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Earning Passive Income with Private Real Estate Investing

Episode Summary

Earning passive income through private real estate investing.

Episode Notes

Laura interviews Denise Piazza, CPA from One Street Capital, about earning passive income through private real estate investing. 

Money Girl is hosted by Laura Adams. A transcript is available at Simplecast

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Episode Transcription

Hey everyone, thanks for joining me this week. I'm Laura Adams, a personal finance author who's been hosting the Money Girl podcast since 2008 with over 42 million downloads. Here on the show, I cover a wide range of personal and small business money topics like building credit, dealing with debt, Investing for retirement, owning real estate, taxes, insurance, money management strategies, and lots more.

I would love for you to subscribe to the podcast if you haven't already. Also, let me know your money questions or comments. A lot of the shows Come from your ideas and your questions. You can leave a voice message by calling 302 364 0308 or send me an email using my contact page at lauradadams.com.

Today I am super excited to be joined by Denise Piazza. She's a CPA and managing partner of OneStreet Capital, which is a private equity real estate firm. She's one of my favorite real estate experts because she Really understands investing at a very high level. Um, she's an expert in private real estate investing, which is also called syndication, which is basically when you invest with a group of professionals.

So instead of investing in a property that you pick out and you know, you buy on your own. You let an experienced team of professionals find profitable deals on your behalf. Denise has a really impressive background. She's worked in real estate, accounting, finance, risk management for over 20 years. She's had finance and accounting roles with top Fortune 100 companies and managed over a billion dollars in acquisitions.

Joint ventures and asset dispositions, making her a genuine expert at analyzing data and developing financial models. She's been involved in over $300 million in real estate transactions as an angel investor, general partner, and limited partner with thousands of units, and she's raised millions of dollars in private capital.

Additionally, Denise has served on the women's leadership and risk management committees. of Fortune 100 companies. So whether you're brand new to real estate, you want to become an active investor, or you prefer earning passive income while somebody else handles all the details, don't miss this episode.

Denise has incredible amounts of wisdom and experience to share with us. Here are a few of the topics we cover. 

So please enjoy this interview with Denise Piazza. 

Laura: Denise, welcome back to the money girl podcast. 

Denise: Thank you for having me, Laura. I'm excited to be here again. 

Laura: Yeah, I am so excited to talk to you about real estate. This is one of my favorite topics. I know many people in the audience are really struggling with, you know, how to get into the real estate market. Should they buy a home? Should they buy an investment? It's, there's a lot to think about. And so I'm really excited because I know you can cut through the confusion and really give it to a straight. So tell the, the audience a little bit about your background, how you got into real estate investing and maybe a little bit else about your professional career.

Denise: Absolutely. So, um, the, you know, the intro resonates with me about struggling to get the best way to get involved. Um, and what makes the most sense for each. person situation. So I'll share a little bit about how I got involved and hopefully that helps, um, folks, you know, understand different avenues that they can take and some of the, um, some of the pitfalls that I experienced and that I'll talk about throughout the show. But, um, I began really working with the real estate industry over 20 years ago, uh, with several of my clients while I was working at an accounting firm. I was preparing returns for some of my highest net worth clients, and I had noticed that one of the common denominators across their portfolios was real estate investments, um, and that was largely due to the tax benefits. So being a CPA, that's something that was, uh, resonated with me, and I knew it was something that I eventually wanted to have in my portfolio. At the time, I didn't have the resources or, um, the liquidity but fast forward a few years later, um, my husband and I who are actually both CPAs. So we say if anyone has trouble falling asleep at night, please call us and we can tell you all about our day. We began to invest in real estate across multiple asset classes we had networks of several clients that had invested in real estate and we purchased single family homes invested in things like triple net lease, retail space and multi-family, which is really just apartment assets. And then more recently we've been focused on the multi-family or apartment investing space. And we started uh several years ago One Street Capital so we could take all of our lessons that we've learned over the past several years Um, from these experiences and investing and provide others with education on determining what, what types of real estate investments there are and what makes the most sense for them with their investing goals. Um, and to really know the right questions to ask before you dive into, um, real estate investing. 

Laura: Yeah, there's a lot to unpack there. Um, let me backup. You mentioned triple net lease. Just explain that for folks who may have no idea what you were talking about. 

Denise: Absolutely. So that's really just, um, a situation when you are, um, when you can be a part owner of a property in which, uh, basically you are only responsible for certain things like property taxes and insurance and your tenant in that property really pays all of the other expenses. You just own the building and you collect passively income from ownership of that building, but all of the expenses around it like the operating expenses, the cleaning expenses and all that other good stuff is the tenants responsibility.

Laura: Yeah, do you think that's generally more typical with commercial Properties, okay. 

Denise: Yes Yes, very typical with commercial properties when a company does not want to own their own real estate, they will, uh, typically, you know, reach out to a company that owns a, that, uh, that may own several properties and lease out that space. 

Laura: Yeah, that's great. I used to own a commercial property, um, that was triple net lease and it was, you know, so wonderful to kind of. be able to walk away and let that tenant sort of make renovations they wanted and kind of handled everything. Um, so yeah, very different from a regular single family home, you know, that you might buy. Um, but yeah, there's, there's a lot to, to differentiate between residential and commercial. So let's talk a little bit about passive income. I mean, I think this is what so many people are looking for. when they get into real estate in the first place. I mean, maybe some people want to actively manage, but I think for a lot of people, um, the idea is that you get to the point where you have very little to do. You have passive income coming from, um, that property. So, explain to us how that happens. How do you get to the point where you can actually have passive income? And maybe it's not that you do, you do nothing, but maybe there's very little involved for the investor to do. 

Denise: Sure. And, um, I agree. I mean, several people ask me exactly what I mean when I say passive income, because there's a lot of different sources out there in a lot of different meanings, but as it relates to real estate, it really just means that you aren't actively involved in managing the property. You make the investment, it's managed by an experienced operator and you collect the distributions and earn the returns. Um, and as you mentioned, there are a lot of different avenues that you can go down to get involved in real estate investing. You can pursue direct ownership and decide to acquire a property such as a single family home, a duplex, and you can become the landlord. Um, this is actually the path that both my business partner and I initially took when we began investing in real estate. Um, what we realized though, after, uh, maybe a year or two years is that it required a lot of upfront capital. Um, It made it difficult to scale because of the amount of upfront capital and that down payment that's required to acquire Um each property and we also quickly learned truthfully that after owning a few single families that uh, we did not want the hassles associated with being a landlord um. So this took me down a path of private real estate investing and this approach involves investing passively with a private real estate investment company um, investing with this type of company can be a great way to get involved in real estate without having to go it alone. Rather than you investing in, say, a single family property on your own, you invest in larger properties along with a group of investors. So, it's private real estate investing when you invest passively you don't have to deal with the burden that I mentioned of, of tenants and those middle of the night phone calls that you can get even when you have a property manager involved. So through each investment, you really get to tap into different real estate markets and opportunities that would otherwise be unavailable to you as a single investor and by investing in these properties with the group and with the private real estate firm, you can get access to the types of institutional quality properties for a smaller percentage of the costs, meaning your investments.

Laura: Yeah. So thanks for explaining that. So it's kind of like they're different levels of investing depending on how much work the individual wants to do or doesn't want to do. And just like you, I've, I did the same thing. I invested in a lot of single family homes, tried to manage them myself, you know, got frustrated, turned them over to a manager and, you know, the manager did a pretty good job for, for a while. But it, it is, you know, once we moved out of state and then where we're, you know, really far away from those properties, it felt a little more unmanageable, and, you know, having that kind of burden of, “Oh my gosh, is the manager doing everything? I can't go by and put an eyeball on that property and actually see it.” So yeah, there are a lot of considerations. You know, when you're talking about private real estate investing, so that seems to me the most passive of all the options that you could get into real estate. Talk to me about the tax advantages. Are they still as good if you are in a private real estate you know, in a membership or with a group of people versus doing it on your own?

Denise: Yes, that's, so that's a very common question that we get they are, there are still significant tax advantages when you compare your different types of portfolio income. So the beauty of investing in assets like real estate is that it can actually lower your tax obligation rather than increase it. Just like some other vehicles may increase it like stocks or mutual funds because of this, strategy and the most beautiful thing within the IRS code. And one strategy that very wealthy investors use to reduce their tax liability, is to invest in assets that benefit from this, uh, tool within the code with that I mentioned called depreciation and the best way to think of depreciation is really the as an example would be the value of an asset the decrease in the value of an asset over time. And that example that probably rings true with most people is the value of your car decreases as soon as you drive it off the lot real estate Is a, a, an asset that benefits from this power of depreciation. So the value of real estate increases or appreciates over time, but the tax basis is decreasing as the property depreciates. So additionally, you can earn cash returns, um, in the forms of distributions and the tax on amount on those distributions is deferred because of this concept called depreciation. So it means essentially your tax on those earnings are offset by the paper losses from depreciation. And the other beautiful concept that was, is you can take advantage of even in passively owning real estate, is deferring your obligation when the property is sold. So deferring your tax obligation on those earnings through something called a 1031 exchange or a lazy turn 1031 exchange, which all you really need to know is that you're kicking the can down the road and you get to hang on to more of your income for a longer period of time. And because of concepts like the time value of money, that's really important to investors is to hold on to as much of your wealth as you can for as long as you can. 

Laura: Yeah, that's a great way to put it. And I've never done a 1031 exchange. But yeah, the idea is that you are. deferring that tax on that gain, putting it in a similar property. And there's a lot of regulations about how quickly you need to do it. And the property's got to be similar and all of that.

So it gets, it gets a little complex. But yeah, real estate has some pretty unique tax advantages that you're not going to find really in any other type of assets, so it is something that, um, you know, can be quite beneficial if you're using it the right way and you understand how to use it the right way. So, Denise, given where we are with, Mortgage rates right now, interest rates still, you know, relatively high. We don't think they're, um, going up a whole lot perhaps, but maybe they're not going to be coming down too quickly either, um, depending on what, what happens. Do you think now is still a good time to invest in real estate? Is there anything that people should be thinking about in terms of waiting and seeing, or should we say, you know what, there's just never going to be the perfect time, and maybe we just need to do our homework and, you know, move forward if we're interested in this investment. 

Denise: Yeah. So great question. I think a lot has happened over the past year, um, in the markets and real estate. And most people are, are aware that interest rates have gone up significantly. And in fact, um, they went up at a pace faster than they have in over 40 years. So it has caused values of some properties to decline. But what that means for me as an investor is that it represents the best opportunity to buy property that we have literally seen in decades. Investors are actually forecasting that this will be the best year for opportunities since the global financial crisis of 2008. So, there is, you know, some, some advantages to buying a little bit of that dip like they talk about, even as it relates to market and real estate. And additionally, at the heart of the reason why we're so focused on investing in apartments is a major housing supply crisis that has been 15 years in the making. It follows years of under building, across the country in the wake of 2008 financial crisis. The National Association of Realtors actually pegged the shortage anywhere from five and a half million to 6. 8 million units short of housing, um, back in 2021 and 2022, um, and this only worsened during the following two years as the Fed increased interest rates, making it more and more difficult for builders to create new supply of housing units.

So, essentially, you know, it's, it became cost prohibited for them. So the shortage in home supply pair with a growing population and strong demand has relentlessly driven up the cost of housing and created an incredibly strong rental demand and renter population. Young people can no longer afford to purchase a new and are forced to rent for much longer periods of time. That's why we tend to focus our, our sites and our efforts on that type of asset class because of those dynamics that are taking place in the market right now with housing. Yeah. 

Laura: That's really interesting that the apartment. Level is still so, so low. I mean, we know that the inventory of, of all homes is, is not anywhere near pre pandemic levels still, but that it's affecting the apartment communities so much and that there's still so much demand there, uh, that's, it's pretty incredible to think about. So you mentioned apartments, is this a big strategy for you, you know, with your company, one street capital is. You know, is that part of your strategy as a business to really focus on that market? Are there other markets that you're focusing on as well? 

Denise: Yeah. I mean, we are constantly in the, you know, research area, just trying to figure out what is what the market dynamics are, what, where the demand is, um, you know, in addition to apartments, we also have invested in multiple other types of properties, things that, you know, tend to to go with the housing area. So we've manufactured homes because of the housing affordability crisis So these are homes where um, you know, basically you can acquire an entire group of manufactured homes They are much more affordable for folks and they are managed by a third party and again sort of that passive income um in Passive income investment type property for those folks who are interested in not actively managing their own properties, you know, just going back to first of all the risk the reduced risk involved I think back to you know basic fundamentals of what people need to survive and that's food shelter and water. So fortunately, you cannot live on the internet yet so there will always be a need for housing. And when you compare these asset classes, these, um, multifamily and mobile home park asset classes going back to 2008 when the values of of many different, you know, values within the stock market and real estate plummeted. The values in multifamily and these types of, um, housing were the quickest to rebound during that time of financial distress. So that's another big reason why we focus on, in those areas is because of that reduced risk associated with them. 

Laura: So if a listener is thinking, “I really want to invest in real estate. I want passive income and passive participation. I don't, you know, want to go out and search for myself. I don't want to try to be a landlord. I'm really looking at this to do just kind of on the side of my day job. I don't want, uh, becoming a landlord to become my full time job.” What type of capital should they have up front? What kind of savings should they think about trying to create first before they can get into this passive investment opportunity? 

Denise: Absolutely. So when investing passively and in, in private real estate investments, the minimum investment typically ranges anywhere from $25,000 to $50,000 depending on the offering. Each investment is structured a bit differently, but our goal at One Street Capital is to ensure our investors feel, comfortable. Um, so we want them to be able to test the waters before diving in with their investments and understand and, um, you know, know the dynamics associated with them before, um, you know, placing a large investment. So we want them to test the waters before diving in with a significant amount up front. So that's why we typically have, why we're typically structured with a bit lower minimum investments than some other private real estate companies. So our last minimum investment was around 25,000. 

Laura: Got it. And then putting that amount up for this investment, you know, what are the typical returns? I know you can't guarantee anything, but, but what might be a typical return that you've seen, uh, for investors that, that, you know, might be just a guideline? 

Denise: Absolutely. So we target a return on investment anywhere from around 15 to 20 percent annually. We always like to under promise and over deliver, uh, but we treat all of our properties and purchases like we're acquiring a business. Basically our goal is to increase that property properties income so that you can sell or refinance it and return, um, investors capital to obtain that, that yeah, target annual return of 15 to 20%. So um, private real estate investments do offer a lot of strong, um, strong returns, diversification and other, um, tax benefits that we touched on. But those are, you know, those are the goals that we typically target, uh, with our acquisitions. 

Laura: And where are you looking? Is it really all around the United States? Are there, you know, certain types of areas you're looking for? I'm kind of curious what you're vetting a property for when you're, you're doing your homework.

Denise: Absolutely. So we always say that when we're acquiring a property, we are, uh, really acquiring a specific neighborhood. We're investing in that neighborhood. When we present an investment opportunity to. To our community it's because we have spent a significant amount of time And energy researching that market first So we have a few criteria that we look for and the first Is that we look for strong levels of population growth and job growth We ensure there's a sufficient amount of job diversity So you want to be in an area where there's a variety of industries supporting the local economy a strong Job growth is much less enticing if you discover that, uh, most of the jobs are in, you know, one particular area, say they're all in the tourism industry. Then you can see how when an event like COVID took, takes place, it can have a significant impact on your property. So you want good job industry diversification as well a recession or that, you know, that negative news story could impact something like the number of tourists and therefore the job growth and the population trend. So a diversified job market is much more attractive so that a hiccup in any single industry wouldn't affect, um, all of the areas in the market as a whole. And we also just, we look to invest in areas with great school districts, low crime rates. As we all know, that will continue to have and facilitate those strong trends in population growth. Ultimately, those are the types of places where people want to move to. Um, all of those factors that I mentioned are critical to us because. It reduces your overall investment risk. Your property is much more likely to appreciate in areas with these population growth, good schools and low crime. Um, so not only are you increasing, you know, the income at the property, but you're also just investing in that area.And that is going to naturally cause your property to appreciate in value. 

Laura: Yeah, that seems like just really smart, common sense type of filters and criteria that you're looking for. So, I'm curious, Denise, what types of mistakes Do you see, you know, you've been in and out of, of this as a, um, as you mentioned, just kind of on your own initially, and then really getting more sophisticated with your investments. So I'm sure you've seen a lot of people make mistakes. Maybe you've made some mistakes yourself early on. What should folks be watching out for when they're thinking about, okay, I'm going to jump into real estate for the very first time and get my very first property. Um, what are some maybe warning signs to think about? And maybe then you'll tell me some, maybe some things that people should do, um, after they watch out for red flags. 

Denise: Absolutely. So the biggest mistake I see, and I made myself, is in, in real estate investing is an investor only looking at. projected returns on a particular investment and not taking into account some other factors that you should consider when you're investing. So once you know you want to invest in real estate, the next question is, you should ask yourself is really, “how do I know it's a good deal?” And I've invested in multiple properties and many different asset classes, had some great experiences, um, and some not as great. But based on what I've I've experienced throughout the last several years, um, is that there are overall three different pillars that we look at to consider in any real estate investment opportunity. And the first thing that we look at is the market. So investing in the right locations and the strong markets reduce your overall investment risks. So the factors that I just mentioned about, you know, low, low crime, good school districts, strong population growth, all make an investment more attractive. The second item that I would say someone should look at is, is that deal itself and the financial projections that are associated with it. There could be some red flags to be on the lookout for when reviewing some financial data. And return projections and, and the last component really is the team itself.

So this is one, the team is one that often gets overlooked, but it is really so critical to the success of the properties business plan and your overall investment returns. And we have a really great free resources, uh, free resource on our website. Um, OneStreetCapital.com where you can. You know, regardless of what type of investment you are investing in, it's just a list of very important questions for anyone to ask before, um, investing in an asset or a property or anything, um, along those lines. So the, the questions are actually applicable to multiple different scenarios. So it's a great resource. One that I highly recommend people looking at, um, and considering before they make an investment. 

Laura: Awesome. Yeah, I will make sure to put a link to that questions document in the show notes, for folks to refer to. So, okay. So looking at those pillars, um, you know, anything else that. are tips that you have for assessing risk for managing potential risk as people are just out thinking, okay, what's, you know, what's my first step, where should I go? Um, anything that they should think of and how to, um, you know, just kind of, there's a lot of numbers that have to be crunched, right? A lot of numbers. Should they take this deal to their accountant? Should they get professional advice? What are some ways just to make sure that people don't end up thinking, “Oh, this looks like a great deal”, but then yeah, it has way more expenses than they anticipate upfront.

Denise: Right. So one thing that we always suggest to anyone is to ask that particular group for referrals. You'd be surprised at how few people actually do this, but it's such an important part of doing your due diligence. The other concept I would look at is that particular company's track record. Um, what have they done in the past? Um, do they have properties in that area and have they been successful at owning and operating them? So they, if you are, you know, it usually typically track records are disclosed. Um, but if not, you are certainly free to ask and ask them what type of returns they have generated in the past. And again, Again, there's also the, those lists of questions really that I think is a great resource that can be applied to any investing opportunity. Um, and it will help pinpoint those red flags that you mentioned, um, for investors, but again, sort of the referrals, the track record, um, all of those things help. Do that, um, or contribute to that due diligence that, uh, someone should use, someone should utilize before investing. 

Laura: That's great. I'm curious if you have any success stories from your investing network, maybe some great deals or something that just kind of shows the potential of using real estate to generate passive income because that's really the goal here is, you know, trying to make it as passive as possible. Does anything come to mind? 

Denise: Yeah. Um, actually our most recent acquisition, um, and that was, uh, going back to 2023, we purchased, it was a huge win for our investor base and, um, we purchased the properties for around 80 million. Um, it was a set of two properties. Um, and recently we received a third party outside third party appraisal back, which assigned the value of those properties at over $13 million. So, um, it was resulting in over a $30 million of instant equity for our investors. And what I like to think is, is equally exciting is that we just acquired them and they're already distributing close to 8% cash flow. Um, and again, because of the tax benefits that I mentioned, you know, from an after-tax perspective, because we do things like depreciation and, um, all that good, all of that good tax stuff, um, we, you know, all that is. Basically, um, cash, you know, after tax as well, uh, 8 percent after tax. So, and then we'll have our goal when we refinance or sell the property of making that, um, you know, anywhere from a, it's projected to be a 17 to 20%, um, annual return. Um, and one of the reasons why we're able to do stuff like this is because with this particular property, we are, um, We are keeping 50 percent of the units in this in this area, um, as what is considered from a tax perspective, affordable. So you keep, um, you do not, we are not renovating, uh, 50 percent of the units and we are keeping rents, uh, at a targeted level of about 60 to 80 percent of the average median income within that area. Um, and that actually eliminates and allows us to, uh, partner with the, um. Texas Housing Authority and eliminate all of our property taxes for the facility. So if anyone, if you know anything about, um, the state of Texas, which is where we acquired these properties, you know that property taxes are always a significant number. Um, so it, it both serves as a built-in value add for our investors at purchase and also helps to provide that downside padding, um, you know, of, of the value of the property, just simply because of the great, um the great purchase price that we had on them. So it's, it's really been, um, an exciting, uh, period of time. 

Laura: Oh man. Congratulations, Denise. That's super impressive. 

Denise: Thank you. 

Laura: Yeah. And you know, that just goes to show that there is a lot of power in numbers and, you know, having a group and, and knowing a lot more about an area and the tax situation. All of that is a big part of the potential return, um, on that property and on that investment. So you kind of don't know what you don't know, you know, in many cases and having the power of, um, other folks who are doing this for a living, um, is incredibly beneficial. So, you know, that's something that I think the average investor would know nothing about, nor have the ability to get in on, you know, a deal of that size, obviously on their own. So that is fantastic. Denise, is there anything else that listeners should know about, uh, working with you, if they're interested in getting involved in passive real estate investing, um, obviously they can go to onestreetcapital.com. We're going to put a link to the, the resources, the questions and the show notes, but what would be the first step if somebody is interested in working with you or just learning more about the process?

Denise: Absolutely. So you can, um, they can join our investor community, um, on our website, onestreetcapital.com as you mentioned. And once you join, you can access all of our free resources and you'll also get access to our deal pipeline. Um, but for your listeners are, we also created a resource, um, and that's the guide to passive investing in real estate, um, that regardless of, of, you know, whether you just want to educate yourself or get more familiar, you can, um, we will send you that once we, once you sign up for the investor community and you mention, um, Laura or the Money Girl podcast, we are happy to send that to you. Um, and you can always, as another option, you can always reach out to me directly, even if you just have a question or tax question on, on this whole, um, area of investing. I'm happy to help in any way. Um, you can email me at Denise@onestreetcapital.com. So, um, any of those ways, Laura, we, I, we love to chat with, uh, folks. We have a big group, um, and we are, um, always excited to have people reach out with questions or, um, join the community. 

Laura: A big thanks to Denise for joining me on the show today. 

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