is. I love the analogy of the rowboat versus cruise ship.

We take our faith into our own hands. There are two kinds of appreciation. There is forced appreciation where you change the net operating income of building divided by the cap rate and you’ve created that value-add. There is market appreciation, which is luck in my opinion.

It depends on who’s wherever. That’s something that someone has to understand. When you’re looking at single-family homes, it’s all about the fair market value. Whereas, in commercial, it’s the value of what the income is that the property is bringing in to the owners. I’m not going to get technical with DSCR and all that stuff. I want to make sure people know that the value is determined by how much income the property can generate after expenses. That’s the most important thing. That’s cool, too. How long are these investments generally? What happens if someone says, “I need my money back.” I get that I’m doing this, but what if I need my money back for something?

There is a big range of different projects out there. You can put your money into all types of projects like development deals. You can build things as quickly as 6 or 18 months is more of a general rule of thumb for development deals a couple of years. For stabilize apartments, where the plan is for two goals, you want cashflow and appreciation. Maybe you only remove tenants naturally as tenants come up and on all of us own rental properties and no on average tends to move out in a couple of years. Therefore, if you go through 5% or 10% of the units every single month, you get through most of it in about a couple of years. You tack on a couple of years on top of that to stabilize financials.

You don’t need much more than 3 to 6 months nowadays, but we call it 4 to 6 years as a normal time horizon. To answer the question of like, “What if I need my money back?” If you need the money back, you shouldn’t invest. This is for accredited investors. If you need $50,000, you probably aren’t managing your money properly. Where else are you going to get a better risk-adjusted return? You got to put the bread in the oven to bake and you can’t pull it out until it’s ready. That’s why it’s nice to find investments that also cashflow, too, so it does give you that cashflow stream as uploaded to development deals where you don’t get anything until the property is sold.

That’s why I was asking that question because a lot of people get in, they’re afraid, and they’re risk-averse. Especially in the mortgage industry, one, the real estate too because there is so much ebb and flow on income, it goes up and it goes down. There is a fear of letting go of some cash for fear that the next market drop might affect it. Again, there is cashflow. What do you think the average cashflow is per month? Not on a percentage, but in dollars. What do you think that equates to when someone’s buying? Let’s say it’s a $10 million property and you’re asking for $100,000 from everybody. What do you think that generally looks like for someone to have that income?

MLM 316 | Investing

Investing: No ordinary income is not as good as passive income. You want to, over time, move from ordinary income to passive income.


We usually go off percentages because you never going to buy always 1% of a building. The buildings range from 100 to 400 units. From an investor’s perspective, it doesn’t matter. You’re putting in $50,000 or $100,000 per deal. Maybe the capital raise is $5 million or it’s $20 million and you have your pro-rata share of the income. That’s why we say it’s more of a percentage basis. Typically, investors are in a couple of dozen deals after a few years. That negates that whole question of like, “What happens if that one deal takes longer?” Relax. That’s why you have this diversified portfolio and it pops like a pop mark.

I was approached by a company that said, “If you put $1 million in this, it will be great.” I was like, “I don’t think I’m going to do that. I’d rather spread it out a little bit more than putting one big chunk.”

My role with my investors is no more than 5% of your net worth into any one deal.

That’s a good thing for everybody to hear is no more than 5% of your net worth into any one deal. That’s wonderful.

If you would like to do $1 million, I’m not going to stop you. That makes their job a lot easier.

If someone can do $1 million for every deal, then that makes more sense. If all you have is $1 million, don’t put it all on one color. What is the simple passive cashflow method that you talk about?

A lot of it plays on each other. For most accredit investors and I think the readers here, your guys’ adjusted gross income is much higher than $200,000 to $300,000. You probably want to start employing some super professional status on your taxes. A caveat, I’m not a tax attorney. I do this all the time. The idea is you guys reading need to learn this stuff to empower yourself to have an educated conversation which your CPA and your tax professional. If not, they’re going to do it the lazy way. That’s easier for them. That’s probably not the best for you.

We take our own faith into our own hands. Click To Tweet

Unfortunately, you have to go into deals first that do cost segregations and give you this big boatload of passive activity losses. Passive activity losses is what allows you to drive your passive income down to nothing. Unfortunately, a lot of you folks and my clients still have high-paying jobs, which is ordinary income. No ordinary income is not as good as passive income. You want to overtime, move from ordinary income to passive income, as passive losses that drive that down to zero, and pay less taxes. That’s where I think most of the people reading here and my clients, they’re at the bigger bang for their buck.

If we can drive somebody, they’re making $600,000 a year and driving down to $400,000, we saved them $100,000 taxes. That’s a lot of pain in the butt short-term rentals or rental property income that tax savings in one-day savings. Step one, you got to go into deals, but the problem is, who do you trust? Everybody’s got a podcast out there, got some bull, or good marketing specialists. You guys are all lending brokers and realtors out there. You guys are like, “This is a marketing game.” To me, the only way to cut through all the noise is to find other pure passive accredit investors and build your relationships with them and figure out where you invest from there.

Once you do, that kick starts step two, now you have the passive losses and you can play different games, which are taxes. Personally, I don’t pay too much taxes. They can go look at my taxes at SimplePassiveCashflow.com/tax. I have all passive income, so I write everything off and I don’t pay tax. The third is for high-income earners is infinite banking, but that’s third on the list. It doesn’t move the needle as much as the first two, but once you get these three things done, most people who financially free in several years, possibly.

Thank you for sharing that. This is something that requires some work. It requires taking some action but taking action in a very strategic way so that you understand exactly how it works. Unfortunately, in 2008 when the credit crisis hit us. For loan officers, loan officers are 100% commission, but they’re W-2. Getting away from taxes is not the worst, but it’s so difficult to do, whereas real estate agents can still do a $10.99. They still can write off a schedule C. It’s very difficult for loan officers. This is another avenue that can help weigh that difference between what we used to have, which was non-reimbursed expenses.

We used to write everything off through that. It’s gone now. There is no mechanism to reduce the gross income that a loan officer has unless they can pull into some passive income to reduce that. That’s important for people to understand as well as this is a good strategy, not only for cashflow but also for an investment and tax benefits as well. I’m not a tax account neither. We both know because we’re involved in it and we know how it works, but we’re not the expert.

We also don’t have jobs anymore like the CPA person. They’re still stuck in that job. They haven’t figured it out. If you are in a real estate professional status, like one doctor makes a lot of money and the other spouse doesn’t do much, they can somehow dedicate 750 hours and jump through other hoops. You can unlock that barrier to use passive losses to offset that ordinary income. If you’re unable to do that, maybe that conservation easement is another solution. There is a myriad of different ways that the wealthy get what they want.

The key is to talk to your financial planner and talk to your CPA before you make any of these decisions. I will tell you that most likely, your financial planner is not going to like you doing something that doesn’t make them money. That’s something that you need to be aware of. They may say, “That’s a bunch of this.” Naysaying but understand from their perspective where that’s coming from and that’s why you need to have the CPA as well as colleague investors who have gone through it to understand how they’re utilizing it.

Unfortunately, what it does is it throws you into regular financing becomes more difficult. My son has been trying to refinance for four months and underwriting is driving him crazy over a $36 passive income loss. They don’t understand what’s going on there and that’s why there is so much of a push going into non-agency for a lot of investors because underwriting doesn’t understand it.

MLM 316 | Investing

Investing: Find other pure passive accredited investors to know where to invest, know taxes, and infinite banking.


You’ve got all these K-1s. K-1 where he owns 0.0000000001% of a syndicate and has a $36 loss. It’s a problem. There are different kinds of problems downstream, self-problem here, but now he has some different problems downstream. We need to be aware of that. As we finish up, thank you so much for sharing all of this. I liked that. I know you run the REI Aloha. Where do you run your REIA? Which island are you on? Where are you at?

I’m on Oahu near the Main Island.

You run the REIA there. That’s another thing. Let’s talk about REIA. I know there is a capital area of REIA here that I belong to but in the Washington DC area. Is REIA a good thing for someone who is thinking about doing this or is there too much noise in REIA with all of the different types of financing that’s out there that a lot of want-to-be-investors show up and then they get confused? Tell us a little bit about what we should be looking for if we want to start jumping into REIA to learn more and meet more people.

The biggest thing is finding other colleagues and pure passive accredited investors to hang out with. Unfortunately, the local real estate club is not going to be that place because most people think of real estate is a get rich quick and broke. Broke being under $1 million net worth. They’re house flipping, wholesaling, maybe buying all rentals but they’re certainly not looking to syndicated deals because the people who are also syndication, private placement investors, most of the clients, for me, it’s between the ages of 40 to 55. They got families and make multiple six figures.

They don’t have time to hang out with a bunch of boroughs at happy hour at the local real estate club. A lot of the free online forms, it’s a bunch of kids on there, too. This is why we’ve changed the way we’ve format things. A lot of it’s more private invitation to accredited investors only for intimate, more private, more secure and that’s the way we’ve gone. That’s my advice that I tell people a lot is don’t waste your time with these types of clubs. You can get the sense of it. It was out there. It’s a time-waster. What you have to do is be on the lookout for accredited real passive investors.

Unfortunately, they value their privacy a lot more than the average Joe. Stick at it. If you spend 2 to 3 years following and following up with the right people, you’re going to start to build that little community. This is why we created SimplePassiveCashflow.com and the family office, a Honda mastermind and the smaller, more intimate community events that we do.

It’s to try to help people, mentor and help each other understand.

Passive activity losses are what allow you to drive your passive income down to nothing. Click To Tweet

There is a lot of Sharks out there, guys who love to get Jen to put in $1 million until some random deal. That doesn’t make sense. That would let her do something like that. Never trust a syndicator. That’s what I tell people. Don’t listen to what I’m saying, but meet the other passive investors. Build real relationships with people. Once you get to financial freedom in five years, it’s all about social relationships. Begin at that.

What would you like to leave everyone with as one piece of advice?

It depends on where you are. If you’re starting out, start off with single-family home and turnkeys. If you’re more of an accredited investor, go into private placements and syndications, and put different points of the journey. Figure out what your highest and best use as you read this show. Feed the beast. Build your machine, wheel and mortgage business or your realtor business. That’s going to be the quickest way to trade time for money to put into real estate investing because this is not an activity. This isn’t passive investing.

That’s key. I used to say that and I still say that. I say it on a whole bunch of podcasts that I’m on. When you have your why or you have your vision, it’s not about the deal. It’s about closing that deal so that you have the cash to do what you want to do and knowing where you’re going to place that cash and not knowing is too easy to spend. You find yourself 40 years down the road saying, “I’ve made all this money, but where is it? What do I have to show for it?” That’s what we’re going to leave you with. Thank you so much, Lane, for joining us.

I love your expertise. I interviewed a couple of different syndicated partners and property managers and everyone has a little different something for us to be reading to and good nuggets for us to learn from so that we can make the right decision. I appreciate all the coaching and mentoring that you’re doing for the readers here. It means a lot. I love what you’re doing. Congratulations on your success. I hope that it continues to grow for you.

Thanks for having me.

Everybody, thank you so much for reading to us and please don’t forget to subscribe to YouTube and make sure that you give us a great five-star rating and write us a review, whether it’s about what Lane talked about or something that you want to talk about or generally what you’re loving with the show. We sure would appreciate that feedback. Until the next episode. We’ll see you soon.


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About Lane Kawaoka

MLM 316 | InvestingLane Kawaoka currently owns 4,500+ units across the US. He lives in Hawaii and recently quit his day job as a Professional Engineer with a MS in Civil Engineering & Construction Management and a BS in Industrial Engineering.

Lane partners with investors who want to build their portfolio, but are too busy to mess with “tenants, toilets, and termites” by curating opportunities in his “Hui Deal Pipeline Club” where his investors have personal access to him and know that Lane is personally putting his money on the line too. The Hui Deal Pipeline Club has acquired over $500 Million dollars of real estate acquired by syndicating over $60 Million Dollars of private equity since 2016.

Lane reverse engineers the wealth-building strategies that the rich use to the middle class via the Top-50 Investing Podcast SimplePassiveCashflow.com. Lane’s mission is to help hard-working professionals out of the rat race, one free strategy call at a time.


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