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When looking for new ways to grow a multifamily investment portfolio, new ventures sometimes can be found in the unlikeliest of places. Qualified opportunity zones, for example, are designated by a federal tax incentive program as “designed to spur economic development and job creation in distressed communities throughout the country and U.S. possessions by providing tax benefits to investors who invest eligible capital into these communities.”

Here are three things to consider before committing to an investment in multifamily properties located in opportunity zones:

1. Qualified Opportunity Funds And Tax Benefits

A qualified opportunity fund (QOF) is the investment vehicle that the investor uses when investing in an opportunity zone. These QOFs have tax benefits for investors. For example, by investing in a QOF, the investor gains the ability to defer taxes from the sale of any asset, including stocks, so long as the proceeds resulting from the capital gains are reinvested into the QOF within 180 days. Additionally, if the investor holds the QOF for at least 10 years, then all of the tax attributable to the gains of the QOF is completely eliminated if the QOF is sold.

2. Market Fundamentals

As with any smart multifamily investment, an investor should take the market fundamentals into consideration and not just think of the possible tax benefits. These market fundamentals include the strength of the investment market, the proximity of transit hubs and jobs within the market and rental rates. No matter where in the country an opportunity zone exists, due diligence and careful evaluation of the market must always be conducted.

For example, here in my local market of Houston, a 13-building innovation district is being constructed in the Midtown neighborhood. The project benefits from a prime location only 1.5 miles from Downtown Houston and one block away from a light rail stop. Additionally, this area is walkable to entertainment, shopping and dining options. The innovation district is being built within one of these opportunity zones which, combined with the positive market fundamentals, makes the Midtown neighborhood a prime candidate for new multifamily investment opportunities.

3. Complex Regulation Requirements

As with any type of tax benefit, there is a fair amount of legal jargon that needs to be understood to ensure that the investment benefits can be reaped to their fullest. All investments in an opportunity zone must be made through a QOF. QOFs can be formed by an eligible corporation or partnership that certifies itself as a QOF when filing its federal income tax return. Individuals do not have to live within the opportunity zone to create and invest in a QOF; however, a QOF must have 90% of its assets within the opportunity zone property, and the business must earn half of its income from activities within the zone. Seeking out a trusted tax advisor who has previously worked within opportunity zones is a smart idea for first-timers to ensure all of the legal requirements are met.

Opportunity zones are a win for residents and investors alike. Residents living within opportunity zones benefit from economic opportunity in their neighborhood, which can provide nicer yet affordable housing, job growth, income growth, a decrease in local crime and entertainment opportunities that weren’t present before. Meanwhile, for investors, investing in opportunity zones creates a more diverse investment portfolio while also knowing that the investment is making a positive impact on a neighborhood that needed it. By keeping these things in mind and creating a concrete investment plan, investors can look to opportunity zones for a promising way to advance communities while also boosting return on investments.