We may admire them, or we even want to be them, but we don’t understand how they do it. How do commercial real estate investors create portfolios worth billions? Well, in the new book, Billion Dollar Portfolio, Brent Sprenkle shows you how to purchase multiple investment properties and maximize your growth by leveraging your resources. Even the ones you didn’t know you had.
You’ll learn how to find the right properties, how to finance and reposition them, increase their value, and even sell or refinance them for a profit. But you don’t have to take it from him. With the stories of Brent’s most successful investors, you’ll see how you too can endure the ups and downs of the business to ultimately build your own billion-dollar portfolio, no matter where you started from.
In today’s podcast, Brent shares with us how anyone can get into commercial real estate, not just those with a lot of money, how he did it himself, the difference between caution and fear, and so much more. So, without further ado, please enjoy this engaging conversation with Brent Sprenkle.
Miles Rote: Hey everyone, my name is Miles Rote and I’m excited to be here today with Brent Sprenkle, author of Billion Dollar Portfolio: How to Create a Real Estate Empire. Brent, I’m excited you’re here. Welcome to the Author Hour podcast.
Brent Sprenkle: Thanks Miles, looking forward to this.
Miles Rote: Yeah, so, let’s kick this off by sharing with everyone a little bit about you and your background, and how you got into real estate in the first place?
Brent Sprenkle: Well, this is going back about 25 years. When I got out of college, I have a degree in mechanical engineering, so I got hired by Hughes Aircraft to work on Direct TV satellites out here in El Segundo, California. It turned out, I was not a very good engineer. I quickly just lost interest in it and it just really wasn’t for me.
I transferred a few different times into different divisions at the company and I wound up working on the side that was working on military projects, and I needed to get a government clearance to work on this specific project that I was on. I couldn’t get a clearance because my stepfather at the time was an Irish citizen, so I wound up getting laid off. I was really upset about the whole process that I’d just lost a job because my stepdad was Irish, what a random thing, right?
So, I decided I don’t ever want to be an employee again, and what can I do where I can make some money, and call my own shots, and be my own boss? But at the same time, I’m young, I have no experience, I have no money, “What can I do?” A friend of mine who, at a very early age, bought several apartment buildings, just said, “You should go become a broker.”
I just said, “But what’s the process?” He’s like, “It’s super easy, you get a real estate license, which is about as difficult as getting a driver’s license, and you work for a real estate brokerage company. The guys I’ve worked with, a lot of them are idiots and they make amazing money. I’m sure you’re going to do amazing.”
So, with that, I opened up the LA Times and saw real estate brokerage companies that specialized in commercial real estate that were hiring. No experience necessary, you needed a car, you needed a computer, and you needed to be able to get a real estate license, which means, pretty much, you just had to be able to answer some very easy questions.
With that, I dove right in, got my real estate license, and picked up the phone, started calling apartment building owners in Los Angeles, and tried putting deals together. As simple as that.
Starting with a Question
Miles Rote: As simple as that. Well yeah, going from slinging deals with your laptop to now, writing a book called The Billion Dollar Portfolio, I’d say that’s quite the road there that you traveled. So, tell us a little bit about what inspired you to write the book in the first place? So that’s quite the journey going from Hughes to having a billion-dollar portfolio. What was the inspiration for wanting to share this book with others?
Brent Sprenkle: Well, what I noticed was, clients of mine, they either owned two or three apartment buildings, or they owned 20, or they owned hundreds of buildings, and I was always curious about why some people own just a few, and some owned more than they can count? They can’t even remember the buildings they own.
That I found interesting. How did they go from two to 200, how did they do it? And then lastly, I was curious about how these people got started. Now, there’s plenty of people out there, unfortunately, I’m not one of them, that came from money, either their parents were wealthy and their parents already owned commercial real estate, and they just simply grew the family’s holdings. They grew their portfolio.
However, I noticed that I would say, my most successful clients were true rags to riches stories. They were people that came from nothing. They either had middle-class parents or they were immigrants, and they arrived here with just the shoes on their feet and now, they own immense holdings of commercial real estate throughout the country.
That fascinated me. How do some people do absolutely nothing, buy a couple of buildings and that’s it, and some people acquire vast holdings worth billions of dollars? That inspired me to ask them a lot of questions, and really get to know them. Some people were super excited to share and they said, “This has been a gift that I’ve been given, and I want to share it with others.” Because, “You can take a horse to water but you can’t make it drink,” is the old expression.
It’s so simple to tell people what you need to do but it takes a lot of risk. First thing, it does take money, and you have to start small and work your way up.
The second thing is, a lot of people think that their ability to take risks when they get older diminishes. They get into a kind of a comfort zone and they’re afraid to take risks. So, the people that were the most successful took risks, but they were very calculated, and they’ve really mitigated their downside.
They said, “What’s the worst-case scenario that I’m going to get myself into? Is the building going to be vacant? Am I going to have a problem paying the loan? Am I going to have a hard time renting units?” If they were comfortable with their ability to keep a commercial building full, they were comfortable buying it, and then they try to renovate it, try to raise rents, try to refinance it, or sell it, and just move on to the next.
There are clients I have that just refuse to sell buildings. They never sell, and there are clients that constantly sell. So, all of these different things that people did, I found to be very interesting and I said, “You know what? For my own purposes,” because I also like investing, “I want to find out how these people did it. What inspired them? What are their best practices and how did they go from A to Z and what did they do in the middle? How did they get to where they are now?”
Because, you know, everybody wants to be–at least I assume that people that are going to be interested in reading this book, everybody wants to be a real estate mogul and own huge amounts of office buildings, shopping centers, apartment buildings. But how do people get there?
What I didn’t want to do is write a book about how to turn $5 into owning a couple of buildings. That’s been written before and 99% of the practices, or their suggestions, they don’t work anymore. That game has been played. So, I wanted to write a book that was from people that maybe own a couple of rental houses or maybe they own a small apartment building and they want to see how they could grow their business, how they could scale it, how they could go from owning a couple of small buildings to some larger buildings.
I wanted to write a book that would be not just appealing to the people who wanted to own a couple of billion dollars’ worth of real estate, but people that just had some interest in growing. Answering how do people go from owning a couple of buildings to maybe a dozen buildings?
That was another thing that I wanted to accomplish, and I have all these clients I’ve met over the last 20 years. All of them have had different stories and have had successes, and a lot of them have had amazing failures as well.
The downturns are always challenging for people, but overall, there are some great stories that people have, and I wanted to memorialize that and be able to, most importantly, to share those stories with other people, because I thought the information was extremely valuable.
Miles Rote: Yeah, and one of the best things about your book is the fact that you bring all those people in and interview them. So, you get the perspectives from all these different people who did it in their different ways and have different perspectives on it. So, it’s not just you being the authority on this subject, which of course, you are, but also, having readers be able to relate to all these different perspectives on it as well.
Brent Sprenkle: Correct. One of the big things I wanted to do is I really wanted to interview people that started with nothing. Because, as a reader, as an investor, I want to hear about the people just like me. The people who started out with a job, they were an engineer, they were a school teacher, they were a doctor, they were an attorney. They didn’t start out in a real estate family, they didn’t start out with family wealth, but they had the desire to get into this business and they wanted to see how they could grow it.
Those are the people that were truly, for me at least, inspirational and that really is the source of what made me want to write this book. How do those people go from owning absolutely no real estate to owning dozens and dozens and dozens of commercial properties?
Miles Rote: I love that, and one thing you do make clear in your book, which you’ve already mentioned on this podcast, is that this is not an overnight, get rich quick scheme. As you said, a lot of those things are false, where the game has already been played.
Another thing that you really touched on, which I loved, was the difference between caution and fear and really walking that line. You were saying earlier, how certain people and investors, have fear when they get older and maybe they don’t take as much risk, and then, of course, it’s important to have caution. What does that look like–the difference between caution and fear and how important is that when it comes to investing in general?
Brent Sprenkle: So, fear is just people listening to the news and hearing, “Oh my god, the economy’s doing poorly. Oh my god, coronavirus. There’s going to be lots of more people losing their jobs.” That’s fear.
Caution is looking at data and seeing trends, seeing that vacancies are climbing. You know, one particular sub-market was at 3% on vacancies, and now, all of a sudden is at 6%. That’s caution, that’s you saying, “Jeez, something’s going on here. I need to be very careful when I’m buying buildings that I’m underwriting.”
You still purchase but you now factor in, “Hey, the building is not going to be full, I’m going to have vacant apartments, I’m going to have vacant commercial space.” You know, “Do I need to adjust the price?”
Everybody is bullish on buying when things are headed up. You know that old expression, “It’s time to sell when your taxi driver tells you it’s time to invest.” It’s the same thing with commercial real estate but the fear part is people listening to the news and getting caught up in the mania. Caution is saying, “There’s a problem in the economy. I still want to be an investor. How do I make sure that I’m not doing something foolish?”
This is happening right now. COVID is decimating commercial real estate in the sense that buildings are becoming vacant–office buildings, shopping centers, massive issues with vacancies, and leasing. Apartment buildings as well, we have a ton of people here in California that aren’t paying rent, they still have a job, they’re just not paying rent because the state won’t allow them to do it, which is just absolutely crazy.
So, how do you adjust? You have to keep investing, but you make sure that you’re factoring that in. That you might have three to six months where you might not have enough money coming in to pay your mortgage. Or you just have to say, “I can’t pay the price I would have paid six months ago because of what is happening to the operations for commercial real estate in this particular area.”
Fear is saying, “I’m not buying because I’m scared.” Caution is, “I still want to buy, I’m a little bit nervous and I’m adjusting my model, probably the price I’m willing to pay, to account for what’s happening in the world right now.”
Miles Rote: Yeah, that makes total sense, and it sounds like what you’re also alluding to, which you definitely touch on in the book, is really thinking long-term and not necessarily the short-term when it comes to these things. As humans, we often can find ourselves really trapped in that short-term thinking and it’s a lot harder to think long-term. But what are the benefits when you are able to zoom out and think more long term?
Brent Sprenkle: Well, you have to think of scale. If you’re buying commercial real estate, it’s not something, like, with stocks, people could own a stock for a matter of minutes, sell it, and make a profit. Commercial real estate is very expensive to purchase, it takes months, escrow, with getting a loan, and then, when you sell the property, it’s expensive to sell. There are commissions to pay, there’s taxes, transfer taxes, state taxes, federal taxes, capital gains, of course, I’m referring to.
It’s not cheap to sell commercial real estate. So, you have to have a very long-term plan. The business model should either be, you’re going to buy a building, reposition it, sell the property, and do what we call a 1031 exchange, which we reference in the book, where you buy another kind of property and defer your taxes. Or you just refinance, pull cash out of the refinance, which allows you to go out and make another investment. That really needs to be the business plan here. The people that just have this idea about coming in, buying some buildings, and sell it, and making a buck, that never works out.
It’s like the turtle and the hare, right? The turtle would be the investor that once a year, they buy a building, or maybe two or three times a year, they buy buildings. The hare comes in and he buys 10 buildings, and we get this all the time. We get people from out of state or out of town, they come to Los Angeles and they buy a dozen buildings in the year, and they’re almost always coming into a market that’s overheated at the very end of the cycle. They buy 10, 12 buildings and they never buy a thing again. They sell, they didn’t make much money, and they move on.
It’s that slow process of buying a couple of buildings a year, those people are amazingly successful. Those are the people that own hundreds of buildings because, every year, they bought two, three, four, five and they make them work. You don’t have to buy the greatest deals, you just have to keep buying deals. Stop being interested in the best deal and saying, “You know, I don’t want to buy unless I’m getting a steal”. Well, guess what that leads to? That leads to you never buying a building. You’re not going to find deals, especially if you’re a beginner. You’re not.
Look for the Singles and Doubles
Miles Rote: Right.
Brent Sprenkle: We use baseball expressions, “singles, doubles, triples, home runs.” You know, the home runs, someone else gets them. You read about them in the paper, you see them on the internet about some transaction that went down and you’re like, “Why didn’t I get deals like that? Why don’t I see deals like that? What do I have to do to get into that group of people that gets those deals?”
Well, you don’t have to be successful. You can be successful not getting those deals, you can be successful in buying singles and doubles. The most successful people I’ve seen in this business have bought singles and doubles. They’ve never bought amazing deals, but they bought well-located properties that had long term growth, and those are the people that always come out ahead.
Miles Rote: Yeah, to continue the baseball analogy, they’re hitting singles and doubles but then the next single and double they hit, that brings the runners home that was on base too, you know? Because as you mentioned, there are different strategies, like you find that single, you find that double and then you refinance, you’re able to pull that cash out, invest again, and you can hit another single or double.
Brent Sprenkle: Well, these people are also not taking a lot of risk by doing that. Typically, a single or a double doesn’t have that much downside risk, that’s why it’s a single or a double. The home run oftentimes is the deal that has a ton of downside potential.
It was a home run because the building was vacant, but the guy that bought it found a way to quickly lease it. That’s why it was so cheap. But, for every home run, there is a failure and, unlike stocks, you buy a piece of commercial real estate, you can’t sell it for zero. You’ve got a loan on it, you’ve got a lender coming to you, you probably have investors.
You have to be very careful about what you buy because, if the deal goes south, there’s a lot of repercussions. Stocks, bonds, unless you’re buying leverage, you can buy something for $30 a share and it goes to zero and you just made a bad investment. You buy an office building for $10 million with a $6 million-dollar loan, you get foreclosed on, they’re coming after your credit, they’re coming after whatever savings you have in a bank. There is recourse, they’re coming after you.
So, you have to be careful, you have to make calculated decisions, you’ve got to mitigate your risk, and really look at your downside. Everyone focuses on their upside, a lot of comments I have in the book are about how everyone is looking at rent growth. Very few people look at what happens when the economy goes down as it has now. “Where could my rents go? Will the building still be able to pay the monthly loan? Will I still have enough money to pay property taxes? How am I going to be able to make distributions to my investors if the economy goes down?”
So, the people that think about that when they’re buying always do well. The people that just assume everything’s going to go like it is now, like 2019, those are the people that make mistakes because of 2020, it happens. No one saw 9/11, no one saw the sub-prime market crashing, no one saw COVID. These are all things that come completely out of the blue and we’re all sitting there going, “Oh my god, what just happened?” The smart investors who always do well long term are the people that buy consistently, they buy good deals, they rarely get amazing deals.
They don’t sell very often, and they do a very, very thorough job with the assumptions they make for when they’re purchasing, and they make sure that they’re covering not only their upside but their downside exposure.
Miles Rote: Yeah, it’s so important, especially when first starting out. Not swinging for the fences but really, you know, trying to hit those singles and doubles. There’s a quote from your friend in the book that goes, “You have to work really hard to find an easy deal.” It’s one of those things that it sounds like, speaking with you, if an easy deal or that home run comes along, you wouldn’t even know it until later on, until you had done this long enough that you could even identify that opportunity in the first place.
Brent Sprenkle: Well, the other thing that always makes me laugh is reasonably priced properties that are on the market. They get passed up by dozens and dozens and dozens of investors. On my own, the buildings I bought, I wasn’t the only one that saw those deals. Everybody in town had seen those properties. I was probably the last person on the list to see that but I looked at it and said, “This is good, this is a single or maybe it’s a double but I like this deal.” Now, all the household name buyers, the ones that are friendly with every broker, they had already seen the deal weeks before and passed on it.
They were looking for something juicier. As I said, you don’t have to get home runs. Singles and doubles are the way to grow wealth and really long term, become very successful in this business. That’s really the key.
Miles Rote: So, a lot of people will have fear just hearing this, when they’re thinking about real estate and investing in real estate and, obviously, not the ones who have done this before. But what would you say to someone, maybe like me, who is getting more into investing? I’ve always been curious about commercial real estate. I see the opportunity right now with everything going on. Is there anything you would tell me as far as advice and really getting started?
Brent Sprenkle: You have to start small, work your way up, just like anything else. So, you know, first things first, as a lot of clients of mine told me, “You need a place to live, you need a roof over your head.” So, probably buy a house or a condo.
Then your second thing that you do, at least for most people is they buy a small investment property. Typically, it’s a duplex or condo somewhere and they rent it out. Buy it, rent it out, and then you’ll get a good sense of how it works to collect rents from tenants, how to renovate vacant units, how to lease units, how to deal with maintenance, also, just the whole purchase process.
Writing an offer, dealing with the negotiation, getting a loan, that’s incredibly stressful for most people getting financing. It is so scary for most people when they are getting started. So, you need to get all that under your belt and then you say, “You know what? That wasn’t so hard, I have a nice duplex that I own, I’m happy with it, my tenants are happy, I never have vacancies, no one ever calls and complains. I have a great loan on it.” Then maybe, “Do I have any resources left so I can go buy another one?” Or you think, “You know, I have a friend who told me that they’d maybe want to buy a deal with me.”
Go sit down with your friend for lunch and discuss the prospects of maybe investing with him or her, and see kind of what their appetite is, how much money they want to spend, and show them the deal you just did, and maybe, you find something else and you go on with him or her.
Make them a partner, make them your investor, I mean, there are various ways to arrange for this. If you don’t have to bring investors in, it’s always easier. There’s one less person to worry about. I have entire chapters in the book about dealing with investors and partners, and that’s one of the trickiest parts of this business.
In general, you have to start small and you have to work your way up. I think I use the analogy, it’s like lifting weights. I mean, no one ever goes to the gym and loads 250 pounds onto a barbell and does the bench press with 250 pounds on it.
You start with 120 and then you go to a hundred and thirty and a hundred and forty, you work your way up. The people that don’t work themselves up, I don’t know how they do it, but they’re most likely going to be at some point, regretting the decision by not starting out small and working their way up.
Miles Rote: Well yeah, exactly and that’s so important too when it comes to risk. And that’s another thing you talk a lot about in your book is, “assessing risk.” How can people perform risk analysis when they’re considering a property?
Brent Sprenkle: Well, that’s a very challenging question to easily answer, but the risk is looking at just about every situation you can think of, where you could get hurt. If there’s an earthquake, what can happen to the building? If there’s a fire. If a COVID epidemic hits and my tenants can’t pay rent. If there is a problem and the state can all of a sudden triple my property taxes or triple utility bills. What if some sort of crazy rent control law is passed, like what happened in New York City? Who is going to manage the building? What if I lose the property manager? You have to look at all your downside and then you have to also think more importantly, what happens if I go from being full to a rental market where there’s 20, 30% vacancy?
How is that going to impact the cashflow? Is there going to be enough money left at the end of the day to pay the mortgage? Am I going to have enough money left to pay the property taxes? What happens if lease rates drop? What happens if we go into a recession and I have to lower my rents from, say, $3 a square foot to $2 a square foot? Or, if it’s an apartment building, from $2,000 to $1,400 a month. What happens if lease rates adjust in a negative way? Am I still going to have enough money to get by? You really need to look at your worst-case scenario.
If your worst-case scenario is, “You know what? I’m still breaking even.” Well, that is probably a heck of a deal and you probably should buy it. If in your worst-case scenario, the deals still break even or is close to it, then that’s a dream deal to buy, because you’ve just looked at your worst-case scenario and you’re still doing okay with it, which means your best-case scenario is a home run.
That’s how the really, really successful investors get to where they wind up. Because they’re looking at the worst-case scenarios they can get themselves into and they’re saying, “You know what? That’s not that bad. I can live with that.”
Miles Rote: Right, yeah, it’s a page out of Warren Buffett’s book as well.
Brent Sprenkle: Some people say, “You know, the worst-case scenario is, I buy this building for five million dollars and we can’t make it work. I could probably sell it for four and a half and lose another $50,000 but that’s my worst-case situation.”
It’s not much different than buying the stock, except, with the stock, it could literally go to zero. Commercial real estate, it’s not going to go down that much.
We’ve seen some pretty bad recessions. In 2009, in most core rental markets, values didn’t really drop much more than 20, 25, 30%. That’s why most people were able to hold on and came out of it on the other side. Almost better off than they were when they went into it, if not better.
Miles Rote: Right and there is the ability too, that I read in your book, that it’s not that you always have to be solely dependent of course on external circumstances. But you can even take the power into your own hands to some extent and even increase the value of your property on your own.
Brent Sprenkle: Well, that’s a big thing that I discuss in the book is what I call, “Finding ways to add value to a property.” Unless you’re buying something that’s got such amazing cashflow that you can just turn it over to management and not think about it, in commercial real estate deals the yields are never that high because they don’t need to be. There are enough buyers out there that deals don’t have to be great.
People always call me, “Why are these cap rates so low?” I say, “Well, because there are 50 people who want to buy it.” The cap rate doesn’t need to be higher. To counteract that, you just have to say, “How could I add value to this property?” It could be as simple as raising rents or maybe you find some other way to add an income stream. You can find a way to add additional revenue streams, add additional units, put a cell tower on the roof, start charging for parking, start charging for utilities, pass-through expenses that are allowed under the lease.
There’s a variety of different ways on every property that you could add value. Some people buy dilapidated properties, and they entitle them for new developments. That’s been a really big value-added strategy that a lot of people have had. They’ve just basically bought buildings for land value and either sold the properties to a developer or they just built the thing themselves and, you know, they went from buying a little apartment building on a big piece of land and all of a sudden, they own a beautiful brand-new apartment building.
There’s a lot of different ways to do things. Every market, every product type is going to be completely different, but it’s the people that can find ways to add value to properties that do incredibly well because, if you buy a building for, say, five million dollars and you can increase the value by 10%, by what I just mentioned, now it’s 555. Well, if we go through a recession, the property drops in value, 10, 20%, you know, you might be exactly where you bought it for.
As opposed to the person that bought a building who did absolutely nothing, and the market crashed and all of a sudden, their lenders call them, saying, “We’re going to foreclose on you.” So, if you can find ways to add value to a property, you’re almost making your building recession-proof, to the best ability that you can.
Anybody Can Do This
Miles Rote: So true, and speaking of adding value, you have been adding value this entire time, during this podcast but this book especially. I highly recommend it to everyone, it’s a great investment of your time if you’re curious about these things. Brent, writing a book is no joke. So first of all, congratulations. If readers could take away one or two things from your book, what would they be?
Brent Sprenkle: Well, it would be that it’s something that anybody can do. So many people just say, “I’d love to own real estate, I’d love to own commercial real estate, but I don’t think I will ever be able to accomplish it.” I disagree. I have seen so many people that had limited resources buy buildings with partners and work their way up. I think, almost anybody can do it, anybody that has any form of an investment and a 401(k), any stock holdings, where they own even a house or a condo, they can all find ways to invest in commercial real estate if they’re willing to take the risk. That’s the first thing.
The second thing is, there are so many people I know that own one or two or three buildings and they’re just afraid to try to buy more. They become comfortable, they become complacent. Some just become flat out lazy and they all have a million excuses, “It’s too expensive now. I remember five years ago, these buildings were half the price.” No excuse for that. You can buy in any market, up, down. Markets are changing. I’ve seen people during the last six months during the pandemic, buy some amazing deals. Why? Because they’re out there, they’re trying, they’re writing offers or making an effort.
There are always opportunities to expand, to keep investing, and just to keep your foot on the gas. You don’t have to make risky investments, you could write 20 offers and not land a single deal in an entire year, and then, the following year, you could buy five buildings and they’re all home runs. You never know, you got to keep on trying.
The people that just give up, or the people who are going to go out of business fairly soon, or their kids will just inherit the buildings that will be dilapidated, and the kids will find ways to add value and expand the portfolio. So, the two big things are anybody can do this, and the people who are already in this business can find ways to buy more buildings, to grow their empire without taking a massive risk.
Miles Rote: Brent, this has been so illuminating. Thank you and I’m so excited for people to check out the book. Everyone, the book is called, Billion Dollar Portfolio: How to Create a Real Estate Empire, and you can find it on Amazon. Brent, besides checking out the book, where can people find you?
Brent Sprenkle: They could call me, they can email me, happy to talk to people.
Miles Rote: I love it. You can find all of the information about Brent in the show notes. Brent, thank you so much for joining us today in this episode of The Author Hour Podcast. I’m really excited to recommend your book and continue to dive in.
Brent Sprenkle: Thank you, Miles. It was a pleasure speaking today with you.