Thoughts on opportunity zone investment - cash vs. loan

[John Kwon]

Hi,

I found a property in a opportunity zone area for $130K which I am planning offer $100K. Also, I am planning to spend about $40K for rehab. ARV is about $190K and rental is about $1800 to 1950. This is a 3 BD, 1 Bath, yard, and detached 2 garage about 1900 sqft.

My conundrum is following where I need your input.

Scenario 1:

I have the cash to buy and rehab. I want to eventually BRRRR the property. BUT... I want to take advantage of OP long term tax break. This means that I need to buy the property under my LLC. This will make BRRRR a bit difficult because I have to use commercial loan - which mean higher rate and shorter term. I called local CU and banks, but the terms are not that great.

Scenario 2:

Buy under my name and get BRRRR, but I don't get the OP benefits.

Scenario 3:

Buy under LLC with 25% down and get a loan. Take advantage of OP. But I don't have as good leverage to but the property at $100K and loan terms . This option gives me more liquidity since I will holding on my case.

Thoughts? Thanks.

John

[Mike Roy]

@John Kwon - I would first make sure you understand all the regulations for Opportunity Zones.  Talk to a CPA who understands them.  From what I understand, one requirement is that you are substantially improving the property, which I THINK has been defined as investing at least as much into the improvement as into the acquisition of the property, so $100k purchase and $100k rehab.  I'm not 100% on this, so maybe some educated BP'ers can verify.

Also, I believe another requirement is that the funds used for the acquisition and rehab must be capital gains from another investment of any asset class (stocks, bonds, RE, crypto, etc.).  

I believe the purchase must also be made through an official opportunity zone fund.

Assuming you have all that in order, I would still be careful that you are not letting taxes drive your investment decision.  It is much more beneficial to by the right property in the right market at the right price.

[Tanner Crawley]

@Mike Roy @John Kwon
You do have to substantially improve the property. However, it is not 100% of the purchase price. You can subtract the land value.

So the formula is (Purchase price-land value=substantial improvement amount). It still sounds like the property you have in mind John may not qualify.  

You can also only get the benefits if you are investing capital gains. 

[John Kwon]

@Mike Roy @Tanner Crawley Thank you for your input. Some of the capital are coming from investment gain. We are planning to buy and hold as rental. But, local banks have limited portfolio options for refinancing under LLC unless it commercial lending. Terms were not great even if we wanted to hold it for 10 years. Loan terms would likely eat away our tax break gain assuming that property goes up in value. We decided to go via the traditional route and pay cash and rahab under our name and BRRRR it. We just placed an offer. Thanks again.

[Samuel Sarmiento]

Hey John.  Looks like Rhinebeck Bank is providing financing in opportunity zones.  Rates are cheap at 3.25% although at 5-year terms.

https://www.prnewswire.com/news-releases/rhinebeck-bank-announces-a-3-000-000-loan-fund-for-the-poughkeepsie-innovation-district-in-poughkeepsie-ny-300803517.html%

[Basit Siddiqi]

@John Kwon

You should consult with an accountant before deciding to venture into qualified opportunity zones/funds.

You may have to invest in a fund instead of investing directly with an LLC(unless the LLC has multiple members and self-certifies). Furthermore, there is the requirement to invest with proceeds from sales of capital assets that had capital gains.

You don't want to do all this legwork to find out that it was all done for nothing.