How to make the right opportunity zone investment

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making the right opportunity zone investment

The moment opportunity zones were approved, potential investors began examining those census tracts while thinking of all the financial gains that could come their way. The tax incentives offered in opportunity zone investments seem too good to pass up. However, it is important to invest with prudence.

While opportunity zones have been approved in every state, the IRS has remained silent in releasing all the regulations investors must follow. That can give investors a reason not to be so hasty. It should also compel them to be discerning when choosing a location. Leaping at the chance to take advantage of capital gains tax incentives is not reason enough to blindly choose a location within an opportunity zone. After all, a real estate investment in an opportunity zone is still a real estate investment first and foremost.

This could also attract part-time investors and if novices start infiltrating these areas with rash investments, it may not turn out to be such a dream solution. This type of investor may lack patience, insight and restraint. Making investments based on tax benefits is actually not a smart investment at all.

That doesn’t mean opportunity zone investments are not a worthwhile endeavor. It simply means that investors should not disregard the basic principles of real estate investing. Before diving in with a sizable investment, it is wise to take a closer look at the area. Keep in mind that these census tracts were selected because they are considered to be economically distressed. A few real estate investments are not going to immediately turn things around.

So what should investors look for when considering opportunity zones?

Investments. Every community is going to have other investors trying to make a buck. However, that does not have to be limited to real estate investors. Companies looking to move their facilities to a new area are investors. Existing startups in a certain area are considered investors. And businesses, new and old, are another kind of investors.

If there is a lack of other investors, there may not be much of an opportunity in that zone. That means the capital gains tax breaks may not be able to counter the plight of certain communities. Therefore, investments in certain opportunity zones may not be such safe investments at all.

The premise for opportunity zones was to attract investors so that they will combine forces and grow a local economy. Selling off an investment after a subsequent increase in value would net a lot more money because of capital gains tax incentives. It is this kind of forward thinking that has created such a buzz about opportunity zones. However, forward thinking must also consider the other intangibles that come with investing.

Potential investors need to ask themselves why they are investing? If it is because of the tax breaks, it might not be such a good idea. That would be like buying something just because it is on sale and not because you truly want it. In order for opportunity zones to work, there needs to be calculated investments. Otherwise, investors may be just playing a game of chance while being enamored by a cheap sticker price.

This kind of thinking may hurt some opportunity zones more than others. Careful and calculated planning may cause certain opportunity zones to thrive while others may not attract as many investors. But it is naïve to think that every opportunity zone will flourish. It may be better to create some very successful opportunity zones and then watch the entire concept have a trickle-down effect.

Furthermore, dashing out and investing in any opportunity zone may stretch investments too wide and take away from the overall effectiveness. For example, investing in workforce housing in an area that is farther away from local companies may not be the smartest investment. It’s important to remember that capital gains are not going to fill vacancies.

Capital gains tax incentives are important to consider when investing, but getting caught up in the hype of opportunity zones should not neglect the basic principles of real estate. The emergence of opportunity zones has not changed any of those principles. Keep in mind that opportunity zones are still in their infancy and should be handled with care, diligence, and lots of restraint.

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