All Forum Posts by: Lane Kawaoka

We’re not back in the early 2000s when you could buy/hope/pray a rental property for $70,000 and get $900 a month in rent—that’s just not the case anymore. The game has changed. My first rental in Birmingham I bought back in 2012 is now around $148,000 and rents for $1,000.

It’s all about adding value. You need to do renovations, improve the property, and drive up rents. The same applies to buying businesses whether it’s online businesses, plumbing companies, or professional services like a CPA rollup.

Hey John, I’m going to give you a bit of a different answer here, beyond the usual high-level stuff, I think your question goes deeper than something that can just be answered in broad strokes. It really comes down to genuine human connection with others in the space or quantifiable things like underwriting of the deal.

That said, the past few years have been challenging, with interest rates going up and commercial real estate coming down 20-30% from the highs. It’s tough, even for myself who bought properties at what we now know in hindsight as the peak. But I wouldn't jump into a deal with people I don’t know well or here they are good—that’s not the best way to learn.

Instead, I’ll take a different approach here. If we're looking at the numbers alone, rather than the people behind the deals, I would focus on a few key things. Let me break it down for you.

1. Reversion Cap Rate: Ensure the reversion cap rate assumptions are realistic and aligned with current market trends. What is the prevailing cap rate in the market for this asset class and make sure that the reversion/exit cap rate is half a percent at least increase bc you're assuming that you're selling it in a junker market.
2. Loan Terms & Exit Strategy:
   • Verify the loan terms (e.g., 3+1+1 extension structure).
   • Confirm if the deal involves bridge loans or fixed-rate, long-term agency financing.
   • Assess if the extension options are realistic based on the current and projected market conditions. Not saying its a bad deal based on loan terms because it might make sense just know as an LP what you are getting into.
3. Market Type & Competition:
   • Determine if the property is in a primary, secondary, or tertiary market.
   • Evaluate supply and demand, focusing on new inventory coming online in primary and secondary markets versus more stable tertiary markets. Secondary markets like Dallas/Phoenix are great growth markets but a lot of developers go there so it create a cyclical market where tertiary markets are the opposite and thus more boring linear markets. Again not saying its a bad deal based it might not align with your investment philosophy.
4. Rent Growth Projections:
   • Analyze rent growth assumptions.
   • Determine if these align with past trends in the market area and take into account inventory coming online. Stronger markets I might use a 3% rent/year escalator factor... OKC (I always pick on this market) I might use 1-1.5% a year.
5. Renovation Scope & Budget:
   • Break down the renovation budget per unit and scope of work.
   • Identify whether renovations are light ($5-10k per unit) or comprehensive ($15k+ per unit). Does it validate the bump in rents... this is going to be out of the scope of 95% of LPs out there who don't have access to Co Star etc.
6. Age and Condition of Property:
   • Assess the age of the property (e.g., 1960s-1990s).
   • Evaluate potential maintenance issues and the adequacy of contingency budgets for older properties. I am a little shell shock from 1980s and older since things just break like my old 96' Honda Accord.
7. Track Record & Past Performance:
   • Evaluate the operator's past deals using third-party reports (e.g., CoStar, Yardi) - these cost 10-20k a year and again this is not in scope or access of LPs.
   • Verify past performance metrics (walk past assets and secret shop their staff at assets) rather than relying solely on marketing materials.
8. • Visit comparable properties physically to validate rent assumptions. Again this requires boots on ground and most LPs will just take word of GP

We will be diving into deep into a topic that investors like you have submitted. Ask your questions live in this interactive training session with Lane.

Note: This is not a session to discuss funds open for funding instead the goal of the meeting is to further your investor education or anonymous personal finance questions. If you are looking to deploy capital with us or have a specific question about an open deal, book a call with our Director of Investor Strategies or call (808) 698-5853. [email protected]

Why UDFI Might Not Be a Big Deal:

Low Passive Income: In most syndications, the passive income flowing back to you is often minimal, especially in the early years due to depreciation and other expenses. This results in a very low amount of income subject to UDFI and, consequently, UBIT. This is the biggest thing if you are going into a lot of deals which what you should do anyway due to diversification.

Solo 401(k) Advantage: If you're using a Solo 401(k) instead of an IRA, you avoid UDFI entirely. While Solo 401(k)s are still subject to UBIT, the absence of UDFI can simplify tax considerations and reduce potential liabilities.

Structuring for Tax and Liability Benefits:

While some investors consider setting up an LLC to loan money to a syndication, this approach is often overly complicated and not typically worth the effort, especially from the syndicator's perspective. A simpler and more effective strategy is to understand the tax implications and plan accordingly, possibly by working with a CPA who can review the specific syndication's operating agreement.

While UDFI is a factor to consider, it shouldn't be a deterrent to investing your retirement funds in real estate syndications. The potential tax implications are often minimal, and with proper planning, you can maximize the benefits of your investment while minimizing any tax burden.

When I started working, I was like most people—brainwashed into thinking that putting money into a retirement plan was the right thing to do. I remember when the Vanguard guy came to our office, pitching us to invest our money into retirement accounts. This is the standard advice: put your money into these retirement accounts and let it grow into a big pile of money by the time you retire.

But think about it—this approach is flawed. You don’t want to wait until the end to use that money. When you reach retirement, you’ll start drawing down from that pile, and you definitely don’t want to touch the principal. Instead, you need to convert it to cash flow. So why not start with the end in mind and create multiple streams of income? Think mini pensions or rental properties that provide steady cash flow.

However, if your net worth is under $4 to $5 million, you’re still in growth mode and should keep your day job. The cash flow from your investments can then be reinvested to generate even more income streams.

Four big reasons why I chose to pull my accounts back in 2012-2014 putting money from these qualified retirement plans (401(k)s, Roth IRAs, and other Qualified Retirement Plans (QRPs)):

1. 1) Taxes: You’ll pay taxes on this money eventually, despite what you might hear about tax-free growth. Taxes are likely to go up in the future due to government entitlement programs. So, it’s smarter to pay taxes now when rates are lower.
2. 2) Income Growth: For those of us striving to hit several million dollars in net worth, we expect to make more money in the future. If your income grows, you’ll be in a higher tax bracket, so paying taxes now at a lower rate makes sense.
3. 3) Access to Funds: The government keeps pushing back the age at which you can withdraw from these accounts without penalties. You want the flexibility to access your money sooner.
4. 4) Tax Benefits from Real Estate: When you invest in real estate, you can take advantage of depreciation and losses to reduce your taxable income today. If you achieve Real Estate Professional status, you could potentially drive your income down to zero, minimizing your taxes.

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Join Us for the Wealth Summit on Aug 1st!

Attention everyone!

We’re hosting a Wealth Summit on taxes, legal protection, and investing, featuring seminars by Ethan Okura and Lane Kawaoka.

Event Details:

Date: Thursday, Aug 1st 2024

Time: 5:30 PM

Location: Honolulu, To be announced

Agenda:

Seminars:

530-645 Tax and Legal Protection - LLCs and Trust

645-730 Investing in Real Estate and Alternative Investments - Introduction to due-diligence

730-8PM Q&A Session

Pau Hana Drinks: Networking and socializing after the seminars

Reposting my response from that other thread you had here again:

Going to say this be great care as it is emotionally difficult to process, speaking from experience.

Properties bought in 2021 are worth about 30% less now. The market has corrected, and unfortunately, this means that the value of your investment has taken a hit.

The main issue is that these properties were purchased at a high basis, meaning you bought when prices were inflated.

Another thing to consider is your loan. If it’s coming due soon, refinancing could be tough. Banks have tightened their lending standards, and where they used to offer 75-80% loan-to-value ratios, now they’re only offering 55-65%. This could mean higher monthly payments or even the need to bring additional cash to the table.

It's a tough situation because these kinds of deals, especially ones from 2021, are facing what we call the “kiss of death.” They just weren’t bought at the right time, and the market hasn’t recovered enough to bring those values back up.

It really has nothing to do with operations of the asset. Its simple what is the BOVs and where is the senior debt.

Going to say this be great care as it is emotionally difficult to process, speaking from experience. 

Properties bought in 2021 are worth about 30% less now. The market has corrected, and unfortunately, this means that the value of your investment has taken a hit.

The main issue is that these properties were purchased at a high basis, meaning you bought when prices were inflated. 

Another thing to consider is your loan. If it’s coming due soon, refinancing could be tough. Banks have tightened their lending standards, and where they used to offer 75-80% loan-to-value ratios, now they’re only offering 55-65%. This could mean higher monthly payments or even the need to bring additional cash to the table.

It's a tough situation because these kinds of deals, especially ones from 2021, are facing what we call the “kiss of death.” They just weren’t bought at the right time, and the market hasn’t recovered enough to bring those values back up.

It really has nothing to do with operations of the asset. Its simple what is the BOVs and where is the senior debt.

Remember when it rains it pours... in other words, occupancy will dip and in conjunction with higher expenses and lower/flat rents so its not just one metric moving.