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Passive Real Estate Investing

Updated: Jul 8, 2022


Note: transcription provided by Otter.AI, which is a technology company that develops speech-to text transcription and translation applications using artificial intelligence and machine learning.


Christopher H. Loo, MD-PhD: Today we're going to be talking about real estate, high net worth real estate investing. We have Lane Kawaoka out of Hawai'i. He's a blogger, he's a podcaster of And he has over a billion dollars in assets under management. So today we're going to talk about his story, how to get started, we're going to talk about investing and saving on taxes. So Lane, welcome.

Lane Kawaoka, PE: Hey, thanks for having me, Chris. Aloha, everybody.

Christopher H. Loo, MD-PhD: Tell you more about your background. I know you've worked with White Coat Investor, and just tell us how you got started and what you offer.

Lane Kawaoka, PE: Yeah, so I started investing back in 2009, when I bought my first rental property, up until that point. And I think like your audience, right, we're taught to all go to school, study hard, be good boys and girls. And I became an engineer, I wasn't as smart as other people, my family who became doctors. But I realized I think a lot of high paid highly stressed out professions, it's not all it’s cracked up to be in. A lot of people, they hit off from these high income occupations, they start to get a go down that road of being a big hamster in the rat race. I got lucky because you know, again, I followed that linear path of going to school studying hard, got a good job, bought a house to live in, because I thought that's what you're supposed to do a while back on my 401k.

But then I bought a house to live in, and because I was traveling all over for work, I just decided to rent it out. And this is back in 2009. And that was when I got the taste of cash flow. I later brought about 11 rentals by 2015, just saving up my money, 20% down payments. And then I realized accredited investors, high net worth investors, don't invest in rental properties after a certain point, especially when they become more of an accredited investor. Due to the headaches, the legal liability, the debt in our personal name. And I mean, let's face it, as turnkey investors just get gouged by all these vendors and property managers that just think of you as some rich guy out in Hawai'i or California.

Christopher H. Loo, MD-PhD: Yeah. So, that's a really good story. And yeah, I just remember I had my first job and I bought my house and I'm just thinking, it was the American dream and I was just like, looking around myself. I'm like, I'm not any happier or sadder than I was. I don't know what people are talking about, you know?

Lane Kawaoka, PE: Yeah. I was lucky. I wasn't I wasn't married and had kids at that point. I mean, I kind of hit that in my early 20s. Still single, still white canvas mode. Yeah, I mean once I bought one rental property and scaled it up, I realized, yeah, this was my ticket out of that rat race.

Christopher H. Loo, MD-PhD: Yeah. That's an amazing feeling. Once people get their taste of cash flow from their rental properties, and they're like, oh, I want to get into this. And so and you actually scaled it up, you realized, with rental properties, you have tenants, you have toilets, you have trash, it's a big headache. And I realized it's just not worth the hassle. But tell us how you scaled it up. Now you have $1 billion in assets under management? How did you transition from a landlord to a big time investor?

Lane Kawaoka, PE: I mean, I always did it the passive way, right, as I was working my full time engineering job, so I had property management to kind of do my dirty work for me. But with 11 rentals, you kind of run into an eviction every other quarter. Some kind of big catastrophe that happens every quarter. And you start to realize with 11 rentals, get a few hundred dollars of cash flow each, that's 3000 bucks a month. It's great, but I mean, it's just not enough and you're gonna need more like 30-40 houses. So you know, multiply that exception rate by three or four, you quickly realize how these single family homes, little rental properties are not scalable.

And that's where I started to pay to get into other higher level mastermind groups, other high paid professionals and they started to realize that they invested in private placements and syndications where they could just be the LP partner. And also because the tax benefits are so much stronger, you get a lot of these passive activity losses through cost segregations. And now, especially If you're able to implement a REP status strategy, real estate professional status, I mean, I personally haven't paid taxes for the last few years. I mean, people can go look at my taxes at I've got the screenshots on there, but you know, the wealthy derive their income down, their adjusted AGI down, with real estate. And that's how you pay less taxes to, in turn, invest more, and do some other strategies.

Christopher H. Loo, MD-PhD: Yeah, that's awesome. A lot of my audience are either getting into real estate or they're active real estate, but they're really what you’d describe as landlording. And so you described a lot of concepts. So we'll define REPs first. What is it for?

Lane Kawaoka, PE: Yeah, so a lot of my doctor clients, or my dentist clients will do real estate professional status is what we call it, it's a designation on your taxes, basically a little checkbox on there. But what that does, is for everybody, you can use the passive losses or deductions from real estate, the depreciation there to offset your passive income. Right and, and that's, that's great. But what's really cool is when you're kind of playing with fires, now, when you can take those passive losses and offset ordinary, potentially W2 incomes. Now there's some hoops to jump through to get this designation REP status. Has nothing to do with being a real estate broker buying and selling houses. But there's kind of two main categories or requirements amongst many that you have to hit. First, you or your spouse can have a full time day job. And you have to put a certain amount of hours into, about 500 to 750 hours into your rental property portfolio, being the manager there. So there's a lot of different strategies to get this designation. I mean, of course, I'm not getting any tax advice here. But we kind of help our clients, educate them. So they can have that educated, empowered conversation with their CPA, and most clients realize 95% of them have to fire their CPA, because the CPAs just don't get this type of stuff.

Christopher H. Loo, MD-PhD: Yeah, that's a really good point. And what you described, it's almost like phantom income, like depreciation, and all these passive losses, it offsets your earned income. So it's almost like free money given to you. The other thing you described in your talk earlier on was cost segregation. So describe what it is and how investors can use that, to minimize their tax liability in real estate?

Lane Kawaoka, PE: Yeah, so I think when we're all like little landlords, we got our single family homes. A lot of investors are aware that you're able to deduct the 127 of the value of the property improvement every single year, which is great. And that typically offsets a lot of your passive income from the investment. But in commercial real estate, we do what's called cost segregation. So basically, we pay a consultant to put this big report for us together, we typically pay about 5000 to $10,000 for each of these reports. So you know, a little landlord, that's just too much money to spend on something like that. But when we buy 40, 100 million dollar apartment complexes, that's a drop in the bucket. But what that little report does for us is it allows us to many times take 1/3, the whole building value all in the first year. Now, this creates a huge, huge amount of passive activity losses. And I would probably say on the magnitude, maybe 10-20, times the amount of deductions in the first year as you would be doing it traditionally using this cost segregation, bonus depreciation method.

And what this does, instead of just merely offsetting your passive income, this creates a huge surplus of passive activity losses, which we call it suspended. So let's say think of it as stained, suspended up in the clouds until you, the taxpayer, choose to strategically use it or not. Now, most people will just let it stay up in the clouds and use it when they have a cash out or any type of capital event they sell the building. But we educate people on how to use it strategically to their best advantage. So for example take a high income or like a doctor like yourself, making $600,000 a year. And there's no one way to play this, and that's what drives like CPAs crazy, it's not a black and white game.

There's different strategies and you know, there's some risks in terms of not taking the best strategy, but one prudent thing that we would kind of use as a baseline strategy, we’d try and lower your income down to $340,000 adjusted gross income. The reason being that there's a big gap between I think that that's 24 or 32% gap. So if you can drive your income from 600, down to 340, a delta of approximately, what is that quarter million? You've just saved 120, $130,000 of taxes, which now you can go and invest that money and get even more passive losses. And then also doing other strategies such as infinite banking, those types of things. And this is just a prime example why the rich get richer and the poor middle class are just becoming smaller and smaller.

Christopher H. Loo, MD-PhD: Taxes are, especially for the ultra rich and the ultra wealthy are their biggest liability. So any sort of tax saving, especially in the hundreds of 1000 millions of dollars if they can save that in taxes, that's huge. You know, because I'm all for paying taxes. But you know, a lot of it's wasted.

Lane Kawaoka, PE: So yeah, I mean, I agree with you. But like, that's where in reality, it's not that ultra wealthy paying the taxes. It's not the smart, sophisticated investors doing this stuff. It's the people just like us, right? It's the engineers, it's the doctors, it's the accountants that are like, these poor working saps, right, like we're the ones in the shrinking middle class that are paying our fair share and above in taxes. And this is why I've been so adamant about teaching people how to do this stuff. Because I mean, it's unfair, right?

We're that we're the good little boys and girls who did everything that the system taught us to do, but the system is kind of letting us down. The system is creating the situation where they want us to keep playing doctor for 10, 20, 30 years. If we stop doing this stuff or stop building bridges, how will society function, right? It sure as heck is not like the trust fund kids, the wealthy people who have the great tax strategist, and it sure as heck isn’t the low end people that's pushing society forward, it's the shrinking middle class.

Christopher H. Loo, MD-PhD: Yeah, I agree. So what are some steps? How can people that want to jumpstart their real estate investing career or save on their taxes? Do you recommend they do the single family route or just jump right into syndicates? What would you advise?

Lane Kawaoka, PE: Yeah, I mean, it depends where you are on his wealth building journey, right? I mean here at, we kind of educate higher paid professionals, and some of our higher paid professionals, what we call HINWYs, which stands for high income, not wealthy yet. I would say if your net worth is under a quarter million and you make a good salary, you may consider buying the rental properties. But I would say certainly, as you become more of an accredited investor, you can just Google the SEC definition for that. You know, I think skipping over these little rental properties would be prudent. And you know, but then you have to surround yourself with the right passive investor colleagues.

Because in this alternative investment world, relationships are everything. And if you're, if you're a landlord now, fortunately, all those relationships that you built over time, do not carry over to being an accredited investor, finding out where to invest, more importantly, who to stay away from. All these broker relationships, all these insurance companies, these property managers, it's just a different world than that non accredited investor world, when you switch over into kind of simple passive cash flow land. And quite frankly, a lot, not a lot of people are able to play nice with others. And this is why. But in a way, it's kind of easy, because you can do it from anywhere. You just have to kind of play nice with others and many accredited investors are very, what I've learned is very kind giving people.

Christopher H. Loo, MD-PhD: Yeah, you've said it so eloquently, Besides that you also have a blog and you teach people how to do this to give back and sort of continue education. So how can people who are interested in learning about simple passive cash flow, or about you, where can they go?

Lane Kawaoka, PE: Yeah, they can listen to podcasts, they can check out my podcast, Passive Real Estate Investing via Simple Passive Cashflow. Now the website has a lot of free resources, they can go to For is a good place to jumpstart and then I'd like to, I have a free book that I'd like to give out to your folks that just hit Amazon bestseller a couple of weeks ago, we released it.. And yeah I think that that's the thing, right? Like, a lot of people listening, we're the kind of the hard working folks.

And for most of my clients the goal is to get you onto this, this train of investing good assets with profitable operators and playing these different tax strategies and do a little bit of infinite banking. And most people who are already making six figures can get to financial freedom in five to 10 years pretty simply. And then you have to figure out what you want to do for the rest of your life, or what I tell people a lot of times, retirement’s not really a thing. Kind of force yourself to think if I had to do something for the rest of my life, what would it be? Maybe that might mean playing doctor, not four days a week, but maybe two or one and a half years? Don't like it or find something else. Right?

Christopher H. Loo, MD-PhD: Exactly. Yeah. You said it so well. And for all the listeners on the show, we'll put on Lane's especially the link to his book. Definitely go and check that out, check out his website. He's got a lot of great articles, and videos. And so Lane, any parting words of wisdom, advice for the listeners?

Lane Kawaoka, PE: You know, I think the hard part about this stuff is that there's a lot of noise out there, right? I mean, there's a lot of information for people who just aren't financially adept, right. They have credit card debt, they don't make more than $60-50,000 a year. You know, finding stuff for the high income earner that is responsible, prudent with their money, their personal finances, it's very hard to find the right information out there. And there's a lot of pundits like Dave Ramsey, Suze Orman that kind of teach the masses, right, the people that are in credit card debt, bad financial space.

And the hard thing is finding your peer group out there that believes, and investing in the captive 401k plans, buying a house to live in and paying it down prudently. That's not what the wealthy do. And that's the hard thing is to kind of separate what makes sense. Think for yourself. And at the end of the day, nobody's going to think out for your best interest in yourself. So go out there and kind of read all you can check out Simple Passive Cash Flow Podcast, and yeah, hopefully we'll be connecting in the future, folks.

Christopher H. Loo, MD-PhD: Awesome. Well, thanks so much, and we look forward to having you on the show again.

Christopher H. Loo, MD-PhD: Many thanks again for being here. If you’re new, you can find me online at Christopher H. Loo, MD-PhD, where I have links to other episodes or links to online resources that will support you on your financial literacy journey. I’ll see you there in on next week’s show. While I bring you thoroughly vetted information on this show regarding a variety of financial topics, I cannot promise you a one size fits all solution. This is why I caution you to continue to learn. Educate yourself and seek professional advice unique to your situation. If you want to talk to me, I welcome it. Please reach out via my website or email at I read and personally respond to all of my emails. Talk soon!


Editor's note: This transcript has been edited for brevity and clarity.


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