Invest in Opportunity Zones through an Opportunity Fund
Opportunity Zones are designated geographic areas that have been identified as low-income census tracts. These census tracts were nominated by governors and certified by the U.S. Department of the Treasury, and now offer preferential tax treatment to those that invest in the specified areas through an Opportunity Fund. Investors can roll their eligible capital gains into a qualified fund and gain:
- The ability to defer capital gains taxes until Dec. 31, 2026.
- A reduced tax payment on original capital gains on a step-up basis ranging from 10% to 15%, depending on the length of time the investment is held.
- A 0% tax on profits derived from the Opportunity Fund if held for 10 years or more.
The National Council of State Housing Agencies (NCSHA) compiled a list of active Opportunity Funds that highlights each fund’s investment focus and targeted geographic location. There is currently an estimated $43 billion of investment capital to be placed across the 8,700 various Opportunity Zones. Some cities, like Erie, Ohio and Los Angeles, California are already stating how the influx of capital commitments coming from Opportunity Funds is resulting in improvements in economic conditions from the development of jobs and affordable housing.
While Opportunity Funds have the chance to make a significant impact on the affordable housing crisis, it is still a relatively new program and the impact it makes cannot be evaluated without further progress. As with any other investment, thoroughly review the Opportunity Fund to assess the quality of its investment strategy before investing, and have a firm understanding of how Opportunity Zones and their tax advantages work.
Invest in affordable housing
Simply building more homes and apartments will not solve the problem. As building costs continue to increase, the average home sales price or rental rate rises with it. Acquiring the land or property for cheap while keeping capital costs, building costs, expenses, and management fees as low as possible are all crucial factors to being able to create affordable housing.
Building new properties is not the only solution. In the third quarter of 2019, ATTOM Data Solutions found that over 1.5 million U.S. single-family homes and condos are vacant, representing 1.6% of all homes. Investors can buy these vacant properties as a distressed sale, which allows flexibility in returns and the option for the investor to provide affordable rental rates or sales price depending on the market area and demand.
Offer rental assistance programs in your rental properties
If you own rental properties, consider offering rental assistance through the housing choice voucher program offered by the federal government. This program, commonly referred to as Section-8 Housing, is funded through the U.S. Department of Housing and Urban Development (HUD) and allows qualified tenants to choose housing in any area, paying the balance of rent that exceeds 30% of the renter's monthly income. Each month the government pays a subsidy of rent to the landlord in addition to the tenant.
With this program, landlords do not have to compromise the rental rate they charge because the tenant will receive rental assistance up to a certain amount. Quality homes can be offered at an affordable price to capable tenants. These programs are very difficult to qualify for and typically have a waiting list that can span over several years. If the tenants do not pay their rent or adhere to the lease, they run the risk of being kicked out of the program. For this reason, turnover rates and evictions are typically much lower than traditional rentals when using Section-8. Landlords interested in taking advantage of this option will need to apply and be approved as a Section 8 housing choice and have to keep up with specific rules and regulations, such as regular and routine maintenance on the home.
Unfortunately, the shortage of affordable homes isn’t going to get better unless significant changes are made. By utilizing some of the strategies above, real estate investors can partake in positive change and help America in its quest for more affordable housing options, while potentially growing their own investment portfolios.