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Opportunity Zone Investing?

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  •  Dont_know_mind 
    Participant
    Status: Physician
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    Earnest refinancing bonus

    There are times when the government does actually give you money (in terms of a direct handout or tax discount in that year) to invest, but this usually only occurs during a recession or in the aftermath of a recession. That is free money and worth taking. There were good incentives to invest during the GFC (if you had the funds).

    This does not sound that attractive to me.

    #171561 Reply
    hatton1 hatton1 
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    Status: Physician
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    Joined: 01/11/2016

    What fund are you specifically looking at Wonka?  I have lots of cap gains.

    #171566 Reply
    wonka31 wonka31 
    Participant
    Status: Physician
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    There are a bunch coming.

    Here’s one that may be worthwhile currently:

    https://origininvestments.com/qoz/

    There’s a brief webinar if you are interested. Origin has a pretty decent track record including through the 2008 debacle.

    #171582 Reply
    Liked by hatton1, Zaphod
    wonka31 wonka31 
    Participant
    Status: Physician
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    hatton1-You May be the perfect person for this given your high capital gains. I have a fair amount, not nearly as much as you. As long as you’re ok with illiquidity for around ten years, it makes sense.

    Also, there’s a decent chance this gets extended past 2026 if it’s successful. I suspect it will be viewed as a successful government program given some of the opportunity zones in the cities I’m familiar with. Some of them are simply not in rough parts of town or already have been ‘up and coming’.

    #171594 Reply
    Liked by hatton1, Zaphod
     CREGuy 
    Participant
    Status: Other Professional, Spouse
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    Joined: 01/16/2018

    I can’t believe how overhyped OZs have become.  The reality is that these investments shouldn’t be considered by the vast majority of people.  There are three reasons:

     

    First, most of the zones are in areas where you would never even consider, for good fundamental reasons.  There are a handful of locations where there is some traction and upside already in place, but the majority of the zones are places where you wouldn’t even have glanced at prior to this program.

     

    The biggest factor however is that unless BOTH of these prerequisites are met, then the opportunity is a non-starter:

    A) You already have or will have to pay capital gains tax (with no other way to shelter it, i.e. not from another property sale because you could just do a 1031 and not have all the restrictions)

    AND

    B) The investment you’re pursuing in the OZ would make financial sense even without the CG shelter.  CG tax is pretty low, so saving 15-20% really shouldn’t move the needle on a project much, especially with all the restrictions that come with it.

     

    Considering that OZs aren’t typically in areas that would normally attract capital (for good reasons), that means that B is extremely rare, then to throw A on top of that, there really shouldn’t be nearly the interest that there is in OZ investing.  That’s not even touching on the pretty onerous restrictions to fully qualify (10 years of illiquidity), just to save fairly paltry CG taxes.

     

    That’s not to say that there aren’t a handful of projects that make sense out there and a handful of people that they make sense for, but the vast majority of people who act on these are probably stepping over dollars to pick up pennies.

    #171621 Reply
    wonka31 wonka31 
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    CREGuy-you are correct. The tax benefit should be icing on the cake and not the reason to invest. If you have a legit sponsor, you can likely find A and B.

    #171630 Reply
     CREGuy 
    Participant
    Status: Other Professional, Spouse
    Posts: 31
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    CREGuy-you are correct. The tax benefit should be icing on the cake and not the reason to invest. If you have a legit sponsor, you can likely find A and B.

    Click to expand…

    Well A has nothing to do with B.  Either you need the CG tax protection or you don’t.  If you don’t have a need to sell another asset that would trigger CG tax, you shouldn’t do so just because you can invest it in a OZ and avoid the CG tax (that wouldn’t exist if you didn’t sell it in the first place).

     

    As for B, I’ve looked at every OZ in my state and 95% of them aren’t even worth an ounce of consideration, and the remaining 5% may produce 1-3 projects that would be worthy of DD and I’m not sure those would actually be worth pursuing after DD.  Point being, that the opportunities that fall into category B are very few and far between.  If you’re insistent on pursuing something, I would be extremely wary of any OZ “fund” and would only commit to specific projects.  The issue being that a fund has to put whatever capital comes in to work, and with the extremely shallow pool of viable deals, you’ll be at a high risk of poor returns as the sponsor deploys capital into marginal/poor deals just to put it to work.  That’s not even taking into consideration the geographic limitations of finding the already sparse deals. How good is your “sponsor” based in FL going to be at finding opportunities in Minnesota?  Because as thin as the deals that qualify as “B” are going to be they will be very hard to come by.  IMO most of these deals/funds are purely a fee based play for the sponsor and will have very poor returns.  All to save 20% on cap gains?  Like I said I’m extremely surprised how much interest there is in these, and even more surprised that people who are or have previously been wary about direct RE investment (shunning fantastic tax advantages such as 1031 exchanges) are suddenly so interested in OZ investment because they can save 20% CG by investing in bad projects that will likely underperform and come with a bunch of unattractive strings attached.  I can’t think of a worse scenario than being stuck in a poorly performing asset that’s illiquid for 10 years and my only positive is that I saved a paltry 20% on CG.

    #171669 Reply
    wonka31 wonka31 
    Participant
    Status: Physician
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    Joined: 03/24/2018

    I think the zones vary from state to state. More than 5% of them are reasonable areas in the four states that I know well. I can’t speak to the other 46.

    Obvious if you don’t have CG, there is no value to investing in these unless you think it’s a great investment.

    You seem pretty down on them, which is fine. I don’t think they are the greatest thing ever, but I think there will be value with the right sponsor if you have a significant amount of CG.

    #171698 Reply
     G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1095
    Joined: 01/08/2016
    I think the zones vary from state to state.

    Click to expand…

    I can’t remember if I commented somewhere here about this, but  in my town there is an OZ where I would totally live/work/play.  Sure, there are a couple of shady establishments, but it is rapidly gentrifying.  My first attending home (middle class neighborhood) was walking distance to the OZ and even in the few years since we’ve moved away, there are tons of places to eat, shop, drink, live; I mean, it’s hipster heaven!  Honestly, if I can just figure out how to invest, it is a no-brainer.

    #171702 Reply
    Liked by Zaphod
    wonka31 wonka31 
    Participant
    Status: Physician
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    Joined: 03/24/2018
    Fundrise eREIT

    G-There are three neighborhoods in particular near me that are the same. One place is somewhere I regularly go for dinner with friends who live in the area. There are some other OZ is the same city that are simply unsafe and I think their ability for a turnaround is quite low given the crime.

    #171732 Reply
    Liked by G
     Tim 
    Participant
    Status: Accountant
    Posts: 563
    Joined: 09/18/2018

    https://www.bloomberg.com/news/articles/2018-11-26/goldman-lucks-into-amazon-windfall-chasing-a-tax-break-in-queens

    Call Goldman Sachs, closed $88mm

    Read Kitces:
    https://www.kitces.com/blog/qualified-opportunity-zone-qoz-fund-qof-defer-avoid-capital-gains/

    Opportunity Funds exist, only requires the gains, not the original capital. If anyone reads all of this and the links he provides, excellent side hustle for consulting.

    #171739 Reply
     Dont_know_mind 
    Participant
    Status: Physician
    Posts: 566
    Joined: 11/21/2017

    I think that ‘reduce your CGT to zero’ angle is a great sales pitch. So good that it even has Hatton interested !

    Someone should attach a hefty sales fee to financial planners to ship this in volume soon.

    #171762 Reply
    Liked by hatton1
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 3702
    Joined: 05/13/2011

    I’m watching the Origin Fund (am already invested in one Origin fund) but was considering just for the benefit at 10 years. I don’t really have any significant gains to move in there and have none that I can’t shelter with my tax losses from TLHing this Fall.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #171798 Reply
    hatton1 hatton1 
    Participant
    Status: Physician
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    Joined: 01/11/2016

    I think that ‘reduce your CGT to zero’ angle is a great sales pitch. So good that it even has Hatton interested !

    Someone should attach a hefty sales fee to financial planners to ship this in volume soon.

    Click to expand…

    Yes it is a good pitch.  I find myself “stuck” with a couple of American Funds that I bought in my 30s that have LTCGs around 850-900k.  I do not reinvest any dividends but these gains have become very large due to compounding.  I have donated some of them.  The 10 year illiquidity would be ok.  I tend to be skeptical of things that sound to good to be true and newer alternative investments.  I will read up on these.  Thanks for the links.

    #171990 Reply
     Tim 
    Participant
    Status: Accountant
    Posts: 563
    Joined: 09/18/2018

    @hatton1
    “ I will read up on these. Thanks for the links.”
    Hobbies and exploring new things keep life interesting. From an investment standpoint, how much risk do you NEED to take to reach your goals?

    I think you would enjoy racing drones as well.!

    #172040 Reply

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