2023 Alternative Assets Summit with Patrick Grimes, Dave Zook, Denis Shapiro, and Bronson Hill

Bronson Hill:
We’re going to jump in. I’m super excited for this topic tonight. Before I introduce our guests, I just want to say something about this topic. A lot of people are really concerned about what to invest in and they’re seeing a lot of times, even for me, with some of the multifamily stuff that I’ve invested in that was producing a lot of cash flow, the cash flow has slowed down due to interest costs or other reasons like that. So, we’ve found some of these alternative deals, such as oil and gas, such as ATMs, other sorts of real estate deals or things that are a little bit alternative can be really, really attractive.
So, we’re going to have a conversation around some different assets. We’re going to do some Q and A at the end. We’re also going to spend some time talking about economics, talk about what the Fed is doing. We’re going to give some different opinions. These are three good friends of mine that are here that really are really experts as well in the space of alternative investing. So, I know you’re going to love it. You’re going to really enjoy it. And actually, I remember it was Patrick Grimes’ birthday tomorrow. Is that right? Awesome. And I think you’re muted there, but you’re turning 21, right? You’re the Benjamin Button case?

Patrick Grimes:
20th annual.

Bronson Hill:
20th annual.

Patrick Grimes:
Yeah, on St. Patty’s day.

Bronson Hill:
Awesome. Awesome man. Well, happy-

Patrick Grimes:
Bring presents. It’s on your calendars now. You can’t forget that.

Bronson Hill:
Well, we’ll have to give you a virtual pie in the face before the night is up here and wish you a happy birthday. Well, let’s go ahead and welcome Patrick from Invest on Main Street. Welcome, Patrick. We’re getting into kind of what you do. Dave Zook. We’ve worked on some deals together, The Real Asset Investor. Welcome, Dave. We just saw each other the Best Ever as well as Patrick was there as well. And then Denis Shapiro, who runs the SIH Capital Group and is the author of, The Alternative Investing Almanac. Is that the correct name?

Denis Shapiro:
Yeah. The Alternative Investment Almanac. It’s close enough.

Bronson Hill:
Awesome. Awesome. Well, so great to have you guys. Really excited to jump in here. We’re going to have a great conversation if you do in our audience, if you do have some questions, you can stick them in the chat. We are going to do a time for Q and A at the end, and there’re actually a chat. There’s also a Q and A area, so if you stick it in the Q and A area, we’ll see it. We probably won’t get to some of the questions until further along in the program, but really excited to go over today. So, let’s just kind of jump in and let’s talk about, I want to kind of start with a little more of a general question, but what really is the case right now for alternative investments beyond things like stocks, bonds, or even multifamily? What are some reasons why maybe you as an operator decided to look outside of some of the traditional kind of ways, even when people think about real estate? Maybe we can start with Denis on this one.

Denis Shapiro:
Yeah. So, I’ll throw two that I have off the top of my head. The first one is lack of liquidity. When the market is this volatile, it’s really good to have a portion of your portfolio that is not moving as volatile as the stocks and bonds. So, a lot of times you come across investors and they’re like, “Well, I do invest in real estate. I do REITs.” Well, if you look at what happens to REITs on a down day, if the market’s down one to 2% because of algorithms, usually your REIT is going to be down almost 95% of that one to 2%. So, you’re not really getting that diversification that you would if you did invest in private real estate. So, I would say that’s the number one reason.
And then a close second is that alternative investments, they allow you to take advantage of your network and building those relationships versus if you’re in the public space, if you build a relationship with the CEO and then you might actually go to jail for insider trading. Versus in the alternative space you could build a relationship with Patrick, with Dave, and all of a sudden now you have an extra layer of information before investing in the oil and gas or affordable housing or ATM machines. So that ability to leverage your relationships and your network, and the fact that it’s a lack of liquidity are the two main, I think pros to investing in alternative investments in today’s atmosphere.

Bronson Hill:
That’s great. Yeah, those are great reasons for sure. Being illiquid, a lot of people think as a negative, but it actually has a lot of positives because it helps you write out some of these volatile times. Dave Zook, what do you think, what are some reasons for people to look beyond traditional investing or even only multifamily type of alternative investing? What are some things you look at?

Dave Zook:
Yeah. Well, we could probably have a whole webinar just based on that question, but I’ve got three. I’ve got control. When you’re running a, let’s say a car wash business, you got control, you can make decisions and kind of control your own destiny there. Predictability. When you’ve got a really good product and you do a really good job and you go out in the market and you’re serving people, assuming you got a viable asset class, you’re going to have pretty predictable outcome. The better you serve your customer, the better that asset’s going to perform and you can control the outcome and it’s predictable.
And then a really important one for me, and you know this is near and dear to my heart, is tax efficiency. When you go out and invest in a, let’s just go to multifamily apartment REIT, you don’t get to take the depreciation and use it to wipe out the tax liability on your other income like you do when you go out and invest in the asset. In a deal with Patrick or Denis, you don’t get that tax efficiency. So, that’s a big one. Many investors who invest in the stock market only, they don’t get that tax efficiency like we do and that we’re so fond of. Because many times that may be your biggest first year’s return is when you wipe out a big chunk of your tax liability. So, tax efficiency is a big one for me too.

Bronson Hill:
Yeah. We’re going to talk a lot more about tax efficiency and that’s one of the reasons why we love alternative investing, especially real estate, is because of some of the tax benefits and there’s other tax benefits and other alternative assets as well. Patrick, what are some reasons you think especially right now is a good time to look in alternative assets?

Patrick Grimes:
Well, first I want to say there’s a lot of really great people. I’m happy to be here. I’ve even got Denis Shapiro’s book I brought with me. I’m hoping he can sign it for me, so don’t leave without doing that. Yeah. A lot of really good comments. I can’t disagree with anything that was just said. If you read my passive investor guide, it says that the middle class actually only diversifies about 8% of their wealth into these alternative investments. High income earners are closer to 25 and the ultra wealthy, 50. And like many of you and the people that are watching, I used to be high income earner in corporate America and I saw my stock portfolio go up and down and I invested heavily in real estate in 2008 and I lost all of it in nine and 10, I saw the bust.
So I like to say that in alternative assets, and if you look at the middle class, ultra wealthy, they’re invested in more than just one alternative asset. Those are assets that don’t rise and fall with the stock market. Those are ones that have different market fundamentals that allow for them to have insulation or shielding from things like inflation, things like interest rate that provide for tax advantage. So, I always am looking for these alternative investments that can not necessarily just diversify into a lot of different kinds of real estate, which we’ve seen can correlate in a similar way that the stock market is sentiment driven thing can correlate, but looking for things like energy, energy is another essential need. Housing and food, we need it even in recessions. In fact, it’s probably the most tax advantaged. And some of these guys on this phone here have those.
I think most of us do have those investments, but even better tax advantages in real estate. But we don’t use debt. They’re shielded from interest rate and natural gas and oil actually hinges with inflation. It’s one of the strongest indicators of inflation. So, you can win with inflation and inflationary environment and in a year like this year when real estate’s in correction and stock markets down, it’s an asset where you can hang your hat and you can win. And that’s the true goal. It’s diversification of your portfolio through breaking it up into non-correlated investments. And that’s done through alternative assets.

Bronson Hill:
That’s really well said, man. We have an eBook we wrote on our website at Bronson Equity. It’s How to Use Inflation to Your Advantage. And you touched on that of rather than being paying by inflation, it actually helps you, right? It actually is allows you to not only weather it but actually grow your wealth during a time of inflation. We’re going to get into specific asset classes here in a minute, but I wanted to take some time. There are some people, obviously the Silicon Valley bank thing is very recent. We’re seeing just different financial stuff happening right now. I think it’s important that we talk about it. I wanted to see what opinions are out there as far as is this simply the Fed raising rates? I have some opinions on what happened at Silicon Valley Bank, but as far as the financial system, does this mean the Fed is going to then hold rates where they are and then they’re going to be able to start lowering them again? And that will change how we borrow for alternative assets such as particularly such as multifamily or other assets. Let’s start with Denis on this one.

Denis Shapiro:
So this is a interesting question because one of, I guess the big benefits of alternative assets is because you could literally invest and then never really follow along in what’s happening because you have an operator there and he or she’s managing the business plan to execution. However, when you get into the traditional side, you kind of get into the habit of, Hey, let me go pull up my portfolio and see what’s going on. So, the last couple of weeks, if you follow the new trend, it’s literally every single data point is changing whether or not the Fed is raising, holding, increasing the raise, everything. And it’s just so funny how you would look at something and say, oh, that cannot be good for the market. And all of a sudden you see the markets up 2%, it’s completely illogical that a mid-major bank is actually collapsing and the market is like, well this prices the potential increase in half. So this is actually really good news for everybody. So, it’s just interesting. You really, when it comes to the traditional side, you really don’t know what’s going to happen. You could only assume, and it usually is a 180 of what you can expect versus a little bit, I’ll just tie it into the alternative space, it’s a little bit more logical if you increase the net NOI of something, the underlining asset’s actually going to increase in value. So, it’s kind of interesting because it’s a lot of noise right now. Maybe in two months no one is even going to remember what SVP is and just like can we talk about 10 years ago, Washington Mutual and I remember I used to bank there and it becomes an afterthought. But what’s going to be here in 10 years is the gases, the ATM machines, the multifamily, the hard assets so to say.

Bronson Hill:
Yeah. You brought up something too that with the Fed, a lot of times they give these forecasts and then they just immediately pivot. They did this whole thing. All rates are good. We have low rates, low rates, all of a sudden they’re just very quickly they turn. So, I don’t care what guidance they say, they’re going to stay committed to that until they decide to turn. Dave Zook, what are some of your thoughts on what’s happening right now, some of the financial issues that are happening or even with the Fed, do you have some opinions on that you can share?

Dave Zook:
Yeah. So, in its pure and simple form is a bail out. They say, oh, no, the taxpayers aren’t going to pay for this. And it was a bail out. And Denis, you shared that what happened in Washington Mutual, it’s an afterthought. And what a lot of these depositors at SVB in two months, it’ll be an afterthought to them. But I guarantee you if those depositors wouldn’t have got billed out and it would’ve, that bank would’ve had to go through its natural course of what you’d think about when you think in terms of capitalism, it would not be an afterthought to many of these depositors that would’ve lost anybody that had deposits in there over $250,000. So, I really heard, or I saw people really cheering about, oh, wow, the feds did the right thing and they stepped in and they made sure… It was there for a little while. Onto Saturday and Sunday you didn’t know what was going to happen, what Monday was going to be like.
And so they stepped in and they just made it okay and wiped out that bank’s mistakes, SVBs mistakes. That was good with the short term. What does it look like for the long term? And now you just let everybody in this country know that nah, you don’t need to be careful and you left the big banks, you can do whatever you want. You’re not accountable for your actions. I just… Look, I’m a capitalist. And what happened there was a giant bail out and maybe it was good for the short term, but I’m not liking for the long term.

Bronson Hill:
They kind of basically said they’re backing up all depositors regardless of any, FDIC was typically up to 250,000. I think 90% of the deposits were above 250,000 at Silicon Valley Bank. And maybe there’s reasons why and they’re considering all the businesses and things, but when you don’t let things take their natural course… Oh, did I freeze for a minute?

Dave Zook:
You’re back.

Bronson Hill:
I’m back. Okay. Yes, so I guess my internet connection is unstable, so hopefully I’ll be more stable. But anyway, the government coming in to back everything up, it gives the impression that there’s a moral hazard there that banks can act however they want and they can be an idiot and the taxpayer and everybody else is responsible. Patrick, what do you think? What are some thoughts on what’s happening and even the Fed and just where we’re at currently?

Patrick Grimes:
Well, I hate to just repeat a lot of what I just heard, but I couldn’t agree more. Unfortunately it’s a bailout and the funds that they used to do it, maybe they were able to pony up this time, but they don’t have the trillions required to be able to not just bail out this bank but all the other banks. So, it’s going to be very difficult for them to pivot in a way where they don’t cause that issue of the calculating dominoes of numerous other banks beginning to make much more risky products, which it’s a competitive world and the banks are going to do their best to put the most competitive products out there, the most attractive products. And it’s got to be regulated that sometimes somebody loses for being too aggressive and unfortunately they’re setting the presidents that president… That that’s not the case.
So we’ll see what happens. At the same time, they’re looking at some bigger picture items. We’re struggling with inflation right now and we need to… So we got a temporary relief on interest rate rises and a lot of people are coming up for air. It seems like we’re doing okay, we’re distributing on most of our properties as planned, but we see a lot of properties, right, and all that. I’m getting calls about that aren’t. And they didn’t control interest rates, get fixed interest rates. So, at the same time I think that there’s some relief to potentially these rate hikes which are needed because there are businesses and there are banks that are going to struggle and maybe it gives them some time to pivot. So, I think potentially they’re moved to give a reprieve on interest rate climbing for a period of time here is a good thing, lets people reset because it’s been pretty aggressive for a while.
At the same time, I don’t think it’s going to end. I think they’re going to continue to raise rates until they get inflation under control. And that’s really the one knob that they have. They really don’t have much other knobs for that, which fortunately for most of our alternative investments, it fairs well for us. I think we tend to do better in down economies. We tend to shine. So, I think we’re going to do pretty solid, but as a country as a whole, it’s not a good thing. We all went through 2008, nine and we had hoped that they fixed a lot of those issues. Well, doesn’t look like all of them.

Bronson Hill:
Obviously not. Yeah. And you mentioned something about rate hikes and we heard Daniel DeMartino-Booth at an investor summit in Belize last year and she was saying that the Fed will continue to increase rates until something breaks and something breaks could be in the credit markets or this could be kind of the first sign Silicon Valley Bank. But basically regardless of whether the rates stay higher or not, we are seeing not in deals that we’re currently in at Bronson Equity, but we’re seeing it, we’re hearing rumblings of it that there are some multifamily or other deals that are in distress. Have you guys heard or are you guys involved with types and I know you guys, you have other debt funds that you do, but there’s kind of this idea that there’s an opportunity here to raise a fund or a debt fund to come in and be like a white knight come in and help provide liquidity if people can’t make payments or maybe they can’t refinance or things. Because a lot of people have bridge debt that’s shorter term. Are you hearing about funds like that? Are you considering doing a fund like that and anybody can jump in if they’re involved in something like that or they’re familiar.

Denis Shapiro:
I can take that. Oh, sorry. Well, I was going to say, so I think it’s important with this question to actually kind of figure out why these multifamily operators are actually in distress. And what ended up happening from what I gather is that the people who were getting floating rate debt, which is the majority. Usually it’s the people who are in fixed debt and are good operators, they are not the ones that are stopping distributions or doing capitals or anything like that. It’s the operators out there who got floating rate debt and then assumed that their floating rate cap would stay on for the life of their deal. And what I think they overlooked and in hindsight obviously it’s easy to say is that insurance gets tapped out and then you got to renew that insurance. So, now what ends up happening is they purchased that insurance for $20,000 last year.
They’re going today because the cap is all used up to buy additional insurance and that insurance is 10 x, 20 x. So, what ends up happening is if they have the reserves, they can pay it easily however, but then they’re probably going to stop distributions just to retap those reserves. But if they don’t, now you’re seeing capital calls. And it’s interesting because pre, let’s say January, 2023, capital call was the same. If you do that as a capital raiser, as an operator, you’re losing a lot of your investor base. It’s so ironic that now we’re in a situation where so many people are going to go through a capital call or stop distributions or just many other bad things where in six months, nine months it’s no longer going to be a cardinal sin. It’s almost going to be like if you are an investor in 10 to 20 deals, you’ve probably had a capital call or you’ve had multiple distributions paused.
So I think it’s an interesting market. I think this is the time where investors really need to focus on their relationships. Operators really need to focus on operating and yes, it is an opportune time. We are constantly talking, we’re constantly following deals that are in distress, but we also want to be careful there. There’s also, besides a financial reason, there’s also an operational reason why some of these deals are in distress. Because if you have a really experienced operator, they might have paused distributions but they’re not in capital call for closure distress. However, if they are financially misplayed the interest rates and they operationally are in trouble, that is not necessarily a deal that you just want to go in there and say, oh, there’s blood on the street, I’m going to buy this deal and become a millionaire overnight. So, it is something that we are watching, but we are very cautious.
We are leveraging our network to find the full story of why that asset is in such distress. A lot of times, even though it’s in distress, it’s being priced appropriately. So, for example, they want five million for an asset, but if you put a million and a half for it’s going to be worth six and a half, seven. So, to me that’s not really distress because you’re going to be doing a lot of work to make a nominal amount of equity. So, I think all those things are important. At [inaudible 00:21:33] Capital Group we do have an income fund. We are just shifting to more assets that are actually collateralized. That’s basically our philosophy during this process. We had the income fund before all of this, so it’s not like we’re like, oh, this is a great time, I’m just going to launch to take advantage of this. But we are shifting the philosophy in that fund a little bit as the times kind of change.

Bronson Hill:
That’s a great summary, Denis, really appreciate that. I think, yeah, we’re seeing in our deals. We had no capital calls, thankfully, knock on wood. But we’re seeing with that just the raise, we have caps on all of our interest rates. A lot of, about 85 to 90% of multifamily debt is bridge debt. So, we have these caps there. So, going from 4.5% up to 6.5%, that does eat into your cash. So, that is a consideration. Patrick, what are your thoughts on this? I know your multifamily as well as other things, have you heard about these type of debt funds to take advantage of distressed operators or things like this or just something you considered as well?

Patrick Grimes:
So I think the good multifamily deals, like Denis was saying, right now what they’re going to be is a combination of bad days have happened. The most recent deal in Atlanta, the guy had a 14% bad debt going through Covid, struggled managing through Covid, then a building burned down, he didn’t have the money to renovate units, they’re still three to 400 below and he just took off with the insurance money. So, we swooped in there and bought it real quick. So, we got a discount. To Denis’s point, you can’t buy it market, you got to buy it a discount and you got to buy with lift and that allows you to win even in a down market. And those are the kind of, I would call it a combination of opportunistic. The guy was like, Hey, instead of rebuilding this building, he can just move away with this insurance bank.
We can move in and do the work to lift it. So, I’d say it’s not necessarily this opportunistic is what I like to call it because sometimes it’s just that they’re distressed. Sometimes you just have the opportunity to jump in and find a really good deal that’s at a discount. But the other part that’s not really being talked about right now that I actually was going to point at was a lot of the reasons why these properties are distressed is because the delinquencies are extremely high right now and people have gone through Covid and they’ve sometimes lost their jobs. Some have gone back to work, some have gotten renter assistantship this entire time, but then it ran out and then they had supplement programs and then those ran out. So, now you finally have these huge waves going through many of the markets where they’re seeing massive delinquencies.
People that have haven’t been paying for years, aren’t getting back to work, aren’t paying, and then the courts are flooded with the evictions. So, I’ve been getting a lot of reports of look, the interest rates are consuming all the income we have because they’re rising not to our cap yet and our income’s going way down. So, that’s really the breaking point is when that break even, that shift happens and then can they survive it? Do they have the reserves? But I think what people aren’t talking about this, well where are those people going? And so instead of coming up with an opportunistic fund where we’re like, Hey look, let’s raise a bunch of capital to find distressed operators. We’re launching a affordable housing fund, which right now going in recession, the demand for affordable houses going like this, there’s a need that needs to be filled.
And in the markets that we’re operating in the Midwest, we have 400 homes now, three bedroom, two bath that have been accumulating over two years and we have huge lists of people looking for affordable housing. They’re not criminals. It has a bad rap. These are hardworking people that just simply don’t make enough to live in these areas and the government will subsidize their rents. So, we are converting two bedroom rent ready, two bedroom, three bath, sorry, three bedroom, two bath homes into affordable housing, which gives us hedging against delinquencies. They get in there, the government subsidizes, there’s a delinquency, the government subsidizes that too. So, it allows us to have consistent cash flow in a recession while serving a need in the economy and with those single-family homes, we can do 30 year fixed interest, which allows for us the ability to hedge rising interest rates. So, I’m kind of taking the different approach instead of saying, let’s find the distress or opportunistic bias, let’s serve the distress need right now and that’s what we’re working on.

Bronson Hill:
Yeah. That’s great and that’s a great way to take advantage. Dave, what are some of your thoughts? Are you hearing about this as well or is there a way that you’re kind of taking advantage of this currently?

Dave Zook:
Yeah. So, I think in this type of environment, and I see it in several different asset classes. One of the big things is five year rate locks expiring. And I’m constantly talking to, over the last two years we’ve acquired around 30,000 acres and I’m hearing it on that side, I’m hearing it on opportunities coming up in the near future or kind of happening already. I’m seeing it in self-storage and we’re seeing it as we’re acquiring pieces of prime, small pieces of prime real estate for car washes. There’s opportunity in the market today that wasn’t available 6, 8, 12 months ago and I believe those opportunities will become stronger. So, Patrick talked about the opportunity where they were able to swoop in and take action and take out an asset that probably wouldn’t have been possible eight months ago, 12 months ago. So, I think it’s good to have cash or access to cash in this type of a market.
I believe we’re going to see opportunities in the next two months, six months, eight months to 18 months that are great buying opportunities that would not be here if we wouldn’t have some of this distress going on the market. So, I see it as a great time to be ready, be agile, have cash or have access to cash and take opportunities or take advantage of the opportunities that [inaudible 00:27:50]. And when I’m talking about take advantage, I’m not talking about take advantage of people. I’m talking about there’s going to be assets that come up for sale that you’re going to be taking a problem off of somebody’s hands. It’s going to work very well for you and your investors.

Bronson Hill:
That’s absolutely right. Just being ready. Being ready for the opportunity. I wanted to take some time now before we get into questions just to really go into one asset class. Have each of you have jump into one asset class. I know we’ve got a lot of different asset classes covered and [inaudible 00:28:22] we offer different types of things. Let’s start with Denis. I know you said that have an income fund. Can you maybe not necessarily to pitch what it is, but just can you talk about some of the pluses and minuses? Obviously there’s risks to everything, so maybe you can just talk on here’s what we’re doing, this is kind of what we’re expecting and these are some of the risks and then we’ll kind of go around and I know Patrick’s got the affordable living and then Dave, you can choose from your whole handful of things that you’re doing, you can choose one to share on. So, why don’t we start with Denis?

Denis Shapiro:
Sure. So, our income fund is a multi-asset income fund. So, our goal was to shield the potential negatives of one type of asset class. So, for example, if you invest in apartment buildings historically speaking, you usually get a year or two. I call the drag years because the first year you have the closing costs that would kind of weigh in on the projections. You have the cost of the CapEx for the business plan. All of that kind of takes a hit on that cash flow year one or two. So, what we decided to do is we wanted to have the apartment building certifications, but we also wanted to balance that out with some ATM exposure and some hard money loans. So, what would happen is as the apartment building goes, matures through their business plan, you get that offset of that higher income from those other cash flowing focused assets.
So it’s kind of like I was modeling our fund for something that I was looking at when I started investing and I started investing 20 years ago and I always thought my portfolio should do two things. It should appreciate in cash flow. And that’s kind of how I got into alternative investments because I found that traditional assets appreciate really well, but when it came to actually creating cash flow, that’s where I struggled. I went through the REITs, the MLPs, the closed-ended funds, all of that stuff and it ended up the same thing. The volatility always crushed the yields. So, that’s where when I was designing my multi-asset income fund, I really kept that in mind. So, I wanted to balance it out. I wanted to have some appreciating assets balanced with some high cash flowing assets and the combination would allow for us to pay a more consistent yield. So, we pay a monthly return, but we are able to pay the same monthly return every single month because we have that balance in there.

Bronson Hill:
That’s great. I like, that being able to balance out some of the things that are more appreciation assets and we get some cash flow in there as well. That’s great. Patrick, talk to us a little bit about what you’re doing with affordable housing and how that plays out for investors and risks involved and things like that.

Patrick Grimes:
Well, I kind of just went into the affordable housing a little bit in that last comment. Maybe I’ll pivot to the energy.

Bronson Hill:
Sure. Yeah.

Patrick Grimes:
So, moving along the same threads that Denis was talking about, it’s important to be diversified and I think that when I got to 500 million CO-GP in my portfolio, I started realizing most of my investors were not as diversified as I was and I started looking at other alternative investments. So, we pivoted into diversified energy funds. Now natural gas and oil drilling because they have the bad wrap of losing investors capital traditionally and even today people will put them in one well, maybe two wells and if you run dry or there’s an operational challenge, they lose it all. So, how do you take advantage of ordinary income write-offs and energy? 75% of your investment comes off your W-2 income.
How do you take advantage of that without losing it all? And so we applied some of the traditional multifamily or real estate concepts to energy and it’s the only type one fund that’s like it where we’re actually buying leases, not just a well assignment, putting it into the fund with known proven locations, like in real estate. We’re drilling dozens of wells across multiple locations. So, you get scale, like if you have a lot of units in a multifamily deal, if one floods or there’s a fire, it washes out in the economics. You also have economy scale. You do that across dozens of wells in multiple states. You also get not only diversification and geography and diversification skill, you get diversification in geology. So, now we can go for some natural gas and some oil and we can pivot between the two. And today we’re pivoting to oil because oil’s a much stronger asset class, but we have drill sites within the fund to pivot back to natural gas and we pause the natural gas well halfway when gas prices took a pause so we’re ready to fire that one back up.
So the diversified energy fund provides for incredible tax advantages, a lower risk way to get into a completely non-correlated investment, we don’t even have debt in the fund, and monthly passive income and an exit. So, that’s probably my number one go-to right now. If you’re looking for that combination of outside of real estate cashflow and appreciation.

Bronson Hill:
That’s great. There’s some great tax benefits as well and we’ll get into in a minute here. Dave, let’s talk, I know you’re holding seven cards in your hand. Which one do you want to talk about as far as alternative assets today that would benefit the conversation and the investors here?

Dave Zook:
Yeah. So, really the funds that I have opened is just a direct reflection of my own portfolio and so we do a lot of self-storage. We’re top four ATM operator in the space and the country, but I’ll talk about car washes because we’re super busy with car washes right now. We got eight operational sites, we’ve got seven more development sites, seven more coming out of the ground and we’ve got a total of 72 lots under contract in some form of development, whether it’s in the very front end of entitlement all the way up to opening in the next couple weeks. So, I’m excited about our car wash. I’m excited about the car wash space. I love it for a number of reasons, but it’s, number one, it’s a very cash flow rich business. The operating margins are… We’re got operating margins in the 45 to 50% range.
You and I were in Salt Lake City last week and multifamily heavy conference and I always feel bad for some of the guys when their deal gets killed because of a 50 basis points or 75 basis point rate hike and I’m just not smart enough to operate on margins that are that skinny. So, just having that operating margin, number one, it’s a really good product. It’s a great product, it’s a cash flow machine. Many people don’t realize this, but when you’re talking a brick and mortar building, typically when you go out and you buy a self-storage facility or an apartment building, you got to do a cost stake study in order to accelerate your depreciation in a car wash and a gas station. They’re unique and they’re the only asset classes were the building actually you can depreciate it like it was a piece of equipment. So you can take the whole building and get 100% bonus depreciation.
Well, and this year it’s 80% first year bonus depreciation on the entire building. You don’t have to do a cost tech study. It’s like it was a piece of equipment. So, just very tax aggressive. We’re building this portfolio to some point sell. We’ve seen large portfolios of well-run tunnel washes, 20 tunnel washes and up in a portfolio trading for 18 to 20 times ebitda. So, being in this space, having the opportunity to run this business and hold the business and create an immense amount of cash flow and income for our investors for ourselves is great. But also being able to at some point exit and seeing those kinds of multiples, it’s a fun asset class to be a part of.

Bronson Hill:
Absolutely, that’s really important. There’s a strategy that’s called the private equity roll up strategy and it’s something that’s being utilized with car washes or dental practices or gas stations where if you have one or two of them, they sell for eight or 10 times ebida or eight or 10 times earnings, but if you have 50 or 30 year, they’ll sell for 20 times and that’s just a strategy. You sell them to private equity and it’s a real attractive strategy. So, this webinar we’re doing is a little different than the ones that we normally do. There are going to be some opportunities presented. Nothing in this presentation isn’t offering for a specific investment. We’re just introducing different types of things and if you’re interested, there are ways to connect with each individual. This will be recorded and sent out. Somebody’s just asking about that. So, I’m going to do that here.
We’re going to take a quick pause here. We’re have some questions that are coming in. If you do have questions for anybody on the panel here or all of us sticking in the chat, there’s a lot more to talk about. So, we have a few more minutes to talk. I did want to share something that’s coming up for us at Bronson Equity. We’re super excited about it. It is a oil and gas technology fund, so it’s very different than any sort of oil and gas deal that you’ll see. It has to do with the way, the method that’s used for oil and gas drilling. There’s a new technology that we’re around that we think will actually change the way that oil and gas is drilled for. This is not a steady Eddie cash flow type of deal. It’s a very high potential 17 x upside or higher if it goes the way we think it could go.
With that comes a little more risk. I just wanted to share this with you and give people an opportunity to see it. So, this is kind of what I love about it. It has high upside, there are some taxable benefits as well and there’s some cash flow that will come from it. It’s another very experienced team. This is going to be Monday night or Monday at 4:00 PM Pacific. So, similar time but just next Monday. So, a few days from now, just right around the corner. So, I’m going to go ahead and stop sharing. I’m going to put the link in the chat here. If any of our panelists have things that they would like to share as well, they can feel free to share that. I’ve always believed that hey, if an investor vests somewhere, it’s great to hear about deals that are unique and so this is a deal that’s very unique and I know a lot of our panelists have unique deals as well.
So I wanted to point that out. So, we are getting a few questions here. Again, if you do have questions, please do stick them in the chat or in the question answer section. We do have a question here from Miguel, wanted to touch base on this. He’s saying because of the situation on short-term rates and capital calls and multifamily pass investing, is there better protection for an investor to invest in a multifamily fund versus investing in a specific property? I have an opinion on that but I’d love to hear from our panelists. What do you guys think, is a multifamily fund better right now or is a specific multifamily deal better or does it depend?

Denis Shapiro:
I could take that. So, to answer that question, there’s just a couple of quick pointers that I always just want to highlight. So, there’s a couple of different funds out there. There’s close-ended funds and there’s evergreen funds. Closed-ended funds have a specific timeframe versus evergreen fund money can go flow in and out. So, those are two important distinctions and the second distinction is between a blind fund and a non-blind fund. It’s basically when you’re investing in the deal, can you see the actual assets inside the deal? So to answer that question, it’s almost impossible to say that a fund is definitely better than a specific deal or vice versa because let’s say it’s a blind fund, then you really are just investing in your relationship with the operator and the track record. So, there are funds where you invested in, it’s a multifamily fund, but if they turn around then their last five deals all had interest rate caps, then you probably would’ve been better off investing in with the one deal with one specific deal that had fixed debt on it.
So it’s kind of hard, but if things are good in a good environment, you could probably be more well diversified and probably have better returns averaged out on the funds versus the specific deals because now you have that exposure to multiple apartment buildings versus that one. So, it’s really hard. It’s really about preference and if you are looking into a fund, don’t just assume it’s better. You got to ask the questions, you got to figure out if it’s a close-ended fund, if it’s an evergreen fund, how many of the assets have been identified, what kind of debt is on those assets. And once you get all of those answers, then you compare it to the specific deal that you are looking at and that’s kind of how you’re going to make that determination.

Bronson Hill:
Awesome, thank you, Denis. You are like an almanac, it’s just inside of you. It just comes out, right? It’s awesome. Patrick, I know you got something there.

Patrick Grimes:
So with the fund model it can lower risk because I think with the implication one, you put a bunch of risky assets potentially in one model and maybe the sum of the parts is lower risk. I like to think funds sometimes they help because you can be opportunistic in your acquisition and be quick. I like more the chance to quietly analyze because I’m an engineer and by trade and I will sit and analyze and analyze and analyze and then I will then acquire an investment. But if you’re going to be buying opportunistic deals or deals that you find at a discount, they’re going to go fast and you’re likely going to get a call from a broker or some kind of referral and then you’re going to have to get in there, underwrite it overnight, the very next day show up on site and I was doing some of that stuff flying from Wahoo out to [inaudible 00:42:21] Florida and Bronson was there on some of those.

Bronson Hill:
They’re crazy, man. Redeye flights all the time and I was like, I don’t know how you’re doing this.

Patrick Grimes:
When you find those, and then now after you’ve done all this due diligence, if you then have to go raise capital for it, you can lose the opportunity. So, some, we’ve partnered with family offices and put up large amounts of money so that we can acquire it fast. Now having a fund, a lot of liquidity in a fund helps you be much more agile. But Denis is saying the challenge is that you don’t have a lot of control over what they’re going to buy. So, you have to be very clear on the investment thesis of what the buy box looks like and you’ve got to really trust that sponsor. At the same time, I kind of prefer that investors get to invest based on the attributes of a specific deal because sometimes sponsors can be under a lot of pressure. They have this money, they’re projecting a return and every day it sits in the fund and it’s not deployed returns going down. And then you flip the script, you end up on the extreme end like a REIT with extraordinarily terrible returns, they have billions to deploy, they’re just swooping up assets at top dollar all over the place and they’re under a lot of pressure to acquire.
It’s better I think to find the right operator and that will present a deal to you and raise the capital based on its own merits. Is that the right strategy right now? It may mean that you won’t be able to move as quickly to buy some of the new opportunistic assets, but that’s the dilemma that I think that you find on the standup deal versus the fund [inaudible 00:43:55].

Bronson Hill:
It’s great, Patrick. Thanks. Dave, you have any thoughts on this?

Dave Zook:
Yeah. So, I’m not in multifamily but I’m very familiar with running cell storage funds and I will just tell you this and I’ll go with your answer and that was, it depends. It depends on what’s in the fund, right? So I’ll give you an example. When we did the roll up in our self storage fund and sold 26 properties, there was about 20 of those properties were in the fund. I think it was 18 or 20 of those properties were in the fund. And then the rest were one-offs that we had done outside of the fund before we created the fund. And of those six or eight properties that were outside the fund, we had a variation between one, the very worst one was 17% annualized all end cash with residue from sale and all that. So, it was 17% annualized.
The very best one was 66% annualized. So, really all you’re doing when you invest in a fund, you’re helping to mitigate that difference. You know that they’re not all going to be 66%. You’re hoping that not maybe you’ll have a dog or two in the fund. Hopefully not, but if you do, you’re spreading your risk across those five, 10, 15, 20 properties in the fund. So, that’s really all you’re doing is you’re getting away from that sort of volatility and maybe picking the wrong one. If you’re not active and you don’t pick the right one, we all want to be in that one that returns 66%, but if you want to spread your risk and expose yourself a little bit less, go with the fund.

Bronson Hill:
Yeah. Absolutely. I think there’s, like you said, depends. There’s different sides to that coin. I’ve always, as an investor, generally preferred individual deals because you can analyze them a little more clearly of what is this deal and then maybe get four or five or we get a number of these together. But if a fund is too large, it’s hard. It can be hard to analyze. But if it’s a great operator it shouldn’t really matter technically. But again, there’s pluses and minuses, there’s a lot of considerations that go into that and I think it just depends on preference. I think there’s a lot there. Another question coming up, has anybody investigated medical office property? And I don’t know if this is talking about specifically medical practices or like a triple net using medical properties. Anybody looked into this at all or even owning I guess more retail or office space related to that? I guess triple net is what they’re asking. Double net. Okay.

Dave Zook:
That is not in my asset class bucket. Not meaning it couldn’t be a good opportunity, but I do not.

Bronson Hill:
Yeah. Yeah. Absolutely. Yeah. Some people love triple net because it provides consistent cash flow. There’s long-term contracts, a lot of people that really want to be passive. That’s a great way people can get a lower return with less supposed risk under a Walgreens or a Starbucks or something like that. So, I think that’s good. Any other questions? I’m not really seeing many more questions come in here. So, I guess you guys are that genius. I can see one more question here. So, if anybody has anything they want to ask either to stump the experts or to just ask questions, there was a question, looks like Patrick asked this, let’s talk for a minute about taxable benefits. I know one of the things that come comes up a lot is that, obviously this is not tax advice to anyone, but there were certain investments such as energy investments, oil and gas or things related to oil and gas that actually can provide in some circumstances ordinary income reduction if some deals allow for someone to become a general partner. Obviously we’re not pointing out any specific investments or things like that, but is this something… How do people weigh that out? And again, if somebody is a W-2 earner or a high S quadrant, meaning they are self-employed, what are some strategies using this or other means to be able to reduce their taxable basis?

Dave Zook:
Yeah, I’m sure Patrick will have something to say here, but I’ll chime in as well. If you want to live the tax efficient life, you got to get creative, you got to find… It’s as simple as having a couple different streams of income. You got your ordinary income, you got your passive income, and then you may have some capital gains, which can be ordinary or passive, but really your job is a shrewd investor. If you want to live the tax efficient life, you got to match up asset classes that will fix your tax problem with that specific stream of income. For me, if want tax relief against ordinary income, I’ve invested in heavily in the natural gas space over the last couple years, been investing with a specific family for going on five years now and we’ve had a natural gas fund for the last two years straight and expect to open one here in the next couple weeks. So, personally I use natural gas and help knock down the tax liability on the ordinary incomes. It’s worked very well.

Bronson Hill:
All right, thanks, Patrick.

Patrick Grimes:
Yeah. Sure. And I think what Dave’s pointing at, the energy is far more tax advantage than real estate. So, the challenge with real estate is that we get a bunch of depreciation and that’s typically 27 and a half year straight line unless you do something cool we can do in large portfolio, single family or multifamily, we can do cost segregation and pull that up and then even bonus appreciation. And what does that mean? That means now you invest 100,000 and maybe you’re at 50 to 60,000 in the first year on your partnership return paper loss. And the challenge with real estate though is that that paper loss, that only offsets passive income for these larger syndication investments, but you’re active in your day job. You’re probably earning a lot, probably a lawyer or a doctor or high income earner like I was and you’re like, well I’m still paying it.
The doctors that call me that are six to 800, 900 a year, they’re paying 45% tax brackets. And no matter how much real estate they invest in, they can’t offset that tax obligation. But what energy lets, what Dave Hooks pointing out there, it’ll let you actually take those income, and they don’t in the first year we don’t call it depreciation, we call it intangible drilling costs. And the difference is that K-1, it has paper losses on it, phantom losses, you made income that year, but it’s phantom and those will actually roll through to reduce your ordinary income, reduce your taxes and offset your ordinary income, your W-2 income, K-1, 1099, all that stuff. So, yeah. It’s the energy fund. I see the question here is, is the energy fund allow for that? And it does. We project about 75% of your investment in the first year.
Last year it was actually 86% of their investment with offset or invest a hundred grand and 86% of the 86 grand last year came off your ordinary income. So, you didn’t get taxed on 86 grand. If you’re in a 40% tax bracket, that’s like saving 33,000, 34, $35,000 just in taxes. A massive return just for investing. So, that does help tremendously. And if you can get into an asset class, which allows for a de-risking approach because there’s a reason it’s tax advantage, let’s be real, there’s a greater risk profile in investing in oil and gas drilling than there is in annuity. So, you’re taking a little bit with a risk profile, you’re getting tax advantage cast on appreciation and diversification and as long as you can find the right operator like Dave’s talking about, maybe do it in the right kind of fund like our funds, then you can do it in a lower risk way and invests like the wealthy and not pay tax.

Bronson Hill:
Right. That’s great. Thank you. Thank you guys for answering that. We got a couple more questions. I want to move a little quicker. I want to get back to Denis here in just a second. Somebody’s asking, PS is asking about never invested in private equity deals before, currently file our own taxes without the need of a CPA or accountant. Can you comment with regards to the tax filings or complexity? Do you need a CPA? I would say this real quick, I’m just going to answer this one. I would say you should 100% get a CPA to do your own taxes because they will find things that you probably, unless you’re a CPA and you’re keeping up on all the stuff, that you will not find. So, I would want to, even if you’re not investing in these passive deals, I would say do it. And I’d say if you are, you definitely need one. So, I would say definitely do it. This is a question we’re going to go around. This is going to be our last question. I want to try to see if we can maybe take about a one minute answer for each of you. So, we’ll start with Denis. Are there particular sectors or categories you like best right now for alternatives that tend to be shorter duration? So kind of like two to four years. So, let’s start with Denis. Anything shorter duration that you like?

Denis Shapiro:
I would definitely put hard money loans, even though that’s kind of difficult because you need to build up a roster or at least partner with someone that has the roster flips. Just because I’m a big fan right now of investing in higher cash flow that’s actually collateralized by hard asset. I think this is the time to do it. The rates have gone up. We see anywhere between 10 to 15% and we’re actually going to be increasing our distributions because of that, because we’re more gearing towards that. So, definitely hard money loans right now. I think there’s is a great environment for that.

Bronson Hill:
Awesome. Thank you. Hard money loans. Awesome. Dave Zook, what are you like for the kind of that mid-range two to four years what alternatives do you like?

Dave Zook:
So our sales storage deals we project a six year hold. But when you look at our history, we’ve been buying from a mom and pop, selling to read in that three, three and a half year range. So, that would fit into two to four year range. When you’re thinking ATMs, you’re thinking about a seven year deal. But when you consider the first year, when you consider the cash flow, and then you consider that you’re getting the tax benefit, the 80% bonus depreciation, when you consider the first 12 months when your cash flow starts, you’re getting 60 to 70% of your cash back in year one. So, you get 60 to 70% of your principal back in your pocket in year one. So, it’s a couple different ways to look at it. And then you got a six year cash flow stream behind it. So, I’d probably go with those two.

Bronson Hill:
Yeah. That’s great. I love ATMs for that reason as well. Patrick, what about you?

Patrick Grimes:
Well, the hard money loan one, certainly with rising interest rates, definitely and a little bit harder to get debt. I think that’s a solid one that Denis brought up. And I’ll probably pivot the same way that David Zook, even though we’re very conservative on our projections and we always say something that the last energy exit was an under three year exit, but we’re saying three to five years. And right now where energy is, Goldman just got on saying was the best hedge against inflation, and we’re seeing great signs in the global demand with OPEC and Russian dialing back. And I think that that’s a really good play. In the affordable housing space right now with affordable housing needs skyrocketing with the ability to hedge against interest rates and with the ability to get rents that are subsidized so we’re not so worried about delinquencies and we can still get 3%. That’s a really solid play. That’s a play right now in the short term that will provide for an incredible demand and a solid cash flow. So, that plays similar like a three to five year play. But the today’s point is we always pack a couple years on the end of be conservative, but those are probably the three I’d mention.

Bronson Hill:
Yeah. For me, I’m a real asset guy. I love the energy space, I love the ATMs. I think also something that has not been mentioned is physical precious metals. I think there’s a great case right now in a time of inflation. Now, metals don’t produce cash flow, but they do store value very well. So, instead of sitting in cash, you can buy precious metals and then you actually borrow against the value of your precious metals if they’re stored at a third party vault. So, that’s an interesting strategy. Well gentlemen, really appreciate you coming on today. If you can put your info in the chat there and then I’m going to have you go around to say if you have anything you’re working on. You mentioned some of the deals. I wanted to share our next event we’re going to have is going to be April 12th at 4:00 PM, so 4:00 PM Pacific.
I’m just going to put this in the chat and it’s going to be an event on inflation. We have two speakers confirmed so far. We’ve got Mark Moss, which has about a half a million subscribers on YouTube.You know Mark Moss, brilliant guy when it comes to economics. Also got Jay Martin who runs the Vancouver Resource Investing Conference, lot of in the mining space. And then we’re working on a couple of other big name folks. So, really, really happy that everybody can join us. Can we just take maybe 20 seconds from each person how people can reach out to you? And then we’ll go ahead and wrap up.

Dave Zook:
[inaudible 00:57:34] So, my website, our website is the realassetinvestor.com. And the best way to reach me is tap into my team. I got a great young team and they will respond. [email protected] Love to help.

Bronson Hill:
Awesome. Thanks, Dave. All right, Patrick.

Patrick Grimes:
Invest on Main Street. Invest on Main and then Street all spelled out.com. That’s their website. We have a couple investments at the top. We’re launching the Affordable Housing Fund in the next month. We have a free download of the Passive Investor Guide, and I dropped a link in the chat to get a free copy of my signed book. Actually, I have hair in that book even so, it wasn’t that long ago.

Bronson Hill:
I don’t think that’s you. I don’t think that’s [inaudible 00:58:24].

Patrick Grimes:
I know. Bronson is the reason why I lost all that hair. Anyways, we’ll send you Amazon number one best seller, a free signed hard copy of that. Love the stories, persistence pivots and game changers. Investonmainstreet.com/book, and I put that in the chat.

Bronson Hill:
Awesome. I love the haircut. Awesome. Denis, how can people get in touch with you?

Denis Shapiro:
Best places? My website, SIHcapitalgroup.com. You go in, if you sign up, we have a eBook, which is a bridge version of my book, the Alternative Investment Almanac, where I interview. Thanks, Patrick. Yeah. That’s my book. We don’t do a lot of deals. We’re not a quantity type shop. We really only do a few deals every year. So, if you want to connect, I love having relationships with my investors, so reach out to me directly. I posted my contact info, but it’s Denis. D-N-I-S. I only have one N in my first name @shcapitalgroup.com.

Bronson Hill:
Awesome. Well, I just wanted to thank each of you, each of the panelists for being here as well as the attendees. Really, you could be doing a lot of things tonight and spending time doing this or watching this on a replay, but you chose to do this. And I think it’s really important that we continue to pay attention because this is just like a game. It’s like a board game where the rules are continually changing, right? The pieces are moving, and if you’re not watching what’s happening, you’ll miss out on opportunities and you’ll lose money, you’ll lose opportunities. So, just really wanted to say thank you to everybody for being here. Again, we’re committed to helping to try to provide a place of valuable education. I see a hand floating up the screen there. I’m not sure what that is. That’s kind of cool. Anyway, some animation there. Anyway, thank you, everybody. Really appreciate it. Everybody have a wonderful night. We look forward to seeing everybody on April 12th or at our oil and gas tech deal coming up here in the near future. Thanks, guys.

Dave Zook:
Thanks Bronson.

Denis Shapiro:
Thanks, Bronson. Dave, Denis.

Bronson Hill:
Thanks.

Patrick Grimes:
Thanks, Bronson.

Bronson Hill:
Guys.

Denis Shapiro:
Have a great day, guys.