The Top Tax Benefits of Owning Commercial Real Estate

Aviva (00:00)
This week's listener of the week is Mary Beth Varta. Mary Beth, thank you so much for leaving us a five star review. And for those of you listening, if you leave us a five star review below, you might be next week's listener of the week, week, week. This week on Commercial Real Estate Secrets, have Stewart

Heath Stewart is a CPA and the CEO of Harvard Grace Capital Stewart. Thank you so much for being on the show today.

Stewart Heath, CPA (00:33)
Thank you for having me. I really appreciate the opportunity.

Aviva (00:36)
Absolutely. So Stewart, let's start by telling the listeners about who you are, what you do, and how we came to be on Commercial Real Estate Secrets, the podcast today.

Stewart Heath, CPA (00:47)
Well, as you said, I am a CPA. I'm a CPA because my dad was a CPA. And I love my dad, but that's probably the last thing that we had in common. I found that I am far too entrepreneurial for most CPAs. And I have nothing but respect for the CPA profession. even though I practiced for 25 years, I really didn't have much.

It really just wasn't me. I was always really desiring to go out and sort of do my own things. So I am a serial entrepreneur. I've started dozens of businesses and a few of them are actually still around, Yeah, but that's true of most entrepreneurs. We try a lot of things. Some of them actually work. So, but how I got to be here and why I ended up in real estate, because

Along the way, I've tried things like a seafood importing company in Nashville, Tennessee, which was, which actually is still around. I'm just not part of it anymore. And, and I did an employee leasing company and a physician billing company and all these other things. and I was just really sort of anti real estate. Because when I came out of

college in 1985 and then shortly thereafter, the 1986 tax act, which actually brought about a fairly significant real estate recession because of the retroactive nature of the 1986 tax act. I'm in my formative years as a business person and people are running around and going, well, real estate's bad.

We don't do that. you go to these breakfast meetings and you listen to bankers talk and this is it. We don't lend on real estate anymore. like, 30 years later, I think, well, that's the stupidest thing I've ever heard anybody say because you prefer collateral that has wheels and you might have to go chase it to another state. And so anyway, I sort of had to have an epiphany to do this.

Started my career with Pricewaterhouse after several years, at the age of 25 figured that I knew everything. And so I started my own firm. one of my first clients was a real estate agent who was fairly entrepreneurial herself. And she was an agent and a house flipper and all this kind of stuff. And she was doing a lot of this kind of stuff.

because she was in a bit of a financial hole with the IRS and won't go into all that. But she was kind of amazing to me. And these days, and she's still my client today, and these days I just refer to her as my business mom. And she'd flip these multi-million dollar houses and bankers would just.

loan or anything she wanted because of her history. And it was amazing. They owned apartment buildings and then flip houses and anyway, and then she was not the one that, that sold me. But then I began to pick up other clients in the real estate business. Maybe they were contractors, builders. And then finally, after about 10 years, I'm looking at it's the year 2000 at this point, I'm looking at all these people. I'm

frustrated that I've got this successful accounting practice and, but I'm not really building any wealth. I'm being very successful at client attraction and billing 28 hours a day. but you're spending it all and not really building value in any kind of assets. And I sort of take a look and I realize I've got this whole group of

of clients over here that are all in the real estate business and by my own hand, I'm doing their taxes. They're not paying any taxes. And so it was sort of, you know, and I'm just applying the law. I'm not really thinking about the end result until I take a step back and they get these big chunks of money when they flip a property and they're not paying hardly anything in taxes. like, I got to do something about this. I needed to create.

additional streams of income. So I sort of had this epiphany at like three o'clock in the morning during my tax season of 2001 and it's like, this has got to change. And so from there, I just started looking. I took some online courses. You might remember, you're probably too young to remember, there's the original infomercial guy was Carlton Sheets.

and he sold this no money down product for $149 money back guarantee. so I started listening to it and it's good stuff and it makes sense. so I found my first several properties in classified ads and I start buying them and I'm like doing it with no money down or very little down and I'm sellers to finance it for me, which is very hard to do.

And usually that only works on some sort of a dog property, but it's a great way to start. And so I just, and then I'm doing rentals. And the next thing I know, have, I honestly don't even remember, I've taken the contractor's license and I've become a licensed contractor and now I'm building houses. And it's like, you know, and I'm like, why did that happen? And, you know, cause I got tired of paying other guys who didn't return my phone calls.

Aviva (05:33)
No.

Stewart Heath, CPA (05:45)
And then I started doing a little bit of development. And just in all clarity and honesty, I built up a pretty good net worth on several different projects, but I really didn't make it out of 2009, the great financial crisis in whole. It ended up giving most of that stuff back to the banks. And most of that was the way I had financed it and the way I had aggressively bought.

Aviva (05:46)
Wow.

Hmm.

Stewart Heath, CPA (06:12)
And I realized upon reflection, hey, this is all on me. This is not about the real estate. It's not the asset's fault that the world changed. And there was a, there was a sea change. The world stopped. Warren Buffett's famous quote was, now, now the tide has gone out, we're going to see who's been swimming without their trunks on. You know, everybody's, he's like, that was me. You know, because I, you know, I was, I was refinancing one property to buy another one. yet it was all

Aviva (06:28)
Yeah. Wow.

Stewart Heath, CPA (06:37)
basically 100 % financing, which is unsustainable when the world slows down. As long as the world keeps going up, you know, 8 % a year, everything's wonderful. And so I sort of got religion about it. I went back and had held several CFO positions about it. And then when I got the chance to basically start my own firm, I started Harvard Grace as a fractional CFO firm.

Aviva (06:41)
Hmm.

Stewart Heath, CPA (07:02)
and never ever really lost my love for real estate. I attracted a lot of real estate based clients. I ended up really managing a lot of their real estate and structuring their deals and financing their stuff. And then I got a chance in 2020 to kind of break out and start Harvard Race Capital, where we now do syndicated real estate. Before I was doing primarily residential, a lot of duplexes, a lot of condos.

I ended up having over 200 personal residential units that we were managing ourselves. I like to say that's the near definition of hell on earth, I can ever imagine. I don't like residential property, although it's the foundation of everything, you know. But at end of the day, you need to enjoy what you do. And so in 2020, we pivoted towards commercial properties.

Aviva (07:47)
Thank

Stewart Heath, CPA (07:56)
which is funny because that was the year of COVID. But we in the South, I'm in Tennessee and primarily Alabama, we kind of pretended there was no pandemic from about June of 2020 on. nobody was staying home and most people kept going to work. outside of our downtown areas, there really wasn't any problems with offices, especially medical office. I liked

Aviva (08:17)
Wow,

Stewart Heath, CPA (08:19)
I sort of found a niche in suburban office, what I called it, outside of central business districts and city centers. Those usually have consumer facing tenants. They're like your state farm agent and your mortgage company and your dentist. From there, we've pivoted to medical office buildings and people go, office?

Aviva (08:24)
Hmph.

Stewart Heath, CPA (08:43)
They start running and screaming and say, hey, you know, and medical office nationwide has not had any hiccups. It's just this major subcategory of the office asset class that has had no hiccups. And that's because your doctor's not going remote and he ain't coming to see you. So, you've got to go in there and go through the big MRI machine and they're not going anywhere. They've spent a half million dollars on there.

Aviva (08:50)
frame.

Stewart Heath, CPA (09:07)
office build out and they're going anywhere. And medical office is still very competitive. We grab them, we compete on them every time we like the numbers and we only get about 25 % of the ones we do because the investors know that these are hugely stable assets. So that's what we've done and we're very boutique about it.

Aviva (09:23)
Sure.

Stewart Heath, CPA (09:28)
We closed our first deal under Harvard Grace, it's capital, just about three years ago from today, end of January of 22. Since then, we've done five deals. Most of them, our motto is boring is beautiful. We love boring stuff. And that means they're all stabilized. We're not doing development. We're not doing crazy interest rate hedge deals. They're all fixed rate mortgages.

And we try to boil it down where the only risk you have is vacancy, which nobody can eliminate. And we turn a lot of properties down because we don't like the tenant mix. Because as a landlord, you're in the business of whatever business your tenants are in. so we kiss a lot of frogs. In 2024, we underwrote over 240 deals.

Aviva (10:07)
Yep.

Stewart Heath, CPA (10:19)
We won three of them and closed one. But our main goal is to provide stabilized and growing cash flow to our investors. And the religion that I got from my crash and burn was that we won't do more than a 70 % loan to value. We will have 12 months of reserves. And we build it in and that

Aviva (10:21)
Wow.

Sure.

Hmph.

Smart.

Stewart Heath, CPA (10:44)
actually hurts returns because we have a lot of cash that just sits there. But if every tenant left the building, we can pay the mortgage for 12 months while we figure out what to do. And the reason I came up with 12 months is because if I had had 12 months of reserves, I would still own some of the assets that I had in 2009, but I had none.

So the religion that I got was all about reserves and just because you don't know what you don't know. that's, when you think the economy is fine and it's gonna keep on going, that's when you need to be scared. So.

Aviva (11:21)
What do you think about 2025 when you talk about, when we look at the economy as a whole?

Stewart Heath, CPA (11:27)
I am very hopeful about 2025. I will say several months ago, I thought it was gonna be a bit hotter than it looks now. I don't think interest rates are really going anywhere. I think they've come back to a reasonable level. I think the Fed was way too late at raising interest rates in the most predictable inflationary time in my lifetime.

Aviva (11:35)
Hmm.

Stewart Heath, CPA (11:52)
And they should have been raising rates from Q4 of 2020. They really waited to, was it early Q2 of 22? Because I closed my first deal at a three and a quarter percent rate fixed for 10 years. And then 60 days later, that same deal would have been four and a half.

Aviva (11:56)
Yeah.

Mm-hmm.

Wow, good for you.

you

Stewart Heath, CPA (12:19)
And

then they raise five times in basically a year and half. It's like, yeah, that's too fast for anybody. But they have certainly engineered a soft landing. I don't necessarily think they should raise. I look at the labor market stats last week. We have a very healthy labor market. Inflation is still a problem.

Aviva (12:38)
Hmm.

Stewart Heath, CPA (12:46)
What does that mean? I think we're sort of in a stable-ish time right now. So there might be balance between buyers and sellers. And, you know, I'm closing two deals here in the next three weeks and our rates are at six and a half and six point six five. And I'm like, hey, I'm old. My first house was nine point seven five. And I'm just like six and a half, baby. I'll do that all day long. I mean, that is a very nice rate.

Aviva (13:11)
You

Yeah.

Stewart Heath, CPA (13:16)
And I think the expectation that we're going to get back down into the fours and fives is a bit unrealistic.

Aviva (13:23)
I had to ask just because

Stewart Heath, CPA (13:25)
Sure. I've got opinions, you just ask.

Aviva (13:26)
Now, you know, I want to talk about everybody's favorite topic, taxes. Can you explain to me if I was a fifth grader, the tax benefits of owning real estate? Yes.

Stewart Heath, CPA (13:39)
Sure.

Any specific piece of real estate

Aviva (13:43)
We'll say commercial, income producing commercial, correct.

Stewart Heath, CPA (13:45)
Okay. Income producing. Okay,

all right. So there are multiple benefits of owning, tax benefits of owning real estate. First of which is called depreciation. Depreciation means that whatever you pay for your asset, you get to deduct from your taxes over a period of time. Now, how fast you get to deduct it depends upon many factors. We won't cover that right now.

But if you buy a building, you're going to get to depreciate some of it over five years and the rest of it over about 30. That piece that you get to deduct over five years will almost guarantee you you're not going to pay tax on the income from your real estate for that five year period because those deductions will be enough to offset the income. Sometimes

that depreciation will let you offset income from other pieces, but not always. That depends upon other things going on in your tax return. So that's benefit number one. Benefit number two is the deductibility of interest. And you can deduct the interest that you've used, that you've borrowed money on to buy the real estate. So all of that, and that's not really true in any other investment.

You can use, if you're buying stocks and bonds, you can borrow against those to buy more. It's called a margin loan. And then you pay interest on that. That interest expense might be deductible if a whole bunch of other things come to pass. But usually it's not if you're a upper income person. But it's absolutely 100 % deductible when you're buying real estate.

Aviva (15:03)
Hmm.

Hm.

Stewart Heath, CPA (15:26)
The other thing about real estate is you can borrow against the value of your real estate. Let's just say you bought it for $100,000 today. Five years from now, that piece of property is worth $200,000. If you want to go borrow some money, can borrow just say $50,000 against that. You take that out and go do something else. Maybe you take a fabulous vacation or you go buy another piece of real estate. That's tax free. You don't pay any taxes on pulling that money.

out of that asset to go do anything with. So those are really the top three benefits of, tax benefits of owning real estate. It's really the most superior form of investment that there's ever been. Wall Street will call us alternative, but maintain that this is the oldest asset class in the world since God made it. So, and really since some caveman let another guy use his

spare cave for two goats a week. know, mean rental property has been around forever.

Aviva (16:30)
My family motto is buy, never sell, party on the profits. So I didn't make it up. just get to play by the rules.

Stewart Heath, CPA (16:34)
Absolutely.

Yeah,

yeah, we are, that is our philosophy too. We're really buy and hold forever. Refinance as often as possible which makes us very different from many other shops around which are trying to turn deals every four or five years because we're not really transaction based. We're investors with our investors and we're living off the cash flow.

Aviva (17:00)
Hey, it's a good way to live. What did I hope our manager doesn't hear this podcast.

Stewart Heath, CPA (17:02)
It is. It is. Unless you're the manager.

Well, it's just, know, they're the ones that are making it all happen. see ya.

Aviva (17:15)
Hey,

we all need each other. We all need each other. What advice do you have for any aspiring investors?

Stewart Heath, CPA (17:18)
We do.

I think the biggest difference between people who aren't successful and people who are not is that the successful people took action. It doesn't mean they were right. every entrepreneurial person will tell you all the mistakes they've made along the way. And frankly, I could fill volumes with mine.

But frankly, we learn from our mistakes and you don't generally make that mistake again. But unless you do it and make the mistake, then there's no learning and then there's also no confidence building. Now, that said, you don't gamble everything you got in the one action, you take prudent actions and steps forward. My very first deal was a $55,000 duplex in the hood.

Aviva (18:13)
Wow.

Stewart Heath, CPA (18:15)
I put down $5,000 and got the seller to carry a note for $50, and paid him off about three years later when I refinanced it, took cash out and bought another piece of property. And I wish I still had that property because it was hardly any maintenance. It was just old block building duplex. And we actually did convert it to a single family residence and then sold it for quite a bit of money little bit later on.

Aviva (18:26)
Wow.

Hmph.

Stewart Heath, CPA (18:42)
I mean, that was one of the biggest advantages to keep in mind about real estate is it's so leverageable. We talked about borrowing money against it, but if you want $100,000 investment, you probably need $25,000, because you can borrow the rest. It's leverageable, and that actually enhances your returns over time. So to your question, and not trying to be flippant, if you're aspiring, get started.

Even if today the only thing you do is you go find some YouTube channel or some other printed resources and start learning. And then continue the learning every day or every week until you're confident to take the next step. And the next step from there might be contact a real estate agent and tell them you're looking for investment properties. And whatever those steps may be.

Aviva (19:16)
Yeah.

Hmph.

Stewart Heath, CPA (19:31)
There's plenty of resources. There are some fabulous podcasts like this one that have a lot of knowledge that's shared at no cost. So that's my advice.

Aviva (19:40)
Yeah.

YouTube University and the beauty of the World Wide Web.

Stewart Heath, CPA (19:46)
It is, yeah. Did not have that when I got started, so.

Aviva (19:50)
Yep,

it's a game changer to say the least. Stewart, what makes you happy with what you do at Harvard Grace Capital?

Stewart Heath, CPA (20:00)
do love what I do, just for the record. I love, and I got to do this this week because we pay quarterly, I love sending money to my investors. And it makes me sad when it might be a little behind plan and we had one of those properties that was a tad behind plan. And today I'm pushing out...

our investor I've already sent them the money, but our reports come out monthly. And then I explain all that, but really I love sending out the money. And that gives me a big high. I like walking my properties. I like finding new properties. I'm a bean counter by trade, but I'm a dirt guy at heart. And I love going around and...

Aviva (20:32)
Huh.

Hahaha.

Stewart Heath, CPA (20:42)
making plans, all right, there's a dead bush, we gotta dress up the landscaping. I love making the properties look as good as they can possibly look because frankly, that has a direct relation to rental rates. If property looks good, people will pay more to be there. And they have confidence that you're gonna keep it looking good. And frankly, when we're looking for properties, we're looking for properties that can be easily made to look better. They're probably mismanaged.

We're not looking for things with physical problems. I'm looking for things that have been mismanaged and like with bad leases, know, the person that hasn't raised their rates for 14 years or whatever it's like. And they think it's worth this when it's really worth this, you know. Those are the things that make me doing the deals and paying the investors. That's what makes me happy.

Aviva (21:38)
Hey, I love to hear it as someone who runs a syndication. I get it. I have to go into the office to sign checks after this and our investors are thrilled.

You know, nobody ever wants out of these investments because you buy right, you do good by your tenants, you do right by your investors, and everybody can do well, thankfully, in this business as you figured out.

Stewart Heath, CPA (22:05)
Yeah, mean,

to me, gets biblical, doing to others as you would have them doing to you. And it's like, we try to treat everybody right. That's sort of our MO. We honor everybody, and from the tenants to the vendors to the investors, and most of the time that works out right. There's always somebody who won't be happy, that's usually not because of anything that we did.

Aviva (22:28)
Stewart, I really appreciate your time. Where can I appreciate your time today on the show? Where can the listeners find you follow you contact you etc.

Stewart Heath, CPA (22:40)
Okay, we are in the usual places, LinkedIn and Facebook. I don't know those handles. But we're there. My daughter actually handles all of my media for that. And we put out a lot of content out there. The best place to get to me is harvardgrace.com. You can find my Calendly link there and I do invite anybody and everybody.

to book some time with me and I can talk real estate all day long. I like talking to new people. There's also free resources there. If you're thinking about investing either passively or actively, there's some checklists there of things, questions you need to ask. It's a really great resource that we wrote a few years ago and there's dictionaries and sort of encyclopedias of terms and other things like that. We also have a

a product, it's one of my favorites, one we created called an Anatomy of a Syndication, which, a lot of people don't know what that term is, just a fancy real estate professionals term for, we're gonna get a group together and we're gonna buy some real estate. just tell you about how it works, about the timeline and you know, a good one usually takes about six months to get done. but yeah, because we've been working on it probably.

Aviva (23:45)
Hmm.

Stewart Heath, CPA (23:49)
90 days before the investor ever hears about it. But find us at harvardgrace.com.

Aviva (23:52)
Sure.

HarvardGrace.com. Stewart, thank you again for being on the show today and for everybody listening. We'll see you next week.

Stewart Heath, CPA (24:00)
Thank you for having me.