in business? I really enjoy now helping other investors or people invest in real estate, and when they get their first passive income and they send me a text like Winky that really like brings so much power in my heart that I want to do it again. When it comes to my family and my friends and my loved ones. It's the the time spent on unplanned afternoons and evenings over coffee or tea or wine. So I just. Invaluable. That's invaluable.
Those are the good memories, And swipes at Mommy Apple's Winky Lumba commercial real estate investor. And today I have a really, really special guest, my good friend Kunal Diwan. Welcome, Kunal, to that. You'll see why you. Excited to be here. Thank you for having me, Winky. Of course. Let a bit about Kunal acknowledge some engineer by education, entrepreneur by choice and real estate investor by passion. Oh my God, I love that simple bio.
Awesome. So today I will discuss the top three passive real estate investing myths, buster. Wow. I love that title. So, real estate. Massive real estate investing myths. Busted. Before we get started, Kunal, I wanted to ask you if you can briefly share your background with me, who you are, and how did you get here? Absolutely. Winky. Those those ten words kind of summarize who I am, where I came from, and what I do right now.
Engineer by education, Entrepreneur by choice and a real estate investor by passion. 11 Words I came in first generation immigrant to this country almost two decades ago now came for my engineering, my master's in engineering, studied in civil and structural engineering, did that and started a regular W2 job. The immigrant challenges broke as everybody I was able to come to this country.
I was the first one in my entire family to actually sit on the airplane, worry about coming international, and the way I was able to pursue a higher education in a number one country in the world is through my 100% scholarship. So that's how I got started. Did my engineer. Yeah, I was blessed and fortunate.
Did my engineering start working on tall buildings in Southern California in a complex seismic analysis and then moved on to a healthcare project and then mixed use and then apartment building. So that was the journey of actually designing and working in construction of buildings and my career was doing great even in the time of the Great Recession. But my personal net worth and balance sheet was not growing at all. And that's when I started looking into investing.
So my first investment was a condo back then in the end of the first decade and started getting that passive income, the paycheck after paying their mortgage and property taxes, the money coming in. That was fantastic. And that's when I got hooked to passive investing by the same time. And I mean $100,000 will only buy so much so fast. It's hard to save money when you have a W2 job. So it's not looking to extra income.
So I started my first business and the end of the first decade with 20 $500 and then over the next 5 to 7 years took that to a multiple, multiple seven figure multi-unit business with my W2. And that was the realization of entrepreneurship as the entrepreneur by choice. And then while I was doing this, I was still getting that paycheck from the person.
Investment started scaling up real estate investments in residential sector in Southern California, in Ventura County, Santa Barbara County, and duplex and triplex at four blocks. The small apartment family and then just a few years ago started scaling up to real estate syndications. So I realized my passion as I was going through this entrepreneurial journey and then to combine both the business and the investing and hence the Liberty Capital was born.
And here I am doing full time real estate investing and making that impact for other W-2 and other business owners of investing in real estate passively. Wow, I love that trajectory. And today, as you gave me the topic that we're going to be talking about, passive real estate meds, you know, and we can not be nearly in the top three of them. So what are some of the misconceptions about passive investing and how do they differ from that?
Active investing Because you were passive, so now you're active. So you have played both roles. Correct? And I'm actually passive today. Also, I still invest with other people like yourself where there is expertise and they take the lead, and I'm just passively investing the money. So before I answer your question though, you know, I have come through the journey of being a landlord of one property than landlords, but multiple properties.
And then I have gone through the challenges of the tenants and the toilets and the termites and all that wonderful stuff. I made a lot of mistakes as well. Oh, honey, I've been burned a lot because I didn't know any better ten years ago. because I didn't know any better ten years ago. So now that when you scale up the challenges, don't go away. So now that when you scale up the challenges, don't go away. They also scale up as well.
So what I can see as a passive investor versus what somebody else is seen as a passive investor who have never done an investing in the truly. Just putting their trust on the sponsor are denied scenarios. So to begin to talk about the top three myths of passive investing, my vision is coming from that mistakes and scars of investing from past 15 years. Awesome. You know what? I have heard this terminology market efficiency. People talk about that a lot when you are passively investing.
So I wanted to bring that into before we dig deep in the math, you know, so how does that market efficiency plays a role in passive investing or how would you define that? I beautiful I mean, that's probably it kind of really ties to the first myth that I want to share with you today. So let's start with the first me. The first myth is people talk about if I buy in a great market, you know, a gateway market or fancy market, you know, everything else will fall in place.
Or if I have a sponsor who can talk, well, speak well. Oh, everything will just happen after. Because the market is great, the data is great. Well, not really. So what they really need to look at the passive investor to look at is the property manager. Not enough weight is placed on property management. We do our due diligence on the market, the population growth, the income growth, the demographics. We talk about the due diligence on our sponsor.
What about the property manager, the actual leasing agent who's going to sell the product at the market rent? Who's going to capture that rent gap in your property? Who's going to make the improvements on the property, the maintenance tech, the the contractor? So it kind of ties with the market efficiency that you're talking about is if the PM, the property manager, has a very small footprint in that market and they are scaling with you. Well, they are going through the learning curve.
That is that's a no no, that's a no no. So if you have a large property, let's say a 300 unit building in a market is what's the track record of property manager for building of that size, what are the challenges they have based in their past projects, making CapEx improvements of property and that size in that market or even submarket? You know, how is their payroll looking right now? Labor market is really tight. It's hard to find good people and then retain them.
So what's the impact of their company culture on your on your property? These are very soft and intangible. The non tangible item that will create tangible impact on your property. So when we talk about market efficiency, the property manager plays a big role in their market efficiency. If I have a thousand doors in a market and I have one team managing all my thousand doors, my investors will be very efficient because my PM has a track record.
My hopefully the culture's great is keeping the staff and the staff is going with them, The regionals are going at them, the sales agents are going with the company with you from 1000 to 2000 door. So that's a top myth. You know, I with my partners right now, we are a vertically integrated firm. We know what's going on in the life of our regional business.
There is a culture of maintenance comes over to the house and sometimes have coffee because there is a bond, so that bonds really brings the commitment and commitment brings productivity, and productivity brings efficiency. When you're scaling, you really. I like that. But as a passive investor, this is a question for you. So passing muster is trying to work the sponsor as you know, you're betting on a horse. I'm sorry, betting on a jockey, not the horse, because but has to be on the jockey.
And jockey has to be well trained to take the horse and horse in our scenario is the property buy, sell in whatever market. So as a passive investor, I’m betting the sponsor not knowing much about the property manager or who the property management company is going to be aligned with this particular sponsor.
How would you go about that being a passive investor, or do you trust your sponsor that they are making that decision with the right property manager, property management company if they don't have it in-house? Absolutely. So in that analogy, the jockey and the horse, the way I visualize it big, the property manager is the caretaker of that horse. What's that caretaker feeding the horse, you know, exercising or health, all that. That's the caretaker. So a lot of weight does the lot of owners.
The responsibility still lies on the sponsor picking the right caretaker for the horse which is picking the right property management company for the horse. And as a passive investor, there should be direct questions to the sponsor about the property management company, just the way a passive investor ask the sponsor. Can you show a track record? Can you share some referrals? Can you share some challenges? All of that questions must be targeted to a property management company as well.
So Mister Sponsor, can you share your experience working with this property manager? Can you share some challenges that this property management company is facing? How is the reporting looking like from the property management company to you? How often would you guys meet? What are your expectations of the property manager and how would you overcome those challenges? We can talk about that for the next 30 minutes just on this topic.
But what I want to bring to the limelight for all the passive investors out there is Don't stop. You're on the sponsor. Dig deeper when it comes to the property manager as well. Awesome. So this is the Mets number one, right? The market deficiency. What is the second Mets. Second, which might ruffle some feathers and that is passive investor looks at the data. It's actually selective data. U-Haul. Sure so many people moving in and there's a population growth is income growth is demographics.
There is employers moving all that beautiful fancy stuff at a macro level, which is great. Don't take me wrong, it's very important. But at the same time, how does this relate to your neighborhoods, to your ultra local market? You know, so there's a sponsor, then there's a market and then there's a gate. The the data. How does all this relate to at a very extremely local micro level? Because we know real estate is not local resources, ultra local.
We know we live in Southern California and we know the property value on this side of the street and the property value Other side of the street is totally different. There are properties on this side of the street where people want to live and there's a waiting list and people's property on this side have a rent drop and nobody wants to go there, whatever the reason might be. So macro data is good sponsors marketing in that market.
The micro data is great, but ask the questions about micro level. So what I do is I draw on maps. Half mile radius. One mile radius, three mile radius, five mile radius. And the ten I mean, I go deep. Then each of those radius, I collect the population and I collect the average income and the median income. All this data is available.
Easy to find and do my own research when it comes to okay, this is my income and I backtrack it when it comes to the rent road or when it comes to the actual mart, the gap in the rent. So don't just rely on the reports on the poster or what the broker gives you or the free websites give you, but rather dig deeper and then take this and compare this to the business plan that the sponsor is creating. It's a little bit of work. But it's not a little bit of work. It's a lot of work.
And then people, especially being a passive investor, they might not be in that particular market. And then if the sponsor is providing you with the data within the one mile radius, and if you can quickly get the data from somewhere, sometimes you just rely on that versus, you know, going in there yourself and researching which is going to take hours and hours or maybe days to figure it out. What is what is right, what is wrong, Because you are not in that market.
Let's say you're in California, for example, and you're trying to invest in Texas. How much you know about the Texas market, especially Houston? Houston has a similar scenario like one block, the on the block. When I was in Houston earlier this this year, I was like, surprised to see that like, wow, there's a dramatic difference in properties, you know, like a block away from each other.
So it's very super hard being on the passive side for myself to figure out whether it's a good deal or not until long, as you know, I trust the sponsor that the data is being relayed to me is accurate. And then I know a little bit some of the tools that I can go online and check the data. I'll get to validated. But if I have to do all the research from the scratch, it's super hard for sure. So let me clarify. This research is not a responsibility of the passive investor. Passive one.
Mr. needs to ask his question. The responsibility lies on the sponsor. Right. I know you are so risky when it comes to data. I mean, your questions are. So we have been talking for like so many years and we know that the depth we have in our conversation when it comes to data and underwriting, right, we just hear this apart. The passive investor must ask these questions to the sponsor, grade the owner and the PM shows their $80,000 income in the five mile radius.
Can you please share with me the income in a half mile radius, around one mile radius and three mile radius that this conversation, the myths about passive investing is to give passive investor tools to go back to the sponsor. Come back to me, come back to you. Share this data with me so I can invest my 100,000 with you and sleep peacefully so that you have done what you were supposed to do before you created this marketing pitch. Yeah. That's true. And I like that.
I mean, it's always all the information, the more information you have, it's better for you to make more informed decision. And that's what we do. You know, whatever deals we bring to our passive investors or whatever deals we are in resting and as a passive investors ourselves, you know, we just do our due diligence on our part. So make sure that we are getting out of way, that whatever we are looking for. So let's move on to our Mets.
Number three, because I have tons of questions for you, but I wanted to go through all the markets before, so go ahead. Tell me about the third met number three. And this is, again, very controversial and someone who has been in business, especially in construction business and rental market business, will understand this. It's called too much value add. I not you know, every every rental market has a cap.
That cap has a lot of factors that depends on the income, that depends on the growth the employer all the things that we already know. Right. So but after a certain point, it is only so much improvements you can make on the property and create an increase in rent.
What I mean by that is this If you plot a graph where there is a let's say a traditional property electromagnetic tradition, like a classic unit, you see, you know what, I'm going to change the flooring and there you go, boom, 60 bucks a month extra. Makes sense. And I'm going to change the countertop in the kitchen. Another 40 bucks a month, I'm going to change Teresa's lighting, another 20 bucks, whatever that number is, depending on the market. Right.
And you drew a plot, a graph where amount spend and the return received. The return on the first, let's say $5,000 will be very high. So the slope of the graph will be very high. But and you keep on spending money on the property, interior or exterior, depending of that market, that submarket, you know, that graph is going to plateau out. So the work there will be up point after 10,000, 12,000, 50, whatever that property in the market is, you're not going to get 80 bucks for every $5,000 spent.
Right. You might even, you might get five bucks at ten bucks. So the question that the passive investor must ask the sponsor is, in your business plan, you are doing all this CapEx improvement and you're spending all this money into your next year and you're expecting this much rent growth over this period of time, right? That's a classic value add. How does that compare to the local market and the local rent in as is scenario?
You know, I have a property of myself where the rental income on a simple makeready is 1250. So the existing rent is 900 something. We turn the unit boom, the carpet painted simple less than $3,000 expense and we get go from 900 something to 1250. I'm going to jump right now if we go over. So now we put some laminate flooring, we put some beautiful countertops and kitchen cabinets, whatever that is. Let's say a ten grand expense, we get 150 extra.
So I ask myself, 3000 are actually less than $3,000, make ready and almost $300 bump or 10,000 plus and 150. But it doesn't make sense, right? So I am not my my my grass is slowly plateauing after that. 1250 Right. And then if I let's do platinum and then I sell it and some other buyer comes in, I am going to add a value to this property by, you know, changing the faucets or whatever that is wi fi package. How much can you really go? Can you take it to 1500 6000?
So I mean, you can, but you will pay in the economic vacancy. So that's a too much value that I'm talking about. So in a nutshell, passive investors should look at the business plan, look at the existing market with the correct comps and go back to the sponsor and ask these questions about how much value Ed is creating, how much rental growth in this product. And that's true.
I agree with you 100%, because each market sports the value add up to a certain level, you know, and also it depends upon the class of the property that you're getting A, B, and C, you cannot really put the upgrades of Class A into class C because market one supported the class or the property one supported. So that's going to be a waste of effort, time and money.
So all those things you have to keep in mind as a sponsor when you are putting the deal together or whenever you're bringing in to the to your investor as well, you know, and plus you have to be in a good position to explain where you're coming from and how you're really adding value. Because by the end of the day, everybody is looking for some good ROIC, right? If you're not getting the good return on your investment is a waste of effort on everybody's part.
So I wanted to ask you a couple questions. After all these Mets, you know, because I know the passive investing is a really good thing, but a lot of people think, you know, when I'm investing passively, I just sacrifice a control over the deal. I don't want it to passive invest with anybody. I just want to be on the active side. So I don't need to hear your take on that.
What would you recommend being an active investor to begin with, or just start investing passively for us, Get the hang of it and then change rules like you did or I did? Wow. That's a very wide question because there is no single answer that will apply to all. So I'll try to answer from one segment. But understand there are multiple layers to this. My kids are very young. I have a six year old. I have a two year old. Whom.
No amount of money is worth losing all the time that I have with them right now. Right? That's me. I know a couple of people who still work 16, 18 hours a day at their job and they have young kids and they come they just eat dinner together, compare. So what is the value of that money? If you can be there with your child. With their family. And practice? You know, right now, everyday I go take my child to swimming practice. That's an hour and a half or deal. Then we also go for soccer.
Then we play in the there's a value in there right now, active real estate investing means you are doing all the work at the at the price of something, right. Versus passive investing. Let's see if you have a job or if you have a business. What about that is you put your money to work and you do your own thing. 6 hours, 8 hours, 10 hours. So you have time left. So when you ask the question, what's better, active or passive?
Well, it just depends on the person, their personal life, how much their value, the time, their money goals, their ambitions, their long term goals. I do want to say that there's something called compounding effect. You know, everybody learned this in a third grade math, but very few actually practicing their life. And the compounding of it is more amplified and passive investing and an active investing. How's that?
That's if somebody has a tech job, let's say they live where you live in San Francisco, where they have a business, where they have employees working in the leveraged. They keep on doing this, but every year they can invest 100,000, 200,000, whatever their capacity is in a passive investment. Every year and keep on compounding. So the money keeps on churning from the business and your money keeps on churning from the cash flowing assets right.
And they're not putting any time and they're getting tax advantages, which is this. So they're saving more, invest more, save more, invest more, save more, invest and keep on doing that. And yet they have the time to do what they want to do. Right. How do you and if you can think about this scenario for ten years, the results are far more then the time value that you have, that the price that you pay, losing a lot of money. So every person should do this math.
If money plays a really big role, yeah, of course. Come to active investing. The the money is great, but it comes with the price. So that's why I passive invest as well. Me too. Yeah. We both align. No amount of money in active investing is worth it and because and that's why passive invest. So I hope that answers to the question but we can. There are multiple layers in this question. So I think you put it very well because the thing is there's the intrinsic value of everything.
Whatever you're trying to do, and then family always come first. If you ask anybody what you're passionate about, the first thing always going to be family. I'm passionate about my family. But how much do you how much time do you spend with your family? That's our next question. A lot of times people get so carried away with their work, with their job, or making money or whatever they regret later on. So but here you have a choice, you know, with passive investing.
So I'm going to ask you to share one successful passive investing example with me. My own. Yeah, sure. Or anybody else. I think it's probably fair if I share my own because then I can share my feelings as well. My, my, my first passive investment with somebody else. And I have never met them. Binky in person. This was during the Corbett time.
Even if I wanted to meet them, I cannot meet them If this was all electronic, like zoom over the screen, I got to know that person would like good, like two months or three months. I was talking to them every other week. Now, I could have invested a whole lot more at that time, but I chose to invest small because you have that risk, right?
But once you get to know that person and I understand their opinion about family and about business opinion about money, how they perceive their own money is what I really wanted to capture. Once I got that, I felt comfortable, then my money with this person would be also taken care of because this person takes care of his own money in certain way, the priorities in business sense. So the success story is more of the journey that I went through.
That person and not an investment will perform if the person performs. So my success is the partnership that journey of three months, understanding the person. I like that I really, really like that because I just feel like experience is more important than anything else. When you're trying to invest or trying to do something, you're creating experience and experience is something that you haven't experienced before or is not part of your knowledge base is something new, right?
If that experience is good, you're going to do it over and over again, and that's what you just shared. I love that. Thank you. So I think we are out of time. Can you share one golden nugget with my audience? Beside whatever you share. One golden nugget is stick to your buy box, stick to your investment thesis, stick to your financial goals, stick to your financial plans, Talk to as many sponsors as you can.
If somebody talks to me and you versus talks to, let's say, John or Steve just making up names, they will get the perspective of each person and continue talking to them, continue following them, continue reading about them, their perspective, and you will find the vehicle where you will feel safe with that sponsor with your first hundred thousand or down the line, your first million. Right? Awesome. So this brings us to our rapid fire round. I'm going to ask you five questions.
You're going to answer in one word, one sentence only. Are you ready? Oh, boy. Let's do it. Right. The first question is what is one of the most important thing that you have learned in your life and how did it change your life after learning it? There's nothing more valuable than time. And I used to burn time at my job and my first business that my second business when my first child was born. It totally changed my perspective.
So no amount of money is worth the the time that you can spend with loving things. What you want to do with your family, beat your passions. I love that. What is one best book that you have read and recommend to my audience? If you are a business owner, I strongly suggest starting with E-Myth. It's a really old book. E-Myth and E-Myth Revisited.
And if you are a young parent and you have kids and it's about parenting and it talks about how to talk to kids, so they listen and how to listen so they can talk. Wonderful book. And you can actually apply this parenting book if you have a team and you can apply the principles from this book to your business team as well. Exactly. That's what I was thinking. And it's all about listening. How carefully you're listening and asking the right questions. I love that.
In one word, what does life mean to you? Happiness. What is your biggest passion in business? I really enjoy now helping other investors or people invest in real estate, and when they get their first passive income and they send me a text like Winky that really like brings so much power in my heart that I want to do it again. When it comes to my family and my friends and my loved ones. It's the the time spent on unplanned afternoons and evenings over coffee or tea or wine. So I just. Invaluable.
That's invaluable. Those are the good memories, Those are the good memories, good start, good experience that they're creating power. So love that if you could turn back in time and talk to your younger self, So love that if you could turn back in time and talk to your younger self, what would that be and why? I would tell myself, Don't be scared. You know, when I was at my job, I was an immigrant. So there was a fear of immigration status, and then there was a fear
of losing a job. Fear of losing the money. Fear, fear, fear. Like there was I was filled with fear. I was ambitious, but my actions were not because that I want to grow fast or rather, I don't want to lose fast or lose it. Right? So it was fear driven. Once I made the shift and started believing in myself. And that was my first investment and the business journey, I started seeing things in a very different way. So don't fear. Why I love that.
I mean, been there, done that kind of thing, you know, for everybody, you know, because we complicate our lives. Life is very simple. It's a smooth sailing. If you just two step process and keep on walking. So how can people reach out to you and all. The best way to reach out to me is on LinkedIn, my full name can all be one on LinkedIn. my full name can all be one on LinkedIn. Oh my God. That was a really, really good conversation today. I really enjoyed the show with you today.
It's a pleasure being always great chatting with you. You have this power of asking great questions, so