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Actionable Investment Tips, Alternative Assets and More

The Work Hard Invest Harder Podcast with Justin Dixon

 

Actionable Investment Tips, Alternative Assets and More

by The Work Hard Invest Harder Podcast with Justin Dixon and Patrick Grimes

Transcript

Justin:
All right, Patrick, welcome to the podcast. Happy to have you on, man.

Patrick:
Yeah, I’m excited to be here. You got a great audience, true to my heart.

Justin:
Yeah. No, no. Appreciate it. We’ll dig into a lot of things here, but let’s start off, give us and the audience a little bit of an overview of yourself and Invest on Main Street and then we’ll go from there.

Patrick:
Yep. My name is Patrick Grimes, founder of Invest on Main Street. We’re a private equity firm. We do alternative investments in real estate and other things. Passive Investing Mastery is our sister company that does also investments in trying to build out that alternative investment part of your portfolio. You find that 25, 50% of high income earners and ultra wealthy are in an alt assets. What is that? Educate people about it and we provide those opportunities.
I came from a high-tech machine design automation and robotics background. Like many of you, I was a high paid tech worker climbing the corporate ladder and I made my way into real estate, ups and downs. I started in 2007, lost it all. Was humbled, made my way back in much slower, tortoise, not the hare, and built single family into multifamily and now into alt assets. It’s been a long journey. It’s been a lot of fun and now and living between Southern California and Hawaii.

Justin:
Yeah, no, we were talking about that just before we launched, and that’s not a screensaver or a logo behind you, that is the real beach and a real background. A lot cooler than my background, even though it’s auto-generated.

Patrick:
Yeah, we’ve got about 500 surfers all riding in the exact same wave at the exact same time here in Waikiki. It’s a lot of fun. My wife and I were out there hitting it together yesterday.

Justin:
That’s awesome. That’s not a bad place to be in Waikiki, that’s for sure. Especially with the weather the way it is out there. Let’s dig into your overall background. You said you started your career in tech and were one of those tech high-powered, high profile employees, and then got your start in real estate in ’07. How did you first of all get exposure to real estate? Because I’m always curious, I grew up in a small town. Real estate investing was not part of the vernacular there. It was get a good job, work for 40 years and hopefully you’ve got enough to retire. How did you get exposure to real estate? And then talk about that first deal and how you started your journey.

Patrick:
A hundred percent. It was exactly as you’re saying. I was raised in a small town, South Side Yosemite National Park. Went to Yosemite High School actually, and we did bounce around a little bit. I was born in Italy and lived in Florida for… But all my formative years were get a job and work hard. My parents though encouraged me to go to engineering school. I was a little tinker. I’d build things, take apart VCRs. I worked for an internet service provider up there at the time doing all kinds of fun things and they’re like, “You know what? You’re talented. Let’s get you off to a university.” And so I didn’t think I was going to do anything other than mechanical engineering. I freaking loved it. It was awesome. We were doing really cool stuff. Automation for tech in aerospace, medical device, EV vehicles. I did robotic cell assembly for Tesla, for example. I mean, it was really neat stuff.

But the first automation company, the design firm that I got a job with out of college, the owner, in fact, he still invests with me today, really good guy. He gave me some advice and he said, “You’re going to do great. You’re going to have a lot of fun in high-tech, but it’s a wild ride. Whatever you do, don’t put all your money in it. If you want to build that future for you and your family, you need to invest in real estate.” And he said his only regret was not investing more sooner.

Justin:
Got it.

Patrick:
And he encouraged me along that path and I read the purple book and off I went.

Justin:
Yeah. No, that’s interesting. I wish I would’ve started in real estate sooner. I’ve started sooner than some people, but there’s definitely people that are starting way earlier than I did. When you started your investment journey, did you jump into passive investing since you were working full-time, and arguably, a bunch of hours? Or did you take the I want to be active route and go into buying your own deals?

Patrick:
I took the I want to be active route.

Justin:
Okay.

Patrick:
I didn’t even know about passive investing until later. In fact, I’ve written a series of Forbes articles on asset protection and scalability, limited liability. Patrick Grimes Forbes, single family versus small D or asset protection or 1031 exchanges. A lot of cool stuff there. As I began to learn about the abilities of passive investing, it became more and more attractive to me. But back then I didn’t know any different and I was inexperienced and I didn’t know what the difference between buying for cashflow and speculating on new construction or pre-development wise.

And back in 2007, when the market was never going to go down, I went heavy. Hard all in one asset, lost my ass and it took me many years to recover from that. Didn’t go bankrupt but foreclosed. And then that after the fact, getting back into high-tech, I did a master’s in engineering and an MBA. Started making high income again. Where was I going to invest it? And following the breadcrumbs of the wealthy led me right back to real estate and cash flowing existing construction, much lower leverage, diversified recession resilient markets. And so I scaled from single family to larger multifamily.

Justin:
Got it. In ’07, it sounds like you were doing some development, some ground up stuff. Is that how you sunk a bunch of your cash into that and didn’t pan out, I guess, the way that you thought?

Patrick:
Yeah, it was even a step before that pre-development. But yeah, I sunk a bunch of cash and before we ever got to building, the market fell apart.

Justin:
Yeah, you definitely hit it on the wrong side of the ’08 bubble, unfortunately. I imagine if you started a couple years earlier or a couple of years later, you would’ve been right in that sweet spot. I’m curious because a lot of people I’ve talked to, their journey goes single family, maybe small multis, and then syndications and all that. And you went even before things were built doing pre-construction. How did you get exposure to the pre-construction world and what does that even mean to invest or are you just investing in the dirt and hoping that somebody will come in and buy it and build it? What’s that look like? And I’m assuming that’s a very yield flow or yield play versus there’s no cashflow in dirt at this point.

Patrick:
Yeah, no cashflow in dirt. It’s all speculation. And I don’t like to encourage people along that path. Now obviously, because especially today, I mean, today we’re finally at that buying window like there was in 2009 and ’10 for people to swoop up great deals. We’re there again today and now’s not the time to be speculating on high returns. It’s investing in discounted buys. But at the risk of misdirecting people, yeah, pre-development… And being the engineer, I do a lot of research. I mean, I don’t think real estate is harder than passing electromagnetic static physics class. I mean, it’s just simply not.

Justin:
I may argue that it’s a little bit, real estate seems easier to understand, I would say.

Patrick:
Yeah, I mean, and I think that’s why you see a lot of engineers, well, we tend to be a little bit of analysis paralysis and it can be systematized. And I have an emphasis in systems engineering and automation my whole career, and it is just rinse, repeat and it’s about modeling reality and having that come true and which is essentially what we do. But the risk adjusted return is much greater when you don’t have a cash flowing income producing asset, not only for that deal, but when you’re signing on a loan in your own name and cross collateralizing, which I didn’t even know what that was, you’re risking everything. They come after me, not just this deal.

And so yeah, the idea is when you do pre-development, you’re buying land, you’re entitling it, you’re getting roads and sewage and everything in there, and then you can build eventually, which we never even got to. And then at that point you’ll have something to rent or sell if you make it on the other side of that big gaping hole of valuation and you’ve paid in cash for the asset, or paid in cash for the loan payments for that asset the whole time. And so not worth the hypothetical return. And so that’s why I’m backpedaling a little bit from talking about it because I don’t like to overemphasize that.

Justin:
Yeah, you don’t want to encourage somebody to go into that, but it’s also, it’s interesting, because obviously none of these buildings that we live in would be built unless somebody speculated and did all the work and hopefully they had a big return by speculating and timing the market I guess a little bit better than maybe you did in ’07, but-

Patrick:
Good for them.

Justin:
Yeah, exactly. Right. I’m curious, I want to dig into the transition from ’07, not ideal, lost a bunch of money and then you started to rebuild yourself into, again, into real estate. But before we jump into that, I want to take a quick sponsor break, so we will be right back. All right. Ready? Three, two, one.

All right, we are back on the Work Hard, Invest Harder podcast with Patrick. We started out talking about your journey up until ’07, doing some speculation and some pre-construction investing. And now I want to transition to, you’ve had some hard times. You said it didn’t go bankrupt, but you’ve had some hard financial times coming out of ’07, ’08. You invested in yourself it sounds like, got some education, an MBA and a master’s degree. Got back into a high paying salary to build up your coffers again, build up some of that financial foundation, and then started to get into real estate investing again. How did you, mindset wise, I’m curious how you picked yourself up and dusted yourself off and then continued to invest in yourself and also invest in the real estate, which ultimately was not an ideal investment in the investments you were doing back in ’07. How did you go through those years, or months or years of that mindset shift and transition back into real estate?

Patrick:
Well, I was always moonlighting essentially real estate. I was a well paid high-tech professional this entire time. It was pretty easily for me to just be like, “Okay, I lost a bunch of my own money. Let me go,” like you said, “dive back into the identify as Patrick the engineer and let’s get back into it.” And so I started doing well, as I was always… I loved what I was doing. And I still love engineering, although I love other things a little bit more, which has caused me to walk away from it.

But once I got to the point where those bonus checks were coming in and I started looking for the right allocations of where to invest, and in fact if you go to my website, investonmainstreet.com, and download the Passive Investor Guide, which is the same guide that’s been there since the very beginning, it shows the allocations of the middle class, the high income and the ultra wealthy. And in the middle class, they have about 8% of their wealth in alternative investments that’s outside of the stock market. The high income earners and the ultra wealthy have between 25 and 50%. Now, that’s not all in real estate. About 25% of that 25 and 50% is in real estate. In fact, if you look at Tiger 21’s allocation, then it is 25%.

And so I’m an alternative investments guy. I’m an alt assets guy, and one of those is real estate and that’s why we also have energy funds. We have some other kinds of assets that people can invest in to build that out, that 25% of your 25 to 50% of your wealth, and which will be the outsize return with cashflow and appreciation to help you retire faster.

But the most important thing is that I was looking for ways that I didn’t lose it all again, if real estate hit or I didn’t lose it all again in the stock market if my 401k or company stocks took a dive. I wanted non-correlated investments, investments that aren’t rising and falling together. I didn’t like the sentiment driven stock market and I wanted to get into these harder assets. It is tough to do if you ignore real estate. Ultimately the strategy of the wealthy are to park their cash and be patient and not to speculate.

And so when I say that I don’t necessarily park the cash and be patient, I actually park and go hard, I work hard for it. And so traditionally for the last five to 10 years, we’ve been buying assets that are under market. I mean, they haven’t been renovated, like apartment building. They need work. And so we’ll buy them and then we’ll renovate them over two or three or five years and then as the rents grow, the valuation will grow and then we’ll be able to sell it for a profit. Now, that worked for many years. Today we’re doing deals completely differently with a completely different thinking cap because things are different today than they were for the last five to 10 years. I believe that you can find a way to invest and win big in up markets and stable markets and in down markets as long as you buy right and you work hard to improve that value.

Justin:
I’m curious, I want to touch on a couple of the things around the alt asset stuff, because I’m curious about the different things because real estate is an alternative asset. It’s not the stocks and mutual funds is normal, and then I think it’s funny that real estate is an alternative asset. But now that we’re recording this in late August 2023, interest rates are higher and grows a lot faster than most people anticipated of the last two years. What are you looking at now? Maybe let’s dig into that philosophy, how you’re looking at deals in the real estate world now differently than you did 12, 24 months ago.

Patrick:
Right. Well, what we talked about before is buying for cashflow, buying in recession resilient markets where there’s diversified employment, where people are moving to, typically because they’re low cost of living, they’re tax advantaged and there’s jobs moving to them, so they’re attracting people. You buy in those kinds of locations, which is what my life became all about, is studying those recession resilient assets, those recession resilient markets, and then buying at a good price and then renovating, whether it was single family or multi.

The challenge today is you can’t look in a crystal ball and say, “Hey, where are valuations going to be in three, five or seven years,” like you could before. You have a bunch of things that weren’t present over the last five to 10 years, and so we’re looking at deals differently. One, you have interest rates that are rising and that reduces valuations. Valuations are really a ratio of your net operating income to cap rates. And cap rates are what things trade at, how values are set in commercial real estate.

But if your income is getting hit because interest rates are higher, your income’s getting hit because taxes are rising right now, your income’s getting hit because insurance is growing dramatically, especially in some of the more favorable markets. Your income’s lowering, so even the cap rate stays flat, your valuation’s going to be less, but it’s not. I mean, the interest rates are rising, so it’s actually, what we’re seeing right now is that the cap rates are growing, which means you’re getting hit on both sides. You’re getting hit on net  income side and on the ratio side.

Now, you add all that to the fact that in order to execute a strategy of renovation, you have to buy materials and you need labor. Well, inflation, increasing your materials costs, increasing your labors costs. COVID increased the timeline to secure materials and made labor more scarce, so it’s growing your timelines. Okay.

Then you stack that on the fact that through COVID, people stopped paying rents and people who, strong operators that had reserves like we do, we have eight months in reserves, they’re probably okay because they’re supplementing it. But operators that didn’t have, banked a bunch of cash on the sidelines, they stopped getting paid and it took a while for the government assistance checks to come in and then those dried up and then the eviction ban prevented people from getting out residents, but then that lifted, which caused a giant backlog in places like Texas and even Atlanta where we can normally get people out in a couple weeks or a month. All of a sudden it’s four to six months.

And so if you didn’t bank, like we do, eight months of expenses in an account just sitting there waiting for a natural or financial disaster, financial disaster is exactly what COVID was, then you’re in a lot of trouble and you can’t get people out to execute your business plan, to renovate the units, to improve them to get income. They’re just sitting there not paying. And so you’re in this situation where all these layered stacks of things cause, and with interest rates continuing to rise, inflation, we don’t actually know where valuations are going to be. What we do know today is we know where to buy and we know what assets to buy.

But we do know today is that for the first time since I think 2009 and ’10, there is a ton of incredible product on the market that is great producing buildings with distressed ownership. Inexperienced, disinterested, battered, worn out, that maybe they didn’t have the reserves to live out COVID. Maybe they’re just exhausted, their occupancy lowered because people were just not paying and they just evicted. They’ve been struggling. Maybe they had, in all of that, maybe they also had a tornado, maybe they had a flood and just they didn’t have replacement cost insurance, but they were already strung out. There’s so many… Or they didn’t get fixed interest rates and now their interest rate’s gone to 10%. Or maybe they got a rate cap, but then that still consumed all their income as the interest rate went to the rate cap. Or maybe they even got fixed at rate cap or none, but their loan is expiring and there’s a trillion and a half dollars in commercial loans expiring by 2025.

This is such an incredible time to where you don’t have to hold it for three to five, five to seven years and renovate very slowly. In fact, I don’t think you should because in that timeframe you’re going to miss this entire buying window, just like the people that made it wealthy in 2009 and ’10. They bought at the right time. That’s where the wealth transferred, the properties transferred to those individuals because they bought in the window.

This is that window and we have an incredible deal flow and that’s why we have the recessionary acquisitions fund because that fund, all cash buys, performing properties and we swoop them up. It’s like whack-a-mole, very quickly. We refi out our capital, buy a second property. We trade the first into a third property and turn one into two, two into four, and we’re not going to take capital and hold it in one thing for three to five years so our investors miss the entire buying window. We’re going to take capital in and we’re going to repurpose it into a dozen properties in the next three to five years, and we’re going to make our return on the buy and then move forward. We’ll make those stair steps instead of the hope and wish and prey into the crystal ball that that property that you’re renovating will actually appreciate.

Justin:
You’re focusing now on raising capital to swoop into some of these distressed assets, and maybe the asset isn’t necessarily distressed, it’s more the owner is distressed because they bought it in March of ’21, thought everything was rosy and then crap hit the fan in the last two years, last year. And so you’re going to buy these multifamily is what you’re focusing on, these syndicated deals that people bought. I guess is that the focus, a hundred to 300 units? Or what does a good property look like for you, assuming it’s in a market that you like?

Patrick:
It’s a good question. By the way, you hit the nail on the head with your leading into explanation. We’re just buying right, and on the diversification side, what is really cool about this strategy is that because we’re not buying something and holding, and we’re not… Really, you got to take a new thinking cap. You got to take the old thinking cap off, put a new one on. There’s nobody else doing it quite like we’re doing it, which is strange, but we’re not buying and holding, we’re not putting a long-term bet on the growth of a particular asset class, like multifamily or retail or whatever it is. We’re also not doing a long-term bet on any particular location. We’re buying things, we’ll make our return going in and then we’re moving out of it.

The traditional very focused locations that we would be in, very narrow markets that we would buy in, we’ve increased that net a little bit. Why? Because we’re just moving forward and we’re leaving enough on the bone for the next guy because we can market it better and that next guy can do much of the improvement and hold it for as long as he wants. We can trade forward very quickly in these assets. There is some multifamily, we have four case studies that we did outside of the fund to demonstrate this is what the strategy is. Three of them are multifamily, one of them is a shopping center.

Justin:
Okay.

Patrick:
And it happens to be that the first asset within the fund is a retail shopping center that we got an incredible base. It’s actually a 10 cap, meaning that we did pay all in cash, and it’s picking out 10% a year just based on buying it all in cash. Incredible. And it’s 60% occupied. The guy was out of California owning it, he inherited it and he didn’t know what to do with it. He dropped to 60% occupancy and he’s like, “Look, can you just take it? COVID, interest rates, everything. I just don’t know what to do with it. I don’t know what to do.” And we swooped in there, got an incredible basis and we’re already refining our capital, we’re moving forward. We’re not going to be in it for very long.

Justin:
When you refinance, you’re still owning the property, right? You’re not going to flip it out. You’re not essentially flipping these things in six months, a year. You’re refinancing, you’re almost doing a bur method of a big asset. You’re coming in, refinancing your money out, taking that money, then buying another property and rinsing and repeating what you’re still owning the assets. Is that what I’m understanding?

Patrick:
It takes very short amount of time for us to execute what we call business plan, because we’re not doing heavy value add on a property, we’re doing very light improvements, because we make most of our return just going in. We will refi because we need to get that capital going as soon as possible into another asset, a second asset. But we will not hold this asset. Why? Because we have the primary asset, we have our investors’ capital trapped in there.

Now, five to 10 years ago we may have said, “Hey look, you know what? We can get the best return for you is for us to get this from 60% to 99% occupancy and for us to improve it to the last one or 2% of valuation and do that over three to five years.” That’s not how you get the best return today. Putting this capital to work in as many deals as possible in this short window, making a step valuation of equity on each acquisition and trading forward as many times as you can in this extraordinary narrow window leans us to say, “We’re going to do a tax advantage exchange. We’re going to take the primary property to the first one and we’re going to do a 1031 into the second one. We can move very quickly. And then that one, we’re going to refi out our capital out of that one and we’re going to trade forward that one into another one. And so by that way, with the first property, turns into property two and three.”

Justin:
Yep.

Patrick:
And then two and three turn into four and five and six and seven, and then those four become eight. And so that way you build a diversified portfolio of assets, so you now, not only is your compounding on equity growing with each rung essentially, but the compounding and cashflow grows as well.

Justin:
Got it. No, that’s super interesting. I hadn’t heard… I’ve heard of other PE firms swooping in and, I don’t want to say being vultures, but coming in and essentially you’re rescuing some people because if they don’t get rescued, the deals are going to go back to the bank and investors are going to lose all their capital. I have heard of other people, other funds preparing themselves and going after deals, and I don’t know how their strategy is if they’re going in all cash and all that fun stuff.

But your step method seems super interesting, because I do agree that if you can find an asset now, and I’m thinking about it the traditional way, not your new thinking cap way necessarily, but if you can find an asset now that pencils based on using the analysis tools that you’ve used up until now, it should be theoretically a good deal because, I don’t know if you agree, but I would think that in three to five years from now, interest rates are going to be lower than they are now, or at the very least steady. Because normally when you’re doing underwriting, you’re analyzing a step increase and interest rate’s higher when you refinance and all that fun stuff. It’s interesting.

I want to transition a little bit to the other assets, because obviously you are the alt asset guy it sounds like. What are some other interesting assets that a person can get involved in or things that you guys are really focused in on right now? And I’m also curious about the diversification that you think about of assets have different return profiles. Some are cashflow heavy. If you think about short-term rentals, they historically are more cashflow than appreciation. Then you’ve got development, which is all appreciation and all equity or all yields. I guess how do you think about a diversified portfolio across the different alternative assets that you guys are looking at?

Patrick:
Sure, yeah. I wanted to say one thing. I love how you pointed at not looking at the thinking cap, but this other way on your last comment, because you’re thinking you would imagine that if something is underwritten today, then it would potentially be penciling. I’ll tell you what, my crystal ball’s broken, man. When I was born in ’82, interest rates were in the high teens.

Justin:
Oh, a hundred percent. Yeah.

Patrick:
Interest rates have been so much higher, I really don’t know. And I would rather not make that gamble today. That’s why I’m saying, “Look, I’m just going to make the return on the buy and trade forward because each step of the way, that’s calculable. Everything else is super fuzzy.” But yeah, I totally get what you’re saying though. Conceptually, you would think. Man, I just don’t know.

But yeah, so on the Invest on Main Street side, the intention of Invest on Main Street, as I mentioned before, is really to grow real estate. And the reality is the more that we diversified, we had partner in 26 acquisitions, large acquisitions, we got more and more of our investors just further and further indexed in real estate. And so we started talking to like, “Where else are you investing in other kinds of assets?” And some of the leading ones were housing, food and energy and healthcare and those tend to all be essential needs, and even in real estate, we’re looking for to be near hospitals and stuff like that, and healthcare centers. You’ve got a bunch in the life science district in Houston and that’s the world’s largest life science center, and those are rockstar assets.

Yeah, we’ve done diversified energy funds, which again, being completely non-correlated investments, investments which don’t rise and fall with real estate, don’t tend to rise and fall directly with the stock market but oil and natural gas investments, and right now oil is strong, pricing is strong. While the tide is receding in real estate, oil is strong. Now, gas is not so strong. Gas went from $7 to two and three-quarter. Having a diversification within energy is also important.

Justin:
Is renewable part of that energy or is it mostly just O and G and natural gas?

Patrick:
I stick to natural gas and oil funds.

Justin:
Got it.

Patrick:
And the other side to those coins is the tax benefits. The government wants you to invest your money into essential needs, into housing and feeding and energizing America as well as keeping them healthy. You can find that very interesting things happen. If you’re buying a real estate property and you got to sell it… Or sorry, if you buy a real estate property in cashflow, you get tax advantages. But then if you go to sell it, the government wants you to keep the money in real estate, so they let you do a 1031 exchange so that you can [inaudible 00:30:38]. Same thing with energy, as it turns out. You invest in energy, they give you huge depreciating losses which lie to offset ordinary income. Ordinary income, like your W2 income, it’s even better than real estate.

Justin:
Yeah, I’ve heard about, I was talking to somebody else on the podcast and it was really interesting that obviously, real estate doesn’t offset your ordinary income, but if you invest in oil and gas, it does. I think it’s super interesting that there are a lot of tax advantages to investing in other things outside of just general real estate, which I think is super interesting.

Patrick:
Even 1031 exchanges, people don’t know this, but a little known exception to the 1031 exchange rules, you can actually do that in oil and gas as well.

Justin:
Oh, interesting.

Patrick:
Yeah, and then within the healthcare space, there’s a number of investments which we haven’t opened yet, but we’re looking at right now, which allow for incredible tax advantage cashflow. Completely non-correlated, and some of these, they’re the kind of assets that you only know about if you’re a hedge fund or a private equity firm, but they’re just simply not well known as these energy and real estate deals aren’t to the typical professional, like me, like I was, like many of your listeners are. We’re working so hard at our jobs making a ton of income and we’re putting in these traditional assets that all they do is leave us on the edge of the seat as we watch the roller coaster of the stock market up and down, whereas there are stable cashflow streams and tax advantages, accelerated retirement and a better retirement with a chance to leave something to your heirs in these alt asset space, we’re helping to educate and demystify those opportunities.

Justin:
How do you invest in, you’ve mentioned food and health. Obviously, we talked a lot about energy, but how do you invest in the food and health, keeping people healthy and feeding people?

Patrick:
We have two of those coming up, so I’d recommend for… I don’t want to go in too much detail right now because we’re focusing on the recessionary acquisitions fund and we just finished two different energy funds, but very right after that, we do have healthcare funds and that we’re looking at launching that give you that alternative investment. And we’re investing right now in a couple on the food side, which we’re going to see how that plans out and if it’s something that we think we can structure in a way which is advantageous for our investors as well. But that’s what the goal of passive investing mastery is, is .com, and that’s the alternative investment extension to be able to move into more of a holistic portfolio for our investors and to just keep doing the real estate stuff over and over.

Justin:
Yeah. It’s a really good segue or transition, because I’m curious to learn, and maybe you can educate investors that are listening, if you want to get involved in passive investing, whether it’s real estate or something else, how do you think is a good way to get started? You’ve never invested in real estate or anything other than what we already talked about the traditional stock market and 401Ks. What’s a good first step for somebody? Obviously, they’re listening to this podcast, so they have had some exposure to real estate, but what’s a good way to dip their toe in the water of just passive investing in general?

Patrick:
Sure. I would recommend jumping into some of my articles on Forbes because I do talk about the differences between direct investing in real estate. If you go to Patrick Grimes Forbes Single Family Versus Multifamily, Patrick Grimes Forbes Asset Protection, and IRA 401k, I’ve got articles that discuss how do you unlock your home equity, how do you unlock your 401k and IRA to self-directed into passive investments in alternative assets, which includes real estate. But my general sense is you just got to do what I did and that’s you got to start listening to podcasts like this, but then you can start reaching out and talking to those operators.

And so the biggest challenge is these are not things that are traditionally publicly listed. You tend to get to know these operators like myself. In fact, if you go to my website, you can set a meeting right up on my calendar. It’s one of the things that I love doing is talking to investors that are like me, wherever they’re at, and seeing if I can provide value to them and if it makes sense for them to participate with us, great. If not, I know dozens of other operators that may have what is better suited for their portfolio.
I tend to say, “You got to do some research.” You got to not only listen to these podcasts, then you got to reach out and talk to these operators, which we do. You also, it’s important to surround yourself with the community and if you’re just going to work, it’s going to be people investing in their 401k and IRA, and these are people that are going to be doing this until they pass or stop working. They’re just not going to branch out. And it takes somebody who, a very special person to wander in the desert by themselves, and we have survival instincts not to do that. Why make that so hard on yourself?

If you go Google local real estate clubs, Ria networks, go to those local, build a community of people that are thinking differently, that are thinking like the high income and the ultra wealthy, that are seeking the 25 to 50% allocation alternative investments, so you can pack together that human instinct and get more empowered to make some of these decisions. But the most important thing is make an investment. Make a goal for yourself to do one passive step a day, jump into a podcast a day, one active step a week. Join a virtual Zoom, jump into our list and you’ll see some. We have a webinar coming up tomorrow actually on alternative investments. We have a whole panel of operators. Jump into and then make an active step and then within the first 90 days, make an investment. Find the right sponsor and move forward. And in that first investment, you’re going to learn a lot. It’s going to be a really interesting time and unlock a whole world for you.

Justin:
Yeah, I think the education piece is where I… And I was a very analysis paralysis person when I first got into this because once you start peeling back the onion of alternative investing, even just real estate, there’s so many different assets classes within real estate. You have a single family, you’ve got fix and flip, short-term rentals, et cetera, et cetera. And so I think what I fell into was the shiny object syndrome where I started chasing every little thing that was pretty cool, and then I landed on syndication as my primary. But yeah, so I definitely agree that getting yourself educated and all that is super important and being around people, because it is interesting, once you make that transition to wanting to wander into taking a different path, if you start talking about real estate or alternative investing to your friends, they look at you like you’ve got two heads and you’re like, “What are you doing? What are you talking about?”

Patrick:
A hundred percent.

Justin:
When my wife and I first got into it, we definitely were like, “We need to find some real estate friends. We need to find some people that we can talk about this stuff with.” No, totally get it. I know you talked about this already, but I like asking people what they think the next six, 12 months is going to look like. I know you said your crystal ball is broken, but maybe, it sounds like you think there’s a buying opportunity maybe with a different thinking mindset of an exit, not just thinking about it traditionally of a three to five to 10 year hold or whatever. But yeah, maybe give me your thinsight on, okay, if you think about multifamily in general, what’s your crystal ball, broken as it is, look like?

Patrick:
Well, what’s very clear to me, being the analyst and engineer, is what I see in the now, and that’s what my point is. Right now and for the next six months, I know I can buy something and get a great price and then move forward and I can execute a short-term business plan. What’s very clear that’s going to happen is interest rates, in my mind, are likely to not drop down, and there’s big announcements coming from the Fed that there’s very likely going to hold true if you’re saying in the next year, year and a half, if not, see a couple more ticks up. There are clear signs that that is going to happen.

What also is true is that by 2025, a trillion and a half dollars in commercial real estate debt is coming due. And with the credit crunch, with the banking collapses, what we’re seeing is that those regional local banks, which turns out to be the banks, the only banks that lend to these commercial real estate deals, they’re having liquidity crunches. A lot of cash is leaving their banks and a lot of the loans that they’ve lent out and the expectation that those loans would get refinanced and they would create liquidity for these banks, it’s not coming true. When you have more and more of their loans out there becoming distressed, that means the banks are going broke. It means they don’t have the money to lend.

And in addition to that, most banks now are looking at the commercial real estate market as much more risky than it has been in years it past. While they had larger allocations, or pie chart of larger allocations of commercial real estate, especially in multifamily, was outsized because for the last 10 years, it’s been the steady tried and true growth, they’re shrinking that allocation. Some banks are just saying, “Hey, look, we used to be interested in these kind of deals. We’re not anymore. In fact, we’re going to lend on everything else because we’re way too exposed to commercial real estate.” We’re going to see a huge amount of great performing assets with distressed ownership because they didn’t have the right kind of long-term debt in place, or they had a number of other of the things that we’ve discussed all play in.

And so that’s why we’re positioning ourselves right now to be that opportunity, that opportunistic cash buyer with the recessionary acquisition fund, and we haven’t mentioned it, but because of the debt crunch, that debt collapse, we actually have a recessionary debt fund, which is an income fund, and that allows the placement of both debt and equity and investors can do that first position debt. Again, in 2009 and ’10, the wealthy billionaires were created by whom those properties transferred to. On the debt side and on the equity side, by placing yourself in both of those for recessionary acquisitions, great assets in troubled times, you could really do well for yourself in the next year and a half to two, maybe even three years. But that’s what our plan is, is to take advantage of that opportunity.

Justin:
Yeah. No, I like it. I really like it. This has been really awesome to have a chat with you, Patrick, and you definitely were a different guest because a lot of the guests that I talk to have a very, they have the traditional thinking cap on, and it sounds like you’ve taken the time and effort to think about a different strategy, which I think is super interesting. But I want to transition to the final three questions that I ask every guest. First question is, what’s one piece of advice that got you started or helped you along your real estate investing journey?

Patrick:
Well, let’s see. I’ve already talked about how I should invest more sooner by Dave Carlberg at the beginning, and that was probably perhaps the biggest piece of advice. Reading Rich Dad, Poor Dad was probably the second, and I mentioned the Purple Book as well. I’ll say what I felt like has really been a mantra that is a quote, how about that?

Justin:
Yeah.

Patrick:
Yeah? And I can’t remember who said it now on the spot, and it was Napoleon or Winston Churchill. It was, “I never won a war that went to plan, but I never won a war that I didn’t plan thoroughly.” And that really hits home because through the times, if you zoom out on time, you can see all these markets, they make different cycles. And when I first invested, I didn’t zoom out far enough and look at the cycles and the recession, didn’t consider the recession resilience over cycles. And today, and for the last five to 10 years, we looked at the last couple recessions and we built a really resilient portfolio based off of what we could see.

Now, did it go to plan? No, because now we have inflation and interest rates and COVID delinquencies, COVID issues, but we’re still winning the battle. Why? Because all the similar kinds of things with reserves and debt and all these things that help people through past recessions that looked a little different are helping us through this recession. And now today we’re doing the same thing. We’re looking at, well, look, let’s zoom out. Let’s see what we saw before. I don’t think it’s going to go perfectly to plan, but I know if we stick to our very thorough and deliberate conservative approach, I think we’re going to win the war again, and so I’m excited about that.

Justin:
Yeah. No, I like it. That makes a lot of sense. You mentioned books, but I’ll ask the question anyway, but what is your favorite real estate or business book that you’re into now, right now?

Patrick:
Trey Taylor, you probably hear a lot about EOS or [inaudible 00:44:53], but Trey Taylor is one of my dear friends. He’s incredible. A CEO Does These Three Things, a book that just came out, and he’s been speaking on it at MIT and all over the country. It’s an incredible book. If you’re serious about building a company and you’re up there on the food chain, you should read this book five times. Trey Taylor, A CEO Does These Three Things. And I’ll tell you what, it’s so well written and it’s so rich with historical representations and stories and comparisons that I’ll tell you what I did. I run every morning and around the beach here, I usually run at one and a half speed when I’m listening to audible books. I actually slowed this down to one.

Justin:
Ah. You want to make sure you’re catching everything.

Patrick:
Oh man, I just loved it. Yeah, and he’s such a solid guy. I recommend everybody read that.

Justin:
No, that’s awesome. I hadn’t heard that book, so I will check it out. All right, last question. If you hit your financial freedom number, meaning you can live an amazing life just off of the passive income from your real estate investments, what would you do?

Patrick:
I think we’re there. My wife, she does… I left engineering and we are at a point now where we don’t necessarily have to work. My wife does feature length animated films because she loves it. She’s a production manager for places like Disney Dreamworks and Nickelodeon. She’s doing really cool stuff. She loves that. We also love our little boy, but during COVID, when things got a little tough, my wife was with the quarantine and all that, she said, “Let’s move to Hawaii,” so we just packed up and moved to Hawaii.
I feel like we’re already in this situation where we have some location freedom and we are still based out of Southern California, but now we’re back in Hawaii again for the summer and fall. And we’re still in this situation where we feel like we can choose to do what we want, and what I love about what I do is I get to work with people like yourself, really cool people in this space. I get to help and serve my investors and we get to create really exciting vehicles and companies moving forward and to produce some great results. I just love what I’m doing right now.

Justin:
Awesome. No, it sounds amazing. Definitely part of our journey and our goals. My wife and I just have that dual location lifestyle where you can live six months in one place, six months in another place, and have that location freedom, not have to be tethered to one specific spot. That’s very, very cool. Awesome. Well, if people want to reach out to you, obviously we talked about some of your links and some of your websites, which we’ll add in the show notes and all that, but what’s the best way, easiest way for somebody to just reach out and learn more about you or get in contact?

Patrick:
Yeah, investonmain, and then, street.com is the website. You can go to that. Investonmainstreet.com/contact, you can find my calendar. Happy to chat with anybody even if you’re not an accredited investor, which is what we require. And if you don’t have a hundred thousand dollars on deck, which is our minimum, that’s fine. We can still get you pointed in the right direction. Happy to invest.

If you’re in your position, you’re a high-tech professional or a doctor or lawyer and you feel like you’re looking for that next little bit of inspiration to get you to that next stage, I do have a book and it was a bestseller. I did a chapter in it. It was called Persistence Pivots and Game Changers, Turning Challenges Into Opportunities. Persistence Pivots and Game Changers, Turning Challenges Into Opportunities. And I love it. I tell my whole story, the ups and downs, the ebbs and the flows, and how we made it out of high-tech. My wife is in there as well.

I did it with a couple other people, like Phil Collin from the lead guitarist of Def Leppard, an actual rockstar. Super cool. His story’s in there. NFL NBA players, coaches, entrepreneurs, there’s a dozen or so. It’s just such a cool… And I loved it so much, I actually bought a bunch of books and I give them out. If somebody wants a copy, I sign them and ship a hard copy out.

Justin:
Very cool.

Patrick:
It’s investonmainstreet.com/book and that’s the secret website. Investonmain, and then, street, all spelled out, .com/book. And you got to make sure to put the name of this podcast in the promo code because we don’t just send them out, ship them out for free to everybody. We want to make sure that you heard about us in a legit spot. But I’m happy to contribute back to your listeners. Obviously, they’re people after my own heart and hope one day we get to have a conversation together.

Justin:
Awesome. Very cool. Well yeah, use Work Hard, Invest Harder as the promo code and go to that website and get his book. Patrick, man, it’s been great. I really appreciate your time and yeah, look forward to chatting down the road.

Patrick:
Justin, it’s been awesome. I appreciate it. Thanks so much.