Investing During Downturns: Cash Dispensers (ATMs) vs Distressed Asset Funds – Cash Flow Fight Club

 

Investing During Downturns: Cash Dispensers (ATMs) vs Distressed Asset Funds

by Cash Flow Fight Club

Transcript

Mike Deaton:

Stepping into the Cashflow Fight Club arena today and facing off are two alternative investments that are each making the most of the current market conditions, solid cashflow, great overall returns, and tax advantages. You can’t get much better than that.

Ligia Deaton:

This is a really fun matchup with two gentlemen that know their investments and are good friends of each other. So let’s get to it.

Mike Deaton:

All right. Coming to us from the island state of Hawaii, our first guest cut his teeth in engineering and corporate America to create one of a kind automation in robotics for manufacturing companies. He’s been active in the real estate investing sector for over 15 years. After experiencing and barely surviving the market crash of 2008 and ’09, he refined his investing approach focusing on essential goods and services like energy and housing. He’s now running an investment fund that capitalizes on these tough market conditions and targeting distressed multifamily properties that can be purchased under market value and deliver immediate returns with minimal additional capital. He’s raised investments totaling over $50 million and acquired a $600 million portfolio, including 5,000 units of multifamily. Please welcome author and founder of Invest on Main Street, Patrick, the Engineer of Great Returns, Grimes.

Ligia Deaton:

Yes.

Mike Deaton:

And fighting out of LA, California. Our next guest started out in the medical sales field and shifted into real estate as a way to help those high earners develop passive income, so they can stop trading their time for money. He’s a partner in over 2,000 units of multifamily, totaling over $200 million in value and has raised and invested over $35 million in capital. Today, he’s representing the power of investing in automated teller machines. He’s an author, public speaker, mastermind and investing club host, host of his own podcast, the Mailbox Money Show. Please welcome Bronson, the Spartan Warrior, Hill. As immortalized by the legendary, Michael Buffer, let’s get ready to rumble.

All right. So welcome, Patrick and Bronson, to the Cashflow Fight Club Podcast. We’re looking forward to a great matchup today. Appreciate you both for joining the show today.

Patrick Grimes:

Yeah, I’m glad to be here. I was a little worried until I found out it was Bronson. And now, I’m ready to go.

Mike Deaton:

Yeah, it’s a pushover. It’ll be a first round TKO you’re going to have.

Bronson Hill:

Wait, I got my gloves out here, man. I’m literally ready. Listen, I got my boxing gloves on. I’m ready to take that guy down and punch through the screen. You’re going to feel this, Patrick. So get ready.

Patrick Grimes:

He’s got a very light touch. That’s why he punches with pillows.

Bronson Hill:

That’s right. The gloves come off then. It might come up as simple.

Mike Deaton:

So a little backstory. You guys know each other very well, it sounds like, have a few years of history and crossed paths quite often. I think Bronson was telling us, Patrick, that you were speaking as recent as yesterday. So we’re looking forward to a spirited matchup here.

Bronson Hill:

Absolutely. We’re actually really good friends, but when we’re not in the arena, when we’re actually fighting each other, we just leave all out.

Mike Deaton:

That’s what you got to do. That’s how you have to do it.

Patrick Grimes:

Today, we’re battling it out. I’m ready for it.

Ligia Deaton:

Awesome. Welcome, both of you. And let’s kick off round one with Bronson. Bronson, tell us a little bit about your background, and what were you doing before, what you do now, and what led you to this type of alternative investments?

Bronson Hill:

Before I was a professional boxer or after?

Mike Deaton:

Yes. Yeah.

Bronson Hill:

Okay. Well, I was in medical device sales for about 10 years. I was making really good money. I basically went into surgery and helped heart surgeons with some of their equipment. And so it was very interesting. I learned a lot. I was making over 200K a year. It was great. But I really wanted financial freedom, which to me, and I think for most people, involves time freedom. And so a lot of the medical profession, people just don’t take much time off. And if you don’t go to work, you don’t get paid. Even physicians that I worked with, some of them were making over $2 million a year and they just couldn’t take time off. They’re working 60, 80 hours a week some of them.

And so I really wanted to try to learn about passive income. And so long story short, started doing single family. I realized that was not going to get me where I wanted to go, which most people have. I think Patrick’s story as well, a little bit of there as well. But I learned about syndication and multifamily and started to meet up in Los Angeles area. That’s actually where I met Patrick. And then just started scaling up, and then we’ve raised almost $40 million for about 200 million in multifamily apartments. We also have ATM machines, and car washes, and oil and gas. And I love what I do. I’m getting ready to go on international trip number six of the year. I’m going to Fiji and New Zealand in about two weeks for two and a half weeks. I just love being able to help people to replace income or generate passive cashflow.

Mike Deaton:

That’s awesome. Yeah, what a great path. That’s a familiar refrain I would say, for a lot of professionals that trade time for money, like doctors, dentists. We know a few surgeons and they are all looking to innovate some type of medical device, so that they don’t have to practice. They can ride on the royalties of some kind of knee replacement or something there. That’s the holy grail for a lot of them. But passive income and investing is a really great way, especially for a lot of those high income earners. Right? They have the money, they just need to get some cashflow coming in. So it’s great. How about you Patrick?

Patrick Grimes:

Well, yeah. So I started somewhat in similar parallels to Bronson. I was a high paid professional and I wasn’t in medical device sales, but I was doing high-tech machine design, automation and robotics. So I was a mechanical engineer and started out my first automation house that I got a job with. The owner said to me that I should invest in real estate. And I was shocked to hear that because he just knocked it out of the park in this high-tech space. But he made it very clear that the sooner I invest, the more I invest as early as possible is… His only regret was not doing that.

So I immediately got way ahead, way over my skis, invested in some risky development projects, lost it all in 2008, ’09 and ’10, and dragged me over the coals pretty bad. I got a master’s in engineering and business, got way up in the corporate ladder trading time for money, started pulling bonus, needed a place to put my investments again, followed the breadcrumbs of the wealthy right back to real estate. But this time, had to do it safer, be the tortoise, not the hare, buy for cashflow, and got into single family, and then traded up to larger apartment buildings.

And so I partnered in about over 4,000 units in multifamily, about half a billion in assets. And I also diversified. We’ve diversified into energy portfolios as well because I’m really an old asset guy and I’m looking for those tax advantaged cashflow that’s recession resilient, that provides long-term appreciation. And I left the engineering stuff behind. In fact, I remember when I first started attending Bronson’s meetup and I was like, “Hey, I’m a single family guy, I want to start buying apartment buildings.” And he was pretty sure, I think, I was another one of those tire kickers that came by. But then all of a sudden, I started buying apartment buildings, and he was like, “What the heck?”

Bronson Hill:

That says about Patrick. See, I met him and he was showing up with his wife 2019, and I’ve never seen somebody take more action in a short amount of time. I just have so much respect for what he’s developed and he’s just doing way bigger things than I’m doing. And I’m like, “Patrick, teach me how to do this,” whatever. He’s up the game. And I say too, I think your automation background where you were working with machinery, automations, it’s helped you a lot in your business to really scale and to grow. And I really admire that part of how you’re doing it. So we’re getting the pleasantries out of the way when we get in the ring.

Patrick Grimes:

I basically rode the jet stream behind Bronson. Right? He took all the blows and I just followed along the right wing.

Bronson Hill:

And then he just passed me. I think I see him off on the horizon there.

Patrick Grimes:

Right at the end of the Tour de France, that was.

Mike Deaton:

That’s awesome. Yeah. Again, familiar reframe we hear from so many people, “I wish I’d have started earlier.” That’s definitely the mantra of the real estate investors, unless you know people like the Donis brothers, who started when they’re 20 or whatever.

Bronson Hill:

They wish they’d started earlier too. They’re like, “Let’s start as a teenager,” right?

Patrick Grimes:

Those kids blow me away. Good for them.

Mike Deaton:

All right. Shout out then to the Donis boys. But good stuff. So today, yeah, you guys both have really diverse backgrounds. You’re well diversified across asset classes and things as you mentioned. So today, Bronson, gives us the ins and outs of ATM and cash machine type investments. And then Patrick, for you, it’ll be multifamily acquisitions and really how you take advantage of the moment of the day, I guess, in terms of where assets are sitting. But yeah, we can roll into round two here. And maybe Patrick, let’s stay with you and just give us an overview and some of the ins and outs on multifamily acquisitions and what you’re doing there, and some of the basics from an investment standpoint as an investor coming in, what they can expect in terms of time and ROI, and a few elements like that.

Patrick Grimes:

Well, so the traditional playbook where you buy a property, and even if it’s a single family or a larger multi, you buy some that’s under market, getting a good deal on it. Maybe it has outdated interiors, needs some renovations, maybe it hasn’t been managed right. And then you improve it over time, raise the rents, raise the valuation, cashflow. That was typically the approach for most of us syndicators over the last couple of decades actually. So what’s interesting right now though is the dynamics have shifted dramatically. And infusing capital to improve properties isn’t necessarily increasing rents anymore to the valuations that we need. In fact, interest rates rising are decreasing valuations and inflationary costs have driven the cost for construction or renovations. So we really definitely need to share the difference between the yester year, literally a year ago, and past, and even through the ’08 downturn. The economics were not like this all at once for multifamily, and we’re where at now today.

And the reason why I want to make that differentiator is because we can’t do deals like that anymore. You can’t buy and hope. You can’t buy, and renovate, and then calculate. In fact, I’m an analyst and that’s what I loved about it before, is I could be very much, here’s the projections, here’s the comparables, there’s their rents. I could infuse capital and renovate, raise the rents. Here’s the valuation, here’s the exit. My crystal ball’s broken now on the typical multifamily play. And so the reason why that’s really exciting is because when markets are troubled, there’s opportunity. Right? And in this particular opportunity, as I mentioned before, I lost everything in 2009 and ’10. I had way over leverage in one asset. I had gone all in. I wasn’t cash flowing. It was a pre-development. I was hoping to be able to get to develop and I was hoping to be able to build something. I was hoping to be able to sell it to cashflow. The market fell apart. Right?

Since then, we built a portfolio that can ride out a recession, but doing a deal today is very different. Why? Because when we go to look at opportunities, there’s a ton of investors that didn’t build their… Hadn’t been through a downturn. They didn’t build their portfolio to write out a downturn. They didn’t buy rate caps. The interest rates of consuming all their income and now they’re paying out of pocket. They didn’t raise enough reserves. The evictions after COVID when people stopped paying rents, those skyrocketed, but there was an eviction ban. I mean, then that lifted the courts are backed up. So there’s all these things with taxes and insurance going up hitting the market right now. And if you weren’t built with a strong financial foundation, you’re in a tough point. And the reason why I’m pivoting away from your question because I’m saying, well, in this recessionary time, how do you do deals?

And that’s why we have the recessionary income fund. You really got to take your thinking cap off because right now, we’re not buying, and holding, and renovating and hoping. Right now, we’re buying properties all in cash that are from operators that are troubled. They need or want out right away. We close within 14 days after we’re done with our due diligence. The last asset, there were multiple higher offers, but we moved faster. And as soon as we bought it, we bought a first asset for $4 million and appraised for 5 million shortly after that. It’s cash flowing in a thin cap, all in cash at 10%, and it’s 60% occupied. It’s a strip center. It’s a retail center. It’s not just multifamily, but multifamily strip centers, industrial. But after lease up, it’s worth 8 million. What’s the CapEx infusion? Almost nothing. It’s almost negligible.

So the strategy behind recessionary acquisitions… And I just published an article last week on Forbes, the upside of downturns, recessionary acquisitions. Patrick Grimes, Forbes, check it out, because I go step by step-by-step. It’s the velocity of capital. It’s making a return on the buy, moving quickly, going direct to owners, finding ones that are troubled, being the source of that relief financially, acquiring it so that you know you make that stair step in your equity on the acquisition. Immediately refining out part of it, buying another asset where you make a stair step, and doing a tax advantage exchange immediately selling the first asset to a third asset. And by that, you turn one asset into two, and two into four.

And now as we approach 2025 when the distressed operators are only going to grow as the interest rates are finally hitting the bottom lines or reserves are running out, we want to buy as many times as we can because it’s the people in 2009 and ’10 that took action and purchased as much as they could, as quickly as they could that are the billionaires today. So people get off the sideline and realize as an analyst… Warren Buffett has a quote. Bronson likes this. What is the quote, Bronson?

Bronson Hill:

I got a lot of Warren Buffet quotes. I have no idea which one.

Patrick Grimes:

Yeah. When others are-

Bronson Hill:

“Be fearful when others greedy and be greedy when others are fearful.” Yeah.

Patrick Grimes:

I personally don’t like the quote because I’m an analyst. I don’t feel like you should be greedy or fearful. You just go back to work.

Mike Deaton:

Yeah. There’s deals in every market. Right?

Patrick Grimes:

And you analyze the deals, and the deal is right now, pencil, on the buy, and we get the returns on the buy like we used to have to wait three to five years from now. And as long as we have this buying opportunity, which we didn’t have one to three years ago, which we probably won’t in three to five years from now, structure the recessionary acquisitions fund to be capital heavy, move as swiftly as we can and keep that velocity of high and compound, allow one to turn into two, two into four and eight, and cashflow and appreciate as much as we can as quickly as we can in this environment.

Mike Deaton:

So how does that look? I love it, by the way. I mean, it’s just classic flipping. Right? I mean, you’re making your money on the spread between the buy and the value. So you’re just finding those distressed assets and not having to inject capital, as you said, CapEx or anything like that. So it’s really a smart play. How do you pitch this to investors? What does this look like for me if were I to invest in you? How much do I need to put in and how long you’re going to hold it? Is it flexible? When do the returns kick in? How does that kind of play out?

Patrick Grimes:

Yeah. So I’ll just pivot a little bit away from the flipping, because the flipping, which is kind of glamorized on the news, people thinking you’d buy it, and then you put a bunch of money, and then you sell it quickly. So just to be-

Mike Deaton:

Yeah, not a fix and flip, but more of just a pure…

Patrick Grimes:

Almost wholesale, almost. We’re buying, and then we’re trading forward. So it’s a little bit different than the typical flipping model. But to your point, and since it’s an open fund, and what’s unique about it and also very cool about it, is instead of investing once, and our minimums are 100,000, and we use accredited investors only, which is why we get to talk too about these deals openly right now with you.

But yeah, if you invested 100,000 into a normal syndication, they would lock it up in one property for three to five or five to seven years. You’d miss this entire buying window. So what’s very unique about this, and I just spoke in front of almost a thousand people in San Francisco and had a bunch of operators come to me and be like, “Nobody’s doing this like this.” Because what we’re doing is when you invest and we refinance, we buy something in cash, we refinance, we don’t distribute the refinance proceeds. We use that to quickly buy the next asset. When we sell, we don’t distribute the sale proceeds. We use that to quickly buy the next asset. And so that means that we keep that stair stepping of your equity all the way until one day, we can’t buy the assets anymore, and then we will dissolve the fund.

Now, we’ve given our opportunity, which is a process of selling out everything. Now in between, we’ve said, “You know what, if you’ll commit to three years with a three-year lockup period, then we’ll let you come in as members and participate and buy units in this fund, but we may dissolve it in five, or seven, or eight years. But if you went out before then, you have a three-year lockup, you could request a redemption of all or part of your initial investment or your initial investment, plus part or all of your profits.” Right? And so at that point, we allow people for a shorter period of time to invest, but by that point, you got to consider that we put your funds into a dozen different properties that we have stair stepped up by that point. Right?

And so the longer you’re in, the higher your proceeds aggregate. And our projected returns, which seems high on a typical deal level where we’re projecting 30 to 40% annualized returns because it’s heavily weighted on the backend. And keep in mind, we are cash flowing 10% on these. We’re buying thin cap properties. So there’s cashflow. We do distribute that. But on the back end, the exits are so high that really is our target was, well, if they only stay in three years, that’s what we’re looking at, like that 30. But if they stay in five, we’re looking at 40% annually because it actually exponentially grows the longer you’re in there. And those returns, people are like, “Oh, it must be very risky.” Well actually, the risky deals right now are the 14, 18% ones that are hoping for valuation gains and infusing a ton of capital that they may not get a return on.

If you look at our case studies, which is how we show this to investors, we have four assets that were done out of the fund. We have the first asset in the fund. We’re just buying right. There’s no magic. We know on the buy what we’re making. And each time, we know what we’re making, each time, we know what we’re making. And then at one point, if we have a really bad day and we somehow miscalculate it, we just sell it for what we paid for it. We don’t have to sell it for what we paid for it, plus all this CapEx. Right?

So it’s a very low risk play and we can calculate it each way. And that’s what I think resonates. And I think a lot of investors really want to participate. We never even did a webinar. We raised all the capital within that 14-day periods for our first acquisition and we have a ton of commits, and got almost 20 million commits in the portal, just people waiting for our next one. I think they really want to participate in the upside of downturns and they just don’t know how. And this is that avenue for how to do it.

Mike Deaton:

Awesome. Yeah. So much good in there that I’d love to pull on. Let’s kind of put a pin in it for a moment. And Bronson has been patiently waiting against the ropes there. So why don’t you give us some insight into the ATM fund, Bronson?

Bronson Hill:

Yeah, yeah. I’ve just been punching the wall here, waiting a chance to go for it. Yeah. So it’s interesting, when I first heard about the ATM fund, I was honestly a little skeptical because I thought, well, do people use ATMs anymore? Everyone’s gone digital, is that even a thing? And through the advice and just the strong recommendation of a friend, I decided to invest. And it’s become my favorite, if not my favorite investment. It’s been my favorite cashflow investment because a lot of things, especially the last couple of years that we’re cash flowing, we’ve seen expenses rise, we’ve seen insurance rise, we’ve seen interest costs rise, all that stuff rise. And a lot of stuff has just stopped cash flowing or it’s cash flowing much less, if it is cash flowing at all. And the ATM fund, the one that we’re in is with the fourth largest operator of ATM machines in the country, and now we’ve raised close to 15 million for the last few years. And it’s just been super consistent.

It’s like the operator pays monthly, it starts month four after you close. And just rough figures, 100K invested returns around 20, 100 a month. Starting month four and it pays every month for seven years. It’s considered a preferred return. It’s not a guaranteed payment. But again, if you can predictably have half your money back in just over a couple of years, there’s a lot of reinvestment possibilities. And that’s what I think a lot of people also are finding like, “What do I do with the cash that I have sitting around?” Kind of what Patrick was saying, “What do I do with that?” Well, if you know, you could put it as something that’s kind of a little more interim. Yeah, it’s a seven-year deal, but if you can get a portion of it back and you’re getting paid monthly, I’ve watched investments like this where people have replaced income or they’ve replaced expenses and be able to have that.

So that’s one major benefit, is just the consistency of the cash flow in over 11 years of doing this. The operator has not missed or reduced a single monthly preferred return payment. It could happen, of course. It could happen. It is an investment. Every investment does carry risk. But I like that element of the consistent cash flow. And the second thing is it has a depreciation. This year, it’s 80% depreciation. Sorry, it’s 100% total depreciation, but it’s 80% this year, and then next year, goes to 60, and then you get the remaining amount of depreciation for years two through five. And the reason why is, and I will say this, it is actually the depreciation is superior to real estate depreciation is actually much, much better. And the reason why is because when you have a multifamily deal, which I know we’re all multifamily people, if you carry forward, you accelerate that depreciation to year one, you’re taking a lot of it now, but if you sell in five years, you’ve got to recapture whatever those you get penalized for the years that you didn’t use. So you have kind of this recapture event.

With ATM machines, it’s equipment that depreciates to zero over a five-year period. You bring it forward and the life of the deal is longer than that time, so you never recapture anything. So it’s kind of amazing that we’ve actually had several investors actually working on another large investor around a million or more from just a single investment coming into the deal, because they’re like, “I’ve got all these gains, what do I do that I can actually help have some depreciation that can offset?” So again, having cashflow, consistency of cashflow, and also having depreciation are kind of the benefits of how it works. I can get into the ATM business itself, which is very interesting and just why I think it is growing. It’s actually not shrinking. It’s actually growing about 4% per year over the last few years and expectation going forward.

So it’s interesting. A lot of people, this is one of the biggest things we have to work through with an investor is that investors will say, “I don’t use ATMs and I never pay for anything.” For me, I don’t use ATMs. When I was in Japan a month ago, I used an ATM, but I really don’t use ATMs. Right? So they think, “Well, if I’m not using it, nobody else is using it.” But in reality, 10% of the US population does not have a bank account. It’s just absolutely shocking, one out of 10. So they’re using things like prepaid debit cards and other things with ATMs and getting paid in cash and different things, but it’s just when you look at the numbers, these aren’t like fly by night group saying this. This is the FDICU saying this. There’s groups that have done major studies to show there’s this huge population of unbanked and underbanked people in the US.

Ligia Deaton:

That’s pretty shocking.

Mike Deaton:

It is, yeah. And I’m glad you went down there a little bit because I have seen ATM funds coming through my inbox and different things. And that is one of the first things that goes through my mind is, who’s using an ATM anymore? I mean, I see them at the banking centers and I don’t know if these are the type that you guys are installing, but they’re a little more… They have a display. You can connect with an agent live if you need to… You can do your banking with a teller essentially in that way. And then I don’t know what AI is coming down the road or whatever, but I would imagine some of that’s in that way. Yeah, so much for the cashless society that we live in.

Bronson Hill:

Yeah. Well, it’s a great conversation because again, really, this conversation around being cashless and going to a digital everything, it’s been around for 30 plus years when we started really using more credit cards. But one thing I will say is that… And what is the primary risk that people use less for this investment is that people use less cash, they go to more digital. Or the government comes out with a central bank digital currency, and then people start going to that. The challenge, if that were to happen, I think there’s major political concerns on the right and left. Right? On the left politically, they would say, “Well, if we put this forward and people couldn’t use cash anymore, who would that hurt?” Well, that would hurt this five to 10% of the population that’s using cash all the time, doesn’t have a bank account. So I think they would say, “Hey, we’re not going to this. This would really hurt people that have cash businesses. They wouldn’t want to do it.”

Secondly, politically on the right, you have privacy issues. You have major, major privacy issues. You can say, “Okay, everything’s digital now,” but the government can’t go in and look at all of your transactions instantly. And then if there’s a central bank digital currency and we were all on it, they could literally say, “Mike, you’ve had a problem with alcohol or tobacco, we’re going to cut off the spending for those things,” or “If you buy guns, we’re not going to allow it with this certain currency.”

And it’s kind of scary. If you think about where China’s at where they’re an authoritative state and there’s a social score and all this stuff, this is a real thing. This is not like science fiction, but they’re not even to a place where they’re cashless. But if we want to become an authoritative dystopia, just do away with cash and make everybody use some central bank digital currency. Right? So I think until that point comes and we’re seeing a growth in it, I think that the 5,000 year history of currencies to my knowledge, nobody’s been able to completely do away with a physical currency. So I just think that it’s going to be here to stay.

Mike Deaton:

Yeah. It’s always been a stretch for me to imagine, but who am I to say yay or nay? But yes, I think it’s a big task. Can it be minimized? I would imagine there are ways, but interesting.

Ligia Deaton:

What is the minimum investment that you accept?

Bronson Hill:

Right now, we may increase it. It’s interesting. It’s increments of 52,000. So 52,000 is the minimum. We might increase that to 104, but it’s basically, the reason it’s 52,000 is when this fund first started, that bought a certain number of ATMs. And so then, they just kept it in. It’s not like when people own, they’re like, “Oh, that’s my three ATMs over here.” It’s basically diversified among a pool of two or 3000. So that’s the nice part, is if you get a terrible location, you’re not in trouble, or if somebody gets a really great location, they’re in good shape. But yeah, so that’s the minimum for it.

Mike Deaton:

It’s not like a vending machine that you put in the neighborhood restaurant down the street and, “That’s my vending machine.”

Bronson Hill:

Yeah, yeah. No, then you could put your name on it or something. But yeah, these guys are in over 12 states and over 25,000 ATMs, and it’s been a great experience working together. And I’ve done quite a bit of diligence with them too, just to kind of make sure I understand the walk through the financials, making sure I understand who’s doing what, who’s involved in which part of the business. But it’s been a wonderful experience. And I have some investors invest a little bit and they come back and they’re like, “There’s money sitting here.” Kind of like Patrick was saying, “There’s money sitting here, what do I do?” And then they deploy like, “Man, this is great,” because of the cashflow. And again, I’d actually kind of ask anyone, is there any investment that you know that pays consistent monthly cashflow that has been that consistent over the last 11 years? I cannot think of one that’s that. Maybe like a CD or something really low, but not at the rates these are paying are very high.

Ligia Deaton:

Do you mind elaborating a little bit about the ROI? You mentioned a seven-year hold. Is that for investment, and then some distributions? Just tell us a little bit about the ROI overall, the average annual. Yes.

Bronson Hill:

Average annual, yes. So it’s hard to describe this investment because everybody’s used to real estate investing and multifamily investing where you have a common thing we’ll see as a five-year time horizon, and it’s like a 1.8 to 2 equity multiple. Right? So it’s like, “Okay, we can understand that.” Well, this one, it’s a seven-year investment and it’s about a 1.8, 1.85 equity multiple. So it looks like it’s a lower total return than a multifamily deal. But I would say, when you get paid in a deal is very important. Right? So if I had a five-year multifamily deal and like a lot of deals, you get paid a little bit longer. Maybe you don’t get paid anything until the very end and you double your money. So you’re 100K [inaudible 00:31:44], but you don’t get anything until the very end. Imagine you had a different deal that you got 90% including addition to your principal back in year one and you had four more years on the deal. That’s very different. Right?

So that’s really the time value of money. That’s the IRR. So this one is about a 19% projected IRR, pays consistently. And so if you were to take the total return and divide it up and say, “Okay, how much are you getting?” It’s about 11%. But if you look at the actual cash on cash, which is a mix of principal and interest, it’s just under 25%. So again, the fact that you put simply as 100K and to get around $25,000 on a return back within roughly the first year, that’s pretty amazing. I have calls with people. Actually, we’ve had it open. By the time this goes live, it will not be open, but we’ve had [inaudible 00:32:32] calls. It’s very difficult. Somebody would be like, “Well, why didn’t you explain it this way? Why didn’t you do this?” I was like, “I don’t know how to explain this.” Because people have this framework they come from that is not very clear on how it works.” So I just have to explain it that, “Hey, well, this is the IRR.

Because when you’re getting money back, if you have half your money back and the deal’s still going, you can take that money, you can reinvest that. Right? So that’s kind of the advantage. It’s not just like if you didn’t do anything for seven years and you had this account just kind of build back up, then yeah, you’d have not an incredible return. But if you can reinvest, I think that’s the big appeal of it.

Ligia Deaton:

Oh, for sure. We have a saying, that money loves speed. I really think it’s so true.

Mike Deaton:

Yeah. I think we have a good understanding of the basics and we’re getting into maybe… So let’s kind of, for the sake of the show, we’ll pivot into round three. We can dive a little deeper. You guys feel free to ask each other questions and/or point out your opponent’s weaknesses or things like that. But yeah, those are some of the things that I wanted to explore. I know Bronson, you talked about the depreciation on the ATM side. For the sake of the listeners, Patrick, maybe your fund and its tax advantages.

Patrick Grimes:

Yeah. What Bronson’s saying is correct, in that there is a bonus depreciation. And the usable life of real estate’s a lot longer than ATMs. And that’s the difference. Right? Because ATMs are basically scrap metal in the next seven years. Right, Bronson? Is that the case? Yeah. Yeah.

I think of the ATM fund as kind of like giving a loan where you’re giving 100,000 or whatever it is, and then you get a principal and interest payment back until seven years happens. And you’ve paid off, the principal’s been paid off, so you don’t get the interest payment anymore. Right? And so it’s kind of like a throttling, you get a fixed return, but part of that return is the principal payment and part of it is the interest, and then at the end, it’s done. So there isn’t an exit on it, but as Bronson is saying, it’s front loaded.

When they asked me to describe it, that’s how I kind of describe it because it’s a high interest rate loan essentially, at the end of the deal, at the day. But to Bronson’s point is when you take real assets, the IRS will let you depreciate those. And it’s kind of like them saying, “Hey, look, as the years go on, you’re going to have to have some money to keep those assets up.” And they don’t really have that. So they’ll let you write off some of your income. And because the assets are kind of parts. That way, the real life of those assets is like seven years. So there’s no way they’d call recapture at the end if you sell it. Right? And real estate, the real life of real assets that people live in essential needs are 27 and a half years. But we can accelerate some of it to 5, 7, 11 years.

So in a fund like ours, we’ll do what’s called a bonus cost segregation, bonus depreciation, to accelerate all of that into the first year. And in a fund like ours, unlike a typical multifamily deal where you get kind of a lump sum of accelerated depreciation, the majority of it in the first year, because we keep acquiring, we keep passing out depreciation every year. So it does give you a consistent… The K-1 keeps showing new depreciation as long as we’re growing that fund, which is kind of cool. And one of the ways that it makes it possible is the use of a 1031 exchange, because we can sell a property. And as was Bronson saying, when you sell, you have this big trigger event of depreciation recapture, but not within our fund. Because within our fund, we trade properties within the fund. So the 1031 exchange allows you to trade the basis forward of the asset, so it doesn’t trigger and we do another cost segregation on another asset that we bought it at a new valuation. Right? And then we do keep doing cost segregations, keep doing trades.

Now when we’d pull out the equity, we buy another asset that’s not a 1031 exchange, but when we sell an asset and trade it into another asset, that’s a 1031 exchange. That allows us to continue. And so if you look at our deck, it actually shows, “Here’s the depreciation in year one, two, three, and four.” So it is a little more tax advantage than your typical real estate depreciations, real estate deals for that reason.

I’m very much an essential needs guy, so I’m single, multifamily. The housing, food and energy is really where the core of the essential needs are. I love old assets and I’m an old assets guy. And if you look at my passive investor guide, it shows an allocation in real estate and we have other alternative investments. I do worry about the bet that you placed on ATMs because right now, there’s been talk for 30 years about the Fedcoin, but it’s now a reality. So the talk of 30 years has actually happened, right? And the government is rolling out the cashless society now. It has been talked for 30 years, but it’s actually happening now.

And while the market’s been going up steady state at 4% too, once you buy those assets, you’re really hoping on the usability of those over the whole life of those. And I think potentially, I think the real estate side’s anchored more in that essential need, that there is actually a growing population and there is underbuilt. And especially in this recessionary time, you can know the return going in. And at any time in which we see that economics don’t make sense, we can exit. And like I said, that could be in three years, it could be in four or five. Right? We’re not making a bet on the long-term stability of any particular investment within the fund, any particular market within the fund. We can be dynamic within the fund to choose markets and assets as we see them more favorable and exit those that aren’t. And I think that the ability to be able to pivot and see similar returns to the ATM fund, but I believe less downside risk because we’re making the return on the buy and not hoping on a particular asset gives it some advantages.

Mike Deaton:

Yeah, it definitely makes sense. Just to close out on the taxes, are you guys actively within your fund working to offset any… When you do sell assets and if you were to pull money out of the fund, there would be some kind of a recapture event most likely, I would guess. Right? And so are you actively trying to offset that with acquisitions? And then also, when the fund dissolves at some point, like you said earlier, whenever you’re unable to buy any more assets, I guess would that also be an event that would cause a recapture like that?

Patrick Grimes:

Yep. Yeah, there most certainly will be because the assets we’re buying have a longer hold. As long as we hold an asset for more than a year at the end before we exit the fund, it’ll be cap gains. Yeah. But we’re projecting about 10, 20% depreciation a year pass through as we grow the fund. And then as we wind down, that will cap out. And as people do redeem, if they redeem three or four or five, you will see a recapture event depending upon how long you’ve been in the fund and how much depreciation that you’ve had. And that’s part of it. That’s part of the value you get at being in real assets is, I think you’re in a bit safer spot because you’re an essential need, but if you invest outside of them, the government will look for some or part of that non-captured depreciation back.

Mike Deaton:

Yeah. I definitely like the fact that it’s an essential need. It sounds like you guys are doing a really good job. This is something I did want to explore a bit of eliminating as many variables as possible in terms of lending variables, cost of renovations and construction and things like that. Right? So it’s just down to a core asset and buying right. How are you doing your underwriting on making purchases like that? Is it a fairly… I guess it’s a bit simpler in a fact that you’re able to evaluate what comps in the market or similar types of cash flowing properties might be bringing, and then you have to make some kind of assumption on the go forward basis. But yeah, curious what that looks like at a high level. I mean, I don’t want to get into your spreadsheets or anything like that, but just kind of what are the essentials of what you’re looking for when you’re going in for assets?

Patrick Grimes:

Well, you got to be careful talking details with an engineer because we could go way in the rabbit hole here. I’ll geek out with you. But just on the surface, there’s really two differences. Essentially, what we’re doing is the same stuff as we did before where we were underwriting based on comparables and cap rates and doing the same due diligence, but there’s kind of two differences. One is we’re going direct to owner instead of through brokers, because the broker’s been whispering the prices that are no longer realistic into the owners. So we’re finding those distressed owners. And then we’re underwriting without the big CapEx and we’re underwriting for shorter holds.

So it’s really the same model, except for it’s a different outreach engine that produces hundreds of opportunities to reach out to owners directly. And it just simply doesn’t plug in the long CapEx play and we see if it pencils on a short-term hold. And otherwise, everything else is the same. We’re doing the taxes, the insurance. We’re looking at the rent rolls, the P&L, the T12. We’re writing everything in the exact same way. Right?

Mike Deaton:

Okay. Cool.

Ligia Deaton:

You mentioned that there’s really low risk in the type of investments that you’re making. What do you see though? What are the risks that you see?

Patrick Grimes:

It’s lower risk. There’s not very low risk in any kind of investment, as Bronson pointed out. You’re at risk to lose all or part of your capital. And if you’re going to invest, you need to be ready and prepared for that because that’s part… unless you’re buying an annuity and you’re seeking for greater returns and you’re diversifying. Hopefully, you’re diversifying and not just in real estate. Real estate’s one allocation. A great diversification tool is the ATM funds. There’s other types of ways to diversify. So as long as you’re investing and this is part of an allocated strategy, you’re not all in one deal like I was when I lost everything. Right? This is a healthy calculated risk. It’s a risk adjusted return.

The issue that people run into today relative to multifamily is that they put in maybe 10 million for the property, another 5 million for improvements, hoping that it would appreciate to 20 million. They’d be able to pay back the down payment, the improvements, and then return a profit and that’s not happening. Or maybe breaking even or at a loss right now. And if they can’t hold it out past this time, then they’re not going to meet their projected returns. And why this is lower risk is because we’re not calculating or trying to predict where cap rates or prices are going to be in two, three, four, five years from now. We’re not trying to predict where inflation will be in two, three or the asset. We’re not even making a bet on a market or a specific asset class. So we have a much more narrow window. And the shorter you look out, the more confidence you can have. Right?

And the other side is we’re not infusing a ton of capital, and then hoping that all the other variables align, so that we can return that capital, that investment dollars, and then make a profit. And so that’s why it makes it lower risk. And in a bad day, to your point, we buy it. Maybe we didn’t buy it for the basis we thought. We have other offers coming in higher, but maybe as soon as we buy it, those go away and maybe we got to sell it for what we paid for it. But in that case, with us, we’re breaking even. Maybe we lost some time, maybe we sell it at a little bit less than we bought it for, but still, in a diversified fund, if any particular one asset we mess up on the underwriting, it’s not going to collapse the fund. And that’s potentially the risk that we see.

Mike Deaton:

Yeah, that’s good stuff. What about, are you each taking retirement account funds in your… People can invest through SDIRAs or…

Bronson Hill:

Yeah. I mean, I’ll jump back in because I’ve been kind of waiting a bit. Just one thing to respond to Patrick’s as well. I think we both agree on this, that having some diversity is good. I would say, multifamily there is definitely an essential, and I see ATMs are as well. Even during COVID, we saw 90% of total, 90% of regular volumes during COVID, and then they came back within a few weeks to about 100%. So we’re seeing, I think the idea of essential is that can change, and I think there’s some different things to look at there too. But yeah, I think in general, when it comes to… I’m sorry, your specific question. I get distracted with responding to…

Mike Deaton:

Just if you’re accepting retirement account funds and what type of investments could come in?

Patrick Grimes:

I got him off his feet there for a second, I think.

Bronson Hill:

Yeah, yeah. Now I got my most back on. No, distracted sometimes. Yeah, we do. We accept different types of accounts. I mean, it’s just again, the biggest thing with retirement accounts, I tell people just from a perspective, if you have a checkbook control account, it’s way easier because you can just say, “I want to invest in this,” and then you send the funds, versus some of these trust groups that do retirements that can just take weeks, two, three weeks to set up, or two to three weeks to have this person sign a paper to go to this department to go… I’m sure you’ve had that experience too, Patrick, where it’s like some people are like, “Why are you paying money to be a part of this?” Because you don’t have any control over the… But we do accept them if they can get it in time.

Patrick Grimes:

Same here, and I echo Bronson’s comments. If you’re in retirement accounts, which are traditionally over allocated into the Wall Street, the stock market, and the best way to do that is to carve out a piece of it to the allocate. And my passive investor guide shows the allocation of the high income and the ultra wealthy. And in order to do that, you have to diversify out of your employee sponsored accounts and get them into hard assets like the ATM fund, or real estate, or oil and gas, or whatever it is. And most certainly, I got an article, Patrick Grimes, Forbes, IRA, because I’m constantly trying to communicate the value of the self-directed variance of a 401k and an IRA, and there’s so little known. And the employers and employer and sponsor, the employer and sponsors are not going to tell you about it because that’s like money on their table that they feed their family with and they’re not going to trade away.

But Bronson is absolutely correct, checkbook controls are controlled accounts where you can have signing authority and you can sign on our docs and where you can wire the funds. It’s much more agile. It also requires a bit more sophisticated individual. And so I’m kind of split, to be honest. Sometimes I feel like having a custodian account where it takes a little more effort for us, we actually call the custodians, and we step them through our docs. So it’s like selling to two people and it does take extra time. But sometimes rather than not self-direct, do a custodian. Again, if you’re sophisticated, go the self-directed route where you have checkbook control. But if you’re not that sophisticated and you’re nervous about doing it, go to the custodian. Maybe upgrade later too, but just start doing it. Right?

Because to make it very easy is to just go with one where they sign on the docs and they wire the funds. But long-term, if you want to be more agile and you don’t want to miss deals that fill it fast, like Bronson and I, you may want to consider upping your game a little bit.

Mike Deaton:

Yep. Definitely a topic for a whole other show. But yeah, we’re also big proponents of all that and getting past a lot of fees and different things that come alongside those company sponsored 401k compliance. All right. So we are kind of down to the wire here. Did you have any final questions? I think one open point that I had that I either didn’t catch or we didn’t cover, Patrick, on your fund, is there an advertised average annual return over the life? I mean, it seems like it might be harder to communicate just because the fund sounds very flexible, but is there some… I mean, it seems like you have.

Patrick Grimes:

Yeah. So we actually do. So it’s a 30 to 40% annualized return, and that was more geared around our projections if you’re in for three or five years. And when you look at our example deals, the case studies, it shows our equity doubling every year. And so people are like, “Well, why are we only getting 30 to 40%?” Well, we’re just projecting very low returns. We already get this sense where it’s unbelievable, but the reality is, it’s not, if you look at the individual deal level acquisitions that we’ve done. But yeah, it was in that 30 to 40% is what we’re projecting on our stats. And since we’re a Reg D506C, just like Bronson’s funds, we can share that.

Mike Deaton:

Sweet. Okay. Final questions or thoughts from your side?

Ligia Deaton:

We didn’t touch on Bronson’s ATM investment business type. Do you see any risks there?

Bronson Hill:

Of it being an ATM business?

Ligia Deaton:

Being an investor in this type of…

Bronson Hill:

Oh yeah, yeah, yeah. Well, like Patrick was saying, there’s always risks in every deal. I think that there’s a few things we look at. One is what is the history of the… I just came up with a book recently behind me called Fire Yourself, which is over here. How do you vet? And when you vet a deal, you start with the market. I think first, you start with the market. There’s some debate of whether you start with the market, and then you go to the person or the operator, then you go to the deal. So I like starting with the market. So when I say, if you have a great operator, but they’re in a market that’s shrinking and not doing well, I don’t think you’re going to do well. And Buffett has a quote about that too. Right? If there’s a business or a segment that has a very poor… It’s very competitive or very poor… I don’t know exactly how the quote goes, but if it’s a very difficult segment and you have great operators, it’s the reputation of the business that will stay intact. Right?

Same with multifamily, if you buy in an area that’s growing. So we see with ATMs, we do see a growing market, we do see things growing. There’s a chart I have, I think it’s 4.3% compound annual growth the last five years, and it’s expected to go forward for at least the next five to seven years at that rate. I mean, the biggest risk, it’s interesting, there is a move to do we go more digital or is there some sort of big forced move because of a crisis? It’s always a possibility for sure. But again, I think it’s not… Will that ever happen someday? Will that happen within the next four years before you have your money back? And then with the taxable benefits, will it happen in the next three years when you count the most taxable benefits? I think, I mean, in my opinion, I don’t think so. But having some diversity is good.

And so I asked this question actually to Paramount, the guy who runs it is Daryl Heller. He runs the ATM company. And I said, “What do you think is the biggest risk is?” And it wasn’t what I expected. He said, “I’m not concerned at all about that we’re going [inaudible 00:52:51]. We’re only seeing this grow and grow and grow.” But he says his biggest concern is that there would be kind of like a rent control type of thing comes into ATMs, which New York has presented it a couple of times in New York City where they’ve said, “We’re going to limit ATM transaction fees to $1.50,” but it is never passed. And even then, the fees in New York, there’s so many transactions or the fees are only like $1.95 or $1.75 or $2. So it wouldn’t be that big to effect.

But I think those are things you always have operator risk, you’ve always got an inflation risk. I think the returns are high enough that we kind of get ahead of where inflation really is. I think for everybody, I always tell people, just make sure you understand the investment. Make sure you feel like you have similar values whoever you’re working with, whatever the asset is. That’s what we talk about in my book as well, is just do you really understand your investment? If you don’t understand it, if you don’t understand what the risks are, you probably haven’t looked hard enough because there’s always one or two primary risks. So I give you kind what I feel the one or two primary risks for this deal are.

Mike Deaton:

Yep. Understood. Noted. All right. Well, Ligia and I are going to take a quick minute just to confer. We’ll come back and you guys feel free to keep punching on each other or just take a break there, but we’ll be back just a second with see who the champion is.

Bronson Hill:

Okay. So they came back quick. This is a clear answer, whatever they’re going to decide.

Ligia Deaton:

It was very close. Very, very close.

Mike Deaton:

Yeah. So this one’s big. I love both of these. And actually, we’ll be writing you both a check after this is over. But no, we love both of these. I think there’s some great advantages, taxes, returns, all that stuff. In this particular instance, it was really close like Ligia said. We’re going to give the nod to Mr. Bronson Hill, who actually brought the glove. And I think what did it for us was just the time value of money and the fact that you start getting paid day one, or month one or whatever, and you can reinvest and things like that. But honestly, both of these are knockout investments and encourage anybody to take a peek and see if they’re a fit.

Ligia Deaton:

I’m personally hooked in both. So I’ll talk to my husband after this.

Patrick Grimes:

Good job, Bronson.

Bronson Hill:

You’ve got to play the Rocky theme music, so I go…

Patrick Grimes:

I told you. I’ve been in Bronson’s jet stream right behind him. He thinks I’ve passed him, but I’m still…

Mike Deaton:

We’ll put in an overlay. Really quickly, Bronson, I know you’ve got a hard stop here, but people want to get in touch with you, what’s the best way?

Bronson Hill:

Best way is just my website, bronsonequity.com. You can join our investor club. We’ve got some free downloads there. I’ve also got my book called Fire Yourself, which is available everywhere. So check that out, and Fire Yourself and create passive income. Thanks for having me.

Mike Deaton:

We’ll get all that in the show notes as well. Patrick, how about you?

Patrick Grimes:

Yeah. So [email protected], my email. You can drop me an email. Passiveinvestingmastery.com. I love talking to investors, anything, wherever you’re at, if you’re credited or not, I can help get you get pointed in the right direction. I also have a book if you want. We ship out a free signed copy. It was a bestseller. Passiveinvestingmastery.com/book, and that’s the secret link. Put the name of this show in the notes, so we know who you are and we’ll get a signed hard copy out to you for free. Appreciate your time on the show. It’s been a lot of fun.

Mike Deaton:

Yeah, both. Thank you both gents for a spirited matchup. Big success wishes to you guys both. I know you’re crushing it. So continued success. I hope to bump into you both sometime in the future here at an event or out and about. So wish you both the best and take care.

Ligia Deaton:

Thank you.

Mike Deaton:

For those of you tuning in, we thank you so much for investing your time with us on the Cashflow Fight Club Podcast. We certainly had a blast, received some knockout insights, all while learning something new. We hope you did too.

Ligia Deaton:

If you had fun, please subscribe to the podcast wherever you watch or listen.

Mike Deaton:

Ligia And I truly believe the beauty of cashflow is having your money fight for you, instead of you having to fight for money. So whether it’s one of these methods or something else, we encourage you to dream big and take action. See you next time.

 

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