In this fourth weekly edition, I’m going to highlight how an alternative investment strategy in Opportunity Zones provides a highly appealing way to diversify portfolios that offset the risk of black swan events like the Coronavirus situation.
Severe market volatility is putting great stress on stock portfolios and clients with long term deeply embedded capital gains are questioning whether to lighten up on stock exposure as corporate guidance for earnings expectations is being reset broadly lower. A wave a closures, cancelations and quarantines are essentially shutting down all manner of everyday activity for businesses and consumers that is having a material impact on the forward outlook for the stock market.
Investors are in a place where they are asking themselves where can they rotate capital away from the volatility of the stock market and into an asset class with competitive returns where they can sleep at night. Fortunately, this is precisely when the discussion of investing in a Qualified Opportunity Fund (QOF) should be put on the table. Few other investments provide the sense of tangible stability, safety and steadiness of returns than real estate – especially income producing real estate.
There is growing fear and concern among clients that they might round-trip the gains of the past three years if the COVID-19 spreads more widely throughout the U.S., lengthens in it time to contain and becomes a nuclear winter for the equity markets where a rebound takes on the look of being more than just a few months away. The notion of a market in turmoil for all of 2020 and into 2021 is beginning to take hold and now is a very appropriate time to consider diverting client assets to opportunity zone funds on any and all rally attempts by the market.
RIA’s first and foremost responsibility to their clients is the preservation of capital and the safeguarding of capital gains. For the next few years, clients can take full advantage of tax-deferred growth, annual income of low single digits in years 1-5 and upper single digits in years 5-10 in renovated or new construction projects that also offer outstanding upside capital appreciation potential of 10% or more per year. These projected returns compete heavily with anything conservative the stock market has to offer.
Clients shaken by the recent wild swings and sudden loss of equity principle that are looking to de-risk their portfolios are excellent candidates for investing a portion of their assets in Opportunity Zones. Whether their stock gains are short-term or long-term, those gains, if invested within 180 days of the sale of stock into an Qualified Opportunity Fund (QOF), are deferred until 2026 and all the capital appreciation achieved from the properties within the Opportunity Zone Fund are free of taxation while also receiving a 10% stepped up cost basis as an additional bonus. That’s powerful.
Real estate is a standard bearer of high-net worth investing – specifically tax-sheltered income real estate. Interest rates are crashing to zero, making the business of real estate development that much more compelling. It’s an incredible time to put new construction capital to work and offers wealthy investors a phenomenal alternative to the stock and bond markets for the next several years.
How awesome it is to offer a 5-10-year brick and mortar income and growth strategy with substantial built-in tax benefits to clients seeking an alternative solution for total return in only U.S. based commercial real estate devoid of geopolitical and currency risks. Keep it simple. Keep it smart and bring an extra layer of value to the client/RIA relationship that has a multi-year impact on growing capital and sheltering taxes in a tangible asset class with the full backing of federal and state governments.
The unique structure of Opportunity Zone Funds offers many benefits of which I’ll continue expand upon each week. Today’s column was to fully recognize that that ground has shifted under the stock market, maybe for a long period to come, and to raise the awareness of how to insulate and grow clients’ capital that solidifies trust and longevity to a RIA’s relationship with their client base. The timing of such a discussion with clients could not be better – so why not have it and have it soon.