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Navigating Loss and Success: Insights on Recession-Resilient Real Estate and Diversified Portfolios

The CSQ Properties Podcast

Navigating Loss and Success: Insights on Recession-Resilient Real Estate and Diversified Portfolios

by Chad Zdeneck | Patrick Grimes

Transcript

Chad Zdeneck:

Hey, Patrick, super excited to have you on the show. Thanks for joining us.

Patrick Grimes:

Chad, you’ve been a good friend for a while now and we’ve seen each other grow, so I’m sure it’s going to be a fun conversation.

Chad Zdeneck:

Yeah, I think it will be as well. I think we first met probably either right before COVID or right during, in the very early stages of the COVID. We went to the… Well, where I hung out with you most was that we went to the Secrets of Successful Syndication in Texas, because Texas was open. I think I knew you a little bit before that from our mutual friend, Bronson Hill. But yeah, we got to go to Texas at the conference, which was nice to have a place that was open. And then, yeah, it’s been great kind of following each other ever since. So excited to dive into this a little bit more today.

Patrick Grimes:

Yeah, Bronson’s been the result of a lot of great relationships that I’ve had. So definitely the connector.

Chad Zdeneck:

A good friend of Bronson’s is a good friend of mine and I’m sure a good friend of yours, so he’s a great guy. So I know you pretty well, but maybe for the sake of the audience, and we have actually a lot of similarities in our journey, which I want to get into a little bit. But before we get into that, maybe you could walk us through your journey on how you started out as an engineer, and entrepreneur, and then into real estate investing, and what that’s been like for you. Tell us a little bit about your background.

Patrick Grimes:

Yeah, sure. So like probably most of the people listening, I was very successful professional in high-tech, machine design, automation and robotics, and I started doing well at it. I loved it. I’m still a geek today, even though I don’t identify as an engineer anymore on my business card, but I do inside. The bonuses I was getting needed to go somewhere and I was originally advised, in fact, the first company I worked for, the machine design firm, the founder said, “Hey, you should put your money into real estate.” And his only regret was not investing more sooner. And that’s what got me started is back in 2006 and ’07. So it was a really bad time to start in real estate, because a number of years later, I lost everything.

Chad Zdeneck:

Yeah. That’ll be a wake-up call. But you still had your W-2, even though you started investing, right? Had you started your own company at that point yet or not?

Patrick Grimes:

No. No. So I saved up a lot and put everything into a pre-development project where, even before development, right? So it was even riskier than creating something from nothing. I had personally guaranteed the loans trying to get really great terms, where I put very little down and leveraged it to the hilt, and then was hoping to create something and double, triple my money every year. And that’s when I learned about speculating, worse investing and the hope that when you’re not buying for cash flows, you create something that eventually cash flows to cover the loan payment. That didn’t pan out for me. The market crashed, went upside down, lender bought and sold my note a couple of times. I couldn’t even find the actual people to talk to, paid out of pocket for a long time before I finally had to stop, and they ended up coming after me because it’s fully recourse, right?

I had to hire an attorney and battled my way through that over four or five years, six years before I ever actually re-approached real estate. But I was definitely humbled, right? I learned a lot of lessons along the way. Meanwhile, I was still doing very well as a high-tech professional. In fact, I went and got a master’s in engineering and business, and started taking executive level positions, and eventually started as a contractor. So when I re-approached real estate as a much more risk averse, tortoise not the hare, that’s when things were more realistic growth, and I started investing in the way that I’ve built the company that I have today.

Chad Zdeneck:

And so, in between you actually… I guess you said you started becoming a contractor, that was like your business that you started within robotics, but concurrently you started investing again as well?

Patrick Grimes:

Yeah. So once I started real estate again, I started looking for recession resilient markets and cash flowing assets, buying real things that produce income. And so, I looked mostly in Texas, and as we could talk all day about the reasons what got me there, and a bit of an analyst, buying distressed properties, renovating and cash flowing. And so, that was working and I was moonlighting that with my successful career as an engineer. I was like the American dream, right? It’s become a landlord.

But to me it was so taxing that my wife and I… When I met my soon to be wife, I realized that I couldn’t do this moonlighting of my real estate with an extremely demanding job. And I’ve got articles in Forbes now to discuss the challenges associated. Patrick Grimes, Forbes Asset Protection and Forbes, Patrick Grimes, single family versus multi. It talks all about the risks and challenges associated with trying to be the DIY real estate investor and a professional.

I was trading all my time away. So I stopped the single family gig. I was able to marry my wife thankfully, and now we have a new boy that I’m excited to spend a lot of time with. At that point, I became a contractor, that gave me some more time to be able to dedicate towards trading up and partnering up into larger assets. And that’s when the built and best on Main Street. Now we have little under 5,000 units. We’ve required half a billion in general partner ownership, as well as some diversified energy funds. And we’re doing a recessionary acquisition fund, but we’re able to scale from there.

Chad Zdeneck:

So what was the transition like? I mean, you mentioned that you were a geek at heart and loved doing robotics, but you really, I know you appreciated the advantages of real estate. What was that transition like for you and was it difficult, or do you have any regrets?

Patrick Grimes:

Well, my regrets now are that I should have partnered sooner, and traded up to bigger assets sooner than I did before, because me trying to control everything and do it all on my own, and venturing out as a DIY investor caused me once to lose everything, and twice for me to lose all my time. And it wasn’t until I began to partner and work harder, took two and a half years from when I did my last single family deal, to where I closed on my first multifamily deal. Large went from three bedroom, two bath to 86 units.

And in that time it took a lot of learning, a lot of traveling, meeting a lot of people, but it was in those trenches of kind of getting in, and growing into this space of what is this more sophisticated private equity syndication world that uses other people’s capital, partners with different people with their superpowers that kind of builds teams that can invest like institutions.

It was in that sort of journey that I had the aha moments that this is really how you take down safer, better assets. I can do what I like doing. I can rely on others to do what they’re good at doing, and we can start scaling a portfolio from there. And it was a lot of fun. And you were involved, and Bronson was involved along the way, as we were rubbing shoulders during those times, attending that Phoebe meet up in Pasadena, Southern California.

Chad Zdeneck:

And what year, I can’t remember, what year did you do your first multifamily deal?

Patrick Grimes:

2019.

Chad Zdeneck:

Okay. So probably actually kind of a similar… I mean, we have a very similar path anyways. I’m a structural engineer, I got my master’s in engineering, I got my MBA, I started a company, very similar. I didn’t start out in single family, but I did start out just doing syndications on my own in 2018, 2019. But I had the similar experience. I was doing everything myself A to Z, and running as a solo GP on these deals, and syndicating, working with investors. And it took a ton of time.

I still do spend a lot of time, but now I’m partnering and doing a lot bigger deals, doing deals outside of California, which is nice. I know you were in Burbank for a while and you can understand some of the challenges as being a landlord in California, but now doing stuff out of state, much larger projects with partners, really like a divide and conquer type approach is a lot better. A lot better. So I can appreciate that, and it’s been fun to witness your journey as you’ve gone along that path. So thanks for sharing it with us. What about, you also had more transitions, you’d done multifamily for a long time, and then you’ve also done oil and gas, energy type investments. What does that transition look like and what drove you to do that?

Patrick Grimes:

Well, ultimately, I’ve never been an all in real estate guy. In fact, on my website there’s a passive investor guide. It’s a free download, and from the very first version of my website, I poured my heart and soul into this thing to try and explain the case study as, hard assets and real estate alternative investments being a core piece of a portfolio for a lot of the things that we’re seeing today. Hedges and recessions, we have hedge against inflation, and all these things for the reasons that we’re today. But if you look at the deck, it actually shows the initial pages, the diversification of the middle class, high income and ultra wealthy, and middle class is about 8% of their wealth into what we consider alternative investments. That’s not what the employer is dropping them into 401ks and IRAs. It’s not what their financial planner is dropping them into, which are all heavily indexed in a sentiment driven, inefficient stock market portfolio.

These are things that are real products, real assets, and that are tax advantaged in different ways. There’s more than just real estate there. In fact, in the United States, housing, food and energy are all tax advantaged. Why? It’s because the government needs us to house, feed and energize America. It’s just funny when I see things on the news about hate non-wealthy people that don’t pay taxes. Well, the interesting part about that is, they’re actually investing alongside of what the government needs the private sector to fund. They need us to house, and feed, and energize America.

So they’re rewarding us. Instead of going and buying Ferraris, we’re buying an apartment building, and then we’re housing America, we’re renovating, we’re building up these buildings. We’re also drilling wells, oil and gas wells that help to energize America. So things like tax advantaged, cash flow, tax write-offs, and the ability to 1031 exchange, where you can sell and buy without paying capital gains. All of those things exist in real estate. They also exist in oil and gas. People don’t know this, realize this. These are exploited by the wealthy, and in a similar way, syndications allow you to invest in real estate.

They allow you to pull capital together to take down deals that only institutions can buy in real estate. They also do the same for diversified energy funds, pull capital together, allow you. So we’ve launched a couple of those and put 20, with partners, and we’ve partnered up, and I think that’s [inaudible 00:12:27] put about 20 million into those. And that helps a completely non-correlated investment where you see the tide going down in real estate, but prices are high in oil, right? And it allows you to have a delinked, non-coupled, true non-correlated, we call it, investment. And similarly, we’re pivoting to other things that are other. And that’s why we have Invest on Main Street. And we also have passiveinvestingmastery.com, and that is a platform purely for alternative investments and recessionary type acquisitions, more opportunistic funds that we’re launching now.

Chad Zdeneck:

Okay. So you’ve had a long path, meandering path through different careers, chapters in your life, if you will. Is there something that you wish you had done differently, or something that you wish you had known before when you were younger? Any lessons learned for investors that are just starting out?

Patrick Grimes:

Well, yeah, when I started out, I didn’t know about risk adjusted returns. I didn’t know that it was possible to invest in a way where it was recession resilient. I didn’t know it was possible to invest in syndications, where I could get the same benefits of direct ownership, but be in a more protected position because I’m a limited partner, and I am only risking the amount of capital I have in the deal. And I didn’t know that you could do that, and still get the tax benefits and the upside. So what I tell people is, and it wasn’t until much later that I… I was trying to do the DIY thing for a long time, which was actually far riskier and it’s glamorized on the news, but if you read the asset protection articles I’ve written in Forbes and some of those others, actually there’s a high risk profile with trying, aside from losing all your time, high risk profile with that.

And so, I tell people, spend some time learning to partner up early on, find people you can partner with that are great operators, that have been doing it a long time, that you can invest with. And in that sense, you’ll be able to get the upside with a lot less downside risk and keep all your time back. And the struggle that I had was kind of relinquishing control. It is funny, because I would just let my 401k go and I wouldn’t even look at it, financial planner go, I wouldn’t even look at it. For some reason, when it was outside of these horrific investment products, I would want to manage it myself and do it on my own. And that only put me at a higher risk position and took my time away. And so, I like to encourage people, partner up outside of those portfolios as well, and seek people that you’ll be successful, and don’t make the mistakes I did twice, before I found the right partners to invest with.

Chad Zdeneck:

So on the partnerships that you’re doing, are you guys the operator on some of these deals? Are you partnering with operators?

Patrick Grimes:

Yeah, so right now we’re launching a recessionary acquisitions fund, which is very near and dear to my heart, because in 2009 and ’10, I was just getting raked over the coals. I hadn’t built a recession resilient portfolio that allowed me to ride out a recession like I have now in this recession, and I wasn’t able to take advantage of any of that, billionaires were made by buying during that time. And now, with the recessionary acquisitions, we’re sponsoring a fund that allows us to acquire as many different properties as we can in this time. Which we’re already seeing huge amounts of deal flow, where it’s not distressed properties, they’re performing properties that are cash flowing. They’re just operators that are struggling for a number of reasons we can talk through, but they want out. They need a source of relief and that relief would be in a quick acquisition, and they can move on.

And what we’re seeing, and we’ve stood up four assets outside of the fund, what we’re seeing is that it’s the ability for us to buy right that creates the return, and then we don’t have to do a long-term improvement renovation strategy. We can just exchange it forward by another one, exchange it forward by another one, and then refi out and buy a second, and use those two to buy four, and then eight. So as fast as we can in this limited window we have with this opportunistic buy zone, let’s buy as many as we can and compound the return, hold for as little time as we can, just keep trading forward. And so that’s our, we’re sponsoring that investment right now, and that’s the most exciting thing I’ve had going on in a long time.

Chad Zdeneck:

Yeah, I agree with you on the deals right now. We’ve got a deal that we’re under contract for a 200 unit building in Dallas and we’re buying it for $500,000 less than the seller bought it for in 2019. And again, it’s a cash producing asset, but it’s got issues with the debt. Of course, bridge debt that’s now refinanced much higher, and the operators don’t want to end up doing a cash in refi. So we’re picking it up and I think there are those sorts of deals that you can find, which in five years we’re going to look back and say, “Wow, remember in 2023 when people were buying and interest rates were higher.”

They’re not super high, a 40-year average, but they’re higher and we’re able to scoop up good deals. So I agree with you, that’s what we’re doing. Speaking of good deals and underwriting, I know you’re engineering background and definitely very analytical. What does the underwriting process look like for you, or how do you determine what some of those good risk adjusted returns would be with respect to underwriting? Is that where you’re figuring that out, or what does it look like for you?

Patrick Grimes:

Well, so traditionally call for the last five years, the game is value add, where you buy a property that you can buy at a good price under market, but you look at the property’s renovation state. Relative to the nearby, you see that it’s renting for below market rates, nearby comparables, but it’s because it hasn’t been renovated and lifted. And so, you buy something that you’ve got at a good basis, but you know can improve it. And so the conservatism is making sure that those are valid using low leverage, which means that you can pay your bills with the cash flow. You just got to do that in the right market, not only because you’re going to have high cash flow markets, but also markets that are recession resilient.

So you want to look at vacancies, where the vacancies have risen to in recessions. And so now you have, well, it’s got to be able to cash flow at recession vacancies, and then you need to lock in a strong foundation, which is the debt. And the debt, if it’s fixed rate, great. If it’s variable rate, you got to get a rate cap. And the rate caps, which very interesting is a lot of the distressed operators that we’re seeing right now, have interest rate caps, but they didn’t give low enough leverage, so that as the interest rate rise to their cap and consume their income, they didn’t get a low enough, safe enough deal where they could sell cash flow on the other side of it. And that’s been exacerbated by a number of other things.

Insurance premiums have gone up dramatically; 10, 20, 30, 50% in some markets because of the increased number of natural disasters. Taxes are going up, inflation’s increasing material costs, labor costs. So there’s dramatic things that are… And with COVID delinquencies, we’ve seen once the rental assistance checks ended, all of a sudden people didn’t resume paying. Probably not a surprise, but what did that mean? That meant we can evict. Well, the eviction bans were lifted, but they were already backed up, and the courts were understaffed.

And now there’s a huge flood, which meant places normally you can evict, like in Texas and Atlanta in two to four weeks, now it’s like four to six months. So there’s a lot of things that, even if you are conservative and recession resilient, there’s a lot of things stacked against you today. And that all aggregates to great performing properties, that the fundamentals of the properties are good, right? But there’s a limit to how much you can watch, says waterproof to a certain depth, right? You can go down to a certain depth until it will crack. And so, it’s in those cracks that you can find the good deals today. It doesn’t necessarily mean that they’re bad properties, or were even underwritten conservatively, it just meant at this time it’s a number of things stacked against the industry.

Chad Zdeneck:

So what areas do you think for your fund that you’re starting now, your acquisitions fund, what areas are you guys planning on looking into, and what asset types?

Patrick Grimes:

Well, so we’re mostly multifamily. The four that have been stood up as case studies for this fund with the strategy, where we’ve got an acquisition engine running that’s producing about 200 leads on these kinds of assets a month. Three of them were multifamily, midsize multifamily, all distressed owners, or owners that just needed out, good assets. One of them was retail, and the first asset we’re bringing in is a retail shopping center. Classic story. It’s 60% occupied. It was an inherited property. The owners don’t want anything to do with it. They’re overwhelmed. Then they just want to exit quickly, direct to owner kind of acquisition.

So we’ve also looked at, so it’s mostly multifamily, triple net retail. Typically, we would be looking much more narrow, because we’d be holding properties for a very long time. We want to make sure the fundamentals of the market and the growth are strong, because we’re hoping for appreciation over time. In this particular fund, we can cast a little wider net, because we’re not hoping for appreciation or rent growth. We’re making the return on the buy, and then we’re trading it forward, and making the return on the buy and trading it forward. So that’s kind of a little bit bigger acquisitions.

Chad Zdeneck:

[inaudible 00:23:14].

Patrick Grimes:

So mostly a lot of the same. Mostly the southeastern states and Texas, a little bit in the heartland.

Chad Zdeneck:

All right. I can’t help but notice the beautiful Zoom background you have behind you

Patrick Grimes:

This virtual background? Yeah. Yeah. So my wife and I moved to Hawaii during COVID. We spent about a little under two years here, and then we went back to Southern California, but we’re spending the summer out here again, and it’s beautiful. So we’re in Oahu, Waikiki. Waikiki Beach.

Chad Zdeneck:

Yeah, so for everyone watching, that is not a Zoom background, it’s his real view he’s got.

Patrick Grimes:

Yeah, I’ve got 500 surfers out here on Waikiki trying to all ride the same wave in.

Chad Zdeneck:

Yeah, I mean, look-

Patrick Grimes:

And I’m drinking my vanilla mac nut coffee here, so it’s living the life. And I’ve got my ukulele in the background right there, living the life here. Aloha, feeling the aloha.

Chad Zdeneck:

You plan, you’re doing one of your ukulele lessons the other day, sorry to interrupt, but I think it’s great. I wanted to bring it up that you’re there, because you’ve been through this journey where you were a DIY guy, you were totally inundated with doing so much work, but now here you are, you’ve got several thousand units under management, and you’re off the coast of Waikiki managing remotely, and running a very successful business. So I think that’s one of the advantages to real estate, and especially if you manage it right, you build the team right, and perhaps most importantly you partnership correctly, that you can hang out in Waikiki and run your business from there, and be very successful. So kudos to you, congratulations.

Patrick Grimes:

Well, thanks. You got to get used to the red-eye flights. I’m flying out to San Francisco to speak at MFIN here in a week, and I’m commonly flying out, doing the over nighters to Texas and Florida. But yeah, so maybe if you’re on the east coast, choose the Bahamas instead of Hawaii. But it’s been really nice. And to your point, it was the flexibility. I mean, my wife does feature-length animated films, she’s a production manager. And it was the remote design of both of our lives that allowed us, and the freedom through real estate and syndication investments, that allowed us to have this freedom to be able to have the location, live where we would like to live and be more transient, like we’re spending the summer here now.

Chad Zdeneck:

I love it. So if people wanted to learn more about you, or Invest on Main Street, what is the best ways to learn more and get in touch with you?

Patrick Grimes:

Yeah. So if you’d like, I can offer a copy of my book. We give it away for free. I wrote a chapter, a book called Persistence, Pivots and Game Changers: Turning Challenges and Opportunities. It was a really fun book. Phil Collins did a chapter, he was actually the lead guitarist of Def Leppard, an actual rock star, that Brian Tracy did it foreword. There was some NFL, NBA players, entrepreneurs, artists in there as well. Really fun book. Everybody tells kind of their life journey. And if anybody’s interested, they can go to investonmainstreet.com/book, investonmainstreet.com/book.

And if you put in the promo code CSQ, I think that we’ll know who you are, and I’ll sign it and we ship out a signed hard copy out to people that are interested. Hope that helps to kind of inspire people. If you want to chat, you can go to Invest on Main Street, Invest on Main, and then street.com/contact. Feel free to set up a call, happy to chat with you, even if you’re not an accredited investor. I am happy to get you pointed in the right direction, understand your goals, and love talking to investors. So happy to do that as well.

Chad Zdeneck:

I appreciate that. I actually read the book and it is a really good book, so thanks for offering that to the listeners. They can get a free copy of the book there, signed, which is nice. And I really appreciate the time, Patrick, spending it with us today. And thanks for everything you shared.

Patrick Grimes:

Appreciate you having me, Chad.