June 2020 - AB Capital

Common stock market investments include stocks, bonds, index funds, and mutual funds. Another common type of real estate investment that you may want to consider adding to your investment portfolio is a real estate hedge fund.

A standard hedge fund is a kind of limited partnership of numerous investors who pool their money together before making investments, which could be something like making an investment with borrowed money. The goal of a hedge fund is to obtain substantial capital gains while hedging against the inherent risk of investing. This portfolio is managed by a professional management firm on behalf of its investors.

When looking specifically at real estate hedge funds, this type of investment has been increasing in popularity over the past decade. While hedge funds can consist of liquid assets that can quickly be converted into cash if need be, hedge fund management firms are accepting more and more real estate as a kind of non-traditional investment. Of the many hedge funds that are in operation throughout the country, nearly 40 percent of them are heavily investing in real estate at the moment.

If you are interested in real estate investment, a real estate hedge fund may be an opportunity for you to diversify your portfolio. If your portfolio is currently comprised of some low-risk, low-return investments, real estate hedge funds are a great way to balance your portfolio. Before you go forward with investing in real estate hedge funds, it’s essential that you know how these hedge funds work, which is detailed in the guide below.

How Do Real Estate Hedge Funds Work?

A real estate hedge fund is a popular type of investing that involves pooling capital from numerous investors before making a single investment in some form of real estate. While hedge funds are very similar to mutual funds, the core difference is that hedge funds generally take on more risk than mutual funds. With any real estate hedge fund making investments in real estate, there are different ways in which a hedge fund manager can choose to make these investments, which depends on the investment strategy that each firm uses.

The most common method of investing via a real estate hedge fund is with a REIT. When you make an investment with a real estate investment trust, the company in charge of the trust essentially owns and operates various types of real estate that can produce income. In many cases, a REIT can be traded on numerous major exchanges. When a hedge fund invests in real estate, it can do so via the publicly-traded stock of existing real estate companies like REITs. When the hedge fund that you’ve invested in decides to invest in a REIT, you can be provided with long-term returns, dividend yields, and portfolio diversification.

Along with investing in REITs, another method of investing in real estate hedge funds is through the acquisition of properties. In most cases, the properties that are acquired by real estate hedge funds are performing poorly in comparison to the wider market, which means that their value could have recently dropped by a significant amount. The benefit of investing in under-performing properties is that these investments can be made at below market rates, which helps to reduce risk. The properties that are invested in by a hedge fund can be centralized in one location or can be purchased from all over the world.

The main difference between a REIT and an investment into an actual property is that a pure real estate hedge fund owns property. On the other hand, a real estate hedge fund that’s centered around a REIT will own stock of real estate companies. Keep in mind that different real estate hedge funds can focus on different things. For instance, some hedge funds will purchase sizable hotels that they can then develop and earn money from. Others invest in debt securities. The strategy that you want to take all depends on the kind of investment you believe will be most successful.

What is the Difference Between Hedge Funds and Mutual Funds?

Hedge funds and mutual funds are two similar forms of investing that come with distinct differences that you should keep in mind. Both of these methods for investing involve the formation of investment partnerships with many individual investors. A firm will manage portfolios that have been built from pooled capital with the primary goal of obtaining higher returns via greater diversification. When you invest into a mutual fund or hedge fund, it’s important that the investment strategy of the managing firm matches your investment strategy.

There are two key differences between hedge funds and mutual funds that you should be aware of. First of all, mutual funds are regulated by the SEC, which means that there’s a limit to how much leverage a mutual fund can take on. As opposed to liquid assets, leverage is borrowed capital that can be acquired when making an investment. Since there’s a cap on the amount of borrowed capital that can be obtained with a mutual fund, this type of investment is considered to be less risky when compared to hedge funds.

Since mutual funds are regulated by the SEC, they are available for daily trading and can be purchased by the public if you’re looking to buy shares in a mutual fund. Because real estate hedge funds aren’t regulated in the same way that mutual funds are, they are considered to be private investments that can only be purchased by accredited investors. The main benefit of investing in a real estate hedge fund is that you can generally obtain higher returns than are possible with a mutual fund. As long as you qualify as an accredited investor, a hedge fund is a way to take on more risk with your portfolio, and in turn, potentially higher yields.

How Do I Invest in a Hedge Fund?

While it’s possible for you to invest in a hedge fund, there are some basic restrictions and guidelines that you should be aware of before attempting to do so. The types of investors who can join the investor pool in a hedge fund must have the ability to make high risk investments. Regulation D places a limit on the number of investors who can join a hedge fund, which is why the investment amount for each is generally on the higher end. The managers and general partners of a hedge fund are in charge of setting minimum investment requirements.

While the minimum investment requirements differ with each hedge fund, they can be anywhere from $100,000 to $1 million. Since real estate hedge funds aren’t regulated directly by the SEC, most investors will need to be accredited. A small number of hedge funds are listed on exchanges, which means that shares of the hedge fund can be purchased via a broker or individually.

How can Hedge Funds Make Big Profits in Real Estate

Before you join a real estate hedge fund, it’s important that you understand the advantages and disadvantages that come with hedge funds.

Advantages of Hedge Funds

When you want to make money in real estate, a hedge fund provides you with the opportunity to bring in high returns for some potentially large profits. Since these investments can be made in a variety of ways with real estate hedge funds, it’s possible to obtain positive returns in both falling and rising markets. You can also customize your investment strategy in any way you see fit. These hedge funds are managed by some of the top investment managers in the world, which somewhat reduces the risk that comes with making such an investment.

Disadvantages of Hedge Funds

However, there are some negative aspects of hedge funds that you should be aware of. For instance, the losses can be substantial if the hedge fund fails and your investments don’t pan out. There’s also much more leverage in a hedge fund when compared to liquid assets, which heightens the risk of a hedge fund. Because hedge funds aren’t liquid, your money can be locked up for long periods of time.

In most cases, hedge funds will last around five years. However, it’s possible for a hedge fund to fail in less than a year. You should start to see returns for your investment after the first year depending on the terms of the hedge fund. The key to a successful real estate hedge fund is to join a reputable hedge fund management company.

Investing in Real Estate Hedge Funds

When you’re considering your many investment options, real estate hedge funds can be highly beneficial for your portfolio in a variety of ways. While hedge funds may be riskier than other investment methods, they also allow for the possibility of higher returns. If your portfolio is balanced, hedge funds are actually able to reduce the risk of your portfolio while increasing returns at the same time. There are also several different ways to invest with real estate hedge funds. Your investments can go into actual properties or can be invested into a REIT, which allows you to select the option that best matches your portfolio strategy.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

A 401k is an investment savings account that’s sponsored by the employer of the individual who holds the account. Workers are able to make contributions to a 401k account via automatic payroll withholding, which means that the money will automatically be taken out of your paycheck and sent to your 401k account. Depending on the account you have, your employer may match a portion or all of your contributions.

Any money that’s placed into a standard 401k plan isn’t taxed until you withdraw the money, which usually occurs after retirement. If you invest in a Roth 401k plan, your withdrawals could also be tax-free. There are a couple of different types of 401k plans that you should be aware of, which include Roth 401k plans and solo/self-employed plans. A Roth 401k plan is a special type of 401k account that’s funded with your after-tax dollars up to a certain amount. Because the account is funded with after-tax dollars, eventual withdrawals don’t need to be taxed, which is the opposite of how a traditional 401k works. Both account types have their advantages and disadvantages.

Withdrawing From Your 401k

Before you start investing in a 401k, it’s important to understand how these accounts work when it comes to withdrawing from them. For one, anything that you withdraw from a 401k before you reach 59.5 years old will result in a tax penalty of 10 percent, which can make for a substantial reduction in your overall savings. You can make a standard 401k withdrawal if you are no longer an employee for the employer that sponsors your 401k plan and are at least 59.5 years old.

If you have invested money into a standard 401k, you will be required to pay income tax whenever you eventually withdraw your money. However, there will be no penalty applied to the withdrawal since you’re over the age of 59.5. After you reach the age of 72, you will need to take out the required minimum distributions from your 401k every year. The amount that you withdraw is based on an IRS formula that dictates the amount by the age you are at the time of the withdrawal. While you can always withdraw all of the money from your 401k account in one withdrawal, this can lead to a significant tax bill that you might want to avoid. If you’re still working in the same workplace, there are some plans that allow you to delay the required minimum distributions until the year that you retire.

Hardship Withdrawals

You should also know about hardship withdrawals when using a 401k account. A hardship withdrawal means that you can only withdraw money from your account without penalties for various emergency purposes in the event that you’re older than 59.5. The many different emergencies that would allow you to qualify for these penalty-free withdrawals include:

Up to 12 months of educational fees and tuition
Medical expenses for care and treatment that are deemed to be essential
Expenses related to a funeral or burial
Expenses that will allow you to prevent being evicted or foreclosed on
Home-buying expenses for a main residence

Being able to withdraw money from your 401k account without incurring a penalty in the event of one of these emergencies occurring should give you peace of mind about investing in a 401k.

Types of 401k Accounts

There are various types of 401k accounts that you should be aware of, which include both a Roth 401k plan and a solo 401k plan. The Roth 401k plan is considered to be highly advantageous for individuals who expect to be wealthier once they reach retirement age. Since the money that’s placed into the account can be withdrawn without requiring you to pay taxes, all of the money in your account once you reach 59.5 is yours to be withdrawn whenever you’d like.

The Roth 401k is among the latest types of retirement plans. While this is a special 401k plan, it provides investors with many of the benefits that can be received from a Roth IRA. The money that you contribute to the plan can’t be written off of your taxes, which means that you should weigh the pros and cons of a Roth 401k alongside a traditional 401k. If the tax benefits that you can receive now are more appealing to you, a traditional 401k might be your preferred option. On the other hand, a Roth 401k allows you to avoid the hassle of paying taxes when you eventually withdraw from the account. The type of 401k account that you select depends largely on your personal preference.

Using Your Solo 401k Plan to Invest in Real Estate

If you want to use your 401k account to invest in real estate, you will need to use a solo 401k plan. A solo 401k requires owners of the account to make contributions with their pre-tax dollars. These contributions can continue to grow within the account tax-free until you withdraw them for retirement. Keep in mind that there are limits to how much you can place into a solo 401k plan in a single year. For 2020, the limit is set to $57,000. If you’re currently older than 50 but have yet to retire, you can add an extra $6,500 per year above the $57,000 limit.

In order to qualify for this type of plan, you will need to be self-employed without having any employees that require W2 forms. However, it’s possible for your spouse to work with you. When you have a solo 401k, your investing possibilities will be broadened significantly since this type of account allows investments to be made in any asset that’s not disallowed under IRS regulations. The types of assets that you can invest in with a solo 401k plan include:

Deeds
Tax liens
Private loans
Private businesses
Limited liability companies

This gives you investment leeway that’s not possible with other 401k accounts. After you save for retirement for a certain number of years, you might want to think about investing in something with high returns and relatively predictable cash flow, such as real estate. By making these investments before you reach retirement age, you should be able to increase the amount of money that you have when you eventually retire. The types of real estate investments that you can make include:

Developed land
Residential property
Foreclosures
Commercial property

Each of these real estate investment opportunities can provide you with stable returns as long as you make smart investments. There are many benefits that come with investing money in real estate. These benefits are compounded when you invest in commercial real estate properties. The main reason that you should think about investing in real estate is that these properties generally appreciate in value over time, which allows them to increase in value with inflation. The average appreciation amount per year since 1968 is right around six percent.

If you invest your money into an apartment building, you can collect money from tenants, which will provide you with monthly payments. You could also make a debt investment in these properties, which would give you the opportunity to collect monthly payments from the interest on the loan that you’ve provided. Whether you like to make risky investments or safe ones, real estate investing accommodates both types of portfolios. Real estate gives you a predictable cash flow and offers equity growth via debt reduction. If you invest into the equity of a property and are in charge of upkeep for the building that you own, the money that you spend on maintenance, improvements, and property upkeep are considered to be tax-deductible, which you can use to reduce the amount of taxes that you owe each year.

Ready to Use Your 401k to Invest in Commercial Real Estate?

If you would like to use your solo 401k to invest in commercial real estate, it’s important that you focus on making the right investment decisions. The real estate that you invest in should be heavily researched so that you can be confident that the property and real estate market surrounding it are in good condition. While it’s not possible to eliminate all risk that comes with making an investment, the research that you do now should help you mitigate risk, which can assist you in maintaining a balanced portfolio.

The United States is known for having an open economy, which essentially means that the domestic community is able to engage in investing and trade with most foreign countries. Individuals and businesses in other countries can also choose to trade and invest with entities in the U.S. While most entities and individuals who invest in U.S. real estate are located in the same country, there are numerous reasons why a foreigner might want to invest in U.S. real estate as well.

The total combined value of all residential homes in the country comes in at around $33.6 trillion. To understand just how large this value is, it’s greater than the total 2020 GDP for the U.S., which is around $19.39 trillion. As this country has one of the more sizable economies in the world, the higher value of residential homes says a lot. The short answer to this question is that foreigners can invest in real estate throughout the U.S. However, there are numerous things to consider if you wish to do so. This article details what you need to know about investing in U.S. real estate.

Difficulties That Foreign Investors May Face When Purchasing U.S. Real Estate

While it’s relatively easy for foreign investors to purchase and invest in U.S. real estate, there are some difficulties that any foreign investor must overcome if they want the process to be smooth and straightforward. Even though it’s perfectly legal for foreigners to invest in U.S. real estate, it may be difficult to obtain a loan for the investment.

It’s also common for foreign investors to run into difficulties understanding U.S. taxes, which can lead to substantial problems when it comes time to invest in a property. Foreign investors will generally have a more difficult time investing in real estate as compared to U.S. citizens. With this in mind, let’s talk about all of the drawbacks and hurdles that you will face as a foreign buyer of U.S. real estate.

Obtaining Real Estate Loans As a Foreign Investor

Likely the main issue that foreigners face when attempting to invest in U.S. real estate is that it can be difficult to obtain a loan from a bank or other financial institution. When it comes to residential properties, both Freddie Mac and Fannie Mae are government-sponsored corporations that guarantee most home loans. The standards that are set by these two institutions are followed by the majority of banks and other financial institutions. The problem is that neither Freddie Mac or Fannie Mae will purchase loans from individuals who aren’t U.S. citizens. Instead, you’ll need to find lenders that don’t work with Freddie Mac or Fannie Mae.

The majority of banks will also forego providing loans to individuals who have never paid taxes within the U.S. This reduces the number of financial institutions that could provide you with the necessary loan. To counteract this issue, you’ll likely need to perform extensive research to find financial institutions that will lend to foreign investors. Keep in mind that you’ll need to provide proof of strong financials. Most foreigners likely don’t have a credit score, which is a top consideration among most banks when they are deciding whether or not to lend money to someone. If you don’t have permanent ties to the U.S., you’ll likely find it difficult to get the loan you’re looking for.

Another reason that banks are wary of lending to foreign individuals is that it’s nearly impossible for the lender to take a foreign borrower to court if the borrower defaults on the loan. While you could try to obtain a loan in your own country, many foreign lenders will avoid providing a loan in this situation. Banks don’t like to provide borrowers with loans outside of their home country. There are also many countries where the laws and regulations dictate that loans can’t be provided outside of the country.

When you’re searching for the right lender in the U.S., it’s important that you’re aware of the costs that come with getting a loan, which typically includes:

An Appraisal fee
An Origination fee
Prepaid interest fees
Closing fees
Insurance fees

These costs could be higher for you than for U.S. borrowers because banks view foreign investors as being riskier to lend to. In order to offset some of this risk, lenders will usually charge relatively high-interest rates or require a substantial down payment before providing you with a loan. The approval process for the loan could also be more stringent, which you should prepare for. If you were a U.S. citizen, the approval process would likely involve the bank looking at your total expenses, your income, and your entire credit history in order to ascertain if you are wholly qualified for the loan.

As a foreign investor, it’s much more difficult for the banks to verify these aspects of your finances. You’ll need to provide much more documentation than is normal, which can include your bank statements and yearly tax returns. Because of the larger amount of documentation that needs to be provided, the approval process will likely also take longer to process.

Navigating Taxes As a Foreign Investor

The U.S. requires foreigners to pay a certain amount of taxes in the country on any real estate gains. You might also be required to pay these taxes in your own country depending on local laws. If you are considered to be a non-resident alien, you won’t need to file your tax return in the U.S. unless you’re currently employed in the country or have source income from the U.S. In accordance with this term, source income includes income that you earn from renting real estate that’s located in the country.

It’s also important to understand that any owner of real estate in the U.S. is subject to the estate tax. This particular tax is paid once the owner of a property dies. The total amount of the estate tax can be as much as 40 percent of the property value. The exact amount that you pay depends on what the estate is currently valued at.

US Real Estate Holding Structures Foreign Investors Should Consider

There are a variety of holding structures that foreign investors are able to use if they would like to avoid paying certain taxes on the real estate that they invest in. Keep in mind that the exact structure type that you select should align with your investment goals if you want to make the most out of this investment.

Individual Direct Ownership

This type of holding structure allows for a foreign investor to own real estate in the U.S. in their own name. This is a very simple type of ownership that’s considered to be beneficial if you want to keep costs down. The main issue with individual direct ownership is that the long-term benefits are minor and could open you up to liability, estate taxes, and various tax reporting requirements. If your property is ever rented out, you will be tasked with paying income tax. If damages occur on the property, you will be held liable for any repair expenses.

Forms of Corporate Indirect Ownership

As mentioned previously, corporations are fully exempt from paying the U.S. estate tax, which is why it’s highly recommended that you place your real estate investment into some kind of corporation holding structure. Here are examples of different corporations that can help protect foreign investors from taxes and liabilities.

Foreign Investors Can Create an LLC

You could choose to create a limited liability company (LLC) to hold your investment. This type of corporation allows for the lowest amount of income taxes when compared to other types of corporate indirect ownership. There is also limited liability for your wealth as an investor, which is directly limited to the value of your property.

You’re not held responsible for any of the damages that occur since your property and the assets within are protected under an LLC. The privacy of the property will remain fully intact since you won’t need to register the name with the state. The main issue with creating an LLC is that it will still be subject to the estate tax. The income tax and sales tax consequences for the property are the same as if you owned the property directly.

U.S. Blocker Structure

This structure is appealing for individual investors who would like to avoid the estate tax that typically occurs upon death. You will have both privacy and asset protection if you decide to use a U.S. blocker structure. If the corporation that you create with this structure is willing to wait for a required five-year period following the sale of your property, you can distribute the cash that was collected from the sale to yourself without any tax consequences. However, the corporation will be subject to a very high capital gains tax rate when the property is eventually sold. .

Leveraged Blocker

This is a complex holding structure that you can use with your U.S. real estate investment. It’s very similar to the U.S. blocker structure with some key differences. This type of holding structure is solely recommended if you’re going to be making larger investments in real estate throughout the U.S. In general, this structure is used when the investments involve several different investors or a type of fund.

In order for this structure to be successful, a substantial amount of planning will need to be done. For one, the investor will need to also have a U.S. corporation. Part of the investment must be loaned to the U.S. corporation, which allows the corporation to obtain certain tax deductions. Since the corporation is able to deduct the interest, the effective tax rate is also lowered.

Ready to invest in U.S. Real Estate?

If you’re interested in investing in U.S. real estate but don’t classify as a citizen of the country, you can still invest as long as you’re aware of what this process involves. The primary difficulties that you’ll face when attempting to invest in U.S. real estate include finding the right loan and being approved for the loan once you’ve found it. You may also be required to make a down payment of 30 percent or more.

While foreign investors will encounter numerous hurdles when investing in U.S. real estate, the benefits of making these investments can be fantastic and may allow you to obtain high returns on your initial investment. To lower your expenses, consider creating some kind of holding structure to place the investment in. With these guidelines, you should be able to get started with your U.S. real estate investment.

Opportunity zones are communities wherein new investments can take advantage of certain tax benefits. Opportunity zones were created in 2017 when the Tax Cuts and Jobs Act was officially passed. This legislation lessened income tax rates for the majority of tax brackets while also providing corporations with larger tax breaks. It was in this piece of legislation that “Qualified Opportunity Zones” came to be.

These zones are meant to facilitate job creation and economic development in certain communities. These communities can be situated in the U.S. or any of its territories. Any investors who place capital within opportunity zones are provided with extensive tax benefits. If you’re looking for the right investment opportunity to add to your portfolio, you might want to consider opportunity zone investments, which will be discussed further in the following article.

What Qualifies as an Opportunity Zone?

Before you get started with investing in opportunity zones, it’s important to understand what qualifies as an opportunity zone. Since these zones are meant to assist with the growth of areas that have generally been economically depressed, there are some restrictions on which tracts of land are able to qualify for designation. For one, the areas will need to qualify as being low-income areas, which requires a poverty rate that’s at least 20 percent or a median family income that doesn’t exceed over 80 percent of the average family income in metropolitan or non-metropolitan areas throughout the state.

For the census tracts that qualify as low-income areas, as much as 25 percent of these tracts can be nominated for the possibility of being designated as opportunity zones by the U.S. Treasury. When looking at the neighborhoods that would qualify as low-income areas, over 55 percent of all neighborhoods in the country were at least considered to be designated as opportunity zones. From all of the neighborhoods and tracts that the U.S. Treasury considered for opportunity zones, around 8,700 were certified as qualified opportunity zones. Once you’ve found the area that you’re interested in investing in, it’s important to know about the tax incentives that will be available to you.

How to Invest in Opportunity Zones

Investing in opportunity zones is relatively straightforward if you make the right investment decisions. It’s possible to invest in these zones by placing your capital into opportunity zone funds, which will act as a vehicle that will allow you to invest capital gains into various opportunity zones. When you invest capital gains into these funds, you’ll be able to defer tax payments until 2027 or until the asset is sold, which can save you a significant sum of money in the meantime.

When you defer tax payments on capital gains, you can invest more of your capital gain for at least a few more years, which can help you increase your earning potential in a manner that wouldn’t be possible if you were required to pay taxes on your capital gains when they were first realized. Along with getting more out of your investments, deferring tax payments gives you the opportunity to invest in opportunity zone funds with this money for at least five years.

What Other Tax Incentives Do Opportunity Zones Offer?

Tax liability refers to the amount of tax debt that a corporation, individual, or other entity owes to the IRS. If you invest in opportunity zones, you may be able to decrease your overall tax liability, which means that you won’t need to pay as much on your yearly taxes. In the event that you hold an opportunity zone fund for at least five years before the December 31, 2026 deadline, you will receive a reduction in your tax liability of 10 percent. Overall, it’s possible to receive a tax liability reduction on capital gains of up to 15 percent. Keep in mind that you will need to invest in an opportunity zone fund by December 31, 2021 if you want to take full advantage of the tax benefits available to you.

If you want to protect your capital gains on a long-term basis, investing in opportunity zone funds is a good avenue to explore. The tax liability that comes with capital gains can actually be wholly eliminated if you hold your opportunity fund investments for ten years or more. Any appreciation that you earn from this investment will have zero capital gains liability to it. When looking through a historical lens, real estate typically appreciates over a long period of time, which means that it’s likely the investment you make will increase in value as you hold it.

Five Notable Opportunity Zones in the US

The following are five of the more notable opportunity zones that are considered to be primed and ready for almost instantaneous growth.

Oakland, California

Oakland is situated near San Francisco and provides commercial and residential real estate developers with some fantastic opportunities for investment. There are already many large technology companies that are based out of Oakland, which include Pandora, VSCO, and Gravitational, the latter of which is a cloud-data service provider. There are also a variety of BART stations situated throughout Oakland that allow for far more convenient commuting in the Bay area. The presence of these stations in Oakland provides residents of the city with more job opportunities as well as easier mobility around the area. Over the past five years, the increase in home values is 48 percent, which is almost double than the rate of previous years.

Seattle, Washington

Seattle is currently in critical need of new investments in commercial and residential properties, which is due mainly to the lack of development when compared to the substantial population growth throughout the city. The opportunity zone for this area is located in South Seattle and is large and contiguous, which means that urban development is possible alongside residential developments.

While you may want to invest in the development of apartment buildings, you should also consider investing in improved transit systems, which could allow for high returns. Condos are also in high demand throughout South Seattle. In the city, the increase of home values over the past five years was 46 percent.

San Jose, California

San Jose is a city in the Bay area that’s experiencing rapid business and housing growth since many of the regions that are slightly north of San Jose, like Palo Alto, San Francisco, and Mountain View, have become increasingly expensive in recent years. In fact, the average price for a San Francisco home in 2000 was around $420,000. As of January 2019, home values in San Francisco skyrocketed by over 300 percent to $1.38 million. At the moment, these areas may not be ideal for investment when compared to San Jose.

Downtown San Jose is home to offices for large companies like Adobe as well as a new Google campus. While this campus is still in development, investors can expect the construction of the campus to create high demand for housing and walkable businesses that are able to support the large number of employees that will be needed by these companies. Throughout the past five years, home values have increased in San Jose by around 39 percent.

Los Angeles, California

While many areas of Los Angeles are teeming with investment opportunities, the possibility of opportunity zone investments is mainly available in Downtown Los Angeles. This particular area experienced a boom in hotels and residential apartments back in 2018. Two of the more recognizable companies that are based out of Downtown LA include Soylent and Spotify, both of which are more popular than ever.

When looking specifically at South Los Angeles, many of the neighborhoods in the area are developing at the moment, which is ideal since these neighborhoods are situated nearby the 10 Freeway and allow for convenient mobility around the city. Los Angeles is also busy working on the creation of additional E Line stations all over the city, which is going to benefit mobility even more. Home values across Los Angeles have increased by around 36 percent over the past five years.

San Diego California

San Diego is yet another city in California that’s becoming increasingly expensive. While San Diego has usually been highly resistant to new developments, the presence of opportunity zones should give you the incentive to consider investing your money into a development project regardless. South Park, Barrio Logan, and Golden Hill are three areas in San Diego that are considered to be opportunity zones. When looking at the increase of home values over the past five years, San Diego has seen an increase of 30 percent. These trends are lasting ones that have yet to display any signs of slowing down.

Do You Want to Diversify Your Portfolio With Opportunity Zone Investing?

If you’re looking to diversify your portfolio with opportunity zone investing, it’s easy to get started with this type of investment. Your main goal should be to invest a realized capital gain into an opportunity zone fund within a period of 180 days after realization has occurred.

If you want to invest in real estate, a bridge loan can be a great source of financing for you. A bridge loan is a kind of short-term loan that can have a term of anywhere from two weeks to three years. However, the majority of bridge loans last for six months to 12 months. When taking out this type of loan, you’ll be provided with short-term funding that you can use to close on a property that you’re investing in or purchase another property while you wait for your current one to be sold.

Many homeowners encounter a two-step transaction that involves purchasing a new building while trying to sell an old one. You should consider seeking a bridge loan when you need to bridge two separate financial transactions. If standard bank financing isn’t available to you, or you need to move quickly to close on a transaction, a bridge loan may be your best bet. This article takes a closer look at how bridge loans work as well as the pros and cons of this specific type of loan.

How Bridge Loans Work

When looking at how bridge loans work, they usually have the same requirements as a standard mortgage. For one, you’ll need to have at least some equity in the property in question. Let’s say you have a home that’s worth $500,000 but still has $300,000 left on the mortgage. You would have $200,000 in equity. The loan needs to be backed by collateral, which is why it’s important that you have access to equity.

The terms of your bridge loan will likely last for around six to twelve months until you will be required to pay back the loan. These loans are designed specifically to be used on a short-term basis to assist you during a period of transition. Keep in mind that the majority of lenders that can provide you with bridge loans won’t go higher than a loan-to-value ratio of 70 percent, which means that you will need to maintain at least 30 percent equity within the current asset that you own in order for a bridge loan to be provided to you.

Pros

There are many reasons why it could be ideal for you to obtain a bridge loan, which includes:

It will provide a safety net in the event that you sell your old home before purchasing a new one so you won’t have to rent
Allows the purchase of a new home, without notable restriction, while placing a current home on the market
Being able to put a down payment on a new home without using the profits from selling your old one
Payments can be deferred or interest-only until you are able to sell your old home, which provides a certain amount of flexibility

Cons

While bridge loans can be beneficial for a variety of situations, there are some negatives to this type of loan that you should consider before applying for one. These cons include:

Bridge loans have exceedingly short lifespans and require a significant amount of work from the lender, which is why the loans can have relatively high-interest rates that can be around 8.5-10.5 percent of the complete loan amount
The closing costs and fees pertaining to this loan can be high and may drive up your costs
The lender that provides you with the loan could decide to use a variable prime rate, which means that your interest rate would increase over time
There’s always the possibility that your home wouldn’t be able to be sold during the six to twelve month term of the loan, which would put you in a problematic situation
These loans are generally considered to be more expensive than a traditional home equity loan

Bridge Loan vs. Home Equity Loan

Before you consider applying for a bridge loan, it’s recommended that you compare bridge loans with home equity loans, which are somewhat similar in how they work. Just like bridge loans, a home equity loan is secured, which means that your current home will be used as collateral. While it might sound risky to use your home as collateral, you should have enough time to sell the current property before the term of the loan ends.

While both of these loans are considered to be secured loans, they are otherwise very different. For one, home equity loans are generally long-term loans. The majority of these loans will come with longer repayment periods that can last anywhere from 5-20 years, which is much higher than the six to twelve months that is standard with a bridge loan. Because of the longer terms with home equity loans, interest rates are typically lower as well. If you are able to effectively qualify for a standard home equity loan, you can expect the interest rates you pay to be around six percent, which is decidedly lower than the 8.5-10.5 percent that comes with bridge loans.

A home equity loan is actually riskier for you when compared to a bridge loan. While bridge loans also come with the risk of being unable to sell the property, a home equity loan puts you at the risk of paying for three separate loans in the event that your old home doesn’t sell on time, which include the original mortgage, the new mortgage, and the home equity loan that you’ve received.

If you’ve built up a significant amount of equity in your current home by paying a substantial amount of the old mortgage, a home equity loan might be the better option for you. There are risks to both loan options that you should keep in mind. However, a bridge loan is typically the better option as long as it fits with your situation.

Find the Right Lender for Your Bridge Loan

The key to obtaining the right bridge loan is to make sure that you choose the correct lender. Likely the easiest way to identify the right lender is to take some time to compare various rates and terms. While the lowest interest rate doesn’t always equate to the best deal, it should be a heavy consideration. If you can find a lender that will provide you with a loan that has interest rates of 7.0-8.0 percent, these would be considered good rates. Short-term loans invariably have high-interest rates, which may cause some anxiety when you’re looking for the right loan. However, doing your research for the best rates will help you in the long term by saving you a substantial sum of money.

It’s also highly recommended that you obtain referrals from friends and family members who may have worked with a lender in the past. Keep in mind that not all lenders offer bridge loans, which will automatically reduce the number of options available to you. Before you agree to a loan from the lender you’re interested in, you should think about visiting their offices to gain a better understanding of their operations and to make sure that they’re legitimate. While it’s important that you obtain low-interest rates with your bridge loan, you might also want to think about looking for lenders that offer low origination fees.

Once you’ve found the right lender, all that’s left for you to do is apply for the loan. Bridge loans can be very beneficial if you’re searching for short-term financing that will bridge the gap between two financial transactions. If you are wholly confident that your current home can be sold within a few weeks to several months, bridge loans are an excellent way to help you get out of your old home and into a new one without needing to worry about an uncertain period between the two transactions.

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Month: June 2020