221: Strategic Stability: Investing Wisely in Volatile Markets – Lane Kawaoka

Big Mike Fund Podcast
Big Mike Fund Podcast
221: Strategic Stability: Investing Wisely in Volatile Markets - Lane Kawaoka

Welcome to a new episode! Today, we’re thrilled to welcome Lane Kawaoka, a best-selling author, real estate syndicator, and podcaster at TheWealthElevator.com, to share his wealth of knowledge with us. With over 12 years of experience as a Licensed Professional Civil/Industrial Engineer, Lane made the bold decision to transition from engineering to full-time investing, ultimately empowering others through his Passive Investor Accelerator & Mastermind.

Lane’s journey began in rainy Seattle, where he learned the ropes of real estate investing as a young college graduate. Armed with a passion for “Cashflow Investing” over “Appreciation Investing,” Lane strategically built a portfolio of 11 single-family rentals across various markets, from Birmingham to Pennsylvania. Today, Lane’s focus lies in syndications, particularly in Class C & B Multi-Family Apartments, RV Parks, mobile homes, and assisted living facilities. His mission? To democratize access to lucrative investment opportunities once reserved for the elite, providing regular people with pathways to financial freedom.

In this episode, Lane delves into a myriad of topics crucial to real estate investors. He discusses the systemic impact of borrowing rates on the real estate market and emphasizes the importance of maintaining an objective perspective in investment decisions. Lane also sheds light on the dynamics of capital calls and investor participation in real estate deals, stressing the necessity of securing new funding for existing investments.

Furthermore, Lane provides insights into the impact of economic downturns on commercial real estate and shares strategies for strategic investing and achieving market stability. He emphasizes the importance of adopting a long-term perspective in real estate investments and explores the current state and potential opportunities in the wine industry for investors.

Lane’s expertise and unique insights promise to enlighten and inspire both seasoned investors and those just starting on their journey. Don’t miss out on this enlightening conversation with Lane Kawaoka. Tune in now to gain invaluable wisdom that could transform your approach to real estate investing!

00:23 – Guest Intro: Lane Kawaoka
02:08 – The systemic impact of borrowing rates on the real estate market
04:38 – The importance of objective perspective in investment decisions
09:28 – The role of capital calls and investors in real estate deals
14:58 – The importance of new funding for existing investments
20:30 – The impact of the recession on commercial real estate
25:09 – Strategic investing and achieving stability in the market
30:22 – The importance of a long-term perspective in real estate investments
33:54 – The current state and potential opportunities in the wine industry for investors
39:47 – The importance of timing and adapting in real estate investments

If you found this episode substantial and want to dig deeper into real estate, or maybe you want to discover better investment opportunities, be sure to check out www.tempofunding.com.

Website: https://thewealthelevator.com/
Linkedin: https://www.linkedin.com/in/lanekawaoka/
Instagram: https://www.instagram.com/reialohadotcom/

Full Transcript:

Intro: Welcome to the BigMike Fund Podcast. Where you learn about advanced wealth building strategies from real estate investing to creating massive ROI and securing retirement profits. So pour yourself a cup of coffee, grab a notepad, and lean in. Because Big Mike has got the mic. Starting now.

Guest Intro

Mike Zlotnik: Welcome to the BigMike Fund podcast. I’m the Big Mike, Mike Zlotnik. Today, it is my pleasure and privilege to welcome Lane Kawaoka. Hi Lane.

Lane Kawaoka: Hey Mike. How’s it going? Aloha everybody.

Mike Zlotnik: Yeah. Aloha. That’s how you say it in Hawaii, right?

Lane Kawaoka: That’s correct. That’s correct.

Mike Zlotnik: And you are from Hawaii, how long have you been living in Hawaii?

Lane Kawaoka: I grew up here, but I was in Seattle for maybe about a dozen years. But you know, as the saying goes, “Live where you want, invest with the numbers. Makes sense. So I like, I like. To be warm. Although I like where you guys are out, out there, out there in New York. We’ve actually got a couple hotels out there now, but yeah, you know, I like the warm weather out here for sure.

Mike Zlotnik: You certainly have a better climate than here in New York, although we have all four seasons, but you certainly enjoy Hawaiian Para Paradise. So Lane, I guess you’re a founder of a few great websites crowdfundaloha.com. simplepassivecashflow.com. reialoha, and you, I guess own and control.

Forgive me, I’m saying this, you know more than, yeah, I do over 10,000 units across various markets. So, Before we dive into real estate, a couple words about you obviously you live in Hawaii family, any, any, anything about you and your family you wanna say?

Lane Kawaoka: Yeah, I got a two year old now, so that’s probably why I haven’t been making it out to some of the circuits especially in the pandemic. But yeah, life changed a little bit recently. But that’s now I realize not a lot of investors get started actively. When their kids are young and born until the kids get to be about eight to 10 years old, at least what I see with my investors, you know, it’s kind of like a no man’s land for doing anything when the kids are young like that, right?

Mike Zlotnik: Yeah, makes sense. It’s, listen when you have small kids, it’s a lot of attention. So it’s either you’re gonna be doing it or your significant other. And if you want your kids to get good education, good life, good, good parenting, you have to be there with them. So alright, so let’s jump into real estate.

Shifting opportunities in multifamily

So what’s kind of, what’s hot out there today? It’s kind of multifamily sector. It’s been beaten up a little bit. It’s been, there’s been a number of concerns with interest rates haven’t risen up, and some of the challenges managing post pandemic, the class C properties have been more difficult to manage than most folks thought.

Are you seeing opportunities shifting from Class C into something better like Class B. What, what, what’s been, what, what have you been up to? Kind of just curious. Yeah, yeah. I mean, were you seeing the opportunities?

Lane Kawaoka: You know, I think like with a lot of operators, we got started with a lot of Class C assets because, you know, that’s all the brokers would give us access to, right?

Luckily we sold a lot of that prior to 2021 when there was a nice selling cycle there. Part of the reason why, you know, a lot of those Class C assets, they’re smaller. You can’t really support a property manager there and then, you know, extra handyman staff to knock out other third party punch lists like plumbing and hvac.

So a lot of those properties, I mean, it wasn’t uncommon to be in like the eight 20% delinquency. So economic vacancy of or economic occupancy of 80% coming in. Still profitable, not from a cashflow basis, but from, you know, a value add, you know, severely taking those 10 distressed properties and bumping it up.

But a lot of the assets that we went into you know, after 2019, we kind of stepped up to, to our, to our thought, we are trying to get to more B class, a little bit better clientele. But you know, going through the pandemic and then eviction moratoriums and you know, you start to realize there’s not much difference between tenants who have $50 in their savings account or no savings account at all.

To those who have $500, a thousand dollars, it’s still, it’s still 1, 1, 1 bad thing happening from just being out on the streets. Right. So I mean, you know, probably a lot of investors listening to this, they’ve kind of heard the narrative, right? The pandemic happened and then eviction moratorium started to happen, and, and then, you know, a little bit of, you know, staying put and then, you know, off to the races in terms of rents. But right now rents are a bit stagnant, right?

Mike Zlotnik: Yeah. Rent growth is slowing down for sure in many markets. And of course, they’re different market by market. Things are different. But why are rent growth stagnated?

Extra supply of product

Mike Zlotnik: Is there extra supply of product being brought to the market? Just curious. What’s happening out there? There were a lot of housing starts. A few years ago, including sort of in the post pandemic era, and some of the product must be coming to the market right now.

Lane Kawaoka: Yeah. And, and, and I’ve got a couple theories and ideas and you know, one of ’em is this is a bit of like, kind of a train slacks hit slack coming out of the system post pandemic, right?

Because like 2021 was just a phenomenal year of rents going up, like in Phoenix where we operate. I think you had like 10 some depends on where you got your data. There are like 10, 20% rent increases per year where normally you wanna underwrite maybe 3% for a hot market like Phoenix. And now I think it might be a little bit negative at this point, but that in that very, you know, up and down market, maybe you can call Las Vegas very similar to, in a similar market where it gets really hot and cold.

You know, certainly there’s a bounce back effect. But my second theory is kind of what you were alluding to there, you know, across all markets you have general supply that’s coming online that’s a little bit more than what the needs are normally. But it’s not like, People need to understand that there’s always thousands of units coming online in a certain m s a, even maybe a hun 10,000 units coming online.

You know, it’s always like a fresh blood supply, if you think about it, because the housing stock is always, always kind of getting older and older and older. Of course it’s hard to kind of figure out, you know, your class D and F product, when are they exactly being bulldozed, right? What is the decay rate of that?

But you always need to have fresh supply coming online. And you know, I look at like the rent increases per year. That’s kind of indicative of the supply and demand dynamic and, and takes into account of what new inventory is coming online. But you know, my, my whole theory on this is, and if you look back two years ago and the, the two year slack back is I think an important rule of thumb, you know, when.

If you look up, you know, people can look up this data on this, on housing starts. So housing starts, doesn’t matter if it’s a single family home or an apartment unit, it gets kind of monetized as a housing start. So when you’re looking at these starts, you know you’re gonna see the, that go to market typically a couple years later.

You know what? You’re gonna go through construction and you’re gonna, it’s gonna go to market and now compete with your existing housing supply there. So if you look back around 2020, you know, if you would’ve started a project in early 20, I. Which maybe, maybe would’ve not been practical during the, due to the pandemic and probably got delayed a little bit.

That inventory would’ve been coming online 2022 in the beginning of that year. And I think what you’re starting to see is the after effects of. 2021 and a half, I think that’s when the interest rates started to be jacked up. Right. I, it’s hard sometimes. It’s hard to remember. But the second half of that 2021 was when those interest rates really started to become a head scratcher for new builders to come in.

I, I remember ’cause we finished. One of our projects in October, and then I remember Thanksgiving kind of going back and forth with a lender and being like, whoa, what’s happening here? So I certainly know Q4 2021 when this dynamic was in full effect. So basically what you’re happening, you’re having a lot of the builders, the developers get, get the wind sucked out of their sails.

So, Again, you gotta apply two years forward. So if, if the brakes got hit quarter four of 2021, now you’re gonna start to see that supply kind of stop or drastically go down. What is that, 2023, quarter four. So that’s about now, right? Or that’s coming up. So it kind of makes sense.

Mike Zlotnik: Yeah, that’s a very interesting perspective.

The two year delay. By the way, the term that I like to use on what, what you described, that the rents were going up a lot and you know, double digit and then they slow down and even turn negative. There’s a wonderful term, it’s kind of a fancy sounding, but it describes, it’s called reversion to the mean or reversion to the average.

As that’s exactly what happens when the rents out pace the historic average. At some point they have to go. Flatline or slightly negative at some point of time to revert to historic average sort of per se. But back to you, the theory on two year delay. Pretty interesting. Yes. The we’re recording this in second half of July, 2023 and we go back two years.

The interest rate here started to show signs of increase at that time. And you’re right by. The late part of 2021 a lot of pain was beginning to, to to be felt. It wasn’t a complete pain. ’cause actually the rates started moving, but the feds hasn’t yet raised rates. It was kind of bonds were beginning to move ahead of the Fed, expecting the Fed to make the move.

But from a new construction start, High interest rates obviously increase the cost of construction and developers. Probably were beginning to slow down. Maybe not completely stop, but at least be mindful of the environment that they, they were getting meaningful headwinds. So now all that supply has been coming to the market and maybe it’ll, it’ll slow down because the starts in 2022 have been substantially slower.

Right? So we will probably see some level of Slower deliveries relative to, I mean, so if it’s a two year delay, that, that, that math makes a lot of sense, so, right. Yeah. Appreciate you sharing. So what are you doing now?

Invest in new construction or sit and wait

Are you investing in new construction now, or you’re sitting and waiting for the market? For the market to go full cycle? Because,

Lane Kawaoka: Yeah, I mean the, it’s hard right now to get financing.

Mike Zlotnik: It’s two years from now, right?

Lane Kawaoka: Yeah. I mean, it’s hard to get financing, but that’s kind of where we, what we see is the opportunity. And a lot of that’s, you know, like, like a lot of. Groups like it, ITR  economics, you know, when they show their housing start forecast and how it bottoms out here next year, that’s the time to go to, you know, go to construction.

So you can pop out two years ahead and in, in a place where not a, not a lot of new inventory is coming online. And hopefully by then if you’ve kind of fallen the, the forward curve on interest rates, maybe we’re back down another point or maybe a point and a half down in the future, and that’s, That’s the kind of thing where a lot of us are thinking that is the time, that’s gonna be a very hot market, right?

That culmination between moderate interest rates and this built up demand due to low supply at that point. So it’s, it’s kind of like that, that saying where, you know, when you go through resistance, you wanna push through, but that’s the whole reason. It’s not really. If you can push through while other people aren’t surviving, then there’s more kind of spoils of war at the end when you get to the finish line.

But you know, it’s, it’s, one of the things is getting lending and if you’re gonna have to come in with a little bit more equity, which is. I think difficult for a lot of retail investors at this point, right? A lot of people on the street are saying, well, there’s a recession coming. I need to hold onto capital.

So yet again, another variable or a barrier for operators to get those LP dollars from investors and a lot of which may have a retail investor mindset where they’re seeing what’s happening in the news headlines and you know, wanna hoard cash a little bit.

Mike Zlotnik: Yeah, that is absolutely accurate. I, I concur with you higher that service and, and the headline news.

So headline, no Noise is discouraging folks to participate or from participating in new construction. But the question, let, let’s just compare. I, I like to compare this so. New construction, if you’re a contrarian player, you, you go in when everybody’s out, right? You basically start building when everybody stopped building, and that’s when you can get the best deals.

In theory, in theory. But your cost of financing is, it’s high. So obviously you have to raise more equity and which is hard to do. And it’s, it’s been difficult journey. But then on the other side, on the new construction side, you can’t really get a discount on the construction cost. It cost what it cost to bill.

So the thought process here is labor, more material costs. They might slightly come down, inflation may slow down, or I don’t know if it’s gonna reverse, but at least the slowdown in inflationary pressures. But the cost to build is still cost to bill. How do you compare this to trying to get a deal maybe on a better distressed.

If you don’t wanna go class C, go class B assets in multifamily, try to find a distressed seller. Not necessarily distressed asset, but a distressed seller where you can get a better price per door, even though it’s not a new product. But it is a product that if you do right marketing, you can theoretically get.

Better price relative to the new construction? ’cause? New construction, yes, it’s a newer product and it might have its own supply demand forces, but at the same time the biggest challenge that I, I I see with new construction today, it’s really difficult to have the numbers pencil unless you’re going to.

Expect or you’re going to perform a substantial increase in prices because interest rates will cycle back down. ’cause your cost of money just gone up a lot, right? And you, you, you’re building on a lower leverage ’cause you’re doing lower leverage, higher cost of money. Your returns on equity just look less attractive if you, if you take a conservative valuation approach in the future value of the asset.

I’m just kind of thinking out loud. You tell me what, what are you seeing? Maybe I’m wrong. Maybe new construction can look very attractive today. But I’m not looking at the right type of opportunities.

Lane Kawaoka: Yeah, I mean, we kind of stay, we’re in the same conjunct conundrum, right? Because we kind of come from the world of operating the class B and c multifamily.

I’ll start off with the things that we don’t like now. I mean, we just had inflation, double digit inflation. Some would argue that it’s still here. Yeah. But when you have, you know, year end markets like you, like Dallas for example, or Harris County in Houston, like a lot of those taxes have tripled. Right.

And I think, I’m sure you guys talk a lot about the insurance, right? Trip insurance has tripled, maybe some places quadruple. And then in addition to all line items on your p and l, so. In terms of going into oper, you know, assets where you have to operate, value add op assets, you still have a lot of variability for those prices to go up there.

And that was kind of the big selling point, I think, to investors with value add projects is you had cashflow supposedly right on a quarterly basis, but if these costs continue to go up, likely they will. There went a lot of your cashflow anyway, and then now at least that’s kinda looking from the con perspective on the multi-family value add side.

Going back to the development side, right? You kind of mentioned, well, you know, you can’t really ascertain your costs right away. A lot of that is, you know, you what you can do. Like you can, in a way it’s kind of mitigating or de-risking a little bit of, you know, doing a guaranteed maximum price contract.

You still can’t price in your materials. That’s always not really insurable in a way, but to kind of build that contract and then at least lock it in at that point. As far as leverage goes, sure you can, maybe you can’t get as big of a first name note. I. I guess what we’ll do is sometimes is bring in a preferred equity lender to increase that leverage from that perspective.

Now there are pros and cons of doing that, of course, right? But when you’re working with a non-predatory bank to come in as a pref equity, that leverage can really juicier returns there. But you couple that we’re bringing in extra capital in case there, those, those things you mentioned, the prices increase.

So that’s kind of the way that we’ll play that I. Additionally, you know, with, with a lot of like changes that will happen in, you know, the monthly family value add side on, on the expenses equation, we don’t really have to contend with that. Once we, once we build, at that point, if those types of expenses like insurance, electricity, whatnot, goes up, then we’ll just sell it.

So we’re kind of mitigating those types of risks on that side. But you know, I think from the big picture point of view, I mean, I’m looking at what people are buying. Some of the, I see these deals float around. They’re buying properties and you know, Texas for $220,000 a unit, and I’m like, well, if you can just build that for Class A, that’s what, 30 years newer and doesn’t have a big CapEx budget to begin with.

That’s what I’m looking at from that perspective. Again, if I can build something for the same price, people are buying 30, 40 year old properties with a big CapEx plan, which is why they’re doing the value add on in the first place, then, you know, that’s, there’s a big, big differential in terms of value and, and potential profit there.

Mike Zlotnik: Yeah. The, the, the. Build new hypothesis or, or, or, or build new strategy. If you can build at a cost similar to the old, of course you’re better off with the new. I, I, I couldn’t argue with you. The whole idea to buy old is if you can buy it at a steep discount. The cost of insurance or insurance is skyrocketed in many markets, right?

And insurance is something that’s gonna be higher even for new product too. It, it, it, it heavily depends on the market. Of course, type of construction matters, but if our hurricane is, is coming through a given market, they’re gonna price all insurance high in that market. So insurance is a gigantic challenge for all operators everywhere unless you are in markets that doesn’t see natural disaster.

Phoenix is one of these markets that sort of been. You know, a little bit away from the, you know, no hurricanes and no tornadoes and so on. But many other parts of the country, they see hail, they see tornadoes, they see hurricanes, they see other natural disasters. So I, I, I’m, I completely understand and agree with you that the.

Also the taxes. Going back to the taxes. So taxes are municipalities everywhere. They, they’re hungry for revenues and, and not much you can do. They’re gonna, it, it’s a, it’s a perpetual battle. It’s a perpetual battle. Politicians needing the, the dollars versus the, you know, homeowners trying to justify kind of what the asset is worth.

There’s always a legal battle. It’s funny, I hear in New York City, For every building, almost every year. You, you, you, you hire  essentially a an attorney that every year you, you, you file a petition to battle the city on the assess taxes, it, it becomes the norm. It’s almost like it’s given that the city will over assess.

You battle it, you’re gonna get a reduction. And every year it, it’s the, the lawyers make a living on this. That’s all they do. They literally battle the city for the continuous assessments. And it’s everywhere. It’s, it’s New York, it’s Florida, it’s Texas. It’s continuous battle. So anyway, let’s go back to the new construction.

’cause I’m, I’m kind of intrigued. You are right. You could. Lock certain costs and certain costs will float. And the preferred equity is an interesting piece. We’ve used preferred equity. I certainly like the idea of preferred equity. You have to be very comfortable and confident in your execution ’cause you’re taking on more risk with having primary debt than preferred equity, relative to the common equity that that system makes sense, as long as you can execute well.

The, the construction also has another risk, and I don’t know how you mitigate that risk. Delays obviously cost overruns and at times you’ve got sort of uncertainty of what the future end will be. On one hand you expect the rents to be at least in line where they are today, but if some kind of.

Negative inflation or, or, or these further flow down while the insurance insurance costs climb. And taxes climb before, you know,

Getting the expected valuation

Mike Zlotnik: You deliver a product and you may not be able to get the valuation you’re expecting. That’s kind of a, and there’s no cash flow, right? You, you basically at that point just sunken in the cost to build until you can deliver the product and, and, and stabilize.

And I’ve seen enough of the new product, depending on the market they build it for certain rents and they can’t get those rents. And then it becomes, boy, I mean, what would you, what did we just build?

Lane Kawaoka: Yeah. I mean, I think that’s kind of where. One of our competitive advantages, right? Like we started as operators.

So this actually happened with our last project. We finished it last year, or 2022, end of 2022. And obviously wasn’t a great time to kind of go to market. And so what we did, we just held onto it and leased it up, right? So most developers. Are specialized in developing, they don’t wanna get into the operation game, so they try to unload it as soon as possible.

That’s, that’s usually the best time to exit if you’re in a good selling market. But if you’re not, you do what we did and we lease it up, and then we kind of just hold and then lease it up and sell it at that point. At that point, it’s less of a risk. Right? You’re not going to that lease up stage. So if you, em, have empathy to the, the new buyer, they’re coming in with even less risk at that point when they’re coming at 90% occupied.

Mike Zlotnik: I’ll use arbitrage. Purchase certificate of occupancy versus lease up. And in residential, in theory, that lease up time is not that long. So if you, if you operate it well in the right market, you can get there fast, right? Comparison to storage, you need three years to lease up, or two and a half years residential.

If you’re in a good market with good product, you could move it relatively quickly.

Lane Kawaoka: And that’s kind of one of my prejudices going through, you know, the multifamily side is like the problem, the biggest variable is people, you know, as the saying says, tenant termites and toilets, the tenants are a big, big one.

And even if you have higher end tenants, they are still people and tenants with problems. And, and that’s, you know, going back to buying value add You know, sure. You know, every deal is different, right. Don’t get me wrong. Right. But like if you’re going after a distressed property, You gotta think that that current operator has been kind of running dry on funds for several months, maybe even a year, and your occupancy and dropping, and then your tenants start to get really bad, badly behaved at that point because things hasn’t been fixed, the management doesn’t care.

The PM company knows that their owners are kind of going under. It’s just not a good situation that I want to kind of step in as the new stepfather. Basically, so that’s something I kind of worry about if people can kind of get a sense of some of my apprehensions with, you know, going into a property that, yeah, you get at a good price, but it’s that price because of a reason.

Right. And that kind of gives me a little goosebumps kind of just thinking about it. Of course, you know, never say never, right? Who knows? We may do one of those, like I said, but generally speaking, you’re not, you’re going into something with a little bit of mold and hair on it. If you’re picking it up at a good price, and generally speaking, I mean, you can make, you can make money in whatever business plan you want.

Typically, the more hair and mold on it, the more money you make. But that’s something that, you know, we’ve always tried to not get into those very deep value add type of projects. We’ve always been, you know, buy something existing that performs pretty well or stabilize. So 90% occupied. Better, you know, so we can get those Fannie Mae, Freddie Mac loans right off the bat.

And part of that is we don’t wanna deal with these really difficult tenant kind of projects. ’cause then, you know, now you’re dealing with more of a culture issue, community issue. And but sure, yeah, if somebody out there want, likes to work on those types of deals, you know, I’m sure they’ll be coming out here in a bit. But boy, you gotta have the stomach for that.

Mike Zlotnik: Yeah Lane I appreciate that. That’s you, you, you, you had great wisdom in there. It’s very, it’s a different, different strokes for different folks. You prefer light lift no heavy value add. ’cause it is a lot of work and we’ve seen this, so many projects you get a good price, but now you’ve got a bunch of tenants you inherited who are getting.

Back to the Covid discussion, we’re getting covid subsidies or city head programs, and these programs are running out and the tenants have stayed there without paying for a long time, and suddenly now they have to pay instead of the program paying, they don’t wanna do that. So as the operator now, you gotta get all these people out because they are essentially you, you know, they, they, they’re living for free and then suddenly becomes an occupancy problem.

You had a great occupancy for a while, but. Now you’ve gotta get ’em out, renovate and lease again. And you are right. It’s, it’s a lot of work. It’s a, it’s a game of specialization. I would say this, if you are local, if you’ve got. Construction crews, you are, you are an operator, you’re like a strong local operator, and you know your market, you know how to execute.

You got leasing, property management, construction management, all that stuff you can do well. But if you’re doing this from Hawaii, you’re trying to operate an asset a thousand miles away or 2000 miles away or however long, you have no choice. If you go for a heavy lift, you, you, it’s very hard to execute.

So you are better off with very light lift completed product, brand new construction, or fairly new. I. Last couple of years at, at full stabilization, you take on less risk just because it’s very difficult to do it any other way. So I, I completely appreciate your position and I certainly feel that it, it is a lower risk, a little bit more stable strategy.

But you don’t have as much upside if you can’t create all that extra value in these, in these assets. But again, it’s a risk reward, right? Most,

To generate high returns, you have to take on risk

Mike Zlotnik: most folks don’t realize that in order to generate higher return, you have to take on more risk. There are of course asymmetric deals where you take, you know, you got a great deal, you’re not taking that heavy risk, but you’re taking still great upside if you execute.

But most of the deals, higher risk. Trade off, but the reverse is true. Lower risk, lower reward. But you have to, you know, you, you don’t have much headache.

Lane Kawaoka: Yeah. I mean, every time we’ve gotten burned in the past is, in terms of due diligence, is on things you, it’s hard to quantify, such as tenant quality, right?

Like you, you sure you, you can go through the audits on, you know, credit scores and you know how much income, but you know, sometimes those things can be faab, fabricated. Right. What was the la the latest one like it used to be, you look at bank statements and stuff like that, but like, sometimes those can be just very fictitious, right?

And you close on a property, you’re not, you can’t go back and do a lawsuit to the previous buyer or seller. It’s just kind of throwing good money at bad money. And that’s, At least from our experience, that’s always been the biggest kind of non-quantifiable due diligence item is that the tenant quality.

And, you know, it’s just kind of like the, the bad thing about the developments now where you replace one problem with another and the developments is it’s hard to find a good 10 acre plus property to build on. That’s in the growing path of progress. There’s just not many of ’em. You know, there’s quite frankly none in Phoenix ’cause it’s all infills, if anything.

So we’re kind of more to, you know, like the Floridas, the Alabamas, the Texases out there for those. But it has, you have insurance problem. Yeah. Yeah. I mean we, I mean, kind of gone are the days I think for us, like doing a deal every other month. We don’t really want that type of throughput anymore. So getting more, you know, selective or having to be more selective, right?

Because we can’t find 10 acre lots of properties every other month or even multiple times a year, right? It’s very more rare. But that’s kind of what we kind of wanted to be as like the vision of, you know, how active we are in the market. So it kind of, it, the transition I think came at the right time.

Mike Zlotnik: Well you’re getting wiser, right? Most kind of wise people, they’re not looking for volume. They’re, they’re looking for fewer, better deals, right? At the end of the day the, the volume game is, is the game of the past. When everything was going up, you wanted to run more and faster, and now when things are going in the wrong direction or things are slowing down, certainly need to do fewer, better deals.

What’s interesting this year

Mike Zlotnik: So what, what have you done this year? I’m just curious. Anything super interesting? It’s been slow for us. I, I can tell you we’ve done a few deals, but way, way slower than, than before just because we, we just don’t want to transact just because You know, it, it is a deal. We want a great deal in this environment. If we don’t find a great deal, I, I’d rather sit in my hands.

Lane Kawaoka: Yeah, I mean we, we, we kind of pulled back our normal acquisitions 2022, summertime. So after that we transitioned to, I. You know, just doing our, our slow steady diet of maybe a development deal a year. So we’ve been doing that you know, probably like yourself, right?

Utilizing your, your network and your connections. We’ve been doing some preferred equity positions. Just, you know, to get our money lent out in more of a secure position. You know, it’s not gonna, you know, it’s not breathtaking returns of course, right? But it’s kind of, You know, getting money working that way.

We actually did some deals near yourself. We, we’ve got that J F K Holiday Inn out there in Queens. If you fly over every time you go into J F K, we’ve got that one out there that we did preferred equity on. But yeah, you know, other than I, I feel like the, the tides are turning a little bit, maybe by the end of the, this, this year, maybe we’ll kind of get back out there and do a little bit more stuff.

But like I said, I don’t know if I wanna do those more distress hairy deals. Definitely wanna, you know, not do floating debt, just find deals that are good. Fixed rate debt so we can kind of hold and definitely, you know, properties that are a little bit nicer areas, so like b plus areas are better, I think is kind of what we would kind of go after again.

Being lighted more towards the quality of tenant than, you know, those heavy, heavy value add plays. I think if we were gonna go into more of those types of deals in the future and I, I’ll give you an example of that. You know, we’ve got some deals in more of the inner part of Houston, right? Kind of rougher areas.

And then we’ve got other deals out, like in Conroe, Texas, you know, the sub, more of a suburb kind of far out there. Cleaner our product lot cleaner, our clientele, and those are the deals that really don’t give us too much problems out there.

Mike Zlotnik: Yeah. Logic dictates that.

Lane Kawaoka: And, and plus, and plus they don’t increase the, the insur or taxes by three times out there in the suburbs too, like how they do in the inner city like Harris County and.

Mike Zlotnik: Well, yeah, it’s, it’s, it’s who is in charge, right? Who is, especially in, in in some of the you know, politically charged municipalities or cities. There’s a lot of, a lot of the battles going on, but I, I hear you. Less headache, simpler life. Still decent returns, but not, not as, not as exciting and in real estate, if you can avoid.

Risk and avoid extra excitement. Maybe that’s, that’s a, that’s a safe path. The one, the one point you mentioned, and I wanted to just briefly chat on this, and we are running out of time and just, but I do believe that the current interest rate cycle is almost over. So floating rate debt is not, it was a big mistake a few years ago, so everyone took it because it looked, it was so low and then it jumped.

But now the reverse is true. People are afraid of the variable rate that when in reality, Because the rate cycle back up and they’re approaching the peak of the current cycle or have already approach whether there’s gonna be another quarter or not. But we we’re almost at the peak at this point. I wouldn’t be fearful of the variable rate debt, although of course you prefer fixed rate debt because it’s a, it’s a one-way street.

All but think about this for a second. If you get fixed rate debt, If you have prepayment penalty, you, you can’t easily refinance. That’s one of the, that’s one of the drawbacks of locking in fixed rate debt. It’s both a beauty and a curse. The beauty is you have insurance policy, right? It’s fixed.

The curse is if the interest rate cycle back down, you try to refin, you got massive prepayment penalty that’s that kind of slows you down. So I just wanted to point out that on the interest rate side, if you can still get bridge debt today, When the interest rates are high, you can always cycle it back down when the rates are, you know, they, they,

Interest rates should come down in a year and a half

Mike Zlotnik: like you said at the beginning of the podcast, the forward curve says in a year and a half, the interest rates should come down quite a bit.

And I, I, I, I concur with this ’cause the, these interest rates today, I just too high for a long-term amount of debt that’s out there. So that’s my view and, and I’m, I’m sticking with it. The us

Lane Kawaoka: I think, I think you’re, you’re exactly right. I would just like add onto that from like the mindset of an operator here.

It’s kind of like, don’t go outside in the sun unless you have a lot of sunscreen. So like in this case, sure interest rates are gonna go down and it makes sense to do variable rate mortgages right now ’cause everybody’s, everything’s telling you one way. But if you, the operator are kind of running low on, you know, reserves or sunscreen, I guess in this analogy, then you still may not want to go out there, I guess.

Right. And I think that’s, I, I not looking back and maybe for the next cycle to happen, you know, you can do floating rate debt and of course buy your rate caps, but you gotta have your reserves, right? Or at least the way we do it, right? You know, just in case you have to float the property, right? If you have cash reserves and you can last a while, then that’s your contingency plan.

But if you don’t have fat reserves, Like I said, even if you have floating rate or the rate caps and everything tells you that the rates are gonna go down, you don’t have that contingency, that backup plan. Right.

Mike Zlotnik: That’s That’s a great point. And I’ll say this, my observation is that from the last couple of years, very few people set up the deals with a lot of reserves.

Most of them painted the deals with very optimistic returns. And if they over raised capital, They thought that capital would be just diluting the, the returns. And that’s, it is a prudent conservative investing strategy to have those reserves, but a lot of people didn’t do it. And the experience of the fear of the variable rate debt is from the deals that were started couple of years ago or a year and a half ago, when the rates were way lower.

And the impact is that, Those deals are suffering. Those deals are distressed because they’re running out of cash. Poor reserve, like, like you pointed out, and the interest rates went up, and if rate cap expires, big problems. And, and if on top of that, they didn’t budget for the tenants to be more difficult than they thought and they had to get rid of bad tenants, that they’re, they’re suffering from operating under performance.

No reserves, interest rates up, all those things combined. It’s a choke. For fresh money today, if you were to buy a fresh deal, I wouldn’t be fearful to get variable rate debt. Although your equity investors for the peace of mind, it’s the sunscreen effect, right? If you tell ’em it’s not fixed rate debt, they, they, they, they can get nervous.

But the reality is it’s a contrarian thinking. What I’m saying is that insurance policy, buying a rate cap today and variable rate debt, Rate caps are freaking too expensive for the risk reward ratio. A few years ago they were, they were cheap. Now it’s the reverse. You’re paying crazy price for something for the insurance policy. You’re highly unlikely to use. Yeah, I was paying like 50 grand. Everybody’s,  yeah, 50 grand in the past. Now that same thing is like 1.5 million. I don’t, well, that’s the crazy part.

And pay right now, the pendulum swung exactly the opposite way. Insure the, the companies that are effectively providing the policy, they realize the demand for those rate caps is high.

But the problem is the interest rates are not gonna shoot up another 150 basis points from here. Highly unlikely. So these rate cap policies is almost a waste of money. But that’s, that’s my 2 cents. So you, yeah, that’s why everybody’s going fixed rate, because at least it feels like you, you know, you, you can’t get.

Feel worse position with that. Appreciate your time, appreciate your wisdom. Appreciate you sharing. How would folks get ahold of you please? You know, is a single website or multiple website what’s the best way to reach out?

Lane Kawaoka: Yeah, email lane@simplepasscashflow.com.

Mike Zlotnik: Thank you kindly. And enjoy your kid. Enjoy your two-year-old. That’s the most important thing in life. Family ahead of all the business we just talked about.

Lane Kawaoka: Yeah. Cool. Thanks. Thanks, Mike. See ya, everybody. Bye.


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