Tag: housing

  • All You Need To Know About Opportunity Zone Investment

    All You Need To Know About Opportunity Zone Investment

    opportunity zone - redline

    Opportunity Zones were established to encourage developers to put money into underdeveloped economies, resulting in increased employment creation and sustainable growth in low-income neighborhoods. Though interest in Opportunity Zones has grown in recent months, there are five things to know about them before investing.

    Key Terms

    Opportunity zones have three key terms to understand:

    • QOZ: A Qualified Opportunity Zone is a census-designated low-income neighborhood that has been authorized by the federal government.

    • Qualified Opportunity Fund (QOF): A Qualified Opportunity Fund is an organization or company created solely for the purpose of investing in a Qualified Opportunity Zone land.

    • Qualified Opportunity Zone Property (QOZP): This refers to real estate or commercial property, corporate shares, or a joint interest in a company that mainly conducts business in a QOZ.

    Benefits of Opportunity Zone Investments

    Investing in Opportunity zones comes with quite a number of lucrative benefits for investors looking to diversify their portfolio. Some of these benefits include:

    • Unrealized capital returns may be invested in Opportunity Zones by any company or person that has capital gains from the selling of an investment asset.
    • Taxation on newly gained capital gains reinvested in an Opportunity Zone is postponed until 2026. (or when the asset is sold)
    • When an investment in an Opportunity Zone is kept for at least five years, the basis of the initial investment is raised by 10%.
    • Additional capital gains produced by Opportunity Zone investments are automatically exempt from capital gains tax if kept for at least ten years.

     

    More information on Opportunity zones

    opportunity zone - redline
    Closeup of man counting payments for home

    1. Opportunity Zones Have Boosted Post-Covid-19 Recovery

    The available data indicates that Qualified Opportunity Funds are well placed to invest in communities in 2020, according to the CEA’s Initial Assessment paper.

    The pandemic sparked a major selloff in the stock market in the first quarter of this year, which most certainly resulted in substantial capital losses for investors leaving a long-term bull market. Despite various State-mandated restrictions aimed at slowing the spread of COVID-19, the CEA claims that capital collected by QOFs increased by around 30% in the first four months of 2020.

    The success of Opportunity Zones prior to COVID-19 shows that the OZ model will help to stimulate economic growth after COVID-19. The federal government has little influence over capital mobilization, encouraging developers to collaborate with local partners to help low-income communities expand and flourish.

     

    2. Enjoy Zero Charges On Capital Gains Tax

    Since the investment base is stepped up to equal market value following a 10-year retention period, any appreciation will be sold tax-free. The true benefit of QOZ investment comes after ten years for long-term investors.

    Consider a $500,000 investment that grows in value over time and is sold after being owned for at least ten years. The whole income would be tax-free if the land valuation rose to $750,000. Of course, owing to the precise financial results of the investment and natural market conditions, profitability is never guaranteed, as it is for any other investment.

    opportunity zone - redline

    3. Opportunity Zone Investments Are Available To Capital Gain Holders.

    Although 1031 exchanges have long favored real estate owners, capital gains on other investments have always been taxed. When the Tax Cuts and Jobs Act of 2018 was signed into law, everything changed.

    Investors with capital gains from other investments, such as stocks and shares, precious metals, a company, or real estate, may now opt to invest in an Opportunity Zone to delay or exclude any of their gains for tax purposes.

     

    4. Opportunity Zone Investments Can Vary Significantly

    Not all Opportunity Zones offer the same level of return as other types of investments. While the prospect of saving money on taxes is appealing, investors should be mindful that an OZ investment may be hiding a risky investment.

    For example, land and buildings in an Opportunity Zone might have already appreciated to the point that incoming investors have less benefit potential. Furthermore, although some QOFs are diversified across industries, high costs may negate most of the expected tax benefits.

    You Probably Should Read These Too..

     

  • How Interest Rates Affect Commercial Real Estate

    How Interest Rates Affect Commercial Real Estate

    The cost of borrowing money or the incentive for saving it is determined by the interest rate. It’s measured as a percentage of the loaned or saved number. When you have a home mortgage, you borrow money from banks. Other loans can be used to finance the purchase of a vehicle, an appliance, or a school.

    Banks borrow money from you in the form of loans, and they pay you interest by using the money you deposit. They finance loans with money from deposits.

    The federal funds rate is the rate at which banks lend one another their reserve deposits. However, it may have an effect on other interest rates, such as consumer loans and the cost of funding commercial real estate, affecting land prices.

    Commercial loan interest rates are typically higher than home loan interest rates. Fees such as valuation, regulatory, loan filing, loan origination, and/or survey fees are common in commercial real estate transactions, and they contribute to the total expense of the loan.

    Here we will analyze the ability of interest rates to significantly influence decisions bordering around the purchase or sale of real estate properties.

    Interest Rates and Property Values: Exploring the Connection

    One tool used by developers to calculate land prices is the income technique. The Net Operating Income (NOI) of a property is calculated by subtracting regular operating expenses from real or forecasted property income.

    After determining the NOI, developers deduct the cost of borrowing from the NOI to estimate the property’s Net Cash Flow (NCF). NCF should also be thought of as the funds left to owners at the end of the day after management and interest costs have been deducted. In several ways, NCF is close to dividend distributions from securities.

    real estate-redline

    How Do Interest Rates Affect the Financial Performance of Commercial Real Estate?

    The use of positive equity is one of the advantages of investing in commercial real estate.

    Consider the case of purchasing a property with a 6% limit rate and a 3.5 percent borrowing fee. A yield of 2.5 percent is produced by the difference between these two metrics (also known as the “spread”).

    Here’s an example of how to use the income method to calculate the investment’s financial performance:

    The cap rate on a property with a market valuation of $1 million and a NOI of $60,000 is 6% ($60,000 NOI / $1 million market value). The corresponding NCF is $25,000, and the yield is 2.5 percent ($25,000 NCF / $1 million market value). ³

    Other future advantages of real estate investing that this 2.5 percent yield does not account for include land loss and a likely rise in property market value. Even without these considerations, the 2.5 percent yield, in this case, exceeds the actual 10-year Treasury yield of 1.5 percent.

    commercial real estate - redline

    Interest Rates Can Tip The Scale Significantly

    It’s enticing to assume that lower interest rates would lead to higher yields and property prices. Since debt service rates decrease as financing becomes less costly, potential cash flows will improve assuming landlords pay the same amount of rent.

    Interest rates, on the other hand, cannot be seen in isolation. Since interest rates are tied to other economic factors, the potentially beneficial impact of declining interest rates can be reduced – or even removed.

    Slowing economic growth, the continuing trade war between the US and China, and persistently low inflation were among the reasons the Fed weighed when cutting the wage, according to the New York Times. The New York Times also reports that Fed officials were split on whether or not to lower the interest rate, citing the healthy labor market and low unemployment as arguments to maintain existing interest rates.

    You Probably Should Read These Too..