How to raise $43M in a year? What kinds of non-recourse loans are available? Patrick Grimes, CEO of Invest on Mainstreet, shares his best practices on how he was able to raise millions and how he overcame the hurdles along the way.
Tell us a little about yourself.
We do passive investments in real estate, energy and some other assets. I came from a background of engineering and made my way into real estate, and then found myself doing multifamily and diversified energy funds. As I diversified, I became a full time private equity firm.
What does the journey to raising $43 million really look like?
I started back in 2006, I got some advice to get into real estate and I invested where I thought we're going to double and triple my money every couple of years but 2009, 2010 happened and I lost it all. It've personally guaranteed on pre development residential and raked me over the coals really bad, but a lot of people got hit pretty hard too. I think that one of the reasons why I'm successful today is because I failed early, failed young, fast and hard. It took me a few years to recover my credit, I worked my way up in the corporate world and did some really cool things. I did medical devices, solar cells, EV vehicles, and automation, robotics, one of a kind things. I got a master's in engineering and business, but I knew I needed to get back into real estate. I did it in much lower risk ways: in single family, both in recession resilient markets and assets that made measurable improvement to cash flow. Not inventing something from nothing, or a new development that's betting and hoping on pre-development returns. Reasonable return for a more moderate and recession resilient risk profile portfolio. That led me to a very successful path of grinding away in my career and moonlighting away in my real estate business. Ultimately, it was when my wife finally came around, and I realized that I was not dateable, and I needed to make some changes and focus on family. I make choices so that my future could grow so I stopped doing single family then traded into larger multi-family and apartment buildings, I partnered up, I started that to do large syndications around growth markets and diversify into other recession resilient, and non correlated assets like energy, where you can build safer portfolios.
Why did you decide to sign on some loans in 2006? And how would you do it differently today?
Single family in my mind is the problem, not the solution. All the guru's are saying: Go flip some houses, wholesale some houses, get an Airbnb, get a home rental. But what they're not telling you is that there's an outsize, there's a large amount of financial and legal liability associated with those because you're not buying an asset that you can afford. You're buying something that you're using the bank's money, and they want collateral for that. They want those single family homes, they want you as collateral, and everything you own as collateral. And that's called cross collateralization. When you're signing on that loan, not only you are putting your net worth, your retirement, your kids' college fund, but also any other investments you have, they are now cross collateralized, and your net worth is at stake. Whether it's land or a single family rental, it's all the same. Not only that, you signed on it in your own name (instead of an LLC: which would protect you from lawsuits or liability claims with somebody tripping and falling), because you wanted really good terms on your debt. And if you're doing an LLC the bank will say no, you have to do it in your own name. Somebody can also trip and fall and you're hoping maybe umbrella insurance will cover it. Liability claims are major issues. And I didn't realize that at the time was I staking everything I had on these deals.
Today I do it differently, a syndication allows the investors that no longer want to slave away being landlords, dealing with tenants, toilets and trash, not wanting to sign on loans and put properties in their own name - where it's easily searchable; or liability claims can come take you down, or in a down market - a lender can come after you for the loans. And when investing into a syndication or you are a limited partner, your biggest risk is what you've invested. That means that every single one of your investments are isolated. But they're not nearby you have to trade your time with your family, friends and hobbies. They're in the growth markets, landlord friendly and tax advantaged markets, you purchase under LLC's that protect you from lawsuits, and you don't have to sign on the loan. The loans themselves are collateralized by the property because the property is a low risk. When you get into a 100-200 unit apartment building, the banks love those. They don't even come after you at all. It provides for a longer sustained retirement, but you've got to overcome the fear of partnering. You have to overcome that control. Most of my investors are doctors, dentists, attorneys, they're used to being the expert, they know everything about what they're doing and are in control of everything, you're also controlling yourself in very dangerous waters. Whereas if you partnered up with people that have decades of experience, invest in better markets that are safer, recession resilient and growing, you'll find yourself in a much better diversified portfolio. Your investments are protected from you, you're protected from them, and they're protected from each other.
Are there any alternative options for loans available that don't require them to be recourse?
In larger commercial assets, above a million dollars, more likely 100-200 unit commercial properties, where they're stabilized - meaning that they're not empty, they are cash flowing, producing income, producing businesses, you can get loans with Fannie and Freddie that are non recourse loans. You can get loans with fixed interest rates to protect your risk from rising interest rates. If you do something fraudulent, then they can still come after you because even a non recourse loan can become a recourse if you're a bad actor. In those loans, for the passive investor, you're not signing on them. As an operator, I am, but I buy the right asset, a low enough risk asset, the asset is better for the operator and the limited partner. You can even do bridge debts, a lot of people do that, as long as you get bridge debt with interest rate caps, you're protected. And you get the right kind of bridge debt, which is a non recourse type of bridge debt, where you don't have a personal guarantee. Then you can also protect yourself as an operator, and the asset as well.
What was the process of raising that much money last year? What are some of the best practices that other syndicators may actually benefit from?
I came from high tech, when I started working, I just kept my head down, just like an engineer would, close to the grinding stone, getting the work done, flying all over, underwriting in the dark, punching out numbers, and doing a lot of heavy lifting. In early 2020, I was advised, you're doing this the hard way, you've got a network of investors, colleagues that you've built a 15 year relationship with from high tech, but there's a lot of other investors out there and until you get your name out there and you tell your story, and you get out of your hermit hole and out from underneath your rock, nobody is going to know your story, you're not going to be as relatable, people aren't going to be drawn to what you're doing. So I wrote a book, it's an Amazon number one best seller. I write for Forbes, I've written several articles on investing in commercial real estate. A lot of educational things about the trials and tribulations that I had. I’m trying to share that message because the guru's are telling you this and certainly your financial planners are not educating you on alternative assets. I went through all that, and I started speaking on stages, I am speaking on MFIN on alternative investments, I've done economics and wealth building strategies, you start to build and people start to relate to your story. I would love to educate and increase the financial IQ of America and help get people into accelerated retirements that are safer, and ones that leave a legacy. And people resonate with that story. And I think they've been attracted to it, we have a great platform on our website www.investonmainstreet.com, and it shows in the amount of people that have come over and said, let's take a look at what you got, I'm interested. We're very happy with the results.
You are a professional. You pick up the phone, even though it might be the weekend or New Year's Day. You're still hustling, you're still taking several calls throughout the day and you automated your business. It’s a business. It isn't that you're going to a conference and giving a speech here and there and writing articles once a week for Forbes.
It is a business and I think perhaps the automation background comes into it. But I've always been a relationship guy. I think that's why I've been successful, more so than automations. I love talking to investors, I'll do everything I can to get you pointed in the right direction, regardless of whether or not you're a good investor for us, and we're a good investor for you. I value that relationship. I'm still in the trenches. A lot of other syndicators have passed the phone duty to others. When people opt in for our content, we will make the first contact, and help with appointment scheduling, but they land those meetings on my calendar. I'm happy to build those relationships and do what I can to contribute.