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

0:00 – Most investors think that returns come from being right about the market, but Warren Buffett knows better
0:05 – Returns come from control
0:07 – Not prediction if your investment outcome depends on the whims of Mr. Market waking up in a good mood
0:12 – Then you’re speculating but if you can add value
0:15 – operationally systematically
0:17 – Relentlessly then you’re investing today
0:20 – We’re talking about the most misunderstood letter in the sunrise capital strategy and that’s a add value because great investors
0:26 – They don’t wait for value to appear. They manufacture it value creation compounds quietly
0:33 – Unglammerously and violently into a gigantic snowball over time
0:37 – 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
0:44 – We’re gonna unveil our three-leather framework on how we drive value into all of our acquisitions
0:50 – My name is Brian Speer. This is the Sage Investor podcast
0:54 – We try to help as many people as possible generate cash flow and build legacy wealth and a tax-efficient manner
0:59 – That’s what I’m trying to do for my family
1:00 – We’re gonna help out as many people as we can do just that over time and the first thing that I really want to dig into in terms of adding value
1:05 – Is the idea and the concept that adding value does not just mean price appreciation
1:10 – It doesn’t mean if you were gonna buy a stock for a hundred dollars and the the stock goes up to a hundred and fifty dollars that any real
1:15 – Material value has been added yes the price has changed but price is what you pay and value is what you get
1:22 – There are a lot of different stocks a lot of different businesses out there that shade trade
1:25 – flippantly based on the whims of Mr. Mr. Market
1:28 – 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
1:37 – What you you should be really trying to focus on is real true value i.e. Enterprise Improvement
1:43 – So from Warren Buffett’s perspective he’s a capital allocator and he’s looking to allocate capital into businesses into human beings
1:50 – That are managing businesses that are focused on enterprise improvement that are focused on adding value in the business
1:58 – Um, and what that means is just finding a way to increase cash flows
2:02 – Over time and what that does is actually legitimately creates real value real value creation comes from compounding
2:10 – Operational excellence day after day week after week month after month year after year
2:14 – It’s not a one-time event. It is an idea. It’s a philosophy
2:18 – It’s a thought process and it takes time to ultimately drive real value in the business
2:23 – It’s the idea and the concept of widening the moat
2:27 – 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
2:32 – Increase revenue decrease expenses largely be a demon on expenses cost over time
2:38 – In the effort of trying to drive enterprise value the idea and the concept really is associated with Jim Collins wrote his great book
2:45 – Called Good to Great and the idea is
2:47 – Many good companies ultimately unfortunately fail and do times but a handful of them
2:52 – Move from good to great. Why do some businesses ultimately make the leap from good to great and inside of that book
2:59 – Exceptionally renowned author Jim Collins walks through the process of understanding your
3:04 – Core competencies
3:06 – Understanding your hedgehog model and then creating a flywheel
3:10 – So in your business you need to understand what you’re exceptionally good at where you can be the best in the world at
3:16 – Continue to do that day after day week after week month after month year after year that becomes your hedgehog
3:21 – Where you become exceptionally world-class at one thing
3:25 – So you can continue to widen the moat
3:27 – i.e. your core competencies which creates an exceptional flywheel effect over long periods of time
3:32 – The idea of the the concept of the flywheel is that if you would envision just a massive gear in your living room
3:39 – Horizontally laid out and let’s say it’s a one-ton gear
3:42 – It’s enormous takes up the entirety of the living room
3:45 – If you’re going to individually go up to that gear and look to try to move it look to try to push it
3:49 – Look to try to get some momentum
3:51 – It would be exceptionally difficult to get any momentum in any way shape or form
3:54 – But
3:55 – Slowly applying all of your pressure applying all of your effort you’re able to slowly get that
4:00 – Flywheel to budge and ever so subtly
4:03 – And over time what happens is as you gain a little bit more momentum by continuing to apply that pressure
4:09 – That flywheel continues to move a little bit faster
4:13 – And if you continue to do that right and you continue to push forward
4:15 – Eventually the momentum created by that flywheel is self-sustaining and get so unbelievably fast
4:23 – That it would be very difficult to slow it down once you continue to get that flywheel rolling
4:27 – But in business what you’re trying to find is an operator and individual who’s running the business
4:32 – Understands the concept of the flywheel and is obsessed with finding a way to continue to widen the mode because if you’re
4:39 – Implementing your hedgehog philosophy. You’re you’re continuing to widen your mode by virtue of
4:45 – Dominating in a flywheel scenario
4:47 – What’s your you’re doing is adding massive amounts of value?
4:51 – You’re really implementing the legitimate value creation and increasing your enterprise value of your organization
4:57 – I’d say the intrinsic value of your company
5:00 – So the real question is how do you get that flywheel spinning exceptionally quickly?
5:04 – What I’d like to tie in is Verne Harnish Verne Harnish is another exceptional
5:07 – author phenomenal entrepreneur
5:09 – I’m fortunate to be a member of both EO YPO strategic coach a lot of these amazing entrepreneurial
5:15 – groups Verne Harnish’s book scaling up he goes on to try to to share
5:21 – How to implement this idea and this concept of this flywheel philosophy in your individual business
5:27 – How do you actually add value over time? And what he basically suggests is that you have to get obviously very
5:33 – Extremely clear as an operator on what you’re good at what you’re trying to achieve set a big vision in the future
5:38 – but then go into
5:41 – Your business and find an exorbitant amount of ways a myriad of ways to make tiny incremental improvements
5:49 – And again Warren Buffett would convey that adding value is not one event
5:53 – It is the idea and the concept of all these tiny
5:56 – Incremental sometimes imperceptible improvements over extremely long periods of time that ends up
6:01 – compounding into something more significant in material and Verne Harnish goes on to explain and scaling up how to go about doing this
6:08 – In a nutshell everyone in the organization has to understand what you’re trying to achieve
6:13 – 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
6:18 – and then find a way
6:20 – To have everyone in the organization
6:23 – Understand that what they do on a day-to-day basis
6:26 – materially impacts the long-term goal and the long-term trajectory of the business so far as to say
6:33 – Bern states you need to have one KPI one individual number that everyone inside of the entirety of the organization
6:38 – Has that they’re accountable for knocking out on a day-to-day basis also tie that one individual KPI
6:46 – To something much more specific to an actual line on the P&L statement or an actual line on the balance sheet and in this way
6:55 – That individual inside of your organization
6:58 – Has a material impact understands logically that their work on a day-to-day basis has a materially impact on the long-term enterprise value of the organization
7:07 – And if you can do that and ultimately rally the troops all pointing in one direction for the betterment of the organization
7:13 – And they take tiny little incremental improvements on a day-to-day basis. We’re talking about
7:18 – 1% better if you can simply have everyone in your organization
7:22 – Get 1% better in their role on an ongoing basis focus on these tiny incremental improvements
7:28 – What happens is you create this massive compound effect over very long periods of time and Jeff Bezos is a good job of kind of explaining this concept
7:37 – He actually worked directly with Jim Collins is kind of a famous case study
7:40 – The Amazon flywheel was literally written on the back of a napkin when Jeff Bezos sat down with Jim Collins way back in like
7:47 – 2000 and they conceptualized what should the flywheel for Amazon be and it’s a great way to kind of exemplify
7:55 – How you can add value which ultimately creates massive amounts of enterprise value over long periods of time
8:01 – The Amazon flywheel is very simple what he’s been trying to do and Jeff Bezos has a quote verbatim stating
8:06 – We’re internally driven to improve our services
8:10 – We lower prices and increase value for our customers before we have to so he’s relentlessly focused on
8:19 – Items that he knows over long periods of time are going to drive value for the enterprise and so you know many times
8:24 – He he gets asked questions of what’s going to happen over the next you know 10 years
8:27 – What do you think the next big investment is going to be the next technology etc
8:30 – What’s going to happen in 10 years and he says you know what that’s a good question
8:33 – What you know a question that nobody ever asks me is what is not going to change over the course of the next 10 years
8:40 – Because if I know something that is not going to change over the next 10 years then I can build a real business
8:46 – Around that and from my perspective in the our crazy world of mobile home parks, right?
8:50 – I know without fail that people are still going to want affordable housing in a decade
8:56 – You can build a real business behind that and from Jeff Bezos perspective
8:59 – He goes, you know, I look out 10 years. I can never in a in a million years
9:03 – Imagine a scenario where when somebody buys something offline that they don’t want it at their door faster quicker with better service
9:12 – I also in a million years could never imagine a scenario when when somebody buys something offline that they wouldn’t want it cheaper
9:18 – So his entire philosophy is focused on trying to improve the customer experience again get the packages to you as quick as possible
9:27 – You guys now have experienced it right you’ve felt this where you buy something off of your phone through the Amazon app
9:32 – It shows up within six hours that is exceptional customer service
9:36 – What what what does this mean? How does this impact the flywheel when you have an exceptional customer experience that brings more traffic
9:42 – You’re going to get more referrals through word of mouth and because you’re getting more people to your site
9:47 – 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
9:53 – That’s what happened Amazon became the everything store everybody wanted to sell everything there
9:57 – And so the selection
9:59 – Increases tremendously when the selection increases tremendously the customer experiences even better
10:04 – And that’s the flywheel that ultimately occurs which allows for tremendous growth and when the growth occurs
10:10 – A yet another secondary style of flywheel occurs when the company is growing
10:15 – They have a much lower cost structure they can provide all these services to the customer at a cheaper rate
10:21 – So if you’re growing you have a lower cost structure internally which means you could lower prices
10:26 – Which further improves the customer experience and yet another massive flywheel continues to turn and that’s how Amazon was able to
10:34 – Increase enterprise value in such a tremendous manner over time
10:37 – Ultimately that is the idea in the concept of adding value where you control your own destiny
10:43 – So when trying to explain the concept of adding value what what we’re really sharing here is that if your entire investment
10:50 – Depends on the whims of mr market waking up in a good mood than that is not an investment that’s speculation
10:56 – Rather you need to be focused on adding value
10:58 – I’m only going to be allocating capital in an investment where I
11:02 – Largely know the outcome where I largely can control the outcome by adding value myself or by allocating capital
11:10 – Two individuals who can control the outcome right?
11:13 – So if you’re just a capital allocator like Warren Buffett
11:15 – He invests in businesses where the operators themselves can control the outcome
11:21 – So it becomes a much higher likelihood and assurance of outcome and that’s what we mean when when we’re stating add value
11:27 – You do so because it massively increases the certainty of outcome in our little world real estate
11:32 – It means sweat equity when we’re buying properties
11:34 – We could do some things that actually pull some levers we have a three lever framework
11:38 – To increase the value of the property shortly after acquiring them and various other businesses have various ways to
11:44 – Ultimately add value really drive enterprise value, but that’s what it means
11:48 – It’s not just relying on price appreciation and the whims of mr market trading businesses at a higher or lower valuation
11:54 – 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
12:05 – Increasing the moat and as you can imagine sometimes the idea and that concept it becomes difficult to actually implement
12:12 – I’ve always can’t I always contemplating widening the moat always trying to think through
12:18 – Real legitimate value creation over long periods of time because sometimes long term value creation and widening the moat
12:26 – It goes against and is it at odds with short-term profitability again
12:31 – Jeff Bezos is always focused on driving down the cost to the end consumer
12:37 – he’s
12:38 – Going short-term profits he could easily charge a little bit more to get that product delivered to your door
12:44 – But he’s trying to continuously drive it down and drive it down and drive it down
12:48 – That is at the detriment of the next quarterly report and the amount of profits
12:53 – He would otherwise be able to generate in the near term but over the very very very long term
12:56 – It’s obviously exceptionally beneficial for the health of the business and the overall enterprise value
13:02 – He’s really driving a real creation here and Warren Buffett has this great quote that when short-term and long-term
13:08 – Conflict widening the moat must take precedence. You need to always be focused on the durable enterprise value
13:15 – The organization over the quarter to quarter optics and people sometimes unfortunately get this wrong
13:20 – At perfect example of this is the idea and a story of blockbuster versus Netflix for those unaware
13:26 – Blockbuster at one point had the ability to buy Netflix for a mere 40 million dollars read hastings the founder and owner of
13:32 – Netflix literally went to blockbuster and said hey guys
13:35 – I’ve built this cool little business here
13:36 – It’s kind of the new way that we’re ultimately trying to drive the same style of product that you guys are creating
13:40 – Board just delivering it to them via mail. We’re delivering these DVDs to mail to the end consumer and blockbuster had no interest
13:47 – And ultimately acquiring that DVD to mail to then consumer business why because they were focused on driving short-term value
13:56 – Due to the fact that there was a corporate raider
13:59 – Carl icon largely overseeing and pulling the strings on blockbuster
14:02 – So he had a heavy stake in blockbuster
14:04 – And he was demanding enforcing the management to drive the profits and hit the number for the quarter
14:10 – If you’re always focused on hitting the number for the most recent quarter
14:14 – It is oftentimes at the detriment of the long-term value of the business
14:18 – So what you if ever press 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
14:26 – You’ll end up like blockbuster because obviously Netflix is flew by them
14:30 – And the next time that they want to go potentially purchase them
14:33 – Why would Netflix ever do it? They had already surpassed the value proposition that blockbuster could bring to the table
14:39 – And now blockbuster unfortunately completely completely defunct
14:42 – Charlie Munger has this other quote almost all good businesses engage in pain-today gain tomorrow activities
14:48 – There has to be some level of delayed gratification to really move from good to great over long periods of time
14:54 – And that’s what we’re talking about in terms of sweat equity right when we’re dumping money back into real estate ventures
14:59 – 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
15:06 – And if you’re not actually adding value what the heck are you doing a bread Jacobs has a great quote bread Jacobs wrote this book
15:12 – How to make a few billion dollars exceptional entrepreneur
15:15 – Multiple phenomenal businesses over long periods of time and he’s got this quote that says if you’re not substantially
15:20 – Improving the companies that you buy
15:23 – You’re just moving capital around and I would pose to you that
15:26 – Unfortunately, there’s been a lot of that in our crazy universe of syndication over the last handful of years
15:30 – There’s a lot of quote unquote professional money razors who don’t actually add value to the investments in any way shape or form
15:38 – They’ve done a good job of creating a little marketing and sales engine
15:40 – And they raise money for syndications. Let’s say they raised 10 million bucks for a multifamily syndication
15:46 – And they go out and buy a multifamily property
15:48 – 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
15:56 – Who doesn’t care in any way shape or form about the stakeholders and the actual individuals who allocate allocated capital to the business at the outset
16:04 – So there’s there’s 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
16:14 – On a day-to-day basis and unless you actually tie those two together, you’re not really creating
16:20 – Value you’re not actually investing what I’d say is you’re speculating
16:23 – It works for a period of time if you’re in a capitol compression environment the minute that that
16:27 – clock strikes 12 and you’re no longer in a capitol compression environment
16:31 – You’re in a precarious situation, which is why so many folks have had paused
16:35 – Pause distributions capital calls unfortunately total loss of capital because they haven’t actually been investors focusing on
16:41 – allocating capital to
16:43 – Individuals and businesses who really focus on real value creation warned buffer didn’t
16:48 – When by guessing the future he won by improving what he owned and we’ll go ahead and give you a couple of case stories on how he actually did it a couple of different ways
16:57 – That exemplify businesses that he invested in where they actually control their own destiny the first one’s a beautiful
17:04 – Story about a Mrs. B and Nebraska furniture mark
17:08 – She is a woman who built a kingdom and she couldn’t read or write in
17:12 – 1983 Berkshire acquired about 90% of Nebraska furniture mark for
17:17 – $60 million the founder beautiful lady named Rose Blumpkin was 89 years old at the time
17:23 – She’d started the business in 1937 with five hundred dollars
17:26 – She’s broke broken English couldn’t read her right and had never ever ever taken a day off
17:32 – She’s in there seven days a week all the time trying to drive the operational efficiency of the business
17:37 – Her strategy was brutally simple sell cheap tell the truth and don’t cheat anybody
17:43 – She operated on paper thin margins massive volume and fanatical cost control
17:49 – Her store became the largest furniture store in all of North America and Buffett loved the business
17:55 – Because Mrs. B added value each and every day. She negotiated with suppliers. She worked the floor
18:03 – She obsessed over customer satisfaction. There was no bureaucracy no waste no ego after Berkshire bought the business
18:09 – He didn’t change the thing. He let Mrs. B run it until she was 103 years old when she finally retired
18:16 – The business had grown exponentially lesson here from Buffett is that you need to buy
18:21 – Wonderful businesses run by wonderful people and then just get out of the way adding value doesn’t mean complexity
18:27 – It means relentless focus on customer satisfaction
18:31 – cost efficiency and operational execution great operators
18:36 – Compound value daily through very small discipline decisions and in real estate
18:40 – It means repositioning underperforming assets right raising rents to market implementing the lost to lease recapture cutting expenses improving management
18:48 – In private equity. It means operational improvement not financial engineering, but actually
18:54 – Operating approving operationally and public markets. It’s
18:58 – backing phenomenal owners like Jim Senegal over at Costco or
19:03 – Berkshire backing all their different CEOs and the various myriad of companies that they own value is added through
19:08 – Execution not from a spreadsheet another phenomenal business that
19:13 – exemplifies this from Buffett’s portfolio is bnsf
19:17 – 44 billion dollar bet that he made on boring and 2010 Berkshire acquired bnsf real-way for
19:24 – Billion dollars at the time it was the second largest
19:27 – Transaction that Warren Buffett had ever done real roads notoriously capital intensive
19:32 – Very heavily regulated and also very very boring
19:36 – Critics they question at the time why Buffett would lock up so much capital in a legacy asset
19:43 – But Buffett saw what everybody else missed real roads have
19:47 – Unbeatable economics for moving freight across North America a massive moat nobody could beat it
19:52 – Trucks can’t compete on cost for long haul both goods moving coal moving grain moving oil moving containers right
19:59 – 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
20:08 – bnsf bnsf wasn’t just a toll bridge it required
20:12 – Consistent
20:13 – Reinvestment so Buffett committed to allocating an additional 40 billion dollars in capital over the next decade right
20:21 – So CapEx capital expenditures to improve the track to improve the locomotives to improve the efficiency
20:27 – He added value by making bnsf faster by making it safer by making it more reliable than all of his competitors and by 2024
20:34 – bnsf generated five billion dollars annually in earnings it became birchers most valuable wholly owned business outside of his traditional
20:43 – Insurance companies adding value often requires reinvestment great businesses oftentimes
20:50 – They’re not just cash cows. They’re going to take a little bit of money to reinvest back into the business
20:55 – They’re engines that require fuel
20:57 – But the key is ensuring that the reinvestment that you are making generates returns over and above
21:03 – The capital cost in real estate. That just means repositioning value ed properties
21:08 – And if you spend two million bucks on CapEx on a turnaround
21:11 – You need to increase value by five million bucks right in private equity
21:15 – It means bolt-on acquisitions and operational improvements and in public markets
21:19 – It’s companies like Amazon that reinvest cash flow exceptionally well into other existing businesses that can grow right the best businesses
21:26 – Generate cash and have really high
21:29 – Reinvestment opportunities. So we’ve defined what adding value is we’ve shared kind of how Buffett has done this historically and allocating capital into businesses
21:36 – That add value now. Let’s show you kind of how how we do it how we’ve historically done it over at sunrise capital
21:41 – We’ll give you a few case studies here right? We’ve done it in both parking and mobile home parks over time
21:45 – The first deal we’ll walk through is parking assets called lures parking facilities actually in Phoenix, Arizona
21:51 – We ended up buying this deal for 20.5 million dollars in the second quarter of 2023
21:57 – Okay, so it’s we’ve on and out for just a little more than two years
22:01 – Amazing parking facility, but it was a mixed-use building not only did we buy the parking we also got
22:05 – An 14-story office building as well as some retail units
22:09 – I think there’s six different retail units on the ground floor
22:11 – And this is a name exceptional location location location
22:14 – They literally call it the lures city center because it is in the center of Phoenix literally the epicenter of Phoenix
22:21 – And the entire city of Phoenix was built up around it this building is about a hundred years old
22:27 – It was constructed before Arizona was a state and the rest of the city ended up growing around this
22:32 – So you can imagine the exceptional location location location
22:35 – We ended up buying this property if fell into our lap because it was right after covid during covid
22:40 – Obviously office values plummeted everyone was working from home
22:45 – Folks weren’t eating out in restaurants near as much and for that reason the NOIs historically on this deal
22:51 – Went south, but what was really occurring is people were still parking in the facility over and over and over
22:56 – Why because it’s literally right next to
23:00 – Maricopa County courthouse and the courts, you know
23:02 – They’re still open people are still getting in trouble and they’ve got to go in and actually paid tickets
23:06 – Etc. And the courts got to keep keep rolling in addition to that
23:09 – It’s one block away from the Phoenix ends arena and two blocks away from chase field
23:13 – So there was an exorbitant amount of demand for parking that never really went away
23:18 – 85% of the NOI from that asset derived from parking and again
23:23 – We bought it right after covid. So it was beautiful on that
23:26 – The the office and retail values were suppressed so much that we were able to buy this one for a song
23:31 – We ended up paying 20.5 million dollars for the asset
23:34 – But we actually also received a five million dollar setter seller credit at closing beautiful location location
23:41 – Has been in high demand for over a hundred years. We’ll continue to be in high demand
23:44 – Regenerations and generations to come again Phoenix is the fourth or fifth largest county in the country
23:50 – And it’s the fastest growing city in the country fastest growing state in the country over the last decade
23:54 – Truly phenomenal economics here in addition to that
23:57 – It’s literally right across the street from cityscape
24:00 – In Phoenix where they just dumped a billion dollar renovation
24:02 – And so again all of these factors led us to understand and that the
24:07 – Demand for that respective facility was still going to remain for a long period of time multiple
24:13 – Demand generators for that that asset was owned
24:17 – By a mixed uh by an institutional owner
24:20 – That was focused on office and retail
24:22 – They were not specialists in parking
24:24 – Parking is often viewed as an ancillary line item a given businesses pnl
24:28 – If you really stopped and look at parking as a business in and of itself
24:31 – It becomes extremely compelling
24:33 – But these individuals were primarily focused on office and retail to the detriment of parking
24:38 – But and to that end the office and retail values
24:42 – Truly plummeted and we were able to go in buy it for a song
24:45 – They really didn’t know how to actually run the parking in the most efficient manner
24:49 – What we were able to do in terms of adding value was bring some of our operational efficiency into the marketplace and begin to change
24:57 – Uh begin to charge we would consider to be market rate for parking
25:00 – They had no idea in terms of keeping their finger on the pulse of what market rates were
25:04 – Also they had not instituted what what we always do in in terms of dynamic pricing as you can imagine
25:10 – When you’re right next to the phoenix suns arena and you’re right next to chase field
25:14 – They were charging a flat rate to park in the facility regardless of what was going on
25:18 – Again when the lakers come to town there’s probably more demand for that basketball game in addition chase field
25:23 – They host a bunch of concerts right when Taylor Swift goes in plays
25:26 – She’s probably going to have a little bit more demand than some of the other
25:30 – Folks that end up playing in the in the venue and they had no idea and concept of dynamic event pricing and shortly after acquisition
25:37 – What we were able to do is just drive NOI tremendously
25:40 – revenues increased precipitously we were able to minimize some of the expense cost associated with the salaries of staff
25:45 – And what that ended up doing was driving up NOI in a material way
25:49 – Less than two years after we bought the business we ended up getting a BOV broker opinion of value of 28 million dollars
25:56 – And again, we were all in for 15.5 million dollars in that respective venture
26:00 – So within two years we almost doubled the value of that property just again less than three years after acquisition
26:07 – By virtue of us actually adding value
26:10 – It’s irrelevant. What everybody else is willing to pay in the marketplace
26:14 – In terms of the price appreciation etc. Price is what you pay value is what you get we focus on
26:20 – Increasing revenues minimizing expenses to ultimately create real value over long periods of time
26:26 – That’s one example of trying to add value shortly thereafter again
26:29 – This is the idea in the concept of sweat equity what we do in the real estate sector another example is in
26:34 – mobile home park sector so
26:36 – We ended up buying a mobile home park in Atlanta for 2.5 million dollars and literally within two years
26:41 – ended up selling it for 10.45 million dollars added an exorbitant amount of value in a relatively short period of time
26:47 – We more than quadrupled the value of the property within two years
26:51 – And we ended up exiting that deal with a multiple of 5.1 in an annualized return of over
26:57 – 144 percent a ridiculous number right this is a grand slam none of your deals like that right it was a deep
27:04 – Heavy value-add transaction the property had 125 spaces only 80 of them were occupied
27:09 – So it was a 65% occupancy we ended up acquiring the asset
27:12 – And it was a beautiful business model and that we were able to truly make a dent in affordable housing when we can go in to
27:18 – Community that’s going to be in high demand the area isn’t an affordable housing crisis
27:22 – We know that there’s a massive demand for the product
27:25 – But for whatever reason previous owner had not
27:28 – Improved the operational efficiency the way that
27:32 – That we’ve historically been able to do so we’ve been doing this now for well over a decade
27:36 – And we have a three-level framework in our manufactured housing communities our mobile home parks to drive value
27:42 – That three-level framework is very simple and straightforward
27:46 – We basically have we consider it low-hanging fruit mid-grade fruit and high-hanging fruit in the low-hanging fruit
27:52 – Scenario the first lever that we pull is recapturing lost to lease whenever we go into an individual deal
27:57 – We’re trying to find assets that ultimately have below market rents
28:00 – We know what the market can bear by virtue of doing all the underwriting in advance
28:03 – And we are looking specifically for assets to acquire where the market rent that they’re currently charging is significantly below
28:10 – The market rent in doing so we know that we can recapture that loss to lease over a period of time
28:15 – We consider that low-hanging fruit the second lever that we pull when we’re adding value is driving operational efficiency
28:23 – This is focusing on increasing revenues minimizing expenses largely this lever were focused on
28:29 – Driving operational efficiency and what we say is we’re billing back for water sewer trash
28:34 – Extremely common and virtually every other real estate sector
28:37 – 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
28:43 – professional operators who really don’t
28:46 – 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
28:53 – 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
28:58 – By virtue of billing back for water sewer trash not having a bunch of leakage all over the place
29:03 – And that drives operational efficiency creates value over long periods of time
29:07 – And the third lever that we end up pulling is the high-hanging fruit
29:09 – We consider that infill and that’s what we ended up doing here in this Atlanta mobile home park
29:14 – But basically infill is when you buy a mobile home park in this example there were a hundred and 25 spaces
29:20 – Only 80 of them were occupied. That means 45 spaces were available to infill with brand new
29:27 – Mobile homes brand new manufactured housing. This is a beautiful opportunity to do well financially while doing good socially
29:34 – We’re in an affordable housing crisis
29:36 – We have the ability at sunrise to flick ding make a dent in the affordable housing crisis
29:41 – I know that I can’t personally solve the affordable housing crisis
29:43 – But we’ll do everything in our power to make a dent
29:46 – So what we’re able to do is bring in a ton of homes
29:50 – Many many many homes to add more affordable housing stocks in the marketplace sell them to
29:55 – The end consumer the residents who ultimately are now able to live the American dream of home ownership
30:00 – They have a nicer place to live all the pre-existing residents
30:02 – 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
30:09 – It’s it improves the community
30:11 – It’s a much nicer place to live and we’re able to make a dent in the affordable housing crisis
30:16 – While driving significant returns for all the investors involved and that’s a virtuous cycle right?
30:22 – That’s the beautiful aspect associated with this business model
30:26 – The last deal I’ll talk about is mobile home park then we ended up acquiring in the northeast
30:30 – Beautiful asset. We ended up buying it for $2.6 million and we were able to pull all the various different levers in our
30:36 – Three-level framework to add value inside of this particular property
30:40 – We bought it for $2.6 million and it had woefully below market rents when we acquired the property
30:45 – It had brutal infrastructure. There were water leaks everywhere
30:49 – The sewer needed significant
30:52 – Work done in terms of catbacks. They need to get dumped back into the property
30:55 – There were abandoned homes skewn throughout the property
30:59 – There were some sell-vigible homes but several unsell-vigible homes and massive below market rents in this particular property
31:06 – When we acquired it the rents were $250 a month when the market was over $400 per month
31:13 – The legacy owner had developed the property literally 40 years ago since inception and had not
31:18 – Maximized the value of the property
31:20 – They had no debt on the asset. We’re throwing off tons of cash flow more than enough cash flow to live their life
31:26 – However, they wanted but and for that reason they were willing to choose
31:31 – Not to drive operational efficiency because they were able to live the life that they wanted and not burden the residents
31:37 – truly the owners grew up
31:39 – Instead of that community and they didn’t want to raise rents as it were on their neighbors
31:43 – But they weren’t providing the best service over time if you don’t dump money back into the property
31:48 – It ends up taking a beautiful what it’s a five-star manufactured housing community
31:53 – Turning into more of a four-star or three-star mobile home park
31:56 – And if you further degrade the community and don’t dump catbacks back into the property
32:00 – It becomes a two-star or one-star trailer park
32:02 – We went ahead and power washed all the homes
32:04 – We removed all the unsell-vigible homes
32:06 – We renovated all of the sell-vigible homes
32:09 – We ended up bringing in brand new homes into the units that were
32:13 – Bacon into the pads that were vacant
32:15 – Fixed all the deferred maintenance rejuvenated the septic fields
32:18 – We held a community cleanup day where everybody was able to throw out anything that was kind of lingering inside of the community
32:24 – Just refreshing it making a much much much nicer place to live
32:27 – And what we found over time is that folks are more than happy to pay a little bit more on a monthly basis
32:32 – For a significantly better living experience
32:34 – And so over the first couple of years of ownership of this asset
32:37 – We were able to recapture the lost lease move the lease from
32:39 – $200 on a monthly basis up to just below market rents
32:44 – So right around $400 which increased the revenues about 60% in the property
32:49 – In doing so within the first two years we took the cumulative value of the asset
32:53 – From $2.6 million up to over $6 million
32:57 – We were able to do a cash out refinance
32:59 – Send all the original capital back to investors in a non-taxable event
33:03 – And folks are then operating on an infinite cash on cash returned from that point forward
33:06 – But that exemplifies your ability to control your own destiny
33:10 – We knew in advance when going into that acquisition
33:13 – That we would have the ability to pull the first lever below market rents
33:16 – Pull the second lever operational inefficiency
33:19 – And pull the third lever bringing additional brand new units into the community via infill
33:23 – And by virtue of doing that we provided much better service to the end residents
33:28 – And were able to drive an exorbitant amount of value in the investment
33:31 – You have to find a way to not just rely exclusively on Mr. Market
33:35 – To determine the success of your investment
33:37 – But rather ensure that you can control your own destiny
33:40 – Because if your investment outcome depends on timing or luck
33:44 – Or optimism or hope you’re exposed
33:47 – But if you can add value patiently, systematically, relentlessly
33:52 – You control your own destiny
33:54 – And that’s why add value sits at the center of the sunrise capital strategy
33:59 – Not because it’s exciting, but because it works