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If you are interested in real estate investing innovative platforms can provide access to higher yielding interest income than traditional brokers. New technologies and regulations have made way to source these higher yielding securities, one in particular being opportunity zones with tax incentives. You can defer capital gains through opportunity zone properties. If you are willing and able to take a long-term investment approach you can get this incentive through qualified opportunity funds (QOF).

Commercial Real Estate

 In part 1 of this series we explain the market, in part 2 we provide a list of top platforms, and here we go into detail on the incentive programs and where to find them. 

Alternative Investment Platforms: Real Estate

Real estate lending platforms apply due diligence to find strong loans. They use filters, algorithms, and data analytics to select specific loans. They screen loans for a favorable Loan to Value ratio. In real estate finance, properties with a high equity balance (property value exceeds loan balance) have a desirable lower Loan to Value ratio. Loans can be offered as private debt secured by real estate assets. To help you mitigate the risk of losses, find first loans with seniority in the event of a borrower’s foreclosure (not riskier second loan financing).

Funding platforms offer, and focus on, different investment classes like debt and equity. Debt investors are lenders, and have different ownership rights in the property than equity holders. Equity investing provides ownership or shareholding rights of a property, but holding periods can be shorter for debt. Shareholders can be rewarded through retained earnings with a downside of a risk of default by the team raising the money. An equity investment has a claim on the assets of the fund after the debt holders. Convertible debt is a loan that can convert to equity under certain conditions. It's a hybrid security with debt and equity-like features.

We continue to see equity offerings for real estate on the equity funding focused platforms we cover. Due to rapid development of of these funding portals and technology shifts we expect to see greater investment in real estate offerings over high growth business equity offerings, which we focus on.

What are Opportunity Zones and QOFs?

The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, creates opportunity zone investing incentives. The intent is “to spur economic development and job creation in distressed communities throughout the country and U.S. possessions by providing tax benefits to investors who invest eligible capital into these communities. Taxpayers may defer tax on eligible capital gains by making an appropriate investment in a Qualified Opportunity Fund and meeting other requirements”, according to the IRS. An IRS FAQ explains the concept in detail and includes a link to find available opportunity zone parcels. A percentage of capital gains rolled over within 180 days is deferred. The percent depends on the number of years an opportunity zone property investment is held.

Qualified opportunity zone property investing is almost as good a gift as the 1031 real estate exchange. 1031 defers income taxes on gains from qualifying real estate sales. To prevent being caught starkers (defined as naked in the Urban Dictionary), read on. Limiting your knowledge could be a risky option.

Does this add another level of diversification to portfolio investments, reducing risk?  Think about it from the view of an investment overlay manager. Consider your portfolio investments held at different sources. Decide whether you would be meeting your portfolio diversification objectives either yourself or with a Chartered Financial Advisor.

Source Opportunity Zone Property

Fundrise, Wells Fargo and Preqin are helpful resources to find these investments.  Fundrise ranks “The Top 10 Opportunity Zones in the US”.  Wells Fargo Bank is a leader in reconstruction loans. It addresses qualified opportunity zones in a wealth planning update article. Existing properties must include eligible improvements equal to the original investment amount. These property improvements impact both sides of the loan to value ratio.  Preqin reports the status of qualified opportunity zone funds (QOFs) investing in insight articles. Preqin’s report, “Opportunity Zone Funds: Investors Waiting in the Wings”, presents survey statistics.

What is Next?

Real estate investment platforms provide portfolio diversification. Some online platforms help source qualified opportunity zone properties and we expect more to follow. At Fund Wisdom we have focused on alternative investing platforms offering equity in startup companies. We showcase ratings, data, and investment offerings across a set of vetted platforms. We have observed a rise in real estate being offered on these platforms. With this rise we have begun to expand our research into real estate. Since we do not specialize in this space we still have some questions about the opportunity at hand:

  • Would lenders on QOF fund real estate loans want to resell those loans directly to real estate lending platforms?
  • If yes, is there a financial incentive for the QOF’s involvement?
  • Can it find information on the existing lender without involving the QOF?
  • Would including qualified opportunity zone property loans improve opportunities for debt investors?
  • Is risk mitigated or increased for investors?
  • QOF investors are long-term investors in the property. Value increases with renovations, proper maintenance, and increased economic prosperity in the community.

Let us know your thoughts in the comments below.

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