Real Estate Nerds 14: Bad Beats

The Highs And Lows Of Syndication Partnerships

Lane Kawaoka

Passive Real Estate Investor

Listen to the Podcast Here:

Welcome back to The Real Estate Nerds Podcast! Lane Kawaoka knows the bandwagon of getting multiple houses to achieve the goal of passive income all too well. He bought eleven of them and realized there was an eviction or two–and at least three big catastrophes–happening every year, whether that was someone stealing an HVAC, major plumbing issues, or even the rain. Lane is a working engineer and remains in that industry by day. He made his real estate debut ten years ago, initially investing in single-family homes. Over eight years in that asset class, he got up to almost a dozen properties, then switched to syndication partnerships. Today, Lane is here to share the dirty laundry of his investing life and the worst deal that he has been through with our host, real estate attorney and fellow investor Scott Smith.

Lane’s Worst Deal: A Roth IRA Ponzi Scheme

Lane sits down with Scott to tell us about his background, transition into real estate, and the worst deal he made as he changed the direction of his real estate career.

[1:00] Lane’s first properties were out-of-state turnkeys. On his eleventh major property, he realized the major issues involved with each property were eating into his time, energy, and profit lines. He concluded the model that had worked for him for his first eight years was no longer scaleable.

[2:30] Veteran investors advised Lane to join them in the world of syndication and partnerships, even saying they personally wished they’d stopped single-family investing years before they did.

[3:30] 2011-2012 was the year Lane began investing as a Limited Partner. He had some money in a Roth IRA, a vehicle that was not yet familiar to him. He didn’t know what to invest in and got some advice from a custodian, who referred him to an unethical outfit that was essentially running a Ponzi scheme: “They were buying up single-family homes, C and D class properties. The deal was I was going to put up all the money for the title to the property.”

[5:30] Because Roth IRAs restricted Lane to investments without debt, he put $43,000 down. The company promised him a 9% fixed rate and to split the profits of the sale 50-50. Lane found out that the company was not reputable as he began doing internet research. Problems later surfaced with his ability to connect those checks. “I was naive and I didn’t know anything. I didn’t know what I didn’t know.”

[6:30] Getting a referral from an IRA Custodian was a bad idea, Lane now realizes. Those custodians are not investors: “I broke the cardinal rule of you don’t work with people you don’t know, like, or trust.” He now uses his network to verify leads ahead of entering into contracts.

[8:30] For the first couple of years, things went fine. Lane got his checks regularly, and felt fairly secure as he held the property’s title. Then he realized nobody was paying taxes on the property. A friend in a similar situation. He speculates that the Ponzi scheme imploded in terms of liquidity around the third year. He had the option to take legal action, but chose not to because he valued his time above that. Lane simply walked away.

[10:00] Scott wonders if an extreme level of due diligence, such as checking the tax rolls, would have helped Lane avoid this situation.  He prefers more transparent deals now and avoids IRAs and QRPs altogether: “I like single-asset LLC deals instead of blind pools.”

[11:20] He believes people buy into the blind pools because of marketing angles: “Normally the unsophisticated investor goes into the blind pool because they buy into that. The more sophisticated investors want to know what the asset is.” Some underwrite it themselves, even.

[12:20] Scott probes Lane’s lack of confidence in Self-Directed IRAs/401(k)s. Lane asserts that the major draw–tax savings–isn’t that great; “You’re still going to pay taxes at some point. You’re just kicking the can down the road.” He prefers paying taxes today, because he believes his taxable income is lower now than it will be in the future. He also compares the numbers to his preferred style of investment (LP Syndication), and feels you have less leverage with self-directed funds because of government restrictions.

[13:30] Lane also feels IRA custodians push these accounts because they’re the ones profiting from them. He advises new investors to remove money from these accounts slowly and strategically.

The Takeaway: Avoid Scams by Building a High Quality Network

This one bad deal didn’t scare Lane off from Limited Partnerships or syndication investing. He’s going “all in” on this strategy now that he’s remedied the main problem that contributed to his falling for the Ponzi scheme: a lack of a solid network.

[14:30] Scott asks what Lane could have done to sniff out and avoid the Ponzi scheme. “You have to surround yourself with the right people. I didn’t have the right people at that point…It’s all your network.”

[15:00] Scott shares that he was once initially skeptical of networking and felt he was wasting time. “Did you have that same experience of having to kiss a lot of toads before finding someone who could really help you?” Lane responds that he did. He’s a type of investor that isn’t common at local meet-ups–he had to find a more “target-rich” environment for network.

[16:25] The two investors find that “pay to play” groups end up being higher value. Meet-ups are great for those who are new or into fix-and-flips, but passive investors may find more results (and fewer “toads”) at groups that require paid membership.

[18:00] Lane offers ways to connect, pointing out: “I’m always looking to connect with other investors. I’m always hunting for that next deal.”

Connect with Lane

Connect with Lane Kawaoka directly by emailing him at [email protected]. While you’re online, be sure to check out his website, Simple Passive Cashflow, where you can find free educational resources as well as his podcast of the same name.

Listener Resources

Thank you for joining us on today’s episode of the Real Estate Nerds Podcast.

For even more free educational resources on real estate investing and the law, check out the Royal Legal Solutions blog. You can also reach our host Scott Smith directly, connect with him on LinkedIn, subscribe to the Royal Legal Solutions YouTube channel, or join our investor community on Facebook.

Don’t forget to subscribe to stay up to date and have the most current episodes of the Real Estate Nerds Podcast directly in your listening library. Every subscription helps us create new, custom content for you. What did you think of today’s episode? What would you like to hear more about in the future? Leave your thoughts and questions in the comments section below, or leave us a review in the iTunes store. We love hearing your feedback, so fire away. Join us again next week to hear Scott chat with Joel Block about raising capital and running investment pools. Thanks for listening and joining us on our journey to become better investors!

Hosted by Scott Smith, Lead Attorney and Founder of Royal Legal Solutions. Schedule your personal consultation now. If you have questions about our content or suggestions for future episodes or guests, reach our podcast team at [email protected].

About Lane Kawaoka

I am a full-time Civil Engineer and Real Estate investor from Honolulu, HI. I currently have an 11 single-family home portfolio with experience in Seattle, Birmingham, Atlanta, Indianapolis, and PA. I am also co-owner of MFPE Investments LLC that currently controls 1200+ multifamily apartment and RV units.

I journal my experiences in The Simple Passive Cashflow Podcast that I put on iTunes & Google Play. My parents got screwed with the 401K and stock market. This experience fueled my mission to get everyone out the corrupt Wall Street roller coaster and into Main Street invests with safer, higher returns that benefit the middle class of America.