How Charles Kao Finds Real Estate Deals With an Unfair Advantage

Charlie Kao (00:00)
You know, I always tell people that like you got to figure out where your unfair advantages are. I use, you know, my market specifically. And also this is also kind of ties into why it made so much sense for us to be vertically integrated. But let’s say that you’re sourcing direct marketing leads. You know, everybody likes to do the out of state owner, the high equity, the foreclosures, all those things, right? Everybody’s hitting after that.

Well, we were like, well, how do we take things one step further to get our unfair advantage?

Scott Bursey (02:00)
Welcome back to the Real Estate Pros podcast powered by Investor Fuel. I’m your host Scott Bursey. And today we’ve got a guest who is bringing a whole new tank of fuel to the world of real estate capital and large scale investment. Charles Kao the powerhouse behind Twin Oaks Capital is joining us. Charles is covering out incredible opportunities, scaling his capital firm with precision. And he’s here to share the blueprint on syndication and strategy.

Get ready to ignite your investment strategies because this conversation is going to be pure fire. Charles, welcome to the show.

Charlie Kao (02:35)
Hey, thanks for having me.

Scott Bursey (02:36)
We are so pumped to have you here. And for those that are not familiar with your journey, please tell us, how did your career begin and what’s your main focus now?

Charlie Kao (02:45)
Yeah, so I tell people that I was kind of enslaved into real estate. I didn’t really have a choice. My dad owned a number of properties in Taiwan where he’s from, immigrated to the United States. And then kind of long story short, he was kind of the right hand man for a woman that owned quite a bit of commercial real estate. And over the course of the 30 years, he bought most of her portfolio. Over that time, my dad is like, hey, I got a son. He’s free labor. He’s got to work for me.

So, you know, every child labor law you can think of along the way from, you know, flat roof commercial buildings to, you know, doing flooring clean house for apartment buildings. I pretty much dead. And so I had a pretty good base. I got out of that and just didn’t want to do anything related to real estate because my dad worked in Fortune 500. And then as I worked for Fortune companies, I realized, you know, if I worked this hard for myself and build my own company, I bet you I could make a lot more money. So that’s kind of how I ended up today.

Scott Bursey (03:40)
That’s awesome. And what markets are you tackling Charles?

Charlie Kao (03:45)
⁓ I’m a, well, so a phrase this way, I’ve been in multiple markets throughout the country, but most of the art markets that I’m not an operator in, I’m more of the passive investor. I always tell people you need three things in real estate to succeed. You need capital, you need time, you have knowledge. So in those areas where I have knowledge gaps, I don’t have the connections with local. I’m typically more of your passive investor, or maybe I’m giving them insight on, you know, how to build self storage, but I don’t have the local contacts.

But as far as actual operating, primarily operating out of central Florida and West Michigan, those markets, any deals I have, I’m the one that, I’m the engine that drives that. So my investors are exactly the opposite of what I said in those other markets. They’re investing more in me and the deals that we do together. And then I’m operating.

Scott Bursey (04:32)
Okay, Florida and Northern Michigan. That’s fantastic. Two excellent markets. Western Michigan. yes. And Charles, curious, what current market strength does Twin Oaks capital leverage most effectively right now?

Charlie Kao (04:36)
our Western Michigan.

You know, our secret sauce, I tell people is threefold. So we’re vertically integrated from the fact that we generally source our own deals while we use brokers and, and other people too, as well. We have our direct marketing and we have our way of sourcing our deal. So that’s an efficiency right there because essentially we can try to get a better deal of not having middlemen involved. Number two, we have basically property management and asset management. So we actually are the ones operating. So we control

Generally one of the highest expense line items for most people, which is the management strategy itself. And then lastly, we’re integrated for the exit as well as the disposition. So really every step of the process, we have our fingerprint on in almost all cases, at least two out of those three areas we control. So that way we can make sure that we hit our returns the way that we see we’re going to. We’re not relying on a third party that may not have the same interest alignment as we do to perform.

Scott Bursey (06:28)
three core fingerprints and that makes sense. Let me ask you this Charles. This is the question that everybody wants to know. What internal weakness are you actively working to mitigate as you scale up your fund?

Charlie Kao (06:42)
Well, you know, it’s a combination of two things. you know, AIs have taken a significant place in our society. We have utilized AI to really essentially replace jobs or also use it to find out who’s not doing their work. So we utilize that. But then we’ve also tried to make some pivots because I can tell you that the biggest thing that everybody’s talking about right now is OpenClaw. It’s a very, very powerful tool.

but it also scares me because week to week, you know, it’s like, wow, I just spent four hours last week learning how to utilize AI. So we’ve even tried to make some pivots too where, okay, can we purchase a business that is resistant to AI, like a trades company? Can we buy an asphalt company? Can we buy a concrete company? So we’re trying to stay ahead with technology, but we’re also trying to find ways that we cannot be made irrelevant with technology too as well.

Scott Bursey (07:31)
Sure, and Charles, a lot of pros can relate to that, think. Systems and team structure are always the bottleneck for growth. It takes real discipline to stop, slow down, and build the right foundation.

So I totally agree with you on that. And Charles, very curious on this, if you can walk us through, where’s the single biggest opportunity for new capital deployment that you see in the next 18 months, let’s say.

Charlie Kao (07:55)
You know, I always tell people that like you got to figure out where your unfair advantages are. I use, you know, my market specifically. And also this is also kind of ties into why it made so much sense for us to be vertically integrated. But let’s say that you’re sourcing direct marketing leads. You know, everybody likes to do the out of state owner, the high equity, the foreclosures, all those things, right? Everybody’s hitting after that.

Well, we were like, well, how do we take things one step further to get our unfair advantage?

So what we realize is that for apartment complexes, it doesn’t matter what size, four units, 150 units, it is public record in my market to figure out when their rental certification is expiring and you can be up to six years out. So what we decided to do is, okay, let’s do this then. Let’s find out who had a six year rental cert.

that was roughly about six to nine months out from the recertification. They’re likely going to have a good amount of expenses to recertify that. And then they’re going, we’re going to basically cross-reference that against your traditional metrics to get extra high quality leads. And what we found is that our close ratio, we would get almost a 10 % response rate of people saying they are interested.

versus maybe like 1%, which is kind of your goal in metrics. And so I know that wasn’t the direct answer to your question for where we see opportunities, but I would say that the real answer is to find where you have unfair advantage in lovers. If you’re not good with quantitative analysis, it’s not gonna be good for you to go out of market to Dallas, Fort Worth, when everybody else that is in that market has QA guys and people that are analyzing that on a desktop very easily. Maybe you wanna go to a hyper local market where you have competitive.

Maybe you have a concrete company, so let’s build construction companies that have a lot of concrete, right? So that’s what I to say is like, don’t be focused on what everybody else is telling you. Don’t be focused on what Fortune is telling you where to invest. Focus on where your unfair advantages are, what you like, and then you can basically apply those unfairly.

Scott Bursey (09:53)
That is answered very nicely. That’s a brilliant contrarian view. And Charles, do you see any threats in the macro economic environment right now?

Charlie Kao (10:38)
I mean, certainly we’ve seen, you know, not try to be political, but we have a kind of a weird scenario with what’s going on with, you know, Iran and kind of worldwide. And so those are all things you got to figure into because that can affect rate uncertainty. It can affect what you have for the stock markets. For example, you know, I had a deal where when we took a very large loss in the market, you know, over a couple of days,

I was originally using a brokerage account as collateral for a deal and the banks were like asking multiple times for statements, you know, so little things like that can influence it anyways. Um, so, you know, I, I see there being risks there too as well, but ultimately I feel that, you know, if you underwrite late conservatively, you know, you shouldn’t have to worry about those things. Like, you know, I’ll give you an example, you know, like when interest rates are at three and a half percent, I can generally buy like, you know, a six and a half, seven and cat.

property pretty easily. And I don’t have to worry about the interest rate spread as much because if interest rates rise maybe to five or six percent and I buy right, then I’m good to go. Now, flash forward today, we have a much higher interest rates than we have now. So I can buy with maybe less margin than I would have in the past because I have a strong belief that the interest rate environment will get better. So I might be buying at an eight and a half or nine cap.

which is maybe not getting interest rates at 7.5, 7%, and that might affect basically my return, but I know that there’s upside in the back and that once rates are dropping, now my returns are getting really good. And obviously the other thing too as well is that, while I pay attention to all those things, I try to stay really disciplined with dollar cost averaging. I had a conversation with a gentleman that, I don’t know how I got roped into it, but we were at a sushi place.

He was talking about real estate being like, you know, this is a terrible time in the market. And I actually had a chart on it that I was using with AI to discuss it. But if you bought one property for, you know, roughly $1 million over the last 20 years, one property year, and overpaid by the market average by 5%, you would still be sitting in a great situation just by dollar cost averaging where people are getting hurt right now.

is they’re overloading basically when money’s really, really loose and then now 80 % of their portfolio has been bought at the wrong time in the market. If you do all those things correctly, you don’t really have to worry about the day to day of what’s going on with geopolitical tensions and things like that. And so for me, as I’ve tried to more lifestyle focused and not be focused on so much in the now because I’ve taken a long term approach to things, I don’t really have to worry about those things as much. I just write it by value.

and buy cash flow today. As long as I follow those rules, I don’t have to worry about that. Now, if I’m buying a new build construction property, needs government financing, I need a specific rate, and there’s also a potential that it could affect lease up, that’s a different thing. But we’re doing less of those deals right now specifically because I’m worried about those concerns.

Scott Bursey (13:30)
And I think we all have our eyes on that. That was broken down very nicely. Let’s talk traction for just a moment here. Charles, where are you gaining the most traction with new investors this quarter?

Charlie Kao (14:24)
Uh, you know, I think it goes to like the 80 20 rule. I used to have, if I had to break it down, I had roughly about 17 to 20 investors that would invest in every single one of my deal. 50 to 55 investors have invested one deal and then maybe a hundred to 140 investors that are in my pipeline that are kind of lingering. I’ve done that. Well, we really kind of just trying to focus, you know, who are those investors that are just really, really easy to work with.

And let’s just start to focus on those four or five, because, know, like I have a one investor, for example, he just came to me and said, Hey, have $900,000 of funds. I want to place. This is the return I want. Can you find a way to place it or whatever? And so it’s like, you know, I can find a way to work with that. And so that’s what we found was much easier than trying to have like, Hey, I’m a staff member. That’s just investor relations. Well, we don’t have any deals. So now you’re sitting around because we don’t, we don’t have deals for you to raise money for.

And so we don’t have to worry about, we need to do deals to feed mouse because we’ve used AI and a number of other sources to really run nice and tight. I don’t have more staff than I need. I don’t have the pressure to do deals I don’t want. And so that’s, I think that’s been kind of our secret sauce to be transitioning to. Let’s just focus on the two or three people that really want to place their funds with us, make them happy. And my one investor, for example,

He had health care, he wants to just focus on investing passively and he’s okay with 8 to 10 % return because once you have $10 million, is $12 million really that much more when you’re 70, 80, 85 years old? Not really, right? So if you can really just build trust with a few really good people, that’s more than enough to grow your business. You don’t need 100 investors and 100 conversations every three months to maintain.

relationship. You really only need to focus on a few. Make them very pleased and then on top of that they’ll be your best salespeople. They’ll refer you people and you don’t have to do anything. You don’t have to say a single thing because they’ll do all that conversation for you.

Scott Bursey (16:23)
And that’s the sauce that I want to use right there. Now, Charles, this is something I think a lot of our listeners want to know when structuring your syndication deals. What is the one non-negotiable term or provision you always include to safeguard your limited partner’s capital? Something most novice fund managers overlook.

Charlie Kao (16:44)
Um, you know, one of the things I see that is very common industry with a lot of syndicators is they’re trying to do that 70 30 structure. You know, there’s more fees out front and whatnot. Most of my deals are structured where I take a very high equity portion, but I have almost no fees out front. So my investors know I don’t really make any money until they make any money. Now the flip side of it, if the deal doesn’t go well, then I’m not making any money and then I’m not making any fees. Right. So you could always say that’s a downside to it.

But one of the biggest things that I try to focus on too, is maintaining the control to make the decisions that I feel are best for that. I think everybody kind of does that, but we really try to focus that like, okay, a third party might say they’re going to do all these things, but we want to maintain vertical integrating our properties. And so we really try to have strong language that we can maintain that control because that control is also what allows me to be interested as a passive investor.

I oftentimes have passive investor in my deals as well as a GP and LP. but I think that’s something that is big. The other thing about it too, as well as is fee structure. I look at this from the lens of the LP that if this deal does not perform, is my GP going to be making a lot of money, right? You know, like, and so I, that may sound weird that most times the LP wants to do that, right?

but I really want to make sure I do my LPs right because if they feel they’re done right, even if you lose money, they’ll be happy. Now, luckily that’s never happened to us, but when I evaluate deals both as an LP and as a GPS for success, I always look at not, did we actually make money? That’s obviously something that’s already guaranteed. The real thing I look at is, did we make the decisions that were right?

with the information we had and did we have the knowledge to get that information? It’s one thing if I didn’t get the information because I didn’t know it was there and I was incompetent. It’s another thing though that if I had their information with what information I had, I made it right. I’m not running to look at five years down the road, did I make these decisions with information I didn’t have, right? So that’s kind of how I look at things from that lens of what is the legal paperwork show?

Scott Bursey (18:51)
Charles, this has been pure gold. The insights into managing risks and scaling capital are just invaluable for our listeners. For those of our listeners who want to follow your journey or collaborate with you, what is the best way for them to reach out?

Charlie Kao (19:06)
I’m on most social platforms. I’m not super active on it, but like LinkedIn I post to. So you just type in my name, Charles. So C-H-A-R-L-E-S, last name K-A-O. And then my Instagram is Charles C. Kao, my last name. And then I’m on Facebook too as well. would say the most information you can get without directly getting a hold of me is my YouTube page.

I’m most well known for self-stores and industrial, even though we have a variety of assets in our portfolio. But I got a lot of videos on there that I’ve done where most of time if you ask me a question and I get it a lot of times, rather than just trying to explain it one time, 15 times, same time over and over again, I’ll try to just put it in one video and answer everybody’s question. And then that way, if you ask me a question, I’ll just send you the video. And that way can get a 15 minute answer versus the one minute I gotta go pick up my kid’s answer.

Scott Bursey (19:56)
Wow, that is awesome and thank you so much Charles for being here today. This has been just a great discussion.

Charlie Kao (20:03)
Thanks for having me.

Scott Bursey (20:04)
And to our listeners, we appreciate each and every one of you. If you got value from today’s episode, please subscribe. We have a lineup of exceptional guests, just like Charles, who are making huge moves in the market. Until next time, keep your standards high and your vision clear. We’ll see you on the next episode, everyone.