Lane Kawaoka on Multifamily Investing,Rising Interest Rates, & Why Value-Add Matters Now

Lane Kawaoka (00:00)
I call it the buy hope and pray model where you buy and hold and be able to cash flow. have to be doing value add in the process, which is obviously more riskier, but you have to be, you know, that’s the only way you’re going to get alpha I think in these markets. And it’s going to be like this for quite some time.

Michelle Kesil (01:47)
Hey everybody, welcome to the Real Estate Pros podcast. I’m your host, Michelle Kesil. Today I’m joined by someone I’m looking forward to chatting with, Lane Kawaoka, who is a real estate investor focusing on multifamily and larger scale operations. So excited to have you here today, Lane.

Lane Kawaoka (02:07)
Yeah, thanks for having me. Aloha everybody.

Michelle Kesil (02:10)
Awesome, let’s dive in. First off, those not familiar with you and your work, can you share what your main focus is these days?

Lane Kawaoka (02:17)
Yeah, I mean, we focus on multifamily apartments in the real estate sector and residential properties, ⁓ kind of stay away from office, ⁓ strip malls, stuff like that. But anything that involves tenants renting boxes to live in, that’s probably more in our sector.

Michelle Kesil (02:33)
Awesome. And what made you get started as an investor?

Lane Kawaoka (02:39)
Yeah, 2009, I was working a couple of years as an engineer right out of college. I was told to go to school, study hard and buy a house to live in and invest in the 401k. But because I was always traveling over for work, you know, as a younger engineer, they kind of put you out on these projects. I was a construction supervisor back then. I just decided to rent out my house on a whim.

And very early on, was like, Whoa, this is kind of cool, right? And I’ll eventually be able to rinse, wash, repeat, do it again. Um, by, you know, bought a duplex a couple of years later in Seattle. And then by 2015, I had 11 rental properties. but up to that point was doing, you know, just a little turnkey rental model by the high, by hope and pray model. But in 2016 started to get more involved in syndications and private placements as it became more of an accredited investor at that point.

Michelle Kesil (03:33)
Awesome. And what markets do you operate out of?

Lane Kawaoka (03:36)
mostly the, the red States. so your Arizona is your Texas, your Alabama is your Florida’s. I guess someone calls the sunbelt States, but you know, lately after the summer of 2022, what interest rates up, we’ve kind of had to definitely pivot. So I’m a little bit market agnostic. it depends on the deal. If we’re buying something where we’re buying, we’re able to pick it up at $250 a square foot and able to sell it in.

you know, current market comps are 500, I quite honestly don’t care where it is. I mean, obviously I want it to be in America where I feel like we have the best legal system. I don’t know if that’s a good thing, but you know, that doesn’t preclude me from, know, doing, we’ve done deals in New York City, very blue state, but you know, it depends on the deal. it’s the deal is a rather just buy low, sell high flip job.

I’m okay going to a blue state, but if I want if I’m have tenants for long term more than a year or two I definitely want to be in one of those Sunbelt red states

Michelle Kesil (04:38)
Yeah. And so you mentioned having to pivot. Is that just location wise or are there any other type of pivots that you have been doing?

Lane Kawaoka (04:47)
Yeah, I mean, in 2022, interest rates skyrocketed 40 year high, quickest time in history. I mean, if you had floating debt, you got absolutely killed. If you’re not talking about it, you’re lying, or you haven’t been around doing deals in, you know, 2016 to 2018. I think you’re seeing a lot of new operators come and being bored today because they just weren’t, didn’t have to go to that, which I guess good for them, right? It’s better to be lucky sometimes.

But yeah, you know, when interest rates went higher, you know, and you know, the hard thing is like when you buy these loans, typically, if you’re doing any type of value add plan, you’re buying it with a one to three year or even five year bridge note. The reason being is you have enough time to be able to add value to the units. But if you’re unlucky, and the market corrects 20 to 30 % downside, like we’ve seen over the last couple years,

You know, you’re probably underwater on your senior debt at that point, even if you’ve implemented your business plan and increase, you know, the NOI. So at this point, ⁓ you know, unless you had like five, six year debt and greater, the properties are really not marked to market today, right? I think that’s what you’re seeing in the institutional world. A lot of these, these big property owners, you know, even the ones that start with B, you know, those big guys, they are having own

owning a lot of these assets and yeah, they’re making their pain, their preff, but they’re owning assets that are worth 70 cents on the dollar than it was 100 and haven’t marked to market that yet in commercial real estate. It’s probably been a bigger impact than the 2008 financial crisis. That was more residential pricing where there’s a lot more transparency where in the commercial markets, again, I keep saying this term that you don’t have day to day mark to market.

where the prices are actually marked to what you’re actually worth today.

Michelle Kesil (07:19)
Yeah, definitely. There’s a lot of nuance and uncertainty there.

Lane Kawaoka (07:24)
Yeah. And I think at this point, you know, interest rates is one thing that’s a big part of your, your debt service. But we, I’ve seen, like, I’ve had a 300 unit apartment complex that we bought in 2020 when interest or the taxes were 150,000 when we first got started. And then, you know, recently now it’s like over 400, right? So these line item expenses keep going up and up and up. And I think it’s just getting harder.

Right? I mean, maybe I sound like I’m complaining a bit, but that’s just, I think that’s the nature of any game out there. It just gets harder and harder to compete. So I think you have to rely more on heavier value add. No longer can you just change out some flooring, change an appliance, charge tenants $50, $100 new tenant, appliance package. You have to do even more value add. Right? I mean, when I first got started buying little rental properties in Alabama in 2012,

I was able to buy a nice class B property for 80, 90 grand. That rented for 900 to a thousand a month. Today, you know, that same property rents for about the same thing, go figure, but it’s about 140, $150,000. So that obviously your debt service is a lot higher because your principal amount on your loan is a lot higher. I mean, it’s just, it’s just getting harder and harder, right? And you no longer can just buy properties and you know,

I call it the buy hope and pray model where you buy and hold and be able to cash flow. have to be doing value add in the process, which is obviously more riskier, but you have to be, you know, that’s the only way you’re going to get alpha I think in these markets. And it’s going to be like this for quite some time.

Michelle Kesil (09:37)
Yeah. What does value add like look like?

Lane Kawaoka (09:40)
Value add could be I mean from a mathematical point of view. It’s anything you’re doing to increase in that operating income So net operating income is the Delta between your income or your expenses so if you can increase your rents or Charge people trash valet or all these others, you know cool ways to make money through the other income category You can increase your top line revenue. I think most times we’re doing that right because you know, it’s

As I think a lot of people follow Uncle G, Grant Cardone, right? He says, and it follows suit with your personal finances too. It’s easier to make more money than it is to save it. Of course you utilize artificial intelligence and you put in better business practices from the previous seller that you you sold on the property recently where you’re trying to cut costs here or there, bringing in better property management, know, streamline things to save some costs here or there.

But obviously with expenses going up due to inflation, it’s hard to kind of hold your expenses, hold that line. But it’s a two-front war, right? You’re increasing income and decreasing expenses, and that’s what increase your NOI. And since we’re all real estate investors, especially in the commercial realm, your property is valued based off your net operating income divided by the prevailing cap rate.

So whether that cap rate is five or six, you don’t have control over that denominator. The denominator is that prevailing cap rate. That’s what assets are traded for in the market. You have control over that numerator, that thing on the top of that equation, in that operating income. So if you can impact that, that’s how you impact your sales price at the end of the day.

Michelle Kesil (11:26)
Yeah, absolutely. And what are you most focused on solving or scaling to next?

Lane Kawaoka (11:31)
You know, I you I talked about the SWOT analysis initially, right before our pre-call here. I mean, I kind of look at, you know, I know this is a real estate investing podcast, but, and I, like, I love real estate. think the tax benefits, it’s one of the most archaic businesses out there, right? Renting boxes to people to live in. I don’t think that’s going to be going away anytime soon.

I still like the workforce housing sector because the rich are getting richer and the poor are getting poorer and the middle class is shrinking to the lower middle class, which hopefully they rent apartments from us. I think that though long term, this is really impacted by interest rates, right? And because that’s really what impacts the commercial real estate prices out there. And if you’re, think every investor needs to have the Chantham financial curve and the CME FedWatch tool bookmark.

Now they don’t need to be Aena like me and check it every couple of weeks, but they definitely should be checking at least once a quarter or a couple of times a year and seeing where the, where they’re essentially like the biggest odds. I think there’s a, that betting website out there that everybody likes like Kaloshi. don’t know how to pronounce it, but what the fedwatch tool is for CME and the chant them financial curve is these are the rate cap for drivers that people like us will use. So these guys got skin in the game.

And they’re not messing around. So they put out forecasts and where they think interest rates are going to be going in the next, you know, coming years, decade plus. it’s obviously just an estimate, right? But I think it’s, you know, obviously large institutional firms use these as the backbone for a lot of their financial models and predictions and the for looking statements. and I think it’s for their mom and Paul investor is definitely something that you should have bookmark on your desktop and check it from time to time.

Michelle Kesil (13:23)
Yeah. So in terms of like what you are looking to scale to next, what is, what is that?

Lane Kawaoka (13:31)
Yeah, I think it’s just being opportunist. I would I try and invest in things that are going to be around on a 10 year trend. You know, like I, so for example, I’m not going to bet on who’s going to be the next leader in the next one or two years in the AI race between open AI, Gemini, Claude, et cetera. I want to, I want to make my bets or my investment theses around things that I think that are going to be long-term sustaining such as workforce housing. mentioned.

another thing is, you know, energy. I, know, with AI becoming more and more prevalent, and you know, with people, know, so much energy goes into a silly chat GPT requests, right? I mean, and we haven’t even seen the widespread adoption of this by regular people. energy demands are going to be going up. So that’s why, you know, I invest in oil and gas and also for the great tax benefits where you don’t need real estate professional status.

And you know, so that’s something that I’m bullish on. I do think that at some point it’s going to push the country and the world to go nuclear. Although there’s a lot of careful on how I choose my words here. There’s a lot of people that don’t like that for obvious reasons because they think a Homer Simpson runs every nuclear power plant out there and they think it’s rather dangerous. I’m not going to comment on whether it’s safe or not.

but I do think that we’re gonna be going that direction. But for now, the vast majority of money is going to, you know, old school oil and gas. And I follow like what the big guys do. If you look at Berkshire Hathaway, Warren Buffett’s company and KKR and the guys who start with B, if you look at their portfolios, you know, yeah, they invest in a little green energy, but the vast amount of their portfolio is still the tried and true oil and gas.

market. So that’s another thing I do, I kind of spy on what the what the big guys do. And you know, you guys can set your own alerts up yourself, right? Like I mentioned a few Apollo, KKR, Blackstone, BlackRock, Berkshire Hathaway, you can kind of see insights on the way that they invest and what big trends that they’re investing on. You know, other things that I like, you know, I like things that do well in wars, wartime, not that I like war, but I’m just

I’m always thinking, well, what’s the next black swan event that’s going to happen in the future? So for me, I think that’s, that’s a war. I were already seeing a couple of them happen right before our eyes. And, so what that means is like, I want to invest in things that are more of an infrastructure play. I think I don’t want to invest in SaaS products and software anymore, because we’ve seen the disruption. Any, any joker can get a vibe coded product out there and the bear to entry is so low.

I think that there’s a huge opportunity from the, that blend between where digital technology and where there’s huge displacement with AI and when like the physical land. I don’t, I haven’t really synthesized what exactly that is yet, but you know, maybe an example would be a electrician, right? A highly technical trade, but you need the guy to go in there and fine tune it and install it. Whereas

You know, at one time, there’s like a week ago, I was thinking, you know, plumbers is a good way of playing it, right? Cause you need the guy to go in there and turn the wrench. But you know, that’s a ⁓ system like, you know, the toilet is rather standard, right? You know, where I could see them automating that process. Whereas, you know, when you’re going in and installing, say a data center, that’s a lot harder for you to, you know, automate with robotics, et cetera.

You know, so these are the ways that I’m kind of thinking of playing in. you know, I, with that investment thesis of, know, what if in a war, what if it were a session? don’t like short-term rentals. I think they’re like one of the worst things to invest in because let’s, let’s look at it guys. Like, when do you go on a vacation? When do you use a short-term rental? When you have, when economy is doing well, when the economy is not doing well and your stocks are taking a crap, you do not go on vacation.

And you do not use these cool Airbnb’s. I think we’re in a bit of a bubble with that type of stuff. And, and doesn’t, and also you could just be shut down by the municipality making a attacks or a play, a political play to take you out. Right. I mean, I live here in Hawaii. You know, Hawaii is very against Airbnb’s and, know, I’m not going to get into the politics of people taking homes away from the residents, but

I know it doesn’t do very well when people are renting out $200 a night, Airbnb’s where yeah, like the big companies are grabbing $500, $600 a night hotels. obviously that obviously goes to, you know, your big companies, but a lot of that flows down to the, you know, the residents here in Hawaii, right? So that’s not good for the economy. so there’s a lot of politics against shutting down little Airbnb’s to block that type of stuff.

So maybe the lesson learned there is whatever you invest in, try to look at it from a legal standpoint and political standpoint, Be on the riding tail of something. And I think that’s where workforce housing has a good thesis around that, right? To not to get too much into details, but that’s little bit of things kind of on the investment front that I’m thinking of these days.

Michelle Kesil (19:44)
Yeah, it’s definitely an interesting perspective. And so are you continuing to invest in real estate or is that something that you’re more cautious about?

Lane Kawaoka (19:56)
Yeah, you know, I still always invest in real estate because I haven’t settled upon this for myself. Like what’s my net? What’s my blend of real estate? I’ve been wrong in the past. Like, I mean, I grew my net worth pretty greatly from 2000. And when did I buy my first rental 2009. And I caught a good wave with real estate. And some of this is market dependent, obviously, but I put my money where my mouth was and I put

100 % of my net worth. pulled my 401k, I pulled my Roth, and we bought rental properties. And then we went into syndication deals in 2016 plus. And I’ve, I rolled the wave, but in 2022 to 2024 commercial real estate came down 30 % off the peaks, and I got punched in the face pretty hard. And I’m realizing myself that I was not diversified. I think at the time I had maybe 90 %

my net worth in that stuff. think the rest was in, you know, infinite banking life insurance, thankfully. But, you know, I don’t know if, you know, I’m not a financial planner, so don’t listen to me. But I’m kind of like, well, it’d nice to have maybe a portion in real estate, right, stuff I’ve done in the past, real estate syndications, apartments, things I know, another quarter in real safe stuff, like life insurance, closing funds.

another quarter in private equity, right? That’s where investing in businesses that are, you know, higher risk, higher return, obviously, and then maybe another section in private credit, right? If you’re not familiar with private credit, it’s one of the biggest things that Wall Street is getting involved in these days with banks kind of pulling back in that sector after 2008. But it’s essentially think of it like a bond. You know, you’re investing more on the debt side.

of deals or in this case, private businesses that are on the road, you know, by professionals, but that’s kind of what I’m thinking for myself personally. But, ⁓ you know, my new book, the wealth elevator, I talk about the different stages of the wealth building game. You know, I’m on the higher floors, floor three, four and above. If your net worth is zero to one million, don’t listen to a thing I’m saying.

you know, you probably should just buy a little rental properties like I did from 2009 to 2015, 16. Yeah. And then, you know, most of the folks I’ll interact with these days are passive investors. we do events for folks that are accredited that are, you know, now trading in the rental properties and getting involved into larger deals as an accredited investor, because they don’t want to really own real estate because of the legal liability, which I was there at one time.

you know, when I was broke working my engineering job, I wasn’t too much of a, I know, I mean, people could have sued me back then, but they couldn’t get too much, can’t get too much blood from a rock. Is it, that’s what they say. I’m not giving anybody legal advice, obviously, but, plus I didn’t know as much as I knew now back then about that type of stuff. But you you talk to a credit investors and I think every investor should have at least five, a credit investor, close friends to be able to interact and bounce.

this stuff around. But yeah, I think that’s a it’s a big issue that you hear all this financial advice out there investment advice. But at what point in the journey does this make sense? So in my book, The Wealth Elevator, I have different floors of the Wealth Elevator. First floor, second floor, third floor is kind of when you’ve hit four to five million net worth, where you if you wanted to, you just put all your money in T bills and show

That’s the term I’ve kind of used lately in some blog articles, T-Ballon shows, know, once you have four or five million and you get, know, the 4 % rule, some people are familiar with that. You could probably just wrestle on the laurels. Like most of my clients need maybe 10 to $20,000 a passive income a month. And you probably get that from that nest egg. And then you don’t need to invest in real estate or crazy syndication deals. But you know, that’s kind of where.

you hit these different net worth thresholds and different floors of the wealth elevator and then strategies kind of change.

Michelle Kesil (24:02)
Yeah, absolutely. Thank you for sharing your knowledge and perspective and viewpoints. we wrap up here, if someone wants to reach out, connect and learn more about your book and what you’re up to, where can people find you?

Lane Kawaoka (24:13)
Yeah, they can check out the wealth elevator on Amazon and if they buy a copy and they need to leave a nice review, they can shoot us an email [email protected] and we’ll hook them up with the PDF version. So if they’re smart, they’ll throw it into AI and ask it their own personal questions. But we’ll also hook you up with the MP3 version there too. So if you’re a bad reader like me, we’ll just read it to you apparently. But yeah, if you like podcasts, check my podcast, the wealth elevator, but yeah, thanks for having me, Michelle. Appreciate it.

Michelle Kesil (24:43)
Yeah, thank you for being here. And for those tuning in, if you got value, make sure you’ve subscribed. We’ve got more conversations with operators like Lane who are building real businesses and we’ll see you on our next episode.