Actionable Investment Tips, Alternative Assets and More – Building a Recession Resilient Portfolio Podcast
Building a Recession Resilient Portfolio: Taking Advantage of the Downturn
Whitney Sewell: Patrick, welcome to the show. I’ve been doing a little research about you beforehand and you’ve got a ton of experience I want to dive into. I know you’re gonna be able to help our listeners today. There’s a ton in your background, though, that I wanna dive into that I know is gonna be beneficial for all of us and let’s you do just that, and give us a little more about who Patrick is, a little bit about your background. And then we’re gonna jump into your experience in real estate and some of the hard knocks as well that I know you’ve learned and come out of.
Patrick Grimes: Yes, I have. It’s all daisies and dandelions. That’s what I’m here to tell you today, Whitney.
Whitney Sewell: That’s great.
Patrick Grimes: Yeah, it’s great to be on your show as well. As I was mentioning before, I’ve heard about your show now many times. It’s kind of that, well, you haven’t been on that show yet. So here I am finally coming full circle and getting out of my engineering hobbit-hole, and getting out in front of the world, and making it to the pinnacle of Whitney’s show today.
Whitney Sewell: That’s right, that’s right. Now, grateful. Again, grateful for the kind words and glad a number of people recommended it. So, Patrick, why real estate? You are an engineer. It’s not easy to become an engineer then transition to something else, right? What happened there? Why the transition and why real estate?
Patrick Grimes: Yeah, not easy to become an engineer is right. I mean, electromagnetic static physics boss was harder than underwriting a multifamily deal, that’s for sure. As a young guy, I was definitely an engineer. And I was building Legos, playing with electronics before I even knew what engineering was. And I started right out of college doing machine design automation and robotics. And it was super fun. And even to this day, I love it. And I only stopped doing it entirely a number of years ago. So for a lot of my career, I was doing really cool automated manufacturing cells for Elon and Tesla, and Lockheed, and Boeing, and Johnson & Johnson for medical devices and satellites and all kinds of cool stuff. And it was just perfect geek heaven. But the seed was planted at the first design firm that I worked for. The founder, Dave Carl Berg, great friend of mine, still invests in my deals today. I actually talk about them in the chapter in a book. I’ll be happy to give a way a copy of that to your listeners at the end here if you’d like. But he gave me some advice and he said his only regret was not investing more in real estate sooner. And I was blown away ’cause this is a very successful high tech guy who’s got his own company doing some of the coolest stuff, most amazing technologies, working with some of the most brilliant companies. And here he is telling me, high tech is volatile and risky. Don’t put all of your money into it. What will get you where you want to go in life is real estate. And so that’s what planted the seed. And I was eager and excited and immediately did my first real estate deal.
Whitney Sewell: You just jumped right in, huh?
Patrick Grimes: I jumped right in, naive and inexperienced. And this was 2006 and ‘7, so I very quickly lost it all.
Whitney Sewell: And what kind of investment was that? Was that a passive investment? Was that a flip? Was that a single family rental? What did you decide to do first?
Patrick Grimes: Well, so as kind of an analyst at heart, I did a bunch of kind of research on what the highest returning deals were. And that invariably in real estate was development, creating something out of nothing. And then if you reel in to the early stages of development, you have pre-development. So I was like, “Well, look, if I do this, I can double and triple my money every year.” And so I actually got into a pre-development deal. We bought land. I personally guaranteed the loan. I wanted to use my money wisely, so I leveraged it as high as I possibly could. I like a 90% loan-to-value, personally guaranteed it to get the best terms I could get. And then went off to the races, paying out of pocket for the loan, hoping that we would get the land ready to go and then a building built in time. And unfortunately, 2008, ‘9 happened and basically the land lost almost all of its value, all the builders were bankrupt. There was no way out. And I learned what cross collateralization was. I learned that when you sign on a recourse loan in your own name, they can come after you and everything. And so they’re not just gonna take the property. They’re gonna come. And so took me a couple years being drag over their coals real bad. Had to hire an attorney, had to do a settlement. The bank did debt forgiveness, they took the property through foreclosure, credit wrecked. I had to pay taxes on the debt forgiveness to the IRS. Like what? Nobody ever said that. And it took me five, six years. I kind of financial and emotional recovery where I was back in high tech, got a master’s in engineering, master’s in business, started pulling in significant income again. Like many of your listeners, high paid professionals, what do you do? And so I had to do real estate, but how? And that’s when I started over again as the tor-
Whitney Sewell: So you went back to school after losing everything?
Patrick Grimes: Yeah, so I was always working, I was always working full-time in high tech. And so after I was gonna make it big into real estate and took me like quite a few years just dumping money to get free of this thing. And I knew I couldn’t get into real estate immediately ’cause the credit was wrecked. But when I got started doing well in high tech, I went and did two master’s degrees to kind of accelerate that ’cause I was like, “Oh yeah, I’m gonna make this work one way or another.” So I went after it and it worked. I was doing really well in high tech, but I had to start investing again. I mean, just probably like most of your listeners, they want diversification. And if you look, my passive investor got on my website since the very first day I started the company, unlike slide five of it, it has the diversification of the wealthy, and the middle class is about 8% in alternative investments and private equity and real estate things outside of your 401 IRA plan or your financial planner index funds. The high income earn have 25% and the ultra wealthy have 50%. So if I was going to make it out, and as a high income earner get to the lifestyle that I needed to get to, I had that voice in my head. I had to get passive income streams that weren’t just my job. I had to get inflation hedging. I had to get debt in the right way, had to start building out streams of income and diversify. And so really the only way to do that was real estate and I had to get back into it, but in the right way. And so that’s what led me back into it.
Whitney Sewell: Nice. I’m surprised or well, I’m not surprised, but very few want to get back in right after they’ve gone through that really been raked through the coals sounds like, losing everything and they think, “Man, I’m gonna stay away from that. I’m gonna go do something else. I know more about or maybe it was tech or something like that, but you didn’t. It sounded like pretty quickly, you still knew that was the path. Is that accurate?
Patrick Grimes: Yeah. Well, so I kept listening to podcasts, I kept reading investing books, and I had that voice in my head from my buddy Dave. And I read The Purple Book, so there’s no escaping. If you really wanna make it, you circle back to real estate. You just have to learn how to do it without speculating. Like I was doing, I was hoping I was gambling, I was taking the big stack and putting it on green and spinning the wheel and hoping, right? But I learned that there are things called recession resilient markets. I learned things about recession resilient asset classes. I learned about buying existing construction for cash flow and then making repairs to them to create value as opposed to creating something from nothing. And I started buying single family homes in Texas, which according to my data was the most recession resilient market performed credibly well and prior downturns with diversified employment. And it was working great. I started moonlighting it and doing my job, flying all over from my job and then building out a single family portfolio in Texas. So that’s what got me back to it. It was working, but it was brutal. And I think that’s what the glamorized TV shows about the fix and flip and all that don’t tell you is that if you’re a high paid successful professional, you’re using a lot of your energy doing that and trying to fulfill this kind of American dream thing where you’re supposed to become a landlord. That’s brutal because it takes all your time away from your family, friends, and hobbies.
Whitney Sewell: For sure.
Whitney Sewell: How did you fund that then? You lost everything, right? I mean, you got all that happened where you lost everything, but then how did you then go forward and fund it? Was it just you had a GOB then that was able to fund buying some single family homes? Or were you able to start getting debt? Or were you funding them completely?
Patrick Grimes: Yeah, so it took me five or six years to shake off the credit issue from 2009. In that time, I had doubled and tripled down in my engineering career, the high tech space doing very well. And then when I got my master’s degrees, I left that and went to a new company where I was like at executive level. And so the bonuses were substantial at that time. And I needed a place to invest, and I needed that diversification. And so it was to a point where I really had to find a way to put that money to work. And invariably, you’re gonna find your way back to real estate. Just investing more of the tortoise instead of the hare, right?
Whitney Sewell: Yeah.
Patrick Grimes: And more humbled. And that’s what really got me back in. And it wasn’t until that I met my soon to be wife because I mean, I’ve traveled a lot. I’ve been through over an age of the world’s countries, it’s been a couple years. A couple gap years traveling through the Middle East, Asia, Southeast Asia, went through Europe. And so I’ve traveled a lot, but when I met my wife and I was spending all this time on my soon to be wife, I had to stop that because I was already 35 and I hadn’t been married yet. I met this wildly amazing girl, but I was not available. And so she was there for my very last single family closing. We did it at, met the notary at Starbucks. And I said, “I’m not doing this anymore, and I have to figure out another way.” But after that, she married me and we just had our baby. But that was a while. That was about six years ago, seven years ago now. But we married in California and Beijing. And it wasn’t until after that that I started trading up to partnering into larger assets, getting over the DIY control issues, learning how to take down bigger assets that are lower risk and work with others and raise capital from others so that we can be successful together. And that’s what led me down the path of multifamily.
Whitney Sewell: Yeah. Our families, our time with family can do that often. It can change our plans. I was gonna ask you, when losing everything if you were married at the time or just the dynamic of family and the impact on that if you’re losing you when you lose a lot like that and it sounds like you were not. It was just you so it didn’t affect maybe a number of family members. I was thinking, though, you said can’t speculate in investing, which we’ve all heard that. But I wondered, xx what would you say, you said recession resilient properties, markets, give us a few thoughts there on the investor listening right now that says, “Well, I know I can’t speculate.” But what does that mean, Patrick? Give me a couple of things that I can take home today when I’m looking at a deal today that’s gonna help me not to ensure I’m not speculating.
Patrick Grimes: Yeah. Well, and so we can kind of unwrap that. And I love to use the example of how we find distressed assets and distressed properties today, and how they got them there, and how we can prevent ourselves from getting there. So for example, there’s a lot of individuals who, during COVID, were buying properties in San Francisco and San Jose. Those are areas that traditionally are markets that are not recession resilient. And if you’ve looked at past data, they have dramatic swings. So you’ve gotta be in areas where diversified employment and that have a past history of being able to write out recessions. And those employment are things like a combination of healthcare, and logistics, and education, maybe some manufacturing, hospitality, but not overweighted. There are specific industries which tend to have better resilience. And when you compound a location, which is recession resilient with a place that is attracting people and jobs, typically, they’re tax advantaged and landlord-friendly, they’re legislative-friendly locations, then you end up with, even if there is a downturn, you’ll still have an influx of people because you have growth and that softens the blow. And that’s what really happened back in 2009 and ’10. And why Houston only almost leveled off before it started going up again, it’s because it was decreasing, but it was growing at the same time. You saw the same thing during COVID where you did have economic impact in the southeastern states and in Texas that are landlord-friendly and advantageous, but they were growing at a rate that helped in the soften the blow. And so you stack on those tax-advantaged, landlord-friendly. So once you’ve got your market established and it’s got that recession resilience and that growth factor with those indicators, you’ve gotta find the right asset. And those assets, and when I say speculating, I mean if I go into the desert and I say, “Hey, this is the new Vegas 2.0, I’m gonna create a new Vegas in the middle of nowhere,” you’re essentially wildcatting like an oil and gas. You’re just going in the middle of nowhere and just creating something that’s a speculation. I, in the same way in development, although there were other developments around, I was taking a piece of land and I was saying, “Look, I can hope that I can get something built on here. I can hope that I can get this entitled and we can get the roads and the facilities and then we can get something built.” That’s more of a speculation. If you’re buying existing assets, which is what I transferred to, then there was already a pad with sticks up and there were other pads nearby with sticks up with houses and roofs and people in them and renting. And so it becomes more of an analyst play when you’re looking, okay, here’s the income generating ability of the apartments nearby and this one, and I can buy it on day one for cash flow and make measurable improvements to it. That’s not a speculation. That’s a calculation, right? And so once you find the right kind of assets, which led me to the three-bedroom, two-bath and then later I transitioned, which I don’t think there’s anything between above 80 units. There’s either three-bedroom, two-bath, which is the longest running appreciating asset in real estate, or there’s inefficiencies beyond that and then more inefficiencies until you finally get to onsite property management, you finally get to 80 plus units that can afford that. You get to properties which are large enough to get non-recourse debt, which means the properties are strong income-generating businesses. And at that point, you get valued based off of your income. And so it’s just much safer bet to be either in one of those two and it’s inefficient in between in my mind. So I found recession resilient assets to be those existing construction, which are traditionally 20 to 50 years old when placed in these markets. Now, the challenge is that, even if you’ve done all that right, and forgive me if if you need to stop me Whitney, go ahead, but even if you’ve done all that right and you’ve got the right kind of asset that you’re buying that can be improved, and it’s been around for a while and it hasn’t been repaired, but you can see the nearby properties that are renting for more that can be repaired, that doesn’t mean you’re home-free. That means you’ve found probably a good deal, but if you don’t structure it in the right way, if you don’t build a economic foundation for it to weather the storms of recessions, then you’re gonna become one of the many distressed operators that exist today. And so, like I did, you could get really high recourse, really high variable debt on that and a lot of people did. And they’re struggling today because those interest rates were not. So as an indicator right now to how do you build, how we build a recession-resilient portfolio is instead of leveraging it to the hilt, we did very low leverage. We put high down payments down. We looked in the past and said, “Hey, during recessions, what did the vacancies drop to?” And so our properties need to cash flow not only when we get to a risk well on day one, but we need to cash flow so much so that we can still pay our bills if another recession happens. So you’re gonna throttle back your returns a little bit because you’re gonna put a lot down. You guys also have to have a foundation of a loan that’s not variable. You need to have the ability to cash flow for the long haul, even if interest rates go up. And right now, there’s a trillion and a half in commercial bank debt coming due at a time when interest rates have skyrocketed. So what does that mean? Some people were very aggressive, like I was in the first downturn, which I’m not anymore, and they said, “Hey, I’m just gonna get the highest leverage I can, and I’m not gonna get fixed debt because they want me to put too much down. I’m gonna get variable debt.” As the interest rates grew, it sucked all their cash flow, so they went upside down. So that’s happening all over the place. Now, some people bought an interest rate cap and we did that on a couple properties, too. But now that means that if you’re gonna get a strong economic foundation for this investment, you have to put enough down not only to cash flow on day one, but put enough down to cash flow when your vacancy increases to what it has in past recessions. But now you have to put enough cashflow to make up for the fact that if interest rates go up, your interest rate payment is going to increase with it until you reach your interest rate cap. So you have to put enough down for that. And then you have to raise even more money to pay for the interest rate cap. So the economics of a deal that can weather the recessionary storm is different. People that are putting huge returns on deals, some of them are just transferring that risk back to their investors/ Some that are projecting very lower, much lower returns are really looking at that capital preservation and long-term wealth. And that’s why I believe it takes a longer period of time to build the right kind of investors to build a better, more healthy wealth building portfolio over a longer period of time. So there’s a number of other factors to go into, but those are some for you.
Whitney Sewell: Yeah, you just talked about building the right kind of investors and for a healthy portfolio. I was just gonna make a note. I want the listeners to know that we’re gonna do another segment with Patrick. And so the next show, you’ll hear him talking about leaning into the recession and putting deals together today and what that looks like. He’s mentioned a number of things already, but we’ll go a little more depth maybe and I wanna hear a little more about the building the right kind of investor base for a healthy network or a healthy business like you’re talking about. But before we end this segment, we’re gonna get back to really the discussion you’re talking about right now, I think, in the next segment even more so. But before we do, I wanted to ask you, you mentioned about partnering, and it sounded like maybe that’s when you really took off in the commercial real estate space. Is that accurate?
Patrick Grimes: Yeah, absolutely.
Whitney Sewell: Yeah, I get questions often about partnering and how we’ve partnered and what that did for us or for me. But when did the aha moment come, the realization that, okay, I can’t do all this myself? I do have to partner with some people maybe that have other skill sets or whatever that is what kind of brought that about because I’ve been combated by this, people wanna know. Well, I wanna do it all myself, I’ll do a better job or whatever. And it’s such a limiting belief, I think, now. But one time, I believe the same thing, I think. But what about you? How did you get past that? How did you know it was the right partnership? Some of those things.
Patrick Grimes: Yeah, I think there’s a combination of things that are kind of where we are in kind of how we’re being raised in this country with the idea that the money is not… We put it all the 401 and IRA, or we put it away to a financial planner and somehow that’s the acceptable automatic way where we can be passive investors in that way, but everything else is dangerous and everything else is scary and risky. And even though you’ll give away your money and never leave and look at it or touch it to these individuals, when it comes to anything else like buying real estate, we wanna maintain control and that’s not uncommon. And especially if you’re a a doctor or dentist or attorney, you’re used to being very, very good, or engineer like I was, or whatever it is you do, you’re used to being the smartest person in the room. You figured out some wildly difficult things. You’re like, “Ah, I can do this too.” But you have 8,000 hours of experience making you brilliant at what you do. Do you really wanna make put 8,000 hours as something else to be as good at that? No, you don’t. Why? Because you go to the dentist to get your teeth cleaned. Do you go to the mechanic to get your car fixed? You are already partnering. But when it’s something about what I was going through at the time, having lost it all once is something that a lot of my investors relate to. I wanted to maintain that control. I wanted to use all of my own money, and I wanted to make sure that everything went… But what that meant was I, Mr. thinking that I can do everything, was doing a bunch of things I didn’t wanna do with my life. I didn’t wanna have all the jobs. I didn’t wanna be chasing property managers and underwriting and dealing with tenants’ toys and trash. I wanted to be investing in what I loved, which was the engineering. And what I loved with was the kite surfing, and backpacking, and traveling, and all the things that I was doing, and marrying my wife. And so it took that breaking point of realizing that, hey, there’s other people doing this better with me. If I partnered with them, I could get some time back and marry my wife. And that’s when I said, “Look, I’m gonna learn how to do this. Definitely, a partner.” And then it worries. But two and a half years from the time that I closed on my last single family home to the time that I closed on our first 86 unit deal, so there was a long period of warmup to new industries, learning how to do larger acquisitions, learning all the roles as Whitney talked about, underwriting, asset management, capital raising, all the different aspects, the new debt products, and finding my paths the exact way. And then I met dozens of people, talked to at least a dozen about possibly working together. And then when it came down to it, very few were aligned in the way that I was where I was very patient with returns. I wanted to build wealth that would grow and be recession resilient. I wasn’t too excited about the idea of doubling and tripling my money the next year and the next. I was more reasonable risk-adjusted returns. And there aren’t that many people out there that are like that. And I was able to finally find some… And it showed up in the underwriting. It showed up in how the properties were managed. And I was able to track the track record and look at the properties, finally able to find some like-minded individuals. And then I just brought value to them. I did everything I possibly do until one day, brought a ton of deals to the table. And one day, they were like, “Hey, let’s work on one together.” And that’s how I got into the space.
Whitney Sewell: Yeah, a couple things you mentioned there I wanted to highlight, you said two and a half years from the last single family to the first multifamily deal. In the moment, I have a similar timeframe, actually, but in the moment, man, it just seems like it’s taken forever. In the grand scheme of things, it’s actually pretty fast to be able to move forward on a project. I feel like that large. I first started learning about this and never imagined being able to buy a hundred unit property. And then I met guys doing it who hadn’t been in the business very long. It kind of opened my eyes to the possibilities, but still it came through partnerships. I love the the thought too behind, hey, you put 10,000 hours in something to become really good at it, you’re probably not gonna wanna spend the time doing that on every piece of this business, right? And you want the people on your team who have done that, right? You want that level of skillset on your team, no doubt about it. So I like the thought behind that. And then you mentioned very few were aligned with you were at and related that maybe to the conservative nature or expectation of returns, right? But anything else there that you would highlight? ‘Cause I get this question often about partnerships. And how did you know it was a good partnership or to move forward? I always ask many times and turn down many people to partner before I actually started partnering. But was there anything else for you that said, you know what, I’m gonna pass this partnership or no, I know this is a good one because of these things?
Patrick Grimes: Yeah. So yeah, I actually did a talk in Dallas recently on the like, well I don’t know what they called it, the critical conversations in partnering. And I kind of told a bunch of stories. But it’s funny that your gap was similar to mine. But you know what, anytime you really wanna make a leap forward, you gotta take a step back. When I did, it took me about that same amount of time to get through my master’s degree. But on the other side of it, my income doubled, right? And as you probably did, when we did the gap, our wealth accelerated, probably quadrupled like mine. But in that and in the trenches and in the battle, I vet partnerships through hard work. What I found was so interesting is either we’re in… I’m in Wakiki right now, and we actually moved to Wiki Hawaii for two years during COVID. We relocated when our son was born, but we quickly realized that we could still spend a lot of time in Hawaii, so I’m here for three months. And so it was sitting here right here when I would get the phone calls and oh, we’ve got this great deal, right? And I would red-eye out to Houston. And I would be walking units enslaving away and the guy that lives in Dallas wouldn’t show up. And so there’s a huge dropout rate in this industry. If you’re talking about partnering, what I’ve seen is that a lot of people are very busy professionals. And I had to rearrange my profession around being a contractor so that I had more freedom to be able to actually proceed and progress in this business until I left it. But they truly are busy with other things. They actually can’t devote the time if they’re not full-time. And a lot of other individuals just simply are already settled and happy with where they’re at. They don’t need to hustle, and they’re not in a hardworking mentality. I’ve always been an extremely hard worker. I mean, that’s just me by nature, not everybody’s like that. What I’ve found is if you talk to the gurus out there is actually a 90% dropout rate from people that’ll pay the… What are they? 20 to 40,000 that, Whitney, you probably know better.
Whitney Sewell: It could be anywhere from 20 to 75,000. I’ve seen it all over the place.
Patrick Grimes: Yeah. And there’s like a 90% dropout rate and it’s not-
Whitney Sewell: For sure.
Patrick Grimes: It’s not the teacher. And when the student’s ready, the teacher will appear, right? And so it’s you that make it, and it’s the individual and it’s their drive. So it also in the crucible of getting work done is how partnerships are interviewed. In my mind, it’s when the broker actually sends a deal, is it underwritten and independently or somebody waiting for somebody else to do it? And we come up with the right solutions and the same conclusions every time and are we working. And do we show up? And is it actually happening? I said so many different partnerships, they’ve been like, alright, let’s partner with jobs you wanna do. And what percentage do you want? And then they’ll quabble. I’m like in these masterminds actually with these people and they’re saying that they can’t get a partnership agreement signed. And I’m like, “Well, you don’t have a deal. You guys have…” And one of the interesting things is that in California, the average we’re from, the average major change in a California state system’s three times. So it’s not people don’t go to college ’cause they’re like, “I don’t know what I wanna do.” Well, you won’t know until you get in there and start doing it. And when you get in there and start doing it, you’re gonna think you know what you wanna do and it’s gonna change. And then you’re gonna think that’s that’s it. And then it’s gonna change and you think that’s it and then it’s gonna change. It’s really about getting in there and getting the work done. And what happens is people reveal themselves and you’re gonna find people that you click with because they’re the people right there working with you. And it’s when those mindset and those mentalities of what their goals are long-term, short-term show up. And how they’re underwriting, how they’re analyzing, and what kind of investors they’re bringing, you’ll see a very clear overlap or a gap. And it’s just the key to just start doing the work and get in front of people and start working with people, and then it’ll happen. It is not the easy thing ’cause just do the work as a response kind of and then people will gravitate to you, or you’ll be pulled in like I was because they just needed somebody that they could trust to get things done. All the things I thought I was gonna be doing, that actually wasn’t what they needed. They actually needed somebody that they could trust to figure things out and get it done and they could rely on. And when we did one together, it essentially was addicted to me ’cause the next one, we just did everything. I just did everything and then I did more. And then the next one, I just did everything and did more. And then it was just so natural. We kind of a loose handshake, but I didn’t have an agreement until after the close of the second deal. But I was just excited to be in the game with the right people and doing the right kind of work that I believed in at that point. And that’s how it was kind of potentially might seem backwards, but that’s how it happened for me.
Whitney Sewell: No, that’s awesome. I agree. Getting in in the trenches with others will tell you a lot, will tell you a lot. I mean, we’ve done the same thing as far as flying places last minute, being there for the… And it does, it shows you who’s committed, who’s not. That’s just one little example. But yeah, there’s so many things that when you’re shoulder to shoulder, making it happen, you quickly see. Patrick, we’re gonna end this segment here. I want the listeners and hey, we’re gonna do another segment with Patrick, and we’re gonna talk about leaning into this recession and finding the upside in the downside or downturn, finding a deal, what that looks like for Patrick today. Patrick, before we do that, tell the listeners how they can get in touch with you and learn more about you.
Patrick Grimes: Yeah, sure. So I make an offer ’cause I’m being the engineer, I keep my head close to the grinding wheel, and I wasn’t natural to get my story out there. And when he was saying, “I’m surprised I didn’t hear about you earlier,” it’s because I didn’t tell people I was out there. I’m not the big flashy marketing guy, but I actually got some advice. Again, I listened to advice to get my story out there ’cause I was a working professional like many of you, battling ups and downs. So I collaborated on a book with some other really cool people like Phil Collins, lead guitarist at Def Leppard, actual rockstar, NFL, NBA players and stuff. It was “Persistence, Pivots and Game Changers, Turning Challenges Into Opportunities.” And I’d be happy to gift your listeners a copy of that. I just bought a bunch. I think it’s really cool and inspiring content. And if you go to invest on mainstreet.com/book, invest on mainstreet.com/book and then you put in the promo code the name of this podcast, I’ll sign it and we’ll ship you a copy just to help inspire you along your way. And if you’d like to chat about investments, happy to do it. Invest on mainstreet.com/contact or anywhere on the page. My calendar’s there, and that’s one of the beautiful things about doing what I do is I get the opportunity to talk to investors. I don’t have a ton availability, but I do have availability. So if you wanna chat, be happy to get you pointed in the right direction. And my email’s Patrick@InvestOnMain and then Street, InvestOnMainStreet.com. We have investments at the top of the page.
Whitney Sewell: You talked about how you lost everything in the recession of ’07, ’08, what happened, but ultimately why it happened, and about speculating and some lessons learned that I know you need to know. I don’t care if you’re active or passive, some lessons that you need to know about investing today. We’re gonna jump into his thoughts on leaning into the current recession. And really what does that look like, finding the upside in the downturn or in a deal right now to Patrick. So, Patrick, welcome back to the show.
Patrick Grimes: Well, Whitney, I’ve been told about your podcast by so many people. Now, I get to go to the back to those people and say, “We doubled down. We did it twice, so double the fund.”
Whitney Sewell: Awesome. Well, let’s jump right back in, Patrick, and let’s do just that, leaning into a recession. Maybe at first, you could kind of give us your thoughts on just the current state of the economy, where we’re at as you see it. Often, I ask this question, people say, “Well I don’t have a crystal ball.” And I say, “Well, yeah, I know, but what you believe is gonna happen affects what you’re doing right now. It affects whether you’re buying or selling or what you’re doing.” So, why don’t you give us just a few thoughts on that? Let’s dive into finding that upside even in today’s market like we’ve talked about.
Patrick Grimes: Yeah, well, the long story short is that there is more upside in this downturn than there has been for the last 10, 20 years. It was Warren Buffet that said, “When others are are greedy, be fearful.” And that’s been the last 10 years and others are fearful, be greedy and that’s now. While I don’t like the emotional aspects of that because it kind of violates that engineering analyst in me ’cause I don’t think we’ve driven… I’m an analyst and the fact is, is that there are more distressed assets because there’s distressed owners, not that the properties are troubled, but because these buildings weren’t properly structured in a good financial foundation and they’re troubled today. So it is incredible time to be taken advantage of the downturn. And it was back in 2008 and ‘9, people like me that didn’t build and hadn’t built a recession resilient portfolio, lost everything. And I came out of that learning how and made the journey of my life being how to build something that would ride out a recession and better longer term debt that doesn’t have variable rates or caps, low leverage in recession, resilient markets, and recession resilient asset classes with reserves, six to eight months of reserves in case we get hit by a financial disaster like a COVID or even a natural disaster and insurance replacement costs. All these things help to build a recession resilient portfolio leading up to today. But today is a new day because anytime you’re building recession resilience, you look in history to see, well, what happened? And then how do we fortify this system to survive things like what has happened before? But in any case, if you have a watch, it says it’s waterproofed to a certain depth, you drop that to a certain depth and it’s gonna crack. So recession resilience is similar. And today, things are very different than they have been. I don’t think you would disagree with that, buddy.
Whitney Sewell: Definitely not. They’re very different than they have been, for sure.
Patrick Grimes: Yeah. So the factors of today, which even very, very strong operators whom had very low leverage and had been conservative about their projections, they got fixed. Or even interest rate caps to protect from rising interest rates, they had reserves that were buying properties with the intent of raising value over time through renovations. How could they even be struggling? Well, a number of things happened. Going into COVID, all of a sudden, people’s jobs disappeared or the government started putting trillions of dollars out there. And so what happened then? Well, what we’ve learned is that that results in inflation. And in 2009 and ’10, we didn’t have that dramatic inflation, right? So’s a little bit different indicators than we had now. I actually have an article in Forbes, Patrick Grimes Forbes Inflation and Attack, if you wanna search for that, it talks about how income-generating real estate can actually help your portfolio grow in an inflationary environment. In that same article, which was written pre these last couple years, I talk about these underlying assumptions are that when your expenses grow track with inflation and your income tracks with inflation and you have fixed debt, what we’re seeing is that expenses are actually outpacing inflation and the debt is growing as well at a greater rate. So a little bit tougher. When we go into inflationary environment, your expenses go up, right? Your rents go up too, but your expenses go up. Now, if it was just your expenses and rents going up with inflation, you’d be okay. But in many of the favorable locations to invest like in the southeastern states and Texas, at the same time insurance premiums have doubled and almost tripled in some areas at least 20-30 if not 50%. In places like Florida and Texas, a lot of the insurance carriers that whether or not you believe in global warming, we have properties that have been hit with two 500-year floods in the last couple years. There’s so many large claims happening in these areas ’cause of the greater number of storms. For whatever reasons, insurance is getting hit hard. Leaving COVID, taxes are rising. Taxes are rising because these government institutions are trying to pay catch up just like the insurance carriers. Meanwhile, our costs for construction, the inflationary costs for construction are going up not just because of inflation, but because of the scarcity of the supply chain, resulting from COVID. So these are things that are rising our costs not only in the materials, but they’re delaying things which cost more. And in the labor content, this great resignation where everybody went home and didn’t want to come back to work, it’s harder to find those jobs that will do the renovations in the construction, which means we’re having to pay more for those jobs, further exacerbating the inflationary measures and further delaying things. So you have this aggregating cost of materials, delays, labor, delays, insurance costs greater amounts and taxes. And it’s gonna consume a lot of these reserves, a lot of these conservative, they underwriting things that a lot of these strong operators put in place. But then we have some other things which have packed on and been even more devastating than all of that happening. Rising interest rates, rising ENT rates over time for operators that had variable rates have risen to the point where they’re completely upside down and aren’t able to pay their bills at all, especially with all this other stuff going on. If they had a rate cap, then their income was further hit until it meant their cap. If they had fixed interest rate, then they’re probably in good shape as long as they can bridge past this time. So interest rates have further exacerbated this. And when all of these costs go up and interest rates go up, the income goes down, which shifts valuations of the properties. Valuations of the properties are actually lowering. And if the debt comes due at a time when the valuations are low, and you don’t have the ability to raise rents because you can’t do it in time. The labor’s too expensive. It’s too scarce, the materials are too expensive, too scarce. And you can’t get people out because right now, the courts are backed up with COVID evictions, then you can’t actually improve your income. And so today is a very unique time where there’s one and a half trillion in commercial real estate debt coming due by 2025. And I’ve heard reports that 200 million to 500 million of that is expected to be in a distressed situation where they’re going to need to recap or renew their loan at a time when their valuation has softened, at a time when they’re trying to get the tenants out that aren’t paying still from COVID. And they have all of these high pressures and it’s throttling back their ability to execute their business plan to raise the rent income. And so even if you’re a very strong operator, this is a really tough time. This is a really tough time for you and that’s okay. And the reason why you hopefully had long-term debt fixed with low leverage, eight to nine months in reserves, and replacement insurance costs and all these things, leading into this so you can ride it out to the other side. So the capital’s preserved. Unlike in the stock market where if you had invested, you’d have taken massive hits on your principle. Right now, your investment’s preserved, but that doesn’t mean you do the same kind of deal. Or Whitney was saying, how do you put in this environment? How do you put a deal together that makes sense today? That doesn’t mean you do more of the last year’s deals and the years before that.
Whitney Sewell: It better look a little different.
Patrick Grimes: You take it completely… Go ahead.
Whitney Sewell: It better look a little different today than maybe two years ago or it’s gonna look different. You had mentioned structuring it the right way and reserves and some of those things, which we’ve all talked about, but probably looks a little different, like you said. Dive into that a little bit. What does it look like structuring it different today to make a deal work today versus two years ago? What does that mean structuring in at the right way?
Patrick Grimes: Yeah. So structuring and deal today, if you look back at 2009 and ’10 when there was distressed good properties, but distressed ownerships, distressed financing, distressed debt, it’s very similar to what’s happening right now. There’s so many performing properties out there that are good buildings. They don’t need huge renovations, they don’t need to be gutted, but they have distressed foundations and financial foundations, and that they’re coming due, and there’s an issue. There’s a lot of similarities. And what happened in 2009 and ’10 was that wealth transferred and people billionaires, or they lost it all like me. And so the chance right now is to take what was similarly a short period of time like in 2009 and ’10 to buy these assets. Like now, we have a huge amount of deal flow of not distressed properties, but distressed ownership, right? To buy these, but you can buy them at a discount today. And instead of trying to buy something that’s troubled and needs a lot of work where you need to hold it for a long time for three to five, seven years, and you’re gonna have to spend a bunch of money to renovate, which is expensive and time-consuming and you can’t find the labor and will take a long time, instead of trying to buy a property and then trying to improve it to 99% over a long period of time, the time with a strategy in this kind of market is to make your return on the buy. And then instead of holding, as the market softens, you wanna hold and write it down. You wanna make your money on the buy and then you want to… By the way, these are difficult to acquire because there’s lots of people out there looking for them and there’s lots of deal flow for these distressed ownership type assets. And it’s only going to increase as we approach 2025. But so you buy in cash and then it’s like whack-a-mole, you pick it up real quick and that’s exactly what was happening in 2009 as the debt product started to dry up. And we’re gonna see more and more of that. So you buy in cash, if you can get leverage, you pull out very low leverage, like 50% leverage. Get a loan for half and then buy a second property quickly with that. And then with your first property, do it exchange a tax advantage, exchange forward to a third property. And then you immediately, with short-term holds, that do that same thing with the second and the third property. So by that, instead of long-term play and perfecting one asset with a lot of work, you rely more swiftly on buying, making a return on the buy and then compounding that into two through a refinance and a tax advantaged trade, and then compounding that in the four and then eight. And then by that, you have a lower risk strategy ’cause you’re not gambling on inflationary measures, causing issues with a value add strategy. You’re not gambling on the ability to get people out in an environment where evictions are backed up. You’re not gambling on the rate, what the values are gonna decrease to in five years because you’re making a return on your buy and then you’re trading it forward and making a return on the buy, trading it to make a return on the buy. And if you continue to do that you compound and as you get one to two, two to four, the rent checks will grow, the cashflow will grow because although you’re getting smaller rents these days, once you compound one asset to 16, you’re going to have greater cashflow. And although you wouldn’t get the same potential equity you would get by holding one asset for five years, you will get vastly more equity if you compound one asset into 16. And so that’s what I believe is the strategy today. It’s the buy-in cash, the refi if you can. Buy a second, trade forward, compound your equity, compound your cash cashflow, and take advantage of this very short window. Don’t hide under a rock. Don’t put your money in savings accounts, that’s negative return with inflation because you’re in fear. But be greedy when others are fearful and move swiftly and with agility. Take the opportunity to buy as much as you can. And I’ve been waiting for this for a long time ’cause I lost everything last time. And I have a portfolio that’s gonna ride this out, but I’m also launching the recessionary acquisitions fund and the recessionary debt fund as a complement to be able to take down as many properties as we can in this buying window. Pretty exciting.
Whitney Sewell: Yeah, that is exciting and I appreciate you. Really just laying out some very clear strategy and a few things that I think every investor should be thinking about as they’re buying properties, or hopefully they’re not just acting out of fear and just doing nothing. It’s the challenge, I think, especially if you lost a lot. Before, you’re gonna be so hesitant. You’ve been hesitant. Maybe it’s been a good thing to some degree, but now you have to take action. And one couple things though I wanted to mention, I get questions about reserves all the time. I’d love to know how you thought about reserves, let’s say a year or two years ago, and how that’s helping you in a recession now, and has that changed how you look at reserves in your buying projects moving forward?
Patrick Grimes: So virtually, all of our decks have had advertised similar metrics, which has said six to eight months in reserves, which means one day we wake up and we get no income. We can float the property for six to eight months. That gets you the ability to do a lot of pivoting because during that time, you can build an entire building. You can restructure the debt. If there’s a hurricane or a flood, natural disaster, you can get yourself back on track and then float the property up front in time for the insurance company to come back and pay the replacement costs for rents in the building. So we’ve always had that. And in the case of COVID, the unexpected happened when all of a sudden, rental assistance checks started coming in. We thought we were great, but what happened? Rental assistance checks stopped. And then what happened? Rent payments didn’t resume. And then what happened? A much bigger financial disaster hit than a hurricane because the courts were already backlogged. The wave of evictions when the eviction ban came up was so big already that when virtually every landlord in the country filed for evictions for these people that hadn’t been paying for years and didn’t resume. Places where we could usually evict him like two to four weeks in Texas or a month or two in Atlanta became four to six months. So now here you’re hit with all these other economic challenges. Meanwhile, you have tenants that aren’t paying, they know they don’t have to pay because they know everybody is not getting evicted. And for extended periods of time, that means you can’t even get them out to renovate to raise rents. So that kind of economic disaster was never foreseen. But those kinds of economic and natural disasters are what the reserves are for. So if you had those pieces in place and the foundation, you should be good. To answer your question about moving forward, we have kind of the luxury if you… There’s actually four assets that we’ve stood up as outside of a fund, which demonstrate the kind of our recessionary acquisition strategy. And you can read on our deal page that describes kind of how they were played out. But we’re going in, buying it with the actual occupancy. Some of them are 40, 60, 70. These are properties that need a lease up. They’re good performing properties that need a lease up. They’re properties that we know before earnest money goes hard. We can see a bridge to getting a 1.8 equity multiple in a short period of time. And we’re actually saying 6-14 months on the conservative side. But we are putting the similar kind of reserves in place, but we don’t have any intentions of needing to use those because the minute that we go in and we’re the source of relief to the distressed owner for financial relief, we can come in and we can offload this from them. And maybe it’s this asset that’s causing them trouble. And in one case, it was actually the other assets they owned that was causing them trouble. And this was a great asset. They just had to offload quickly so they could use that cashflow elsewhere. We are putting similar reserves in place today, but our intention is not to have to hold it long enough to even the amount of reserves we have because our intention is to hold it for such a short period of time that we can immediately just go to the next buy and the next buy.
Whitney Sewell: And when you say six months of reserves, what does that include exactly? Is that debt service as well? Is it just expenses? I’ve heard people say different things. I just wonder.
Patrick Grimes: Six to eight months worth in expenses and debt reserve. Oh no, it’s operating expenses, not debt reserves.
Whitney Sewell: Yeah. Typically, your debt provider’s gonna require reserves as well. I’ve just heard different people say different things that they’re including in that, so I just wondered. Well, Patrick, I wanna jump to a few final questions. And I wonder, like, what would you say is the biggest challenge in your business right now?
Patrick Grimes: Well, I’d say the biggest challenge in our business was that we have been putting together the recessionary acquisitions fund and then re-pivoting and resetting investors’ expectations because there are a lot of syndicators out there, packing the deals, which are similar to last year and the year and the year before, and they don’t look any different. And the biggest challenge for me is to explain. And I’m talking in front of 600 people in San Francisco on recessionary acquisitions at the MFIN. And I’m getting out on podcasts to talk to people, like, “Hey, look, I was the guy that lost it all one time. Now’s the time to do things very, very differently.” And I think the message has been received. I think there are investors out there that are getting it, that you can do things dramatically different today and win big instead of long and short, long hold, short holds, instead of buying in cash, instead of buying with… And all these things that seem counterintuitive, but make sense today. And I think it’s been working well. The first acquisition in the fund oversubscribed before we sent an email out. So there has been a pretty big draw towards the strategy.
Whitney Sewell: That’s awesome. Oversubscribed before we even sent an email out, that’s a good problem to have. On that train of thought, what’s your best source for meeting new investors right now?
Patrick Grimes: So I come from that automation and robotics engineer, keep my head to the grinding wheel, don’t do a lot of flashy marketing, so I don’t necessarily have, here’s my metrics of the hard funnel data of… But I do get a lot of investors setting up calls with me. I think that it’s hard to… I don’t actually have all the numbers together, but I do offer the book. I get on podcasts and I’m excited to finally be on Whitney’s here today. I get on stages about every month. I’m speaking on a large stage around the country, Seattle, Houston, Dallas, San Francisco. And I think that I came from a high tech background, and so I have large following of entrepreneurs, business owners that have invested millions of dollars in high-tech automation solutions. And that’s how I got started. And I think kind of that reputation kind of grew into now a broader audience of investors that are resonating with the analytical analyst approach and looking to invest with somebody who’s seen the worst and thought their way back in. So yeah, I can’t really. Sorry, I don’t have an answer for your question.
Whitney Sewell: No, no, it’s all right. You’re doing a number of things, though. I mean, you talked about speaking, being on podcasts and whatnot, and to be able to raise or to oversubscribe before you send the email out. You’re doing something correct. How did those that people know about the deal? Did you call them? How did you notify them? How did they know to subscribe?
Patrick Grimes: Yeah, so we put a up and coming thing on our website, and I’ve been talking about it on different platforms. We send out weekly emails. We don’t say, “Hey, a deal’s open.” We did say, “Recessionary acquisition is something we’re working on in the future. If you’re interested, opt in on the wait list.” And so we did send those kinds of emails, about 10,000 people in our database. We had about 400 people express interest before so we never actually launched a raise for that. We just tapped into that priority queue.
Whitney Sewell: That’s awesome. What would you say is your best advice for passive investors today?
Patrick Grimes: I’d say invest with somebody who’s been through a tough time and is still kicking because the sense of the get rich quick or the glamour of being an operator, once the going gets tough, you really get to see that kind of the true character come out. And if they went through that tough time and then they made it out, and they have reasons and they can articulate, this is how I’m not doing that again, that’s what the VCs look for in Silicon Valley when they invest in startup owners. Start up owners say, “Hey, here’s where my failures were and this is exactly why it happened and how we’re gonna make it out.” And so I tend to vote for people that have been through that kind of journey. And those are the people that tend… I was on a panel in Chicago talking about economics, and every single other person on the panel had lost big before. And I thought it was really interesting because not very many people will talk about economics today in this market, but a bunch of people who had been through the dirty, dirty failure and have lost and seen how the economics that can shift, the demand can shift, and how the models can get turned upside down and that watch can go so deep that it cracks. And those are the people that have learned through the crucible of failure. And I tend to put my vote in that basket.
Whitney Sewell: What are the most important metrics that you track? Could be personally or professionally.
Patrick Grimes: Most important metrics that I track personally or professionally, well, we do track, trying to think of the metrics that we have tracking. So personally, my wife and I, we try and make personal time happen on a regular basis. So we try and get out on regular dates between the two of us. Now that we’ve had our little one, that’s been a little bit more challenging. And so we have an au pair who’s arriving today here in Hawaii from Paris. So she is literally on the opposite time zone. That’s gonna be great because we’re gonna have some more time. We’re both very much adventurers and so we try to get out on monthly excursions and events, and we try to get out on walks. And she even went kite surfing with me here on the island. So that’s perhaps the most important one right now is that, and then doing my daily time with my little one that I carve out both in the morning and then the afternoon. On the business side, we have all kinds of metrics. We show our returns. We track cashflow. We track investors coming in. We have kind of like this no investor left behind thing where we review all the questions that are coming in, make sure everything’s getting answered. And I don’t know, there’s just a bunch of rabbit hole stuff that we could probably-
Whitney Sewell: Yeah, yeah. No, that’s helpful. I appreciate that. One of the first things you mentioned is the family component, the time with your wife and now with your child as well. And I’ve talked about it so often on the show, it’s like, man, those are often. Unfortunately, the things that get pushed aside. It’s what we claim we’re doing it for, right? But those are the things that often put on the back burner when we’re over here doing all this work for them. And they do, they unfortunately aren’t a metric or we feel like they shouldn’t be a metric because whether they’re so important. Often, if you don’t make it a metric or put it on the calendar, it doesn’t happen. I know that for myself anyway, so I was grateful that you mentioned that first thing. What would you say is the number one thing that contributed to your success?
Patrick Grimes: Persistence. So, to a fault, I’m a persistent guy, and that’s why it was so interesting that I did the “Persistence, Pivots and Game Changers” book because the industry I chose of machine design automation and robotics is a highly risky industry where everything you’re doing, you’re inventing for the first time. It’s a one of a kind custom machine design product. And we were doing those for Tesla, and Lockheed, and Boeing where it would come in and be like, “Hey, this is, this is the only one of its kind,” it’s a gizmo, or gadget, or product, or device, or medical device, whatever, “Can you build one of these one time?” And the whole product, the whole process of design and development is overcoming failure and being persistent. And even though we built the 3D models and we did the calculations, it would never go to plan. And then we had to adapt. And we would use lessons learned moving forward, but the next thing was totally different. Was it Winston Churchill who said he never won a war that went to plan, but he never won a war that he didn’t plan thoroughly? And then there’s another one, that’s if you ever find yourself traveling through hell, keep going. So I think that persistence and pivots. And to a fault, my wife sometimes has accused me of being super persistent.
Whitney Sewell: Yeah, no, that’s some good quotes as well. I love the persistence. I mean, you have to be right if you’re gonna be successful at almost anything. How do you like to give back?
Patrick Grimes: So my wife and I, we’re actually working on that. Now that I’ve kinda left the engineering and we’re full-time on this, we participated in a bunch of activities related to Salvation Army. We were out in Florida with Rod Khleif, participating in giving back the gifts that he gives to the Boys and Girls Club. And we’ve done a bunch of charitable giving my wife has a passion for. She does feature length animated films, and she has a passion for helping out young artists. She actually works on the other side of this door as a production manager, and she’s done large feature length films with Disney, Nickelodeon, and Dreamworks. And so she wants to give back to Cal Arts, the school she went to for a master’s to kind of sponsor struggling artists to make their dreams happen. We’ve got a ton of little things we’re doing here and there. And we’re working on a version of Passive Investing Mastery, which is another branch of invest on Main Street that does alternative investments, but passive giving, right? And the ability to create that foundation kind of formalize it, but that’s, that’s in our short-term sites and our short-term goals to really formalize that and kind of go from, “Oh, let’s do this, let’s do that, do this. Here’s our vision and let’s, let’s really do something cool.”
Whitney Sewell: I love that. Patrick, I’m grateful for your time and giving back to us in the audience over two segments here and diving today on putting that deal together today in this economy today, what does that look like, and structuring it the right way, and even thinking through reserves and building, or thinking through the recession resilience, what does that mean to you. Just grateful for your transparency and being willing to help us and the listeners. How can they get in touch with you and learn more about you?
Patrick Grimes: Yeah, so [email protected], [email protected]. If you go to invest on mainstreet.com, at the top, you can see we have some upcoming deals, the recessionary acquisitions fund, the debt fund. We have a multifamily placeholder right now. We have some other alternative investments coming up. We’re really trying to give that opportunity to diversify 25-50% of your wealth into alternative investments. And so if you want, there’s ability to schedule a call with me, please do so. I love talking to investors. One of the things that I love doing about the fact that I can left my engineering career, now I get to just invest in people. So investonmainstreet.com/contactmycalendar. I don’t have a ton of availability, but I absolutely have it. Wherever you’re at in your journey, happy to get you pointed in the right direction. And if you wanna hear my story, that book “Persistence, Pivots and Game Changers, Turning Challenges Into Opportunities.” Brian Tracy did the forward and Phil Collins did a chapter. He is a lead guitarist; Def Leppard, an actual rockstar. And we have some NFL, NBA players, and entrepreneurs. It was an amazing project to be a part of. It’s such a great time. I tell my whole story for the first time. I get it all out there the dirty, dirty and everything, the grind getting raked over the coals and then pivoting again and again. But we give it away for free. I bought a bunch of them. I think it’s fun book and it helps. If it helps to inspire you, then that’s enough for me. So if you go to InvestOnMainStreet.com, InvestOnMainStreet.com/book, that’s the secret link. And you go on there and you put in there Whitney’s name or the name of this podcast, we know who you are, as a promo code and you’re not some random, we will work on getting you and I’ll sign it, a copy of that book shipped out to you for free.