Set Yourself Up For Success With Diversified Investments  – The Wealth Flow Podcast

 

Set Yourself Up For Success With Diversified Investments

by The Wealth Flow Podcast

Transcript

Keith Borie:

Welcome to The Wealth Flow. My guest today is Patrick Grimes. Patrick is the founder of Passive Investing Mastery, a company dedicated to educating and providing alternative investments. He is also the founder of a private equity firm, Invest on Main Street, where he has acquired over 600 million in real estate, including 4,000 units in multifamily apartment communities across Texas and Southeastern U.S. He’s diversified his investments to include energy, including 100-plus natural gas and oil wells in five locations across five states.

He’s also a partner on a best-selling Amazon book, Persistence, Pivot, Game Changers, Turning Challenges Into Opportunities. In his prior life, he was a mechanical engineer with a B.S. in mechanical engineering and an MBA and M.S. in engineering, and was inducted into the Forbes Real Estate Council to contribute to Forbes Magazine on commercial real estate topics. So Patrick, welcome to the show.

Patrick Grimes:

Glad to be here, Keith. Your show’s right in line with our vision at Passive Investing Mastery and Invest on Main Street, so it’ll be a good friendly talk today.

Keith Borie:

Absolutely. And I can’t wait to dive into a lot of the things we’ve talked about in the pre-show, but as I start with everybody, I’d like to get some background on you. Where did you grow up? Obviously you took a different path initially with the mechanical engineering, but what led you to real estate?

Patrick Grimes:

Yep, so we did bounce around a little bit growing up, so I tend to say where I grew up was where I spent my formative years. I was born in Italy. My dad was in the US Air Force, and we lived in Florida for a little while, in Southern California before settling down in what is, I think, middle school, junior high, and high school up in Yosemite National Park, South Side, Oakhurst, Bass Lake mountain community. So I went to Yosemite High School.

Keith Borie:

Wow.

Patrick Grimes:

I’m a mountain boy.

Keith Borie:

Beautiful up there. Beautiful up there for sure.

Patrick Grimes:

Yeah, we were raised with just bunny ears on a TV, fuzzy channel 8 and 11 watching. If we did turn on the TV, it was Matlock or Murder, She Wrote. So we spent most of our time out on the mountain. Our backyard was a hill that we could snow-sled down, and we went rock climbing and sailing and hiking all the time, so it was good to be in nature. Moved to the city when I went to college. I made it out of the mountains. Engineering was great, I loved it. I’m a geek internally in my heart still today, even though I don’t do that anymore, but yeah, I did well. Engineering was a great path and I still am passionate about it today, but it just wasn’t going to get me and my family where we wanted to get to, so ended up having to pivot.

Keith Borie:

Yeah. You pivoted into real estate. How did you start in real estate?

Patrick Grimes:

I worked at some places, like eight-month internships, but my first real job was a company called Kinematic Automation up in the mountains, North side of Yosemite National Park actually, and was doing automation or robotics. One of the owners, I got to know him very quickly, who still invests with me today, really solid guy, I mean, this was a long time ago. He said that his only regret was not investing more sooner into real estate. I’m like, “Wow, what?” He goes, “You’re going to be very talented in this high-tech space, but don’t put all your eggs in that basket. Diversify, put your investments in real estate, more as you can, the sooner.”

And so that’s what got me on the path, and I was rocking because I jumped in headfirst, snot-nosed college grad, inexperienced right into what was the highest returning asset class I could find, which is pre-development, hoping to develop and build. And then 2009 and ’10 happened, so I lost it all. I dove very quickly and I learned the hard lessons very, very early in my career, but I was able to climb out. I went through foreclosure, I avoided bankruptcy, paid debt, forgiveness, all nine yards, lost the property, but I was a talented engineer doing well, so eventually I was back in the seat again with income to invest, and I just learned how to do it in a lower risk profile, invest like the wealthy, be the tortoise, not the hare.

Keith Borie:

Yeah, maybe we can expand upon that a little bit. I’d like to hear maybe, Patrick, you’ve been through 2008, 2009 timeframe. A lot of folks are saying that right now we’re going through something. Is it the same? There’s different dynamics around this one versus the last, but what were some of the lessons maybe you learned and what are you doing differently on your investments to be that tortoise versus the hare?

Patrick Grimes:

Well, this could be a whole hour-long conversation right here because I have a whole theory on this and I write articles and forums on all this. What happened in 2009 which is very different than what happening now, it was actually the single largest fraud, I guess it’s a fraud, which is buyers were not qualified, they didn’t have the reserves, they didn’t have the income, and so there was just really not any there, there behind the loans. And now, these days, there is.

And the challenges are different that we see today, but the principles, as you say, what is it that allowed us to be the tortoise, not the hare, to build a portfolio that would ride out recessions? The principles are somewhat similar. Because even though COVID and interest rates and inflation show up a little differently than what happened in 2009, they’re still financial disasters and there’s some similarities. Right off the bat, I learned you need to buy for cash flow so I don’t do development and construction anymore. I like to buy income-producing, cash-flowing assets-

Keith Borie:

Great.

Patrick Grimes:

… right on day one, and I like to buy ones that I can get at a discount, that I can work harder to find the right deals and make a measurable improvement to increase my position, go to work and improve it, but not create something out of nothing, not gamble, not slide the big stack over on green 24 anymore. But the principles from there, aside from being cash flow, is recession-resilient markets, which means we’re looking for places that didn’t just do these massive swings like they did in 2009. Mostly that’s places with diversified employment that are stronger in recession-resilient verticals.

And so once you’re in the right spot, you want to find the right asset that’s cash-flowing, and then you’ve got to put a really strong financial foundation, which means long-term fixed interest rates or cap rates, cap debt so that if interest rates go wild like they have, you have put up enough down to cash flow, you put up enough down so even if interest rates rise to your cap, you can still cash flow and write it out. But then when we found COVID is an economic disaster because people stopped paying rent. Maybe rental assistance helped a little bit, but then that went away, but the eviction ban finally picked up, but then they’re backlogged.

Keith Borie:

Right.

Patrick Grimes:

Right? That is equivalent to a tornado hitting your property and you can’t collect rent. It’s the same thing, same financial disaster, people in your property and you can’t collect rent. So we put eight to 10 months in operating reserves, so we’ll raise enough capital to pay the down payment, we’ll raise enough capital to fix it up, we’ll raise enough capital for operating reserves that allow us to pay all our bills for eight to 10 months, literally turn off the spigot. And then we have replacement cost insurance that will both rebuild the building and pay back the rents in case there is actually natural disasters.

The combination of those general principles are the foundation, and then there’s just layers of nuances beyond that. But the point is to not become the distressed owner that we’re buying these deals from, because we’re buying deals from people that they’re great performing assets, but they didn’t have the foresight, the preparedness to build it, to buy it and structure it in a way to survive. And so we approach it in a way where if we can’t do it and not become those people, if we can’t do it with these principles, we just don’t do it.

Keith Borie:

Yeah. Well, there should be a lot of opportunities like that, I think, coming up. Here, I’m sure you’re already seeing them. But yeah, those sound like great principles that you’ve put in place for sure. Before the show, Patrick, we were talking a little bit about single family and starting with single family and then moving into multifamily. And I know you’ve written the articles on it there at Forbes as well, so maybe if you could give the audience just your opinion of the two and why you prefer multifamily from an investment standpoint.

Patrick Grimes:

Yeah, I have Patrick Grimes, Forbes, Single Family Versus Multifamily would get you there, or you can go to our website and you’ll find them, or Patrick Grimes, Forbes, Asset Protection. I think those two combined, you need to really put together the story, because I did do single family before I traded up into multi, and I was a high-tech professional, I was a high paid professional, probably like many of your listeners, thinking that, “Well, the American dream is to become a landlord.” I’m really good at what I do in automation and robotics, so I’m obviously going to be really good at buying my own place and renting it. And so it turns out that while I was successful at that and I was buying properties, but I wasn’t buying in my own backyard, I was buying them where it made sense to buy, where I could cash flow.

The economics as far as the cash flow where it was recession-resilient, it was landlord friendly in Texas, and I’m in California. And those properties did very well, but the problem was I was still learning. I’m an academic, I was downloading every book, listening to everything, reading every guide I could, but I was still making it up as I went along, and it was with all my own money, but that’s a lot of stress and a lot of challenge. When I was dedicating most of my time to this thing, this job that produced the income that allowed me to invest, I was having to moonlight my real estate career, which me, I mean, I went white water rafting in Banks, Grand Canyon, I’ve hiked Fuji, Shasta, Cortina. I’ve done a lot of stuff, base camp of Everest. You can’t do all those things that really build an actualized life if you’re slaving away by day and slaving away by night.

Keith Borie:

That’s exactly right.

Patrick Grimes:

Right. It was actually my soon to be wife that came on the scene and that’s when I finally said, look, I need to take a break. And I told her she was there for my very last single family closing as while this is working and while we’re finding properties, improving and pulling out our capital and holding and building a portfolio, I need to take a break from this. And then we got married in California and Beijing, but also aside from just the time, it just wasn’t scalable. Trying to get to 20 or 40 properties on a single family basis in the Midwest, you need to really build that diversified retirement. The getting there is extremely painful and it’s a one stair step at a time. And so we saw that, the life we had at below 10 was going to be very different than the life we had 40 to 50.

And so it took some time for me to reset, learn about other options, scaling into multifamily and partnering, try not to do everything myself. I mean, I don’t go try and be my own mechanic. Why am I trying to fix my investment portfolio all on my own? And that’s the art of partnering. And it turns out that not only does the trade to syndicate passive investing or syndicating the larger apartments or owning larger apartments scale easier, and you can do it in better markets more efficiently, but it’s less risky. You can spread out your investments if you’re passive investing and you don’t have to sign on the loans, sign on the property, which expose you to frivolous lawsuits or a lender coming after you like they did me in 2009 and ’10. I didn’t know what cross collateralization was then. Most of my investors don’t know what it is now. And so that’s all education, that is good stuff. And those articles I wrote, try and really bring it home, just personal experience. Also, the book, which we’ll give away at the end here.

Keith Borie:

Okay. Yeah. Fantastic. And so it’s scalable, a whole lot more scalable to do multifamily. What are some of the other advantages that you found with multi?

Patrick Grimes:

Yeah, the tax advantages are significant as well. In single family, you’re stuck at this 27 and a half year depreciation schedule. It’s so small, a lot of people don’t even think about it in single family, it’s just not even on their radar. Maybe their CPA does it in the background, but when we buy a larger multifamily deal, we’ll do something called a cost segregation study, which allows us to pass through significant passive losses in the first year, oftentimes somewhere between 50 and 70% of our investment in the first year, which is awesome. It’s awesome for our investors because they have other investments that can help to offset those gains.

Keith Borie:

Yeah, for sure. And so maybe go into that a little bit on how that works, what the process is to get the cost segregation, and then obviously happy to have you speak to bonus depreciation and some of the changes that are happening right now with that.

Patrick Grimes:

Well, if you’re a passive investor, there’s virtually no work for you. Once you’ve signed the docs and where your funds in a K-1 shows up and you’ll just see a bunch of passive losses. So you’ll be in a really strong position off the bat. Behind the scenes, we are hiring an engineering firm/accounting firm that does a cost segregation study. And so they’ll take the property and they’ll add up all the components in it and say, “Oh, there’s this many light sockets, this much in flooring, this much in appliances, put those in the different buckets.” And in each of those buckets, you can say, “Well, this is allowed to be accelerated depreciated faster than 27 and a half, and this one’s allowed it to be appreciated faster, this is 5, 7, 11 year buckets.

And so you put all in these different buckets, you can accelerate these different things. Happens to be when you’re doing a multifamily building, a lot of the price are these rapidly accelerating components, things that don’t last 27 and a half years. So if you spend the money, which really only makes sense of larger assets like this, you can get a high percentage of that price accelerated with accelerated depreciation. Now, bonus depreciation was signed by Trump, and for a number of years, you can take a 100% of that price of the depreciable losses or whatever. You buy a property for 20 million, maybe you can depreciate 15 or 17 faster. We could take a 100% in the first year, meaning you invest a 100 grand, maybe 75% of your investment shows as a phantom loss. And that’s really cool for some investors.

Definitely helps to allow for your cash flow to be offset. Now, it’s down to 80 and it’s going to step down to 60 over the years. But right now, we’re still passing through anywhere from 40 to 60% depending upon the asset and paper loss in the first year. And like I said, at the very least, it means for most of our investors, their cash flow that we push out monthly gets offset. But for other investors maybe that they’re real estate professionals, they can have their entire income offset, like their active income offset, right?

Keith Borie:

Right.

Patrick Grimes:

And then on the energy side, even if they’re not real estate professionals, what they call the IDCs, intangible drilling costs, that depreciation offsets active income even if they’re not real estate professionals. So that can be very, very significant. So we use that across the board on all of our investments.

Keith Borie:

Yeah. Maybe while we’re on, I know we’re talking multifamily, but you just brought up how the depreciation works on the oil and gas. Can you give us a little bit more color on that and how that’s different? And maybe reiterate the real estate professional status because not everybody obviously that’s listening is going to have that or be able to do that, but the oil and gas depreciation, they certainly would have the ability to.

Patrick Grimes:

Yeah, it’s a really good question, and I get it a lot. People talk to me all the time, well, I can’t be a real estate professional, so I can’t take advantages over the ordinary income, my W-2 income. I can’t take the passive losses that you give me and offset my ordinary income, my W-2 income. And then sometimes they’ll say, well, actually my wife’s a real estate professional because she manages a rental property of ours. And then so if she does the investment, then she can write off her real estate income if she has it, or and also her husband’s through the 1040, her active income, maybe a surgeon, lawyer, doc, whatever. So there’s ways people work to try and make the passive losses in real estate offset active income. Otherwise, if you have passive gains like you’ve sold some real estate, that can help be offset by the passive income.

But sometimes it’s just not the case. You can’t become a real estate professional, your wife can’t become a real estate professional, but you’d like to figure out how to invest to then get an ordinary income write off for your high income. That’s the holy grail, and you got to be careful first because there is a lot of strategies. There’s probably a handful of strategies out there which claim that they can do this, but it’s risky and there’s no real tangible asset there. It’s kind of a hope. And so in those cases, it’s like the tax tail wagging the dog is what we call it. You got to make sure that you’re investing in the right investment first, and then is it tax advantaged investment, second. So we tend to stick with recession resilient, non-correlated investments. And so in addition to real estate, we’re doing energy and we are not currently right now what we did last year, we don’t have anything open at present, but in that particular one, you’re going to be a little cautious because there’s a higher risk profile with energy.

But I like that it’s investing in an essential need, the government subsidizes housing and the food and energy and healthcare. So if you can be clever about investing into those energizing and feeding and housing and some investments that we’re looking at presenting and keeping America healthy, the government will reward you with these tax advantages. And it seems like every so often I see some kind of hate about, “Oh, this person didn’t pay taxes. The wealthy don’t pay.” But it’s interesting because if you go buy a Ferrari, you’re paying taxes, but you’re not helping anybody out. But if you invest alongside of the government in oil and gas drilling, they give you intangible drilling costs that’s similar to depreciation in real estate. You invest in real estate to housing, they give you depreciation. The differences between those two is that, like we said, if you’re a passive investor in real estate and a syndication, that would be passive losses, which we talked about.

But in oil and gas, the intangible drilling costs, if you invest in a certain way in certain types of vehicles, they can be passed through as an active loss. So it can help offset year one income. There are other investments which provide for similar kinds of offsets, but we won’t go on all of them today, but you don’t have to become a real estate professional to get the benefits in oil and gas intangibles. That just comes through as being an investor in the specific type of oil and gas investment, which is just oil drilling, old school oil and gas drilling where you have intangible drilling costs.

Keith Borie:

Okay, fantastic. Yeah, that’s interesting. And was that a pivot after COVID as far as raising for some of those deals or what did that look like? In other words, what led you to go into the oil and gas?

Patrick Grimes:

If you go back to my passive investor guide that I created, and it’s on my website, it’s a free download at investonmainstreet.com, right at the front of that thing, I have the diversification of the wealthy, and that’s really what my whole journey has been. It’s been trying to learn how those who may have exceeded, even that founder of the high-tech firm I was working for succeeded, he claimed because of his real estate investments, right?

Keith Borie:

Right.

Patrick Grimes:

It was following the breadcrumbs of the wealthy and ultimately those lead to a diversified portfolio, not just real estate. If you go to our new company, which we had invest on Main Street, which grew to half a billion in acquired assets and partnership in 4,000 plus units around the Southeastern states in Texas, a little bit in the Midwest, but we grew a large real estate portfolio. But when I was talking to investors, I was always saying, don’t put more than 5% of your portfolio into one deal. And here’s the asset allocation. Middle class has 8% of their wealth in alternative investments outside of the stock market, but high income and ultra wealthy have between 25 and 50 business, real estate, equity.

If you look at Tiger 21’s allocation, which are a group of people that have over 20 million in net worth and they publish their allocations, they have 26% of their wealth in real estate, and then another, I think it’s 27 and 26 in private equity, so they’re diversifying into alternative investments. Those investments tend to be tax advantage that provide essential needs that are non-correlated, meaning they don’t rise all and fall at once. So people that are going all in high-tech, well, that’s not a good allocation strategy, all in real estate, not a good allocation strategy. And that’s why when we launched the energy fund, we said, “Look, it’s an advantageous time. Let’s launch this.” At this point, we see prices of oil and gas strong and let’s get into a cash flowing fund and let’s diversify.”

We got such an overwhelming response from our investors that said, “Hey, look, this makes a ton of sense. We need more of these. We didn’t even know they existed. They’re usually reserved for the institutional investors. We need more of these completely alternative non-correlated ones that don’t rise and fall together, assets that are non-correlated,” but why are you doing it from a real estate company? So we founded Passive Investing Mastery because ultimately just like my portfolio and my friends where we trade alternative investments like baseball cards, they’re really only known to a few of us.

So we founded Passive Investing Mastery to say, “Look, we may do real estate with Invest on Main Street, but we want to do consistent educational webinars to educate on ATM funds, laundry mats, car washes, self storage, all kinds of different alternative investments,” which we did, we just did a panel and all those came up and more all kinds of alternative investments which have different recession resilient cash flow and appreciation to outpace the stock market and then provide those investments.

And so we have the recessionary acquisitions fund and our income fund, which is an asset-backed debt fund, both in Passive Investing Mastery, and we’re adding some more here to those to help educate and bring those tier one best in class alternative investments, both educate and bring those to our investors. And that’s really the journey that the company’s undergone.

Keith Borie:

That’s great, and I think it gives you a good perspective of all the different things that are out there. I’ve got several friends that have invested in the ATM thing, and there’s some depreciation you can get from that as well, I believe. You could correct me if I’m wrong, but I think that there’s some kind of a depreciation or something that you can take year one on those.

Patrick Grimes:

There is.

Keith Borie:

Yeah. And then the car washes are super popular right now as well. I see that going around as well. So there’s a lot of neat things out there that aren’t specific to real estate, but give folks some options when it comes to investing. So that’s neat for sure.

Patrick Grimes:

Yeah, absolutely. And people need that community, right? They need to not just Google search and find like, oh, there’s a car wash. What does that even mean? They need to find a community where we’ll educate them on possibilities, introduce them to people that are doing it so that they can see themselves actually like others who have succeeded. Just like I did, I needed to seek out those people that were in my profession or in my circle that had done something to really think it was possible for me and to really energize me and then get the right kind of advisors, people I can ask questions too so that I had a community that was committed to developing my financial future, not just a circle of your work friends that are focused on putting stuff away in the 401(k) and IRA.

Keith Borie:

Yeah, exactly. That’s neat. Why don’t we talk maybe a little bit about before the show, we talked a little bit about self-directed IRAs and being able to invest in some of these alternative investments utilizing that tool? Can you dive into that maybe a little bit?

Patrick Grimes:

Yeah. So, I do have an article in Forbes. Everybody wants to go deep into, its Patrick Grimes Forbes, IRAs, 401(k), and you’ll find it just hitting Google. But for the most part, I worked in the high-tech business doing automation and robotics for some of the largest, most successful companies, the Teslas, Lockheed, Abbott, Johnson & Johnson, Boeing, we did all kinds of really cool stuff for new and innovative gizmos and gadgets out there. And each time, I was just so blown away when I get into these facilities and I was working with some of those brilliant people in the world and I would learn that their understanding of investing was very, very limited.

Maybe back then, they weren’t doing crypto so much, but maybe they were day trading or they knew maybe one or two things, but I was so interested, I was always asking like, “Hey, how are you guys investing? What are you doing?” For the most part, about 90% of them had either all of it with their 401(k) or IRA and mostly in index funds because they’re talking to a financial planner and that’s all that they sell and they won’t sell away or else they lose off their… Or they had it in stocks in startups or they had it in stocks in their company and they were like, “Oh, we’re going to go IPO.” And none of it was truly diversified outside of Wall Street, very little of any, or maybe they bought a rental home and that was it, right?

And Lake Tahoe rental home and somehow that was going to get them there. But the interesting thing is, is that in your 401(k) and IRA, while most people think that your funds are trapped there and you’re stuck with the financial planner, if it’s an IRA or a past 401(k), hey, I don’t want you to manage it all and you don’t have a say over that and you can reach out to some of the self-directed companies. There’s a lot of them. And we’ve been on webinars for about a dozen great self-directed IRA, 401(k) custodians where you can peel off maybe 10, 20, 30, maybe like the wealthy, 50% of your retirement account, pull it out of traditional investments and get it diversified into alternative investments.

And when you do that, you basically roll part of it over into this self-directed account. And then you can invest in all kinds of different assets. You can buy gold, you can buy silver, you can invest in a car wash, you can invest in a multifamily deal, you can even invest in an income asset-backed debt fund. And that will allow you to then invest more like the wealthy and unlock what most investors think is this kind of trap there until they’re 59 and a half, they don’t have access to it. Way to unlock that and truly get some exciting growth and appreciation that will get you that retirement faster and get you at a safer, more balanced portfolio. Because the worst thing in the world is your time to retire and it’s in a down year for the stock market and you don’t have any funds other than that. So every time you pull money out of your retirement account, it’s like a five to 10 x hit because the market’s been hit so bad, it won’t rebound.

So you really need to have income streams aside from your job and aside from dwindling down your retirement account, you really need to find those alternative assets that are non-correlated with Wall Street that’ll get you there to have a safe plan to retire when you want, and to be able to not dwindle down your retirement until you die and build your retirement to leave something to your heirs and live the retirement of your dreams. And really that’s their goal at Passive Investing Masteries get people to that point and then get them to the point where they can then have the financial resources to give back. For the causes that they care about so dearly in this world, I really think people should be aiming there not just the financial stability or financial freedom, but to have the resources to make an impact. And that’s our goal.

Keith Borie:

Yeah, that’s great. So tell me a little bit more about that community. Is that like a mastermind or is it just a group of people that meet? What does that look like?

Patrick Grimes:

So we have started every couple of weeks we’re doing panels. We just had a couple car wash guy, laundromat guy on the last one. We just did actually one on AI this last week. And so we’ve created these environments where people could come up, we talk about different topics, we field a lot of questions and we bring in some expert in some spaces, and every time people will be like, “I had no idea that that even existed. This is cool, this is great.” And we’re in the process right now of building out a Facebook community so that we can allow the investors to begin to connect. And so we just peeled off the last two investments, acquisitions and income into it, and then later this year, we’re going to start adding additional different channels to it and so we can start building that community of people that are all in the space.

Keith Borie:

Oh, that’s really neat. Before the show, Patrick, we were talking a little bit about some of the current stuff that you have going on. You want to maybe dive into some of that and why it’s set up particularly interested in the fund where you’re buying assets, distressed assets, but for basically all cash and their cash flowing from day one to the investors.

Patrick Grimes:

Yeah. So we have a recessionary acquisition fund, which is the sister to the recessionary income fund, and the income is the debt side and the acquisition fund is the equity side. And what makes it recessionary? Well, as we’ve talked about the higher interest rates and inflation has and with the bank constricting issues that we’ve seen have caused a lot of properties to become financially distressed. I mean, they’re great performing assets, but the ownership didn’t quite build it to last through these trying times. And even if you are a very skilled operator, you may just got unlucky and the year that your loan is expiring is this year when interest rates are high and people aren’t buying and you’ve got a performing asset, well, that’s only going to continue to grow as we get closer to 2025 because we have a trillion and a half in commercial real estate debt, short-term debt coming due all at the same time when people are struggling with the higher interest rates, the inflated costs and evictions lingering from COVID. Atlanta area has 12,000 backed up evictions right now. It’s pretty amazing.

Keith Borie:

Oh my gosh.

Patrick Grimes:

But again, performing assets that need debt and we have the ability or need financial relief. And so we have the ability and we have this acquisition engine where we’re reaching out to owners directly. We’ll use a broker if the owner wants, but we want to make sure we get the owner first because we’re looking for those people motivated to close very quickly. We’re looking for those people that brokers haven’t whispered pricing that’s so high, they’re never going to sell in their ear that are individuals willing to sell at a basis where we know we can make a solid return on the buy. The last asset that we picked up, for example, had appraised a couple of years earlier for it. It was a 4.7 million. It had fallen to 60% occupancy and the owner was disinterested, inherited it from his dad in California, and this is in the Midwest. And we were able to pull in there and do an all cash buy and close in 14 days.

We did the due diligence in front, but from when we closed and there was two other higher offers, but we were able to move quickly. Right after we closed, it appraised over 5 million and as is with at least a value of 8 million. And so the ability for us to essentially provide very little to no capital into the deal to get an immediate return is our goal. If it’s to be able to project, hey, here’s the returns we can make just from buying right. And where my crystal ball’s broken, today, it’s what happens in three to five years because interest rates and inflation and everything else. So what we’re doing within the fund, instead of holding it and spending a ton of money improving it, we’re not doing that, because we’re buying it. We were immediately pulling out our capital and then we’re buying a second asset within the fund.

So we’re not distributing refinances, we’re distributing rents. I mean, this thing was bought at a 10 cap, which means it puts us out a ton of cash flow. We’re distributing rents, but we’re going to take that refi and we’re going to buy a second asset and then we’re going to take the first asset with a couple of months of few months of improvement, and then we’re going to 1031 exchange, exchange it four into a third asset. So that one asset became the second and third asset. So one to two, do that again, two to four. And so by constantly with quick agility and velocity, stair stepping up, the equity, the gain and the fun, you can get some exciting compounding returns. And each step I can calculate because I know today I can buy the asset at a discount and I know I can trade it forward at a better price now.

So that means each step of the way, we do a very low risk step. Worth a bad day for us if we’re somehow off, which we’re not, because people are bidding higher than us on these assets and we’re just closing quicker. But if we were off, we just sell it for what we bought it for. So it’s not a bad day, everybody loses everything. But so far, we know exactly what those stair steps are and eventually those deals probably will dry up maybe in two, three years from now when everything’s stabilized. We weren’t able to do this three to five years ago. We probably won’t five years from today. But for now, during this recession, buying right and trading forward, refining out and trading forward, that’s the lowest risk path the analyst NECs can calculate for building. And the returns are high. I mean, because we can compound that growth and we know we’re buying right as we go, so produces a pretty high return.

Keith Borie:

Yeah, that sounds very interesting. And how are you finding some of the owners on these things? Are you working through banks that are identifying these as opportunities or do you call directly to the owners on it and try to intersect it that way or how are you going about finding them?

Patrick Grimes:

It’s a really good question. And the slide deck of our investment, we do go over what we call our proprietary acquisition system. And that is a bit of the secret sauce because we have intelligent software overlaid with other tools that provide for certain characteristics that we look for to suggest distress operator, but performing asset to narrow down the millions of assets down to certain ones in certain regions that have certain characteristics. And then we have a team of people that do the outreach and then connect with the pre-vet, where again, we’re going direct to owner. And then we have the acquisition side, which once we find out they’re pre-vetted, then we dive in there and see if we can make something happen quickly. And so far, it’s been great and there’s four assets which were done outside the fund, which provided the business case and helped to shape the strategy for the fund. And now, that our pipeline’s getting fuller, the fund is going to see some really exciting growth and investors are really jumping on board for it.

Keith Borie:

Yeah, for sure. That’s awesome. It makes a lot of sense, especially right now, and like you said, it may dry up at some point, but for the foreseeable couple years, that sounds like a strategy that’s going to work really nice for you. Are these just multifamily or are these a variety of different asset classes?

Patrick Grimes:

Yeah. So typically we would stick to a very narrow subset of B and C class, 20 to 50-year-old in certain micro markets of different locations. But because we’re not going to be vertically managing them for three to five years, we’re not going to be doing a slow drawn renovation plan over three to five years and we’re not setting up shop there forever. It allows us to open up a little bit bigger net because we’re also not making a bet on the long-term appreciation and health of a specific market. We’re not necessarily requiring tons of people moving into town because we need that long-term steady state growth. We’re just moving in and we’re moving out.

And so if we get offers which we’re willing to pay more and we can see that it’s sellable quickly and we can get in and move out, that opens up not only, we’re still primarily focused in diversified areas of better landlord friendly and recession resilient, but the Heartland, Midwest, Southeast in Texas, but we are opening it up just a little bit more markets within those areas we wouldn’t typically operate with our narrow strategy of three to five years, and not just multifamily, where the majority of the case studies are multifamily and a combination of retail, we are opening up some retail centers as well.

And for example, the first one we just bought was the one I described and we got it at a 10 cap, cash flows at 10%, all in cash, and we’re looking at a 50% loan to value, refi so super safe and 60% occupies, still cash on 10%, that means there really nowhere to go and appraise right off the bat at 5 million, which means we’re already at 20% return just from the buy. And we’re looking at ability to lift that much higher in very short period of time without putting a ton into it and then move forward.

So that asset class is potentially a really good one for us when in specific markets as well. There was an industrial property we were currently looking at which suggests extraordinary by the stress operator that we could get and be more sophisticated in just a number of months and then trade forward on that. And there’s a couple others that we’re looking at. We’re staying away from office. I’m not an office fan.

Keith Borie:

Okay. Yeah, it’s a little tough right now. So, I think there’s a value there, but banks aren’t wanting to… It’s harder on the exit piece of it, right? If you’re trying to get new debt on it, a lot of folks aren’t wanting to loan on that right now.

Patrick Grimes:

I foresee a lot of blood in the water in office, and if I was going to do office, I would be spearfishing specific ones that could be converted out of office. So that’s my take.

Keith Borie:

Yeah, for sure. Well, I know we’re running just a little bit long on time and I want to be respectful of your time, Patrick. I’ve got a couple additional questions for you, but maybe before we go there, if you could tell everybody how they can find out more about you and your investments and get a copy of that book.

Patrick Grimes:

Right. So, passiveinvestingmastery.com is the site where we have our new investments moving forward. Passiveinvestingmastery.com, I recommend you go on there. We have the asset-backed real estate income fund. It’s a debt fund. We also have the acquisitions fund, which we talked about today. If you go to passiveinvestingmastery.com/book, passiveinvestingmastery.com/book and that’s the secret URL and we can give you a free copy. Actually, I sign them and we ship them out for free. Please include Wealth Flow so we know you’re not a random, we don’t just give them out to everybody, but we’ll make sure and get one shipped out to you.

And that’s just my way, I mean, I tell my whole story in the book and it was an Amazon bestseller, but we have Phil Collen on there who is the league guitarist in Def Leppard, an actual rock star, he tells his story. There’s an MBA, NFL, coaches, players, entrepreneurs. It just was such a fun book and it was received incredibly well. So highly recommend you jump in there at and you can also set up a meeting with me. One of the things that I love doing is connecting with investors. So if wherever you’re at in your journey, I’ve been through it to some degree and I’d be happy to have that time and connect with you directly.

Keith Borie:

All right, sounds good. And maybe a couple other questions for you, but when you’re not doing the real estate investing and not at work, what do you like to do, Patrick?

Patrick Grimes:

Well, so being mountain boy raised, I love to get out there. Been backpacking all around the world. I’ve been two gap years traveling through Europe and the Middle East and Asia and Southeast Asia and hiked. My wife and I have been traveling out in India. I’ve hiked Nepal, love getting out there in the wilderness. We’re in Hawaii right now and so I love to get out there and do some spearfish and I think I used that analogy in a minute ago and been getting into kitesurfing, and surfing, of course, I’m overlooking Waikiki Beach right here and there’s a 100 people trying to ride one wave and all at once. So to the extent that I can find a wave where I have some room, it’s been a lot of fun and I love to get out there and my wife and I love to travel. I think our biggest thing is we have a nine-month-old and I’m fortunate enough now to be able to work from home and spend as much time as possible with him.

Keith Borie:

Yeah, that’s great. Two last questions if you have a minute. How about for a new investor, maybe somebody who’s just starting out their investment journey, what advice could you give them?

Patrick Grimes:

That’s a good question and I like to say partner up, and if you read my book, it’ll explain why. Because the first time I got into it, I went weighing over my head trying to get into some pretty complex risky stuff, pre-development, all in on one deal over leveraged. It was tough and I paid the price. I lost everything, and not only in the deal, but they came after me for more, fully recourse and cross col… I mean, I didn’t even know what that means, signing on debt till then. And then after that, I had a lot of success in single family, buying, renovating and holding. But I’ll tell you what, it consumed a lot of my free time and I was making trade-offs, trading away from my family, friends and hobbies, because I was moonlighting it.

And it wasn’t until I learned to partner that I can truly scale my portfolio and trade up into better larger assets, which you got to be careful partnering too. But I learned how to trust and verify and come together with other professionals in this space that had a track record in specific niches and to leverage that, that partnering is when I finally let go of the control of the aspects, and I was able to trust and collaborate, that’s when I finally got out of the rat race. I finally was able to scale the portfolio and see some success.

Keith Borie:

Okay. Yeah, that’s great. I think that’s tremendous advice. And then what about, last question for you, just a book recommendation, maybe something doesn’t have to necessarily be real estate related, but just a book you’ve read recently that you’d recommend to the audience?

Patrick Grimes:

Trade Taylor is an incredible individual. He’s a family office friend of mine that is invested in some of our deals and he wrote this book that is just taken off right now. It just hot off the press here, A CEO Does These Three Things. A CEO Does These Three Things. And if you’re an entrepreneur, a business owner, I listen to this book I run every morning, and I listen to podcasts or audiobooks and I listened to his book at one and a half Speed. I slowed it down to one and a quarter speed and then I slowed it down to one speed because it was so dense with such great analogies and historic lessons and it combined different management practices in the very simplistic and understandable and concise, but a lot of good stuff there. I listened to it and I listened to it again. I think any CEO very serious about launching up their company should look up Trade Taylor A CEO Does These Three Things. And I mean, he’s now presenting it at Johns Hopkins and MIT. He is just doing great with it and I’m just so impressed.

Keith Borie:

Yeah, that’s great. Sounds like a good book and it’s one I haven’t heard of yet, so I’ll definitely, I’m a runner as well, so that’s where I’ll usually hit my audibles. All right. Well, Patrick, I sure appreciate you taking some time to be on The Wealth Flow. I think you’ve added a ton of value and I know everybody enjoyed your story and what you’ve got going on. And don’t forget about the free book. Can you give us that maybe one last time we can close with that, where to be able to get their copy?

Patrick Grimes:

Yeah. So, passiveinvestingmastery.com, passiveinvestingmastery.com/book, that’s the website. Feel free, jump in there, make sure you put The Wealth Flow podcast in there as a promo code and also set up a call. Love to chat with you wherever you’re at in your investing journey and get to know your goals and see if we can get you pointed in the right direction. Lot of great passive investments out there to be discovered, so happy to help be the person to unveil those.

Keith Borie:

Absolutely. All right. Well, thank you, Patrick.

Patrick Grimes:

Appreciate your time, Keith.

Keith Borie:

Being that you’re still here, I trust you found value in this episode. I personally wish I would’ve known these guests and strategies when I started my wealth creation journey. Go to wealthflow.capital to subscribe to our newsletter. And as a free gift, we will send you our quarterly market report and the top 10 things to look for in an investment opportunity. Take a minute to give our show a rating and review. Help us reach a million professionals by subscribing and sharing this episode with someone you know who could also find value in it.

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