The Buffett-Inspired Approach to Building Enduring Wealth

0:00 – I believe multi-millionaires who want an enduring legacy should own cash flowing real estate forever and not gamble on fixed and flipped speculation.
0:08 – Warren Buffett once said rule number one, don’t lose money. Rule number two, don’t forget rule number one.
0:12 – But over the last several years, investors have experienced pause distributions, capital calls, sometimes total loss of capital.
0:19 – They’ve got fragile income streams. They don’t have durably predictable income over long periods of time.
0:24 – They have tax erosion, too much of their money on a monthly basis. An annual basis is going to Uncle Sam.
0:29 – And they’ve got no margin for error, right? They’ve spent decades building this amount of wealth and they’ve
0:33 – know that one bad deal could literally unravel everything. So today, I’m going to unveil the Sunrise Capital Strategy.
0:39 – This is a framework that’s built upon history’s greatest businessmen, history’s greatest investors,
0:45 – to preclude some of those significant pain points that all of us have unfortunately faced over the last handful of years.
0:51 – We’re leveraging time-tested principles of folks like Warren Buffett and Charlie Munger,
0:56 – they’ve implemented these strategies to build a business from zero dollars to one trillion dollars
1:02 – in just one generation. And we’ve taken those principles and we’ve applied them
1:07 – to real estate, essential use real estate, in an effort to help everybody generate cash flow
1:12 – and build legacy wealth in a tax-efficient manner. That’s what I’m trying to do for my family,
1:15 – it’s what my business partner is trying to do for his family. We’re going to help out as many people
1:18 – as possible do that as we can along the way so that we can move from simply building wealth,
1:23 – but that’s not enough. We can’t just simply build wealth, but we can also move towards
1:28 – becoming a sage investor, where we not only build wealth, but we also build wisdom over time,
1:32 – and we pass along not only wealth, but wisdom so that you can materially change your tree,
1:37 – your family tree from multiple generations to come. My name is Brian Spear. I’m the co-founder,
1:42 – principal, CEO over at Sunrise Capital Investors, and we’ve used the Sunrise Capital strategy
1:48 – to great effect for more than a decade now. We’ve done some pretty amazing things. We’ve helped
1:51 – over a thousand investors over time. We’ve done about a billion dollars in transactions.
1:55 – We manage hundreds of millions of dollars for our partners along the way. We’ve got hundreds of
2:00 – millions of dollars in mobile home parks and parking assets all over the country, 18 different
2:03 – states now. It’s amazing. Over 30 consecutive quarters of on-time distributions to our partners.
2:08 – We’ve got multiple deals, multiple funds, where we’ve basically taken that investor capital.
2:12 – We’ve gotten it all back to investors, so folks are operating on an infinite cash return.
2:17 – They’re playing with the house’s money, as it were. We’ve done 16 full cycle mobile home park
2:22 – deals, with over a 40% internal rate of return, all this crazy stuff. I say all of that to simply
2:27 – convey that that success, that track record, is not because we invest in the best deals. It’s not
2:34 – because we invest in the best niches. I can prove it to you because there’s plenty of guys that
2:39 – invest in mobile home parks that have pause distributions, capital calls, total loss of capital,
2:45 – over the last handful of years. Why have we been so successful? We would point to the sunrise
2:51 – capital strategy. It is the manner in which we ultimately manage capital. That is the key
2:57 – differentiator. That is the secret sauce of what we do. Today, for the first time, we’re going to
3:02 – unveil that to the marketplace. I have literally had thousands of calls with investors over time.
3:08 – And the same sorts of things pop up over and over and over. These are guys that are seven figures,
3:12 – eight figures, sometimes nine figures in that worth over time. It’s interesting to see the sort of
3:18 – themes that pop up. And the sad state of affairs is you come to realize that they have fragile
3:22 – income streams. They’re seeking durable, predictable income over long periods of time. And it’s
3:29 – very elusive. It’s very hard to ultimately get them. Even the deals that are successful,
3:33 – sometimes it’s very lumpy where there’s not a lot of income in the very interim period of time.
3:37 – And then maybe after three or four years, they sell a property and they get a big spike of income.
3:41 – Congratulations if that works. But what happens? A, if that pot of gold at the end of the rainbow never
3:46 – comes. And wouldn’t it be better to have safe, predictable, durable income coming in like clockwork
3:50 – every single week, every single month, every single quarter, every single year so that you could
3:54 – live the life that you want today. Have the freedom, freedom of time, freedom of money, freedom of
3:58 – relationship, freedom of purpose that you want with your family right now. Instead of wondering when
4:02 – that next check is going to come, all of the individuals that we serve understand that pain point
4:08 – and our capital strategy solves for that. Another one of the main themes that we hear over and
4:12 – over and over again is that folks are facing tax erosion. Taxes are eroding a huge portion
4:18 – of their wealth, right? These folks are in the highest tax bracket and they’re getting crushed.
4:23 – Uncle Sam has taken a huge percentage of every additional dollar that they’re earning on an annual
4:27 – basis. It seems like the success that they have, they’re being penalized for that success.
4:31 – At the end of the day, write us on about what you make. It’s about what you keep. And we do our best
4:34 – to try to help you keep more of your heart and money in your pocket. We feel like you can do
4:37 – a better with it than the government can. The Sunrise Capital Investors strategy solves for that.
4:42 – Another one of the main pain points that we hear over and over and over a common refrain is that
4:46 – there’s no margin for error. It shows up in a handful of different ways, but the truth is they
4:50 – realize that one bad deal could unravel everything. Folks have done everything right. They’ve worked
4:56 – exceptionally hard for many, many years, oftentimes decades to finally become, quote, unquote,
5:02 – successful in the ISO society, right? They’ve worked really hard. They’ve gone to school.
5:06 – They’ve got good grades. They’ve gotten a degree. They’ve gotten an advanced degree. Sometimes
5:09 – they had to take out loans along the way. Then they went under the professional world. They started
5:13 – working hard, started generating great incomes along the way, paid off those student loans,
5:17 – finally got above water, now started building a little bit of wealth over time, have some money
5:20 – to finally invest. It’s taken decades to ultimately get there. And they realize that one bad deal could
5:26 – unravel everything. So at this stage, principal loss isn’t an option. It’s taken decades to ultimately
5:33 – get here. And one bad deal, one significant mistake could erase decades of hard work. And the
5:40 – capital strategy solves for that by keeping a margin of safety every step of the way. You’ve already
5:47 – been burned before or you’ve seen friends and family members who have been burned. So again,
5:51 – you got to avoid that like the plague and the capital strategy solves for that. And at the end of the
5:55 – day, unfortunately we’ve had folks that have passed away that have become investors in our funds
6:00 – over time. And when you have conversations with folks that have been involved for extremely long
6:05 – periods of time and they’re getting towards the end of the journey, you have more of a significant
6:08 – revelation. You’ve built some wealth over time. But so what? People begin reflecting on the meaning
6:14 – of life and what they’re trying to achieve and ultimately what they’re really doing. They want to
6:18 – be able to have the sufficient cash flow to do what they want and live the lifestyle that they
6:22 – would like with their family today. But they also at the end of the rainbow not only want to pass
6:25 – along a little bit of wealth, but they want to understand that what they’re doing has meaning,
6:29 – right? They don’t want to walk away with an unfulfilled legacy. They want to walk away knowing that
6:33 – what they did actually matters, right? On paper you’ve succeeded, but you’re wondering what’s my
6:37 – legacy? What’s it going to be? You’re running out of time to share all the value, share all the wisdom
6:42 – that you’re going to nurture your family for generations to come. And the capital strategy
6:46 – solves for that. It helps people move away from just building a little bit of wealth and passing
6:49 – along a little bit of money towards passing along, passing along not only wealth, but also wisdom,
6:55 – how to manage money in a framework to ensure that all the time energy effort and decades of
7:00 – hard work that you put in does not get squandered immediately upon your departure, right? You could
7:04 – pass along a framework for the next generation so that your kids and your grandchildren and beyond
7:10 – ultimately are exceptionally well off decades down the road as you had originally envisioned as
7:14 – you were going through this life, so that you know that it’s not all for not as it were. We’ve
7:19 – had too many scenarios where you’ve seen folks, you know, go bootstraps to bootstraps in the
7:23 – handful of generations. You’ve heard those horror stories. You don’t want to be part of that group.
7:26 – And so when you read about all the world’s most successful entrepreneurs, all the world’s
7:31 – most successful businessmen, all the world’s most successful investors, you come to realize that
7:37 – the time-tested principles are the ones that you should be building your foundational strategy
7:43 – upon. You don’t want to be building things upon fleeting things that come and go. And when you
7:47 – sit back and you reflect on that, you come to realize that you want to build your capital strategy
7:53 – on principles that were true a hundred years ago that are true today and that are going to be true
7:59 – a hundred years from now. And it’s for this reason, right? They’re very simple things like, again,
8:05 – buy businesses at real reasonable prices, focus on cash flow over appreciation, hold assets forever
8:11 – to maximize compound growth over time. Don’t invest outside of your circle of competence.
8:16 – Always protect the downside before you ever even consider the upside, right? The old Charlie
8:19 – Munger Invert always Invert, right? Protect the downside before you ever even contemplate the
8:24 – upside. All these are foundational principles that have been true for thousands of years and will
8:27 – be true for thousands of years from now. And that’s really should be the foundation of your philosophy.
8:31 – This is my personal perspective. And it’s why all of these roads lead back to the crazy world
8:36 – of mobile home parks. For those unaware, Warren Buffett, he’s actually the largest player in the
8:41 – mobile home park space. He’s the largest owner of mobile homes in the world. He’s the largest
8:47 – builder of mobile homes in the world through Clayton homes. He’s the largest lender on mobile homes
8:51 – in the world through 21st mortgage. And he’s the second largest lender on mobile home parks
8:56 – through Burkadia, which is a subsidiary of Berkshire Hathaway. And again, it’s because of the amazing
9:01 – moat that this business has, right? Beautiful supply and demand economics along the way. And it’s
9:06 – not just Warren Buffett, the greatest investor of all time. Sam Zell is readily known as the greatest
9:11 – real estate investor of all time. He’s the founder of the modern REIT. He started equity office. He
9:16 – started equity lifestyle. He started equity residential. And he is quoted as stating verbatim that
9:22 – mobile home parks are the best real estate investment that has ever existed. So if the best investor
9:27 – of all time and the best real estate investor of all time, both believe that mobile home parks
9:32 – are the best investment around, I would pose to you that we’d be well served to ultimately dig a
9:36 – heck of a lot deeper into knowing why that is the case. And I’ve certainly done so over the past
9:40 – decade dedicated a huge percentage of my time to understanding the niche allocating huge
9:46 – portions of my personal family’s net worth towards it well over 90% of our net worth is inside
9:51 – of this respective niche. And I think we’d be well served to you’d be well served to actually
9:56 – explore if that’d be a good fit for you and your family as well over time. But it’s as I’ve
10:00 – mentioned, it’s not just the individual niche, it’s not just the individual deals that ultimately
10:04 – determine whether or not you’re going to be successful along the way. It’s how you manage money.
10:08 – So we’re going to go ahead and introduce today the seven pillar framework known as the Sunrise
10:13 – Capital Strategy. And we don’t have time to dig super granularly into each one of the individual
10:18 – letters of the acronym. Again, the word capital is a seven letter acronym, which outlines kind of the
10:24 – capital strategy over time. We don’t have enough time to dig really, really granularly into each
10:29 – individual letter of the acronym. We’ll do so in subsequent episodes and we’ll be talking about
10:32 – this for years and years and years to come. But today we’re going to do a very quick flyover,
10:35 – we’ll walk through each of the individual letters, what they stand for, and then we’ll do a quick
10:39 – little zoom through. I need to get you an understanding of how we manage money for the betterment
10:45 – of everybody involved, for the betterment of our family, my business partners family, and everybody
10:48 – that ends up joining our team. We believe that this is in fact the best way to manage capital
10:52 – to have the highest likelihood of outcome, the highest assurance of outcome possible.
10:56 – So we’re going to dive into some of these here today, but C is cash flow first. It’s the foundation
11:01 – of everything we do over here at Sunrise. Henry Singleton would convey that you need to optimize
11:06 – for free cash flow. And Warren Buffett is just a huge fan of Henry Singleton. And Warren Buffett
11:10 – would convey that Henry Singleton is the best single best capital allocator in the history of the
11:15 – United States. And as you guys know, cash flow is the lifeblood of any respective business.
11:20 – Without cash flow, the business will eventually die, maybe not immediately, but eventually
11:24 – that business will unfortunately die. I was actually speaking in Pasadena a couple of months ago.
11:29 – And when I was out there on stage, I used an example of folks that are involved for those unaware
11:35 – of Pasadena’s pretty expensive out there. I don’t know if you know pretty expensive to buy houses
11:38 – out there, right? So if folks were going to go out there and just use that city as an example to go
11:43 – purchase single family residential real estate, right? And you’re going to make an investment,
11:46 – you’re going to go buy a house and ultimately rent it out to the marketplace. Again,
11:50 – because it’s so expensive, let’s just use a round number, say it’s a million dollar house
11:53 – that you’re going to buy and you’re going to rent it out. Well, that house is going to end up
11:56 – having a few thousand dollars of rent on a month of the basis. And it’s probably unlikely,
12:00 – given the high purchase price of that individual investment and the modest amount of revenue coming
12:03 – in from rent that that’s going to be a cash flow positive investment. Let’s say it’s probably
12:07 – cash flow negative. Maybe it’s in that neutral. Maybe you get lucky and you got a little bit of
12:12 – positive cash flow. But the sadst of affairs is it’s probably unlikely that you’ve fully baked
12:18 – into account all the myriad of different expenses that are associated with that respective investment
12:23 – over the long term. The capital expenditures are ultimately going to pop up at some point,
12:27 – somebody somewhere, right? So when you’ve taken into account the pity payment, the principal,
12:30 – interest taxes, insurance, etc. You might be cash flow positive, but the truth of the matter is
12:34 – you’re probably haven’t taken into account all the turns, the residents turning over time. You
12:37 – also probably haven’t taken into account in earnest the cost associated with modifying the roof
12:45 – over 20, 30 years, right? In the the various turns that are necessary as well as, you know,
12:50 – the water heaters and all the myriad of things that go out over very long periods of time.
12:54 – And that’s how a lot of folks ultimately get into a precarious situations because you haven’t
12:58 – really underwritten prudently the cash flow needs of any given individual respective business.
13:04 – And you see this far too often in syndications where guys are doing fixed and flip investments
13:08 – over the course of three to seven years and they’re believing that they have a certain
13:11 – sufficient amount of cash flow in the interim period. But the truth of the matter is, you know,
13:15 – they’re operating with a hot potato philosophy that, hey, we’re going to get in and out of this
13:18 – before we have to fix the roof or before we have to fix this that or the other. And the sad
13:22 – state of affairs is if you operate with that business model, it’s a hot potato and somebody
13:25 – somewhere they’re going to miss time the market, they’re not going to be able to get out,
13:28 – they’re going to have to go fix those additional capital expenditures, it’s going to suck all the
13:31 – cash out of the business and you’re going to adversely affect everybody along the way,
13:34 – that business eventually dies. And this is why you’ve had too many different individuals over
13:38 – the course of the last handful of years have paused distributions, capital calls, sometimes total
13:43 – loss of capital because you’re not focusing from a cash flow first perspective. And if I’m going
13:48 – to zoom further out, you know, when Henry Singleton is allocating capital, he’s talking about
13:52 – optimizing for free cash flow. So what are we really looking to do? We’re trying to basically
13:56 – look out into the marketplace across the bevy of different things that are available to you
14:00 – and determine which individual business is ultimately going to throw off the most cash flow
14:04 – over the course of the next 50 years. So you’re not only focusing on the individual cash on cash
14:09 – return on a monthly basis, which is where most folks ultimately stop when you’re thinking about
14:12 – real estate investments, right? That Pasadena single family house that we’re referring to,
14:16 – it’s got rent that comes in, it’s got expenses that you got to pay on an ongoing basis. And ultimately,
14:21 – you know, you might have a tiny little bit of operating cash flow. And that’s what most people
14:25 – think about. But the truth of the matter is real cash flow, free cash flow, optimizing for free
14:30 – cash flow, you have to take into account a significantly longer duration. And what that means is
14:35 – over long periods of time, the investments need to be deployed in assets that have high quality
14:44 – long term macroeconomic tailwinds where the property values likely increase over time. And that can
14:48 – be due to just high quality long term macroeconomic tailwinds, as I’m mentioning, or it could be due
14:53 – to forced appreciation where you have the ability to control your own destiny by virtue of
14:57 – implementing a business model that that where you can materially control the NOI. But regardless,
15:02 – let’s say you buy a property worth a million bucks over time, fingers crossed, that property
15:05 – will increase in value. You have a little bit of retained earnings in the balance sheet.
15:09 – You have to then think, how can I ultimately extract those retained earnings on the balance
15:13 – sheet and actually get them into my pocket? That would be another form of free cash flow. And when
15:17 – you take into account both of those things, when you take into account the operational free cash flow,
15:21 – plus the retained earnings on the balance sheet extract that when you compare it to the
15:25 – CapEx, the capital expenditures that you have to redeploy into that business over time,
15:30 – you simply look at all of the math. And you say, which business is ultimately going to provide me
15:36 – the best free cash flow over the course of the next 50 years? You have to have a much longer time
15:41 – horizon than what most folks ultimately do to ensure the outcome that you want for you and your
15:48 – family. And if you take that strategy and you look at it across 50 year horizon, you say,
15:53 – which investment is best? This ABCD, and you simply deploy the capital to the investment that’s
15:58 – likely to achieve the best optimized free cash flow over the course of the next five decades.
16:03 – And if you do this consistently over long periods of time, you have a very high likelihood
16:06 – of an assurance of outcome. And you have to make sure that whatever deals that you’re investing in
16:10 – are going to have sufficient cash flow to write out the next inevitable recession because everybody’s
16:14 – crystal ball is broken. My crystal ball is broken. Your crystal ball is broken. The Fed doesn’t even
16:18 – know what they’re doing. Okay. So you have to have cash flow, which is the lifeblood of the business
16:23 – that will survive through the next inevitable recession. And if you can do that, then it checks
16:27 – the box. And then you can move on to the next stage of the capital strategy, which is a add value.
16:32 – And when we say a add value, what we mean is we must materially be able to impact and influence
16:38 – the value of the properties, meaning I do not want the investment and the success and the outcome
16:47 – of my investment to be determined exclusively at the whims of Mr. Market. I want to ensure that my
16:55 – investment, I have the ability to make a material impact on the outcome as to whether or not that
17:01 – investment is going to be successful. And you do this by adding value, by forced appreciation,
17:05 – not just long-term macroeconomic talents, but forced appreciation by, you know, if I’m going to
17:10 – look at the chess board, right, and we’re out there and we’re playing the game and I’m walking
17:12 – into that game, there must be a couple of moves that I can make on that chess board to materially
17:17 – impact the outcome of the game. So whenever we buy a property, we have a three-level framework
17:21 – that we instill, anytime that we buy a new asset, where we have three levers that we can pull,
17:26 – different opportunities that we have to materially make changes in the value of that respective
17:31 – property to drive, revenue to minimize expenses, to materially impact the outcome where I can
17:36 – flick, ding, make a dent, and actually determine whether or not that investment is going to be
17:40 – successful. So, you know, that three-level framework can come in the form of, you know, low,
17:44 – low-hanging fruit, mid-grade fruit, and high-hanging fruit. On the low-hanging fruit, it’s just buying
17:48 – deals with the low-market rents over time, where we know that we could recapture that loss to
17:51 – least. We find this oftentimes in more natural state sectors, I won’t go on here, but basically
17:55 – in a nutshell, if you can find deals that have below-market rents, you can oftentimes
17:59 – control your own destiny. In the same vein, we have a second lever that we pull is operational
18:06 – inefficiency. When you’re in niche real estate sectors, you can find situations where, for whatever
18:10 – reason, they’ve been operated, you know, and owned from mom and pop operators that haven’t
18:14 – maximized the efficiency of the investments. You can oftentimes build back for water sewer trash.
18:18 – These things are commonplace in more traditional real estate sectors. You’d see that all over in
18:22 – multi-family, but in our crazy world of mobile home parks, oftentimes we’ll find deals that
18:26 – folks haven’t built back for utilities, which is one of the most simple ways to ensure that
18:33 – everyone is treating the property as fairly as possible, and the truth of the matter is,
18:37 – if you’re doing that, then you’re actually treating the residents more fairly, because if you do
18:43 – not, then over time, the rents are going to have to increase at a rate higher than they otherwise
18:48 – should. If people are only paying for what they use, then they won’t squander as much. It means
18:52 – you don’t have to drive revenues from the lot rents in nearest higher manner, getting a little
18:58 – bit more granular here. But the point is, you have to ensure that you can materially impact the
19:04 – NOI, and we can do so through three different levers, buying below market rents, operational
19:08 – inefficiency, and the third lever is infill. So basically, in the nutshell, there’s oftentimes,
19:13 – you know, opportunities in mobile home parks where you buy a hundred space mobile home parks.
19:16 – Maybe there’s 80 homes there, and there’s 20 vacant lots. Well, the highest hanging fruit, the
19:21 – most difficult upside to achieve, is actually bringing in 20 brand new homes, selling them to the
19:26 – marketplace. Again, adding more affordable housing stock to the marketplace. It’s a beautiful
19:30 – thing. You get to make a dent in the affordable housing crisis, but it takes a little bit more time
19:34 – energy effort and work to do that. But you know, because there’s a massive demand for affordable
19:38 – housing, that you’ll be able to bring that to the marketplace and increase revenues along the
19:42 – way. And these are ways that, just by virtue of having a high quality business, being a great
19:46 – operator, that you can control your own destiny. And so if you can check those boxes, you can
19:52 – see, make sure you can check the box and cash flow through any respective recession,
19:56 – and an A, ensure that you can check the box by materially being able to make a couple of moves
20:01 – on the chessboard and control your own destiny, then it passes enough. We continue to move forward
20:06 – with that respective deal. The third tier of the capital strategy is to P, protect the downside.
20:11 – And we’ve talked about this before, but again, Charlie Munger, invert, always invert.
20:15 – Far too often people go into investments thinking, how much money can I make, et cetera,
20:18 – what’s the internal rate of return, how much money can I make, and thinking about the top side.
20:22 – The truth of the matter is, you should be spending exorbitant amounts of your time,
20:26 – virtually all of your time, thinking about how can I lose money? How can I lose my money?
20:30 – And for this reason, you have to try to do everything in your power to mitigate downside risk.
20:35 – This letter of the acronym has so much involved in it that it would be impossible for me to share
20:41 – all the insights in just a very brief period of time. But suffice to say, the intent of this
20:47 – section of the capital strategy is to mitigate every aspect, every single individual downside risk
20:53 – that you could possibly find. We mitigate every one of those before we even contemplating the
20:58 – upside in a respective investment. And it means ensuring that you have sufficient margin of
21:04 – safety immediately at acquisition where you’re buying, we’ve got, I could give you 50 different
21:08 – appraisals over time, where when we buy a deal, the appraised value, we purchase prices,
21:13 – let’s say 10 million bucks, and the appraised value is significantly higher than that.
21:17 – That’s a margin of safety, and you have to buy with a margin of safety and maintain that margin
21:21 – of safety throughout the entirety of the holding period. And it’s not just that, right? That margin
21:25 – of safety, it protects the downside in an exorbitant amount of ways, but it’s not just exclusively buying
21:30 – deals where the appraised value immediately day one is significantly higher than the purchase price.
21:35 – It also means mitigating downside risk by not getting on in front of your skis from a debt
21:39 – perspective. It means staggering term debt expirations inside of a fund structure so that you’re
21:43 – not at a single point of failure. If you have a, you know, the next great recession occurs,
21:47 – or COVID occurs, and you’ve got all of the different individual assets that have term debt
21:51 – expirations that align simultaneously. That provides significantly more risk for any of the different
21:56 – individuals that are involved in that respective fund structure. There’s so much more
22:01 – there to unpack, but in a nutshell, you’re avoiding downside risk in every way, shape, or form before
22:06 – you ever even contemplate the upside in the investment. So again, Pete, protect the downside.
22:11 – And while Pete protected downside is a massively important aspect of the capital strategy,
22:16 – and you can mitigate virtually every aspect in every downside risk in a respective investment,
22:21 – the truth is the sad state of affairs is you cannot, you literally cannot mitigate every single
22:26 – individual piece that is a downside risk in the investment. And I would point to the fact that
22:32 – my crystal ball is broken, your crystal ball is broken, everybody’s crystal ball is broken,
22:36 – and market timing risk is something that you literally cannot remove from the investment.
22:41 – When you run the rabbit hole and you think critically about all the different ways you can
22:44 – lose all of your money, that is one area that we will never be able to solve for. I can promise
22:48 – you that there will be an inevitable next recession, right? But nobody ever knows when the next
22:54 – black swan events going to occur. Nobody knows when the next savings and loan crisis is going to
22:58 – occur. The next internet bubble is going to occur. The next great recession or the next massive
23:02 – COVID issue or the interest rate increases. Nobody knows when that’s going to occur. The only way
23:07 – to mitigate downside risk in terms of market timing is to I invest, don’t speculate. And when we
23:15 – say that, what we mean is invest for the long term. Anybody that invests and believes that they’re
23:21 – investing, right? With a fix and flip, buy, fix and sell business model over three to five year
23:25 – horizon or five to seven year horizon, you might think that you’re investing. You might
23:29 – genuinely believe that you’re investing, but you are actually speculating because you don’t know
23:36 – whether or not at the end of that three year horizon, that bridge loan or that five year horizon,
23:41 – that fixed rate five year loan, you do not know if you’re going to end up being in one of those
23:47 – precarious black swan situations where you could literally lose all of your money. And for that
23:51 – reason, you have to go into an investment with the intent to buy and hold forever. Warren Buffett
23:56 – is conveyor that, hey, if I’m going to go buy a deal, I don’t care if the stock market literally
24:00 – turns off for 10 years because I’m buying a durably wonderful businesses that I’m competent is going
24:06 – to perform for a decade and beyond. This is the same approach that we must take if we’re actually
24:11 – investing and we’re not speculating. And for those folks that have already quote unquote made it in
24:15 – the eyes of society that have already built some wealth that have already become successful. The
24:18 – truth is if you are out there gambling with your money, you are making an imprudent decision.
24:23 – It’s taking you decades to get to where you’re at and you have no margin for error. One bad deal
24:27 – could literally wipe out decades of hard work, time, energy and effort. So don’t do that, invest,
24:32 – literally invest. Don’t speculate. That’s the only way you could do it is literally buy and hold
24:36 – investments over extremely long periods of time. And if you’re going to do that, then logically,
24:42 – the next thought is if I’m going to buy and hold assets and I really need to hold on to them
24:47 – over extremely long periods of time, then I need to buy durably wonderful businesses,
24:52 – meaning I need to invest in asset classes that have exceptionally high quality long-term
24:57 – macroeconomic tailwinds where the demand for the product is going up at a rate way higher than
25:02 – the new supply coming online because that leads to long-term, same store and a wide growth. And
25:06 – that’s just a fancy way to say better compound interest. And that’s really what you’re seeking.
25:11 – In the very near term, it’s beautiful to be able to flick, ding, make a dent and create some
25:15 – value add along the way. That’s beautiful. I love every bit of it. But when you’re really investing
25:19 – over very long periods of time, it’s also, and I’d say even more important to invest where the long-term
25:25 – macroeconomic tailwinds are in your favor because time heals many, many, many, many, many, many,
25:30 – wounds in real estate. Real estate is very forgiving. Real estate is not a get-rich, quick style of
25:35 – business over a short period of time with a low probability of success. Real estate is a build
25:41 – massive amounts of wealth over a very long period of time with a very high probability of success.
25:47 – But you have to actually be an investor. You can’t be a fix and flip in and out. Maybe the deal
25:52 – works. Maybe it doesn’t work. Try to get the timing right. Because if you’re doing that,
25:55 – you’re creating significantly more risk than you otherwise should. And eventually, if you’re
26:00 – operating with, you know, development deals, deep value, heavy value add opportunistic transactions
26:06 – eventually, somebody somewhere is going to mistime the market. And you’re going to get crushed.
26:10 – You’re going to hurt investors dearly. As Munger would say, you never want to interrupt the
26:14 – compounding, right? So avoid that like the plague actually invest. Do not speculate. This is why we
26:20 – love mobile home parks. They have the best long-term same-store and a wide growth out of any
26:23 – respective real estate sector. That’s why Warren Buffett and Charlie Munger, or it’s why Warren Buffett
26:27 – Charlie Munger and Sam Zell are so heavily invested in the space, ridiculously profound long-term
26:32 – macroeconomic tailwinds, huge moat in the industry. I won’t go on. But suffice to say you have to
26:37 – actually invest and don’t speculate. And if you check all of those boxes, right? If you cash
26:41 – flow first, if you add value, if you protect the downside, you invest and you don’t speculate
26:45 – that allows you to T build a tax-efficient structure. If the investment checks all the boxes,
26:50 – it’s doing all the right things. You know that it’s going to be successful. Then you optimize for
26:53 – tax efficiency at that point. And it means a lot of different things. It’s optimizing for tax efficiency
26:58 – throughout the entirety of the life cycle of the investment. So we start out of the gate by leveraging
27:02 – cost segregation studies, accelerated bonus depreciation. And we are remarkably tax-efficient in
27:07 – this crazy world of mobile home parks. I don’t care what niche you’re involved in. You try to
27:10 – optimize for tax efficiency. But in the mobile home park sector, it is remarkably tax-efficient.
27:14 – We’ve got a partner in the Midwest that is a physician that owns multiple different clinics.
27:19 – And he literally is very fortunate to make multiple seven figures on an annual basis.
27:23 – His wife happens to be a real estate professional that’s a stay-at-home wife that ultimately manages
27:28 – the capital on behalf of the family. She’s very intelligent, manages the capital on behalf of
27:32 – the family. So they’re able to leverage the real estate professional designation to have passive
27:37 – losses offset their active income. In a nutshell, on average over the course of the last seven years,
27:41 – an investment that’s been moved forward inside of our funds, somebody that moved forward with a
27:46 – $1 million investment, we use the terminology, somebody that moved forward with a million dollar
27:49 – investment inside of our fund received a $930,000 passive loss year one inside of the investment
27:54 – on average. And so what this means is we’ve got a guy that basically invests about a million
27:58 – bucks every single year. And he’s able to take that $930,000 passive loss in offset his other
28:03 – active income immediately out of the game. It’s a passive phantom loss. This is not a real cold-hard
28:09 – cash loss. But rather, he’s able to report to the government that he’s losing money when in
28:12 – actuality we’re outbound making cash flow, we’re making distributions, the properties are increasing
28:16 – in value. But on one hand, he’s able to report to the government that he’s losing money for his
28:21 – K-1 passive loss. So he’s able to basically save literally hundreds of thousands of dollars
28:28 – every single year in capital that would otherwise go to Uncle Sam so he can keep it in his
28:33 – his own pocket because at the end of the day, it’s not about what you make, it’s about what you keep.
28:37 – And that’s before we even begin to send outbound distributions and the properties continue to
28:40 – increase in value over time. And that’s the very beginning, right? This is at the very outset,
28:44 – this is the very early stages of the investment. So we, at the very beginning, we’re trying to
28:49 – leverage the time value of money by increasing the accelerated bonus depreciation immediately out
28:53 – of the gate. Then throughout the entirety of the holding period, some of the other things that we’re
28:56 – doing are as opposed to the bi-fix and cell model where you’re going to get crushed by capital gains,
29:03 – tax depreciation recapture, friction costs associated with brokerage fees, as well as, you know,
29:09 – if you sell a deal, you know, there’s a cash drag between when you sell a deal A and when you buy a
29:13 – deal B. When you’re doing bi-fix and cell model, all these things slowly take away from the
29:18 – base of investment that you have. They siphon off some of that capital along the way. When, in
29:22 – actuality, what you should be doing is after you’ve added value, the investment has increased,
29:27 – you got retained on a balance sheet. As opposed to selling the investments, you simply do a cash
29:31 – out refinance, take that capital out as a non-taxable event over time, and continue to allow compounding
29:37 – to occur. If you buy durably wonderful business that’s throwing off exceptional cash flow today,
29:41 – you know it’s going to throw off exceptional cash flow in a decade and two decades. Why would you
29:45 – not retain that asset over very long periods of time? Because it’s going to continue to throw off
29:49 – massive cash flow. It’s going to continue to increase in value over time. This is why you want to
29:52 – invest in durably wonderful businesses. Durable and the income is durable, predictable, safe over
29:56 – long periods of time, and wonderful in that the long-term macroeconomic tailwinds are such that
30:01 – you’re going to have long-term same-store and wide growth continuing to increase over long periods
30:05 – of time. And when you have that, then why would you ever sell? Because if you were to sell,
30:09 – right, you’re going to end up getting crushed by depreciation recapture, capital gains,
30:14 – and so much more along the way. So avoid that like the plague, retain a tax-efficient structure
30:19 – throughout the entirety of the duration of the holding period. It’ll allow you to compound
30:24 – wealth so much faster over long periods of time. So assuming you’ve checked all those boxes, right,
30:29 – you’ve generated cash flow along the way, added value, protect the downside, invest, don’t speculate,
30:33 – you have a tax-efficient structure, it has the highest assurance of outcome possible.
30:39 – If you operate with this manner, I cannot guarantee that we’ll be able to get all the chips off
30:44 – the table in a very reasonable period of time. We always underwrite to get all the investment
30:48 – chips off the table, somewhere between years five and seven, and our first fund, we were able to
30:52 – do that in three years, and our second fund, we were able to return all investor capital in four
30:55 – years. But even if we miss the boat, and we don’t do it in a five to seven year horizon, even if it
31:00 – takes a little bit longer, maybe it’s eight, nine, ten years. From my perspective, that’s better
31:03 – than a sharp stick in the eye. What I know to be true is if you operate a business and manage capital
31:08 – with the philosophy that I’ve just outlined, we will eventually be able to get all of the chips
31:13 – off the table. Maybe it won’t be perfect, but it is a better than a sharp stick in the eye,
31:17 – because we’re avoiding the downside risk, which is from my humble perspective, the most important
31:22 – piece of the puzzle along the way. And if you can ensure that you do not lose money, again,
31:26 – rule number one, don’t lose money, rule number two, don’t forget rule number one. You will
31:29 – eventually be able to get all the chips off the table and be operating on an infinite cash
31:33 – on cash return. This is the highest assurance of outcome possible that we have found today
31:38 – to manage capital in the most prudent manner, so that we can eventually extract all of our
31:42 – original money back out and operate on an infinite cash on cash return. That’s what I do for my
31:46 – family’s money, and that’s what we believe is the best opportunity for the marketplace today,
31:51 – and how you should manage capital prudently, to just try to generate cash flow and build legacy
31:56 – wealth in a tax-efficient manner. And if you do that, then you have the opportunity to leave a
32:02 – legacy to the next generation. You really have two different opportunities and two different
32:06 – paths that you can choose. The sad state of affairs is you can choose the path of the Vanderbilt
32:10 – or choose the path of the Rockefellers. Many, many moons ago, the Rockefellers and the Vanderbilt,
32:15 – at different periods of time, were the most wealthy individuals in this country. The Vanderbilt’s
32:18 – unfortunately within three generations went bootstraps to bootstraps. However, the Vanderbilt’s
32:23 – still today have hundreds and hundreds and hundreds of individuals that are Rockefellers that are
32:27 – living off of the original capital, the original principle, that the patriarch built hundreds of
32:32 – years ago. And it’s because they’re not just passing along wealth, but passing along a framework,
32:37 – and passing along wisdom, and how to actually manage that capital for the betterment of the family
32:43 – multiple generations down the road. So real estate’s one of these beautiful businesses where you
32:47 – have the ability to completely and materially change your family tree in one generation. I’m
32:51 – living proof of that. I’ve started from nothing, and ultimately have changed our family tree in one
32:55 – generation. And I know that managing capital in this manner is the best way to flick ding make a
33:01 – difference and change your family tree, become a sage investor, not just pass along wealth, but also
33:05 – pass along wisdom. If this framework resonates with you, if you recognize the challenges, the same
33:12 – challenges that I do, and if you’re serious about protecting what you’ve already built along the
33:17 – way, then there’s a next step. You know, feel free to go to sunrisecapitalstrategy.com. We’ve
33:23 – done a quick little fly over here today, but we go much, much deeper. We’ve got a capital strategy,
33:28 – masterclass, where we go much, much deeper on this respective topic, where we walk through the
33:32 – sunrise capital strategy in detail with case studies and actual deals that we’ve done that exemplify
33:37 – the things that we’re outlining here, and we’ll go much, much deeper and do time over the next
33:40 – episodes along the way. We’ll talk about how it works, why it works, how it’s applied in the real
33:45 – world to help investors create durable cash flow, protect the downside, and then build legacy wealth
33:50 – over time. Again, this isn’t theory, guys. This isn’t hype. This is what we do with a disciplined
33:54 – approach to managing capital once you’ve already won the game, and that’s sunrisecapitalstrategy.com.
34:02 – In the next episode, we’re going to walk through the origin story. We’re going to talk about how this
34:06 – strategy was developed, how it’s forged, how it was built, why it exists, and how sunrise was
34:11 – built from the ground up. Not the highlight, real the real story behind the scenes,
34:15 – and I’ll see you next time, guys. Until next time, you’d be great.