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From Distress to Success: Alternative Investments To Win During Downturns

The Building Wealth Through Commercial Real Estate Podcast with

Jonathan Wei

 

How to “Cash In” in Hard Times Cash Dispensers (ATMs) vs Distressed Asset Funds

From Distress to Success: Alternative Investments To Win During Downturns

by The Building Wealth Through Commercial Real Estate Podcast with Jonathan Wei

Transcript

Jonathan Wei:

Welcome to the Building Wealth Through Commercial Real Estate podcast. I’m your host Jonathan Wei, and I’m the founder of Greystone Capital Group, my investment firm. If you’re interested in passively investing with us please visit greystonecapgroup.com and join our investor network. Okay, and now onto the show. Okay, today I have a wonderful guest, Patrick Grimes. And Patrick Grimes, we met through our mastermind. I’m very happy to have you on the show. Thank you for coming on the show, Patrick.

Patrick Grimes:

Glad to be here, Jonathan, good to see you again.

Jonathan Wei:

Great. Patrick is a founder and CEO of InvestonMainstreet.com. It’s a private equity firm that enhances business professionals quality of life by providing tax-shielded and inflation-hedged passive investment alternative investments. Since 2007, Patrick has purchased distressed real estate assets, renovating, stabilizing front of a long-term cash flow. He has raised over $60 million to acquire 600 million portfolio, including over 4,000 units in multifamily apartment communities in emerging markets across Texas and southeast United States. He has also diversified investments in energy that include 100-plus natural oil and gas wells in five locations across five states.

Patrick is also a co-author of the Amazon number one bestselling book, and he actively writes articles on investing in commercial real estate for Forbes and Inman. He holds a bachelor’s degree and a master’s degree in engineering as well as an MBA. Well, that’s a wonderful background, Patrick, very impressive. And I’m very glad that today you can share some insights on the state of the market, multifamily, what’s going on now with all these interest rate hikes. I mean, how do you feel, for my listeners? Is it a good time to jump in and acquire or should we hold back? What are your insights about that?

Patrick Grimes:

Well, both. By the way, great to be here, Jonathan. It’s a combination of both of those. There are strategies of, call it, yesteryear, maybe the last three to five, five to 10 years where investments were put together. Those strategies aren’t the right strategies today. And there is a lot of operators still putting deals together like that as if interest rates, and inflation, and COVID, and the material shortages, and labor shortages, and costs and delays … As if none of that’s happening.

But then there are other investments put together which are really geared towards leaning from the downturn, leaning into a downturn, and finding the upside of downturn. Me having been through somebody who lost everything in 2009 and ’10, not building recession-resilient portfolios, doing all in development, and personally guaranteeing highly leveraged balloon stuff back then, and being rug drug through the gutter, I at least have appreciation for how to build a recession resilient portfolio. Now that we’re in a time where there’s a lot of good buys, how to structure those deals that allow you to take advantage of the downturn?

Jonathan Wei:

That’s wonderful how you learned, I guess, your lesson from back then in 2009 when I guess a great recession happened 2008 and post-2009. So tell us, what did you do? Did you aggressively take bridge loans or how did you get yourself into hot water at that time?

Patrick Grimes:

So I use the word wonderful. Sure, it was wonderful. No. I was fresh out of college as a mechanical design engineer very eager and doing well, but got some advice to get into real estate as soon as I … To put as much as I can as soon as I can. So I went for the highest returning deals. I didn’t know about risk-adjusted returns, I didn’t know about recession returns. I didn’t know even what a personal guarantee was or cross-collateralization. So I got into a development where they had a reputation in the recent history for doubling and tripling your investment each year because you’re in pre-development, you’re going to develop something to be developed and then build on it. So I got a couple steps ahead. Well, as it turns out, high degree of risk. And while everybody back in 2006 and ’07 was like “Oh, never going to go down.” Here’s way too much money for somebody who doesn’t know how to spend it like an inexperienced engineer like I was.

Jonathan Wei:

Okay.

Patrick Grimes:

It was a balloon debt where I was paying out of pocket without a cash-flowing asset, right? When the property turned upside down the lender sold, bought, sold, bought the note numerous times, and then they came after me. They wanted my assets as collateral. To their right, right, because they … I didn’t guaranteed this. It took me a while to find an attorney to help me negotiate my way out. It’s funny because he told me, “You got to stop paying.” I was like “No, the right thing to do is to pay.” They’re like, “They’re never going to talk to you until you stop paying.”

Jonathan Wei:

Oh, I see.

Patrick Grimes:

The only even way is get the conversation going apparently was to stop paying. We worked out an agreement. I did settle, they did debt forgiveness, and then I had to pay taxes on the forgiven debt in the next year.

Jonathan Wei:

Oh, okay. Okay. Cancellation of debt Section 108. I’m a tax person so I know the code section, unfortunately. It’s called COD, it’s called COD.

Patrick Grimes:

Then you know that means I just had to pay the income tax. Their forgiven debt became my tax obligation in the subsequent year. Great forgiveness, right, really appreciative of that.

Jonathan Wei:

So it’s hard because even though it’s great that they forgive the loan financially on the books, but the IRS, Uncle Sam will say, “Well, that’s truly income because you didn’t have to pay anything.” So in their mind, you should pay tax on that income basically.

Patrick Grimes:

Me personally, yeah.

Jonathan Wei:

Yeah, no, unfortunately. Oh, so it’s a development that also happened. Okay, very interesting, very interesting. So I guess the risk there was you did it during a time when, unfortunately, it was risky, and then you didn’t know … That went upside down, that’s what happened basically.

Patrick Grimes:

Yes.

Jonathan Wei:

Good, good. And how did you, I guess, come back from that period when you climbed back to your success? What did you do? And how did you change your mindset?

Patrick Grimes:

Well, I was still gainfully employed as a talented automation robotics mechanical engineer and so I dove into that, did well. I got a master’s in engineering, an MBA, started as an executive, moved companies, and then I ended up with bonuses again wondered where to invest it. I had seen my 401(k) take a ride as well as my real estate portfolio and so I was eager to find something else. If you follow the breadcrumbs of the wealthy it just leads you right back to real estate. The challenge was how? Because I hadn’t seen that in the ugly. What I learned about is how the wealthy take the path of the tortoise and not the hare, right? And I was humbled at this point. I learned about recession-resilient markets. I learned about recession-resilient asset classes. Existing construction that cash flows on day one where you can make measurable improvements and improve the value through renovations. And so I started buying single-family in Texas essentially from southern California-

Jonathan Wei:

Nice.

Patrick Grimes:

And building a portfolio. It was a moonlight business that was a very demanding job but it was working. It was working until I met my wife. And then when I met my wife I realized I couldn’t moonlight real estate and marry her so I took a long break. And then after that we traded up to larger commercial assets and multifamily. The same strategy, the same process of low leverage, fixed interest, or capped. A lot of reserves, existing construction, cash flowing, and recession-resilient markets. That fear in the back of my mind of what happens if was always there and it’s always present. And I’m glad to say that right now I feel very good about our portfolio. Even in the challenges that this market had which we could talk about. I mean, the market’s in a really tough spot right now.

Jonathan Wei:

Everyone’s looking for deals and it’s very hard to find those … The unicorn deals that everyone wants, right? They want good debt, they want pretty good … A good location like Dallas where I live. They want the good assets. The debt went up so your DCR, it’s going to be hard to meet that debt service ratio. And then the seller price still haven’t come down to a point where we want it to so that makes more sense. So it’s very hard to find deals these days. And I’m not sure how you find these deals or you have any deals. I mean, what are your thoughts on this market?

Patrick Grimes:

With the economics the way they are, I might … My looking glass for where things are going to be at in three to five and five to seven years in terms of valuations, interest rates, it’s a lot more fuzzy than it was five, 10 years ago. We’re structuring deals now not around trying to hope that we can grow rents that appreciate through renovations and value add. In fact, we’re not doing the longer-term holds right now. Where our recessionary acquisition fund finds investments where we know we can buy right and we trade out quickly.

The whole point is, which I couldn’t say three to five years ago is that we have a ton of deal flow where you can make your return on the buy. And that’s awesome, right? With the very clear now today that there’s an asset where you can make that return on the buy, and then immediately we close quickly all in cash and … Or from our fund and then capital rates from our fund. So we lock it up at the lowest basis, re[inaudible 00:09:50] our capital by a second, then trade the first one forward to a third. And we do that under a year, we turn one into two and then two and four and then four into eight all within a fund. And we’re still distributing cash flow along the way. And so one becomes two because four, you get a lot of cash flow eventually. But then your equity grows very quickly more measurably and calculated because we’re … Each time we’re making a step it’s a calculated make your return on the buy and then trade forward and make your return on the buy.

And that’s a lot more measurable and lower risk than buying now, raising a ton of capital to do renovations, and hope that valuations hold true at a rate, which as you renovate, you can improve rents and improve value. But you’re at a time right now when the tides lowering and values are resetting, so the longer you hold, the more at risk you are that all your effort just be consumed by evaluating a business.

Jonathan Wei:

I see. I see. Your strategy is buy now. So how do you buy now at the right price? Your strategy is saying buy now at the right price and then sell it I guess quickly short term. So explain that a little more so I understand.

Patrick Grimes:

It’s a little counterintuitive because we’ve conditioned our investors that when we buy we then hold, we slowly renovate all the units. Well, that’s not a good idea right now. Why is that not a good idea? It’s because material costs are higher with inflation, and it’s harder to find them because of the supply chain issues coming out of COVID. Labor costs are higher and it takes longer to do things. Because of the great resignation. And also it’s hard to just get people out of the units. The eviction ban backed up the courts. As soon as they lifted it we couldn’t get people evicted. When the rental assistance checks stopped coming in those people stopped paying. It’s harder to even evict to get people out to do more expensive and longer renovations. And so I just don’t think it makes sense right now to put a bunch of stock in hoping you can improve over the long haul.

Which we now have an acquisitions engine which goes out there tie … We actually target owners directly. We’re finding a lot of distressed owners. Why? Because they weren’t prepared. Maybe it’s because of a natural disaster, maybe it’s because their delinquencies because of COVID, or maybe it’s because their debt interest rate increased and it consumed all their income, or a combination of those. Or their debt’s just coming due and they haven’t been able to execute their business plan in time to refinance out of it. And the new debt is not going to be good for them because it’s at a higher interest rate, right? So a combination of these factors lead a ton of really, really good property. Great performing assets that are owned by distressed owners because they didn’t have the right financial foundation to write out this recession. And so to be this source of relief, we can step in there and restructure it, buy it, and cash it at a great basis and then make that return, right? And so we’re-

Jonathan Wei:

Oh, I see.

Patrick Grimes:

Filtering through a lot of properties right now and we’re finding those good ones. We just raised 4.8 million and locked in a property at a sales price of 4.2 million in the fund. We raised the capital and placed it … We closed on the asset within 12 days of completing our due diligence. Raised the capital, put the capital to work in three days, and we’re projecting to get a 2X equity multiple on that asset under 12 months. And we’re already working on the refinance to buy the second asset, and we’re hunting for a third asset to trade forward very quickly.

Our goal is buy as much as we can as quickly as we can, continue to trade forward while these deals are available. I mean, I don’t know, three to five years ago they weren’t. We think one and a half trillion in commercial real estate debt coming due by 2025 there’s going to be a lot. We’re actually on the brink of a bunch of opportunity. I’m pretty sure we’ll be able to have this much deal flow in three to five. Pretty likely much more deal flow in three to five years. We’ll see. We’re going to ride this out as long as we can. But the point is, each step is a calculated step much less long-term forecast and risk.

Jonathan Wei:

Okay, so very interesting. What you’re telling me is you have your own team that does acquisitions kind of almost wholesaling or finding these direct to owner using AI. Say, “Hey, if you’re the owner, maybe in CoStar report, I’m going to call you up and see if you’re in trouble and we’ll try to help you out, rescue you, rescue capital.” I guess you already have the capital in your fund already, right, or you have to raise the capital?

Patrick Grimes:

So I raised capital. It’s always been a strength of mine coming from automation and robotics background. We’d put together multi-billion dollar custom machine design-build projects that were very risky.

Jonathan Wei:

Okay, okay.

Patrick Grimes:

Raising capital for real estate is much more calculated and assured return than those development projects that I was … That I spent my professional career putting together.

Jonathan Wei:

Right, right. But I assume that right now in your fund you already have the capital, you just got to go out there and deploy the capital. Is that correct? Or is it empty, a brand new fund?

Patrick Grimes:

We raise in tranches. So right now we just finished our first tranche for our first X, and then we’re refinancing that, and then we’ll pair the refinance proceeds with … And we go to buy the next asset, if we need more asset, more capital than what we have in the fundraise a little bit more in the second tranche.

Jonathan Wei:

Oh, I see.

Patrick Grimes:

We’ve got to sell this property. Depending upon the size of the next property, we’ll 1031 exchange into it, we may need to add some more capital to it, right? And then one into two and then two into four. So we’ll add capital. But we continue to repurpose the capital through … Of refinances and sell to rapidly grow-

Jonathan Wei:

Oh, I see.

Patrick Grimes:

A number of assets within the fund to compound cash flow and compound your yield, your equity, as fast as we can when we have this buying opportunity. You still get your cash flow. I mean, just like in a normal deal, the cash flow still goes … It’s not as big in the first asset. Any deal you get into now it’s hard to cash flow because interest rate, cost, everything has just gone up. If you compound that into two and then four and then eight, now you’re trying to get some … Now you’re getting some exciting, right?

Jonathan Wei:

Okay, okay.

Patrick Grimes:

You invest once. Instead of holding an asset for three to five years and missing the entire buying window, you invest once. We’ll buy a dozen assets with that dollar in three to five years, right?

Jonathan Wei:

Yes.

Patrick Grimes:

More efficient.

Jonathan Wei:

Interesting. That’s interesting. Because I had always a debate about single asset versus fund. And I had that on my podcast with Joe Fairless, another guy, we spoke about that. We kept debating, if you should do a fund or should do a single asset. Now my investor like to see and touch the property. If I create a blind fund they can’t see it so I’m not … I’m a little hesitant to raise capital, they don’t see nothing. That’s the issue I was worried about.

Patrick Grimes:

And so again you’re talking about three, five, 10 years ago and you’re talking about a very different model. You’re talking about still buying and holding for three to five or five to seven to 10 years, but you’re talking about buying one at a time but then holding, shutting the fund down.

Jonathan Wei:

Yeah, right.

Patrick Grimes:

Right. And this is a completely different conversation with an entirely different model where all of that doesn’t make sense. What we’re buying is something we’re trading out of immediately so you don’t have to get married to it, you’re not bringing it home introducing it to mom, and then putting your property manager on-site to live there and visiting it every quarter for five years. It is just purely we’re going to visit it, hang out for a little while, and then trade it forward. If you convey that message, right, to the investors then they get it. Why? Because single-family operators do this all the time. They buy stuff and flip it, and move forward. It’s just that in the single-family world, it’s easier to find those deals over the last 10 years. It is very cool right now that we can find them in commercial assets.

Jonathan Wei:

Right, right.

Patrick Grimes:

It’s not an extraordinary thing with doing it it’s just … In the strategy just we’re applying it to commercial asset.

Jonathan Wei:

Right. So almost like a fix and flip for a short term for multifamily in essence, right?

Patrick Grimes:

Yeah. Whereas we’re not doing any long-term value add, right? Where you associate a heavy renovation with a fix and flip, we’re only doing … We can do it in a month or two or three. We’re buying great assets already that don’t have renovations but we’re just making the return on the buy.

Jonathan Wei:

I see. So light renovation cosmetic, not heavy value add, and not long-term. That’s very interesting. That’s a very different strategy than I know but that’s very unique. That’s very good, that’s very good.

Patrick Grimes:

I don’t know anybody else doing it and I don’t know why. Or maybe they find the deal flow. But it makes a ton of sense.

Jonathan Wei:

I think it’s because a lot of people can’t find a deal flow, and they don’t know how to source the deal from the owner directly. It’s hard to convince an owner to sell you the deal. Unless you have a really great team that knows how to talk and convince them, I mean, it’s hard to convince the owner, I think that’s the issue.

Patrick Grimes:

Yep, exactly.

Jonathan Wei:

So good. So it’s great that you guys are having great success and you’re doing that in your fund. And so that’s a very valuable critical point. That’s very interesting. And I guess how do reach out? Is it automatic online? You reach out to investors that you want to invest? What’s your approach to raising capital?

Patrick Grimes:

I mean, I’ve been doing this for a little while so I’ve developed … We closed on the first asset, raised the capital without really sending out a mass email at all. We just had a bunch of our investors that were interested in deals that joined the wait list, investonmainstreet.com. We have a waitlist for our recessionary acquisitions fund, and we have about 12 million in commitments right now to apply towards. I mean, if somebody’s interested jump in there because we’ve got a ton of opportunity. We got two more assets in the hopper looking to close on November, December. The sooner you invest the faster you start compounding and the less of this buying window you get to take advantage of.

The people that made billions of dollars in 2009 and ’10, there were people that … Those assets that people lost transferred to, right? People that took action and made calculated buying decisions at the right time. Where fear is something that’s rampant, and sentiment-driven news is scaring people, that’s perfect for me because I’m an engineer and I’m calculated. I can go back to my numbers and be like “Wow, this is amazing let’s buy it, right?

Jonathan Wei:

That’s great. That’s great, that’s great.

Patrick Grimes:

That’s where we’re at right now.

Jonathan Wei:

Okay, great. That’s great. Okay, that’s great. I guess people, either they know you or you knew a relationship with them. And is this a 506(c) or B normally this deals you’re looking at?

Patrick Grimes:

I’ve only ever done Reg D 506(c) as in Charlie, 100,000 minimums for accredited investors only. And that means a million dollars in net worth not including your personal residence, 200,000 in income as an individual, or 300,000 in income jointly with your spouse. I’ve always done deals that way. But that allows me to talk about them right now to you, right? For non-accredited investors, you can’t really talk about what you’re doing, and you got to be really only … You got to know who I can trust and have this inner circle of preexisting relationship. So it takes somebody like me out there to talk about what we’re doing. If you’re non-accredited, still set up a call. I mean, I love talking to investors. I have an open calendar, investonmainstream.com/contact, and I can get you pointed in the right direction to people that do deals for non-accredited investors that I know of, but they won’t be on this podcast talking about them because they can’t.

Jonathan Wei:

I see, I see. So you only do 506(c) which is great because you’re one of the few that only does 506(c). Most of them do 506(b) is what I know from my lawyer. But you’re the one who does 506(c) because you go straight to the accredited investor where you can advertise. So I assume you have some really elaborate strategies on how to do that on certain platforms who attract new investors. Okay.

Patrick Grimes:

Mostly when I started out it was my relationships through the high-tech automation and robotics. I did not go friends and family when I started out. I went through prior colleagues at prior works, people that I went to university with, and my robotics and automation. And they were very interested because I had developed respect. It wasn’t until I did the first couple deals that I realized … I was like wow, I’m pulling in some capital. This is an important part of the business let me scale this.

And I got some advice. “Hey, you need to get your story out there.” I’ve got a bestselling book I’m happy to give away. We actually send a signed hard copy shipped for free to … This is called Persistence, Pivots and Game Changers, Turning Challenges Into Opportunities. It did make a bestseller on Amazon. And there’s some really cool stories. Phil Collins, lead guitarist at Def Leppard, an actual rock star, and some NFL, NBA players. It was a really fun book, great team. I did a chapter, I tell my whole story. I get good feedback that it helps inspire people so we offer that. If anybody wants a copy they can go investonmainstreet.com/book, and then enter the promo code: add this podcast, investonmainstreet.com/book.

So that helped out a lot, right, because people started realizing … Learning about my story. Getting on podcasts. I speak on stages now. I just did 600 people at MFIN in San Francisco this last weekend. Just starting to get my name out there. My story about the ups and downs, my investment thesis. People started getting attracted to that. I don’t think it’s any magic marketing, I think people see through that.

Jonathan Wei:

Okay.

Patrick Grimes:

And they just want to invest with good conservative people that are doing the best they can. I think you got to get yourself out there.

Jonathan Wei:

Great. That’s great, Patrick. I’m really impressed you’re raising capital track record because not many people can raise that kind of money. Not many operators can raise that kind of money is what I can see. So that’s really good that you have that track record, it’s really good. And you’re very unique because very thoughtful in how you strategize and calculate your vision and how you acquire deals. And it’s not like the ones that I’ve been shown or taught in the past so it’s very different, it’s great. Touch on AI. So what do you think about AI and I guess investing, in general? Advice you can share on that.

Patrick Grimes:

Well, there’s some AI tools we use a lot. I contributed to an article in Forbes. I have quite a few articles in Forbes on the uses of AI in real estate. Reonomy is one of them. It’s a machine learning algorithm that does a lot of web scraping and compiling of information. We can do intelligent searches and stuff like that. That was one that’s, man, for three to four years was very strong. I think in this market our strategy’s very different now so we’re not using as much of that. From a daily basis we have conversations with our team, how can we make this more efficient with AI? I know we’ve already implemented AI in phone systems in the properties, a handful of properties for leasing as appointments as well as maintenance requests. And it’s been well received. I mean, they don’t have an attitude and they don’t argue they just submit things. That’s been productive. Other than that, there’s just a bunch of little AI tools we use around the office.

Jonathan Wei:

Okay. Okay, great, great. That’s great to share. So if anyone wants to reach out to you, Patrick, how do they reach out to you and get ahold of you?

Patrick Grimes:

So investonmainstreet.com/contact. My calendar’s right there. Happy to chat to anybody if they want to set up a call. One of the things that I love about what I get to do, now that I’ve left the engineering world altogether, is I have time available to just meet people, and learn about where they’re headed, and see if I can get them point in the right direction. That’s be awesome. So my email’s [email protected]. And we also have an educational for alternative investments is really where we talk about … Other than real estate even. We’ve done diversified energy funds and stuff like that that helped to really give you some non-correlated investments in alternative assets.

We also have Passive Investing Mastery which is a sister company we’re launching, really excited about that. Invest on Main Street’s really solidified in this real estate space whereas I’ve always been a believer in diversification. Even my Passive Investor guide, it’s a free download on my website. [inaudible 00:26:53] that’s the diversification of the wealth. It talks about only 25 to 50% of the high-income and ultra wealthiest portfolio is in alternative investments. It’s not all of it in real estate it’s diversified. And so we try and help solve that need. PassiveInvestingMastery.com’s a great resource for you on that.

Jonathan Wei:

Okay, great. Well, thank you, Patrick, for coming on the show I appreciate it.

Patrick Grimes:

Happy to be here, Jonathan, thank you.

Intro:

Thanks for listening. For more information, you can find us online at www.greystonecapgroup.com. Check back weekly for new episodes. See you again next time.