The Millionacres Podcast

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How do commercial real estate investors build billion-dollar portfolios? Understand the mindset shift that is required to invest like a billionaire, and the different strategies to find value and create wealth through commercial real estate.

Show Notes

Building a billion dollar portfolio takes time… a lot of time in fact. Brent Sprenkle is an expert commercial real estate broker with over 20 years of experience working with billion dollar clients. In this episode we dive into the strategies and ideas that build billion dollar portfolios. 


0:00 Introduction
1:17 Developing a billion dollar mindset
5:50 The bargain hunter real estate strategy 
7:55 The cluster strategy 
10:42 Understanding Cap Rates
14:10 Long term thinking to build a large portfolio
17:38 Don’t look at the history of the sales price
22:40 Managing your greed
26:07 Leaving upside in the deal
28:41 Deciding what renovations to pursue 
32:40 Run your business like a Honda
35:50 Bouncing back from bad deals
38:10 The #1 Billion dollar personality trait

What is The Millionacres Podcast?

Our mission at Millionacres is to educate and empower investors to make great decisions and achieve real estate investing success. We provide regular content and perspective for everyone from those just starting out to seasoned pros with decades of experience. At Millionacres, we work every day to help you demystify real estate investing and build real wealth. Millionacres is a Motley Fool Service. Learn more at www.millionacres.com

MALE_1: [MUSIC] You are listening to the Millionacres podcast. Our mission at Millionacres is to educate and empower investors to make great decisions and achieve real estate investing success. We provide regular content and perspective for everyone from those just starting out to seasoned pros with decades of experience. At Millionacres, we work every day to help you demystify real estate investing.

Deidre Woollard: Hello. I'm Deidre Woollard, an editor at Millionacres and thank you so much for tuning into the Millionacres podcast. Today's guest has book called Billion Dollar Portfolio. When I saw that title I was like, "Yes, please." Brent Sprenkle has worked as a commercial real estate broker and an investor in Los Angeles for two of the nation's top firms for Berkadia and Sperry Van Ness, and he specializes in apartment sales. He's got more than 20 years of experience and expertise in assessing his clients' real estate portfolios, managing his own portfolio with more than 350 apartment buildings sold. His sales of commercial properties have exceeded 1.2 billion. Hey, Brent.

Brent Sprenkle: Hello, how are you?

Deidre Woollard: I'm doing great. So let's get right into it, because I think one of the things I thought was great in the book about Billion Dollar Portfolio was this idea of mindset, and usually, I'm like, "Uh, mindset," because it sounds fluffy. But in the book, you have this really good example of how you didn't have a billion dollar portfolio mindset in 2020 during the pandemic, you owned an apartment building, something interesting happened. Can you share that story with us?

Brent Sprenkle: I think all of us have the unfortunate tendency to panic at difficult times in our lives. When COVID hit in March, you remember the stock market literally just dropping in half. We also have major issues with buildings that we owned. A building I bought maybe five years ago, it was one of these low-rent buildings and I got lucky with completely re-positioned into property and pretty much doubling the value of the building within about 12-18-month period. But my property manager as well as my lender convinced me to keep it and refinance the building and pull some money out and move on to another deal. Instead of just cashing out on what would have been an amazing short-term gain and doing it in an exchange and buying a larger deal, I went the easy route and just held onto it, refinanced, kept it. What happened during the recession, we had the entire property rented out to an Airbnb operator, they were basically running the property as a hotel. They ran the units for me, above-market, and then they went right back and rented then out as a hotel room. When the pandemic hit, now, a lot of trouble, and they just basically mailed the keys back. Didn't even give me notice, just said, "We're done," and that hurt. Because remember, I now had a much larger loan on the property. You tend to panic and you're like, "Oh, my gosh. Now, what do I do? I have a vacant building." Yes, there was money in the bank, there were reserves. We can weather the storm, but it didn't feel good. So the mindset really was knowing that, just like the stock market, it goes down and it will come back. These are good companies, their stock doesn't go to zero. This was good real estate, it doesn't drop to zero. Yes, it might go from being worth X to 90 percent of X, but it's going to eventually come back to what it was and maybe even drastically more. The mindset that I forced myself to have was, this is a short-term thing, this is a pandemic, this wasn't caused because there was an earthquake and it's going to take years to rebuild, this was caused because people lost their jobs, tourism was gone, and it's going to come back. Mindset is very critical to get you through these very difficult times that happen, but also not being over-leveraged in this game is very critical. On our property, despite me refinancing, I wasn't over-leveraged. It wasn't a horrible situation to have to keep a building vacant for three months.

Deidre Woollard: Interesting. I like what you said there too about short-term thinking versus long-term thinking. I think that what happens so much is appropriately loses value, panic, they sell, they forget that these markets are cyclical and what goes down is probably going to come back up. The Los Angeles, especially isn't going to lose its value over time.

Brent Sprenkle: Herd mentality. Look at the stock market, it doesn't go down a little bit. It just crashes because everyone is just pulling their money out. So you have to try to not pay attention to the masses, not follow the herd. I think as humans back to our hunter-gatherer origins, we're just used to, there's fire, everyone run, and we're used to just more biologically trained to react that way to horrible situations. That's what separates really good investors from the amateurs. I still think that I've got a long way to go and all of us do. But those are hopefully once in a generation things like COVID, and I'm hoping we don't have to live through another one of them. Although there's always a new surprise on the horizon that we don't see. No one saw that coming, no one saw 911, no one saw sub-prime, these things happen.

Deidre Woollard: Yeah, absolutely. I want to go into some of the things you talked about in the book. You just mentioned being a hunter-gatherer in real estate. There were a couple of strategies you had in the book that I thought were pretty interesting. One of them was The Bargain Hunter. The Bargain Hunter buys any property anywhere as long as it pencils out. That felt really risky to me, but it sounds like it works for some people.

Brent Sprenkle: Remember, most, if not all of these strategies are from clients of mine that have built these billion-dollar portfolios. That is what some clients of mine do. They know that apartment buildings in certain areas sell for 200,000 a unit, so they see something at 150, they jump on it. They see shopping centers that they know sell for $300 a square foot, and they see one at 200, they jump on it, they're buying an arbitrage. They're just saying, this's usually is worth X and I see one at Y, it's not going to go lower in value. It's already probably around bottom. I'm in to buy this property, try to improve it and get it up to where it should be, and either sell a property of nice profit or keep it, refinance it, and just throw it under management. That is a strategy, there's obviously downside risk to that. Properties that are cheap in comparison with others are for a reason is mismanaged, is in a challenging area, there's issues with the property. You have to really be an expert on that particular property and that particular submarket to buy in that business plan. If not, you can just get crushed, especially if it's out of town, out of state especially so many people made that mistake. They're buying in 2,000 -3,000 miles away from where they live in an area that their friends have bought and say great things, but they have no idea what they're doing. They go to that market, someone says this is a good deal, they buy it and they wind up later regretting it. As long as they are not over-leveraged, they're going to hold on and hopefully do okay. But again, bind with this strategy is little bit risky for that reason that there's a reason why the properties are cheaper than others, and you have to be very careful.

Deidre Woollard: Yeah, absolutely. Another strategy you mentioned was the cluster strategy. I think this one is one a lot of people do, you get comfortable with the neighborhood or a sector and you just stay there. My concern with that is then, it's a little bit of a lack of diversification. Is that something that you feel like it seems like a lower-risk strategy, but does it end up being higher risk in the long term?

Brent Sprenkle: This is a strategy that Bob Hart from TruAmerica shared with me and he's, by far, one of the most successful real estate investors in the country. His idea was that, and they're based out of West Los Angeles. If they're going to fly to say Florida, they're not just going to buy one building there, they're going to buy four or five buildings. They have an economy scale, they fly into town, they go see the four or five buildings, they meet with the managers, maybe they go look around at some other deals are for sale. They jump back into the plane, they're home the same day. That was his strategy. But yes, if you're buying a ton of one particular property in one particular area, you have the downside risk of recessions, political risk, economic risk. This is Los Angeles, there could be an earthquake and then you're seeing they're going now what? Rent control. Look at all the people that own apartment buildings in New York City and they passed in same rent control laws a few years ago. Those properties dropped like 40 percent overnight, and they are not yet back. So yes, there is definitely economic risk and political risks buying too much of one prior type in one particular area. That's the issue at clustering. Yes, it's very efficient, it's very logical, but you just have to be careful about where you're doing it. You have to make sure you buy in area where there's going to be appreciation or rental growing, population, job growth, all the logical things that we all know about. But this is why people buy different product type all over the country to have that diversification. But maybe pick one prototype in two or three different areas, a lot easier than picking three or four different prototypes in 10 different areas. Hard to get that economy of scale for that clustering and you're spreading yourself too thin.

Deidre Woollard: Yeah, I think that's a really good point because I feel like for investors, a lot of times, you want to keep track of what's happening in that particular area, certainly what's happening at neighborhood counsels, what's happening with zoning, all of that. That's a lot to manage if you're looking at a bunch of different areas.

Brent Sprenkle: It's a bit overwhelming, but this is why people set up corporations and they get different asset managers and different people side different tasks. But it just depends on your level of scale and what you're looking to do, and how much money you have to play with.

Deidre Woollard: Let's talk a little bit about cap rates because I feel like that's something for beginning investors. They keep hearing the phrase cap rate. They don't exactly know what it means. They don't know what the target cap rate that you should be looking for. How do you talk to your clients and to other investors about the basics of understanding cap rates?

Brent Sprenkle: Cap rate is the essential economic indicator in commercial real estate. It just purely tells you what your yield is going to be if you buy something, all cash, you buy million dollar property to five cap, no loan, you are just paying a million bucks for cash. You're getting a five percent return if it's a five cap. It's just the unlevered return. Now, there's a difference between buying a five cap with no upside and a five cap with upside. With upside, which is whatever we're looking for, you've got somewhere to grow, and you feel comfortable that you've got to grow the rents. When there is no upside, you've got to be buying that property a really great cap rate and you have to just hope that that area that you're buying in and that just the property to begin with is going to have the ability for rents to grow up. We just had a client upon ability in San Diego at apartment building. It had no upside, the owner completely maxed out the rents. But the buyer knew that this was an area that was having really great rent growth to the tune of about eight percent a year. So he knew if he bought this property even at a five cap with no upside, he was going to be able to grow the rents probably a 5.5 cap within a year, which is just amazing. All the other buyers like, "This thing is tapped out, what I'm I going to do with it?" Now, if you're buying a building at a five cap in an area where there's no rent growth, leases a good cap rate going in. But we see oftentimes the mistake that people make is not focusing on the healthy combination of current cap rate versus potential cap rate. There has got to be an opportunity for you to add value to the property. Because if you can't, you're selling it for no better than what you're buying it for. If you're buying a property at 4.5 cap, and you think you can make the property at 5.5 cap through some relatively simple rent increases, then you're going to do great long-term. You can sell it at a profit, refinance, pull some cash out and move onto the next property you have. That's really the dream of real estate is buying a property and being able to go back to the well and refinance every few years, pull a little bit of cash out in a healthy manner, and use those proceeds to go buy the next deal. That's the dream. If you're buying a property and you can never raise rents, I see these big box retailers with a zero rent escalations, and I don't quite get those, but it's a safe haven, I think, for the right groups. You're not going to be able to reposition to sell anything at a profit anytime soon. But if you're looking for yield and it's like a coupon clipper, then I guess that's where you go. But there's a healthy medium between what the current cap rate is, with the market cap rate is. I'd rather buy a 4.5 cap if I thought I can get to a 5.5 cap, than buy a five cap with no upside because at least I know I've got a fighting chance to 4.5 cap of being able to reposition it and increase the value.

Deidre Woollard: Well, I think that that also ties into that billion dollars portfolio of mindset too. I think a lot of people get hung up on one property in the one moment and what you are really encouraging here is chest not checkers, long-term thinking about refinancing what you're going to get, how it's all going to play out, and how this one decision then sets you up for the next one, which I think is what a lot of people get. They can't quite get from 1, 2, 3 properties to that larger having a real portfolio.

Brent Sprenkle: It's a different mindset. I put this also in the book. We have a lot of clients on one, two, or three buildings, now, we have clients own 20, 30, 40, 50. There's rarely people that have like five or six buildings. It's either have a couple or they have like ridiculous portfolio, and it's their mindset when you get to meet the people and you talk to them, they buy one or two or three, and became challenging, it became too much management, and it just became overwhelming and they're like, no more. The people that kept buying were the people they liked that they bought the building, they added some value, they turn it over to management, they bought the next building, fixed it off, turnover to management. It was a game for them. It was like monopoly. They just enjoyed it and they saw the path. They saw that within a very short period of time, I can go from one building to five, then I can go from 5-15, I can go from 15 -40, and they see how they can scale the business. At some point, they start bringing investors in and it just explodes from there. That's really the mindset that people have these massive portfolios. Everyone starts out with like a little building for the most part, and then they buy a bigger building, and it's incredible that doesn't take long for there's a snowball. But of course, there is economic issues, in the middle, there's a recession, there's other things that happen, health issues, family issues, and it's hard to get through that. But the people that enjoy it and find it to be fulfilling, a metal challenging, like a game forum almost to say, those are the people that thrive and have huge portfolios. They just enjoy it. They enjoy the thrill of the next property they're going to buy. They get a kick out of that. It's like a rush for them. It's like great golf shot, like wow, I did that. I pulled it off. Amazing. It's a feeling that I get. When you talk to people after they bought deals, they have these great stories, and if they brag about it, they feel really great about it. People who really talk as much about selling properties, they seem to like buying that more than selling.

Deidre Woollard: I would be with that from a stock and real estate investing perspective, I love that. The process of the research, "Do I like this company? Do I like the management?" I get very into that part. But the one I have to sell it part, I think I have to sell it. That's not the romance. The romance is in the considering whether or not that property or that investment is right for you. That's the fun part for me at least.

Brent Sprenkle: There's no pride of ownership with stocks. [laughs]

Deidre Woollard: Well, there's still pride of ownership with stocks.

Brent Sprenkle: Maybe if you buy stock for 10 bucks, you sell for 15, you feel pretty good. But the people who buy real estate, they're oftentimes going to keep it for 5, 10, 20 years generational, who knows? It's the acquisition that really gets these people excited like, "Well, I just bought an amazing deal. I feel I can do really well in the long term. I got a great loan on it." That's a real sensation. Sure, there's people are like, "I bought a deal for a million bucks and sold a year later for 1,600, pulled out 450,000 net." That's a big rush. But more these people get excited, they just closed on a great purchase. That's a feeling I'd be great to have more often than not that, after a while, you run out of money. [laughs]

Deidre Woollard: Good point. Another thing that you said in the book that I thought was really interesting is, you don't look at the history of what a property sold for. I think that is fascinating because I think everyone, what if you're buying a house, if you're buying and investment. Everybody looks, especially now with things like Zillow. Everybody looks, "Okay, they bought it for this." Then and they get all wound up in that. It reminds me of that idea of not looking backward because that's not where you're going. You obviously think this is a bad idea, why is it such a bad idea?

Brent Sprenkle: If you're looking at buying a building for let's say five million dollars, and the prior owner bought it for a million. You're negotiating over 25 or 50 grand. Oftentimes, you're like, "This guy is just a greedy pig. He bought this thing for a million bucks and he is being greedy over 40 grand?" That's not a good mindset to have. It's, who cares what you paid for or she paid for? It's irrelevant. That's the first thing. You want to keep agreed aspect down about the seller's profit. The second thing is how irrelevant it is? What if the property the person bought it for a million dollars was burned down? What if it just had an earthquake? What if it was 50 years ago? What if there's another story behind it? It is irrelevant to what is worth now. The second thing is stocks. I mean, look at what Amazon stock was a bit ago. Look what Bitcoin was not that long ago. Sure, real estate has a real value and Bitcoin, no offense to those who invest in it, who knows what it's really worth like Tesla stock? Sky's the limit, right? But if a property is worth a million and it goes to two million and goes to three million, as long as it's going up for logical reasons, the rents are going up along with it, and the net income is going up, and you see a path that it's going to continue, the net property could double in value every 5-10 years. You know what that does to your net worth, and the cash you can pull out on a refinance or sale. Oftentimes, if you see a building was worth a million dollars 10 years ago and elsewhere four, that's a good chance it could be worth eight in another five years. Maybe it's a good thing. But it can lead people to think, "Oh my God, I'm over paying this property because the same is worth a third of this not that long ago." You need to look at what it's worth today, in comparison to other properties are for sale. What other properties have recently sold for? You need to think to yourself, "How can I reposition this property to take it from three million to five? If I sold it five million, how can I go buy property for eight million to get it to 12?" That's a billion-dollar mindset.

Deidre Woollard: All right, I love that. Let's take a quick break. here.

MALE_1: You like what you are hearing? Get more real estate investing news and advice for a Millionacres on Instagram @Millionacres, and on Twitter @millionacres_co.

Deidre Woollard: During our break today, we are excited to have Millionacres lead investment analyst, Matt Argersinger here to speak briefly about one of our newest services, Real Estate Winners. Thank you for joining us, Matt.

Matt Argersinger: Thanks for having me.

Deidre Woollard: So what is Real Estate Winners and who is it for?

Matt Argersinger: Well, I like to think of Real Estate Winners as our answer to Stock Advisor in the real estate market. It is a service that provides recommendations on publicly traded REIT real estate investment trusts and real estate companies. It's a pretty big universe out there. There is over 200 REITs to choose from, and probably dozens, if not hundreds of real estate companies are in our universe. We provide regular investment recommendations as well as commentary on the market, education material, and it's really designed to get anyone who's interested in investing and learning about real estate started.

Deidre Woollard: So is it geared towards new investors or is it more for seasoned pros?

Matt Argersinger: I think Real Estate Winners can serve both. I think if you're a investor, maybe you're just getting started with stocks and you want to learn more about how to add real estate to your portfolio. Great place to start. If you're a seasoned investor, and just thinking, "Okay, how can I diversify my portfolio, maybe reduce the volatility of my portfolio, maybe add some income to my portfolio" I think Real Estate Winners a great solution for that cohort as well.

Deidre Woollard: Fantastic. What are the benefits of being a member of Real Estate Winners?

Matt Argersinger: Number one benefit is, Day 1 when you join, you get our top 10 investment ideas at the moment. Really right from the beginning, you know what our 10 best ideas in the publicly traded real estate market are. Then going forward on a monthly basis, you will get a new recommendation, sometimes more than one new recommendation. As well as regular content that we're coming out. We're covering our past recommendations, providing updates, and talking about the real estate market. It's really the full package.

Deidre Woollard: Perfect. What do you need to get started?

Matt Argersinger: Really all you need is a discount brokerage account. So if you are used to buying stocks, and you already probably have that. If you haven't bought stocks in the past, of course, just open a discount brokerage account. These days, you don't even have to pay commissions, it's fantastic. It's really couldn't be easier to get started investing with Real Estate Winners.

Deidre Woollard: Sounds fantastic, so how can people sign up?

Matt Argersinger: Sure, they can head over to real.fool.com. That's R-E-A-L.fool.com.

Deidre Woollard: Great. Thank you so much, Matt. [MUSIC] All right, I'm back with Brent Sprenkle, and we are talking about how to build your billion-dollar portfolio. So before the break, you mentioned something, you mentioned greed. This came up in your book a lot and I thought it was really interesting. You talked about managing your greed. I feel right now, people are so focused on highest-value for the property. Really, it's hard to not let your greed get out of control because it's part of your excitement. But why do you need to manage your own greed?

Brent Sprenkle: You'll never be able to transact if you're constantly focused on getting the last dollar. A client of mine, Andrew Tavakoli taught me that expression, "Manage your greed." I was always fascinated with it. Because at first, when he told me that, I was offended like, "You called me greedy?" It's like an offensive term, right? He was like, "No, hold on. Greed is when you buy a building for five million, and three years later, it's worth 10. You have an offer for 10 million and you're like, 'No, I'm going to keep it because I think I can make it worth 11 million in six months.' That's being greedy." I said, "Wait, Andrew, how do you stop that?" He said, "You need to have a business plan." Especially if you're buying property with investors, you may say, "We're buying this property for five million, we're going to sell the property when we can get the value to between eight and nine million net. Here's how we're going to do it, and here's approximately how long it's going to take, and how much we're going to spend on it. If you get the property from five million to eight million in 3, 4, 5 years, everyone's thrilled. If we get to 10, everyone's jumping up and down and you're probably get a bonus if you want to put that deal together. But if you get the property from five million to 10 and you don't sell it, well, what if it drops down to six the next time there's a recession. Then you're really kicking yourself. You could have cashed out and moved on to the next deal. Because for you to take a property from five million to eight million, you probably squeezed most of that juice out of that lemon. There's not much upside left. You need to sell and move on. Now, if you own a property yourself like that little building that I have in Hollywood that I did the Airbnb thing on. No one is going to be mad at you if the property goes from one million to two million and drops back down to one if there's a recession. But if you buy the building with investors, you have to make sure everyone's core business strategy is in writing about what you're buying the property for, what you're going to sell it for? You're managing everyone's expectations, which is the same as what their greed level is going to be and they know what the plan is. Managing your greed is just your way of making sure you execute on what you do. It's no different from what people do with their stockbrokers. They tell them, 'We're going to buy the stock for $10. When it gets to 13, sell it." There's no emotion. It's automatic, they just do it. Goes into an algorithm in their computer. They only will have to push a button. But real estate, the tendency is to say, "I can keep doing it, because there's another unit that has rent below market. I can add another amenity. There's a rent renewal coming up." It never ends and those are little things that don't affect the value that much. Maybe they take it from 10 million to 10.1 million to 10.2 million, depend on a lot of work and you don't gain that much from it. You better off selling and moving onto the next deal. That's how you build your billion-dollars portfolio.

Deidre Woollard: Well, that relates to another concept that you talked about in the book that I really liked and I thought was a little bit different than what I've heard from other people, which is the idea of leaving meat on the bone for the next buyer, which is when you had that rent renewal, you don't renovate every single unit. You don't bring the building to absolute perfection. I thought that was really interesting because a lot of owners, they want to make the building absolutely perfect because they feel they can get the highest price. This strategy is interesting to me, how does it work exactly?

Brent Sprenkle: Commercial real estate is different than buying a new car or a new house. On a new car, you expect in perfection, new house, same thing. Everybody wants to add value on a commercial real estate investment. They want to look at a property and go, "If I paint a building, I bet I can get a higher rent. If I landscape it, I bet I can get higher rent. If I make some cosmetic improvements to some units or vacancies, I bet I'll get a higher rent." They want to feel they're smarter than the previous owner. Then will say, "That last guy was lazy and I'm going to take advantage of that because I feel if I do X, Y, and Z, I can raise rents 150 bucks a month on all these units." If you are the one that makes your building like a brand new car, you'll leave no room for the new owner to do anything. They are looking and be, "What am I going to possibly do with this property?" They go to every unit, they hired a designer and it's a brand new building, but it's 60 years old. What am I going to possibly do, and what's going to happen in 2 or 3 years and all these cosmetic upgrades fade, and the units aren't brand-new and hip and the facade, the paint on, the landscaping outlook isn't good anymore. It's going to be worth less. Everybody wants to feel they can add some value to a property to push rents higher. You need to give them that dream, that meat on the bone, that they can do it. Sometimes, if people are selling a 100-unit apartment building, they do an amazing job on 70 units though. Renovate the units and get high rents. Then they'll dangle that carrot in front of the buyer, "Hey, these 30 units we haven't touched. If you go in and renovate those 30 units, you can do much better." Reality is, these 30 other units, it's going to be a lot of money to renovate those things as time. That's why people do 2/3 of the work, they leave some meat on the bone, they sell the property. Everybody's happy. Buyers either feel they have an opportunity and they are getting the "Good deal" for you to have a happy transaction.

Deidre Woollard: That makes sense. Let's talk a little bit about renovation because there's a lot of that you discussed in the book about the unseen things, fixing roofs, plumbing, electrical, that kind of stuff, versus fixing the aesthetic things. Replacing counter-tops, doing paint, landscaping. How do you decide which of those things to do first?

Brent Sprenkle: Everyone has a different business strategy. A client, he does all of mechanicals immediately. If the roof is somewhat older, he will put a brand-new roof on it. The plumbing looks suspect, he'll just re-plumb the building. He just once to get it over with. Because he knows it's faster and cheaper to do it all once than to do a piecemeal. Everyone who has ever owned an apartment knows, once your plumb is bad, you could spend 100 grand redoing the plumbing here and there, as opposed to spending 40 grand just gutting it all once. Age strategy is getting over with, it's cheaper and then you can move on to other big-picture things. Now, I have other clients. They buy buildings, they do nothing in mechanical. They just make the building look as pretty as they can. That's what we call putting lipstick on a pig, might not be the nicest expression. But from the outside, it looks great, paint, aesthetics, landscaping. They take half the units and they make them amazing. They get high rents and then they sell. The buyer comes in, whoa, we got plumbing issues, we get roof issues, we get other problems, maybe as a small credit. But the guy is selling the property. Aim's strategy is used by enabling to keep it for a long time, so he wants to make sure everything is great. The other guys, and I won't name names, they are buying the building into churn and burn it. You have to be really careful about who you are buying from. If you're buying a property from somebody who you find out, just want to do for a living, they're flippers of commercial real estate. You probably know that they probably haven't done much on the mechanicals because you don't get if you spend 100 grand redoing the plumbing, a buyer is not going to pay an extra $100,000 for. They expect the plumbing to be great. They are not going to pay you 30 grand because you just spend 30 grand on new roof. They expect a roof to be good. These are long-term items that you're doing to save money for yourself for the course of 10 years. If you're buying a building to get out of it in a year or two, you're probably just going to fix the glaring items, which is the leaky sewer line, low water pressure in a couple of units factored, half the windows don't operate, and some of the ACs are dead, because you can't get good rents with those. You can't get good tenants and can't get good rents and that's the issue. Certain people do absolutely nothing but they know if there is no water pressure, they're going to have issues renting their units. So they take care of the essential items so they can lease the units, and then they can sell for a profit and move on. The buyer will have to deal with those upgrades later. But that's why people do inspection.

Deidre Woollard: [laughs] Good point. What I think the other reason I like that strategy too, is you mentioned earlier the newness aspect on renovations in individual units, or even changing the color of the building, that fades out pretty fast. Whereas dealing with the deferred maintenance, first, you get that stuff done. Those things, I think, in general, once you replace roof, you're not going to need to do it next year. It seems if you are holding it for any length of time, that makes a lot of sense.

Brent Sprenkle: They also have an issue these days with insurance companies. Insurance companies want to make sure that all the major systems have been upgraded within 30 years. If you haven't touched plumbing or electrical or roof in a while, your insurance rate could be literally doubled what you'd like it to be. If it goes from five grand to 10, you're blowing $5,000 with nothing to show for it, every year, over the course of five years, is 25 grand. That $25,000 would have gone a long way towards some good upgrades.

Deidre Woollard: I think that's really smart. That reminds me of my favorite quote in the book which was from Keith Wasserman about running your business like a Honda. I like that analogy because I think all of us know the Honda brand and that idea of cars that just run forever. What does that analogy mean to you?

Brent Sprenkle: Lean and mean what Keith was referring to is run the property as efficiently as you can. Don't spend money on things where you don't get a yield from it. Like painting the back of the building that no one ever goes there besides the utility person. Don't spend extra money on things that you're not going to have anything to show for. Over management, things of that nature. If you're running a Ritz-Carlton, sure, everything has got to be perfect. But you are running industrial building, a shopping center, an apartment building, there are certain things you spend your money on, there are certain things that you don't. Run like a Honda just means model of efficiency. You spend your money where you need to, you try to keep your expenses low, and you try to just maximize what you have and eliminate expenses that aren't going to get you anywhere. We're not talking about not taking care of deferred maintenance, that we're saying take care of what we have to in the most efficient manner. A lot of people say they are going to do that. They make the efforts and then they just turn it over to management, and then they will think about it, and then five years later they find out that the management company has been having trash taken out five times a week or could've been done twice and they just blew five grand a year on extra trash removal. You have to be very cognizant of all your overhead and where you're spending your money.

Deidre Woollard: Well, that was another thing that you mentioned in the book that I thought was interesting was, and this is going to sound really cynical. But that idea that you're probably going to get taken at some point, a little bit by some property managers something. That there's probably something that's going to happen and it's just a fact of being in the game.

Brent Sprenkle: It's not necessarily the property management company, but it's a vendor, their employees, it's anybody. The people see an opportunity to take advantage of a situation. Oftentimes, it can't help themselves. Lots of people get their laundry money stolen by the person who's supposed to be taking it out. We've seen situations where people have just been fight out, overbuild by a vendor who just pockets some money. That's the challenge, it's the little things. The big things people pay attention to as $10,000 apartment building, they want to pay attention to it. But the $200 monthly recurring charge, people just don't even look at it. It could turn out that it's not really even happening. I had a situation myself where I was paying for cleaning. Supposedly, there was a situation where there was trash going up in front of our property. We had to have someone come by three times a week to take the trash out. I won't buy it. There was trash everywhere. How am I paying three times a week for this? It turned out, I was just getting robbed. The property manager was just taking advantage of that, knew I didn't ever go into building, and most to say I don't use him anymore. But you have to be careful with what is going on in your buildings. Was it, well, Reagan said, "Trust, but verify" or something like that, you have to do that. You have to be cognizant but you have to check things out.

Deidre Woollard: Absolutely. At The Motley Fool, we know all of our stock investments aren't going to be winners. You've mentioned in the book the same thing happens in real estate. There's good deals, there's bad deals, but there's also a lot of deals that are in the middle. How do you bounce back from the not great deal?

Brent Sprenkle: The people that don't do well real estate are the people that are just only focused on buying with leverage. Thank the Lord, we don't see much of that anymore. But 10-15 years ago, back in the subprime days, people getting 97 percent loans, those are the people just got wiped out. You are going to buy something, it's going to happen, that's not going to do particularly well. You're going to buy a building for two million dollars in three-years later, it's worth two million dollars or 1.8 or 1.9. You really have two choices, see if you can do something to improve the value of the building or just get out of it. You have to take really an educator's approach, talk to people, talk to real estate brokers, talk to the property managers, and see what your options are. But if you don't think you can improve the value of the building, probably get out of it. That's what people do in the stock market. They buy stock for 10 bucks, it goes down to nine, they think there's no chance of coming back, oh, guess what? They need a write-off for all the other stocks that did incredibly well. Sell that property. You only need to have two in exchange, take the money, go buy another deal. Some people refuse to sell at a loss. At my opinion, it's foolish, because that property might not ever do well and then they're stuck with this dog for the rest of their life where they could reposition it by selling the property, take the money, buy another deal that might do amazingly well. They bought a property for a million bucks, doesn't do well, they sell for 900,000, but they go buy another building for a million dollars and it's worth three million a couple of years later. That's the person who's going to eventually have that billion-dollar portfolio, that's the right mindset.

Deidre Woollard: There's some costs fallacy that gets people all the time.

Brent Sprenkle: Not everyone is going to be amazing, especially if it's commercial properties. We've seen what's happened with retail, not easy. Rents simply don't stay down for long, commercials are different deal, office, retail, shopping centers, I mean, those sometimes go down and don't come back up for a while. That's why you really have to be careful with what you're buying.

Deidre Woollard: Absolutely. Last question for you. Obviously, you have these high profile clients that have billion-dollar portfolios. What's the one personality trait you think is most likely to indicate success for anyone who wants to replicate that and get their own billion-dollar portfolio?

Brent Sprenkle: They all have tenacity that's beyond even my ability to explain it. They just don't give up, they buy a deal and it doesn't work out, and they fixed like we just talked about, they sell at a loss, move on, next deal. They don't get caught up in the mistakes they made. They are just willing to keep trying and keep buying and keep looking and keep digging. They are aggressive but not in the same ways, sometimes, people think negatively about aggressive people. I hate to use this expression, they're deal junkies, they just get a kick out of it. They get a kick out of finding the next deal, buying it. It's a rush to them. That is the type of person who winds up very successful in anything that they do. A bit lastly, most importantly, they enjoy it. If they don't enjoy looking at commercial real estate, talking to brokers, driving real estate, they should go find something else to do. If you didn't play Monopoly when you were a kid, this isn't for you because this is a different version of Monopoly, you're spending real money. I have a friend named Kenny who did incredibly well commercial real estate. But then just got really exhausted with dealing with tenants and with the city, all sorts of headaches, he is working his way out of the business. He just never had passion for it. But he saw that prices were really amazingly rock-bottom low back in the '90s, and he took advantage of that. But the people are getting in the business now, prices are not an all-time low. They are an all-time high. These people must really feel passionate about wanting to be in this business and feel there is a way they can grow it and succeed and do well. Which is a different mentality than a person who's getting in the, hate to says this again, Bitcoin in crypto, who expect to make a super quick buck. This is a long-term business. This is not an overnight deal. You're not going to get rich quick in real estate, but you are going to grow an amazing long-term business legacy for your family. There's a lot of amazing things at our commercial real estate, but getting there is much longer and more painful, and cash is obviously key, your ability to have the money to buy your next deal is so important. But I don't know if I probably answered your question to one characteristic is definitely tenacity, but there are so many others that go into it. It's like asking the one characteristic of an amazing athlete. A lot of it is just various different things, I mean, everyone has their thing that makes them successful, but the people that just stick with it are the people that always do well.

Deidre Woollard: I think that's perfect. I think that's a great place to end things because yeah, tenacity. Athletes, hey, look at someone like Chris Paul in the NBA playoffs, it took him what? Sixteen years to get there. Tenacity, it can be a beautiful thing.

Brent Sprenkle: Yeah. Of course, they also probably really enjoy playing basketball. [laughs] This is like to do something eight hours a day, you better enjoy. I used to be an engineer and I hated it. Because I was like, I'm never going to be successful engineer because I don't like what I'm doing. I'm never going to be good at this and do well financially because I don't have any passion for this and I don't enjoy it. There's no challenge. The people that do well in commercial real estate are always looking for that next challenge. They get a rush out of finding the next deal. That to them is like opening a Christmas presents. It's just like, "Well, what's in this box? What I'm I going to find?" It's just a different mindset.

Deidre Woollard: [MUSIC] I love that. Thank you so much for your time. A reminder to listeners, the book is Billion Dollar Portfolio. Check it out, it's awesome. Remember, you can always email us at media@millionacres.com to share your thoughts. Stay well, and stay invested.

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