What You Need To Know About Multifamily Investing For Cash Flow Opportunity

Hey, it's Mark Podolski, the Land Geek, with your favorite niche real estate website, www.thelandgeek.com. and we're bringing back an oldie but a goodie. But before we talk to our guests that you've all known before, I'd be remiss if I didn't properly introduce my co host, Six Sigma. You know him, you love him. Scott Todd from scotttodd.net landmodo.com and most importantly, you're not automating your Craigslist postings. Posting domination.com forward/, the land geek, Scott Todd. How are you, Mark?

I'm great. How are you?

I'm great. I'm great. My, my treadmill desk is on its last legs here. I'm walking. Stop walking.

Oh, man. You're going to have to, like. I don't know, you're going to have to, like, get something new.

I know, but that frugal part of me does not want to buy the new shiny object.

But I don't want you to trip, man. I don't want you to trip while you're on a podcast. That'd be terrible.

No, I know, I know. And then there's another part of me is like, well, I can't trip on a podcast. You might as well go out and get a new treadmill.

It's a business expense.

I think it definitely would be. I hope it would be. I mean, of course. And it's good for me to walk and talk. But let's talk to our guest because Lane Kawaoka. Hello, Lane.

Aloha, Mark.

Aloha from Simple Cash. SimplePassiveCashflow.com is back and he's doing something a little bit differently. So for those of you that don't know Lane, he is a young guy, and in 2009, he was able to start investing in real estate and discover the difference in cash flow investing and appreciation investing. And he moved his portfolio into 11 single family rentals in Birmingham, Atlanta, Indianapolis, Pennsylvania. Today is focused on class C and B multifamily apartment investing because of the nation's demand for affordable housing. And he's also got a great podcast which had years truly on. So, Lane, how are you?

Hey, what's up, Mark? It's morning time here in Hawaii. I just moved over here.

Oh, nice. I'm gonna be there in a few few weeks for my 20th wedding anniversary. I'm very excited to go to Kauai.

All right, well, let me know if you come to Honolulu.

I will. I think you should come to Kauai and just say hi. My wife be so impressed, man.

Listen, I'm gonna, I'm gonna be in Hawaii too, Mark, like just weeks after you. And Honolulu for my 20th wedding anniversary.

Go figure. See, we didn't plan that either, by the way.

We meet up and talk real estate or talk a little bit about automating Craigslist listings. And they go, it's a business trip, right?

That's right, man, that's right.

Yeah, but really we want to talk about like what you're doing because I think it's very interesting, the real estate strategy you're. You've sort of morphed into. So kind of tell us what you're doing and what you're doing now and why you're doing it now.

Yeah, so probably about a couple of years ago, my portfolio went to in freeze mode. You know, we all know the seller's market that we're in these days. And you know, a lot of us aren't hitting the numbers that we used to. I mean, a lot of us got entitled to getting that 1% for like a 1980s single family home just within the loop track or, you know, about a half a mile away from the city center and you know, good stable neighborhoods. But these days, I mean, a lot of people that are coming to me for buying their first rental or you know, working with turnkey rentals, you know, they're buying outside the loop track, which is like an hour plus out of the city, and it's like 1950s properties. And I mean right now everything that rents for $800 or less, I'd be willing to say that's a war zone property. I mean, it's. You've got like about a 10% chance that you've got a, you found like a diamond in a rough. And you know, a lot of people, I mean, if you're finding on a website or you're not flying down to Detroit, Memphis, Birmingham and Annapolis, all these cash flow markets, you know, you're just getting the junk that's getting sent out to the out of state investors or the people that they know who are sort of the suckers or quote unquote, the Californians. And you know, it's just hard. And then that brings the total returns down to. I mean, we all know why we started to invest in real estate. The four ways you invest in, why you invest, the mortgage appreciation, tax benefits, and then the cash flow, that total returns definitely coming down. It's not in the 20s, 30s percent anymore. It's definitely a little Lower. So, you know, I stopped. I started that podcast about 18 months, two years ago and been working on that and it's kind of kept me busy and. But I haven't bought any. I didn't buy anything for a little bit because I was making the switch to the multifamily.

Interesting, interesting.

So.

Tell us what you're doing now with multifamily.

Yeah, so it took me a long time to get educated in the multifamily space. All the same components are there, but a lot of things are different, you know, in terms of the tenant profile, how you acquire properties, lending. We can kind of go through those differences if you'd like, but it's a lot to cover. And a lot of people who are established in the single family world, it's a very humbling experience to essentially start over and go to something else. It's kind of like you've got your system in the land and let's just say you're forced to go to mobile homes. I mean, you know a lot about this business, but it take you a while to get going, right?

Oh yeah.

I mean, it's just very, very difficult. And so I've been studying, networking with a totally different networking crowd too. But recently I was counting how many units. I had had about 434 units in counting in about three or four deals. I picked that up over the last six months recently.

Okay, great. And how's that looking for on a cash flow basis?

So usually about multifamily deals, the quote unquote level of return is right about 15 to 20% IRR per year. And usually these things go the life cycle about three to seven years. So if you're thinking about, you know, right around 20% a year, but it's not all in, you know, every year, it's not all cash flow.

Right.

A lot of these properties, you can go after slightly properties with a slight problem. So the reason I went to multifamily is you can get non recourse lending and these non recourse loans from Fannie or Freddie go to properties that are stabilized. So that is 85% and up. So these are properties that are cash flowing and performing. The businesses are performing right now.

Just so our listeners understand. Lane, explain to us the difference between a non recourse loan and a recourse loan because.

Yeah, so this is. That aspect was kind of the reason that put me into multifamily. Because when you buy a Fannie Mae Freddie Mac loan, you know, for a single family home, the ones that we can get 10 of these loans into her name. What's happening is the government is stepping in there and being able to sort of be an insurance company. If anything goes wrong, the government buys it. That's why the rates are very subsidized. I think right now the average is about a little over a 5%. But this is a non a recourse loan. So if you're picking up the single family homes with Fannie or fair debt, yes, it's government subsidized. But if anything happens to the property or you fall behind on your payments, well the lender has recourse to come back to your personal balance sheet and come back and take your car, take your dog, take your house, right. Despite any of this LLC stuff, they come right through that and get it right. So when I discovered that all these affluent investors in the multifamily space were getting these non recourse loans, it made me stop and think and like why are, why would the government be subsidizing these people who are, you know, on the top of the food chain, giving them the best terms and this non recourse debt? And the reason is that the government, the government wants to stimulate workforce housing, the class C, class B housing because I mean, let's face it, look at all the demographic charts. That's why one of the reasons why we invest in real estate is because the population is just getting larger and larger and we're not like Japan, I mean our population is growing because we have so much immigration. So the writings on the wall and that's. If you're into real estate and you're into the fact that the population is going up, you know, multifamily or just anything in real estate, I mean real estate's not going to be going anywhere. So when I discovered that these very favorable loans and are going to multifamily and the government was severely subsidizing these loans, I mean it just made so much sense to go into this space and take advantage of that.

I love it. Scott Todd, what are your thoughts?

So are you looking at, I mean like you said that you had 400 plus doors. Are they class C, are they class B? Like what's the breakdown of it? And can you explain that for the listeners? Like what's the difference between the classes?

All right, so there is just like single family, there's class A, B and C is obviously the white collar, nice places to live. B is the blue and white collar mix. I'd say in this day and age that's Kind of the upper middle class, it seems like. And then the class C is your working class folks. A lot of people, you know, a lot of these markets, these are the single single mom working from home with a couple kids. You have some section 8 in here. And of course there's class D, which I would probably categorize as war zone properties where the, you've probably got to go have a gun to go collect your rent. So there's all kinds of multifamily investors. The type I am and the crowd that I'm in is the picking up the C class to B minus property in a better area because you can't do anything about the location. So you can improve a property, a half a class to a full class by adding amenities, you know, anywhere from 3,000 to $7,000 of rehab per unit. So you know, adding backsplashes to, you know, that's kind of the high end rehab. But you know, changing out countertops, cabinets, changing the appliances to not stainless steel, but you know, the black basic appliances, but you know, new ones. Getting away from that, I don't know how to explain that. That white one that we all had in college and those college cabinets I call them.

So like when, like, so when you're going in there, you, you're actually putting in additional capital to, to refurbish these apartments.

Right, right, right. Because the business plan from a macro sense is you're taking a property that's, that's working as a class C or class B or whatever it's at, but you're trying to take it up a step. You're trying to increase that revenue because on the ground level you're trying to get that tenant who's paying, currently paying maybe 550 or 650 to be paying maybe 50, $100 more. You're trying to get that 5 to 15% increase in rent, which sounds a little bit of, you know, hey, some of these people are going to move out. But the whole idea is you improve these communities because a lot of these communities are in the 500 zone. There's a lot of crime, there's no sense of community. There's no barbecues, there's no amenities, there's no playgrounds. So you try and create that best you can with property management. That's Johnny on the spot with things and just trying to create a better place for people to live.

I mean, that's the phenomenal thing about physical real estate, is that you can add that value. Now in land investing, we can make improvements to it, but it's not kind of the same type of impact. Would you agree, Scott?

Yeah, I mean, it's kind of hard to, I mean, like, you know, what can we add value? And I mean there's little things that we can do to add value. Things like, you know, maybe a survey or something else. But you know, it's crazy, Mark, because I feel like whenever, if I were to invest some money into the improvement of the land, I'm not going to get the same return back that I would get just by buying the land individually. Right. Whereas like with multifamily or even I guess a house, you know, if I put in money to make an improvement, I can take it up a class. And when I do that, then, man, I'm going to have a kind of a higher cap rate. I'm going to recoup kind of my numbers very quickly. Right. Like it's, I'll get like a 10x multiplier on my, on my capital. Whereas with us, I mean, if I spend, you know, $700 on a survey, well, how much am I going to, I can't, I can't mark up the land $7,000 now for that, that one piece. And so for us, like when I look at improvements or you know, capital additions to the property, I kind of like shy away from it.

Right, right. I mean, I think our advantage versus multifamily is that we're in such a inefficient market. Right. And it's very difficult to even value raw land, especially in the areas that we target. So Lane, Jeff Bezos has this great quote. If everything's going to change, what's not going to change? And when you think about real estate investing, if everything's going to change, what's not going to change?

I think there is a. Look where the population is. Look where the. Imagine it like a bell curve. You don't have too many people living in the A class. You've got a whole bunch of people in the B minus C C class. I mean, look where the median household incomes are. And again, we're all like the immigration coming in who are trying to get up into the middle of the bell curve. I think if you stay around that bell curve, whether things shift around a little bit, I think you're safe. And that's not going to change. That's why you try and buy a C property and you get it up to the B as soon as possible. Because in a correction, look at all the cranes in Seattle or all these other development heavy places where Things are just getting more expensive and developments coming in in a correction, that stuff is going to go offline because now young, young white collar worker is not going to be able to make, you know, afford the 2250 or $3000 rent on their two bedroom condo. You know, it's just not going to work. So the bell curve will shift downwards. So the A class tenants will move down to the B's, the B's will move down to the C's. That's where we waiting for them with our apartment complexes because we'll have the best value, the best property with the best communities, with the best prices.

Makes sense. Makes sense.

Yeah. But you know what, you guys with the land investing, I mean I think you hit it right on the head. It's inefficient market and you guys are buying it with such a discount in the front end. That's essentially the value that you're buying. And you don't, I don't, you guys don't really need to infuse anymore. I mean that's pretty much, that's, that's your game. That how I understand it. Yeah.

I mean what advice would you give somebody that wanted to get into multifamily, like where would they even start?

I think it's with the people. And so the properties difference between multi family and single family that you like single family, you're trying to look for these off market deals, the pocket listings. In the multifamily scape, it just doesn't flow through those type of channels, it flows through the brokers because in this scape the brokers actually do their job which is actually get on the phone, pull these lists, call sellers, build rapport with sellers. Then when they finally, you know, when the sellers want to sell, they call up that broker and the broker has the listing and then he shops it around to his buyers. And it's funny because everything in commercial is so much more, why should I say, the infrastructure is there and people are doing their job, they're playing their roles in multifamily. So you as the buyer need to go to the broker. But if you've only bought a few single family homes, you've never closed on one of these properties that are 1, 2 to 5 million. You know, what is your ability to close, you know.

Right.

Let alone ability to fund the deal and experience.

All right, great, great. So what's what sucks about multifamily?

It's an unfair game because. Exactly for what I just mentioned, you know, if you don't have a deal, haven't done a deal before, then you can't get a deal. But if you've done the deal, then it's easy. And you hear it a lot on these podcasts. And it's so true that getting your first deal is the hardest. And to get that broker to give you a deal that just, that makes sense because you know, 99% of the stuff out there that are just, you know, kind of sucker deals, you'll get the broker to just send it to you because they figure that you're just another either institutional buyer or unsophisticated buyer. I mean a lot of the stuff that I underwrite that, you know, the numbers usually work out where they want six and a half and I'm underwriting the deal for like five or less. I mean the numbers aren't just make, aren't making any sense that. So I don't know who's buying this stuff.

Well, I mean I think that, look, I think they're suckers. Suckers that are uneducated and ready to go and they just want to jump on the bandwagon and go right.

I mean I think there's a distinction between multifamily investors. So I'm operating in the 60 and over space. You know, obviously we all know about, you know, when you get up, when you go above 60 units, you get that economy of scale to be able to put a property manage in there, in there at full time. But so the reason why in that less than 60 unit scape, you've got all the unsophisticated real estate investors in there. These are the, the guys who have been in the game for five to 30 years. And you know, I mean the guy, the guys who have been in the game for 30 years, I mean there's a reason why they're still doing it because they're not very sophisticated. These are the guys who buy prop by a 4 Plex and they never cash out or never re leverage it into the next asset. So a lot of these guys follow this progression of getting a single family home, duplex, quad eight plex, 16 plex, 32 plex. And they're doing it by themselves and they're not very sophisticated. They might have a high net worth, but they don't have the other two components which are the partners and the experience in the eyes of a broker to get the deal done. So you're competing with a lot of these other guys. And I've analyzed probably about 500 deals in the last year and I've got My little scattered chart. And the pricing, the data speaks for itself. The pricing in the 60 unit skateboard, a lot worse. And I believe it's because all these unsophisticated buyers are bidding up the prices there.

That would totally make sense.

For sure.

Well, we're at that point in the podcast now, Lane, where we're gonna put you on the spot and ask you for your tip of the week. A website, a resource, a book, something actionable, where the art of passive listeners are passive income listeners can go right now, improve their businesses, improve their lives. What have you got?

Let's see. Well, I recently did an article on networking because it's so important to multifamily investors because we've got a team up on all these deals. And, you know, people come to my podcast and my. My website, and they're always trying to hit me up for information. I'm sure you guys get this a lot too. And the emails are just ridiculous, right? Like, you know, some people, I call it don't be an asshole. And that's a s. I love that. Yeah, ask. Obviously, nothing too blunt and saying the other, but the saying is don't, you know, don't be that guy who keeps coming and asking all these questions. You know, who are you using for your turnkey provider? Who's your insurance guy? Who's your CPA guy? Should I buy this? What do you think about this? You know, can you check my underwriting? You know, this person is that it has. Comes from that taker mentality. And you can tell usually that these people with the taker mentalities as opposed to the giving mentality, usually people don't go very far, nor do they take action. It seems like it's always a scarcity mindset that they're coming from. So always try to look to add value first. And then the way I see it is you find people who are in the position to help you, obviously why you're going to them in the first place, and just give value off the bat. And you might give value to about 10 of them and only one or two might respond, but you're gonna get a lot farther doing that than kind of being an asshole. And just keep asking question after question, or just keep taking and taking and taking, and then, then you ask like, well, okay, how can I add value? You know, the number one mistake is saying, hey, Mark, like, I love what you do. I love, like, I don't want to get into land. Like, how can I help you out? And you probably are like, I've Already spent too much time on this. You know, dude, like, you need to figure out how to help me. Don't ask me what to do. I'm busy enough as it is. I've got all this stuff flying around. Well, I mean, you're a little bit more passive. You got the system smart. But I mean, time is important and you don't have time to think of what somebody can do for you.

Yeah, I mean, yeah, I get a lot of those emails in various different ways, Scott, I'm sure you do as well. And yeah, I mean, it's, you're right. Like, it's not a good use of my time.

I mean, it's not like you're a jerk either. I mean, you want to help people, but like, you know, in this business, like 99% of people don't end up doing anything. So that the 20 minutes it takes you to draft an email won't really, really go that far. I mean, that's, I mean, that's why I created my coaching program or I mean, my little one on one, because I'm like, if you're serious, you'll do this. It's not for the money and I don't really want to spend the time doing it, but it's there, it's. It's an option as opposed to just people thinking it's a black hole for advice. Right, right.

And we have so much free information out there. There's so much information. Like if they want that information, they can get it. They don't need to go directly to me and get it because we've already created all of it. So it's almost like, it's almost like the lazy way to do it.

Right, right. And what these people don't realize is the biggest thing is the network.

Right.

You can, you can learn about this stuff anywhere. You can go to any coaching program. It has the videos and the PDFs and the how to guides, but it's, you know, especially in multifamily and I'm guessing it's the land, it's the systems and it's the people that, that you interact with. That's your team. That's invaluable stuff.

Yeah, absolutely. That's, that's the good stuff.

Yeah. And unless you're in the inner circle and, you know, working with you, you're not going to get it.

Right, Right. Yeah, exactly. Exactly. All right. I love that tip, Scott. Todd, what's your tip of the week?

Mark? My tip is actually a, it's an, it's an iPhone app that I wouldn't have ever caught my mind or even figured out how to use this for business, but I started seeing people on Facebook actually using this, like, for fun. And I'm like, that's a great idea. So the app is Boomerang for Instagram. Okay. So you may not have an Instagram account. It's okay. You may not use Instagram. It's okay. Boomerang for Instagram. And what it does is it takes a few pictures. So like, you take a few pictures and. Or if you can imagine, like you're holding down the button and it's recording, like, what's going on, but it's making, like, multiple pictures. So it's almost like still frame, if you will. So, like, you know, it might catch you, like, doing one thing and then a few seconds later catch you doing another thing and then another thing, and then it speeds it up into a video. And so if you put it onto Facebook, it's like this catchy kind of like video that just pops on someone's newsfeed.

And.

And when I saw it, I was like, man, that's a great way of getting someone's attention so that they read your stuff.

Very cool. Shoot a burst of photos and create captivating mini videos. It's fine. It's moving. Hold still while you're shooting. That is cool. Ready to create your own. Get started. All right, I'll let Boomerang have access to the camera. Would like access to the photos?

Sure.

Should I have access my location? No, you don't get location. All right, cool. I'll take some photos of you guys.

You'll have some fun with it today.

Here we go. I'm gonna take photos of you guys.

Well, this video.

It's not video. It's. It's gonna be a still, right?

Well, just. Yeah, it will take multiple pictures and turn it into like a little video.

So.

All right, so see? All right, cool. So now that's cool. Awesome. All right, so I love that tip Boomerang from Instagram. My tip the week is. Learn more about Lane Kawaoka at simple passive cash flow.com simple passive cash flow.com check out the podcast. Learn more about the very exciting, sophisticated, cool, high IRR return world of multifamily investing@simplepassivecashflow.com Lane Kawaoka. Any final words of advice?

No. Get out there and get some. And if you guys need anything, just shoot me an email and maybe we can work each other. I think it's a weird landscape these days. Fundraising is high. You know, there's a lot of funds out there looking for doll, looking for yield, and the deals are very scarce. So, I mean, I'm looking for deals all the time. You got a deal and you find it and I'll analyze it for you. And if it works, I can bring my investors and we can team up. And that's how this game is played.

I love it and I love playing the game. It's all about the game.

Scott.

Todd, are we good?

We're good, Mark.

All right, Well, I want to thank all the listeners. Just remind them. Today's podcast is sponsored by GeekPay IO. It is the only automated financial CRM in the world. A set it and forget it system. No longer do you have to deal with borrowers. Hey, what's my current balance? It automates notifications. Automates payment via ach. It backs up payments with credit card. It's amazing. And you get your first note for free. To check it out, go to Geek Pay IO and get involved with that today. I also remind the listeners the only way we're gonna get the quality of guests like Elaine Kawaoka from simplepassivecashflow.com is if you do us three little favors. You gotta subscribe, you gotta rate. Gonna review the podcast. Send us a screenshot of your review to supporthelandgeek.com we're gonna send you free the $97 passive income launch kit. Go out there, take action and let freedom ring ring. Thanks, everybody.