All Forum Posts by: Lane Kawaoka

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The reason those investor accounts are out dated because many operators get more institutional... when they go over 2-4B in AUM... higher splits and fees means less ROI for LPs... the trade off is reliability in terms of counter party risk (stealing your money). However some big institutions use a net zero reversion cap rate, assuming they're selling into a stronger market as opposed to increasing it by 0.5%-1.0%. I remember attending this real estate conference without the usual YouTube influencers and real estate fake gurus. I asked a bunch of institutional operators about their strategies. Their answers were surprising. Most people in Sub 2B in AUM expect the market to dip slightly and use a reversion cap rate of about half a percent.

Take late 2023, for example. We saw cap rates accelerate. Phoenix, Arizona, is a perfect case. Cap rates there jumped from 3.5% to 6.5%, even 7%. That's a 30-40% drop in market value. It all boils down to how commercial real estate works: your net operating income divided by the cap rate determines your property's value. Let me break it down: A property with a net operating income of half a million, at a 3.5% cap rate, is worth around 14 million. But at a 6% cap rate? It's only worth about 8.3 million. That's a huge loss.

This is why your investment model needs to account for cap rate changes. If it doesn't, you're in trouble when rates spike. And that's exactly what happened last year. Diversifying over different time lengths is key to handling these swings. High cap rates are rare, but they do happen. As a passive investor, you've got to weigh the risk and reward.

Operators usually evolve (less in favor for LP). They either go institutional, tapping into large, passive sources of capital, or they change asset classes.  For the smaller LP investor, finding the right operator is crucial but if you net worth is under 4M (what I call endgame status) then I would try to find a less institutional operator.

So happy to see this. Great place to start building the portfolio. I bought turnkeys in 2012-2015 and it created the opportunity to accredited status and beyond.

I started with turnkey rentals when net worth was under 750K.

Then move to larger deals from there.

We run a group only for Qualified Investors and Accredited. Aloha!

Engineer in Seattle 2009. Then bought turnkey rentals 2012-2015. Syndications after. 

Quit W2 2018

The "1% Rule" in real estate investing is a guideline used by investors to quickly assess the potential of a rental property. It states that the monthly rent of a property should be at least 1% of its purchase price. For example, if a house is bought for $100,000, it should rent for at least $1,000 per month. This rule helps investors evaluate whether a property can generate adequate cash flow relative to its cost. Back in 2015 I had 11 of these turnkey rentals in places like Birmingham, Atlanta, Indianapolis.

The 1% Rule is not a strict criterion but a starting point for deeper analysis. It doesn't account for other important factors like property condition, location, market trends, and expenses (maintenance, taxes, insurance, property management). While a property meeting the 1% Rule might indicate good potential cash flow, it doesn’t guarantee profitability. I would recommend getting a simple analysis spreadsheet to do more in depth underwriting.

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Remember In Hawaii, STRs come with extra taxes: a 10.25% Transient Accommodations Tax (TAT), a 4% General Excise Tax (GET), plus a 0.5% Oahu Surcharge Tax on gross income from rents. Even if you are out of state resident that GET tax is charged on Hawaii clients which is messed up.

STRs are definitely in vogue, but they're not without risks. Across Europe, cities are cracking down with new bylaws to regulate and tax them. In some cases, they're banning them entirely. Take Toronto, for instance. They've recently outlawed STRs of secondary dwellings due to a lack of affordable rental housing. You can rent out your primary residence or a room in it, but there's an annual license fee and a nightly tax involved.

Many investors jumped on the STR bandwagon, expecting the market to stay the same. Big mistake. They didn't account for regulatory changes or market saturation, which could lower prices. With historically low barriers to entry, STRs seemed like a golden opportunity. But now, many Toronto property owners are facing financial troubles, with the new rules set to kick in six months.

Bottom line: Don't bank on the current market conditions staying the same, especially if you're making a 25-year financial commitment. Personally, I stay away from the mainstream trends where everyone who is priced out of traditional long term rentals are now trying to rent out a room or a whole house on the daily. 

Sounds like you have hit the Penthouse, you should be conscious of and not trade your time for money. You’ve hit the endgame (15-25K a month passive). You can finally prioritize the things that are really important—like being there for your family with your time, instead of justifying spending your time to afford the life be there for your family.