Sounds like the perfect have your cake and eat it too scenario. With new tax law changes in 2017, you can finally do just that — diversify and change your risk while keeping your rate of return as good or better. On top of that, all growth on your money would be tax free.
Multifamily Real Estate Investment
Any investor can seriously build their wealth and add more diversity to their portfolio by investing in multifamily real estate. Most of us have a goal to accumulate a higher net worth.
Why then would multifamily real estate be a high-impact investment strategy for you to use?
A home has always been and will always be a necessary expense. Other types of real estate investments can be impacted by changes in consumer demands, but people will always need a home. For any investor, this keeps demand high, and with population growth in the U.S., we are far behind current existing demand.
Fewer People Buying Homes for Multiple Reasons
In 2018, homeownership fell to a record low of 64%. People continue getting divorced, and as this happens, housing demand rises. An affordability gap continues to widen. Between mounting student debt, credit card debt and cost-of-living increases, many people can’t afford the down payment needed to purchase a home. There is also fear of another housing bubble. These issues and more add up to additional long-term renters.
There are more types of loan options available for multifamily properties than any other commercial property type. Banks, life insurance companies, debt funds, Fannie Mae and Freddie Mac all have many vehicles to finance multifamily property investments with strong leverage, reasonable rates and term flexibility.
So How Does Your Money Grow Tax-Free?
In 2017, the tax law changed to open a new investment vehicle called Opportunity Zones. This invested capital gains into certain designated areas in the United States, which allows investors to grow their investment without paying any tax on the initial investment growth. The money must be invested in the Opportunity Zone for at least 10 years to grow tax free – and tax-free growth makes a huge difference to an investment. The money you would normally pay in taxes remains invested and continues to grow, making comparable investments pale in comparison. This is a great discussion for your CPA or tax advisor.
For a simple illustration, compare a capital gain investment into a real estate fund vs. a stock investment. We will only consider federal tax amounts. We will invest $100,000 and grow both at 10% for 10 years and see how the stock investment falls behind. Since both investments are coming from capital gains, there would be taxes due. The stock investment would pay $23,800 in federal taxes, leaving $76,200 to invest in the stock market. The new law allows for the tax can to be kicked down the road for an OZ investment, leaving you $100,000 to invest and pay the tax man seven years from now.
Both investments will be placed one time and assumed to not be bought and sold over and over, thus we will have no additional taxes during the process. In year seven, the stock portfolio has grown to $148,993 and no tax is due. The OZ investment has grown to $194,872 and has a tax bill due in year 8 of $20,230.
Side note, the tax that is due is reduced from the original tax amount due as part of the 2017 tax reform.
In year 10, both portfolios are again sold. The stock portfolio is worth $197,643 and has a tax bill due of $28,903, leaving an ending balance of $168,740. The OZ investment is worth $235,944 and has no tax bill. Now the equation that shows you can have your cake and eat it too: $235,944 – $168,740 = $67,204
An increase in return of $67,204, with less risk into a product with extremely high demand.
Daniel Fullmer is director of investor relations at Galena Opportunity Fund. Contact him at (208) 202-2504 or firstname.lastname@example.org or go to www.galenafund.com for more information.
Learn more at the IBR’s expert forum Opportunity Zones Part 2: Taking Action scheduled for 3:30 to 6 p.m. on Sept. 24 at the Inn at 500 Capitol in downtown Boise. To register, go here.
This article is sponsored content provided by Galena Opportunity Fund.