Real Estate Investing Basics

The 20 Best Performing Opportunity Zones for Real Estate Investors

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There is a lot of buzz among investors surrounding Opportunity Zones. But what do we know about where investments are being made and how these investments are performing? With 8,700 certified Opportunity Zones to choose from, there is no shortage of opportunity. The challenge is knowing where to put your money.

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What Are Opportunity Zones Anyway?

On December 22, 2017, the Tax Cuts and Jobs Act created a new section of the tax code that provides tax incentives for investments in certified Opportunity Zones through Opportunity Funds. Opportunity Zones are census tracts, nominated by governors and certified by the U.S. Department of the Treasury. Opportunity Funds are investment vehicles that invest at least 90 percent of their capital in Qualified Opportunity Zones. The objective of the program is to promote economic development in low-income areas by offering investors substantial federal tax advantages.

The Tax Benefits of Investing in Opportunity Zones

To qualify for the tax incentives, investors must invest the gains from a sale of a prior investment within 180 days. Only the gain or profit must be rolled into an Opportunity Fund, not the original principal. And only the taxable gains rolled over into an Opportunity Fund are eligible to receive the tax incentives.

calculator with less tax and more tax buttons

The tax incentives can be realized in one of three ways:

  • A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund
  • A step-up in basis for capital gains reinvested in an Opportunity Fund
  • A permanent exclusion in taxable income of capital gains if the investment is held for at least 10 years

Related: Choose Wisely: 1031 Exchange or Opportunity Zone Investing?

The Best Performing Opportunity Zones

Now that we have the backstory on Opportunity Zones out of the way, let’s return to the original question: Which Opportunity Zones are the best performing?

For a couple of reasons, the short answer seems to be, “It is too early to tell.” Until April of this year, when new guidance was released, investment into Opportunity Zones was hindered by regulatory confusion. Many investors felt that a lack of clarity in the tax code could result in an investment that ends up being ineligible for the tax benefit. The new guidance has helped to clarify areas of concern, including the types of businesses eligible for investment.

Another reason it is too early to tell how well Opportunity Zones are performing is that government (IRS) reporting won’t start until 2022. Until then, we’ll need to rely on private sources and anecdotal reports. Although official government data on their performance isn’t available just yet, experts suggest investors look at several factors to assess the potential of an Opportunity Zone investment.

Related: Opportunity Funds Are Knocking—How Will You Answer?

Experts suggest that Opportunity Zones likely to perform above average will be near:

  • Areas that have experienced rapid population growth and neighborhood improvements in recent years
  • Public transportation or where expanded transportation is being added
  • Areas that have very expensive housing
  • Areas experiencing an affordability crisis
  • Major employment hubs and job centers
  • Areas experiencing rapid business growth

Several Opportunity Funds and organizations have produced their top picks for Opportunity Zones.

Fundrise [1], for example, published its list of the top 10 Opportunity Zones in the country with more immediate growth potential:

  1. Oakland: West Oakland, Uptown, Jingletown, and Coliseum Industrial
  2. Los Angeles: Downtown and South Los Angeles
  3. San Jose: Market Almaden, Washington Guadalupe, East Northside, Jackson Taylor, and Mayfair
  4. San Diego: Golden Hill, South Park, and Barrio Logan
  5. Seattle: Beacon Hill and the International District
  6. Portland: Pearl District and Central Eastside
  7. Phoenix: Downtown, Tempe, Chandler, and Mesa
  8. Nashville: East Bank, Five Points, 12 South, and Edgehill
  9. Atlanta: Bankhead, Grove Park, and English Avenue
  10. New York City: Brooklyn

LOCUS [2], a national coalition of real estate developers and investors who advocate for sustainable, equitable, walkable development in America’s metropolitan areas, also created a ranking of Opportunity Zones. Their ranking is based on the walkability, job and housing density, and proximity to centers of economic activity. The top 10 Opportunity Zones according to LOCUS can be found in:

  1. Downtown Portland, Oregon
  2. Downtown Oakland, California
  3. Downtown Seattle, Washington
  4. Center City East, Philadelphia, Pennsylvania
  5. Inner Harbor, Baltimore, Maryland
  6. Downtown Newark, New Jersey
  7. Downtown Detroit, Michigan
  8. Journal Square, New York
  9. Downtown St. Paul, Minnesota
  10. Wilshire Central BID, California

The Bottom Line

While we don’t have any hard data about Opportunity Zone performance, it seems the characteristics of a good real estate investment apply here, just as they do with traditional real estate investments. Because of the buzz around tax incentives, Opportunity Zone investments are attracting outsiders who may be less savvy when it comes to picking a good investment. It will be important for these new investors, as well as the experienced, to look at the merits of the investment in and of itself in addition to the potential tax benefits. With smart investing choices, this program has the potential to benefit investors and the communities in need.

Sources:

[1] https://fundrise.com/education/blog-posts/the-top-10-opportunity-zones-in-the-united-states

[2] https://smartgrowthamerica.org/resources/locus-opportunity-zones-national-ranking-report/

What other questions do you have about Opportunity Zones? Which zones do you believe are positioned to perform well? Why?

Let’s discuss in the comment section. 

Ian Colville is the Managing Partner of CCM Finance. Ian is a native of Minnesota (born in Rochester). He brings both a formal education (BA in Economics and MBA) as well as industry experience to CCM Finance. Ian is passionate about the many opportunities that real estate investments offer for both short-term and long-term financial gains. He is committed to helping local real estate investors turn those opportunities into profits. When not doing real estate deals Ian enjoys – well mostly he enjoys working on real estate deals. But if he does break away he is likely spending time with family or at the gym. Find out more about CCM-Finance and Ian here.

    Nancy Roth Investor from Washington, Washington D.C.
    Replied about 2 months ago
    Agree it's a great program but I concluded it was not a good fit for me, and I believe that same will be true for many, if not most, RE investors. First of all, you only have a 180-day window to invest capital gains from an asset sale. I found that to be too short a time, because the program is so new, and it's very hard to vet individual projects and the Opportunity Zones in which they reside. You may only invest capital gains, not earned or other income. Second, the maximum benefit for this investment does not kick in for 10 years, so your funds are lying fallow, generating no cashflow for a long time. True, you've deferred the capital gains tax over that time, and for some investors with a long time horizon, that might work out fine. But ten years is too long a time for me. Finally, all the Opportunity Funds, including the one Fundrise started for its OZ projects, only accept investments from accredited investors, which limits access for many of us. An alternate approach to gaining some advantage from this great program might be to piggyback on the Opportunity Zone developments, buying adjacent rental property in promising OZs. Although you will not directly partake of the program benefits, you also will not need to meet the stringent requirements of direct investment in a designated OZ project. Still, the right project in the right OZ will turn on a real-estate appreciation escalator in that developing community, from which your adjacent property stands to benefit.
    Lisa Foreman Investor from Richmond, Virginia
    Replied about 2 months ago
    So, unless an investor is selling an existing asset to fund a purchase in an opportunity zone, there's no tax advantage to buying in OZ, right? The comment above implies there may be strategic advantages, but there is no tax incentive? I thought the property could still appreciate tax free if held for 10 years or longer, regardless of the source of funding. Also, I didn't realize investors must participate in a fund.
    Tushar Prasad
    Replied about 2 months ago
    Seems good for those selling stocks (which are at all time highs) and putting the long term gains in QOF. That’s what I have been doing to diversify my portfolio from stocks to real estate. If I owned real estate, I don’t think I would have sold that and invested the gains in QOF. Why would anybody do that against the options of tax-free cash-out refinance or 1031 exchange?
    Isaac Agbolosoo Rental Property Investor from Grosse ile
    Replied about 2 months ago
    How about Detroit?
    Michael Baum from Olympia, Washington
    Replied about 2 months ago
    It's interesting what makes an OZ. For example Downtown Seattle, Beacon Hill and the International district are all quite expensive. I guess it has to do with not only revitalization of an area, but making it more affordable for regular folks.
    Nashid Ali
    Replied 12 days ago
    @michaelbaum "interesting" is one way to describe it. the law is clear it was supposed to be low income areas... the actually state application though is not so much on point. Cleveland is another area with some very nice OZs near Downtown. I think if you want a recipe for OZs in more expensive areas, I would look to OZs specifically near Downtown areas, in between suburban/commute areas and along transits.