Leaving your full-time job to become a full-time investor certainly has pros and cons, and it’s not necessarily for everybody. In this episode, Marco Santarelli talks to Lane Kawaoka about the pros and cons of going into full-time real estate investing, what he’s learned from the journey, and some things that you never thought about to help you see if it’s the direction you want to go. Lane Kawaoka is the Principal at Simple Passive Cashflow. He was a full-time civil engineer from Honolulu, Hawaii who is now a full-time real estate investor with a portfolio of single-family homes in Seattle, Birmingham, Atlanta, Indianapolis and Pennsylvania. Join Marco and Lane to understand the beauty of the real estate world through Lane’s investing journey.
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I have a returning guest who has gone from a full-time professional career, essentially what he calls his job, to be a full-time real estate investor. There are certainly pros and cons and it’s not necessarily for everybody. It may be a goal for you but it may not be a goal for someone else. We’re going to talk to Lane about the pros and cons, what he’s learned, his journey and maybe talk about some things that you never thought about and see if it’s the direction you want to go. At the end of the day, what we do agree on is that passive income is great. Being a passive real estate investor shouldn’t take a lot of your time and get involved in passive real estate investments is nothing complicated. It’s a matter of having the desire and the ability and the right team and knowledge to move forward. That doesn’t take a whole lot. Let’s explore that with Lane.
If you missed our last episode, be sure to listen to Financial Preparedness – Is Your Financial House In Order?
Enjoy the show!
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Going From Full-Time Job To Full-Time Investor
It’s my pleasure to welcome Lane Kawaoka back to the show. He was a full-time civil engineer from Honolulu, Hawaii and he quit his full-time. He’s now a full-time real estate investor with a portfolio of single-family homes in Seattle, Birmingham, Atlanta, Indianapolis and Pennsylvania. He’s also a partner in syndication that controls over 2,600 apartments and RV units. After Lane’s, parents got duped with their 401(k) in stock market investments, he made it a mission of his to help people get off of what he calls the corrupt Wall Street roller coaster and start focusing on main street investments with safer, higher returns that benefit the American middle class. Welcome back to the show, Lane.
Thanks for having me, Marco.
We had you on the show back in episode number 107. You were working full-time as a civil engineer and investing on the side in real estate and trying to build a passive income portfolio for yourself. You’ve achieved that. Why don’t we start off as a refresher, learning about you and telling us about your background and how you got started in real estate investing?
I graduated from college in 2007 from engineering school but at that point, just like everybody else told to go to school, get a good job, work at the said job and buy that primary residence because it’s supposedly the way to get on to escalate your wealth. I bought that first home in 2009. I was never at home because I was working at a job that was 100% travel. I started to rent it out. The rent is for $2,200, the mortgage was $1,600 and for a young twenty-year-old kid, that was a lot of beer money. I knew nothing about the One Percent Rule. That house was $350,000 in Seattle in an A class neighborhood. I knew nothing about getting B and C class properties, but it got me started. I’m an accidental landlord.
You were working full-time professionally as a civil engineer and I think you did that for a number of years. You finally took the leap and quit your job. What was it that made you decide to quit being a civil engineer? Aside from the obvious, which is a passive income, you have the ability to quit, do it but some people love what they do. I don’t know if that was you if you loved what you did. Tell us what made you make the decision.
I didn’t like what I did, let’s be honest. A lot of engineers, unfortunately, we don’t work with people. We work with things and numbers, which isn’t very fun. There’s a disconnect with a lot of our careers and a lot of us get put into management positions and have to take a higher salary with way more responsibilities. It’s a bad deal. Early on when I bought that first rental and I was making a few hundred dollars of cashflow, I was like, “This is my ticket out of this rat race.” It’s a slow thing but it works.
I was surprised to know you didn’t like your job because that takes a lot of time and schooling to get to become a civil engineer. A lot of people look up to engineers because they recognize that aside from it being a good paying job, a six-figure income, it’s a respected profession. If you don’t like it, you don’t like it.
In the beginning, I was working for a big private company and obviously, that’s not any fun because it’s a very cut throat. You get to watch your back. I went to more government jobs and things got a lot better, a lot more pleasant people to work around with, a little bit more quality of life. Still having to go at this job day-in, day-out and just trade your time for money for $100,000 salary isn’t that bad. It is pretty much easy money. There’s more to life, especially when your investments start to hit that hockey stick and exponentially grow on you.
You cut your teeth on turnkey real estate investments and then you ventured out into doing larger deals through syndication. How did investing in turnkey real estate and these other investments ultimately make that possible for you? I’m not asking you the obvious answer that passive income stacked, but what happened in that journey that allowed you to grow personally and in your portfolio and then leave your job?
It’s definitely a progression. The second rental in Seattle I bought I was starting to learning about, “Maybe we shouldn’t buy this luxury real estate. Let’s buy more of a B class rental.” I learned about more cashflowing secondary and tertiary markets. The third property I bought was a turnkey rental. It was out of your comfort zone, even for me who is already a landlord for a few years to buy something sight unseen and going off property managers and inspectors as my due diligence squad. That was what got me comfortable buying out of state. That’s a big step that I think most passive investors should get through.
How important was the team that you assembled, the people you were working with to your success in investing a long distance? I say I invested long distance 3,000 miles away from Southern California because I was investing in Florida, Georgia, Michigan. You’re in Hawaii. It’s not that you even have land between you and your properties. You have land and a huge ocean called the Pacific.
I think most of the sophisticated passive investors are not going to visit the property if you have a few properties because it’s a $1,000-trip and more importantly a day or two away from your family or $150,000-plus job doesn’t make sense. You have to rely on the team. The most important one is the property manager and the second is the inspector. The third, which I don’t consider a part of your team is your broker. They’re trying to get you to buy properties, which is why your guys’ team is nice.
The property manager to me is the most important team member and then everybody else just fills in the roles that they fill in. You made this massive transition from full-time employment to full-time real estate investor. Do you want to comment about that transition, how that came to be and how it was when you actually said, “I quit,” and then rolled into your new role?
I went to this Tony Robbins thing and this is the second time I went and he brainwashed me again to start thinking of how I’m going to quit. My first exercise was like, “Do I have my basic necessities covered?” I’m not up to my goal of passive cashflow a month by any means but I’m getting there. It’s more like, “Do I take that time and focus it on finding more deals, meeting more people and vetting the deals I do go and more heavily? Or do I spend my day at my job getting easy paychecks?” It’s where I want to put the finite number of times is what I’m thinking. I thought to get the numbers done first, but then also think how am I going to use the time? It is a logical progression. Why are you going to give up this easy money at your day job? At the end of the day that is like a bunch of turnkey rentals in that sense.
People are thinking, “That would be such a shock or disruption in my life cutting off my income.” Which by the way, I don’t recommend for most people because the fact that you actually have income, whether it’s professional income or W-2 income, you have to look at that as an asset. You can’t qualify for financing in most cases especially with residential financing unless you can show income at least for the last two years. To make the leap and quit your full-time employment or whatever employment that might be and venture out into “full-time real estate investing” is actually not a smart thing to do unless you can transition and have the income to carry you through forward and through it. At the end of the day, we need to qualify for financing to keep building a portfolio. Was there any problem with you doing that or any fear?
I’m glad you brought that up. You can get ten in your name and ten to your spouse’s name but at that point, I was Fannie Mae’d out. I had reached my cap and I was using commercial financing at that point, which you don’t need a W-2 salary. For me, it checked that box. I did this Tim Ferriss, a lot of investors follow him. If you can Google this fear-setting exercise he does, there’s a little TED speech he did. I have it on my website SimplePassiveCashflow.com/quit. It’s more of a journal. What you do is you list out all the things that you’re scared of and all the fears and you say, “How are we going to mitigate each and every one of these things?” If there’s no way to mitigate it, it’s just worry and there’s some limiting belief or fear that we’ve got to get our own heads around. I have my list of all the things on that page. It’s everything I could have mitigated one way or another. It wasn’t that big of an issue. When I broke it down like that, it made this whole illogical step very plausible.
How did you take that forward to setting your income target and timeline? You must have had a plan and an income goal or target and maybe a timeline that you applied to that. Did you actually take the time to map it out that transition?
I use this analogy of cashflow. Once you get up to having enough cashflow, you can basically pay for your necessities. You’re zero gravity, you’re not floating upwards, you’re not sinking down to the Earth. Mostly people are Earth dwellers, they walk around the Earth because there’s gravity. I was still at the point where I was zero-g. I wasn’t flying off into the stratosphere yet but I knew that this was working and the time that I would have spent in finding better deals would send me up there eventually. At that point, I felt comfortable to get going because the rent would get paid, the bills will get paid whether I did anything or not. I felt like my time and energy was spent to propel this forward, this whole crazy real estate investing a thing.
In one of your emails to me, you mentioned dealing with some limiting beliefs. I don’t know if you remember that but if you do, how did you deal and overcome those limiting beliefs?
I definitely see it. I missed that few thousand dollars coming in every couple of weeks. It’s a mess for sure, but then there were a lot of projects that I felt like I could undergo and propel my real estate investing because I’d never had the bandwidth to do it. Partly the reason I didn’t do it because I had this easy money coming in and there was no reason to do it. This is the reason why rich doctors never even buy a turnkey rental because the pain isn’t there. There’s not enough motivation. That’s why a lot of engineers do this because they don’t make as much money. They’re forced into taking a little bit of a chance.
You’re saying they’re in a comfort zone that holds them back because they’re comfortable. At least, I shouldn’t say all of them but a lot of them don’t feel that they need to do more than what they’re doing in order to get ahead especially down the road, because they’re looking at maybe the now and the short-term future. Is that the point there?
That or ignorance is bliss.
I like to say ignorance is expensive. Bliss can lead to, “What is the opportunity cost? What have you lost by being comfortable?” There’s a saying that you’re not growing until you put yourself outside your comfort zone. Until you put yourself in a situation where you are feeling uncomfortable mentally, physically or otherwise, you’re not actually moving ahead or growing or becoming a bigger, better version of yourself. I believe that and I think if a lot of people take themselves back a little bit out of their comfort zone, they realize, “Maybe there are other possibilities out there.”
When you start to become more sophisticated investors, you start hanging out with people who say that stuff you just said all over and over again. You start to believe it like a little bit of a religion. I totally agree with what you said and here I am, I can self-diagnose myself and say, “This is another example. I need to get on my comfort zone and do it.” It’s no different than sending off that check to the escrow company for $20,000 to buy that first turnkey rental or that $50,000 check to the syndication where you don’t get any title or anything. It’s another step in the progression.
The point is you keep taking steps towards your goal until you’ve achieved your goal or surpassed it. Talking about goals and strategies and all that stuff. You mentioned something about a strategy around your taxes. I didn’t know what you mean by that. My question, if I had to put it into the form of a question, what was your strategy back then around taxes which made you make that leap and get away from a $100,000-plus a year job and going full-time into your investing?
With a lot of these single-family homes or turnkeys, you’re depreciating asset over 27 years. I’m sure you talk about this a lot, which is nice. With bigger deals, you’re able to do cost segregation, which costs $5,000 to $10,000, which is not worth it on a smaller property. On a bigger deal, people pull their money together and do this engineer to do a cost seg for you and then you can get bonus depreciation because you’re writing off each individual part of the building. A lot of these deals I’m going in, if I’m putting in $50,000 in my first year, there may be no returns in the first year, but we’ll have maybe $35,000, $40,000 of first-year depreciation. A lot of times I think with this bonus depreciation law, which is phasing out, we’re able to write off an entire asset, 30% of it. Now, I have all these K-1 tax forms coming back just like how people have their depreciation under single-family homes. These passive losses are stacking up in my passive lose bucket not doing anything. Because I’m not a real estate professional, they can’t tap into that. Part of the strategy was for me to quit my job right before the middle of the year so in 2019 I can qualify as a real estate professional to actually use those passive losses.
The whole thing about cost segregation, there are companies actually set up that allow investors investing in smaller deals like single-families, duplexes, fourplexes to do an affordable cost segregation study that allows them to take the same advantages of doing it on a commercial deal at a smaller level. Whether it’s a single property or a handful of a portfolio of them. They do it across the board and they do it at a nominal fee on a per door basis.
I’ve heard it was like $400 or $500 and you go into a website, you type in some preliminary information. My understanding is it’s good enough. You’re not paying them that much of course from the get-go, but it’s good enough and you’re going to be able to aggressively right off that asset quicker.
I actually interviewed this guy. I’ll get you the information and for those people reading this, it’s one of our previous episodes.
It’s definitely something good if you’re going to hold it more than five years. The longer you hold on that, the better that is.
Lane, you’re a big advocate of investing passively. You and I live it, breathe it, talk about it and preach about it. What might be some of the big lessons that you’ve learned since I had you on the show because you were actively investing as a full-time employee. Now you’re a full-time investor without the safety net of employment. What can you share? I’d love to know your thoughts.
Right before we last spoke, I was going down this path of being more an active investor, being an apartment operator. Then I realized there was no way I was going to be able to do it. I wasn’t in the physical location to do these deals. A lot of these deals to cashflow you need to be in Texas or the southeast and I’m not there. I live in Hawaii and at the time I’d been in Seattle. Just recognizing that I wasn’t in a position to do it. I did this other exercise where I figured out how much assets I had and if I grew my portfolio by 15%, I would be where I wanted to be and be financially free. That’s the goal. I asked a lot of investors a lot of time, “What is your goal? What are you doing this for? What’s that passive number that you’re shooting for per month?” You can use math and figure out when you’re going to hit it. If that’s your goal, then why would you want to go pick up a twenty-unit and put in all your eggs in one basket and do it all yourself? Just continue to pick up some single-family homes, pay them down, cashflow that way or go into bigger deals in the syndication. Figure out what your end game is. Define the rules of the game. If you don’t, you’ll just keep playing.
Do you have any suggestions based on that for people reading this and saying, “I want to grow what I’m doing or start investing passively?”
I think with single-family homes, it’s not unheard of to get 20% to 30% a year. You might only cashflow, especially these days, it’s still tough. You might own a cashflow of 5% to 10% but that’s only the tip of the iceberg. You’re not seeing the mortgage paid down by the tenant. You do not see the little appreciation and you do not see the tax benefits. That’s why you’re investing in this stuff and not Wall Street traditional assets.
I don’t know what happened with your parents and the whole thing about getting taken by Wall Street and their 401(k)s and all that stuff. This whole thing about retirement accounts, there’s almost $9 trillion in IRAs. Of that, less than 5% is actually held in a self-directed retirement account, which is eye-opening and something to take note of if you’re reading this. If you can understand that you can convert your IRA and sometimes your 401(k) into a self-directed account, then that allows you to do a whole lot more with it. What’s interesting is at such a small number, we have about $300 billion of that. That is at least for the foreseeable future, going to be coming of age, if you will, with the 10,000 Baby Boomers that are retiring what seems to be every day.
These Boomers need to put this money into something. They’re coming out of company-sponsored pension plans and maybe 401(k)s. Now, they need to start looking at, “How do I create income from what I’ve built in terms of a nest egg and what investment vehicles would I put it in?” I’d like to know what your thoughts are on using self-directed retirement accounts and maybe some tips or suggestions for people. Neither one of us is registered investment advisors. We can’t tell people what to do, but we can certainly talk about it. I’d love to know what you think about all that.
Access to the liquidity is number one. When I look at an investor’s profile, the first thing I’m looking for is low-hanging fruit. That’s usually just the liquidity that they have. We’re going to go and invest that, pick up a single-family home here or put it into a deal here. Inevitably people will burn through that. The average guy has about maybe $50,000 or $100,000 into that. We started looking for the next higher hanging fruit, which is typically what’s in there is a retirement account or what equity they have in their home. Every situation is different, it’s one or the other but they have so much money in their retirement account not making anything. I would say especially in this market, that’s probably the more stuff at risk at this point. Let’s go attack that and allocate those funds first.
Self-directed IRA is a great way to get access to that. I would prefer putting it in eQRP or a solo 401(k) format so you’re not subject to UDFI tax. The government says, “Marco, it’s cool that you can invest this stuff and we’re going to give you these good tax treatment with it, but as soon as you start leveraging the money, taking $20,000 out of your self-directed IRA and getting another $50,000 loan to buy that single-family home, we’re going to tax you on the portion of that.” I don’t want to say it’s a deal killer, but it definitely cuts into your returns.
For those wondering what a solo 401(k) is and eQRP, which is a Qualified Retirement Plan, we’ve also covered that on a previous episode. You could search for that on our website. They’re actually very flexible and powerful vehicles that allow you to self-direct your retirement account and it gives you some additional options and flexibility and being able to do that. If you’re using a regular 401(k) or a self-directed IRA and these are truly self-directed, as long as you don’t have leverage, you have no risk of having what’s called UBIT taxes on interest income or any kind of income that you get in there. I’m not the expert on this, so the guests I bring on are the ones you should be following to. Not so much myself.
It’s a good conversation and every situation is different. You shouldn’t listen here and say, “He said you should make eQRP,” every situation is different. For me, when I had my 401(k) a few years back, I didn’t do eQRP or a self-directed IRA. I took it out. One was for simplicity. I didn’t want it into this account. I paid the taxes and I paid the penalty. For me, the taxes are going to go as income. You have to be mindful where your AGI is. If you’re already in the highest one, you’re going to pay a lot of taxes. You can strategically do it when you’re in a lower income time or strategically take it over a few years so you don’t pop into that next higher tax bracket. It’s a little complicated.
AGI meaning Adjusted Gross Income. Lane, I’m of the belief that everyone who’s not a full-time real estate investor is busily involved in everything else in their life, whether it be family, career, their friends, their hobbies, you name it. What final thoughts and maybe some advice can you give to these what I refer to as busy professionals and investors that are looking to grow their real estate portfolio?
I would say if you’re a passive investor, you shouldn’t be spending more than a few hours a week being a passive investor. I don’t know what there is to do. I say this reflecting back when I would be doing a bunch of so-called investing stuff, looking at spreadsheets. I look back at myself and I say, “Was I wasting a whole bunch of time?” There was no reason for me to be making that amazing spreadsheet. This stuff isn’t that hard. It’s passive real estate investing. It shouldn’t take up too much of your time. You should be spending your time with your kids. For a lot of us, unfortunately, you don’t want to know this. You probably should just go back to work because that’s your best way of creating capital.
The ability to qualify for financing if and when you need it.
I’m actually selling off my single-family homes. I don’t do any of that stuff that I would waste a Saturday, Sunday afternoon a few years ago. It was all non-value-added work. If you’re a passive investor and you’re spending more than a few hours a week on this, you’re doing it the wrong way.
Maybe you are doing it the right way, but you’re doing it with nobody on your team. You’re trying to do it all yourself, which I guess in hindsight is the wrong way to do it. You need the right people and the right strategy. Lane, I appreciate you taking the time to come on the show again. Tell our audience where they can find you or where they can get more information.
You guys can check out my blog and podcast, SimplePassiveCashflow.com. My email is Lane@SimplePassiveCashflow.com. Thanks for having me again, Marco.
It’s been my pleasure, Lane. Thanks for coming back on. We’ll talk soon.
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