Passive Investing Strategies To Profit In a Recession
Transcript
Patrick Grimes: Glad to be here, Ajay. I’m excited about it.
Ajay: You are welcome. You’re welcome to the show. You’re welcome to India, and I’m sure not just in India, but a lot of people, not just in the U.S., but also, in several parts of the world will be benefiting from what you are going to share with the audience. My first question to you, Patrick, is to understand from you, is that you started your real estate investment in 2007, and you are still going strong. 2007 did not impact you much, and now you are as strong as ever, so what is the reason for your success? Is it luck? Is it that you are much more smarter than a lot of other people? How does it work on this front? Second thing is, along with that, is that earlier, people used to say that you invest on Wall Street. Now, you’re talking about invest on mainstream, on back alleys, front street, wherever it is, and you’re getting a lot of money in every real estate investment as possible that works for you. How does this work? Help us understand these two part of this.
Patrick Grimes: Sure. Well, I think like most people who have been successful, they work hard, they fail, they learn from their mistakes and they move forward. I’d say that’s probably what’s very, very common with me. I started out as a machine design automation robotics engineer, and I immediately back, graduating college, got some advice to invest in real estate. I did invest back right before the last big boom, or bust I mean, and I lost a lot. I was investing and speculating and trying to make it big, double and triple my money every year or two. Unfortunately, I didn’t know about buying for cash flow, I didn’t know about getting low leverage, I didn’t know about recession resilience. Back in 2007, market was never going to go down. I ended up riding it down and dropped through foreclosure. I was in pre-development. It took me quite a few years to recover from that, but I came out fighting, got a master’s in engineering and business, started doing some really cool projects with companies like Tesla, SpaceX, Lockheed, Johnson and Johnson, doing automated assembly systems.
Then I was like, well, where am I going to invest, and figured out all the mistakes I’d made and how to invest in real estate in a more conservative, be the tortoise and not the hare, and that’s what led me back in. I was able to be successful starting out incrementally, single family homes and then scaled them up into larger apartment buildings, diversified into energy, and now we’re launching off into a recessionary acquisitions phase, where we’re launching a fund specifically about picking up great deals in the recession this time. Whereas last time, I was riding it down, this time I have a strong portfolio that’s carrying me through it and we’re getting cash heavy, and we’ve begun to start to acquiring some excellent deals this time.
Ajay: Right, Patrick. $416 million portfolio, real estate portfolio, and including 3,000 plus units across the southeastern United States and Texas. Help us understand, what does your company invest on mainstreaming all about? Also, talk about automation systems because I’m quite intrigued by the fact that person from robotics and suddenly, developed an interest into real estate means these are two things and very, very different things. Help us understand this part also. Was real estate very profitable to you at that point in time or you just went in for the speculative nature of it at that point as it existed?
Patrick Grimes: The advice that I got when I was just a young snot-nosed engineer was from one of the founders, and I talk about him in my book who said his only regret after having built this wildly successful high-tech firm, his only regret was not investing more, sooner, into real estate, and that stuck with me. I read Robert Kiyosaki’s Rich Dad, Poor Dad book. I learned about the cash flow quadrant and buying assets and not liabilities, and I didn’t come from a wild lavish upbringing. When I started making money, I was like, well, where am I going to invest it? And so then, real estate became a side hustle for me after I lost it all and I started, I was moonlighting single family buying in recession, resilient markets, homes that needed some renovation that I could get my capital out and immediately begin renting for cashflow, not getting high leverage debt, keeping it very low leverage and building what I thought was going to be 20 or 50 homes.
And then I was going to retire, when I realized that I can’t do that and be a high-tech robotics engineer. It was too much because I couldn’t get married. I was constantly traveling around and I was getting two master’s degrees while moonlighting this stuff out of Texas and living in southern California, and when I met my wife, I told her I was going to take a break from single family, and then when I scaled in the, and I said, “Look, I got to scale up. I’m going to do bigger assets. I got to partner with people that are in the markets, so we’re taking down things together. I don’t have to do it all on my own,” and that’s when I built invest on Main Street.
I said, “Look, we’re going to build a private equity firm, we’re going to raise capital from others, we’re going to partner with different individuals that have different disciplines in different areas and we’re going to build a diversified portfolio throughout the recession resilient markets, and so Invest on Main Street came out of that, me graduating from the do-it-yourself, DIY, single family guy to a larger institutional approach to calculated risk averse investing at scale. Yes, it became more profitable than engineering and I am a huge nerd, love engineering to death, took apart VCRs, played with Legos growing up. I don’t think I’m ever going to get over that, but what became much more profitable and the right thing for my family, which freed our time and our location. We moved to Hawaii during COVID, spending three months in Hawaii again this summer. We have a newborn. I get to spend every day with them. That life was brought by succeeding in real estate and also, in the energy portfolios that we’re in as well, so that’s why.
Ajay: That’s why. Someone who has seen the loss and someone who is seeing the real estate as it is, from surviving 2008 and now looking at the future in 2023, and with the state of the interest rates at this point in time, what would you advise people who want to put money into real estate? Is it the best of time or is it not so good time for real estate investment? How do you like to put it for people who want to look at real estate either for big money or in terms of some sort of a retirement planning? How should one understand the market as it is at the moment and the way it is shaping out?
Patrick Grimes: The traditional deals, the passive investments, we put together large one to 300 unit multi-family acquisitions in various locations in the southeastern United States, those kinds of investments have gone from being a bit of a needle in a haystack to almost non-existent now. Hard, it’s almost impossible to find in the way that we were looking for them before, and we’re still headed for some pain in the United States. I think that with the interest rates just going up again, the fed’s rhetoric is not lessening, they’re still going to go strong. There is more banking issues to happen. My general sense is if you see any investments that look today like they did a year ago, they’re packaged the same way, they have the same returns, they’re saying the same things. Those operators have their heads in the sand and somebody who’s lost everything in 2008 and nine, I know what it’s like to be in that situation when I was the guy with my head in the sand and I was buying into, it’s never going to go down. It’s never going to go down.
Today, is the time to be shifting focus towards how can you lean into the recession. Just like how a lot of people made it very, very well in 2009 and 10, they completely shifted their strategy, and that’s why we’re looking. We have a completely different acquisitions engine that’s looking for distressed assets. These are people that are having a hardship because of the recession. These are individuals which didn’t have an interest rate cap and had floating debt. That means all their cash flow is gone, probably in the red. These are people that, their tenants are not paying their rents, because COVID delinquencies are still super high and the courts are backed up evicting. That’s happening all over. These are people that maybe, a combination of those having a natural disaster happen. What we’re finding is the recession with the jobs lost, delinquencies, interest rates, also insurance has gone up 20 to 40% around various places in the United States.
All of these things aggregate to these various operators that we’re finding and we’re going through a thousand leads a month right now. We’re actually investigating 200 properties a month and we’re finding a couple deals a month now, where we can pick up these properties at extraordinary discounts. Not just a 10 to 15% average annual return, but extraordinary discounts to the point where we could get our capital out. We could buy it and get our capital out in six months to a year, is what we’re seeing. We’re getting some of those investments now that are similar to what you could do in 2009 and 10. They’re not as prevalent as they were in nine and 10, but that’s why we started this recessionary acquisitions fund because that is where I think investors should be leaning today, is looking how can they benefit from the recession.
Ajay: Right. Right. Two aspects of it. One is the wealth building part. As an individual, how does one see the real estate market at the moment? And second thing is, even in terms of retirement planning, a lot of people are very cautious, especially if they are 40 plus or around 50, and they don’t want to take any risk, and right now, as I said with the state of the inflation, with the rising trend, and I guess maybe this is not the last that they have done, you never know about these things. Even if whatever they say situations can turn different, and again, the market scenario is different. The war in Europe is still on and nobody’s quite clear how things are panning out and everything is so interrelated it can impact one thing, and then another thing can just, you don’t get impacted strongly.
As an individual, how should I look at the real estate market market in terms of my wealth building? What should be the strategy here? And second thing is in terms of my retirement planning, does it fit or does it not fit? Is it only fit for in terms of only if you are wanting to get into using that real estate property or apartment or whatever it is for your own use, or maybe I’m not getting the full sense of it. Help us understand. A lot of people in India also want to, there’s a huge number of people who are in the U.S. and people also put in a lot of money there, so how should they look at it if they have some spare money and they want to put into that market.
Patrick Grimes: Right. I get this question a lot and the interesting thing is, is that especially in America, and I don’t know so much in India, the financial IQ is very, very low when it comes to anything outside of the stock market. People, they think of investing and they think of, well, the defacto place to invest is in your 401K or IRA. I’m sure you have a variation of qualified retirement accounts in India, which is basically all stock market. Maybe they’ve graduated from a 401K to an IRA. Maybe they’ve graduated to a financial planner. Once again, put them all inside of securities into the stock market or maybe they’re doing a DIY kind of venture out and buy their own rental property. Well, I saw myself struggle with that. I wasn’t the expert. What I’d say is that coming from a guy with two master’s degrees, my third master’s degree where I learned to invest passively in a commercial, that’s where I found the sweet spot.
I think that when you invest for retirement, you need to invest in recession resilient markets, if you’re going to do in real estate. Those are markets which tend to not go crazy like the Las Vegas, the New York, LA, markets that are stable. You need to invest in investments with very low debt. In our opportunistic fund, we’re looking at 50% leverage. What does that mean? That means we’re really cash flow heavy. That means we cash flow on day one and that provides for capital preservation. When you get that debt, a lot of what’s happening now is a lot of people didn’t get fixed interest rates or they didn’t get interest rate caps. You need to make sure you’re investing in a way where your cash flow’s not going to get consumed. And then you need reserves on the sideline. You can’t spend every penny just to buy the asset.
We keep in a reserve account, six to eight months worth in reserves on the sidelines. That means if a tornado comes and hits, we’re well insured, but you still have to float the property, and it’s people that even though they’re insured, they didn’t have the capital on hand to float the property while they waited for that to come, and then they lose it. It can be, just like in any kind of investment, it can be a very low risk capital preserved investment when the deal is structured property and in the right market. If you read Forbes, Patrick Grimes Inflation, you can read my article on, this is exactly how I think income generating real estate when structured properly, and the assumptions I just explained can actually allow you to win with inflation. Meaning that when inflation goes up, income goes up.
Now, expenses go up too, but our expenses are less than our rents, so oftentimes, we’re at least hedged with inflation, if not earning more, provided that we get steady debt. I was born in the early 80s, and back then, interest rates were double and triple what they are now. What was happening in real estate? People were making lots of money. How is that possible? Well, the deals were structured differently. There wasn’t a lot of panic and fear and people were calculated at how to make it work, and I think that it’s important to keep in mind that you can make money in real estate in any economy with double and triple interest rates we have now, but you’ve got to find the right and operator to invest with, and when you do that, you will outperform the stock market.
You’ll provide tax advantages in inflation hedging and capital preservation. I highly recommend, I think it’s perhaps the most valuable tool available for retirement planning, but it requires quite a bit of information to do it on your own, or you can passively invest with an operator, somebody who’s been through a downturn that speaks the language of failure and recovery and is kind of on their own soapbox doing things in a very different way and is patient with the returns. We’re not returning. We’re not saying you’re going to double and triple your money every year. I’m an example of what happens when you try to do that. Reasonable calculated growth over time is the key.
Ajay: Absolutely. Absolutely. If there is somebody who can handhold them like you can, then there is nothing better than that, and if this is available then people should make use of that. Do tell us, tell the audience about your Invest on Main Street, what it does, who are the people who can approach you, your company for their planning, for your advice? And second thing is, you started the real estate investment as a side hustle. Is it still lucrative as a side hustle even at this point in time?
Patrick Grimes: No, Invest on Main Street, it’s a real private equity firm, not a side hustle anymore. Actually, during COVID, I did engineering and I actually did automated COVID assembly test kits, and that was really cool to be involved in that. Again, I am still a geek, but no, I’m not doing engineering anymore. This is my one and only gig. It is Invest on Main Street, we put together investments for accredited investors in the United States. That’s somebody with a million in net worth, not including their personal residence, 200,000 in income as an individual, or 300,000 when combined with their spouse, and that’s the SEC requirements, and we’re just kind of obliged to verify that. Our minimums are like, a hundred thousand dollars, so we kind of make that bar a little bit high, but sometimes we’re raising anywhere from four to $30 million for some of the acquisitions.
It does make it tough. If anybody doesn’t meet those requirements, but they’re still interested, you can still set up a meeting. I’ll point you to others that don’t have those requirements, but you’ll never hear them on a podcast because if they don’t require the investors to be accredited, they can’t talk about their investments publicly, so it’s a little bit of a chicken before the egg thing here, but my general sense any individuals that are busy professionals, I’m really passionate about helping. I was and have been one, my whole life, working hard tirelessly, trying to get out of the grind and the rat race. I’m super passionate about helping people invest in ways to meet their goals for accelerate retirement and live the retirement of their dreams while building their legacy, so that they can leave something to their kids happy to help point you in the right direction if that’s what you’re doing.
If you’re out there trying to do the DIY, do it yourself real estate guy, I feel your pain. I went through all that and I’m happy to chat with you, and I have articles, a bunch of stuff, bunch of content on my website that talk about some of the risks associated, asset protection problems associated with that strategy that the gurus aren’t telling you about, and how to structure these investments, especially these passive ones that don’t require you to take time from your family, friends and hobbies, allow you to go enjoy your life, but use this money making machine and maximize its potential with diversified portfolios of investments. That’s really our niche and our goal with invest on Main Street is to kind of raise the awareness. We’re fighting against the employers which say, “Hey, put some money in your 401k, we’ll match it. That makes it a good deal.” What you don’t know is inflation is affecting that. The market volatility is inflecting that and you’re not going to make it out, and you’re not going to have anything left after you retire and pass.
We’re fighting against that. We’re fighting against all the financial planners which don’t make money from our investments. They’re going to put you into all these things they make money on, but they can’t make money on private real estate offerings, private diversified energy funds, so they’re going to fight you on that. The reality is, we’re not a secret. The wealthy invest in ours. In fact, some of our investors are incredibly wealthy. We’re passionate about bringing it to the working professionals, the accredited investors, the doctors, the dentists, the entrepreneurs, the managers out there that are fearful of the traditional path of investing, realize it’s never going to get them out, and they want to diversify into inflationary interest rate protected type vehicles and we can provide that, and that’s why it’s there and that’s why I’m doing it.
Ajay: Absolutely. Right. Do you ever get the fear or have you ever thought of de-risking or you have already done it in a situation like 2008? Does it ever occur to you that 2008 situation can come again or do you think that it’s not a probability right now?
Patrick Grimes: Oh, will 2008 happened again? Of course I think it… Well, each recession is a little different in its own way. There are fundamentals about 2008. 2008 more so than a real estate crash, it was actually the biggest incidence of fraud in the country’s history where the banks were essentially criminals. They were not verifying income, they were not verifying credit, they were falsifying documents and then selling them as prime security, so that was fraud. That wasn’t just a real estate crash, and even though things look a little bit shaky right now, believe it or not, that part where we have verified income, verified jobs, and credit, that’s for the most part, that’s been fixed to a large degree. We’re not going into a recession where people simply can’t pay their bills. That’s not happening this time to the scale that it was before.
We have much more qualified buyers in the market, much more qualified people that have the ability to pay their mortgages going into this one. There are other things that will affect different credit crunches and the government will adapt. During COVID, we saw even for our multi-family deals, which tend to be the lowest risk assets in real estate, we saw the bridge lending or the banks dry up and we used Fannie and Freddie. Congress has created Fannie and Freddie to provide debt. We’ll see stuff like that. We’re going to see a credit crunch coming up in the next year or two. That’s going to create a lot of opportunities for a recessionary acquisition strategy like we have, but it’s going to cause a lot of pain for others that weren’t prepared for another 2008. I think it was… Was it Napoleon that said, “I never won a war that went to plan, but I never won a war that I didn’t plan thoroughly.” My general sense is, when we look at the underwriting, it’s like when we look at the projections and the performers of our properties, it’s like we’re going to go to battle.
We don’t know exactly the nature of the crash that’s going to happen, but we’ve seen from the past what it was required to be resilient through those delinquencies, debt, interest rates, insurance, maintenance, natural disasters. You can build these properties around these, fortify these investments around all the disasters we’ve seen, and then we’re going to be agile as we go through it. I think, of course there’s going to be some kind of cyclic markle and that’s part of capitalism, but it doesn’t mean that those that don’t plan thoroughly aren’t going to win that battle. Meanwhile, you’re much safer in a real asset, capital preserved real asset that cash flows, than you are where your investment’s still there. Maybe you’re just playing with the distributions, then you are in a stock market where overnight you lose half or more of your equity in a crash. My general sense is, make sure you got the right partner to invest with, but make sure you’re diversifying in those recession-resilient inflation hedged assets because there may be another 2008 type of investment coming up.
Ajay: Right. Right. There is so much to learn from you, Patrick, and especially somebody who has got good educational background. You know so much about automation, your design, robots, automation systems and all that stuff for other people. How do people connect with you? You have also written a book, Persistence, Pivots and Game Changers, Turning Challenges Into Opportunities. How do people know more about you? What’s the best way to connect with you?
Patrick Grimes: Sure. InvestOnMain, and then street.com, InvestOnMain, and then street.com. Happy to chat with you if you go there, click on contact, set up a call. I’d love to hear about your story, get you pointed in the right direction. We have investments coming up at the top of the website. Our book is Persistence, Pivots and Game Changers, Turning Challenges Into Opportunities. Forward by Brian Tracy. I’m on here. I did this with a couple other really awesome guys. Phil Collen, lead guitarist of Def Leppard, some NFL, NBA coaches, players, entrepreneurs, actors, some really cool people in this book. I did a chapter. I tell my whole story and it did make an Amazon number one bestseller. Happy to give it away. This is part of my contributing back out there to try and inspire others down the path, so if you just go to InvestOnMainStreet.com/book. InvestOnMainStreet.com/book and I need a promo code from you. What do you want your promo code to be?
Ajay: You can make it, KAJ is perfectly all right.
Patrick Grimes: There you go. Include that promo code there, make sure you fill that out, and set up a call if you’d like to have a chat, and we’ll get you a signed hard copy of that book sent to you.
Ajay: Right. Right. My last question to you, Patrick, is that a person from automation, your protomation systems, how do you manage the real estate part and the pro automation systems company together? Because both things must be, it needs a lot of your mind, your mind space, as well as your time. How do you manage it in terms of as an entrepreneur, as a person who’s taking care of both the companies, even one simple thing is very difficult in today’s situation or have you put it all on automation?
Patrick Grimes: No, I just have an AI that I use for it all. No, so I did leave the engineering stuff behind now, so thankfully, I can spend time with my wife and my boy as well as my company, where my passion now is Invest on Main Street, but it wasn’t easy. I’ll tell you what, just doing the machine design automation and robotics, those are very challenging projects where I would go into these facilities, brilliant people coming up with these crazy ideas and we’d have to build these machines, one of a kind each time, and that was a lot of stress was the first product was a prototype. It was not easy, and I was flying around constantly. I spent a lot of years getting two master’s degrees while doing that full time, so I’ve never been one to let it go, but it paid off because on the other side, I was able to create more value and I was able to get paid more along the way, and then like I said, it was when I learned to partner in the real estate because I was moonlighting my real estate career.
It wasn’t until I learned to partner with others and bring my superpower, what I was really good at, the analysis projections, the underwriting, I’m a bit of an analyst, travel out, figure out these deals, and then work with others that had spent 20 years property managing and asset managing investments and in specific markets that I’m investing in and partnering with others to work on these deals together was when I was able to really do it in a healthy way. I was able to do the engineering and then scale a real estate portfolio to the point where I could walk away from engineering, and that’s really what it took, to let that control go, and that’s the challenge with all passive investments. Defacto people think, oh, I can invest in the stock market passively, but when it comes to buying a real estate deal, I want to do it myself. Well, that didn’t work for me. I had to partner with others to make that work, so that’s my general sense of advice.
Ajay: Right. Right. You advise a lot of people. Life on the Main Street also can be sometimes very, very individual and lonely also sometimes, so who do you go for advice for?
Patrick Grimes: Well, I’m in a number of masterminds. Masterminds meaning, I get invited to a small group of people, and I have about three of those that I attend regularly, and they’re all alternative investments based, so different operators in different spaces. We’re kind of a peculiar group of people and we’re all navigating similar challenges, and many of them are far more experienced. They have a lot larger portfolios, bigger teams, and I’m just very fortunate to be at the table, so I attend a lot of that and that accountability has been big. There was a time, especially when we were living in Hawaii during COVID, it was my wife’s idea, she was like, “Let’s move to Hawaii.” Two and a half weeks later, I had us on a plane. I was like, “All right, that’s your idea. We’re going.”
Anyways, we’re out there. I was actually waking up, I think at four in the morning Hawaii time, because it’s a six-hour time change to the East Coast and I was waking up at three, going on my run, taking a shower. I run every morning and I would be in this mastermind at four in the morning. It’s dark. And I did that every single Monday for almost the entire time I was there because I valued so much that connection, and I guess while I’m on that, I do run every single morning and I did the lake right behind me. I ran around that with my puppy and I listened to exclusively the combination of podcasts, TED Talks, and audible books while I’m doing that, and that inspiration, the constant, and I’m always, it’s self-improvement, investing, management, CEO, those constant engaging and putting into work some of those principles that I’m learning is just an amazing, amazing thing. If I might recommend a book, can I recommend a book? Is that okay?
Ajay: Of course, of course, of course.
Patrick Grimes: Is it okay if it’s not my book?
Ajay: It’s okay. No problem.
Patrick Grimes: Yeah.
Ajay: Any book. Yeah, book is knowledge and my show is also about knowledge.
Patrick Grimes: Real time, and I tend to think fast and I probably talk too fast too, apologize for that. I get that feedback. I usually listen to these books at one and a half speed, and then I’ll go through it again or again, sometimes two or three times, but this book was the first book in years that I dialed it from one and a half to one and a quarter, and then I dialed it from one and a quarter to one speed, and it’s, A CEO Only Does Three Things. A CEO Only Does Three Things, and it’s by Trey Taylor. He runs a family office. He’s just an extraordinary individual I have had the opportunity to work with, and if you’re real serious about managing a business, then you’ve got to read this three times or listen to it three times because he’s got so much. It’s deep rich content with such great historic references, and it talks about the tribal sense of the whole and the ritual sense. There’s so much good stuff and I highly recommend A CEO Only Does Three Things. It did just recently come out, so you probably haven’t heard about it, but I’m super impressed by, it’s an example of one of the books that’s making a fundamental shift in my management strategy that just comes from carving out the time to run around the lake with my dog and kind of meditate on some self-improvement.
Ajay: Wonderful, wonderful. Thank you for all your views on investing on mainstream, Patrick, and I can also tell you that from what I see from here, there is certainly a great view even on the street that you live in and in the backdrop, I can see that great view. I hope even for the investors, even for all those people who invest in real estate or any other place, there is always a great view for them. There is always a great view of the future for them. So with this, it’s a wrap on this very special edition of the KAJ Masterclass Live. Thank you so much, indeed, for joining us.
Patrick Grimes: I appreciate your time, Ajay. Enjoyed it so much.
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