This episode is all about real estate investing and the difference between syndications and funds.
Key points:
Patrick mentions the benefits of blind pool funds for investors:
Your feedback is invaluable to me and the show! Leave an honest rating and review at The Conscious Investor on Apple Podcasts
Visit ThreeKeysInvestments.com to download “Why Invest in Apartments” and "Syndication Made Simple"
Visit IAmAConsciousInvestor.com to download "Beyond Financial Freedom: A Conscious Investors Guide to Personal Freedom".
Apply to the investor club or schedule a call HERE
Learn about coaching with Julie HERE.
If you’re looking for an affordable healthcare solution, check out Christian Healthcare Ministries by visiting https://bit.ly/3JTRm1I
Episodes referenced in the introduction:
This episode is all about real estate investing and the difference between syndications and funds.
Key points:
Patrick mentions the benefits of blind pool funds for investors:
Your feedback is invaluable to me and the show! Leave an honest rating and review at The Conscious Investor on Apple Podcasts
Visit ThreeKeysInvestments.com to download “Why Invest in Apartments” and "Syndication Made Simple"
Visit IAmAConsciousInvestor.com to download "Beyond Financial Freedom: A Conscious Investors Guide to Personal Freedom".
Apply to the investor club or schedule a call HERE
Learn about coaching with Julie HERE.
If you’re looking for an affordable healthcare solution, check out Christian Healthcare Ministries by visiting https://bit.ly/3JTRm1I
Episodes referenced in the introduction:
Welcome back, conscious Investor.
Speaker 1:I am so excited to have someone who is an expert to speak about funds. There are so many options when it comes to investing and they have different upsides and different downsides, and we have to be looking at both of those really pragmatically, and that's why I'm really excited about having Patrick Grimes, a friend of mine, on the show. He understands real estate inside and out and because he's experienced real estate investing for decades and went through the 08 debacle and such, it really gives him a perspective that is unlike a lot of other investors who've joined the game in the last decade, in the last seven years even, and so I love his perspective. Patrick is coming on. He's going to be talking about funds in detail. He's going to break apart what's a joint venture, what's a syndication and what is a fund. What should you be looking for in a fund operator and how does that fund work? What are some of the peculiarities that are common to those funds? What should you be looking for in a fund operator and how does that fund work? What are some of the peculiarities that are common to those funds? He's also going to show us in real time because he has a fund that he runs and it's a powerful fund. You're going to want to listen so that you can see the creativity that real estate allows for and accommodates, and how Patrick is just keeping his finger on the pulse of the market and saying, okay, this doesn't work. That part of that season of real estate investing is no longer producing the returns that we're looking for what is going to work? And so he is looking at, hey, this is what the next three, four years look like and this is how we are going to really catapult our investor returns. So you know, conscious Investor, I am not into fast money. I like money that is stable, safe and secure. That is all air quotes, because nothing is really stable, safe and certain. However, we can look at things as much as possible for those hallmark traits that would demonstrate that. What I appreciate is how Patrick is going to show you in the funds that he is operating, how they are producing just a little more stability into investors' portfolios. If you're curious about funds, how they work, how they operate, this episode is a million percent for you.
Speaker 1:Hello, conscious Investor, and welcome back. I'm your host, julie Hawley. For over four years, I've paired my background in real estate, investing, education and coaching to create powerful content for you each week. This podcast is where we take a holistic approach to investing by focusing on three ingredients to a life of personal freedom health, mindset and wealth. We'll talk about everything from passive investing through syndication and how to use your retirement accounts to boost your investing, to mineral balancing and gut brain health, and into topics that cultivate your inner strength and resilience so you can thrive regardless of any of life's current events. And yes, those are all episodes currently available and linked in the show notes below. Join me each Monday for a mindset episode and later in the week for an interview with expert investors and health professionals, so that you can experience your greatest health, strongest mindset and build the wisest wealth. Oh my gosh, patrick, I am so excited to have you here back on the Conscious Investor. You're one of the very rare repeat guests, so you're an alumni and that's super exciting, but welcome back.
Speaker 2:I'm glad to be here. It's good to be hanging out with you again, Julie.
Speaker 1:Yeah, absolutely. I always love, I always enjoy our conversations when we see each other at events and everything. It's great to have you back on the show. You're someone that I trust you know with. You know just investment philosophy in general and how you structure deals, so I'm excited. But we got to start with the opening question. As always, you know it Conscious Investor, patrick, who are you and what do you do?
Speaker 2:A bald guy that shaves his head every day. First, before I started investing, I had hair, and now you know when it happens. So, oh, no, we. So I am the CEO, founder of Passive Investing Mastery, and that is a company that helps provide alternative investment to accredited investors, busy professionals like I once was. I was a high tech paid professional in machine design, automation and robotics and trying to learn how to diversify not just the startup stocks and retirement accounts and I didn't know where and how to do it. So I went on a long journey, lost some money, made some money and figured out how to mess with recession resilience and diversify into non-correlated or allocate the things that aren't all down at once, and so we now have some awesome opportunities and recessionary times that help investors win for the upside of downturns, and that's really what we're about right now.
Speaker 1:I love that, and the first time that you and I ever met was at an event in LA, and it's so wild to think about that. It was so long ago at this point, so many years ago, but it's great to see the trajectory and momentum that you've gained over the years and the many successes that you've had. You had mentioned, you know, as you're talking about just exploring different ways of investing, what were some of the ways that you, you know, explored on your own before going into active, an active role in the multifamily and real estate space?
Speaker 2:Yeah. So when I was an automation and robotics engineer, I was working in places like Tesla, solar cells for Lockheed, then medical devices for Johnson, johnson and Abbott, and there was the theory, the investment theory of all these people working real hard, real sharp, very smart people working in the Silicon Valley and all these startups and the bigger companies, was you, early as you can and as much as you can invest in real estate? And that came from the founder of the first high-tech company I worked for. Actually, he still invests with me today. Actually great guy, he said, although he made money in high tech, he actually invested it all and made his wealth in real estate. And so that got me on the path.
Speaker 2:Now I took the young and over-exuberant approach and I did my analysis and research. But I invested into pre-development, lost my ass, lost everything during 2009 and 10, and the global financial collapse the loan that I did was personally guaranteed. Global financial collapse that the loan that I did was personally guaranteed quickly became underneath. That was paying out of pocket. The property wasn't worth anything. The developers went bankrupt and you know I had to exit out of that came tell between my legs and it struck. It hit me pretty hard, but I learned my lesson on investing right for cash flow investing lesson on investing right For cashflow, investing on speculating and lower risk debt products.
Speaker 2:I was a talented engineer. I had a master's in engineering and business, and so it wasn't long before I was, you know, back on my feet looking for a place to invest in. You know, the breadcrumbs of the wealthy lead right back to real estate. So, you know, I did that in recession resilient markets. That time I wasn't, you know, doing it in California. I was doing it in Texas and buying existing single family homes that just needed a lift, doing some renovations and holding, refining out my capital. It was like the Burr method, but before I knew what the Burr method was, I was moonlighting it right, and so I built up that and then eventually moonlighting that didn't work so well when I met my soon-to-be wife, whom you know, and at that point I told her I was going to do single family and we got married.
Speaker 2:I traded up to larger assets where I could partner and ones that scaled, which allowed me to be able to leave engineering, and that was in building the multifamily portfolio. We did some energy investments. Actually, my family has some energy trust. I don't know if you know that. So we've kind of been in energy and also we have a debt fund and an acquisitions fund. So there's definitely diversification there to help round out our investors' portfolios.
Speaker 1:I always appreciate it when people have actually have very clear memories from the last crash, Because it doesn't matter if you're paying attention, doesn't matter if you lost or you held or anything, it just matters if you were aware and you got the lesson of invest, you know. I loved what you said. You said investing, not speculating, and so many people leading into that crash were speculating and like oh, it's just going to keep.
Speaker 1:You know this is going to be great, it's going to be good. Let's just keep going. And so I appreciate that lesson learned, because and that's why you know, having strong guests like you on the show, where we can't just amplify voices, where you know they don't understand that key principle right there, it's so foundational and so important, especially in the times that we're in. You are so well versed in funds, you have funds and I know with your engineering mind that you are extremely meticulous and detailed in everything that you do, which is wonderful, and I appreciate that so much.
Speaker 1:I'm wondering if you can give we haven't had anyone on the show in the last year and a half probably talk about funds, and that is a really big topic. And so here's what I'm curious about, Patrick. I'm curious, you know, if we can, just if you can describe what is a fund like, the difference between a fund in a syndication, and how do we even vet a fund. I'm giving you all the information up front, all the initial questions, and then you know we can go from there, and then you know we can go from there.
Speaker 2:Well, first of all, this is not legal advice. I'm not an attorney. I'm sure they might have a different. But so the word syndication, to my understanding, is thrown around, meaning that if, Julie, if you and I went to go buy the house across the street right, I don't know what street I'm talking about, but the house across the lake behind me here and we were both active, then we could be joint, part joint. We could be joint owners and operators. We could be partners right, we can do that together. We'll have a joint venture, right, and that means we both have controlling interests. But what if I said to you hey, julie, I want you to get, you know, I want four of your friends to put in 50 grand each, and then I'm going to put in some.
Speaker 2:But then you are totally passive and you're not going to make. You're going to have any control rights. You don't have any decision. But at the same time, you're limited in your risk because you're not the operator. So I'm going to limit your risk to how much you've invested in the deal. You're not unlimitedly liable for the loan amount. I'm going to sign on the loan. Unlimitedly liable for the loan amount. I'm going to sign on the loan, you're not going to be liable for a lawsuit, you're limited partner. And so when you have that limited partner and you have that active sponsor, general partner, you kind of syndicated.
Speaker 2:Now you split it up into a lot of different types. The most common ones are reg D offerings that you hear about. There's like reg A Grant Cardone has a reg A and the benefit there is you can almost go to anybody and ask for little amounts of money, right. But the negative there is you're going to anybody and asking for a little amounts of money, right, you're not going for any level of sophistication, any level of net worth and liquidity requirements. So then there's there's reg D, reg D funds, which are the ones that we hear and see about more often, right, and there's, there's a reg D, right, and there's the Reg D B, and then there's the Reg D A or, sorry, there's the Reg D C funds, right, and then. So the Reg D B funds are the ones that are for non-accredited investors and the Reg D C funds are the ones that are for accredited investors, and so those are the ones we see Now when you say fund, which is so any one of these syndications that are stood up are a fund, and the majority of them are Reg D 506 B and some of them are Reg D 506 C, like we do, that allow credit investors only.
Speaker 2:But when you say funds, which you often mean, or when people say the word fund, what they think about is well, is it two different things Is it a feeder fund or is it a fund of fund? Right, meaning, even though every syndication, rent is technically a fund and a Reg D 506B or C are the common ones that we work in, people don't consider that a fund. They consider it a fund if this offering is not just buying one asset, if it's buying lots of assets, or it's open for a long time, or it's open and closed, or if it's a fund of funds, meaning you got one fund and you got more funds underneath it. Right, but it actually turns out that all syndications are actually funds. And so when you say funds, maybe you mean fund of funds, right, meaning that I'm gonna go create a fund, but I'm gonna to go create a fund, but I'm going to go invest in other funds too, and then it's a fund of funds, right, I create a fund and I have feeder funds, which are special purpose vehicles set up just to invest in my fund right, so that's technically a fund as well. It's the fund of fund as well. So I don't know if that helps.
Speaker 2:But the benefit of building an open fund, right? Or a blind pool open fund, where that means that you don't, you have an investment thesis, you don't have an asset yet, right, you have an investment thesis and with that thesis you're saying I'm going to go buy this kind of stuff. Yeah, you don't know what it is and you don't get to approve it, what those are, because you're limited. But you're going to give me the money and I'm going to go about and do this. There are some benefits to that structure, right. But then you've got to find the investors willing to kind of relinquish control, right.
Speaker 2:And so our debt fund, which is a real estate asset-backed debt fund. It is a blind pool open fund, meaning people can subscribe and they can redeem, and they can subscribe and they can redeem. We put, hey, these are the kinds of loans where a senior secured, where loan to value is no higher than 65 or trending 40 to 50. We're going to go out and invest in all these loans, right, and so that's a fund of fun, our acquisitions fund similar. It's a fund to fund a blind pool and we're saying, hey, we're going to go buy things in cash, right, but I mean, that sounds cool, but you don't get to know what it is because we just closed on our last one in 14 days, and so we're not going to go ask for permission, right, to do that.
Speaker 2:But here's the deal, here's the projected returns and here's the guardrails by which we're going to spend the money in the fund. Right, and it's a blind pull open fund, but that gives us the benefit to really pounce when we need to pounce, right. And then we, instead of just being one asset in the fund, and we push, refinance out proceeds to investors, and when we sell that one asset, we push the sale proceeds out and they're kind of forced to take a refinance or a sale. Being a blind pull open fund means in ours that we can take the refinances and then reinvest in the fund, and then we can take the sale and then reinvest into more assets in the fund and, instead of that being forced out, that when we refinance and we sell, we grow value. It increases the value of their unit price and so if they want out, they can request a redemption and then we pay them at the new unit price, but it's when they request the redemption.
Speaker 2:You don't have to be exited in a certain year. I'm not forcing it out. So there's a lot of benefits in both of those, because it allows you to build a large diversified pool, either in debt or acquisitions, allows you to move very quickly, get the best deal, buy the best notes, originate the best loans or buy the best assets. Right. You have to find investors that are working with a sponsor that has a track record and that you believe in is gonna make the right decisions, because you're not investing in a specific asset. But I think it's a lot lower risk and you can potentially get higher returns because their latitude given to the sponsors.
Speaker 1:So this is all super powerful information and I really appreciate when just how you describe the difference between joint venture, syndication and fund and the idea of the blind fund and the pros and the cons and we haven't talked about the cons, we touched on them a little bit. But what's interesting also, I'm going to add, on the pro side of it, is you it and I'm going to say it in another way is it's a liquid investment. So in a syndication it's illiquid. You're locked in, you're tied up, you're in it through the duration of the hold period.
Speaker 1:But when you're involved in a fund of this nature, I'm understanding it's liquid, I can go in there and I can say, hey, you know what, I'm understanding it's liquid. I can go in there and I can say, hey, you know what, patrick, I want to exit out of this, hand my money back and you're going to give it to me at whatever the value is at that time. So if you've grown that portfolio in the fund substantially, I could exit and so it really has that same structure. And then I trust you can clarify and, like, refine this, make it all pretty. But it's really operating in a very similar way to a stock, to a public investment where you can trade it in that same capacity.
Speaker 2:Well, you can't. There's no open market for private placements and that's what all these are. They're private placements, they're not public, we're not you know. So we're not registering. But yeah, I think you had it right. So now your liquidity is defined by the documents of the fund, first of all. So not all funds are like that, right? Some may say we're gonna buy a bunch of assets, you don't get out until we push it all to you. They may say that and it'd still be a blind pull open fund. Now the debt fund we have. We know people want liquidity right now.
Speaker 2:Right, we're getting really high interest rates and first position loans and it's opportunistic to do that. It's not normally good to do a ton of debt, but right now the interest rates are really high and banks are pencils down. So let's jump in there and let's do some debt. But like, we have 90 day notes, 180 in one year, so they can roll 90 days forward, half a year or one year forward and they can exit at any one of those increments, right? Or we have a three-year lockup in the debt fund where if you're doing a class A, class B share it's on a note you can join in through three years. After three years you can request a redemption. You have the same three-year lockup of the acquisition fund. We do need the capital for long enough to produce the project in return.
Speaker 2:Right, you can't. They can't come in and out and actually the securities doesn't actually allow for less than a year. They don't want you to trade in and out of these things, and so there's guidelines around that and that's why the debt fund in order to do less than a year, we actually have notes, right, so you're getting a note from the fund. It's like you're loaning the fund money because we're going to be compliant. You can't really do those short term. The benefit is the notes are like fixed interest right, you get a fixed seven, eight, never 10, right, it's really cool. But on the Class A shares you get a lot of upside right, because you get to participate in the preferred return and promote the split of the profits. So same thing with both funds. Those are all things.
Speaker 2:You have a lot of latitude in these funds to be able to do almost anything you want, as long as you disclose it in the fund documents and then disclose, disclose, disclose, right. And so that's what securities attorneys are for and that's why the private placement mirandas are so long. It's that kind of how do we confine it to the point where we build trust with the investors that they know what we're doing, but then leave it open-ended enough for us to be successful. Right and pivot when we need to pivot and that's been the case. Right, because a lot of the funds right now are struggling because they need to do capital calls or they need to do something because they weren't prepared for rising interest rates or taxes or insurance. Right, so you got to be careful as a sponsor. You want to narrow it as much as you can without narrowing it too much and as long as it's disclosed you can have latitude to build your fund almost to do almost anything.
Speaker 1:I love all of the flexibility that's involved with funds. I've sat at some tables with some of our friends where it's just amazing to see the opportunity and how it can be such. There's so much upside for investors. One concern I have and this is definitely not with you, and so one concern I have, and I'd love to hear your sentiments on this is that, just like when everything gets easy, everyone seems to flock to it and do it and they want to be like oh, you know, hey, I'm now the master of funds, and they don't have the same. You're dedicated to learning, knowing, understanding before you take action. Like no, no, I'm going to know what I'm doing. Not everybody's like that, which is why we see some messes out there in the streets right now. Which is why we see some messes out there in the streets right now. So how do we vet fund managers?
Speaker 2:particularly in the real estate space. That's a really good point. And I cause I, you know, I actually tell people and we were, were we on a panel before I deal with you. I was on a panel, you were hosting a deal maker live, I think, and it was about how to vet sponsors, right? So me and you have had this intimate conversation before, and so we go through the gamut. So I like to say that I from cause the, I come from the operator perspective, right? So I vet partners through the crucible of getting things done right and I travel out, I do the due diligence, we do the underwriting. You see who really shows up and stays at the table.
Speaker 2:But as a limited partner looking away into alternative investments, it's tough, right. There's a ton of different opportunities out there. There's a ton of different sponsors and you need to spend the time to get to know the individual. You need to ask for references from other investors. You need to ask them for to get to know the individual, you need to ask for references from other investors. You need to ask them for background checks and then wonder why they're saying no to you. If they are, you can ask them questions.
Speaker 2:Have you ever been through bankruptcy? I can say I haven't. I almost did back in 2009 and 2010, but I fought it. I fought through and didn't right. But you can look at what past companies this was a really good look at what past companies they've been involved with, check their linkedin and then you can search, uh, those companies for regulatory issues. Right, we've actually. We actually saw one sponsor who had a prior company who had a bunch of sec violations and he just created a new company, right, and we're like, oh, wow, this is kind of so there's.
Speaker 2:I would say, check with their, ask them for their track record and ask them for background checks. Ask them for what companies they worked with before and then what investments have they exited. Then cross-examine those, go talk to other investors. It's not an arduous process actually. If you're a limited partner out there wanting to learn, you'll probably spend a lot of time learning how to crochet or knit, right, but if you wrap your mind around, oh, this is exciting and fun.
Speaker 2:It's a way that I get to retire earlier, because I'm not going to go for the 7%, 8%, 9% I'm getting over in. The 7% is what traditionally in S&P 500 for 30 years I'm going to go for double that. Well, I can retire and live health. So I'll spend some time meeting other people, talk to other investors, see if they have referrals that they can give you.
Speaker 2:Googling these, make a game of it kind of gamify the due diligence process. And if you find that they're they're not willing, they don't have the time for you, they're not interested in answering your questions, then they're not the right fit for you. And I've run into this before where I have just simply been made to feel bad because I'm asking questions about the recourse loan that they're getting and I'm asking questions about you know what the limit of my risk is, you know in the deal and they're making me feel bad about it. So I actually, you know, I bow out of those kinds of things. You know, don't. Take some time, learn, get to know the sponsor, get to know the industry and do your research.
Speaker 1:I say, if I start to feel bad about asking questions, I'm the same way, I just back away. Because I'm thinking I always tell myself if I'm, if I'm not feeling great about asking questions right now, if I feel like it's not being received right now, and this is like basically, let's just say first date type thing, you know first, second, third date, then what's that going to feel like when we're, you know, two, three years into a deal, like no, hard stop, hard pass exit the stage right there.
Speaker 2:I always tell investors I am always available. My calendar is at the bottom of every email and I allocate time every week to talk to them. That's one of the things that I love about the business. And I do have other people that go through decks and, you know, have investor relations, but I'm always there. They can call and text me and that's an important relationship and I think if you don't have that value, if you can't make that time for your investors, then that says a lot right and to your point. Man, this is just. This isn't even the first dance we got a whole marriage to go Exactly.
Speaker 1:You have some, really, and you touched on it earlier, but I'd like to do a deeper dive into. You have the acquisition fund. You know the recession fund, so I'd love to like actually get the thesis behind those funds. How did they originate? And you can choose which. Which fund do you want to start with or how you want to talk about it.
Speaker 1:But let's just give a real-time example to the conscious investor of here's how this looks. Here's a fund and I think that we're in compliance because they're 506C Correct, so we can talk about everything quite openly. Um, and if you're a new conscious investor, 506c it just means it's accredited investors only like super high level here and and so he can talk about all the details of it, he can advertise it, it can be out in the public a lot of times. You know my company, three keys investments. We operate generally under a 506B umbrella, which is why you don't hear me talking about investment opportunities until they're closed, unless you are in the investor community. So there's a big difference and this is a fantastic opportunity If you're a newer investor or if you're curious about funds, to really understand real time. Hey, here's a real fund that's really open, and here's what it looks like.
Speaker 2:Right, so, yeah, so we since the very beginning, I did Reg D 506C for accredited investors only because I came from the high tech space and pretty much most of my people that were working with me to create automation and robotic solutions they were all accredited. So it was natural for me. Most people go your route, truly actually they go Reg D 506B, but yeah, so the inception of the acquisitions fund right, we set up a lot of independent syndications and I've co-partnered in a lot of syndications as a general partner. I think there's 5,000 some multifamily units across the Midwest, southeast and Texas total. Now it's quite a bit and I think that's spread over 17 different syndications. Some were portfolios of one to three units but they were all fixed assets. These are what we're buying. Actually, there was one that was seven assets, but this is what we're buying and we're going to raise this amount of capital and we're going to execute this plan and that required the analytical engineer in me was really down in the books and you know calculating and working on the underwriting and I think that's how we met potentially and working in underwriting stuff to purchase, price the nearby comparable rents higher that I could put in a certain capital expense to renovate those units and get the higher rents, and then, with the cap rates and the pricing, the way things are trading, I can correlate that to a valuation gain, right? Well, they came crashing down about two years, about a year, year and a half ago. Right, well, they came crashing down about two years, about a year, year and a half ago. Right, because the ability for me to calculate infusion of capital to rent growth right through forced appreciation and evaluation gain became much more challenging. And the reason why is because interest rates started to grow, right, and as interest rates started to grow, valuations started to soften, valuations started to go down. I mean because when interest rates grow, then it's more expensive, the debt is more expensive to get, it's harder to get debt on these things, which means people want a lower sales price, right, and so that correlates together.
Speaker 2:Inflation hit, and I've got an article in Forbes about how inflation multifamily is a hedge against inflation, which is still true. The fundamentals are true, but you compound inflation, increasing the material costs, increasing the payroll, increasing the labor for not only the CapEx but daily operations. Well, that hits more of your income. So your valuation and your income is getting hit too. And then insurance and a lot of the favorable markets like texas and florida, that went up almost 30 a year and some markets have doubled and in some markets you can't get it anymore. In some coastal areas in florida areas have just left.
Speaker 2:So there's been a. Essentially there was just a stepwise function. Where about you know, conservative, 5% year to year rent growth was typical and underwritten as conservative, and now we're at 30% for a couple years. So all those things kind of affected. And then COVID hit and then there's just wild delinquencies and me and my crystal ball is fuzzy now julie, like I can't see far off into the future even now. Um, you know, jerome pell just got it on and saying in february 6th this year that the effects of commercial real estate, uh, on the banking system is just beginning. So we're going to see a lot of impact from that.
Speaker 2:So commercial real estate, the valuations are a little uncertain and what I do know is that I can't underwrite like I used to, I can't see through the crystal ball like I used to, I can't calculate with a high confidence interval exactly in three to five years where things are going to be. But what I can calculate, what I can see, is that there are really good deals right now that right now I can get at a great basis and if I pay all in cash for those, I can lock it up quickly and I've made my return going in and then we can trade forward. We can trade out of those within a year or 14 months into another asset that we bought right, and we can do it all in cash. And to me I can calculate that because it's short, it's near term and I'm not trying to hope that a bunch of CapEx correlates to valuation gain, with all this lack of confidence and all the variables that would get us there the lack of confidence and all the variables that would get us there. So the idea behind the acquisition fund was precisely that it was let's go in cash heavy, right. Let's find these deals from distressed operators. These are people that have performing assets. We got one at a 10 cap, one in an eight cap, meaning they're cash flowing, but the operators are financially distressed. They're financially distressed because maybe they got too, they didn't put enough down on it, maybe they got a bridge loan or short-term variable interest loan that skyrocketed, maybe all of that happened and they inherited the property and they don't know what to do, or they got a divorce, or they're retiring or there's somebody that you know who knows, but all these things, maybe they're just financially distressed and the economics all of a sudden tipped them over the edge and they need to exit. They want to exit quick and so our funnel deal flow came is strong, but now all of a sudden, we can raise capital for people looking as a recessionary acquisitions fund, people looking to pounce and potentially participate in the best buying opportunity or second best buying opportunity of our lives.
Speaker 2:I think 2009 or 10 was the first and I missed it because I was getting ranked over the Colts, but that was the evolution and so so far it's been great. Our first asset, for example, we bought for just around $4 million it's right after we appraised right and it was other offers much higher, but they were going to hopefully get bank debt and close in 60 to 90 days. Right, a really low basis and immediately appreciated at $5 million. So we got a 25% valuation gain literally on day one, cash flows on day one at a 10 cap strong cash flow and that's 60% occupied. We occupy it without any capex very minimal to any capex in front of it. We just occupy it and it appraised at eight percent, eight, eight million, right, so, uh, and then within a year, we're already looking at listing in april, may this year. So so the strongest, uh, buy right.
Speaker 2:The strongest strategy, I think, is just to buy as much as you can and exit and then buy, and then exit and buy, because we're in a very short window where you can do recessionary acquisitions and the faster you can churn and burn these and we can pull out. As soon as we bought in cash, we pulled out our capital with a refi and we bought the second asset in cash. We're looking to trade 1031, this first asset, into a third and then, at each tranche, if we don't have enough, we inject more capital into the fund and they buy in at the unit price at that time and we just keep compounding. It's a stepwise function and it's so calculated in my mind that we'll just, with a day that we can no longer buy that way, we'll just stop and we can wind down the fund, and so that was really the inception of the acquisitions fund Let do something, let's do it.
Speaker 2:It's completely different than what we were doing before, um, but but let's do what makes sense and we can make work, and as fast, as much as we can in this in this recessionary time, and we're going to be able to do this through 2025, 2026 and 2027 easy. But I am definitely not going to put my money in something that's going to lock it up three to five or five to seven years right now, because I'm going to miss the entire buying window if that's the case. An investment in the acquisition fund means you're going to get it split up and diced up into a half a dozen assets in that timeframe Maybe a dozen assets in that timeframe right, because we're trading it forward and stepping up each time. So that's that's really why I'm really excited about it, cause it's the coolest thing I got going on right now. So that's that's what we're doing. I mean, that's just the acquisition fund. It's kind of a different story with the income fund.
Speaker 1:Well, I love this. I mean, because this is what I love about real estate is that if you are a professional in the real estate space, then you are. You are living and breathing what is the market offering right now and pivoting and saying, okay, wait, that's not the game anymore. Not that it's a game, quote, unquote, but like that's not the path anymore. They the new strategy. This is going to be the strategy that's going to help us, like knowing that the ultimate goal is we're here to invest into, you know, produce outsized returns as much as possible. Stable, solid, wonderful, well, stable air quotes on that, we can't actually say that, but we want to make that type of moment, create that kind of momentum velocity of capital there. So what kind of returns, by the way, is that fund getting? That sounds powerful, sounds off the hook.
Speaker 2:Yeah, kind of returns. By the way, is that fund getting? That sounds powerful, sounds off the hook. Yeah, even though it's a REGDI fund, I still struggle to returns and each individual asset. We don't buy it unless we know we can get a 1.8 equity multiple in under a year. So the asset by asset returns are very high. But if I said exactly what we're projecting with the fund, it scares people away. So I just, you know very conservative, you know north of 20,. You know north of 30% annualized average returns. Because if you just, I mean it's just, it's just the sum of the parts is all, it really is Right. And when you're, when you're making that return going in, it's each time, it's really hard to not get that on the backside, right?
Speaker 1:Well, and that's where we make our. We make our money when we are buying on the front end, like if you're, if you're buying it correctly, that's where you know great, we've made our money right here.
Speaker 2:Yeah, but then if you go inject, you know, 5 million in CapEx to renovate it, you've got to make, make, you've got to get the valuation north of that and that's where it's breaking down right now. Right, yeah, and so that's what I'm saying.
Speaker 1:Like we buy, buy right, always buy right, like it's part of my sleep at night. Policy I don't want distressed deals in my life.
Speaker 2:So you know, just buying things right on the front end, knowing that, okay, this is going to work, even if xyz happens, it's going to be okay, and I think that on the debt fund side it plays more into the fact that you know banks are mostly they're in distress right now and there's no nobody arguing that and there's only more distress coming. They were way too over-indexed in investments and as not just office but other commercial real estate assets that have devalued because of rising interest rates and the banks are just not getting paid off. Banks have traditionally diversified into bonds, which have devalued because of rising interest rates, so there's a liquidity crunch. So these performing assets, they just don't have lenders coming to the table or the lenders are uncertain what they can lend at and so they draw them on 30, 60, 90 days and they keep changing the terms. So there's a lack of trust in the lending environment. Just like out of 2009 and 10, private credit or private debt really exploded. We're seeing that right now, and so my partner, lance, actually went through 2009 and 10 as a debt fund manager and I don't know if you know Lance Peterson, super great guy, but he's my partner in the debt fund and he also ran Verives that had two billion in fund administration, mostly debt funds. So we both come from seeing the turbulence of years past.
Speaker 2:So the debt fund allows us to participate in the lower position on the capital stack, right when people are kind of they don't want to get in. Maybe they don't want to invest for the upside of the downturn, maybe they want to invest for capital preservation and just ride it out, but they can't keep it in the bank because they're losing with inflation. So what do they do with it? So if you're in a 50% loan to value loan, which is higher than our average right now, and the commercial real estate has dropped by 15%, well, you still have 35% above that. I mean there's a huge valuation fluctuation before the debt investor loses anything, right. And a 15% reduction in a property value means a 32% reduction for common equity. It means a 0% reduction for the senior secured loan. When you're in a 50% means a 32% reduction for common equity. It means a 0% reduction for the senior secured loan when you're in a 50% loan to value.
Speaker 2:So the loan to value portfolio the small balance commercial real estate debt we're doing and performing assets is we're originating at 13% and it's incredible, at 13% plus two points, and we get to share in those returns. And because we have short term notes with class A shares and the short term notes are capped. You know a lot of the class A shares get to participate in a lot of that upside and so we've actually been averaging 15% monthly annualized returns since inception to our Class A share members, because we're originally at 13,. But a lot of the portfolio is only getting, you know, 97, 8.5% or 10%, so that you know we share that, the Class A share members.
Speaker 2:So that gives the opportunity to really get returns that would normally be like equity, the common equity, the most volatile, risky side, right, but be in a more secured position. And so that's why we call it the recessionary income fund, because in this time for the next two, three years, when we're still able to originate, there's troubled banks and operators don't trust banks and we can move faster because we'll still do our due diligence but we'll do it more swiftly and we're trusted. We've been around for a long time. People keep coming back, we can originate at higher rates. Let's pass that down to our investors and let's give them a place where they can get great cash flow compounded monthly or distributed. And so that's really the thesis behind that. It's all in their two sister recessionary funds that provide for that ability to get that upside of the downturn.
Speaker 1:I absolutely love it. I mean, there are so many other questions, but we have to start wrapping up, which is so sad, but I love the. I just I really value that you were looking at things in such a creative way and also drawing you know, ensuring the expertise behind it and bringing the experience. That is critical, in my opinion, it is anytime you're investing conscious investor with anyone in a syndication and a fund. You need to know what is their experience, what is their background, what is their track record, what is their character, how are they going to show up at the table and and ensuring that your best interests are always top of mind. So I appreciate that Everything that you're offering investors right now. Patrick, what is the best way for the conscious investor to learn more about either of these recessionary funds that you have?
Speaker 2:Well, so PassiveInvestingMasterycom all spelled out. Sorry about that PassiveInvestingMasterycom, but it's such a cool name because we want to share alternative investments. We have the funds there. Take a look. You can also set up a meeting with me and if you do, I give away a copy of this book. I did a chapter in it and it was an Amazon number, was an Amazon number one bestseller persistence, pivots and game changers, turning challenges and opportunities.
Speaker 2:Had a really great time writing. It Tells my whole journey through high tech, how I tried to get out, got back, thrown back in again, you know, would tell between my legs and made my way through doing yourself single to multi, to everyone. But if it inspires anybody else then it's worth it. I sign up. I send copies out for free. So passiveinvestingmasterycom slash book and you set up a meeting with me, get a copy of the book, if not just to talk to me, but Phil Collins, lead guitarist at Def Leppard, is on here. We have some NFL, nba players, a lot of cool people cooler than me, actual rock star telling cool stories. Really enjoyed the project. But yeah, I'd love to talk with anybody, even if you're not an accredited investor. Everybody starts somewhere. I did too right. I was not accredited when I started out and I'm happy to have a call, understand your goals and Julie and I both have a wide network. You're in great hands with Julie, by the way, but we both have a wide network and get you pointed in the right direction.
Speaker 1:I love that. We do both have really great networks and I always say if I can't serve you, I have a great powerful network. I can refer you out to somebody else who can serve your investor needs or whatever the needs are that I'm unable to, and serve your investor needs or whatever the needs are that I'm unable to. So, patrick, thank you so much for just coming and serving the conscious investor. See, I'm already turning into a passive investor over with you. I love it. Thank you so much for coming on the show and pouring your wisdom, knowledge and experience.
Speaker 2:I appreciate the invitation. Had such a great time once again.
Speaker 1:Awesome, conscious investor. Remember, adventure belongs on the trail, not in your investing and not in your personal life. So if you're looking for support, don't hesitate. Go down to the show notes, schedule time to chat with me, and that could be your first step. That could be your 10th step. Whatever step it is, there's no reason to ever be stuck in life and, as I mentioned, if I don't have the resources to serve and support you, I am going to point you in a direction and make a connection that will help you become unstuck or get that momentum that you are looking for. So head on down to the show notes, let's have a conversation soon, and until next time, cheers to your health, your mindset and your wealth. Are you enjoying this episode? Help spread the word by sharing the episode with a friend or family member, because, really, where would any of our lives be without other people sharing great content with us? Help spread the word by sharing on your social platforms and with those you care about, and remember, tag me at Happy Julie Holly.