080 | Real Estate Cash Flow, Depreciation & Passive Income: Strategies for High-Income Earners with Lane Kawaoka

Patrick: [00:00:00] Are you too busy running the business to build wealth outside of it? You’re not alone. For so many entrepreneurs, it feels like all the time and energy goes into building the business and there’s just not much left over to think about investing, especially in something like real estate. But what if you didn’t have to be the landlord dealing with toilets, tenants, and all the headaches that come from one of the most powerful wealth building tools out there?
Hey everyone. Welcome back to another episode of the Vital Wealth Strategies Podcast. I’m your host, Patrick Lonergan, and today we’re digging into real estate as a strategy for business owners who went to build long-term tax advantaged wealth without turning it into a second job. I’m joined by Lane Kaka, a former engineer who transitioned into real estate and has now built a portfolio of over 10,000 rental units worth more than $2.1 billion.
He’s a three-time bestselling author host of a Top 50 investing podcast and the [00:01:00] founder of The Wealth Elevator, which helps investors move from overwhelmed and overworked to truly financially free. In our conversation, lane shares how business owners can take the wealth they’re generating inside their business.
And start multiplying it outside of it through real estate without having to become full-time investors. We talk about how to vet deals, avoid common syndication traps, and what the path looks like as you go from active income to passive wealth. And if you’re ready to start thinking more strategically about your own plan, be sure to head over to vital strategies.com/tax.
Our team would love to help you start building out a personalized strategy that puts more money back in your pocket and get your dollars working harder for you. This is one of those episodes where a small shift in your thinking could unlock a whole new level of opportunity. Let’s dive in. All right.
I’m excited about our conversation today. We’ve got Lane Kaka. Uh, on the show. Lane is a former engineer turned real estate mogul who’s built a portfolio over [00:02:00] 10,000 rental units, totaling more than $2.1 billion in real estate. Uh, he’s also a three times bestselling author and host of a Top 50 investing podcast.
So thank you Lane so much for, for joining us here today. I’m, I’m excited about this. Yeah, thanks for having me. Aloha everybody. Lane, you’re the founder of the, the Wealth Elevator and, uh, you, you’ve built a portfolio over 10,000 rental units, and I’m excited to get into, uh, multifamily. I think that’s a fantastic opportunity for us to, to get into.
But before we get there, I, I think about our, our listener. You know, they’re an entrepreneur, they’re very excited about wealth building, and one of the things that we spend a lot of time talking about is. There’s really two fantastic ways to build wealth. The first one is, is building a business. Uh, but that can be really challenging.
You know, the number of business owners that don’t make it, uh, is really high. The second way to do that is investing in real estate. And the reason we think it makes a lot of sense is there’s really, uh, four factors that really drive that, [00:03:00] that growth. First is cash flow. People think about passive income with real estate, and that’s, that’s first option.
Second is appreciation. You know, the. The asset value goes up. Then next is the loan amortization. It pays itself down. And then, uh, one of our maybe favorite hidden wealth strategies in there is depreciation. You know, we can, uh, especially if we’re a real estate professional, we can, uh, accelerate a lot of that depreciation and offset other income, and we can, we can build wealth almost completely tax free.
So I’m excited about digging into. These, these different topics. But when I think about the listener and, and what the challenges are is like, uh, first it comes up as like, I don’t have time. I don’t have time to go be a real estate. You know, professional and dealing with the tenants and toilets, toilets and turnover and all those other, uh, other things.
So then, then there’s maybe an internal question of like, I don’t, I don’t even know how to do, you know, a real estate deal. I’m really good at this arena, but not, not that one. And then, uh, I. Finally, it might be philosophical in the context of like, geez, I see all these people making tons of money in real estate and it’s just, uh, it’s not fair that I can’t [00:04:00] get into that, that game.
So, um, thank you so much for joining us. If we can get into just a little bit of your background. Can you tell us how you went from former engineer to real estate mogul?
Lane: Yeah, yeah. Thanks for having me. Um, I, so my story, I call it the linear path. I was taught to go to school, study hard, um, was also taught to be pretty frugal with my money.
I. Graduated college in 2007, um, with a civil, uh, industrial engineering degree. Eventually got a civil engineering master’s, but started to work as a construction supervisor for a Fortune 50 company. I. And, um, you know, just taught to do the old 401k max out the 401k, and then also buy a house to live in, which I don’t necessarily think is the best idea for a lot of people out there.
But, you know, I was brainwashed, right? Like we were all by my parents and, um, bought that house to live in. But because my first job, you know, I was traveling all over for work as a young professional. I was never, I was only on one Saturdays. I just decided to [00:05:00] rent it out on a whim. And, you know, those four things that you mentioned, right?
The. I was hooked. Mm-hmm. That was 2009. Um, bought another duplex a few years later, and then several years later in 2015, I had 11 of these little rental properties. Um, and, and between then and then I. Uh, the first few units were in Seattle, Washington, where I lived at the time, so I could feel it, touch it, but then I went outta state, so had five rentals in Atlanta, four in Birmingham, one in Pennsylvania, one in Indianapolis.
So I was doing the remote landlord thing. Mm-hmm. Up until that point. And that was kind of where I became more of an accredited investor, um, by SEC standards, you know, million dollar net worth or greater at that point.
Patrick: Yeah. I love it. Uh, this is great. So. Can you tell us how you went from, because I think there’s a big jump that, that needs to take place from, from, ’cause it can be really slow.
You know, when I put 20% down, I buy something, uh, it [00:06:00] creates a little bit of cash flow. Uh, but unfortunately I figure out that pretty soon my cash flow goes into a major repair, like, you know, a roof or, you know, something along those lines. It can be hard to accelerate that growth. How did you go from, you know, acquiring these to, to really like, uh, the level that you’re at today?
Lane: Yeah, I think, you know, up until this point, I was just buying these properties somewhat turnkey, right? I wasn’t doing the by rent rehab, I wasn’t flipping houses, I wasn’t wholesaling houses. To me, that’s what you all do when you’re on the kind of the starter level of what I call the wealth elevator, right?
In the basement level, a lot of guys don’t have. You know, they don’t even make $50,000 a year. Um, they’re trying to get rich quick so they, you know, they see on HGTV, these flipping houses shows. Yeah. Um, my formula up, up until that point was just 20% down payment. Like you said, I was just a good saver with my money, but I got up to that point, you know, 11 rental properties, which created maybe a few grand of passive cashflow a month [00:07:00] after all expenses.
And it hit a sticking point where, you know, first, you know, you can’t get more than 10 Fannie Mae Freddie Mac loans in your name. Um, you can get 10 your spouse’s name too. So that’s a little trick, but. You don’t wanna own rental properties, right? Once you get a certain point. Um, with 11 rental properties, I had professional property management, but I was having maybe an eviction or two a year.
Some kind of big catastrophe happens every quarter. Um, and this is with 11 I. And you know, most of my clients aspire to more than $10,000 of passive cash flow a month. So you have to triple that exception rate at least. So now you’re talking about an eviction every other month, like something happening every week pretty much basically.
And it’s just not scalable. And then, you know, when you own rental properties, even through, like at LLC, you know, today we, we work with folks and we do the irrevocable. Um. LLC or irrevocable trust, so there’s a little bit more asset protection, but even if you’re buying these things with LLC, like you’re [00:08:00] still on the front line to getting sued on these things.
And you got like 30 tenants in this case. Right. So I was searching for, you know, there’s probably something next, right? And what does any smart kid do with an engineering degree? You know, when you’re buying single family homes, you buy multi-family. Duh, right?
Patrick: Yeah.
Lane: Yeah. So I. I kind of was searching around.
Um, luckily I was kind of still young at this time, um, was kind of in my early thirties and I just happened to meet up with other accredited investors, and this is why, the power of networking. But, you know, unfortunately you’re not gonna find any of these guys at the local real estate club. You know, those, you’ll find just like the, the lower net worth guys off the palaces.
But I went to a lot of national conferences and, you know, joined a lot of groups and networked like crazy. Um. It didn’t have any kids at the time and nothing better to do basically. Right. It took a lot of time. Yeah, and what I realized was there were a lot of people just in my shoes, right, the quiet wealthy who had a million, $2 million net worth or greater that [00:09:00] had, but had a bunch of rental properties.
But in the. You know, the genesis of selling those off to becoming a lp, a passive investor, limited partner. In a larger syndication where we have a group of 50 or 150 investors could take down a 200, 300 unit apartment complex. And the cool thing about that, just like when you’re owning a rental property yourself, you know, you don’t have all that Wall Street bloat like a reit.
Mm-hmm. Like a REIT is just crazy fees and expense ratios and that type of stuff. Um. In this case, with the syndication, you have a general partner that takes on the, the signing up of the debt, the liability, but you get pretty much direct access to the deal. They have carried interest, of course, but hey, that’s part of the joint venture, essentially.
Mm-hmm. And I got into this world and I was. I was sold. Right. I mean, the hard thing, and we can talk about later is like the, you know, we’re finding the right people vetting deals, but from a high level it’s like, yeah, why wouldn’t [00:10:00] anybody wanna do this? Right? And the tax benefits are stronger here. Um, that was kind of my transition around 2015, I would say.
I.
Patrick: Yeah, I, I love this. And, and I think we, we followed a similar path. You know, we, we had portfolio of small single family, multifamily, and uh, uh, I remember we went to this conference and it was expensive to get there, and it reshaped our thinking as to what was possible. And we were like, oh, okay. We’ve got the background.
We can go put together one of these. Um. These bigger deals and we, we found somebody to partner with and, you know, we put in a lot of sweat equity and not a whole lot of cash. And, um, it was interesting to just see how that opened us up to more of those, those opportunities. And you touched on a, I think a very, very important piece.
Um, two, two things I wanna highlight First is. You can’t just look at every opportunity that comes down the line as a real estate opportunity, whether it’s a REIT or, you know, uh, if you’re [00:11:00] accredited investor, there’s some ppms out there, you know, private placement memorandums that, you know, people put together.
Like, Hey, you can put some money into these things. And, uh. Uh, it’ll be a great, great deal. I’ve seen so many abuses on both of those side of things, you know, where the, uh, sort of reit, sometimes syndication deals are so bloated with fees. They have so many layers of affiliates in there that it’s like they’re making all of the money along the way.
And if any trickles out to the investor, great. But they don’t work out so well. Or the operator had some luck and they’re trying to scale this thing up and uh, they’ve get a high sort of management fee to just sort of run this process. But at the end of the day, um, they can end up. With all of the money and the deal goes bad and it’s like, well, uh, I’m sorry about that.
So I, I think there’s absolutely something to be, uh, said to just vetting and knowing who you’re dealing with and when you’re getting into deals. ’cause it’s, um, uh, I think it makes or breaks the opportunities. [00:12:00] Uh, finding somebody with a proven track record is a critical piece. So, um, this is great. So. Can you talk us a little bit, uh, you’ve touched on the wealth elevator.
I’m excited about this concept. Can you give us a, the breakdown of, you know, going from how do we start at bottom floor and sort of work our way up to, uh, really accelerating our wealth as as time goes on?
Lane: Yeah. Yeah. And, and maybe I’ll start with like the, the whole idea came about, like, there’s a lot of good books out there.
Like Dave Ramsey, cz Orman, but these guys write books made for the masses, right? A lot of guys in that basement level of what I call the wealth elevator. You know, this would be the floor. Like your nephew would be at basically right outta college. Um, or, you know, somebody who makes less than 50, $60,000 a year.
Not yet any net worth. Maybe under a hundred thousand dollars net worth. Um, I was lucky enough because I graduated with an engineering degree and, um, not too much student loans that I was kind [00:13:00] of put in that first floor of the wealth elevator where you’re, you’re a non a credit investor. Your net worth is still, you know, under a million dollars, you don’t make an extreme amount of money over two 50.
So you’re at what I call, this is kind of the adolescence of investing, right? You, you’re stuck, you’re not getting access to good syndication deals. And even if you did, it was, it would be with unproven operators, guys getting started. Um, but this is what I get and I did from 2009 to 2015. Um, and this is.
Frustrating part. Like this is not a get rich quick scheme. This takes a lot of years and it’s like watching grass grow, but mm-hmm. And you know, you’re basically limited to how much you can save. You know, most of people in this zone maybe can save 10 grand. You know, I was able to save. 50, a hundred grand.
So I was able to expedite through this level. But like I said, when I started to meet other credit investors, started to learn this trifecta of strategies where [00:14:00] you’re investing directly in alternative investments, cutting out the middleman. The tax strategies and then infinite banking too on the side.
And this is kind of what is the formula for the second floor of the wealth elevator? You know, these guys are our credit investors. So either make over $250,000 a year or net worth $1 million or greater. Now, I know we’re talking to a lot of business owners out there. Um, you know, likely if you have a revenue of $4 million, you’re probably in that second floor of the wealth elevator.
And this was the concept that, you know, like. There’s a lot of financial advice out there. Even like Rich Dad, poor Dad. Right. Rich Dad, poor Dad to me is mainly written for people in the basement and the first floor. Plus there’s no actionable advice in that book. Great mindset stuff for sure. Yep. But it was, um, my, my approach and in the book there’s like, in the middle of the book, there’s like a tear out table.
Right? A flow chart. ’cause I’m an engineer, of course, right? Yeah. Like the first step is like figuring out where you are. Right, because certain things apply to [00:15:00] certain places on the journey, and as opposed to taking the approach of going on TikTok and like getting all this random financial advice, certain financial advice is, you know, is more adaptable to certain places on the journey.
So it’s important to understand these different levels. Of course, there’s levels beyond that, but you know, those are kind of, kind of the, I think the second floor for people listening today is kind of the on wrap. Most people get on here. Mm-hmm.
Patrick: Yeah, I, I, I love this and I think you’re, you’re so right on, you know, a lot of the, the advice out there, it, it’s generated for the masses and it really doesn’t have anything to do with wealth building.
So, uh, I think that’s, um,
Lane: yeah, it’s more strategies of like, get on broke, right. And the, the basement, even the first floor. Yeah. Um, and, and that’s where like, you know, responsible people that have been at this for a bit. Amassing net worth, you know, it’s like, well, there’s no book [00:16:00] written for people on the second floor and then the third floor and then the penthouse.
Mm-hmm. Um, and then, you know, just kind of like I have a saying like, you know, act, act your wealth age, you know, I’m sure you and I aren’t going to the club at one 30 to 2:00 AM in the morning. Right. Like, those days are gone. Just like certain things like, you know, like. Yeah. I’m not gonna not have my $6 latte.
Like, that’s just not gonna happen. Right. Like, that’s silly. Absolutely. But you know, there was a time where I would go to like FinCon and hang out with all these super cheap, frugal people and like, these are the things that we would do, like credit card hacking, travel hacking, right? Like, that’s cool when you’re in your twenties, but you know, when you have family, like most of my clients today are in their fifties typically.
Mm-hmm.
Patrick: I, I love this. So I, I, I’m very interested in, in talking about, um. Sort of the opportunities you’ve created. ’cause I, I look at the, the, we’ll call it the high net worth individual, the entrepreneur, they are so busy, uh, [00:17:00] building wealth inside of their business, you know, and, and exactly like you said, our clients are, you know, net take home north of a million dollars a year.
And so it’s like they are not worried about, you know, the. $6 latte, they’re taking the direct flight a hundred percent of the time. They don’t care what the cheapest option is. So I, I’m curious about what, what are the opportunities out there? Uh, if somebody is going lane, this, this real estate thing sounds amazing, but I don’t have time or energy for that.
Can you talk us through a little bit about what a wise way is to get invested in some of these deals versus going out and taking a hundred grand and putting it down on a single family or duplex, uh, type property?
Lane: Yeah, I mean, we talked about the single family homes. I mean, it’s just not scalable that way.
And then the legal liability, right? Especially for people with a million dollars or greater, you’re actually a bigger target to get sued, where in theory, if you’re less than that, no one really wants to sue you. You’re broke. Mm-hmm. Right? There’s nothing really to get there. So. You start to [00:18:00] get into the syndication world where the tax benefits are are stronger with bonus depreciation there.
But the hard part here is, well, how do I get access to these country club deals, right? Mm-hmm. With this proverbial country club, right? These are all private deals where you have to go and seek out the operator and that’s what’s hard, right? A lot of this is like people try and play the fake it till you make it game.
Um, I’ve been in dozens and dozens of deals as a general partner lead sponsor. Um, and be a hundred plus as a LP myself. Um. Yeah, I think what you, the first thing I, I tell people is like, there’s a spectrum of operators in terms of experience. You have institutional firms, you know, these are the guys who have done billions of deals and then you’ve got newbie groups, um, you know, guys that are, haven’t yet won, met $1 billion assets on their ownership.
Right. And on the spectrum, you know, you’ve got. One’s gonna be a lot more expensive in terms of fees and splits. One’s you might get like [00:19:00] 80, 20 splits for all we know. But you definitely don’t wanna work with, or I wouldn’t look, I wouldn’t. You guys can make your own decisions, right? Right. Um. To me, I, what I try and look for are guys kind of in the middle, right?
The middle market, right? Good fee fees and split structures. Um, where, you know, there’s a good kind of nce uh, structure between the GP and the LPs. But you know, you definitely wanna find a guy who’s not in those first dozen or couple dozen deals, right? Because I’ve been there, right? Like my first 50 deals that I went into as a partner, um, I.
I would probably say maybe a few of those. I was like, shoot, maybe I shouldn’t have invested with that person or that deal. Yeah. But that’s part of the game. Um, and I try my best to like, I think that’s my role here is like try and get people past that step as much as possible. You know, if, if you played the Game Oregon Trail, like most of us have, right?
We’re that all that age, we’re aging ourselves here. I was never one to just. Charge [00:20:00] across that river by myself. I always find the guide. Right. And to me it’s kind of two parts here. You know, you analyze the people and then you analyze the deal for what it is not, not the returns profile, but what are the assumptions in the model that the operator is making to see are they being audacious with some of their projections or are they being conservative?
You know? And just to name a few, like what is their full, full. Occupancy assumption better not be 95% occupied or more, that’s way too high. That’s not possible. Um, from a underwriting standpoint, what is the reversion cap rate? What do they assume the market’s gonna be selling for in the future? Um, and then, you know, then you look at things like fees and splits, right?
That typically range between one to three 5%, right? Like you, it has to line up based on where this operator is in terms of the experience spectrum.
Patrick: Yeah. Yeah. Lane. And I think you bring up an important point too. I, and this is [00:21:00] a. Uh, sort of a fine detail when I, I look at investing in syndications, right?
Like I can, I can invest in a particular deal and I can look at that deal on its own, or I can just put my money into a fund, right? And I’m just gonna trust that the manager of that fund’s going to pick, pick wise investments. Uh, I, I think you just highlighted the importance of, of looking at a, a particular deal so I can analyze the opportunity, you know, on its own and make sure that the, um, you know, the gp, the, the general partner that’s putting the thing together is, uh, uh, looking at it with, uh, clear eyes.
Is that, is that a fair assumption that you, you, you like the, the single property versus the, um, blind pool?
Lane: Yeah, I mean, you know, I like to look at, I like to do single asset deals as a investor myself too. Mm-hmm. Because I have the ability to underwrite it and I wanna look at the deal where, I guess like some advice you hear out there on the internet is like, well just [00:22:00] invest with the operator.
Right. Pick, pick the jockey, you know, the horse and the jockey analogy. And I don’t, I don’t entirely agree with that. Like I get it. Look, if you’re an investor and you dunno what you’re looking at, then yeah, pick the jockey. I mean, that’s what I do when I, one time I went like horse race gambling. I didn’t know what I was doing.
I’m just gonna bet on the cool horse, right? Yeah. Um, and the cool thing about real estate is you in real estate, the jock that the horse, which is like the deal, if you underwrite the deal, um, it’s actually. You know, you can do pretty well. Where I think in, when you’re investing in businesses, like we also do some private equity investments ourselves.
It’s like flip flop. The operator is more important than the jockey. Um, and that’s kinda why my approach is like, alright, before I even look at the operators. You know, past history, I’m just gonna look at the deal first because if they’re underwriting with a reversion cap rate that’s lower than an entrance cap rate, they’re already being way too aggressive [00:23:00] there.
I’m not even gonna look at the deal. Um, so there’s a few things that I kind of stick to as like, it maybe a taking 80 20 approach to just cut down the time. ’cause you got, you wanna go through a lot of these deals, right? And you don’t wanna be jaded at the first deal, like this amazing deal. Um, but. You know, I think that’s, I kind of take a little bit alternative approach, but because I know how to, you know, take the p and ls and the rent rolls and the financials and do my thing, but I think some of the advice you hear is predicated on people who don’t know anything, which is, I think, short selling.
A lot of people out there, smart people, uh, and then they say, well just, just invest in the jockey, the good guy, right? But then I’m like, man, like. On the lower rungs when you work with people that are under $1 billion of assets, like these training groups that these guys go to. And then I’ve been to some of those conferences myself, right?
These fake conferences, non-industry conferences where they teach you more about like showing a good social media presence and getting interviewed on podcasts [00:24:00] Then like. Operating a freaking deal. It’s silly, right? I mean, yeah. I guess part of it too is like, the only way you learn about doing this is operating deals like we’ve had, um, and ups and downs, but mm-hmm.
You know, that’s unfortunately like the, the world of like newer operators, right? And for new investors, it kind of, man, it just makes things really tough, I think.
Patrick: Yeah. Yeah. This is great. So I, I’m going to. I’m gonna go back and highlight a few things that, that you mentioned. Um, so for somebody that doesn’t understand sort of real estate lingo, I wanna talk about cap rates for a second.
Okay. So, if a building is producing an NOI net operating income of a million dollars. Okay? And I buy that, uh, property at a, um. Let’s say a really low cap rate, like a four cap. Okay? That means I’m getting 4% on my, um, my money. If I pay, uh, a million dollars, or excuse [00:25:00] me, if I pay cash for that building, it means I’m getting a 4% rate of return on my, uh, my money when I’m at, um, a 4%, uh, cap rate.
So that means my. Um, um, price is going to be relatively low, right? Uh, lower cap rates means generally higher prices. And then if I’m good going to the future and I’m looking at, um, selling it, I should probably be using the same number. Right? You know, my in when I’m, what I’m buying at and when I’m selling at, you know, we’re gonna assume those cap rates are the same.
I think you were highlighting like if I’m buying it one cap rate and I’m selling it a lower cap rate. You know, it means my price is going to be higher in the future. And that’s probably not a fair way to look at doing that deal. So I think that’s, um, uh, an important piece to, to highlight. ’cause I, I think there’s, there’s a lot of wisdom in that and I think that the thing I want to point out is going back to your point on finding the guide to help you cross the river in the Oregon trail.
Um, having somebody that can come alongside you and look at these deals and analyze ’em, like we do that all the time with our clients. [00:26:00] It sounds like you are helping, you know, the people that are looking at your deals, uh, analyze those, those things as well. And I think that’s, uh, that’s great. ’cause most people see the spreadsheet, they see the proforma and they’re like, I have no idea what all these figures mean.
I don’t know what I. Um, you know, the debt service coverage ratio should be or shouldn’t be, but those are important factors. So I dunno if you have anything else to to highlight there, but I think that’s, uh,
Lane: yeah, a a bunch of things. I mean, debt service coverage ratio should always be 1.25 or greater. So you’re able to hit your debt service with a little bit of buffer there.
But, you know, adding onto your, your discussion, the cap rates, right? Cap rates are what some people use that as sort of like, well, how good is your machine? Rolling at, right. How much money is it making? Um, what I’m talking about at upfront, um, due diligence is, you know, in like, you know, you have a spreadsheet, right?
Just like your guys’ businesses, when you guys are trying to sell your business, it’s a model. It’s a silly spreadsheet. Mm-hmm. It could be pretty advanced, right? As most of these things are. [00:27:00] Um, because it’s just a template of course, but to me, the biggest number sell on that spreadsheet in multifamily real estate is the reversion cap rate spread.
Uh, sell. So what this thing is, is like, it’s an assumption of what the heck this asset is going to trade for in the future. So you can buy a class B acid in Dallas, for example. You know, I’m gonna take a, take a stab at this ’cause it’s been, yeah. Um, we had the correction these last several years, but let’s just say it’s a five cap.
Today.
Patrick: Yep. Yep.
Lane: And, um, you know, in the underwriting, you wanna us usually assume that you’re selling it into a crappier market. Imagine that, um, to be conservative. So an operator might use as underwriting a five and a half, right? So increase the, what this assets are trading for or what we call the prevailing cap rate.
What are these as same assets in this submarket and what this asset is trading for today. And you want to increase it to assume to be a little bit more [00:28:00] conservative. So. You know, an investor in LP doesn’t have to be super sophisticated. It could probably look for the sell on the spreadsheet or in the underwriting or just ask, you know, what is the, what is the, these assets trading for today?
Five. Five. What is, what are you guys assuming that’s gonna be trading for in the, in the future prevailing cap rate or reversion cap rate, or exit cap rate? All these three things mean the same thing, five and a half. Now if they say it’s four and a half, that means they’re being more aggressive and that’s a big red flag.
Mm-hmm. For example. Yeah. But you know, this is something that like, say they, they said it was a five, so they, they’re assuming, they’re saying selling in the same market that might and, but, but I look at the diva, I’m like, well, let me down regulate this to be, you know, the same standard of conservativeness as anybody else that underwrites it as the industry standard.
Well, maybe a, when they put out the deal, it was gonna be a hundred percent return in five years. But when I normalize it, it’s really like 65%. You probably wouldn’t [00:29:00] invest in the deal, but that’s where I’m like, a lot of new investors, they just take what’s on the PDF, but you also have to regulate it based on what the assumptions are.
And that just one, that one, that one selling the spreadsheet, half a percent went away. Just fudge the numbers. 30, 40%.
Patrick: Yeah. Yeah. I, I love this.
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So another thing that we think about when it comes to real estate. We’ve talked about cashflow. Cashflow drives the value of the asset. A lot of times in real estate, uh, there’s mom and pop operators, they’ve been doing it for a long time, they’re sort of tired and there, there might be some opportunity to sort of, uh, fix that cash flow.
How much of that are you, are you looking for because I, I know you highlighted like a class B property. If I had to pick an asset class, class A is like brand new, just built, um, um. Higher net worth people are living in those properties. Uh, we’ll say Class C is very run down, it’s tired, um, you know, probably subsidized housing, that type of thing.
B is like, Hey, we’ve got our, um, you know, middle class folks living here. There’s generally some opportunity, kind of an older building might be 15, 20 years old. [00:31:00] Um, and feel free to correct anything there that I just said, but um, yeah. How much opportunity are you looking for to like fix the. The operations or cash flow to really drive the value up?
Lane: Yeah, I think, I mean, our strategy has kind of changed over the years. Like when we first got started doing this, we’d buy a lot of like crappy class. C Um, normally the age, I think I go off of age, so like 1975 and older. Probably B class C, it’s like 1960s properties. Um, probably what maybe a lot of us lived in in college, right?
Like that kind of garbage. Um. We would buy a lot of these, like smaller units too, but they’d be bigger turnovers, like mm-hmm. Bigger renovation bumps. Um, and these, you know, we made a lot of good money with this, but like during the hold, like, man, it was just difficult working with this, the clientele, as you could imagine, like, you know, some of these deals we’d [00:32:00] have like 80% occupancy or fi or economic occupancy, which means you, you know, maybe the property’s full 100%.
Yeah, but you only, you have 20% of the people’s deadbeats not paying rent. I mean, that’s just how it is. Yeah, right. Absolutely. That’s just how it is in the Class C world. Later, we stepped up to more Class B, you know, nicer properties, and then even getting into the A’s and then developing, right. That’s even the ultimate nice, better clientele.
But you know, as we kind of went along, we kind of went a little bit more lighter on the value add side as you go to class B, right? Mm-hmm. So renovation budgets in the Class C side are a lot deeper, so maybe $10,000. Um, you know, if I normalize it just for the same market, like Texas, for example, right?
Mm-hmm. Where the Class B side, there’s less things to do. You know, it’s so the. As we’ve kind of went along, um, we’ve kind of gotten more conservative in the, the undertaking in a way, but I’m [00:33:00] not gonna say that that’s it, that’s the right strategy. It’s just that what the operator, what’s their, what they do.
Um, I know I’m good friends with some people who take down very hideous projects and they, um, they look for. Things that are like less than 50% occupied, I then, that’s another thing we try and fix, um, state of properties that are 85, 90% occupied or greater so we can get the good financing on the, on the entrance.
Yeah. Um, I think as we move along, I think we’re, we’re kind of following that trend. Like we just, we don’t want to. You can make great money when you work with more hideous things. Yep. But that’s kind of been our company trend to kind of get away from that. Yeah. As a time being. And just
Patrick: to highlight that for just a second, you can absolutely make more money.
You can also lose more money and the amount of time and energy that goes into those opportunities is just, is just greater. And the stress level is greater. And so it, uh, anytime you’re doing construction of any sort, you [00:34:00] know, and we, we’ve done some ground up development stuff to, uh, anytime you’re building something versus coming in and fixing a, an already operating cash flow opportunity, uh, there’s just more risk involved.
And so, especially when you’re cleaning out the whole sections of the property to, uh, remodel those, uh, to, to get it done efficiently and effectively, I get. It just brings the risk level up and the stress level up. And so, um, yeah, as we just generally see as investors, one of two things happen. They either mature and they go, okay, I’m really good at this thing right here, right now.
I’m just gonna do more of this thing, you know, we’re gonna scale that thing up. Or they go, oh. Uh, I made some money here. I’m going to make my life a little easier and move up, uh, sort of class rank in, in property and, uh, uh, not have as much, I’ll say, stress in my life. So, yeah, I think those, uh, I, I appreciate your approach.
It seems like it’s the, the wise, mature thing to do. So,
Lane: I mean, it’s also is like market dependent too, like I think. [00:35:00] Like what we’re seeing now, the lower end properties are, are kind of taking a beating at this point just because, you know, you know, just to give people a little bit of, um, history lesson in 2020, you had the pandemic interest rates went pretty much down to zero again, and you had this like, free for all cash.
So all these new developers, us, our ourselves include, we, we build a couple properties, so we’re guilty as this is as anybody else, but all these new. Builders start to build from 2020 to 2023. And you know, buildings take a year or two to, you know, come out as babies, right? Babies take nine months, buildings takes a couple years.
So right now they’re all flooding the market right now. So you have a lot of new inventory, comp competition. So that’s lowering the price on the class A Normally when you launch a a new property, you have a concession of like one to two months of free rent. Now it’s like two to four across the country.
So what [00:36:00] this is doing is absolutely beating up the Class B and C properties at this point. Now this is just a temporary thing, right? But this is just an example of all these kind of micro trends that are happening amongst the big thing. But you know where you start at the top, right? Like all this multifamily.
Yeah, it makes all sense, right? But there’s these, there’s micro trends that kind of happen based on like, you know, free money, free for all money in 2020 to 2023, creating all these. Building babies now and then, you know, this will work its way through the system. 20 26, 20 27, things will get back to, to normal and you’ll have that elasticity and going back to the Bs and Cs.
Um, but yeah, I mean, you said earlier like the, the term recession proof, like, I mean, nothing’s completely recession proof, but the theory is, is, you know, in tough times. People need more value-based living options, so mm-hmm. Rents $800 to $1,100 rent, and that’s where these class B and C properties reside.
And, [00:37:00] but you know, you have these micro trends that kind of occur.
Patrick: Yeah. Yeah. I love this. So I, I want to take this a couple different ways. Let’s, let’s talk about economic downturn and when we think about the universe of investment opportunities out there when it comes to real estate, I’ve got. Uh, commercial industrial office, multifamily.
Okay. And I’d like to get your opinion and then we can sort of have a conversation around, um, which of those asset classes makes the most sense if the economy starts turning down? ’cause I, I think there’s. One thing I’d like to acknowledge is we, we had our last recession in, you know, oh 8, 0 9, and that was 17 years ago.
Economic cycles are generally 10 or 12 years, and so I feel like we’re a little bit overdue for a recession. Uh, who knows if the. Uh, current sort of disruption in the economy with tariffs and that type of thing is going to be the thing that kicks us into that, or if it’s going to be something else. But what I do [00:38:00] know is we do go through economic cycles and whether one’s coming, you know, this year, next year or the year after, I don’t know, but, uh, they, they do tend to come.
I’m curious what your thoughts are on, um, you know, multifamily versus some of those other asset classes and how they can weather a storm in, in a recession.
Lane: Yeah, I mean, commercial real estate, so multifamily office absolutely got killed the last two to three years. Um, it went down 20 to 30% off the peaks worse than 2008.
And the reason being, um, you know, single family homes didn’t really kind of stayed strong. The reason being is, um, with single family homes you have 30 year. Um, mortgage cycles, right? So prices, demand drops. People don’t sell because they don’t have to. We, in commercial real estate, you know, most people will use bridge debt on value add projects and mm-hmm.
When the demand drops, like how it did, like we stopped buying in summer of 2022 and interest rates start to go up and that’s where the [00:39:00] demand dropped. But, you know, people had to transact because the loans. Expired. Right? They’re on shorter term. So that’s why you, you’re seeing a 20, 30% drop off the peaks, which makes commercial real estate very, very appealing today, right?
So if you are a contrarian investor, you need to take note of that. But the problem, you know, here’s the problem with like, why we haven’t really bought anything in the, in our space yet, is you need two things to make a deal work. You need the price, which is what we have, right? The lower price today. But.
But debt isn’t comboing to make the deal work. Right. So like today, you know, I used to get 75% leverage on these projects today. That’s like way less like in the sixties. Yeah. And that just kills my numbers. Like I just have to bring a lot more to the table. Um, I can get the economics, want to kind of pull the trigger on a deal.
So I. Look, I, I think long term, and we can come back to this long term, I [00:40:00] like real estate, um, multifamily for sure, but it, at least from what I see, like the fed rate’s not gonna come under three and a half percent maybe in the next five, 10 years. You know, so I’m assuming it’s gonna be like this for the long haul.
And if people don’t believe it, you can go to the chant on financial curve. That’s probably the best indicator where interest rates are going to be. Um, that error free money is over. So from that perspective, uh, real estate lost a big trade win to our backs. Mm-hmm. Um, and this is why we’ve also started to look at investing in private equity deals, you know, and kind of getting away from real estate a little bit, unless in, of course, every individual deals different, right?
Mm-hmm. But I’m just speaking in terms of generalities. Yeah.
Patrick: Yeah. I, I love this. And, and I think there’s, there’s a few. Points that I, I’ve sort of seen through, um, you know, we lived through 2008, uh, nine, 10 with the, um, sort of recession taking place. And one thing that [00:41:00] we, we noticed was there’s sort of two factors and, uh, location matters, you know, where you’re investing I think is important.
If that economy is strong, it it, it helps. Um, and then the second factor was we, we had some business partners that had. Uh, industrial property warehouses that were sitting vacant. You know, there was, it didn’t matter what they did with their leases, there was just nobody to fill that space because the economy wasn’t producing enough products to like make that, uh, that asset viable.
Same thing with, uh, some retail and office space. It’s like, look, if businesses are not thriving, they’re not opening up new storefronts. And so, um, that can be. Be a challenge. You can again, move the rent to zero and there’s nobody to move in. We’re multi-family. You drop the rent 10%, somebody’s moving into that property and uh, you know, you can at least keep your cash flow going, which we like.
And you, you highlighted that too. You know, when. Uh, when times are good, people are moving up into, you know, uh, residential, uh, [00:42:00] properties like B uh, they may moving outta the C into the B and then when things times are tough, they might be moving outta the A, into the B. So it’s, um, we, we like multifamily for those, those reasons.
Um, and I also am curious about your. Comment on private equity. ’cause I feel like private equity and real estate investment are very similar. They’re hyper-focused on, on cashflow and how is this deal performing from a cashflow perspective? And so, um, I dunno if we wanna wander too far into that, but, uh, do you wanna give us to your thoughts on, on the opportunities in, in the private equity space?
I mean,
Lane: I, I think we’re talking when, I mean, private equity, it’s like you got, y’all brought, owning your own businesses, right? Mm-hmm. Yeah. This can be a, a variety of different things, but. I think the hard thing of, with real estate, you know, and this is my, I know I’m talking to business owners out there, and we all, everybody thinks the grass is greener on the other side.
Maybe I’m making a, I’m on the real estate side, looking over at PE side and vice versa, the listeners the opposite. [00:43:00] You know, here’s the crappy thing about real estate. As I mentioned earlier, interest rates aren’t gonna come back to what it was. Um, that’s number one. Number two. Like, we’ve seen taxes and insurance just skyrocket on these things.
I’ve had properties where it triples. Mm-hmm. And the funny joke is, well, what do you do when that happens? Yeah. You sure? You’re tested, you get a lawyer, blah, blah, blah. But Right. You pay it, you pay the dang thing. Right. Because you have to, they’re uncontrollable expenses. And the all the good things about real estate, the bad things is like, there’s not that many levers that you can pull.
Right. It’s a very simple business plan. There’s not much levers you can do, whereas you guys out there are owning businesses. It is a lot more risk, don’t get me wrong. Mm-hmm. Whereas real estate, it kind of stuck. Um, you know, you know, I don’t wanna be argumentative, but like, to add, counterpoint to what you just said [00:44:00] earlier, you can just lower your rent 10% and get some people in there.
But that’s a race to the bottom. You do not wanna do that because then you’re just gonna get garbage tenants. Who’s gonna jack your property up 12 months, 18 months down the road. You’re probably gonna have, I mean, not probably, but just a higher level of evictions. Mm-hmm. That you’re just gonna kind of kick, you know, kick the can down the road with that.
So you can’t play the game of just, you know, dropping it, dropping it, dropping. You gotta keep it where the market is at so you can attract. The better tenants because Yeah. You know, again, I’m talking to business owners out there. You have employees. You guys know that the good employees is a rarity out there.
No different than tenants. Like, yeah, there are. Maybe you could say that most of ’em are really bad and we need to stay away from ’em. But the way to do that is kind of keeping your rents right at market and then being really good on your standards for letting the right ones in. Mm-hmm. Doing your background checks, but.
You know, like [00:45:00] that, this is kind of where it’s like, well, shoot, you just confused me lane. Like, you know, there is no right or wrong way of doing this. I think like, look, I had my real estate portfolio. I wrote, I wrote a good wave from 2009 to 2022. I had 90% plus of my net worth in real estate, and that wasn’t, I learned a lesson, right?
And I’m kind of, I’m always gonna have real estate, don’t get me wrong. Yeah, I’ve bad talk real estate for the last five minutes, but. I, I still like it. I understand it. I can underwrite it. Um, but I’m looking more of like a diversified approach, is kind of what I’m looking to do personally. You know, everybody’s in a different situation, different net worths, different times in life.
I’m still in the growth stages myself, but, you know, coming back to real estate, you know, they’re not making any more of it. We’re in a population growth country. Some people argue with that. But then I would say, well, when we go after workforce housing is really my investment thesis. And the reason being [00:46:00] is the rich are getting richer, the poor are getting poor.
The lower middle class is getting bigger. The middle class where maybe I started is shrinking and to become the lower middle class, and we’d sure like to house them in our apartments.
Patrick: Yeah. Yeah. I, I, I love this and I. I totally agree with you in the context of turnover and trash. Tenants are not anything you wanna deal with.
’cause it, it just, it’s so expensive. Uh, it might be short term win, but, uh. Um, you know, lowering that rent 10% might, might cause more problems than it’s worth. Um, so I, I think this is, this is great. Lane. This has been a fantastic discussion around real estate as a wealth building tool. Uh, we, we, we’ve dug into some, some nuance there.
If somebody’s interested in, in learning more about the wealth elevator and sort of getting plugged into you and everything you’ve got going on, what, what are the best ways for, uh, people to do that?
Lane: I. They can, [00:47:00] uh, go on Amazon. Um, just type in the wealth elevator. I’m sure it’ll pop up. It’s got at least a hundred reviews there.
Mm-hmm. Um, if they buy it and they leave a nice review and email it to us, um, we’ll hook come up with the PDF and the MP three version. Um, I know myself, I don’t read too well. I just listen to things these days, so.
Patrick: Yeah.
Lane: Um, I think there’s audible, there’s an audible version too. Um, I sat down and recorded that myself, but.
Great. Yeah. You know, I would say the first part of this is like figuring out where you are at. Mm-hmm. Figuring out what your cattle grade is and starting from there. Um, you know, always, always, uh, would like to have calls with people, kind of point ’em in the right direction, you know, for some, some cases, I mean, these retirement accounts don’t make any sense.
Sometimes it does. I know. I mean, it depends on where you are in this, this wealth elevator journey.
Patrick: Yeah. No, I, I love this. So, first step, figure out where you’re at in the map, and then, uh, from there you can [00:48:00] create a plan. Um, I, I also have been impressed with all of the content you’ve got on the wealth elevator.com.
I, I think there’s a, uh, fantastic resource there so people can go check that out. We’ll have links to that in the show notes along with the book. But, uh, uh, lane, this has, this has been great. You know, when I think about building wealth. You’ve highlighted a few key points, and I think it all starts with, um, really a basis in cash flow, whether it’s a business or a piece of real estate.
Every dollar that we can increase that cash flow increases the value of that asset generally by a multiple. And so I. We think it’s the best way to build wealth and you can build financial security doing some of those things that you discussed early on with Dave Ramsey and Susie Orman. Like they’re, they’re like in the basement level and, you know, help you get unbroke and sort of build up to a point where you know, you’re.
Portfolio can support your lifestyle, but that’s not really wealth, that’s not impact type wealth. And so, uh, I, I [00:49:00] appreciate the good work you’re doing here on, uh, really getting these principles out into the world for, for people to, um, learn what it looks like to, uh, uh, accelerate that, that process. And, and we think about what happens if they don’t.
Right. You know, if I just keep doing what everybody. It taught me to do in school. You know, I go to go to work, get a good job, I start putting some dollars away. That, that can be a frustrating process. Uh, ’cause it, it doesn’t ever feel like we’re really ever getting ahead. So, uh, I think this is, this is great.
Anything else to add, uh, before we, before we wrap up?
Lane: Yeah. You know, I think a lot of people out there, they probably run businesses that make over a million dollar in revenue. You know, obviously the first thing to do is like, work to sell and exit the, the business, whether you do mm-hmm. A, a partial sale, see on board or, you know, I, I think the goal at the end of the day, even for my clients is to get the four or $5 million net worth, which is somewhere around the third, fourth floor of the wealth elevator.
Um, there are things past that for sure, but you know, when you [00:50:00] go over 10, $20 million plus for sure, but. To get to that first rung of four to 5 million, that’s enough that you can retire off a 4% withdrawal rate and, you know, give a couple million to each of the kids. Um, anymore might be overkill from a, you know, spoiling kids from that perspective, although it’s the generation three that you gotta worry about, worry about more.
Um, but, you know, I think that’s, I, I, I always. I think it’s the sprint getting to that point and my, mm-hmm. Or my attitude and style is like, once you get there, just relax and trade time for, or trade money and time for experiences at that point. Mm-hmm. But, you know, I think that’s at, at that point, that’s I think where a lot of people are pretty close to probably listening.
At this point. Yeah. And if you wanna keep growing the wealth after that, then yeah, sure. Getting deal flow, aligning, analyzing deals, going into private equity makes a lot of sense to stay on that road. But for most people, that’s, that may not be a path. You may just [00:51:00] wanna put it into life insurance or TBIs and chill in a way.
Yeah. Yeah. But get to that four, five mil, that’s, that’s the big, I think that’s a big, uh, stopping point for a lot of people.
Patrick: I love it. And, uh, you know, that that takes a fair amount of work. You know, you really kind of gotta put your nose down and and grind to, to get there. And, um, uh, you highlighted some key points too about keeping your expenses as low as possible so you can allocate more dollars to, uh, sort of that net worth column.
I think that’s, I. There’s a lot of wisdom in that too. And that’s, that’s an unsexy answer that most people don’t want to hear, but it’s, uh, it’s very true. So, lane, this has been a fantastic conversation. I do appreciate it. Again, I, I encourage everybody to go check out, uh, the book, the Wealth Elevator, and, uh, you can also go to the wealth elevator.com and see everything that lane’s got going on there.
But, um, uh, this has been great. Thanks. Thanks so much for tuning in to this episode of the Vital Wealth Strategies Podcast. I hope you found a ton of value in my conversation with Lane today. And that it gave you a clearer [00:52:00] picture of how you can start using real estate to build real lasting wealth outside of your business.
If this episode sparked something for you, I’d love for you to share it with a friend or colleague who could use this kind of insight. You never know who’s one conversation away from a breakthrough. And if you’re ready to start building your own strategy and taking action on the ideas we talked about, head over to vital strategies.com/tax.
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You’re vital to your family, creating abundance in every aspect of life. And you’re vital to me because you’re committed to growing your wealth, leading with purpose, creating something truly great. Thank you for being a part of this incredible community of vital entrepreneurs. I appreciate you and I look forward to having you back here next time on the Vital Wealth Strategies Podcast, where we help entrepreneurs minimize their taxes, master [00:53:00] wealth, and optimize their lives.