Opportunity Zones offer investors tax-deferred status but the risk is high for this untested investment, there are better ways to access the real estate market.
A New Way To Invest In Real Estate
Opportunity Zones are the latest buzzword in real estate investing. Recently introduced by HUD chief Ben Carson Opportunity Zones are areas designated within and by each state to be economically distressed. If certified by the Department of the Treasury these zones are eligible for a real estate development tax-break that could be a once in a lifetime opportunity for investors.
The Opportunity Zone was created as a way for distressed neighborhoods to attract much-needed investment dollars. In exchange for funding, investors are eligible for preferred tax treatment that includes deferment of taxes, reduction of taxes, and avoidance of taxes if portfolio investments are held for at least ten years.
Naturally, because the opportunity for profits is alluring, there are a number of investment funds coming onto the market geared towards these assets. The problem is that the market is new, the funds are untested, and the fees are high. The upshot is that tax benefits are passed on to investors of these funds. The first method is to sell an asset on which you expect to make substantial capital gains. The gains can be re-invested in an Opportunity Zone fund and allowed to appreciate at tax-preferred rates that decline to zero after ten years.
Here Are Five Ways To Invest In Real Estate Without Owning Property
Real estate investment is lucrative to say the least. It is also very risky and takes a lot of capital (and time) the average investor just doesn’t have. The good news is that there are several ways to invest in real estate without owning property that offer many of the same benefits as the real thing.
Real estate is a real asset. Real assets include natural resources, commodities and infrastructure as well as real estate, all assets with an intrinsic value unrelated to their ability to “make money”. A business is valuable when it makes money, a real asset is valuable by itself because it is something we need and can’t live without.
The real question is if investors should still be looking at real estate as we go into 2019 and the answer is a resounding yes. By my estimation the housing cycle has a long way to go before topping out, NOI growth is positive, pricing of real estate relative to other asset classes is favorable, and real estate (real assets in general) is a natural safeguard against rising interest rates.
Real Estate ETF’s – ETFs, exchange-traded funds, are the easiest and most accessible means for investors to access the real estate market. ETFs like the Vanguard Real Estate ETF (VNQ) are passively managed funds benchmarked to an index of real estate assets. ETFs provide liquid markets, low entry cost (VNQ is about $76 per share), and qualified dividends are taxed at the lower 10% capital gains rate. The problem with real estate ETFs is that they are most often benchmarked to an index of REITs which means gains are typically lower that that of the underlying assets. The VNQ is yielding about 6% at today’s prices while many of the REITs in its portfolio are producing returns in the range of 10%.
REITs – REITs, Real Estate Investment Trusts, are special funds incorporated and traded like stock. They invest all their capital in real estate projects ranging from residential to retail, hospitality, healthcare, business, and industrial purposes. REITs tend to deliver much higher returns with lower costs than their ETF counterparts but there is a catch. Because REITs receive tax-exempt status a lot of the tax liability is passed on to the shareholder so it is important to know what you are getting into. The best way to avoid the tax issue altogether is to hold your REITs in an IRA or other tax-sheltered retirement accounts.
Closed-End Funds – Closed-End funds are just like ETFs except they are actively managed by a team of professionals rather than benchmarked to an index. Closed-end funds invest according to strategy and can target any type of investment, not just real estate. Closed-End funds like the Brookfield Real Assets Income Fund (RA) take a unique approach to real estate by investing in mortgage-backed securities. Mortgage-backed securities are products usually only available to large financial institutions, hedge funds, and accredited investors. The Real Assets Income fund allows average investors, those with less than $100,000 of investable assets, access to the private equity markets.
Private Equity Markets – The private equity markets are by far the best way to invest in real estate but there is a catch. Private equity and hedge fund investing is limited to accredited investors, those with income greater than $200,000 or investable assets over $100,000. The good news is that, if you qualify, there are many choices. MRA Capital Partners operates a hybrid private equity fund that specializes in real estate and asset-backed lending. MRA targets value-adding and cash-flow producing projects across the US and is not limited in its scope. Multi-family, student housing, supermarket-anchored, investment-grade retail space, and redevelopment are all part of the package.
Fundrise – Fundrise is one of my favorite real estate investments. It is a crowd-sourced private equity real estate investment platform that offers the ease of equity investment (ETFs, CEFs) with the access and returns of REITs and private equity funds. The only catch is that it is an illiquid market that you must be able to commit too. Investment can be as little as $500 with an expected 10% annual ROI so long as you are prepared to hold each for at least five years. Five years is the investment horizon for the min-funds investors are able to purchase through the platform. The funds are all tailored to a style and region of real-estate investment and targeted either toward income, growth, or both.