In the first part of this series, we discussed the more well-known ways to invest in real estate. These options are great for people who are just getting started with investing or for those that like to take a more standard approach. 

However, in part two, we will be taking a deeper dive into more uncommon ways to invest in real estate. These methods may be better suited to people who are willing to take on more risk and/or who already have some experience in putting their money into various investment instruments. Without further ado, let’s get started. 

Qualified Opportunity Zones or QOZs

Opportunity zones are areas that have economically distressed communities which need investment, innovation, and revitalization. QOZs were created back in 2017 thanks to the newly accepted Tax Cuts and Jobs Act. The main idea behind having opportunity zones is to encourage people to invest there and thus open more jobs and spur economic growth. 

Opportunity zones are determined through the population census and are typically low-income neighborhoods and their surrounding areas. They get nominated by the state governor and then certified and designated by the treasury secretary. 

In order to make investments in low-income communities more lucrative, the government has created the so-called “qualified opportunity zones,” which include a lot of tax benefits for all the investors who choose to put their money in this kind of investment. 

For those that don’t know, a qualified opportunity fund, or a QOF, is an investment instrument similar to a partnership or corporation that’s made specifically for money to be invested in qualified opportunity zones. For a corporation to be classified as a qualified opportunity fund, it must be self-certified with the 8996 form, along with its federal income tax. Once it is recognized as such, qualified opportunity funds are obliged to invest at least 90% of their assets in qualified opportunity zones so that they can qualify for tax benefits. 

How Does This Benefit You?

By being a part of a qualified opportunity fund, you’re able to invest in both businesses and real estate that are located in the opportunity zone and that meet a set of particular criteria. For example, when it comes to real estate, it has to be either brand new or vastly improved to qualify. Purchasing real estate without making major improvements is forbidden, and a “major improvement” is considered an investment of at least an equal amount of money as the cost of the building. Additionally, the improvement should be completed within 30 months. 

The primary reason you should consider investing in qualified opportunity zones is the tax benefits. By doing so, you can defer tax payments on capital gains from other investments that you made previously. More specifically, if, as an investor, you allocated your gains from one investment into a qualified opportunity fund within 180 days of the sale date, then you can defer the tax payments on those gains until the opportunity is sold. 

Along with that, investors in qualified funds can minimize their tax payments by holding on to those investments for five to ten years. If you hold on to a qualified opportunity fund for a minimum of five years, you can get a 10% exclusion of the deferred gain. If you hold onto it for seven years, you get a 15% exclusion. 

Real Estate Debt Funds

A real estate debt fund has equity-backed capital that lends money either to current owners of real estate assets or to prospective buyers. If you invest in one of these funds, you will receive periodic payments for the interest charged against the loaned capital and mortgages. These types of funds offer loans collateralized by real estate assets to people for a wide range of business and commercial real estate needs.

Usually, these kinds of debt funds are focused on one particular kind of loan strategy or investment idea. For example, some put their focus on construction loans that are for building family homes, while others prefer to invest in the construction of shopping and retail buildings. Other typical loan types might include hospitality, hotels, and industrial buildings. 

Now, you might be wondering why you would want to invest in a real estate fund. The returns, of course! These kinds of funds generate a large percentage of their income through interest on lent capital, and in case the borrower defaults, they get the collateral underlying the loan. The interest rates commonly start at 9% and can fluctuate depending on what’s happening in the market currently. Payments are made on a monthly or quarterly basis, and loan amounts range from $5 million to more than $150, depending on the situation.

Hard Money Lending 

If you’re reading this article, you likely already consider real estate investing to be a lucrative way to earn more money. While real estate investment trusts and crowdfunding allow you to invest passively in real estate, if you wish to own property directly, then hard money lending just might be the thing for you.

Bridge loans or hard money loans are short-term loans that real estate investors can use to finance a particular project. This kind of lending strategy is often used by people who do house flipping or real estate developers who want to renovate and quickly sell a particular property. Typically, hard money loans are not given by banks or other mainstream institutions and are instead issued by private lenders. 

Unlike the typical way in which banks give loans — through determining how creditworthy you are — private lenders estimate the value of the property you want to renovate and then decide on whether to loan the money or not. More specifically, lenders tend to focus on what’s called the “after repair value,” which estimates what the property might be worth after all the renovations are done. 

Now, all of this sounds great in theory, but this strategy is associated with some potential cons. The two main ones you need to consider are: 

  • Cost: While these loans are convenient, you’re paying the price for that. Their interest rates tend to be a lot higher than those of conventional loans, and you will also probably pay a lot in service fees. 
  • Shorter payment period: You typically only have a few months to pay back a hard money loan, which means you’re taking a risk, regardless of how prosperous you assume the property you renovated will become. 

All in all, hard money loans are worth it if you already have money and you need to get some funding quickly for a particular project that you’re certain will become a success. 

Tax Lien Investing 

If a property owner doesn’t pay their taxes, a tax lien can be made against the property by the municipality, which is then sold off so that the municipality can get its tax revenue. If you have the money, those tax liens are available for purchase, and you can get them at any time. 

At that point, the property owner has the chance to pay back what they owe, plus interest. This is where investors can make money. Each state has its own limit on how much interest can be charged, and the rate may fluctuate depending on several different factors. If the property owner doesn’t pay the taxes (and interest) in the given period, the investor who bought the tax lien can foreclose on the property. It’s important to note that this happens very rarely, so it is far from the best way to go about acquiring physical real estate. 

In Conclusion 

Hopefully, this article has helped you learn about the more unusual ways you can invest in real estate. The methods discussed above are not as well-known as those we discussed in part one, and some of them do require quite more extensive financial and property knowledge. 

If you’re interested in learning more about these methods or want to get a general portfolio overview, you can contact our experts at Alpha Wealth Funds. We will be more than happy to consult with you and help you decide whether any of these investment strategies are suitable for your current financial situation and future goals. 

Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Michael Torrence

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Michael Torrence – Investment Advisor Representative: Michael was born and raised in Ohio and attended The Ohio State University. After College, he was commissioned as a 2ndLt in the United States Marine Corps. He attended his initial training in Quantico, Virginia, then graduated at the top of his Primary Aviator Class and was selected for the Strike (Jet) Platform.

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