Case Study: Turning a $2.6M Park Into a $10M Permanent Asset | EP. 11

0:00 – We turned $2.6 million into a $10 million asset, returned all investor capital and created a cash flowing machine
0:06 – that’s going to pay our investors for years to come.
0:09 – Today I want to walk you through a real-world transaction through the lens of our
0:13 – wealth building blueprint, which is the Sunrise Capital stretching.
0:16 – This mobile home park acquisition we acquired it eight years ago for $2.6 million.
0:21 – And it has since more than tripled in value.
0:25 – It’s returned to 100% of investor capital while still having them retain ownership.
0:30 – It’s going to generate cash flow for years on end and it still hasn’t paid a dime in taxes.
0:37 – Welcome back to the Sage Investor. My name is Brian Spear. This is the podcast that helps investors
0:41 – generate cash flow and build legacy wealth in a tax-efficient manner because that’s what I’m trying to
0:46 – do for my family. And we’re going to help as many people as we possibly can over time.
0:50 – This is a real-world application of what happens when you execute the capital strategy correctly.
0:57 – Now this episode, it’s not about returns, it’s about process, it’s about how to actually
1:01 – execute the system in time. If you’re joining us for the first time, we just came off of a really
1:06 – deep dive, a series where we walk through each individual pillar of the Sunrise Capital
1:11 – stretching in depth. And right now we’re going to dig into the application, the practical application
1:16 – of what happens when you implement it in real life. A handful of years ago, we found a mobile
1:21 – home park deal in the Northeast and the property was producing right around $200,000 in NOI.
1:26 – And we negotiated a purchase price of $2.6 million for that asset. The appraised value out of the
1:32 – gate there was $3.6 million. So we had a really nice margin of safety. The bank provided $1.6
1:40 – million in debt. So we brought $1 million in equity to the table, right? $1 million was the
1:46 – fuel. And what happened next is really where strategy matters. In a moment, we’re going to dig into
1:51 – how we dramatically increased the NOI, the net operating income. But what I want you to do is I want
1:56 – you to notice something. None of that upside mattered unless this foundation was really solid
2:03 – in the first place. And that brings us to the very first pillar of the Sunrise Capital Investor
2:07 – Strategy, the letter C, which is cash flow first. Each individual letter of the word capital is
2:13 – one of the seven pillars. So we’re starting with first C cash flow first. Here is the initial stats
2:18 – on this deal, okay? $200,000 in NOI. There was $120,000 of annual debt service. And that left $80,000
2:26 – in annual cash flow. Now that’s an 8% cash on cash return right out of the gate from day one. Before
2:33 – we ever talk about appreciation, before we ever talk about value add, before we ever talk about
2:38 – refinance, we need cash flow from day one. Why? Why is that the case? Because cash flow really
2:44 – buys you breathing room. It allows the asset to breathe. It buys patients, right? Patience ends up
2:49 – buying power and power buys you more opportunity down the road. And it kind of ties into one of the
2:56 – adamant principles that we have underneath this cash flow first principle. And it is literally
2:59 – that cash flow is oxygen. You have to have sufficient cash flow to write out the next inevitable
3:05 – recession because cash flow is the lifeblood of any respective business. The minute that the cash flow
3:10 – dries up and you have no more cash, the business dies. That is the only real reason at the end of
3:16 – the day that businesses die because they run out of cash. Cash flow is oxygen. So you have to focus
3:22 – on cash flow first. And that’s capital pillar number one cash flow first Henry Singleton goes on
3:26 – ad nauseam about this. People know Warren Buffett. He’s readily known as the best investor of all
3:30 – time. But many fewer people actually know who Henry Singleton is. Warren Buffett would tell you
3:36 – that Henry Singleton is the single best capital allocator in US history. Charlie Mungers got this
3:42 – great quote about him. He’s like, man, if you looked at Henry Singleton’s track record over time,
3:46 – the result that he has are quote, utterly ridiculous, utterly ridiculous. And why is that the case?
3:53 – Because Henry Singleton focused single-mindedly and exclusively on cash flow. The simple quip is
4:00 – the following. Revenue is vanity. Profit, NOI is sanity. But even still, NOI is an opinion.
4:11 – Cash flow is a fact. And that’s what you need to focus on. Whenever you make an investment,
4:17 – you’re putting cash into a deal. How much cash flow comes out of that deal is really at the end of
4:22 – the day the only thing that actually matters. So you’ve got to focus on cash flow today right out of
4:27 – the gate throwing off cash flow and ensure that that cash flow is going to continue into perpetuity.
4:31 – Right? So cash flow first, that is the floor. And now that we’ve protected the floor, we can talk
4:37 – about the ceiling. How high can we go from there? But here’s the discipline. Right? The ceiling only
4:42 – matters if you’ve got an exceptionally solid financial foundation. If the floor cannot collapse.
4:47 – And that’s the first principle at C, cash flow first. Moving on here, it leads us into a
4:53 – ad value. We didn’t buy this asset, hoping that the market was going to save us. We bought it
5:00 – because we knew that we could create the outcome ourselves as you’re going to begin to see here.
5:05 – You know, the portfolio that we ended up acquiring, that mobile home park was already producing
5:09 – right around $200,000 in NOI. But it was nowhere near optimized. And that matters because in our
5:17 – world, NOI is the steering wheel, right? This is how you ultimately control your own destiny.
5:22 – At the end of the day, one of those sage principles that we’re going to reiterate over and over and
5:26 – over is that when I go into an investment, I want to control my own destiny. You must control
5:33 – your own destiny. I don’t want the whims of my investment whether or not it’s going to be successful
5:36 – to be determined upon the winds of Mr. Market. And we were able to control our own destiny in this
5:40 – deal by implementing what we consider to be our three lever framework. So we came into the transaction
5:46 – with a light value ad plan. This is not a crazy, risky projection from really deep heavy value ad,
5:52 – opportunistic value ad stuff. We’re talking about real operational moves that actually stick,
5:58 – a simple business model that doesn’t take a genius to implement and do time. And so the three
6:04 – tiers will outline of the following. The first tier is low hanging fruit. This is the easy,
6:08 – simple upside tier one below market rents, recapturing the lost to lease. That is the cleanest
6:14 – upside in this business. So, you know, elaborating a little bit here, when we acquired this deal,
6:20 – the lot rents on the property was $250 per month. That’s a very modest, modest monthly rent.
6:28 – As you can imagine, we’re in a first world civilized society. Can you live for all in cost and
6:31 – housing of $250 per month? Really doesn’t exist. But the market rent, when you look at all the
6:36 – different communities in the immediate vicinity, the market rent was already at $400, which meant that
6:42 – the property acquired was 60% below market rent. And we knew that we could recapture that lost
6:48 – to lease. It was an inevitability over time. Wasn’t going to happen in the first month. But we knew
6:53 – that we were going to be able to recapture that lost to lease. That’s the low hanging fruit,
6:57 – pulling lever number one. Now pulling lever number two, it allows us to do a little bit more work,
7:01 – a little bit more grease on the finger nails in order to get this done. We’re talking about
7:05 – operational efficiency. This is mid grade fruit in the vast majority of other real estate sectors,
7:10 – billing back for utilities as commonplace. But in a very fragmented niche like mobile home parks,
7:15 – it’s just not near as commonplace as you would have otherwise imagined. So billing back for water,
7:19 – sewer trash, you see that across the board and virtually every other sector, not here in the land
7:24 – of mobile home parks, which is a good thing. We’re playing in a fragmented niche with a lot of
7:28 – mom and pop operators not operating the deals with peak efficiency, which allows us to add further
7:33 – value in a relatively simple manner shortly after we’ve acquired the deal. All we’ve really
7:37 – going and do is fix the simple things, the broken parts, fix the stuff that’s broken. I’m talking
7:42 – about, again, billing back for water, sewer trash, tightening the management over time. There were
7:46 – several different individual mobile homes on site that were vacant that simply needed renovation.
7:51 – It’s very much like turning vacant multifamily units, simple operational upside, mid grade fruit.
7:57 – From our perspective, this is something that’s relatively easy upside. You just have to run the
8:02 – business like a business and you can find many more of these style of opportunities in a fragmented
8:08 – marketplace where these deals are owners are oftentimes tired, but they’re really not needing to
8:13 – squeeze out any more NOI to the bottom line because they’re already thrown off as much cash flow as
8:16 – they need to live the lives that they want for them and their families. But we know that there’s
8:20 – further upside there. We know that we can add value that we can actually materially increase the NOI
8:25 – ourselves by implementing our value ad plan. And we ended up giving ourselves right around 18 to 24
8:31 – months to ultimately execute those first two tiers of the light value ad plan, those first two
8:36 – levers. And you know, I want to emphasize one of the principles that we have underneath the ad value
8:42 – pillar. One of those principles is that as a limited partner, when you start investing passively
8:47 – in various deals, what you come to understand is that you need to bet on the jockey, not on the horse.
8:53 – For folks that have done many, many deals over many, many decades, it becomes an inevitability
8:57 – that they end up getting to the point where they’re not focused on individually doing deals per
9:02 – say, but rather finding trustworthy partners on whom they can rely over long periods of time.
9:07 – Because when you’re adding value, when you’re implementing the light value ad business model and
9:13 – seeking to materially impact the NOI, that is only going to be done by a trusted business partner
9:18 – who is understanding how Jim Collins institutes a flywheel in a business where you can take one
9:25 – percent incremental improvements across everyone inside of the organization actually add value
9:30 – along the way. There’s far too many out there syndicators who are professional money managers,
9:34 – who are too far removed from the day to day operations, right? They outsource the operations
9:38 – to third party property management companies. And the third party property management company,
9:41 – the on-site staff is so far removed from the actual owner of the business that they don’t really care
9:47 – and they’re not incentivized based on what the owner actually needs or wants. So management
9:53 – matters oftentimes far more than models, far more than the pro forma. You need to bet on the
9:58 – jockey, not the horse, a vertically integrated platform as far superior than outsourcing operations
10:04 – to third party management. You need somebody who’s actually going to be willing to get the dirt
10:08 – under the fingernails and implement the business model themselves. We’ve come to understand that’s
10:12 – a far superior way to ensure the outcome of your respective investment. We ended up buying this deal
10:18 – based on the first two levers. The third lever is high-hanging fruit. That’s really
10:23 – infilling vacant lots. It’s higher upside, but there’s also higher complexity there,
10:27 – and we actually did not underwrite it as a requirement in this particular transaction. When we do
10:33 – deals, we want to make sure that actually pencil on the back of an applicant where the deal has so much
10:39 – juice, has so much margin. When somebody walks into your restaurant, you’re eating at a restaurant,
10:43 – somebody walks in through the door, and there’s somewhere between 400 and 450 pounds. You might not
10:49 – know exactly how much they weigh, but you know that they’re fat. You know that they’re overweight,
10:55 – and that’s really what we’re looking for. We’re looking for deals that are fat that makes sense
10:58 – on the back of an applicant that have enough of a distance between the current purchase price
11:03 – and the intrinsic value that we know that the deals are going to work out over time. So you don’t
11:06 – need to be perfect because nobody’s going to be perfect. And so you got to have a little bit of
11:11 – a margin there in any event. This allowed us to go to the third tier, which is the high hanging
11:15 – fruit and that infill when we bought the deal, there was 180 lots in this perspective mobile home
11:19 – parking. About 20 of them were vacant, where there’s literally vacant lots, and you could add value
11:24 – by virtue of going in and bringing in brand new homes to the marketplace. It’s a beautiful thing
11:29 – because it’s one of these beautiful business models where you could do well financially while doing
11:33 – doing it socially as well. You know, you can bring brand new affordable housing stock to the marketplace,
11:38 – make a dent in the affordable housing crisis, provide a beautiful brand new home,
11:42 – the American dream of home ownership to a new resident who absolutely yearns and needs it,
11:46 – and also make a lot of money along the way. Every brand new infilled lot that you actually fill
11:51 – was worth zero dollars because it was generating zero dollars of income. But at a very reasonable
11:55 – lot rate, oftentimes in the current market, a lot that is full is worth 70, 80,000 dollars,
12:02 – sometimes much more than that, depending on the market you’re in and the value of that respective
12:06 – lot rent. The reason that you see a lot of these niche assets and mobile home parks that have a lot
12:11 – of vacant lots is oftentimes because there’s a lot of complexity associated with making that happen.
12:17 – When you’re running a mobile home park, you’re actually running multiple businesses simultaneously.
12:22 – On one hand, you’re running a version of a multi-family property where you are serving residents
12:28 – on a monthly basis and they’re providing you with a monthly rent. But on the other hand, when
12:32 – you’re actually selling homes, you’re operating very much like a car dealership. You quite literally
12:39 – have to go out when you’re selling homes and actually get a dealer’s license in every state in
12:44 – which you operate. As you can imagine, there’s just significantly more complexity associated with
12:49 – making this happen. And for this reason, it’s the high hanging fruit. It’s the more difficult upside.
12:54 – But if you’re willing to go through the process of building a vertically integrated property
12:58 – management company in this crazy unique sector, you can really add a lot of value and control your
13:02 – own destiny along the way. But it is important to note that this deal had to work without needing
13:11 – the riskiest upside because infill is icing on the cake. We’ve always viewed it in that manner.
13:16 – And the truth is when you buy a mobile home park, you really don’t know with absolute assurance,
13:21 – the absorption of the brand new homes going into that respective community until you’ve operated
13:26 – in that respective MSA for at least a few quarters. And then after you’ve proven the concept,
13:29 – and you actually sold some of those brand new homes, then you can much better project the absorption
13:34 – rate over time. But because that’s a little bit more risky, we don’t underwrite to that to the
13:38 – nth degree. We’re not perfect there. And nobody else is. But in a nutshell, that three lever framework,
13:42 – that is add value done the right way. Single individual levers, real control, measurable NOI expansion.
13:52 – And in a few minutes, you’ll see why this controllable NOI growth gives us leverage,
13:57 – not just with lenders, but also with time moving on to the third pillar, which is P, protect the
14:03 – downside. We bought this asset below the current market value and well below the intrinsic value of
14:10 – the asset. If this deal required optimism or hope or perfection, we would have ignored it.
14:18 – Because optimism is not a strategy. Hope is not a strategy. You have to structure it. You have to
14:24 – engineer it. You have to control your outcome. And what you have to ensure is that you have a margin
14:30 – of safety. We believe a margin of safety is mandatory. And in this deal, there was an immediate
14:37 – margin of safety right out of the gate, right at closing. We have to have a cushion at closing
14:41 – and maintain that cushion throughout the entirety of the holding period. When we bought the deal,
14:46 – $2.6 million, appraisal was $3.6 million. That’s an immediate margin of safety. We also used
14:53 – very conservative leverage, about a 60% loan to value ratio. We funded all of the cash reserves
14:59 – up front. We had a solid bulletproof balance sheet cash to write out the next inevitable recession.
15:04 – We understood what we couldn’t control. And we only underwrote what we could control. We did not
15:11 – underwrite cap rate compression, crazy heroic infill having to be perfect. We did not underwrite
15:18 – market appreciation. And if the deal had required that level of optimism, we would have ignored it,
15:24 – right? Because your downside must be covered before you ever even contemplate the upside.
15:31 – You know, Charlie Mungers got this phenomenal quote, invert always invert. And we’ve taken that
15:35 – principle and we’ve made it our own by stating invert before investing. Invert before investing.
15:40 – Every single investment you’re ever going to do, you need to contemplate not thinking about
15:44 – how much money can I make. But rather, ask the question, how can I lose all of my money? Before
15:49 – a deal actually gets to investment committee, it is put on the acquisitions team. Tell me every single
15:55 – way in which I can lose all of my, all of my money, all of my family’s money. Before we ever buy that
16:00 – deal, think through every single way in which we can lose all the money. And if you can find an
16:04 – exceptional credible manner in which to mitigate that respective risk, then we can get more comfortable.
16:09 – But you have to focus first on return of investment before you ever contemplate the return on investment.
16:14 – And this deal worked without hero assumptions in a crazy pro forma. And that’s pillow number three,
16:20 – protect the downside. And the truth is, while we can think through every single way in which we
16:26 – could lose money and protect all those, mitigate all those, there is quite literally one risk
16:31 – that we cannot completely mitigate in any respective investment. And that is market timing
16:37 – risk, which is why you have to adhere to the fourth pillar of the capital strategy, which is to
16:43 – I invest, don’t speculate. And when we say invest don’t speculate, we mean that you must buy
16:52 – income-producing assets and hold on to them over very long periods of time. This is completely
16:58 – inverse to the idea and the concept of speculation, where you’re betting on price appreciation,
17:04 – where you’re looking to buy low and sell high. For us, that’s gambling, that’s speculation. And for
17:09 – my money, that’s what folks that are in the fixed and flipped business do. I don’t care if you’re
17:13 – fixing and flipping a single family home or a hotel or a multifamily building, it’s completely
17:18 – irrelevant. If you’re trying to implement a buy fixed sell model over the course of three years,
17:23 – four years, five years, that is inherently risky. Why? Because your crystal ball is broken.
17:30 – My crystal ball is broken and the Fed doesn’t even know what they’re doing. If the term debt
17:34 – expiration on that fixed and flipped deal is during the next unfortunate market timing event,
17:39 – you’re putting yourself in an exceptionally risky spot and you ultimately can lose all of your
17:45 – money. That’s why so many folks have had pause distributions, capital calls, sometimes total
17:49 – loss of capital in the last handful of years during the crazy interest rate increase.
17:53 – And so how do you mitigate this? You mitigate it by actually being an investor where you invest
18:00 – and you do not speculate. When you invest, you buy and hold assets over a long period of time
18:06 – adhering to Warren Buffett’s philosophy. My favorite hold period is forever. And you do so because
18:12 – it allows you so much more time. The truth is you can mitigate nearly every respective risk of
18:18 – making an investment. But you have to understand the difference between risk and uncertainty.
18:24 – We can protect the downside and mitigate exorbitant amounts of risk. But we cannot mitigate
18:31 – completely uncertain events. And it is for this reason that you must adhere to the following
18:36 – principle. You must plan for black swans. You must plan for black swans. Why? Black swan events are
18:44 – kind of these odd things that you feel are so unbelievably rare as to be absurd. But over the
18:49 – course of your entire investment lifeline, you can virtually guarantee that you’re going to run
18:53 – into multiple black swan events. The sad state of affairs is in the regular course of business,
18:57 – most folks do not plan for black swan events. It doesn’t show up in the pro forma because the
19:02 – difference is people are planning for risks. They’re not planning for uncertainties. You could put
19:06 – all the risks in the pro forma and mitigate them. You can mitigate even for active god risk,
19:11 – right? You can buy insurance. But what you can’t plan for is market timing risk. You can’t solve
19:15 – for it. So you have to put a structure around it that allows you to survive during the next
19:21 – inevitable black swan event because I can assure you if you go research history, you will come to
19:28 – find that there will be another influenza pandemic. There will be another savings and loan crisis.
19:33 – There will be another internet bubble. There will be another great recession. There will be
19:36 – another COVID pandemic. There will be another black swan event at some point throughout the rest of
19:41 – your investment life. And if you do not plan for black swan events, you’re going to be in a very
19:46 – precarious spot. So you have to extend your horizon and structure your investment in such a way
19:51 – that you can survive during the next inevitable black swan event. So you have to underwrite to
19:56 – survive this. How do you do so? You extend the horizon. You extend the horizon timeline. Again,
20:02 – our favorite whole period is forever. You have long term fixed rate debt. You negotiate
20:07 – prepayment penalties well in advance that give you flexibility. In a perfect world, we have a 10-year
20:12 – fixed rate term and optionality with a two-one step down prepay where you can have a very modest
20:18 – prepayment penalty in the first year, modest prepayment penalty in the second year, and then have
20:22 – tons of optionality to do cash out refinances when market conditions warrant instead of having
20:28 – forced liquidity events. You’ve got to make sure that you have a really sufficient DSCR debt
20:32 – service coverage ratio in terms to hold on for many years into the future and that allows the
20:37 – investment to breathe. It allows you to survive. You have to actually be an investor. And if you’re
20:42 – going to do that, you have to buy deals that have exceptionally favorable long-term macroeconomic
20:47 – talents. That’s why we love this deal, right? Mobile home parks are phenomenal. Unbelievably
20:51 – massive demand. No new supply coming online creates exceptionally profound compound interest over
20:56 – long periods of time. We buy to hold forever. Doesn’t mean we will hold every asset forever.
21:01 – But we buy with the intent to hold forever because we want durable income streams. We’re looking
21:06 – for durably wonderful businesses. And that’s what we absolutely found in this property in the
21:12 – Northeast. Durable. How do we mean? It provides safe, predictable, durable income over exceedingly
21:19 – long periods of time. It’s been thrown off cash flow for decades. It’s thrown off cash flow
21:23 – today and it’s going to be thrown off cash flow for decades into the future. And wonderful. And
21:27 – then it’s got exceptionally phenomenal long-term macroeconomic talents, massive demand for the
21:32 – product. No new supply coming online, which provides exceptional compound interest, a durably
21:37 – wonderful business. So knowing that we plan to hold, having durable income from from day one
21:44 – right out of the gate, what do we do next? As opposed to selling the asset, we simply refinance.
21:49 – We bought the property for $2.6 million. Within 24 months, we increased the value of the property
21:54 – to $6 million. At that point, we went back to the bank and said, what kind of loan would you give
21:59 – us given the new valuation that we’ve created, given the higher NOI and new new cash flow that this
22:04 – deal is throwing off? They said they were willing to provide us a loan of $3.6 million. So we took
22:09 – that $3.6 million loan. We paid off the old $1.6 million loan. We returned all of the original
22:17 – investment capital that additional $1 million. And we distributed an additional $1 million of
22:24 – cash out refinance proceeds. What does this mean? Investors got their entire capital back. They
22:29 – received collected cash flow every single year along the way, every quarter-like clockwork. And
22:34 – they still own the asset. And that’s when we ultimately hit infinite cash on cash returns.
22:39 – From our perspective, this is the most prudent way to ultimately generate cash flow and build
22:44 – legacy wealth in a tax-efficient manner. Every single investment we’re trying to do,
22:47 – I’m trying to send out a dollar of cash by deals and know that in due time that capital is going
22:53 – to come back to us and we’re going to be playing with the house’s money. We’re going to be playing
22:57 – with an infinite cash on cash return. We could take that original investment dollar, send it over
23:01 – and buy another asset with that dollar, continue to do the same thing, get that back over time
23:07 – without selling assets to cash out refinance proceeds. Now we have multiple streams of income off
23:11 – of that original investment dollar. You’re beginning to build a snowball. After you get it back
23:15 – the second time, you can go buy a third asset. All of a sudden, you’re creating significant momentum.
23:19 – You’re creating generating cash flow and building legacy wealth in a tax-efficient manner,
23:22 – creating a very gigantic snowball in a very efficient capital structure, which leads me to the
23:28 – fifth pillar of the capital strategy, which is T tax-efficient structure. And this is one of the
23:34 – pieces that I think a lot of investors miss over time. Taxes do not just reduce returns. They
23:39 – don’t just simply reduce returns. They actually compound in reverse. Everybody knows the eighth
23:46 – one of the world, right? Compound interest is the eighth one of the world. But what they don’t
23:49 – typically realize is that taxes provide that same compounding, but they do it in reverse. They
23:55 – absolutely devastate your returns over long periods of time. If you’re going to take an investment
23:59 – that’s got a 10% rate of return, but you’re going to pay the tax man, 20% every single year,
24:03 – and you take that 10% rate of return, and you take 20% out. Now you only have an 8% return,
24:08 – and if you look at 10% versus 8% over the course of 50 years, the results are absolutely astounding
24:13 – over long periods of time, because taxes compound in reverse. So you have to avoid paying the
24:18 – tax man. Warren Buffett has literally not paid tax for 60 years. You have to try to create a tax
24:25 – efficient structure that allows you to defer, defer, defer paying taxes for as far as the
24:31 – I can see. Taxes interrupt compounding. Every dollar that you do not pay in taxes ultimately remains
24:37 – in your principal base. Remains in your flywheel can continue to compound and ultimately creates
24:41 – significantly more wealth. So what happened in this particular deal? We ended up buying the transaction,
24:46 – and they ended up having year one depreciation that produced a massive windfall and massive
24:50 – phantom loss for them. So investors received $80,000 in outbound cash distributions while reporting
24:57 – to the government that they actually lost money. They had massive paper losses that they reported
25:03 – into the government. Depreciation is like magic, which you can actually do by actually following
25:06 – the code. What about the cash out refinance proceeds? Non-taxable. Why? Because refinance proceeds are
25:14 – debt, not income. So when you do a cash out refinance, you take that equity. You send it back to
25:20 – investors in a non-taxable event. You take debt out. It goes on the balance sheet as a liability.
25:25 – And for this reason, you do not pay tax on a liability. So years later, let’s fast forward.
25:30 – What has ultimately happened in this deal? Now the NOI exceeds $500,000. The valuation of
25:36 – the property is roughly worth $9 million. And the truth is, we have the luxury of going back and
25:41 – taking multiple bites at the apple. We’ve already gotten all the chips off the table with a cash out
25:45 – refinance. A huge, nice cash out refinance. A big bite at the apple. Now as the value of the properties
25:50 – continue to increase another $3 million, we can go back and do another cash out refinance, take
25:55 – another bite at the apple, and we’ll continue to do so into perpetuity. And still there’s no need
26:01 – to sell. There’s no gigantic tax hit. We’ve got continued cash flow. It leads up to the principle
26:08 – that we’re talking about inside of tax efficient structure is that activity is the enemy of returns.
26:13 – And ultimately, we’ve learned this the hard way. We’ve made a lot of mistakes along the way.
26:17 – We’ve gone full cycle on 16 different mobile home park deals that have generated on average
26:22 – an internal rate of return north of 40, north of 40%. But we know after having gone through that,
26:28 – I’ve got the scar tissue to prove it that a fixed and flipped business model is inferior to a long
26:34 – term buy improve refinance and hold business model. It is much more tax efficient back to the
26:42 – outset. Revenue is vanity. Profit NOI is sanity. But still, NOI is an opinion cash flow is a fact.
26:50 – But better yet, the only thing that actually matters is after tax free cash flow. Because it ain’t
26:57 – about what you make. It’s about what you keep. And at the end of the day, that is exactly how you
27:02 – generate the best overall return. Generate the best risk of just returns. Keep your principle
27:06 – based the highest and create the most compound interest possible. Activity is the enemy of returns.
27:11 – If we done those fix and flips, you’re going to have a lot of friction cost, transactional cost,
27:15 – reinvestment risk, so much more associated with this. It is much better. I know deep in my bone
27:20 – marrow and have the scar tissue to prove it that buying and holding assets in durably wonderful
27:26 – businesses is a far superior way to produce the best risk of just returns for me and my family.
27:31 – You know, at this point, you might think to yourself, well, hey, that worked out pretty well.
27:34 – You know, and I couldn’t agree more, right? That was a grand slam type of deal, a grand slam
27:39 – outcome. And not every deal is going to be a grand slam. We’ve hit a lot of singles and doubles
27:42 – along the way. And that’s all well and good and perfectly fine. But the real question that I
27:48 – believe that you should ask yourself is, was this outcome simply good fortune? Was this just luck?
27:55 – Or was it engineered? Now, let’s talk about the sixth principle in the sunrise capital strategy.
28:03 – And that pillar is a, assurance of outcome. It might be the single most important principle
28:08 – that we talk about, assurance of outcome. Why? Because here’s the reality. Nothing about this
28:13 – deal was accidental. Think about your own portfolio for a minute, right? If you could spend a
28:18 – little bit of time thinking about this and contemplating it, write down the three variables on your
28:23 – current investments. And what do they hinge upon? What are those three variables that ultimately
28:28 – determine the success or failure of your investment? And how many of those variables are outside
28:33 – of your personal control? From our perspective, we didn’t hope that the market would appreciate.
28:39 – We didn’t wish that interest rates would fall. We didn’t cross our fingers that some buyer would
28:44 – come along in the greater fool theory and bail us out. We engineered the outcome. And the truth
28:49 – of the matter is, you don’t need to predict the future. One of the salient principles that we
28:54 – have here is, you don’t need to predict the future. When you engineer the inputs, the outputs
29:03 – become very predictable. So let’s walk through what that means, right? When we bought the property,
29:07 – the NOI, the net operating income was $200,000. And we knew there was below market rents. We knew
29:16 – there were operational efficiencies. And we knew there were simple controllable levers that we could
29:22 – pull to ultimately increase the value precipitously. We were not relying on macro speculation.
29:29 – We were not relying on execution or heroic operational execution. And that’s the key difference.
29:37 – It’s a simple business model. If your investment absolutely 100 percent depends on appreciation
29:44 – and the valuation provided by Mr. Market, then you do not control the outcome. If your investment
29:49 – depends on cap rate compression to skyrocket the value of your property, then you do not control
29:55 – the outcome. But if your investment depends on raising rents to the market rate that already
30:02 – exists, fixing expense leakage, minimizing the expense load, tightening the operations, improving
30:09 – the NOI, the controllable NOI, now you’re in control. And when you control NOI, you control value,
30:17 – you control refinance opportunities, you control capital return timing, you control the trajectory,
30:25 – you don’t have to predict the future. Eventually, it will work out in your favor. What would
30:30 – mean when we say you don’t have to predict the future? What we mean is this. If you’re focusing on
30:35 – growing the NOI, that’s all you can do. Focus on growing the NOI and increasing the cash
30:39 – with the property throws off. You’re focusing on the playing field, right? There’s a phenomenal book
30:43 – written by and about Bill Walsh. It’s called a score takes care of itself. He was one phenomenal
30:48 – 49ers coach in the 1990s during the dynasty when they won one multiple Super Bowls. They literally
30:53 – were the worst team in the NFL. And he found a way to completely turn around that respective
30:57 – franchise to the point where they became a dynasty revered. How were they able to do it? Because
31:03 – he focused on the playing field, setting a standard, controlling what you can control. And if you do
31:10 – that, then the results take care of themselves. So how do we apply this in business?
31:16 – Instead of a real estate investment, if we get up every single day and we’re walking around and
31:19 – we’re trying to find a dollar, either by increasing the top line revenue or decreasing the expenses
31:23 – in the property, we’re throwing off more cash flow. If we can do that, we can add value to the
31:28 – property, control the NOI ourselves, control the cash flow ourselves. We know that the score
31:32 – takes care of itself. And when we say the score, we mean the value of the property. The value of the
31:36 – property is completely dependent upon the whims of Mr. Market, that is outside of your control
31:42 – in the near term. The market is a voting machine in the near term. It’ll vote up and down the price
31:49 – of various stocks and price of various properties. At one point, right around 2000, Bezos’s Amazon was
31:54 – worth a hundred cents on the dollar and a mere 12 months later, it had dropped 85% of it in value.
32:00 – It had dropped 85% in value in one year. And when Bezos looked at that, he actually was reporting
32:05 – in his annual letter that while the stock is down 85% the truth is, I’m looking at all the different
32:09 – metrics of the individual business, every single KPI that you would want to improve has been improving
32:16 – inside of the business. And so in the near term, the market is getting it wrong. It is Mr. Market
32:22 – is very manic. It’s a voting machine in the near term based on sentiment. But over the very long
32:27 – term, the market is a weighing machine. And it actually will eventually, over the very long
32:34 – term, see the merit in the actual underlying business model based on how much cash flow the deal
32:39 – throws off. And eventually, the long term value of your business will trend towards the underlying
32:45 – intrinsic value, i.e. the cash flows that your business throws off. And for this reason,
32:51 – you don’t need to worry about the whims of Mr. Market. You’re simply controlling what you can
32:54 – control. Focus on increasing NOI, focus on increasing cash flow. And when you do that, the score
33:01 – takes care of itself. And while no investment is guaranteed, at the end of the day,
33:06 – the Sunrise Capital Strategy was engineered for one thing near certainty of result. Based on
33:14 – minimizing the downside risk, planning for the inevitable black swans, buying with the margin
33:19 – of safety, implementing a very safe, predictable business model over long periods of time,
33:23 – I know with an exceedingly high assurance of outcome that in every single scenario where I make
33:29 – an investment and send an outbound dollar into the marketplace that eventually, I’m going to
33:34 – get all the chips off the table and I’m going to be playing with the house’s money. This deal was
33:38 – a grand slam. We were able to do that in a mere two years. Not every single deal is going to go
33:43 – that way. Sometimes it’s going to take a little bit longer. In scenarios where you have an
33:48 – act of God occur or you have black swan events occur or the individual underwriting
33:52 – pro forma assumptions don’t go the way that you would have otherwise planned. And many of these
33:56 – things simultaneously occur. Maybe it takes a little bit longer to get all those chips off the
34:01 – table, but because you have been exceptional about mitigating the downside risks, planning for the
34:06 – next inevitable black swan events, I have an exceedingly high likelihood assurance of outcome
34:12 – that I’m going to get all the chips off the table. In our first fund, we were able to do that in
34:15 – the first three years. And our second fund, we ended up doing it in the first four. We like to try
34:19 – to say at some point we project out somewhere between years five and seven when we could do that.
34:23 – But even if it takes longer than that, you have a litany of things go a rye in the business.
34:27 – Maybe it takes eight, nine, ten years to ultimately get all the chips off the table.
34:32 – But from our perspective, again, what’s the downside risk? Maybe it takes that long to get
34:36 – all the chips off the table. What’s happened in the interim period of time? We’ve been receiving cash
34:40 – flow every single quarter like clockwork. And I know eventually over the long term, I’ll get all
34:46 – those chips off the table. I’ll be playing with the house’s money. And then we can really begin
34:50 – building that snowball. From my perspective, it is the highest assurance of outcome possible
34:57 – when actually investing. This is how I personally invest all of my family’s money. From my perspective,
35:02 – it’s sage investment advice, the best way that I know how to do it. And that is assurance of outcome.
35:07 – And if you can virtually guarantee that you’re going to avoid losing money, it provides you the
35:12 – opportunity to think for the long term and implement the seventh pillar of the capital strategy.
35:18 – And that is L legacy built to last. This is where most investors end up breaking discipline.
35:24 – Because by the time that they’re in this respective deal, right? Typically, when you buy a deal
35:28 – like this and they’re in the third year, you bought it with a great basis. You increase the value of
35:32 – the property increases of NOIs growing 50, 60, 70%. The value of the property ended up jumping from
35:37 – $2.6 million to over $6 million. We already returned all investor capital. We distributed additional
35:42 – refinance proceeds. Most operators would simply sell because the spreadsheet tells you that you won.
35:50 – You generate an massive and turner rate of return, a beautiful windfall. You could write about it
35:55 – in the press and do all the fun things. It actually would make you feel good for about a month.
36:01 – But the spreadsheet does not understand compounding and legacy wealth. You need to think in
36:08 – generations, not in years. And when you do that, you extend your horizon long enough. You can
36:14 – realize you have multiple opportunities to have multiple bites at the apple, a second liquidity
36:20 – event, a third liquidity event, so much more opportunities there. You’re not focusing on the
36:24 – internal rate of return. You’re focusing on how much free cash flow does this business throw off
36:29 – after taxes over the next 50 years. Most people would simply lock in a big internal rate of return.
36:35 – Take a victory lap, move on to the next deal. And we’ve done that before. But here’s what experience
36:42 – teaches you. The real wealth is not created in the exit. It’s created in the hold. We never intend
36:51 – to sell this asset. We’d much prefer to hold it forever. And it’s why you hear so many different
36:57 – investors decades down the road share the age old sage wisdom that I wish I would have never sold
37:05 – that. Because they now understand that flipping deals is an inferior way to invest. You shouldn’t
37:10 – be focused on flipping deals. You should be focused on actually investing over the long term.
37:17 – You know, Charlie Munger and Warren Buffett every single year stand up in Omaha, Nebraska and
37:22 – explain some of the wisdom that they’ve learned over time. And literally decades ago, they spoke
37:28 – about the fact that they actually absolutely hate this idea and this concept about flipping deals.
37:35 – Don’t take my word for it. I want you to hear directly from Charlie Munger and Warren Buffett
37:40 – on why they believe buy and hold is superior to fix and flip. Well, the interesting thing about it
37:46 – to me is the mindset. With all of these new helpers in the world, they talk about doing deals.
37:56 – That is not the mindset at Berkshire, where we are trying to welcome partners.
38:05 – It’s a totally different mindset. The guy who’s doing a deal, he wants to do the deal and unwind the
38:14 – deal and not too far ahead and make a large profit, et cetera. And that’s not our mindset at all.
38:21 – We like the things that we can buy and that never leave us and we like the relationships that
38:28 – last and are fruitful, not just for us, but for the people working there and the customers and
38:34 – everybody else. I think our system is going to work better
38:39 – long term than flipping a lot of deals. And we have so many new deal flippers in the game
38:46 – that I think they’re going to get in one another’s way. I know that words. I don’t think there’s
38:51 – enough money out there to have all this new class make all the money they expect to make on a
38:57 – permanent basis, just flipping, flipping, flipping, flipping. I’ll make it on fees, fees, fees, fees.
39:05 – In a nutshell, that’s the sunrise capital strategy in a nutshell. We’ve in our studies
39:10 – studied the world’s greatest investors, the world’s greatest businessmen founders from centuries
39:15 – over took timeless principles that were true hundreds of years ago that are true today and are
39:20 – going to be true hundreds of years from now and implemented it into essential use real estate.
39:26 – And in this particular deal, how did it work out? Right, we bought a deal right away below market
39:31 – value. Did we generate a cash flow from day one? We controlled our destiny by increasing the NOI
39:38 – 50% within the first couple of years. We returned to 100% of capital. We generated additional
39:43 – refinance proceeds right out of the gate two years after we bought the thing. And we maintained
39:48 – a margin of safety throughout the entirety of the holding period. This is the most optimal way
39:53 – to create tax efficient wealth. And that is the capital strategy in action. And now here’s the
39:59 – question, was there any point in that process where we needed the market to cooperate perfectly?
40:06 – If cap rates never compressed, if financing had tightened along the way, if liquidity had dried up,
40:12 – would this deal still compound? Maybe we wouldn’t have been able to do it in two years,
40:18 – but it was an inevitability. It is definitely going to occur. We have an exceedingly high assurance
40:25 – of outcome. So I would implore you for the betterment of you and your family to dig into some of
40:29 – these sage investment principles. Understand the sunrise capital strategy begin to implement some
40:34 – of that in your own personal portfolio, allocate capital with that intention of mine of ultimately
40:40 – having an exceedingly high assurance of outcome. So feel free to take that and implement that
40:44 – in your own individual personal portfolio. And at the end of the day, if you want to partner with
40:47 – somebody who’s been doing it for 15 years to great effect, we’d be happy to jump on talk shop,
40:52 – have a conversation with you and your family along the way. Feel free to head to invest with sunrise.com.
40:59 – Now, in closing here, guys, most people, they chase shiny objects. We build systems.
41:06 – Most people end up selling when they win. We hold when we win because mobile home parks,
41:12 – they’re not just assets. They are durable, recession resistant income machines. When you buy
41:19 – right, when you operate right, when you refinance right, and when you hold right, infinite income,
41:26 – it is not luck. It is structure. And this deal proves it. If you found this helpful,
41:32 – obviously, feel free to subscribe. We would welcome the opportunity to serve you on an ongoing
41:36 – weekly basis, dropping more sage investment advice into your inbox once per week into perpetuity,
41:42 – right? We are so excited over here. We are just getting started. We’ve unpacked a lot over time,
41:46 – but we are just getting started and looking forward to serving you and your family for many,
41:51 – many, many, many more years as we progress. But until next time, you be great.