Add Value: The Most Misunderstood (Yet Crucial) Wealth Multiplier | Ep. 5

This episode explores the “Add Value” principle, which serves as the critical second pillar of the Sunrise C.A.P.I.T.A.L. strategy. Host Brian Spear challenges the conventional approach of most modern investors, whose portfolios run on theory, hope, and dangerous market speculation. Instead of treating capital deployment as an educated gamble that relies entirely on macro appreciation, Spear introduces a repeatable, operational methodology designed to actively control an investment’s upside and secure long-term capital preservation.

The core thesis of this briefing emphasizes prioritizing the tangible value put into an asset rather than the value taken out. By focusing on simple, tiny, and highly incremental changes rather than massive overhauls, investors can unlock significant upside while fundamentally stabilizing their portfolios against market volatility. Spear outlines an actionable three-lever value-add playbook that has historically generated tens of millions of dollars in forced equity across his portfolio.

To anchor these practical methodologies in historical precedent, the episode analyzes Warren Buffett’s multi-billion-dollar bet on seemingly boring, unloved, and misunderstood businesses that outperformed market expectations through disciplined value creation. Designed specifically for high-net-worth investors and legacy-minded business owners, this executive briefing clarifies how to eliminate reliance on luck. Listeners will learn to implement systematic frameworks to transition from passive spectators to active participants, enabling more calculated, lower-risk capital allocation decisions that reliably compound multi-generational wealth in any market environment.

Key Takeaways

• Control the Investment Destiny: True wealth multiplication relies on operational value creation and forced equity rather than speculative market appreciation or passive timing.
• The Power of Incrementalism: Massive financial upside and property value increases are consistently unlocked through compounding tiny, systematic operational adjustments.
• Shift from Trader to Owner: Successful capital allocation requires moving away from speculative gambling and transitioning into structured, asset-level participation.
• Prioritize Input Over Output: Enduring portfolio stability is built by consistently focusing on the value put into an asset rather than trying to extract early gains.
• Embrace Mundane Excellence: Long-term capital preservation is driven by investing in unloved, stable, and essential-use business models that feature durable competitive advantages.
   

Key Topics Covered

• Forced Equity and Real Estate Value Add
• The Sunrise C.A.P.I.T.A.L. Strategy Framework
• Speculation vs. Portfolio Participation
• Operational Excellence and Incremental Compounding
• Warren Buffett’s Asset Allocation Methodology
• Capital Preservation and Risk Mitigation Strategies
   

Episode Chapters

00:00 Intro

An introduction to the second pillar of the framework, contrasting speculative investing with structured wealth creation.

01:02 Where Real “Value” is Created

An exploration of why traditional portfolios fail by relying on macro luck and how operational value insertion shifts control back to the investor.

05:00 Tiny Changes, Massive Results

A tactical look at how small, structured operational improvements compound to create outsized forced equity and asset appreciation.

10:43 Don’t Speculate, Participate

A direct challenge to the trader mindset, explaining why active participation inside a business model outperforms hopeful gambling.

13:19 Blockbuster’s Fatal Mistake

A historical case study analyzing how a lack of forward-thinking value creation and rigid structures can destroy an industry giant.

14:42 Pain Today, Gain Tomorrow

An examination of investor temperament, highlighting why enduring wealth requires front-loading operational efforts and absorbing short-term friction.

16:47 Buffett’s “Boring” Billionaire Business

A deep dive into Warren Buffett’s multi-billion-dollar acquisition strategy targeting unglamorous, essential-demand businesses that consistently generate cash flow.

21:30 $10M Value-Add Example

A real-world breakdown showcasing how small, practical adjustments directly generated over ten million dollars in portfolio value.

26:32 “Levers” That Uncover Millions

An overview of the specific strategic levers business owners and investors can pull to instantly optimize operational efficiency and maximize asset performance.

33:31 This Determines Any Investment

The concluding principle regarding underwriting safety, alignment of incentives, and the ultimate metrics that separate legacy wealth from fleeting riches.

Full Transcript

[Transcript begins]

Brian Spear: Welcome back to the show. Today, we are breaking down the critical second pillar of our framework, focusing entirely on how we actively control the future of our assets. Most investors have it completely wrong. Their portfolios run on theory, hope, and speculation—an educated gamble at best that they pray will pay off in the long run. What if there was a way to ensure your hard-earned capital was put to good use, grew stably, and had such a definitive upside that it’s almost impossible to lose? There’s only one way to do it, and every investor can: Add value.

We’ve done it—and continue to do it—on almost every asset we own, creating massive returns and increasing property values by many multiples by doing what most won’t—prioritizing the value we put in, not the value we take out. In this episode, I’m walking through the second pillar of the Sunrise C.A.P.I.T.A.L. strategy, sharing real-world examples of how we created tens of millions in value from simple, tiny, incremental changes. Don’t take my word for it. Buffett’s examples are showcased, too—the billion-dollar “boring” businesses everyone missed, but did one thing right—always added value. If you can learn to truly add value, you can control your destiny and build a legacy in any market. Let’s get into the details.

Most investors think that returns come from being right about the market, but Warren Buffett knows better. Returns come from control, not prediction. If your investment outcome depends on the whims of Mr. Market waking up in a good mood, then you’re speculating. But if you can add value operationally, systematically, relentlessly, then you’re investing. Today, we’re talking about the most misunderstood letter in the Sunrise Capital strategy, and that’s “A”—Add Value. Because great investors, they don’t wait for value to appear. They manufacture it. Value creation compounds quietly, unglamorously, and violently into a gigantic snowball over time.

So let me define what creating value is, how Warren Buffett has historically done it, and how we do it today. At the end of the episode, we’re gonna unveil our three-lever framework on how we drive value into all of our acquisitions. My name is Brian Spear. This is the Sage Investor podcast. We try to help as many people as possible generate cash flow and build legacy wealth in a tax-efficient manner. That’s what I’m trying to do for my family. We’re gonna help out as many people as we can do just that over time.

The first thing that I really want to dig into in terms of adding value is the idea and the concept that adding value does not just mean price appreciation. It doesn’t mean if you were gonna buy a stock for a hundred dollars and the stock goes up to a hundred and fifty dollars that any real material value has been added. Yes, the price has changed, but price is what you pay and value is what you get. There are a lot of different stocks, a lot of different businesses out there that trade flippantly based on the whims of Mr. Market, but it really doesn’t actually provide the true intrinsic value of the asset. When you’re investing capital and when you’re running a business, what you should be really trying to focus on is real true value, i.e., Enterprise Improvement.

So from Warren Buffett’s perspective, he’s a capital allocator and he’s looking to allocate capital into businesses, into human beings that are managing businesses that are focused on enterprise improvement, that are focused on adding value in the business. And what that means is just finding a way to increase cash flows over time, and what that does is actually legitimately creates real value. Real value creation comes from compounding operational excellence day after day, week after week, month after month, year after year. It’s not a one-time event. It is an idea. It’s a philosophy. It’s a thought process, and it takes time to ultimately drive real value in the business. It’s the idea and the concept of widening the moat.

So in a nutshell, the individual that’s running the business should be focused on trying to drive value on a day-to-day basis: increase revenue, decrease expenses, largely be a demon on expenses and cost over time in the effort of trying to drive enterprise value. The idea and the concept really is associated with Jim Collins, who wrote his great book called Good to Great. And the idea is many good companies ultimately, unfortunately, fail in due times, but a handful of them move from good to great. Why do some businesses ultimately make the leap from good to great? Inside of that book, exceptionally renowned author Jim Collins walks through the process of understanding your core competencies, understanding your hedgehog model, and then creating a flywheel.

So in your business, you need to understand what you’re exceptionally good at, where you can be the best in the world at, and continue to do that day after day, week after week, month after month, year after year. That becomes your hedgehog, where you become exceptionally world-class at one thing so you can continue to widen the moat, i.e., your core competencies, which creates an exceptional flywheel effect over long periods of time. The idea of the concept of the flywheel is that if you would envision just a massive gear in your living room, horizontally laid out, and let’s say it’s a one-ton gear. It’s enormous, takes up the entirety of the living room. If you’re going to individually go up to that gear and look to try to move it, look to try to push it, look to try to get some momentum, it would be exceptionally difficult to get any momentum in any way, shape, or form.

But slowly applying all of your pressure, applying all of your effort, you’re able to slowly get that flywheel to budge ever so subtly. And over time, what happens is as you gain a little bit more momentum by continuing to apply that pressure, that flywheel continues to move a little bit faster. And if you continue to do that, right, and you continue to push forward, eventually the momentum created by that flywheel is self-sustaining and gets so unbelievably fast that it would be very difficult to slow it down once you continue to get that flywheel rolling.

In business, what you’re trying to find is an operator, an individual who’s running the business, who understands the concept of the flywheel and is obsessed with finding a way to continue to widen the moat. Because if you’re implementing your hedgehog philosophy, you’re continuing to widen your moat by virtue of dominating in a flywheel scenario, what you are doing is adding massive amounts of value. You’re really implementing the legitimate value creation and increasing your enterprise value of your organization, I’d say the intrinsic value of your company.

So the real question is, how do you get that flywheel spinning exceptionally quickly? What I’d like to tie in is Verne Harnish. Verne Harnish is another exceptional author, phenomenal entrepreneur. I’m fortunate to be a member of both EO, YPO, Strategic Coach, a lot of these amazing entrepreneurial groups. Verne Harnish’s book Scaling Up, he goes on to try to share how to implement this idea and this concept of this flywheel philosophy in your individual business. How do you actually add value over time? And what he basically suggests is that you have to get obviously very, extremely clear as an operator on what you’re good at, what you’re trying to achieve, set a big vision in the future, but then go into your business and find an exorbitant amount of ways, a myriad of ways to make tiny incremental improvements.

And again, Warren Buffett would convey that adding value is not one event. It is the idea and the concept of all these tiny incremental, sometimes imperceptible improvements over extremely long periods of time that ends up compounding into something more significant and material. Verne Harnish goes on to explain in Scaling Up how to go about doing this. In a nutshell, everyone in the organization has to understand what you’re trying to achieve. You have to set a vision with clarity on who you are, where you’re at, where you’re going, what you’re trying to achieve, and then find a way to have everyone in the organization understand that what they do on a day-to-day basis materially impacts the long-term goal and the long-term trajectory of the business.

So far as to say, Verne states you need to have one KPI, one individual number that everyone inside of the entirety of the organization has that they’re accountable for knocking out on a day-to-day basis. Also, tie that one individual KPI to something much more specific to an actual line on the P&L statement or an actual line on the balance sheet. In this way, that individual inside of your organization has a material impact, understands logically that their work on a day-to-day basis has a material impact on the long-term enterprise value of the organization.

And if you can do that and ultimately rally the troops, all pointing in one direction for the betterment of the organization, and they take tiny little incremental improvements on a day-to-day basis—we’re talking about 1% better—if you can simply have everyone in your organization get 1% better in their role on an ongoing basis, focus on these tiny incremental improvements, what happens is you create this massive compound effect over very long periods of time.

Jeff Bezos does a good job of kind of explaining this concept. He actually worked directly with Jim Collins, it’s kind of a famous case study. The Amazon flywheel was literally written on the back of a napkin when Jeff Bezos sat down with Jim Collins way back in like 2000, and they conceptualized what should the flywheel for Amazon be. It’s a great way to kind of exemplify how you can add value, which ultimately creates massive amounts of enterprise value over long periods of time.

The Amazon flywheel is very simple, what he’s been trying to do. Jeff Bezos has a quote verbatim stating, “We’re internally driven to improve our services. We lower prices and increase value for our customers before we have to.” So he’s relentlessly focused on items that he knows over long periods of time are going to drive value for the enterprise. So you know, many times he gets asked questions of what’s going to happen over the next, you know, 10 years, what do you think the next big investment is going to be, the next technology, etc., what’s going to happen in 10 years. And he says, “You know what, that’s a good question. But a question that nobody ever asks me is what is not going to change over the course of the next 10 years? Because if I know something that is not going to change over the next 10 years, then I can build a real business around that.”

From my perspective in our crazy world of mobile home parks, right, I know without fail that people are still going to want affordable housing in a decade. You can build a real business behind that. And from Jeff Bezos’ perspective, he goes, “You know, I look out 10 years. I can never in a million years imagine a scenario where when somebody buys something offline that they don’t want it at their door faster, quicker, with better service. I also in a million years could never imagine a scenario when somebody buys something offline that they wouldn’t want it cheaper.”

So his entire philosophy is focused on trying to improve the customer experience, again, get the packages to you as quick as possible. You guys now have experienced it, right? You’ve felt this where you buy something off of your phone through the Amazon app, it shows up within six hours. That is exceptional customer service. What does this mean? How does this impact the flywheel? When you have an exceptional customer experience, that brings more traffic. You’re going to get more referrals through word of mouth, and because you’re getting more people to your site, you’re going to have more sellers. More individuals are going to want to show up and share and sell more products on your website. That’s what happened; Amazon became the everything store, everybody wanted to sell everything there. And so the selection increases tremendously. When the selection increases tremendously, the customer experience is even better.

And that’s the flywheel that ultimately occurs, which allows for tremendous growth. And when the growth occurs, a yet another secondary style of flywheel occurs. When the company is growing, they have a much lower cost structure. They can provide all these services to the customer at a cheaper rate. So if you’re growing, you have a lower cost structure internally, which means you could lower prices, which further improves the customer experience, and yet another massive flywheel continues to turn. And that’s how Amazon was able to increase enterprise value in such a tremendous manner over time. Ultimately, that is the idea and the concept of adding value where you control your own destiny.

So when trying to explain the concept of adding value, what we’re really sharing here is that if your entire investment depends on the whims of Mr. Market waking up in a good mood, then that is not an investment, that’s speculation. Rather, you need to be focused on adding value. I’m only going to be allocating capital in an investment where I largely know the outcome, where I largely can control the outcome by adding value myself or by allocating capital to individuals who can control the outcome, right? So if you’re just a capital allocator like Warren Buffett, he invests in businesses where the operators themselves can control the outcome. So it becomes a much higher likelihood and assurance of outcome, and that’s what we mean when we’re stating add value. You do so because it massively increases the certainty of outcome.

In our little world of real estate, it means sweat equity. When we’re buying properties, we could do some things that actually pull some levers. We have a three-lever framework to increase the value of the property shortly after acquiring them. Various other businesses have various ways to ultimately add value, really drive enterprise value, but that’s what it means. It’s not just relying on price appreciation and the whims of Mr. Market trading businesses at a higher or lower valuation. It means you can control your own destiny by increasing the enterprise value by virtue of increasing revenues, minimizing expenses, and driving long-term value over time and increasing the moat.

As you can imagine, sometimes the idea and that concept, it becomes difficult to actually implement. I’m always contemplating widening the moat, always trying to think through real legitimate value creation over long periods of time, because sometimes long-term value creation and widening the moat, it goes against and is at odds with short-term profitability. Again, Jeff Bezos is always focused on driving down the cost to the end consumer. He’s foregoing short-term profits. He could easily charge a little bit more to get that product delivered to your door, but he’s trying to continuously drive it down and drive it down and drive it down. That is at the detriment of the next quarterly report and the amount of profits he would otherwise be able to generate in the near term. But over the very, very, very long term, it’s obviously exceptionally beneficial for the health of the business and the overall enterprise value. He’s really driving a real creation here.

Warren Buffett has this great quote that when short-term and long-term conflict, widening the moat must take precedence. You need to always be focused on the durable enterprise value of the organization over the quarter-to-quarter optics. People sometimes, unfortunately, get this wrong. A perfect example of this is the idea and a story of Blockbuster versus Netflix. For those unaware, Blockbuster at one point had the ability to buy Netflix for a mere 40 million dollars. Reed Hastings, the founder and owner of Netflix, literally went to Blockbuster and said, “Hey guys, I’ve built this cool little business here. It’s kind of the new way that we’re ultimately trying to drive the same style of product that you guys are creating, but we’re delivering it to them via mail. We’re delivering these DVDs through mail to the end consumer.”

And Blockbuster had no interest in ultimately acquiring that DVD-to-mail-to-the-end-consumer business. Why? Because they were focused on driving short-term value due to the fact that there was a corporate raider, Carl Icahn, largely overseeing and pulling the strings on Blockbuster. So he had a heavy stake in Blockbuster, and he was demanding and forcing the management to drive the profits and hit the number for the quarter. If you’re always focused on hitting the number for the most recent quarter, it is oftentimes at the detriment of the long-term value of the business. So if ever pressed to choose between the short-term and the long-term, you have to choose the long-term moat, widening the moat, or else at some point you’ll end up like Blockbuster because obviously Netflix flew by them. And the next time that they want to go potentially purchase them, why would Netflix ever do it? They had already surpassed the value proposition that Blockbuster could bring to the table, and now Blockbuster, unfortunately, is completely, completely defunct.

Charlie Munger has this other quote: “Almost all good businesses engage in pain-today, gain-tomorrow activities.” There has to be some level of delayed gratification to really move from good to great over long periods of time. And that’s what we’re talking about in terms of sweat equity, right? When we’re dumping money back into real estate ventures, you’re losing a little bit of additional CapEx out the door today for the benefit of drawing a significantly higher valuation over long periods of time.

And if you’re not actually adding value, what the heck are you doing? Brad Jacobs has a great quote. Brad Jacobs wrote this book, How to Make a Few Billion Dollars, exceptional entrepreneur, multiple phenomenal businesses over long periods of time, and he’s got this quote that says, “If you’re not substantially improving the companies that you buy, you’re just moving capital around.” And I would pose to you that, unfortunately, there’s been a lot of that in our crazy universe of syndication over the last handful of years. There’s a lot of quote-unquote professional money raisers who don’t actually add value to the investments in any way, shape, or form. They’ve done a good job of creating a little marketing and sales engine, and they raise money for syndications. Let’s say they raise 10 million bucks for a multifamily syndication and they go out and buy a multifamily property. But then what do they do? They literally outsource the operational efficiency and the real legitimate value creation to a third-party property management company who doesn’t care in any way, shape, or form about the stakeholders and the actual individuals who allocated capital to the business at the outset.

So there’s a gap in terms of what the investor needs and what the end individual who’s supposed to be accountable for driving value is actually doing on a day-to-day basis. And unless you actually tie those two together, you’re not really creating value. You’re not actually investing; what I’d say is you’re speculating. It works for a period of time if you’re in a capital compression environment. The minute that that clock strikes 12 and you’re no longer in a capital compression environment, you’re in a precarious situation, which is why so many folks have had paused distributions, capital calls, and unfortunately, total loss of capital because they haven’t actually been investors focusing on allocating capital to individuals and businesses who really focus on real value creation.

Warren Buffett didn’t win by guessing the future; he won by improving what he owned. We’ll go ahead and give you a couple of case stories on how he actually did it a couple of different ways that exemplify businesses that he invested in where they actually control their own destiny.

The first one’s a beautiful story about a Mrs. B and Nebraska Furniture Mart. She is a woman who built a kingdom, and she couldn’t read or write. In 1983, Berkshire acquired about 90% of Nebraska Furniture Mart for 60 million dollars. The founder, a beautiful lady named Rose Blumkin, was 89 years old at the time. She’d started the business in 1937 with five hundred dollars. She spoke broken English, couldn’t read or write, and had never, ever, ever taken a day off. She’s in there seven days a week all the time trying to drive the operational efficiency of the business.

Her strategy was brutally simple: sell cheap, tell the truth, and don’t cheat anybody. She operated on paper-thin margins, massive volume, and fanatical cost control. Her store became the largest furniture store in all of North America, and Buffett loved the business because Mrs. B added value each and every day. She negotiated with suppliers, she worked the floor, she obsessed over customer satisfaction. There was no bureaucracy, no waste, no ego. After Berkshire bought the business, he didn’t change a thing. He let Mrs. B run it until she was 103 years old when she finally retired. The business had grown exponentially.

The lesson here from Buffett is that you need to buy wonderful businesses run by wonderful people and then just get out of the way. Adding value doesn’t mean complexity; it means relentless focus on customer satisfaction, cost efficiency, and operational execution. Great operators compound value daily through very small disciplined decisions. In real estate, it means repositioning underperforming assets, right? Raising rents to market, implementing the loss-to-lease recapture, cutting expenses, improving management. In private equity, it means operational improvement, not financial engineering, but actually improving operationally. In public markets, it’s backing phenomenal owners like Jim Sinegal over at Costco or Berkshire backing all their different CEOs and the various myriad of companies that they own. Value is added through execution, not from a spreadsheet.

Another phenomenal business that exemplifies this from Buffett’s portfolio is BNSF, a 44 billion dollar bet that he made on boring. In 2010, Berkshire acquired BNSF Railway for 44 billion dollars. At the time, it was the second largest transaction that Warren Buffett had ever done. Railroads are notoriously capital intensive, very heavily regulated, and also very, very boring. Critics, they questioned at the time why Buffett would lock up so much capital in a legacy asset. But Buffett saw what everybody else missed: railroads have unbeatable economics for moving freight across North America, a massive moat, nobody could beat it. Trucks can’t compete on cost for long-haul bulk goods moving coal, moving grain, moving oil, moving containers, right? BNSF owns the physical infrastructure, 23,000 miles of track, and it can’t be replicated. The idea is he’s trying to widen the moat.

BNSF wasn’t just a toll bridge; it required consistent reinvestment. So Buffett committed to allocating an additional 40 billion dollars in capital over the next decade, right? So CapEx, capital expenditures, to improve the track, to improve the locomotives, to improve the efficiency. He added value by making BNSF faster, by making it safer, by making it more reliable than all of his competitors. And by 2024, BNSF generated five billion dollars annually in earnings. It became Berkshire’s most valuable wholly owned business outside of his traditional insurance companies.

Adding value often requires reinvestment. Great businesses, they’re not just cash cows. They’re going to take a little bit of money to reinvest back into the business; they’re engines that require fuel. But the key is ensuring that the reinvestment that you are making generates returns over and above the capital cost. In real estate, that just means repositioning value-add properties. If you spend two million bucks on CapEx on a turnaround, you need to increase value by five million bucks, right? In private equity, it means bolt-on acquisitions and operational improvements, and in public markets, it’s companies like Amazon that reinvest cash flow exceptionally well into other existing businesses that can grow, right? The best businesses generate cash and have really high reinvestment opportunities.

So we’ve defined what adding value is, we’ve shared kind of how Buffett has done this historically in allocating capital into businesses that add value. Now let’s show you kind of how we do it, how we’ve historically done it over at Sunrise Capital. We’ll give you a few case studies here, right? We’ve done it in both parking and mobile home parks over time.

The first deal we’ll walk through is parking assets called Luhrs Parking Facilities, actually in Phoenix, Arizona. We ended up buying this deal for 20.5 million dollars in the second quarter of 2023. Okay, so we’ve owned it for just a little more than two years. Amazing parking facility, but it was a mixed-use building. Not only did we buy the parking, we also got a 14-story office building as well as some retail units. I think there’s six different retail units on the ground floor. And this is an exceptional location: location, location, location. They literally call it the Luhrs City Center because it is in the center of Phoenix, literally the epicenter of Phoenix. And the entire city of Phoenix was built up around it. This building is about a hundred years old; it was constructed before Arizona was a state, and the rest of the city ended up growing around this. So you can imagine the exceptional location, location, location.

We ended up buying this property, it fell into our lap because it was right after COVID. During COVID, obviously, office values plummeted, everyone was working from home, folks weren’t eating out in restaurants near as much, and for that reason, the NOIs historically on this deal went south. But what was really occurring is people were still parking in the facility over and over and over. Why? Because it’s literally right next to Maricopa County Courthouse and the courts. You know, they’re still open, people are still getting in trouble and they’ve got to go in and actually pay tickets, etc., and the courts got to keep rolling. In addition to that, it’s one block away from the Phoenix Suns Arena and two blocks away from Chase Field. So there was an exorbitant amount of demand for parking that never really went away.

85% of the NOI from that asset derived from parking, and again, we bought it right after COVID. So it was beautiful on that. The office and retail values were suppressed so much that we were able to buy this one for a song. We ended up paying 20.5 million dollars for the asset, but we actually also received a five million dollar seller credit at closing. Beautiful location, location, has been in high demand for over a hundred years, will continue to be in high demand for generations and generations to come. Again, Phoenix is the fourth or fifth largest county in the country, and it’s the fastest growing city in the country, fastest growing state in the country over the last decade. Truly phenomenal economics here. In addition to that, it’s literally right across the street from CityScape in Phoenix, where they just dumped a billion-dollar renovation. And so, again, all of these factors led us to understand that the demand for that respective facility was still going to remain for a long period of time, multiple demand generators for that asset.

It was owned by an institutional owner that was focused on office and retail. They were not specialists in parking. Parking is often viewed as an ancillary line item on a given business’s P&L. If you really stop and look at parking as a business in and of itself, it becomes extremely compelling. But these individuals were primarily focused on office and retail to the detriment of parking, and to that end, the office and retail values truly plummeted, and we were able to go in and buy it for a song. They really didn’t know how to actually run the parking in the most efficient manner.

What we were able to do in terms of adding value was bring some of our operational efficiency into the marketplace and begin to charge what we would consider to be market rate for parking. They had no idea in terms of keeping their finger on the pulse of what market rates were. Also, they had not instituted what we always do in terms of dynamic pricing. As you can imagine, when you’re right next to the Phoenix Suns Arena and you’re right next to Chase Field, they were charging a flat rate to park in the facility regardless of what was going on. Again, when the Lakers come to town, there’s probably more demand for that basketball game. In addition, Chase Field, they host a bunch of concerts, right? When Taylor Swift goes in and plays, she’s probably going to have a little bit more demand than some of the other folks that end up playing in the venue, and they had no idea and concept of dynamic event pricing.

And shortly after acquisition, what we were able to do is just drive NOI tremendously. Revenues increased precipitously, we were able to minimize some of the expense cost associated with the salaries of staff, and what that ended up doing was driving up NOI in a material way. Less than two years after we bought the business, we ended up getting a BOV, broker opinion of value, of 28 million dollars. And again, we were all in for 15.5 million dollars in that respective venture. So within two years, we almost doubled the value of that property, just again less than three years after acquisition, by virtue of us actually adding value. It’s irrelevant what everybody else is willing to pay in the marketplace in terms of the price appreciation, etc. Price is what you pay, value is what you get. We focus on increasing revenues, minimizing expenses to ultimately create real value over long periods of time. That’s one example of trying to add value shortly thereafter. Again, this is the idea and the concept of sweat equity, what we do in the real estate sector.

Another example is in the mobile home park sector. So we ended up buying a mobile home park in Atlanta for 2.5 million dollars, and literally within two years, ended up selling it for 10.45 million dollars. Added an exorbitant amount of value in a relatively short period of time. We more than quadrupled the value of the property within two years, and we ended up exiting that deal with a multiple of 5.1 and an annualized return of over 144 percent—a ridiculous number, right? This is a grand slam, not all of your deals look like that, right? It was a deep, heavy value-add transaction. The property had 125 spaces, only 80 of them were occupied, so it was a 65% occupancy when we ended up acquiring the asset.

And it was a beautiful business model in that we were able to truly make a dent in affordable housing. When we can go into a community that’s going to be in high demand—the area is in an affordable housing crisis—we know that there’s a massive demand for the product, but for whatever reason, the previous owner had not improved the operational efficiency the way that we’ve historically been able to do so. We’ve been doing this now for well over a decade, and we have a three-lever framework in our manufactured housing communities, our mobile home parks, to drive value.

That three-lever framework is very simple and straightforward. We basically have what we consider low-hanging fruit, mid-grade fruit, and high-hanging fruit. In the low-hanging fruit scenario, the first lever that we pull is recapturing lost to lease. Whenever we go into an individual deal, we’re trying to find assets that ultimately have below-market rents. We know what the market can bear by virtue of doing all the underwriting in advance, and we are looking specifically for assets to acquire where the market rent that they’re currently charging is significantly below the market rent. In doing so, we know that we can recapture that loss to lease over a period of time; we consider that low-hanging fruit.

The second lever that we pull when we’re adding value is driving operational efficiency. This is focusing on increasing revenues, minimizing expenses. Largely, this lever, we’re focused on driving operational efficiency in what we say is we’re billing back for water, sewer, trash—extremely common in virtually every other real estate sector. But when we’re in the niche real estate sector of mobile home parks, you buy deals from a lot of mom-and-pop operators that are not professional operators, who really don’t drive a cost down the way that most assuredly they can and I would say should over time, truly for the betterment of the residents. If the community is operating more efficiently, the truth is you don’t have to charge as much, you’re able to serve the residents better by virtue of billing back for water, sewer, trash, not having a bunch of leakage all over the place, and that drives operational efficiency, creates value over long periods of time.

And the third lever that we end up pulling is the high-hanging fruit; we consider that infill, and that’s what we ended up doing here in this Atlanta mobile home park. But basically, infill is when you buy a mobile home park—in this example, there were 125 spaces, only 80 of them were occupied. That means 45 spaces were available to infill with brand new mobile homes, brand new manufactured housing. This is a beautiful opportunity to do well financially while doing good socially. We’re in an affordable housing crisis. We have the ability at Sunrise to flick, ding, make a dent in the affordable housing crisis. I know that I can’t personally solve the affordable housing crisis, but we’ll do everything in our power to make a dent. So what we’re able to do is bring in a ton of homes, many, many, many homes to add more affordable housing stock in the marketplace, sell them to the end consumer, the residents who ultimately are now able to live the American dream of homeownership. They have a nicer place to live. All the pre-existing residents, they’d much prefer to be in a beautiful community with brand new homes as opposed to sitting around next to a bunch of vacant and abandoned lots. It improves the community, it’s a much nicer place to live, and we’re able to make a dent in the affordable housing crisis while driving significant returns for all the investors involved. And that’s a virtuous cycle, right? That’s the beautiful aspect associated with this business model.

The last deal I’ll talk about is a mobile home park that we ended up acquiring in the Northeast. Beautiful asset. We ended up buying it for $2.6 million, and we were able to pull all the various different levers in our three-lever framework to add value inside of this particular property. We bought it for $2.6 million, and it had woefully below-market rents when we acquired the property. It had brutal infrastructure—there were water leaks everywhere, the sewer needed significant work done in terms of CapEx that needed to get dumped back into the property. There were abandoned homes strewn throughout the property; there were some salvageable homes but several unsalvageable homes and massive below-market rents in this particular property. When we acquired it, the rents were $250 a month when the market was over $400 per month.

The legacy owner had developed the property literally 40 years ago since inception and had not maximized the value of the property. They had no debt on the asset, were throwing off tons of cash flow, more than enough cash flow to live their life however they wanted. And for that reason, they were willing to choose not to drive operational efficiency because they were able to live the life that they wanted and not burden the residents. Truly, the owners grew up inside of that community, and they didn’t want to raise rents, as it were, on their neighbors. But they weren’t providing the best service over time. If you don’t dump money back into the property, it ends up taking a beautiful, what I’d say is a five-star manufactured housing community, turning into more of a four-star or three-star mobile home park. And if you further degrade the community and don’t dump CapEx back into the property, it becomes a two-star or one-star trailer park.

We went ahead and power-washed all the homes, we removed all the unsalvageable homes, we renovated all of the salvageable homes. We ended up bringing in brand new homes into the units that were vacant, into the pads that were vacant, fixed all the deferred maintenance, rejuvenated the septic fields. We held a community cleanup day where everybody was able to throw out anything that was kind of lingering inside of the community, just refreshing it, making it a much, much, much nicer place to live. And what we found over time is that folks are more than happy to pay a little bit more on a monthly basis for a significantly better living experience.

And so over the first couple of years of ownership of this asset, we were able to recapture the lost lease, move the lease from $200 on a monthly basis up to just below market rents, so right around $400, which increased the revenues about 60% in the property. In doing so, within the first two years, we took the cumulative value of the asset from $2.6 million up to over $6 million. We were able to do a cash-out refinance, send all the original capital back to investors in a non-taxable event, and folks are then operating on an infinite cash-on-cash return from that point forward. But that exemplifies your ability to control your own destiny.

We knew in advance when going into that acquisition that we would have the ability to pull the first lever (below-market rents), pull the second lever (operational inefficiency), and pull the third lever (bringing additional brand new units into the community via infill). And by virtue of doing that, we provided much better service to the end residents and were able to drive an exorbitant amount of value in the investment. You have to find a way to not just rely exclusively on Mr. Market to determine the success of your investment, but rather ensure that you can control your own destiny. Because if your investment outcome depends on timing or luck or optimism or hope, you’re exposed. But if you can add value patiently, systematically, relentlessly, you control your own destiny. And that’s why add value sits at the center of the Sunrise Capital strategy—not because it’s exciting, but because it works.

[Transcript ends]