Can you imagine earning but not having to go to work each day and retiring at the age of 32 and living the life of your dreams? Lane Kawaoka was living the linear path, going to college, graduating with an engineering degree from the University of Washington, and getting a day job in the corporate world as dictated by the status quo. Renting out his Seattle home got him started on real estate investing at the age of 22. Fast forward ten years, Lane is enjoying passive streams of income from investing. He’s now offering a powerful master class to help working professionals like him generate passive income and have the freedom to do what they want. Work towards your goals by taking advantage of the financial education he’s crafted from his experience with Main Street investments.
Live the Life of Your Dreams By Investing To Generate Passive Income with Lane Kawaoka
We have one of the top passive income experts as our guest, Lane Kawaoka, who has, at the ripe old age of 32, already created enough passive income to live the life of his dreams. Lane, I love your story. I love what you’re doing. We’ve had other people on the show before who talked about passive income, but the way you’re doing it is unique because of your age and the approach that you’ve taken. Tell me about how you got started and where you got this whole idea and how it evolved.
My story starts out pretty boring. I grew up in Hawaii as a kid. I was born on that linear path of study hard, go to college, once you’re at college, study hard again. I got an engineering degree at the University of Washington, and then I go and worked hard at that first job, which I did. Up to that point, it was a real linear path of doing what you’re supposed to do. An engineering degree gets probably paid the best with an undergraduate degree. That’s what I did and went to work for a good job. I graduated in 2007 at the time, so I had a couple of years of experience under my belt before 2008 came around. I was doing a construction management job. If anybody’s done those jobs, those are the worst jobs for the new people because you’re traveling all the time. I was always traveling. I was Frequent Flyer Status Platinum on every airline for a few years. I would leave on Sunday afternoon, come back on Friday evening. It allowed me to save a lot of money because I’m cheap, too. I have a laundry list of all these stupid ways that I would save money, like washing cars in the rain. I used to do all that stuff with the credit cards, sign up for bonuses, and do these balance transfers with the 6% rewards checking account.
What you’re saying is that you care about how you spend your money. That is a great sign of a person who is focused on savings. What was the next step? How did you get to the place where you decided that having a job was not going to cut it for you?
I was still living the linear path. My goal at the time was to buy a primary residence because that’s what everybody tells you to do. I saved $80,000 in the first few years of working and I bought a $350,000 home in Seattle, Washington, A class rental, which is not the rentals that you’d like to buy as a sophisticated investor, but I did. It was getting started as probably the best thing for most people. I started living there. I was traveling so much, it didn’t make sense for me to be in this big place in my early twenties, so I called up an old landlord and said, “Can you rent this thing out for me?” I was able to live in hotels all the time for work. She was like, “It’s easy.” We got a tenant in there and my mortgage was $1,600. The rents that are brought in were $2,200 and there was quite a bit of a delta between the two. That’s a lot of beer money for a young twenty-year-old kid or 22-year-old kid at that time.
A class rental. Did I hear you right?
There’s A class, B Class, C Class, and D class rentals. A Class are for your white-collar workers. These are the luxury buildings. These are all new construction; these don’t cashflow. These are more for institutional investors that are looking for lower returns and more security. This is not where your sophisticated investors are investing for cashflow. As you go down in the spectrum, B class are more of a mix between white-collar and blue-collar. Class C, these are primarily manufacturing jobs, or these are the car dealers in Las Vegas, so that’s $600 a month to $1,000 a month rent. There’s Class D, which I wouldn’t advocate for investing in because those are too much problems. I think the sweet spot is in this B- to C+ area.
When you think about your rent and you think about your mortgage, we have a lot of other things that make up the “expenses” of a property. You have insurance, you have taxes, you have water and sewer, you have other basic maintenance costs. If you’re having someone rent it out for you, you’re paying a management fee. Talk a little bit about that, particularly with that first property.
When you first get started, you don’t know any of this stuff. You share it a lot at cocktail parties, “I have this rental.” Your rents are covering the mortgage, but there are a lot of expenses in this. Typically, you want to be penciling down 10% of your rents for repairs and other 10% for your other maintenance or capital expenditures, large things like roofs or large components, another 5% to 10% on vacancy and maintenance there, and probably another 10% on property management because you’re trying to scale as an investor. I always tell investors, “Stop being a landlord, be an investor.” If you don’t have that professional property management in there, it’s not an investment. You’re finding yourself another job. That’s what I’m all about. I’m trying to do this thing where if I knew what your highest investment, you use them. For a lot of people it’s such a high‑paying job. As an engineer, I don’t get paid that much, but my time is still pretty valuable.
You talked about delta. It sounds like you erased the delta that you talked about earlier.
At the time, I’m looking at it as a great way to get started. The only reason the numbers worked at the time was because it was 2009, 2010. That same property that I found for $350,000 would be $450,000 or $500,000 today. Something that I like to talk about people who aren’t really new to the subject is this topic of rent to value ratios. You take the monthly rent divided by the purchase price of the property. In most places that I buy homes, I’m typically buying them at 1% or much higher, so $100,000 home. If you’re living on the West Coast, I know a lot of people are saying, “Where are you buying $100,000 homes?” Blue-collar Midwest cities, this is the median price home that a lot of American is living in and it’s a very good stable stock. You take $100,000 home and that’s renting for about $1,000. $1,000 divide by $100,000, that’s 1%. If you’re higher than that 1%, you should probably look into it more. I’m not saying that it’s a good investment, but at least the numbers make sense. You always do the numbers first and then you always do due diligence on the property.
Lane is describing the way he evaluates a property. As you bought that first Class A property, and as you started to rent it out, tell me what happened next. You’re on planes a lot and in hotels a lot, but how did the next one come about and how did your thinking change after that?
I’m collecting a few hundred bucks every month. At that time, it’s a small portion of my salary, but I quickly saw how this could scale up and my savings got a lot more sharpened. I had this defined goal and it was the beginning of the storm. I started devouring all these podcasts, books, and started learning about the material and networking. The goal at that point was to save up for another one. As I started to learn more about this stuff, I decided I should try and go for more of B Class rental. I saved up for another duplex in Seattle. In the next few years, I purchased that one. That was my next step. At the time, I was studying to get a master’s degree, so I was still living that linear path, which I think was a complete waste of time. I got a Master’s in Civil Engineering. All that is is this paper on the wall that doesn’t or didn’t get me anything and wasted a few years of my life.
What you have done when you go to school and when you learn something and if the thought crosses your mind, “Why am I doing this? I will never need this. I’m never going to be a civil engineer again.” Here’s what my daughter said when she was going to college, “Why do I have to learn this? I’m never going to use this in my real life.” Here’s the answer that made all the difference to me when I was going through engineering school back in the 1970s. It’s not a matter of what you learn, it’s a matter of teaching you how to think. That, in my opinion, is what you gained by taking the time and the effort to study civil engineering. Not only that, but it sets you up for a life of learning. That’s my opinion and I don’t know you and I could be completely wrong, but that’s how I feel about college, that’s how I feel about learning. In my opinion, studying and learning to study is more important than the actual material that you learn.
I agree with you with the undergraduate degree, learning to learn with people, the great memories from college, but this was an online master’s degree that employers can’t tell the difference if it was a master’s degree from a brick and mortar. It was from the University of Washington, but it was all online and, in my opinion, a racket to get money from foreign students. I didn’t care. My employer paid it.
I want to hear the story of the second property. What happened next?
At the time, I was saving up to buy a third property. That was 2012. If you look back on the charts, that was the time where we started to come up and been on this great bull market for the past five or six years since that point. You’re not going find stuff that’s 0.7% or higher in Seattle, Hawaii, Los Angeles, or San Francisco. You’re probably looking at 0.5% rent to value ratio. You’re not going stick that triangle through the square peg in this situation. That was where I was at. I was like, “Am I not going to invest anymore?” I’m local to Seattle and I was trying all sorts of things. I started to look at house for flipping a little bit, but I realized the difference between those who invest for cashflow and those that speculate for appreciation. Cashflow investors are what the sophisticated investors are doing. The appreciation-based are the gamblers out there, the people who want to feel that warm and fuzzy of buying real estate, but they don’t know what they’re doing.
Which are you?
My goal was to be able to create passive streams of income to be able to quit my job. I still work at my day job. Having the freedom to do that, the only way to do that is with cashflow. With that in mind, my goal was cashflow. I had to go down the cashflow route and find investments that produce income where the income was more than the expenses.
The 1% factor was still in your mind, but you couldn’t pick a property on the West Coast. Where did you find and how did you find those +1% properties?
I had to go out of state. It was frustrating, but looking back on it now, it is like, “This is a great pivot point.” I know you’re a Tony Robbins fan, too. He has this thing of, “If one door closes, another opens.” I pivoted all my learning towards how do I manage this stuff out of state? How do I work with people I’ve never met before? It opened up a new skill set and I’m very thankful for at that moment, that hardship that happened where I couldn’t find deals in my own backyard. I bought one rental in Birmingham, Alabama to try it out and it worked out well. I sold my two rentals in Seattle and did this thing called a 1031 exchange. I bought nine in Atlanta, Birmingham, and Indianapolis.
1031 exchange means that if somebody buys a property and makes a profit on it, as long as they roll it into the next property, they do not have to pay tax. Is that correct?
That is correct.
When you say you went out of state, did you get in your car and drive to Birmingham? How did you find that property? How do people locate properties outside of the area that they live in?
I didn’t see the property, which a lot of people think is crazy. A lot of sophisticated investors don’t see their properties, but they get team members to do their due diligence for them. This is how I did it and this is maybe not the best way to do it. There are websites where you can find other passive investors that are doing it. That’s the key. There are a lot of sharks that market properties and try to get referrals. Those are not disinterested parties. You need to find other investors like myself, “Who are you using?” Build rapport with people, help how you can, always try to find how you can add value to people. Don’t just take information. Try and find a few of these people. I had good conversations over the phone and I asked what they were doing, who were they buying from, what numbers they were seeing, and how they did things. A lot of these are more than an hour-long phone calls, and I kick myself in the butt that I don’t have their phone numbers to be able to say thank you.
Where did you go to meet these types of people? Did you join a REIA? What did you do?
I went online. The REIAs were not very good source of these people. You have a lot of people with the old school thinking where you invest where you live in your backyard. Real estate is a forgiving investment class that you can have a bad strategy and make a lot of money. I still go to REIAs because I’m hustling, I’m still trying to grow my business, but there’s a lot of older guys in there that are going to REIAs, and I’m like, “When I’m 45, I’m not going to be going on a Thursday night to a REIA.”
What’s a REIA?
REIA is a local real estate investing club. There’s a lot of good meet-ups up there that are free, and I would suggest those and trying to go to those.
Go to MeetUp.com, look for some real estate meet-ups, and start looking there. Look for some REIAs in your neighborhood. I’m sure you can attend any of them free for the first time and get a feel for what those are about. You started learning, you started acquiring information, and then you made one big move. You sold your investment properties that you had picked out yourself individually one at a time and you bought a block of ten or eleven In Alabama?
I traded two properties for nine in the 1031 exchange. It’s a crazy time. Those 1031s aren’t the best of things.
This is about growth and businesses, it’s not about being comfortable or staying comfortable. It’s about taking that risk and making that move. You could do it slowly and do like Lane did at the beginning, but what he decided to do was take a quantum leap and accelerate his progress. You own these nine properties. I would be thinking, “I could never do that. I’ve never seen the properties. I don’t know anything about these people. I don’t even know if they’re nice folks.” Shouldn’t I know those things? What would you say to stuff like that?
You start off with small steps. You buy that first property, and that’s what I did. I bought that first property in Birmingham and I see how they work. I got proof of concept, and I scaled from there. What I tell my guys about risk is, “You always try to get proof of concept first, but then you evaluate the current situation.” At that point, my investing career was over because I wasn’t finding any cashflow in Seattle. For a lot of people, getting off the bench is like, “You know what’s going to happen if you keep getting 8% to 10% in the stock market.” You know what’s going to happen and you keep working at your job for another 40 to 50 years. You’re going to retire with some crappy watch and then you’re going to probably die because that’s what the actuarial tables tell you. Do you want that because we know that’s going to happen, or do you want to take this less beaten path? A lot of us had done it in the past. You have to work with the right people, and this is how it is. Maybe I need to change that philosophy, but this is real estate investing. You’ve got to Google stuff on your own. This is not for the faint of heart. It’s not easy, but it’s pretty simple.
Get online and start working, start researching, start figuring stuff out and start applying. You bought your nine properties. Is that where you are, or did you continue to acquire properties?
I started to go into multi-families, so the unit count escalated from there.
Why multi-families? Why not stay with single families?
There’s a YouTube where I calculate the return that you’re getting from these properties. When you’re doing it yourself, you’re probably getting anywhere from 20% to 35% a year ROI. Taking your 8% to 10%, you can shove that. This is why you’re doing real estate because of these higher returns and it’s a lot more stable because you own the asset. It’s a hard brick and mortar. If the CEO does something stupid, your price of your stock doesn’t plummet 20%. Cashflow-wise, I was getting about a few hundred bucks per property. I don’t have very lofty goals. I’m pretty minimalist. $10,000 is a goal that a lot of people have per month. $10,000 divided by $300, and you’re going to need near 20, 30, 40, 50 of these properties. At ten properties, I have property manager doing the work for me, but I’m creating a job for myself. It’s not scalable. I was starting to network with higher, sophisticated investors and that’s exactly what they were doing. Everybody’s saying, “We started with single family homes and we weren’t getting to our goals with a single family home.”
As they say, you are the sum total of the five people that you learn from and hang around. You had to change your five people.
That’s what makes me a little sour about the REIAs. There are people that are flying to these conferences and they’re very sophisticated investors and they’re light years ahead of the people at the local REIAs.
Listening to you describe it, it seems doable. It’s not like taking the leap from never having owned anything to buying 150-unit building. It’s a progression and it’s a path. You are an educator when it comes to this. You’re a guy who likes to share what he knows and you teach this as well. Can you describe some of the things you do to help others?
A couple of years ago I started a podcast and a website, and my thought was put it on the internet like a journal to follow my story. A lot of people are asking me, “How do you do that? How do you buy a rental property where you haven’t seen before?” I wrote an article because I got tired of doing the same thing again and again. I made podcasts about it and that’s how it started. We’ll go back to around 2012 or 2013 at my day job. Everybody goes through it in corporate America where you go through a bad time at work where you either run into the wrong people, a bad boss, a bad quality of life, and this puts things in perspective. I’m pretty fortunate that I’ve hit a lot of these experiences a lot early in life than a lot of people. I was never home and working 60+ hours a week for these people that didn’t appreciate me. What is this all for? My passive income, my real estate side, is going up and I was making more money than my boss and my boss’s boss, and they were treating me like dirt. Things happen for a reason. I saw a lot of other people in the same situation where a young couple, they got kids, and both parents have to go to work all day long and had to send their kids to childcare because they’re in that 8% to 10% stock market or mutual funds and 401(k)s that are robbing the middle class of America of a good quality of life.
You are very generous when you say 8% to 10% in the stock market. I don’t think many people are even achieving that. I love the fact that you take action. I love the fact that you continue to push yourself and try new things. What I really like about you is that you decided that you would teach others and you would help them with following the same path as you have. I want to ask you about some of the things that you offer on your website, SimplePassiveCashflow.com. You mentioned to me that you have a goodie drive. Help me understand what you meant by that because it sounded cool.
I like to try and give away as much free information as I can. I’ve thrown a bunch of financial spreadsheets in there, some analysis spreadsheets, and some PDFs with some good information, how to buy out of state rental. People can go on there and download it, see and try it out. It’s a treasure trove of good stuff.
At this stage in your life, are you still working a full-time job?
I am. I’ve got to go there in a couple of hours.
What I like about what you’re saying is that you’re not doing this to take big risks. You’re doing this simply, you’re doing it slowly, you’re doing it carefully, and you’re doing it with research and by learning. People can follow this path and do the same thing that you have done. They can stay with their job if that’s what they’re focused on right now and one at a time start acquiring these tiny little banks that keep generating interest for them forever. Lane, I love to ask this question because it helps me understand my guests better. Who, in all of space and time, would you like to have one hour to enjoy a walk in the park, a quick lunch, or an intense conversation with?
I’d say probably Tim Ferriss. I read his book and he seems to be a questioner like myself and always tinkering. I don’t know what he would be able to do for me in terms of real estate, but it would be interesting to talk to somebody like that.
I would share with him how I was so inspired by The 4-Hour Workweek book. Tim’s an incredible guy, and it’s a great choice. My final question is the change the world question. What is it that you are doing or would like to do, and it doesn’t even have to be related to what you’re doing right now, that has the potential to literally change the world?
Financial education is probably the thing that most people need to work on. If we don’t teach people to balance their checkbook or manage credit cards, that’s the first thing that needs to get taught. Where do you go once you get out of debt? It’s this investing stuff. Get it out of the current financial institutions that are like roller coasters and get it into Main Street investments that help people like you and me in putting investments in homes that you and I live in. That’s what we need to start achieving as opposed to following the Wall Street dogma and keep doing what they want us to do.
You are changing the world by helping everyone understand how their money works, how to best use their money to benefit themselves and their family. I want to encourage people to get busy. Lane started when he was 22 years old. No matter what age you are, no matter where you live, you can start right now. I hope that you take this lead and take action. Thank you, Lane.
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