Why Traditional Investing Falls Short, Building Real Wealth with Alternative Assets

Transcript

Kathy Fettke:

Patrick, welcome to the Real Wealth Show.

Patrick Grimes:

Excited to be here, Kathy. Should be a fun discussion.

Kathy Fettke:

Absolutely. Always like talking about passive income and how we can get more of it. So let’s talk about what you were doing first in your career before you started investing.

Patrick Grimes:

Well, like probably many of your listeners, I was out there in the corporate world fighting my way up the ladder. I was a mechanical engineer. I did a machine design automation and robotics focus on my first jobs. I actually worked for a machine design firm. A lot of really cool stuff, a lot of medical device, and later progressed into aerospace and electric vehicles. I started doing well. I started getting some income. I didn’t come from a lot of money, so I started stashing it all and then wondering where to invest. And I was surrounded by all these high-tech startups and really cool projects at these big companies. And I was trying to figure out which one to invest in. When the owner of the company, when I asked, said, “Actually, don’t do any of those. Make your money in high-tech and invest it in alternatives, invest it in real estate.”

And I was like, “Whoa, really?” Turns out that’s where he made his money and it worked out for him. So I decided to do the same.

Kathy Fettke:

Okay. And so, what did you do? What was your first investment?

Patrick Grimes:

Well, timing was not on my side, because this was back in 2006 and ’07. And so, back in ’09 and ’10, I lost everything in the subprime mortgage collapse when I got involved into a pre-development, sort of a speculative approach at real estate residential plots. And everything went upside down. But I recovered quickly. My ego was battered and bruised. I didn’t go through bankruptcy, but I did go through foreclosure, which…

Kathy Fettke:

Yeah, so many did. Yeah.

Patrick Grimes:

Learned a lot and was humble.

Kathy Fettke:

So your first investment was in development right before 2008. For those of you who don’t know that there were so many foreclosures that new homes just, I mean, they couldn’t sell new homes when you could buy an existing home maybe built last year, a year before for half the price. So builders just went down left and right, and so did investors. But you said that didn’t stop you. That’s amazing. So why not? Why did you keep going?

Patrick Grimes:

Well, it did for a while.

Kathy Fettke:

Okay.

Patrick Grimes:

Yeah. I was humbled in my investing career. I went and got a master’s in engineering and an MBA, still a very successful engineer. Hopped over to be a bigger fish in some smaller ponds. Took a pretty big position at a Southern California design firm. And then I started doing some really cool stuff. I was robotic sales for the Tesla motor assembly. I was doing Lockheed satellites and heart valves for Edwards, and ablation catheters for Johnson & Johnson, like really neat stuff.

Kathy Fettke:

Cutting edge. Yeah.

Patrick Grimes:

Yeah. Working with some of the smartest people to this day I’ve ever met in my life, but in meantime, I’m asking them where they’re investing and it’s like maybe a startup here, maybe a crypto, mostly their employee sponsored plan and buying nice cars. And so, I knew that there was more, because that time when I got into real estate investing early, I was learning a lot and I was reading books like The Purple Book from Robert Kiyosaki. And so, I knew that there was more. So I started researching more alts and that kind of voice stuck with me that if I really wanted to build security for my family, I needed to figure out how to do it in alternatives, not in high-tech. So I was led back to real estate, but not, you said… It wasn’t even a development, it was pre-development right before.

This time, it was existing properties and not in volatile markets. Actually, I did a bunch of research, found out Houston was fairly stable and leveled out, and then went up again during the subprime mortgage collapse. And so, whereas some in other regions, like Phoenix and Orlando, it took like 12 years to recover just to break even. So I started learning about recession resilient markets, and recession resilient asset classes, three bedroom, two bath, existing construction, diversified employment and landlord friendly types of markets. And it led me to Houston.

So there I was in Southern California, building a team, buying properties, and renovating, and refying, and renting and repeating. And before I knew what the BRRRR was, I was doing all that from Southern California. And it was working, but I mean, it was brutal. It was brutal doing that all on my own and trying to manage all the aspects of it. I ended up having to stop eventually, because I met my soon to be wife and it was moonlighting real estate and being a robotics guy by day, just gosh, that was-

Kathy Fettke:

No time for the new wife and that’s not going to work. Yeah. Yeah. I mean, we did the same, Rich and I chose Dallas. I liked Houston too. I thought the taxes were a little bit, property taxes were a little bit higher there and we saw so much growth happening in Dallas, but same thing. I’d go out, build my team, get my property management place, buy these older homes, fix them up. In some cases we would just buy new. And really that’s how Real Wealth started, is I’d come and talk about it on my podcast and people would say, “Oh, I want to do that too.” But all right, so you decided to take a break because you’re focused on marriage, then what?

Patrick Grimes:

It’s like two and a half years later, we had gotten married in Big Bear, in Southern California and Beijing. I was on a horse with a red suit and a dragon, and she had a red dress with the Phoenix and a carrier and-

Kathy Fettke:

Oh, wow.

Patrick Grimes:

… it was a legit, but two and half years later-

Kathy Fettke:

That’s a California wedding right there.

Patrick Grimes:

We made our way, my wife and I, being kind of a conservative Chinese girl, she was going to CalArts, working for Disney. We landed in Burbank at the time. I took a position as a contractor at this point, so that I could free up more of my time and I could have more freedom from just saving away at the W2 eight to nine every single day. And I was a bit better tax strategy, because I was able to write off more expenses. And that allowed me to allocate some of the hours during my day to my investing career, not just do it at night and kind of better balance. And so, I decided to get back into it, but not single family, because while that worked and those are great deals, I needed to learn how to partner. I needed to learn how to scale in ways where I wasn’t chasing property managers to chase a scattered portfolio.

And so, really my calculus was there really wasn’t anything between three bedroom, two bath and 80 unit apartment buildings in terms of real estate, because you couldn’t just go commercial at five, because you still have all the same property management issues, you don’t have the same amount of better debt and you can’t have onsite leasing and maintenance. And so, it really was 80. And so, two and a half years later, we were partnering up with some others on an 86 unit. And so, that’s kind of how that grew. And then from there we did a bunch of co-GPing and partnering on apartment buildings. And so, that’s what really kind of launched that side. And since then it’s been constant diversification into other kinds of alternatives.

Kathy Fettke:

Like gold or crypto or what?

Patrick Grimes:

So I am a gold guy actually. I bought gold a while back.

Kathy Fettke:

It’s done real well. It’s done real well this past year.

Patrick Grimes:

And I’m not a crypto guy, but I do have an allocation to crypto and I’m killing it, but I mean, I’m not proud of it. Nobody should be proud of it, but I’m doing so… I mean, it’s pretty impressive, but I mean, you can’t really take credit for that. But I’m not either of those. Really, I’m a non-correlated, what we call like less… Truly true diversification is when you invest into investments, which have different market fundamentals, that don’t rise and fall together. Coming from a guy who’s lost everything before in a downturn and then saw recent hit in apartment buildings, right? And I’ve seen high-tech industry go up and down firsthand. I’ve seen companies go out of business. It’s important to make sure that just like how the wealthy, the family offices, the hedge funds, sovereign funds, allocation strategies for them are looking for what we call non-correlated alternatives, right?

Things that don’t rise and fall. And so, yes, gold is very important and that strategy, a cash equivalent that is not correlated to the dollar and it tends to rise when broader instability occurs. So we’re seeing that now. But my actual journey led me more towards ones that had kind of a combination of sort of non-correlation and also tax advantages. So I did some energy investments and some oil and gas, which being a high income earner, that was very helpful, but you got to have the stomach for it, right? That’s a tough way to go. My focus recently has been in private credit. We do a lot of private credit, which is kind of that below 60% loan to value, small balanced commercial real estate lending. We have a fund for that. We’re buying properties in cash in a fund acquisitions and we’re doing legal investing.

So investing in the legal industry through our diversified litigation portfolio. And that’s when things actually get real exciting, right? Because you look at kind of like at the popular ones, you’re the stock market, maybe people are like in real estate, maybe it’s just a rental, and then they realize that that consumes your life, but then what are the other things you can do that don’t rise and fall together? Well, oil and gas is a completely different market cycle, but it’s volatile and it’s a commodity. Well, man, can you have the best of all worlds? Can you invest somewhere where it’s just good in good times and great in bad times? I mean, attorneys are-

Kathy Fettke:

Sounds like a good plan.

Patrick Grimes:

Yeah. They’re real busy when times are good and when people get litigious. In bad times, attorneys are really busy. So you look at the market fundamentals of the legal industry, healthcare, education, CPA firms, HVAC people, plumbers, those are kind of that Venn diagram of recession, resilience and non-correlation that can really help build pillars of stability. And that’s been our focus for some time now.

Kathy Fettke:

So do you think if you just put your money in the S&P and just forgot about it, just kept doing the traditional investing, you’d end up where you are today?

Patrick Grimes:

No. No, not at all. I mean, and I think you probably can… Your audience, I mean, I understand you have a lot of real estate professionals out there. I mean, just by becoming a real estate professional, I was able to defer a lot of my taxes and just the tax advantages alone that I’ve quadrupled, but I would’ve gotten in the S&P and being able to defer the fees to Uncle Sam. But I mean, the compounding effects of both, I mean, in real estate debt pay down with appreciation and cashflow are just things you just simply can’t have in a stock market portfolio. Those that just rely entirely on the stock market portfolios are in a really tough spot very frequently, because every market goes on its cycle. And so, when you’re in a downturn, if you don’t have somewhere else to pull from, you’re pulling very expensive money out of your stock portfolio, because it just dropped a bunch.

So I mean, the intention is to build a resilient portfolio that not trying to predict, but knowing that cycles happen and that you can still build a net valued portfolio that will continue to be stable or grow regardless of the market swings. That’s really that not just financial independence, but it’s financial security and that should be everybody’s goal.

Kathy Fettke:

Yeah. Investing in something is better than investing in nothing. So if people are investing in the S&P or the stock market and at least they’re doing that, that’s great. It’s a great place to start. When I look at it, I just can’t compare, because one of the, I guess, themes of investing in the stock market is you’re deferring your taxes, depending on how you’re investing, but let’s say you’re investing in your IRA or your 401k, and you’re deferring that with the idea that eventually you’ll take that money and be living on it, and you’ll be in a lower tax bracket. And I just don’t think that’s… I hope that’s not true. I hope you’re in a better tax bracket by the time that you’re retiring, plus you’re going to need so much more money at that time, because of inflation. And then, I look at real estate and if I just keep buying a house every year, I mean, let’s just say it’s a house, it’s not an apartment, just something simple.

By the time I’m going to need that money, I can refi or I can just sell the property. But if I refi, I could take that money, get access to that money tax-free. I can’t compare the two. And then when you add leverage that you could put, in your case, if you’re doing a BRRRR, almost nothing into a property, so everything you’re getting out of it is just kind of like free money. But even if you put 20% down over time, you’re going to get that money back and everything after that is kind of free money. So I don’t know, I can’t compare the two, just nothing compares to real estate in my opinion.

Patrick Grimes:

And I think the key is that you can’t compare it, because they have very different fundamentals, makes them both good allocations. One doesn’t win over the other. One may accelerate growth, like real estate may accelerate growth faster than the stock market, but still, you can’t be only in real estate, right? I’ve done that and I’ve lost it all doing that already once. So it’s important to understand that while everything has completely different fundamentals, then that’s great. That means it’s a great allocation. And if you look at kind of Edward Wolf or you look at Tiger 21, they put about 20 to 27% of their portfolios in real estate. That’s a really nice allocation, but where’s the other 75%, right?

Kathy Fettke:

Yeah.

Patrick Grimes:

Stocks and bonds are dialing down quite a bit. Where are these other lesser known alternatives that provide similar non-correlation and resilience and wealth building opportunities? What are those? And that’s why we have a platform to both educate on alternatives and sponsor alternative investments. I mean, I get medical one coming up here pretty soon in first quarter next year, for example.

Kathy Fettke:

Yeah. Medical industry is going to take off for sure with all these aging baby boomers. Okay. So how long does it really take to be able to walk from your W2? I mean, some people believe in fire, retiring early. What do you think is realistic and have you been able to basically replace your income through your investments?

Patrick Grimes:

Yeah. So it depends on your goals. I actually never… I’m still an engineer and even through COVID, I was still doing COVID automated assembly test kit assembly system. So I mean, even not that long ago, I was still in it. In fact, those were record years for me, because of just the extraordinary amount of funding that went into those and how easy it was to repurpose some of the flu test kit machines and stuff.

But I mean, a lot of people just don’t want to and shouldn’t, because they’re not entrepreneurs. They’re not people that want to go create their own business. Maybe they just want to work for a W2 and they want to spend the time with their family and not a lot of people are wired to be entrepreneurs, go out and venture. And so, I find that for the majority of people out there, that’s not their goal, right? Their goal is to figure out how to have an investing career without trading the time away from their family, friends, and hobbies. But it wasn’t actually my expectation to do so. And it just happened to be that eventually I realized I was having more fun and more freedom doing it to where it went out. It went out over my engineering career.

The steps that it took me to do was, first, I had to invest and fail and lose it all. And then the next time I invested, I had to lose all my time. And so, the third time I invested, I’d succeeded the second. The third time I invested, I learned how to scale to a way in which was sustainable, where I was able to have a balance and partner up. But through that process, I couldn’t just do it as a W2. So I actually had to break out, as I mentioned, as an S Corp, as an independent contractor, which allowed me to take advantage of the tax advantages. And then when I started feeling that independence and security, I was able to throttle up my alternatives to where the day, I remember the exact day, and it was a really interesting time, because I was separating from this contract that I had at the time, and I was like, “Well, I have all these other ones I could get into right away.”

And I remember the exact day, because it was around November, my boy was going to be born, Christmas baby, right? And I was like, “Do I just dive into this investment stuff or do I go back and do part-time engineering and part-time investment stuff?”

And I remember the day, it was scary, because I just wanted to care for my boy and I didn’t want to take the risk, but I knew if I didn’t do it now, I wouldn’t do it. I’d never be younger. I’d never have more time. I just got to do it. So I did it. And I went from being real busy doing engineering and real estate to the very next day, shutting off my emails on the engineering stuff and just being real busy doing investments, to the point where I just filled up all my time without even realizing it.

So I was able to do a very smooth transition and it took… By that time, I had partnered in a bunch of apartment units and I had sort of on the backs of my single family stuff, and I had investments in a couple other different things where we were able to float ourselves. And ever since then, I’ve been building on those investments and income streams. So I was able to do the transition, still miss it though, actually. I still miss being a geek and hanging out with those guys, and coming up with creative solutions.

Kathy Fettke:

But we call it job optional. So if you want to go back to work, you can, you don’t have to. Yeah. Wonderful. All right. What final advice would you give to people who want what you have that are working long hours, they’re maybe facing burnout and it seems like a long road ahead before they can actually live off passive income. What advice do you have?

Patrick Grimes:

Well, so I’ve been there and I feel what they’re going through and you’re going through. Here’s what I typically say is nobody can do this alone. And that’s how I went wrong, right? I ventured out there and I lost it all first time. Second time, I lost all my time. It wasn’t until I started networking, I started working with other people and I started modeling myself after other people that had been successful. And in order to do that, I had to build a support network. The human condition isn’t designed to just venture out into the forest or venture out to the desert alone. And our friends and family, the ones that love us most, they’re going to pull us back, because they have this desire to protect us. So you got to find those that will pull you forward. And so, what I say is every single day, I run it every single morning and I listen to podcasts, audiobooks, TED Talks, investing webinars.

Every single day, do one passive step where you’re driving, cleaning the house, whatever it is, at the gym. Do one passive step to educate yourself and learn and start reprogramming your brain with this content created by people that are being and succeeding at how you want to succeed at. And then once a week is the goal. If not, once every two weeks, at the very least, get physically around. I mean, for a while, that was only on Zoom. I’m still a fan of getting physically in front of and uncomfortably close to those that are succeeding. Join podcast, sorry, join meetups, go to… There’s Phoebe, there’s all these different real estate types of or alternative investing types of events. And we host one ourself on passiveinvestingmastery.com.

The intention being, be physically around these people, build those relationships. When I was super early on and I built those relationships with people, I still can call them. I can still get their advice and we can still move forward. And we’ve been tracking each other’s growth, holding each other accountable and encouraging each other. That’s what you need to draw you forward and then just take action, right? Make a goal, 90, 120 days. Take action into an investment that provides for the lifestyle you want. Maybe it doesn’t control your time. Maybe it doesn’t distract you more from what actually matters to you most, family, friends, hobbies, right? Take an action and see how it goes, right? But have a disciplined approach, passive, active and action, and just chip away at it and you’ll get there.

Kathy Fettke:

Love it. All right, Patrick. Well, thank you so much for joining me here on the Real Wealth Show and sharing your wisdom.