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Raising Money And Scaling By Passively Investing In Multifamily With Lane Kawaoka

September 11, 2020

chrisseveney

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In these trying times, what people want to learn the most is how to grow their business despite the pandemic. What other investment options are out there? In this episode, Chris Seveney sits down with Lane Kawaoka from SimplePassiveCashflow.com to ask about his trials and tribulations and how he was able to scale. An engineer turned investor, Lane has some unique perspectives to offer when it comes to structuring deals, building relationships, and managing everything in the business. He also shares the struggles brought on by the COVID-19 crisis and what he has been doing to overcome each of them. Join him and Chris in this conversation as they talk further about passive investing, raising your money, and more.

Listen to the podcast here:

Raising Money And Scaling By Passively Investing In Multifamily With Lane Kawaoka

We have a special guest. We have Lane Kawaoka from SimplePassiveCashflow.com. Lane, how are you?

Thanks for having me, Chris.

Lane is from Hawaii. We all can be very jealous based on where he’s located. While he’s out on the small end of the Big Island, he has built a pretty significant portfolio of multifamily properties. I wanted to talk with him about his trials, tribulations and how he’s been able to scale. I wanted to talk about raising money because that’s one thing a lot of people look for, but also other options in passive investing as well. We’ll look at it from both sides, people who are looking to grow a business, as well as other options to invest out there. Lane, why don’t you to tell us a little bit about yourself?

I own 3,500 units, mostly apartment buildings and some mobile home parks. My story started right after I graduated from college. I went to school for Engineering. I came from one of these families where we’re all taught to study hard, go to school and work at a job for 40 years. I studied hard and got a job. I worked a civil engineering job, a construction management job. I saved up to buy a house, falling for all that dogma that they tell you to buy a house to live in. Because I was never home and I was working on the road all the time, I decided to rent it out. That was where all this started. That was where I got to taste the cashflow. The rent that I brought in was $2,200 a month and the mortgage was $1,600. I didn’t know anything about rent to value ratios or 50% roll. I just knew that I made a few hundred bucks of cashflow every month and I was like, “I got to keep doing this again.” That was where it all started back in 2009 when I bought that first property.

You’re well ahead of me because I’m a civil engineer. I worked in the construction management for fifteen years, then I made a little switch over to the development side. I worked for a developer. I still worked the 9:00 to 5:00 while I try to grow mine. You took that leap, which it’s extremely difficult for many people to let go of that 9:00 to 5:00 because it’s branded in everybody so much. My parents are like, “You’ve got to work the job so it’s secure. If the economy happens, you’re taken care of.” You were traveling a lot working. What made you make that leap to say, “Screw it on the full-time gig. I’m going to hop into doing it myself?” How many rentals and what was the size of your portfolio at that time?

Maybe I got lucky. In my first job, my employer sucked. It was a very conservative company and nobody liked working there. I managed a blue-collar union workforce and there was a bunch of nonsense. You know how it is on the construction site. It’s ridiculous. It’s a bunch of politics and nonsense. I got a bad taste in my mouth, if you can’t tell. When I bought that first rental after two years of doing the 9:00 to 5:00 or the 5:00 to 9:00 or the 100% travel job where it seemed like I was working all the time, I was making a few hundred bucks a month, but that doesn’t include like the mortgage pay down, the tax benefits and all of the visible appreciation.

You shouldn’t count that in my opinion, but the appreciation is there and you leverage your 401, 501. I realized that it wasn’t too hard to save for that first time. If I keep doing this, I’ll get myself out of the rat race. It’s going to take 1 to 5 years for sure, but if I keep plugging away at this and continue to work at my day job, I’ll get out of the rat race. Once I got up to three rental properties, I was like, “This is going to work.” That was when I became a super bad employee at that time.

As you were getting these properties, were you raising money on the side? Were you using your own because you had the job? Would you be able to be qualified? Where were they located as well?

The first few properties were in Seattle. I bought those with conventional financing. My biggest thing was I saved money. I was frugal. That was the way I got brought up. I didn’t have a place of residence. I lived off the company dime for a few years. I was able to put away $80,000 a year for a few years. That went all to investments. That was how I built up. Around 2015, I got up to eleven rental properties. It’s all with Fannie Mae and Freddie Mac loans, 20% down, nothing special. I don’t know how to do all this wholesaling, flipping, and no money down stuff. I just saved my money and invest it. It was all my money.

Don't do anything until you have somebody who can calibrate you. Click To Tweet

There are ways you can accelerate it. I see the kids doing all the first strategy now. It’s great but it’s a lot of risks. You got to figure out what your highest and best use. My dentist and doctor clients were like, “This is a no-brainer.” Why would they want to screw around with a property and make $30,000 where they can go on an extra Saturday and do extra surgery and make it there? Unfortunately, us engineers don’t make that much money.

We can do very well and that’s why I went over to the development side. You see all the people in the development side making all the money and being able to golf on Fridays and on the weekends. Us engineers were on construction sites. You’re working six days a week, ten hours a day. They own you. It wears on you. I was project managing and running jobs. You’re working for them and you get burnt out. The pay was well, but you had no time to do anything on your own. A few things popped in my head when you’re talking about that. First is congratulations on being able to save money because I know when I was out of college and stuff, I was buying the big screen TVs, the new cars and stuff. I was loving life. It’s awesome doing that. You said you had eleven units in 2015. We’re in 2020 and you have 3,500 units.

That is correct. That’s when things have exploded. The thing that happened for me was I started to join different mastermind groups, which costs over $10,000 to $20,000 a year. That was where I got around other more sophisticated investors like doctors, lawyers and engineers that were 10, 20, 30 years older than myself that had owned rental property before. They all laugh and everybody talks about getting Fannie Mae-d out ten properties to your name. They don’t want anything to do with that. It’s not a scalable way of investing. I saw it firsthand. With my eleven rentals, I was having an eviction or two every year, and some big catastrophe that happened every quarter. I had property management to deal with all that nonsense, but it got to be a chore and all that was for a measly $3,000 of passive a month, which is great. Don’t get me wrong, but I don’t know anybody who could live off of that. You’re saying I need $9,000 to $10,000 a month of passive. That’s 30 houses. All the numbers I told you on eviction, multiply that by three. Now you’re having an eviction every few months and that’s every other week.

I know people in this business with mastermind. There are training, masterminds and some very expensive programs that also don’t provide a lot of benefit. People get upset about them, especially when you’re putting out $10,000, $20,000. What I find interesting is yours definitely worked. A point that I make to people when they try and sign up for some of this stuff is you should have some experience to network around these people. Would you agree with that?

If you’re brand new to this, at least consume all the free stuff. Listen to all the books and podcasts for six months. Don’t do anything until you have somebody who can calibrate you that’s a buddy of yours or somebody who’s done it before. That’s where “Your network is your net worth” comes to play, especially when all your network gets to be about $500,000.

Getting to the units you had, I’m guessing you’re syndicating or you have private investors. Do you do the Reg D 506(c) and putting a fund together, and then getting also some debt financing on these deals? How are you structuring these deals now?

It’s 506(b). I do it the old-fashioned way with all my investors. A lot of people like to play on the internet and do that part of mass marketing, which is why they can only do 506(c) deals and go after credit investors. I want to know everybody I work with. Some people are very difficult to work with and I don’t want to work with them. Life’s too short. That’s why I left the day job because of these damn people. The people that drive me crazy.

You’re resonating with me right now because I started my note business with doing individual JV deals, one person, one deal. As you try and scale that, it’s impossible. I started putting stuff in funds and it’s the same way, I like to get to know every investor. You also realize too that some people can be a real pain. They’re a lot more work to deal with than the money you’re going to make off them. It’s not worth the money that you may be making as a partnership on that deal. I liked that idea also of getting to know your investors because as you get to know them, you build more trust.

It’s alignment too. I try to start it off like, “We’re not an institution. If you want to pay 4% or 5% acquisition fees and do 50/50 splits with a big company who has teams of investor relations, bookkeepers and staff, directors of operation, and regional managers, go do that.” That’s not what guys like you and I are. We’d like to build a relationship. We’re more of a cooperative type of operation. Some people want that, but sometimes you get these ridiculous people who invest $50,000 and now they’re calling you up every other week. I’m like, “Is that what you do with your other $2 million that you have in the stock market? I hope not because you should be calling them up 8 or 16 times more than me.”

Their investments are a lot more volatile.

GDNI 116 | Raising Money

Raising Money: Investors need to think about what kind of risk-reward profile they are going for.

 

There are many hardworking professionals out there that are slaving away. They are thankful that you make them 10%, 12%, 15%. Even if it was only 7%, they’re so gracious. I’m like, “Why the heck would I want to waste my time to work with somebody who’s a jerk?”

It’s funny you mentioned percent too because pre-COVID, I tell people that the average deal is 10%, 15%. That’s what to expect. You can have some that don’t do well, and you might have some that do a little better. You get people who are looking for the 20%, 25%. They say, “This is what I got with this other person.” The first thing I tell them is, “Can I have their contact information? I want to go invest with them if I can be passive and get 20% with them, and do all the work on this end.” With a lot of deals you’re seeing, you’re part of some of these masterminds. I like to tell people some of the realities of this business. I still work for a developer and we underwrite deals in single digits because of sometimes the size of them in the scale. We’re putting money into it and looking at long-term appreciation isn’t included in some of that. On average, what’s your range for a lot of your deals?

This is not speaking for myself, but for most LPs out there. They’re trying to go into a deal where they’re on a development type of deal. It’s a little bit higher risk where there’s not stabilized cashflow in place. They’re looking to double their money in three years. They are more stabilized asset that’s producing cashflow right away that’s probably going to double their money in every 5 to 6 years. That’s where yours falls in line. Yours is a lot more less risky, which is why the returns are that way. Investors need to think what kind of risk-reward profile they are going for. If you’re looking at a development deal and it’s double your money in 5 to 6 years, where’s all your money going? It’s probably going to sponsor compensation.

You’ve grown to size. How many people do you have? Are you a one-man show? Do you have employees? How do you manage everything?

On the operation side, it’s not just me managing deals and rent. We use our property managers pretty heavily. We are not micro-managers, that’s for sure. We like good companies to work with. We manage that manager as the asset manager role. I got a few people to help me. That’s where your systems and processes come into play. The one thing that’s hard to scale is the individual time on the phone with people and seeing how I can help people. That’s the hard part, but that’s the stuff I enjoy.

I’m internally chuckling because when you talk about systems and so forth, I can’t beat that into people enough of putting good systems in place and spending the money for some good systems. Systems are so key to being able to work on your business and have those phone calls with people. You may have somebody on the phone right now who wants to invest $500,000 or $1 million. You can’t take that phone call because you’re too busy doing something that is ancillary. If you had proper systems in place, it would make your life so much easier. It’s the engineer in you and I feel the engineer in me a little bit on that.

It’s something I took away from corporate life. You have bosses. The reason why they got to where they were was because they grinded and they’re hard worker. When there’s a manager or a director level, they need to effectively manage the people under them and stop doing the work. They need to create systems. The best managers I always had were when they put people first. They were able to get their shit done and have time for the direct reports. The first frontline workers go first.

That carries through to investment deals where it’s people who work for you or your investors. You put them first. At least that’s what I know a lot of people do from that sense. You did have a few years in the corporate world. You talked about working for directors. This is something that I go back and forth with people a lot of times. There are a lot of successful people who didn’t work in the corporate world and worked their way up, and have done excellent. I come from the corporate world and you have for a few years. I’ve worked with some smart people in my career and I learned a lot from them. It’s helped me grow my personal business. I’m curious about your thoughts on that as well.

I worked as an engineer for about twelve years. I quit my job because it’s gotten to be too much. You realize that a lot of these people that you’re working for in Corporate America are very high performing individuals and very smart people. When I invest with people or partners, I like to pick professionals and ex-professionals, people with college degrees. I’m calling it my criteria for partners or people I invest through when I invest passively sometimes. It shows a level of pedigree. That’s not to say that a college degree is worth anything. I pull back and forth on that. There are a lot of hardened skills that come from working within a system or bureaucracy that can be carried forward in real estate investing. Real estate investing is all project management at the end of the day.

The best managers are those who put people first. Click To Tweet

With your investors, you mentioned they’re educated but also more knowledgeable in real estate. Have you had times where you’ve had people who are less knowledgeable in real estate and more knowledgeable? Have you noticed the difference between those types of investors?

Unfortunately, 80% of passive investors don’t know what they’re investing. I would say a smaller number than you think have owned real estate before.

Outside of their primary house?

Yeah. I look at some of these pitch decks and I’m like, “There’s nothing that tells you that you should invest in this deal. How did you make your decision?” It’s a shiny pitch deck. I don’t think you need to do that. It’s more investing with the right people to build up the relationships around you that have invested with the sponsor in the past that can buy off them. In other words, you can be a rich guy and have some right friends who’ve invested with somebody in the past, and you’d be totally fine with that. The trouble is for a lot of us first-generation wealth people, I didn’t have any people that gets syndication deals with these country clubs, let alone even own rental properties.

You said you didn’t have that generational wealth. How difficult was it for you to start raising money?

I just told how it is. I’m like, “Here are the things I’m looking at, the reversion cap rate, the rental comps. I put it into my analyzer. If you want to invest, go ahead. I’m putting in $50,000.” I said the same thing you did. If you can find something better, let me know. First of all, when you bring that deal to me, the first thing I’m always asking is, “Who do you know personally that has invested with this person in the past?” I’ve gotten burned with that when I follow that a couple of times. I don’t want to invest with anybody unless I know, like or trust them.

The biggest thing is I’m going to go on LinkedIn or Facebook. I’m going to see who do I know that knows this person and I’m going to shoot them an informal text like, “Do you know Mike?” “No, I’m just another random friend.” “Let’s move on. Let’s find somebody that I can correlate the story.” At this point, I know enough people. There’s no reason for me to go outside to a random person. That’s what you got to be careful for. There are many random people out there in podcast land and real land that pop up out of nowhere. Supposedly, they have a lot of units. I’m in this business and I have a hard time doing it myself.

I joke with people because they’re like, “You have a podcast.” I’m like, “Just because I have podcast means nothing.” There are a lot of people who have podcasts out there who do things in a very unethical manner or have done things that I would never ever in a million years investing. Just because somebody has a podcast doesn’t means they can stand in front of a camera or a microphone and talk. If it’s a marketing person, it doesn’t mean they know the numbers. A lot of people get sold on that. That’s why when I talk with people, I’m like, “Go run a background check on me. Make sure that I don’t have a rap sheet of 25 judgments against me from bad deals,” or things along those lines. Similar too, I want to know who I’m investing or building a relationship as well, but it’s that trust. The first thing I tell people is due diligence is important and key on the relationship. If you’re going to invest in a deal, as part of doing due diligence on the actual property, you should do it in the person who is going to be operating the property as well. You as a manager should understand who that other individual is as well.

My due diligence process on some of the deals in front of me is number one, I’m going to underwrite the deal. I’m going to get the P&Ls and the rent rolls and put it into my analyzer. What I’m trying to do is I’m trying to figure out what the assumptions are. What are they assuming for occupancy? What are they assuming for rent comps? I verify the rent comps myself and then what is the assumed reversion cap? What do they think the market is going to be in the future? At that point, I can determine if this person is underwriting their deal in an irresponsible way. If they’re not doing it in a conservative way, I don’t want to talk to the guy. That’s where you go on your network. If somebody has invested with somebody in the past and they’ve doubled their money in 3 to 5 years, that weighs more than me running my numbers and fact-checking their latest deal.

What’s the average unit size of your portfolio roughly?

GDNI 116 | Raising Money

Raising Money: Having proper systems in place would make your life so much easier.

 

It’s gotten bigger. We try to stay above 150 units these days. In the beginning, we did some 50. They always say 60 units is that scale where you can have a property manager sit in the office for you. Truthfully, you need to get above 100 units so you can justify that second person, which is the handyman or the dude that drives around in a golf cart that takes care of these third-party vendor items before lunchtime. That’s where we can get the economies to scale.

I love when you see the underwriting where they’ll give you the rent rolls and stuff, but then I’ll say, “Rent could be raised to X or Y.” You don’t see it as much on bigger deals and some of these smaller deals. The first comment always is, “If you can get that, why aren’t you getting it?” I joke with people internally. It’s like, “If you take someone who’s paying $1,200 a month rent on a location and tell them they’re going to pay $1,400, that person’s going to be moving out because there’s no way somebody at $1,200 is going to be able to afford a 20% bump.” People unfortunately don’t live that way in our society.

They’re going to tell you to go take a hike. They’re bunking on you. Which could be the case. That market price for that agent vintage and class could be $1,400, but I want to see them bumping up the first year or second year vacancy, maybe 10% to 20%, and then I’ll buy it. I’d say 95% of passive investors don’t know how to do that. Maybe they can do a few checks and reversion cap rate, what is the rent increases per year for that market, but that’s about it. That’s all you need to invest as a passive.

The multifamily market is hot in most markets. Do you acquire across the states? Are you in certain markets for your acquisitions? Where have you been focused and where do you plan on being focused in the next 24 months? Do you see any issues with the COVID crisis or lending and coming up in the pipeline for you?

It’s not generic, but the population is increasing due to job growth and in markets where the cashflow is because that’s a big criteria of ours. A lot in the South and Southeast. In this day and age, you can’t go to big secondary markets. It’s hard to find deals there like in Dallas or Atlanta. You got to go under some rocks and tertiary type of markets like Huntsville, Alabama or some smaller market like that. As far as COVID goes, it depends what your acquisition strategy is. I focus mainly on stabilized deals and 90% occupied or more. There was a big story out there in media land where they say there’s a big shelf of foreclosures coming. They’re in deferment now. To me, I don’t care. If they are having trouble or their collections and occupancy are dipping, you probably wouldn’t want to buy it anyway. I know a lot of investors who that might be their primary strategy where they go after severely distressed assets. For me, it’s not. I buy more properties with owners with problems, not properties with problems.

How do you source the properties?

It’s mostly brokers. In stabilized assets and you were working with more of a sophisticated seller base, they’re not idiots. They’re not going to sell it. We get all the letters. Everybody’s trying to buy a property. It’s like, “You’re wasting your time.” We’re not some distressed guy in his $30,000 house that didn’t know how to use the cell phone. You’re going to go to brokers. You try and get the right guys who are thinking about retiring. A lot of times, it’s a family that owns the property outright, which is crazy to me. Their net worth is $20 million to $50 million and their kid doesn’t want to take over their property in the secondary or tertiary market that the kid has never been to. They’d rather go live in Miami, Florida and take the cash. Your loss is our gain.

Also, the fact that they grew up in that lifestyle of fixing things in the properties. Now as a family gets older and they’re old, they’re like, “Screw this. I want nothing to do with it. If we can cash this thing out, go live, take the money and run type thing.” I’ve seen that a lot because real estate is a difficult business. Part of the challenge with real estate and where you see, especially on the construction sites and so forth for management, you’re seeing a lack of people because it’s a conflict-oriented business. It’s not all unicorns and rainbows. Even when I started, not a lot of people like conflict. As time goes on, people try and work to resolve that more and more, but there’s still a lot of conflicts involved in this business. Especially younger generations being brought up. They’re like, “I don’t want to do that. I want to go do something else.”

Another layer to that is those properties you’re talking about, maybe the 5-unit or 50-unit type of properties, if they’re still using those kinds of core systems, they’re not going to be able to get above 40 to 60. I don’t care how hard you work. You’re not going to be able to manage something like that. We try and focus more on 120 units at the very least because that’s where you get the economies of scale on that side. We’re not working with that mom-and-pop investor. They are a mom-and-pop but they have legit systems in place where they hire a semi-closed family member to manage it. That’s common.

The vast majority of passive investors don't really know what they're investing. Click To Tweet

I got a call from an investor who’s got 50 single-families. He’s 69 years old and he’s been managing them himself the entire time. All of a sudden, he’s like, “I’m trying to sell them.” I’m like, “Who would have thought in 69? Why don’t you go to 80?” I joked to him about it and stuff. He’s been taking care of it. He was talking to me about them because he wanted to owner finance and being into notes and understanding that process. Also, he was looking at it from the perspective of, “If I owner finance it, can I do this or that?” He still wants control. I’m like, “If you still want control, just hire a property manager.” He’s at a point where he wanted to cash out, which is good. It speaks to that mom-and-pop perspective. I’m curious because with your markets, people see on the news a lot of things about the free rent, the rent strikes and stuff, have your numbers dipped significantly?

Normally, we’re at 97% out of 100%. You’re going to have a few deadbeats that don’t pay. That’s consistent every month. April collections dipped down a little bit at maybe 95%. In June, it dipped below 90% but that was the low point. The way we underwrite these deals, we’re still making money if we can stay close to 60% collections. I come out of this and I’m like, “This workforce housing. Thank God I didn’t do strip malls or office space.” At the end of the day, people need a place to work, especially in the workforce housing world. Now I’m even more confident in this type of asset class.

I work for a developer that owns a variety of strip malls. They own malls, office, retail, residential. It’s interesting though because they’re in Washington, DC which is its own market in the sense of office is here. It doesn’t get affected because it’s a lot of attorneys, tech firms and places that people need to go. You mentioned the multifamily. You buy mostly the ones that have high occupancies. I was curious if you’ve heard anything which would probably help your business in the sense. I’ve heard there’s a lumber shortage and pricing for lumber has gone through the roof, which is a lot of new developments, which then slowed down or stopped in some of these markets. With COVID, they thought rent prices would start coming down, but now we have a supply-demand issue where they’re going to think rents are going to go up in major markets, especially those that are hurting for the workforce housing. I’m curious if you’ve heard or read anything about that.

Lumber prices are up right now but there’s uncertainty that the supply chain from China or whatever they said. We’re working on a project where we were going to be signing a guaranteed maximum price type of contract. It makes the owner’s life a lot easier if we don’t hit our prices. We push that risk to the contractor. The lumber price is the least of their problem. As soon as we sign that contract, we’re locked in. If those prices go higher, then we don’t sign it and we wait for things to subside, which more likely it will. I would assume labor would be even cheaper. There will be unemployment. It plays one way or the other. Either way, it’s like “tails I win, heads I win” type of thing. Once I sign that GMP contract, I’m locked in and I’m good. I keep risking myself. I’m paying a little bit more, but at least I know my costs for certainty or top line price or the bottom-line price.

Where do you want to grow your business to in the next period of time? What’s your end goal with your business? Where do you want to get it to?

I probably want to do less deals because they’re stressful. Not all deals go well. I would say a majority of them do and exceed expectations. I’ll probably need to work for money. If I don’t need money, why would I want to take on unneeded risk and stress? I enjoy more of my family office practice where I have a mastermind of accredited investors. We help them set up their own personal family offices. Picking deals is only a third of it. The other third is the taxes, legal, infinite banking. How do you pull it all together? The other third is your network. How do you surround yourself with the right people that are not on the free internet forums or the local REIA, which is typically filled with non-accredited investors?

Going back to COVID and the whole free rent thing. We were a little concerned with that initially Like the CTC, the news in California, #freerent. There’s a lot of nonsense that comes from the California Socialist Republic. We were debating on how to message this to tenants. We didn’t want to be too firm because then we might have tipped all the tenants off. If you’re Californians and you’re out there in Iowa or Texas, you’re like, “Maybe this free rent thing is real.” You know how people are. They don’t need anything. They just read Twitters. We ended up saying it firmly like, “Rent is due. If you need a workaround, let us know. Communicate beforehand.”

That’s what’s nice about when we invest in red states. You’re not going to have these government entitlement programs. The laws typically going to be on the landlord side. That’s what I like about this workforce housing populations. They work hard. They understand that if they don’t pay, they can’t stay. It’s a good old-fashioned hard work ethic, a Midwestern thing or Southern South thing. They know that there’s no freebies in life. You’re going to have a few people that are like that, but culturally they know they got to pay.

It’s similar with me when this whole thing hit. I called some attorneys on the phone and be like, “What should the message be? Should I reach out to people and let them know, ‘Your payments are still due,’ or not do anything? Let them come to us to see if they’ll ask for a modification?” My attorneys said, “Don’t do anything. The moment you reach out or even give the hint of potentially offering something, you’re going to have the windfall of people coming.” That was interesting.

Don’t show weakness. I had a few people in my mastermind that still have rental properties in California. I’m like, “You got to get unload of those things.” This is the exact reason. They freaked out. They’re like, “It’s $2,000 rent that I’m not going to get in.” Now they’re not going to be able to evict them for 1 to 2 years or whatever it is. They’re like, “We’re going to give them one-month forbearance.” I’m like, “If you want to give them free money, that’s up to you. To me, be cool and look to unload that rental property that I told you six months ago to unload.” You shouldn’t hold the properties in these states. They don’t have any cashflow.

GDNI 116 | Raising Money

Raising Money: What’s nice about investing in red States is how you’re not going to have these government entitlement programs, the laws typically are to be on the landlord side.

 

Speaking of cashflow in properties, do you typically have a sunset period on your properties? Do you hold them 5, 7 years or sell them? Do you hold them five years and refinance them again to try and get more equity out of deals? What’s your model that you try and follow?

The business plan is to go in and do anywhere from $4,000 to $6,000 where we have per unit. That’s categorized as value add or medium value add. We’re changing out the flooring, the new appliances, but we’re not getting into heavy stuff like cabinets and countertops. Essentially, as tenants naturally come up, we’re turning the units and the rents up $1,500. That’s all we’re doing. Those of you who own rental properties. You guys know tenants move out. We can go through the majority of the units in the first couple of years. After that point, in theory, we’ve done all the force appreciation as we can when the value is high. We look to either cash out refinance at no taxes. There can still be finance or sell the asset.

At that point, we have a variety of options. If the market still has legs, we might pull it out and do a refinance. We got some properties in Mississippi that we’re not entirely bullish on that market. What we’ll probably do on that is rehab the majority of the units, lease it for the next buyer, unload it and move on. That’s the beauty of this stuff. It’s a hybrid strategy. We have multiple exits. If the market is on fire, for example, if they happened to build five more casinos and golf park next to the Hard Rock, we’re in for another. We’ll stick it out but if not, we’re out. It’s the same thing with the next recession. When the recession comes, we keep cashflowing. Maybe we’ll slow down the rehabs. Rehab is done for even cheaper. The nice thing is we’ve already raised all the money. We’ll probably capitalized and do whatever you want.

It’s funny when I hear numbers like $5,000 to do light rehabs. Where I’m located, to do full rehab, you’re at about $30,000 a unit. Light, you’re probably at $10,000 to $15,000. The rents are a different animal. When you can push $2.50 to $3 a square foot in rent, you can easily accommodate putting $10,000, $15,000 into units from that perspective. It comes down to due diligence and underwriting, and making sure the numbers are correct. If they’re not, it’s garbage in, garbage out.

We have investors come and do tours with us and that’s what they get. We show them an older unit with the yellow appliances that have the visible colors. We take them to the newer unit, which has the nice luxury vinyl stuff, the new not quite stainless steel, but the black appliance that’s nice. They’re like, “This is cool.” We tell them we used to get $700 a month. Now we’re getting some of them $850, even $900. They’re like, “How much does this cost?” “Maybe $4,500 for the cost for them.” That’s when they get it. They’re like, “We’ll keep doing this for the other 200 units.”

If you’re getting your $200 unit and you’re putting in $5,000, you get your money back in two years essentially.

It’s even more. I have 100 units and we turned six units and we got $200 rent increase from where we were. If you do the math, 200 times 12 and then divide that by the cap rate, we created $250,000 of value in one month of forced appreciation. That’s a part of commercial real estate.

Lane, I want to thank you for being on this episode. How can people reach out to you if they want to find you, learn more information about your business, and learn about your deals? What’s the best way for people to learn more about you?

They can go to my website, SimplePassiveCashflow.com. I got my podcasts Simple Passive Cashflow. If you’re looking to buy single-family home turnkey rentals like how I was initially back in 2016, check out the first few podcasts. We’re all about that. You’ll see how my story has changed. I’ve moved on to different stuff these past few years. My email is [email protected].

It’s everyone’s goal once they start getting those few to move it to multi and to get to much larger scale. It’s much easier managing 50 units under one roof than it is with 50 different single-families or in your case, 3,500. Lane, I want to thank you for joining us. Thank you everyone for reading.

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