Why Puerto Rico real estate might be the best Opportunity Zone investment
Can a picture really be worth a thousand words? We think it can be worth so much more.
When you compare the Opportunity Zone map of the mainland United States to that of Puerto Rico, you can learn about the general location of the area. However, if you combine the map with other data, you’ll understand why investing in an Opportunity Zone fund focused on real estate in Puerto Rico can be highly lucrative.
Before we look at why you should go beyond the Opportunity Zone map, let’s take a step back. What’s an Opportunity Zone, and how does it help you get the most from your investments?
What Are Opportunity Zones?
Opportunity Zones are economically-distressed regions that have been nominated by each state governor and have been certified by the Secretary of the U.S. Treasury. They were introduced as part of the Tax Cuts & Jobs Act of December 2017.
When you invest in an Opportunity Zone fund, you are eligible to defer and reduce the tax liability on your original investment and eliminate any capital gains tax on the new investment.
Investing in Opportunity Zones gives you many advantages over a traditional 1031 exchange because you can apply any capital gain, not just those from real estate. This includes stocks, bonds, businesses, artwork, cryptocurrency, precious metals, and even a baseball card collection!
When you invest in an Opportunity Zone fund within 180 days of the sale of the asset you can defer the capital gains tax due on the original investment through the end of 2026. Plus you’ll receive a 15% reduction in the amount due if you make a Qualified Opportunity Zone investment by the end of 2019 and hold the new asset for seven years. For Qualified Opportunity Zone investments made in 2020 and 2021 you’ll receive a 10% reduction if you hold them through the end of 2026.
Last but not least, if you hold the Qualified Opportunity Zone investment before you sell for at least 10 years you’ll pay no tax on any capital gains from the new investment!
If you are going to take advantage of Opportunity Zones, the question then becomes where should you invest so you can optimize your profits?
Location, Location, Location
Since the legislation was designed to stimulate investment and local economies in distressed areas where the median income is below the state average, the locations tend to be in impoverished or underdeveloped regions. Most Opportunity Zone developers are promising returns in the 4-6% range.
While this forecasted return is higher than a traditional savings account, certificate of deposit, or money market fund, it isn’t the best available option when you compare it to other types of investment vehicles. What can you do to get more out of investing in Opportunity Zones?
To answer that question, we need to look at the Opportunity Zone map. And as savvy investors already know, the old adage “location, location, location,” is definitely true when it comes to Opportunity Zones.
Understanding the Opportunity Zone Map
The standard Opportunity Zone map indicates the location of every Opportunity Zone within the mainland United States as well as Alaska and Puerto Rico.
This interactive map shows where Opportunity Zones are located as well as demographic information (e.g. population, median income, and poverty level) and census data of these areas.
However, it doesn’t give you helpful insights into other important factors that can impact the future economic potential of an area. The map is more like a snapshot in time rather than a tool to help you better predict the future performance of investments.
To understand the projected yield of an investment, you need to go beyond the Opportunity Zone map and understand the growth potential of the individual regions.
What the Opportunity Zone Map Doesn’t Tell You
The Opportunity Zone map reflects a given areas economic situation at the time of being designated as an Opportunity Zone. As you can imagine, in many places the circumstances have changed and some assumptions are no longer valid.
When you look at the Opportunity Zone map of the mainland U.S., you’ll notice that all of the coastal beach areas are white, indicating that there is little or no location for Opportunity Zone development or investing.
On the other hand, 98.5% of Puerto Rico has been designated as an Opportunity Zone, including 99% of its beaches. You might be confused by this especially if you know that the island has what many consider to be some of the best beaches in the entire Carribean.
After all, waterfront homes are worth more than double the value of properties in inland areas and they often better maintain their value even during economic downturns. Not to mention the Puerto Rico real estate market is on the upswing and tourism has rebounded to record levels..
With favorable acquisition costs and a growing vacation rental market, total returns for real estate investments in Puerto Rico can be as high as 15% to 20% before accounting for the individual tax benefits available under the Opportunity Zone legislation.
So what turned (almost) the entire island into an Opportunity Zone?
The likely explanation is that Hurricane Maria had just hit Puerto Rico when the Opportunity Zone legislation was enacted at the end of 2017. At the time there were multiple news stories about the island’s struggle to rebuild amidst its debt problems. The images on the news depicted a devastated region and created a strong visual impact on the nation (including the legislators).
That information, however, was more like a snapshot in time rather than a long-term depiction of the economic potential of the area. Because as of today the island is experiencing a remarkable recovery.
As you can see, all Opportunity Zones aren’t created equal, and the same brown color on the map doesn’t tell you what the future holds for any given area.
Would you rather invest in a debilitated region…
… or one that’s supported by a booming tourist industry full of beachfront real estate?
There’s no substitute for a great location in real estate investing!
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