"The Highs And Lows Of Syndication Partnerships"
Passive Real Estate Investor
Episode 14: "Bad Beats"
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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 Lane@SimplePassiveCashflow.com. 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.
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.
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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.
When making business decisions that affect your long-term goals, like what types of investments to make with your retirement dollars and which vehicles to use, it really is best to be aware of all of your options. We frequently talk about the Solo 401(k) and Self-Directed IRA as tools for funding your retirement. But what about life insurance? And what about the stock market? What if we told you there is a tool that allows to to reap some benefits of both? It’s called Indexed Universal Life Insurance–and some investors have found it a useful addition to their retirement plans.
What Is Indexed Universal Life Insurance?
Indexed Universal Life Insurance (IUL) plans are a variety of permanent life insurance plan that features a cash-building element. One primary benefit of these plans is that the policy holder gets some of the gains of being associated with the stock market without all of the risk Wall Street is famous for. This is in no small part because of how these policies are designed. IULs earn in part because they are directly linked to a market index, such as the Dow or the S&P 500. Any gains remain within the policy, albeit a cap rate will limit how much you can make. However, you are protected during a particularly bad year for your index with an IUL. The worst case scenario with these plans is that you make nothing, but you never actually lose money no matter how poorly your index performs. The protection of your principal is actually derived in part from the same cap rate that limits your gains.
How much money do policyholders stand to make? Historically, returns run between 5-9%. The S&P Index has actually returned at 9-11%, but the upside limit on UILs stems from the account’s cap rate. For this reason, many advisors argue that the UIL can make a wise addition to a retirement or estate plan once more traditional and self-directed accounts are maxed out.
Tax Benefits of Indexed Universal Life Insurance (IUL) Plans
There are three key tax benefits of IULs. First, you may pay into the policy with pre-tax or after-tax funds. Withdrawals from the policy may be made tax-free if you are under 59 1/2. Such withdrawals are regarded as loans, with your death benefit serving as collateral. Any funds paid out to the beneficiary are also tax-free, including normal benefits upon your passing. This is true regardless of their value.
Ask the Experts at Royal Legal Solutions About Your Retirement Planning Options
Regardless of where you are in the retirement planning process, Royal Legal Solutions an assist you. We have extensive experience educating investors about self-directed investment options. Many of our investor-clients love our Solo 401k information, product, and compliance services. Our Self-Directed IRA services can also be helpful for retirement planning, as the SDIRA is yet another vehicle that allows you to diversify and take total control of your investments. To determine which of the available retirement planning strategies are best for you, consult with one of our experts at Royal Legal Solutions. You may also contact us with any questions you may have about your options.