Ep 83 – How to Find And Invest in Opportunity Zones with Malaki Sims

One of the buzz words in real estate the last few years has been “Opportunity Zones”. What exactly are they and how do you follow the rules to get all the benefits?

Adam Schroeder and Zach Lemaster take with Malaki Sims about his experience investing in Opportunity Zones and how a regular investor can take advantage of the offering.

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Transcript:

Hey, rent to retirement, it’s Adam Schroeder here with Zach Lemaster for another episode. And today we are joined by Malaki Sims. He is a real estate investor, developer, and CPA who builds and rents in the inner city. And we’re going to touch on a subject that we haven’t really touched on before and take a deep dive in. So Malika, welcome to the show. Thanks, I appreciate it. Thank you for having me on and giving me a chance to, you know, talk about something that a lot of people can benefit from, and I really appreciate it. Yeah, absolutely. So let’s first start off these things that I mentioned, we’re going to talk about our opportunity zones, which have are fairly new thing to most investors hearing about. So can you give us a brief overview of what an opportunity zone actually is and how they were designated? Sure. So the opportunity zone law is essentially, the government has decided certain areas, certain parts of the country, we’re going to give you a tax break for if you come in and put your private dollars in this area to substantially improve the area. So you can do that by, you know, doing significant rehab to something or building something from the ground up to do new construction. And essentially, they we have all this money in untapped capital gains, you know, trillions of dollars, and the government figures, okay, we can tap some of these capital gains, get private investors to allow us to tax a portion of it, to come in and improve these areas, in exchange for that will give them this very huge tax break at the end, as long as they stay in this area and hold this property for at least a decade. Now, you mentioned significant improvements, is this something that you have to like submit an application for and then say, you know, I’m going to rehab, you know, 123 main and one to five main? And this is, what do I qualify? Or how do you make sure that you’re going to be following the rules as you’re getting into it?

Now, so it’s pretty self regulated, actually, which is kind of the beauty of the program, you know, stuff like a 1031 exchange and different avenues like that, you’d have to go through some type of intermediary, they kind of have to do everything for you. But with this program, you essentially just tell the IRS, you know, there’s a there’s a fund that you have to have, what to manage everything is called a qualified Opportunity Fund, which is basically a entity that you set up to own your property, which most real estate investors have anyway, you know, a partnership, LLC, C Corp, sup something that holds their actual assets. So you’re just telling the government, this company that’s holding my assets, is a qualified Opportunity Fund, which qualifies for this program, and it’s some paperwork that you fill out to designate their font is that type.

So let’s break this down. Malikai, a little bit for anyone that is heard of opportunity zones? Or if they haven’t, at all, like, what does this mean? Big picture, if we could just kind of simplify the process. Basically, what this means is the government has identified certain areas throughout the country, and there’s opportunities to new zones everywhere, often some people associate opportunity zones as being, you know, low income areas. But that’s not necessarily true, there’s, there’s just general, I mean, you can pull up a map and look at opportunity zones, we’ve actually found investors that have invested in opportunity zones, and not even known that they were in opportunity zones or built properties in them. Right. Um, so this is a strategy that you can look at. And the first, the first thing to do is identify where the opportunity zones are, and if those are areas that you want to invest in. But basically, what this means is by either doing large improvement, and we’ll talk about how to quantify that or building a property doing an improvement in that area, which is what the government, that’s why they did this is to incentivize, you know, more progression and economic development in an area. You will basically, if you hold it for 10 years, be able to sell that property and completely eliminate your capital gains. Is that the gist of it? Pretty much so I walk you through it like this, essentially, you say, the government says, Hey, XYZ neighborhood, we want to see improvement in this area. So we designate that as a opportunity zone, if you invest in this area with certain stipulations, we’ll give you this huge tax break. The first tax break is if you first of all you have to invest with capital gains, it can’t be ordinary income, it has to be capital gain income. If you take some of your capital gains out now, the government says you can take that out now in that pay tax on this capital gain until 2026 2026. You have to pay the Pipers do you have to pay tax on the gain that you just took out? Okay.

If you put that game in what they call the qualified Opportunity Fund, which is just basically an entity that you purchase your assets in. So now that your money’s in that fun, you have a certain timeframe to go out and purchase real estate or a business in that fun. And if you hold that business in that fund for at least 10 years, then the capital gains that you get from selling that entity from selling that real estate is tax free, you don’t have to pay capital gains on that. But you have to pay gains on the original gain that you made the investment in initially. And on top of that, you have to either do new construction. So you have to build something from ground up. Because essentially, the premise is the government saying we need you to make these areas better, right. So you either need to do new construction to make it better, or you

have to do significant rehab. So significant rehab, just think of it this way, if I buy something for $100, I need to do $101. In the accounts, this Yeah. And that’s a that’s a really good point. Because quite honestly, the only way I’ve looked at making opportunity zones work is doing new construction, right? Because if you buy $100,000 property, it could be a rather big stretch to put $100,000 renovation into it? Well, it depends. So there’s actually a small caveat, it might not come into play, depending on the property. But if you buy vacant property, and it’s been vacant for at least three years, then you don’t have to meet the substantial improvement requirements. Now, what are the odds that you’re going to find something that’s been vacant for three years that doesn’t need a lot of work? You know, but you never know, there’s the possibility

in Additionally, the other caveat is, it really depends on you know, your purchase price. So if I find a great deal on something, and I can get a house for 20,000 books, I only have to put 20,000 books of improvements into it. It makes sense. Yeah. And those are going to be areas that you know, it really depends, I think for like the average person just looking at this if you’re not a rehabber, or if you’re you don’t have this established business to find off market value properties and do this substantial rehab, probably what would make more sense is just to build in these new construction, which is kind of the best way to get it anyway, I’m saying as far as bang for your buck, because essentially, if you’re building from ground up a you know, everything is new, but B, you can you know, cash out refi at the end on the new value and get all your money back. Because if you’re building and you’re doing it the right way, you should be under cost. It should cost less to build than to buy something brand new. Yeah, absolutely. Before we move on, let’s just clarify, investing with capital gains a little bit, that’s a little unclear to me as far as the money going into. So I can’t just make 100k from my job, and then put it into this fund this qualified Fund, which you need to set up to invest in opportunity zones. So can you break that down just for like the average are laying in person? Right? What does that mean investing with capital gains. So capital gains, income is different. It’s not active income, not from your job, it’s a different income category. So essentially, I buy a house, I buy an asset, I sell that asset later that income, I hold it for a year. So that’s capital gain income. So I’m making income from the asset increasing in value from when I bought it, compared to when I sell it. And that’s typically taxed at a lower rate than active income, or my w two income would be, you know, depending on how much money you’re making, but you have to you have to invest in the program with that type of income, because the government’s essentially saying

this $6 trillion in capital gains that’s untapped, that investors keep rolling over from deal to deal, you know, project to project and they never pay tax on, you have to pull a portion of that out to invest now, so so they, they’re giving you a huge tax break at the end. But in exchange, they’re potentially getting to tax some money now that they wouldn’t have gotten if you didn’t decide to put it out into this program. So you sell a property? Yes. And let’s say okay, just to go through a scenario, so everyone kind of understands this, let’s say you bought a property for $100,000. You held it five years, whatever, it’s worth $200,000. Now, so you pass that year threshold, so it’s no longer is it active income, it’s into the capital gains category. So bought for 100 sell for 200, you have $100,000 of capital gains. Yes, for even numbers. So you have to pay the capital gains tax on that which, you know, what, 20 22%, depending on your location,

probably, but then you can take that money and put it into this qualified Opportunity Fund, which you you establish, to be able to put into something else to then hold it for seven years and not pay capital gains. So so that 100,000

You have 180 days to put that 100,000 In your qualified Opportunity Fund.

So if we’re doing good today, June the 10th, I think 1112, something like that, whatever.

Today, 13, I take,

I take my 100,000 game right now, I have, I have basically six months from today to move that into my fund, okay, it has to be in the fund. And then I have another time period is, it changes depending on when you put it in. But essentially, then I have to get that $100,000 of gain, I have to get 90% of it into some type of property, a property or business, I focus more on the property side, but let’s just keep it simple and state property, I have to get 90% of that 100,000 90,000 of it into an investment of some type. So you can’t just cash out and park the money in the fund and not invest it. Because then how long was that you have 180 days money into the fund.

And then how long to invest it into a project typically is just a another 180 days, but it’s really based on like, like they have to two criteria each, each, each year. So the end of June and December, they basically have a test where you have to have 90% of your funds into some type of investment. So depending on when you make your initial, you know, transferring that’s going to be your cut off, you know, those two cut off points is kind of what determines if your if your fun, you know, is a legal fund or not to make sure that you’re hitting that 90% threshold. Now, the tax on that $100,000 isn’t due until 2026, you have to pay it in 2026. And then if you hold that investment for 10 years and sell that investment, then the capital gains from that you don’t have to pay tax. Do these have to be capital gains from real estate? Or can they be capital gains from capital gains?

Anything? Okay? Losses capital gains, that have to do from real estate, and you don’t need to sell if the house costs just like any other type of real estate. If your house cost $100,000, you

don’t need $100,000 of capital gains you just need. You just need whatever you need to get the deal. You can still use financing for the program for the risk. And so when it comes to opportunity zones, like what’s the best way to actually find out what you know, where are the opportunities zones? Are? Is it the like? Is there a website for it specifically? Is it just like you look on IRS website? Or where do you find I will I will Google opportunity’s own map and just look there, you can search by address location. Or you can Google I live in Houston, Google opportunity zone map Houston. And Houston has a website that focuses on opportunity zones in most cities have one as well, when you mentioned acquiring businesses, you know, you can do real estate or businesses with the businesses. Are you just having to keep them afloat? Or are you having to invest capital into them as well? Will you put capital into the businesses business, but they have to have those businesses have to have, you know, property and things like that in the opportunity zone? And a certain percentage of it has to be there. But I don’t I don’t even I don’t touch that side at all. I focus strictly on the on the real estate. Okay, I just didn’t know if you knew like, do you have to make that $100,000 business into a $200,000 business? Or you just have to keep it open? Yeah, then I’m not I’m not sure. Okay. Only because I’ve never done a business. Yeah, fair enough. So I could see a lot of people looking at this, and they’re intrigued by the idea, obviously, you know, taxes being a huge when you when you make good money in real estate and do value add projects, or just let appreciation do what it does, like we’ve seen over the past few years, it’s like, you know, the tax day is coming. And so there’s all sorts of different creative ways we try to expedite our investing success by limiting the the amount of tax we have to pay today down the road. You know, we’ve talked about cost segregation studies in the past, that’s a big, big thing that we do personally. But still, I mean, depreciation is recapped trouble, you know, you can 1031 that, but with an opportunity zone, I could see someone looking at this and saying, I love the idea of it. But it seems like so complicated with how to set it up, set up the font, are there people out there that easy? You know, do this for people? Or is it can you just research and educate yourself on how to do what so I would say that the biggest caveat is whether or not you’re raising money from other people. So if you’re raising money from other people, whether that be via pure syndication or you know, crowdfunding, or something like that, if you’re raising, then you have SEC type rules that you have to get involved with, then it can get complex and you need to get some professional help. But if it’s just you, doing your own investing with your own money, then literally you only fill out two additional forms

with Iris, so I don’t in my opinion, I don’t think you need anybody to do that or anybody other than whatever

CPA you’re already using, they’re going to fill out one extra sheet of paper with the entity that the opportunity fund that’s holding your assets that you’re purchasing your real estate through. And then with your 1041 year, they’re going to or whatever year you do the initial investment, they’re going to fill out one additional form to kind of let the IRS No, I saw something, I created a capital gain, but I’m not paying tax on it now, because I put that money in opportunity for you, you have the CPA background. So it may seem, you know, rather easy, but definitely having a CPA that could that understands this stuff, too, could probably guide you, I would think right. So when that’s right. So that’s why I say it’s either you or is two other forms for your CPA to fill out two additional forms. One with the business return, and one with the tax return with

the business return, you’re essentially letting the government know this, this entity is a qualified Opportunity Fund. So we’re we’re putting this under the opportunity Zone program. And then with your personal 1040, you’re letting them know that I sold something, but I’m not paying tax on it. Now, because I put the money in this fund. Let me just review the steps now. And let me know if you miss anything just to make sure that I fully comprehend this and everyone listening does as well. So if you’re interested in investing in opportunity zones, this is a way to pay tax upfront on a capital gains, but ultimately improve the value appreciation down the road holding for 10 years and not pay any capital gains on that as long as you follow the rules. But essentially, you identify an opportunity zone, you have a capital gain from a sale real estate or from some other source that has a capital gain, you establish a qualified Opportunity Fund that you need to put the money into within 180 days, right, the money needs to go into that fund with 180 days from the point of receiving your your capital gains, right. So it can come to your bank account. It’s not like a 1031 where it has to go to an intermediary.

Establish that fund put the money in there 190 days, from that 180 days. And by the way, the taxes on the capital gains that you have to pay on that technically isn’t due until 2026. Right. And then from that point, you have roughly 180 days, I believe, to then put 90% of that money into a project does that projects need to be completed? It doesn’t just need to

end typically.

Especially for significant rehab, they typically give you about 30 months to get it done. What about at least on new construction? Yeah, 30 months? Yeah, to get it done. So let’s talk about your specific strategy. Because I mean, you are someone that’s investing. And it sounds like doing construction, specifically in opportunity zones is kind of one of your main investing strategies. Can you talk a little bit about your story and like specifically what you’re doing? Sure. So I started doing real estate investing around 2011. And I’m in the Houston market, the Houston market used to be pretty cheap. But now it’s getting kind of expensive, because we have all these people coming from California, and all types of other places, and they’re driving the market up. So eventually, at some point, I realized it, it’s it got cheaper to build stuff, especially if you want inner city property as opposed to things you know, closer to the suburbs, than it costs to buy to buy stuff. So I changed our strategy, once this law came out. And once I saw the law come in 2017, I changed our strategy to focus on building

in inside the city, inside the main city limits, because again, this, the real estate and opportunity zones is really great real estate in a lot of areas. So we do new construction.

We just you know, we buy land, we use the capital gains to buy land, get into the deal. And then we build new housing on top of that, and then we hold it and rent it out. So we’re going to hold it, you know, we’ll definitely make sure we hold it at least 10 years, but we don’t necessarily plan on selling anything. So for us, the law, the law is really just you know, we do in real estate, you want to provide as many exit avenues as possible. So it’s a long term exit Avenue just in case something happens and we need to sell something at least we know that we can sell it in that pay taxes on it. So what happens if you do sell within that 10 year period? Isn’t there like a isn’t there something to do with like five years partial or you just pay the tax that you normally would have paid anyway? No penalty, but you you even if you sell it, you’ve done what the program intends for you to do you made improvement in the area. So now all you’re going to do is sell it and pay US tax when we were going to give you a tax break

as well. What kind of what kind of response has, I mean, have you seen I mean, obviously you’re doing it in Houston, kind of with what you’re seeing

Across the country, has this been working? Well, has there been a pretty substantial amount of money put into these areas? Yes, for larger deals, largest syndication, larger private projects, for individual investors like myself,

the lack of education on it is, you know, we just don’t really know about the program, I still see a lot of people, you know, trying to do 1031 exchanges now, instead of doing this, which is, you know, more more advantageous, but so, yeah, most most individual investors don’t seem to just be educated on program enough to do it. So most of the activity that you see, revolves around large syndicators of people with large funds that are convincing others to, you know, come invest in our fund, you know, as a passive investor, and then we’ll pass these tax breaks on to you, which is fine. You know, that’s, that’s, that’s great. But in people that do, you know, regular normal investors that do significant rehab, which is a lot of them, or they’re doing bill to rent, which is quite popular now, and getting more popular by the day, this program is tailor made for those investors, they don’t have to do anything different. They what they’re doing now, they just have to do it in a certain area, and make sure that it’s structured properly. Yeah, so it sounds like I mean, at the big funds are doing it, I assume that means that there’s a lot of work being done on like apartment buildings and those kinds of things. But the single family sector in these areas, isn’t really being served like it was hoped for. Not a lot, I haven’t seen it a lot. And actually, I’ve seen more just from our friend base, more individuals that, that are doing investment in the opportunity zone and didn’t know that it was opportunity zone, you know, and by the time they figure it out, it’s too late, because you know, you have to make the purchase for capital gains, you have to purchase it through that fun. So once you do it, you know, you can’t go back and, you know, set the clock back and do it again. Yeah, Adam, if you look at Southwest Florida, and some of the areas we’re doing build to rent, there’s a good chunk of that, that is opportunity zone that is, you know, very viable real estate, actually, it’s

like right in smack dab. And, you know, the area that we like to focus on in some of the personal bills that I have, are in opportunity zones, we’ve elected not to go that route, because our plan is to simply just liquidate them in less than 10 years, but we knew that going into it. Right. And that’s, you know, that was our plan. But let’s just that’s the other great thing about Bill to rent, is that with the Ozy law, not only do you not have capital gains, but there’s no depreciation recapture, either. Well, that’s something we should probably talk about, as well, because I wanted to hit on how you can combine some other tax strategies to really maximize this. So for someone that’s I mean, everyone takes normal depreciation, right? I think you’re required to take depreciation, right? But you’re gonna, they’re gonna make, like,

let’s say eight. Yeah, so and that’s an important thing of why, you know, you gotta be tracking depreciation, making sure you’re working with an account, right, you know, is familiar with real estate. So many times, we see just a monopod investors that just aren’t calculating depreciation or doing it appropriately.

But with combining this with other tax benefits, so someone that wants to do like a cost segregation study, you can also do that. And are you saying if you follow these rules, there’s no depreciation recapture for that period? Yes. And when you say off, same thing, no depreciation recapture. So if you have some property, and you want to take it costs eight now and get your 100% bonus depreciation, that fear of paying that that tax back is eliminated.

Any 1031 rules around opportunity zones?

I mean, you can I guess it doesn’t really apply, right? If you whenever you want to need to, there is no capital gains. But so for your instance, though, your capital gains or your capital gains coming, and not to get too personal, but are you selling real estate? Or? I mean, no, I don’t, I’m not I don’t sell any real estate. So I’ll sell other things to create a capital gain, and then put it into real estate and put it into real estate. Yes, because again, the program’s deals allow you to use leverage. So the real estate that you buy, you just need enough money to get the deal. You don’t need enough money for everything else, you can finance everything, which is another thing, that’s great. That’ll be able to rent, because at the end of the day, you have this, this new asset sitting there and building.

You know, if you if you’re doing rehab, there are certain limitations as far as the loans that you can get to do your rehab work. But the deal to rent, it’s a lot easier to finance the process with

a lot of debt from beginning to end. So how you’re making this work is you’re taking your

a lot of debt from beginning to end. So how you’re making this work is you’re taking your capital gains, you’re using that to put in this fund. You’re buying the land with the fund, you’re hiring a builder to build in these areas. And that’s that’s base

To clear, right? Yeah, take take, take capital gains by land, get enough capital gains to get the deal, which is, you know, via the land or the long enough capital gains to get into a loan, and then finance the rest, build the rest, I mean, finished, finished of house, new house, at the end of the day,

take a you know, you know, take a loan, the finances out, keep your your portion of capital gains in there, because you can’t, they don’t want you making money, you know, from disguise sales and things like that off of pulling your capital gains out too early that you originally invested. So keep that in the fun, finance the risks, and then you know, get a new product, that hopefully if you build it the right way, you should have less repair cost, you know, as the years go on, and then you have a new house that’s essentially free that you have the option to sail tax free in 10 years.

Just to be clear, let’s say going back to this example, you have $100,000 of capital gains from whatever could be a real estate sale or whatever source, you put that $100,000 into this qualified fund.

You don’t necessarily need to invest that $100,000, right. I mean, you could do if the land is $20,000. And let’s say a build is 200,000, can you carve out, I mean, can you just do that one build and keep the money in the fund, or so that’s where that’s where again, so every every half halfway point of the year, the end of June, and December, they have these trigger point tests to make sure that your fun is in compliance, and to be in compliance. 90% of the gains that you put into the fund have to be in some type of property. So you can’t use the fun to just park your capital gains, you have to get it in some type of investment. So you could take that $100,000 You could buy 520 $1,000 Lots, or I guess what, you’d need five of them to be at 90%. And then, you know, build five houses in that opportunity zone, run a cost segregation to take accelerated depreciation if you’re a real estate professional. Yes. And bada boom, Bada bing, no taxes paid when you sell 10 years and no, no depreciation recapture? Well, so Yes, correct. So you get take your cost segregation, if you’re a real estate professional, or if you’re doing short term rental, because if you’re doing short term rental, that counts as active income, you don’t have to be a real estate professional. So it kind of helps you, if you hold if you’re building to rent, just don’t we talked about that with our last CPA interview with was a Brandon. Brandon. Yes. Brandon Hall? I think it was it, you know, talked about that a little bit Malaki, if you don’t mind, just the the differentiating factor with doing short term, versus, you know,

being a real estate professional and having to do cost segue. Okay, so, so a real estate professional status is really hard to get if you have a regular job, obviously, if you don’t, or so, or you or your spouse, if somebody doesn’t, and they’re your spouse is the one really doing all the work, then, you know, they can, you know, make it a little easier for them to qualify for that designation. Because it real estate is inherently considered to be passive, it’s not active. So they don’t want you counting that against your regular job, which is the active income bracket active income bucket. But short term rental, you know, is considered, you know, to be more like someone renting a hotel or something like that the service is you, you’re doing things you know, on a daily basis, so it kind of can be considered active. So if you’re doing short term rental, and you’re the main one doing all the work, no one’s doing more work than you and they have certain hours, you know, that you have to hit and things like that, then you can use all of those losses, as in counted against active income without being a real estate professional, do you mean Cossack or doing accelerated depreciation for short term rental? Yes. Okay. It’s actually better so, because with short term, you know, you always have the argument should I arbitrage or should I own right? The main advantage to owning versus arbitrage is that you do get the depreciation and the accelerated depreciation plus your taxes, you know, interest and things like that the mandated depreciation, which if you have a normal job, it allows you to offset that against your W two income without being a real estate professional. So it’s a nice, nice little shortcut, and you would do with cost sex study on that as well though, right to determine what accelerated depreciation you can take without being a real estate professional. Sorry, you still need a car seat if you want the bonus. If not, then you know, do it under the normal timeframe. Now going back to the opportunity fund that you create for yourself, let’s say I sold a property had the $100,000 in gain, but I really needed 120,000 to do the project that I want. Can you add in your own capital? Are you just kind of out of luck and need to find another deal? No, you can add in capital or financing you know

from others, it’s no problem is the again. So the main thing is the the portion that that you need to get the deal should be with, with your capital gains. Oh, but but if I only had 100,000 in capital gains, I needed 120. I couldn’t just take 20 Total take another income, another income type? No, no, it all has any any money that comes into it. That’s not finance Sorry, I misunderstood. Any, any money that comes that’s not financed, needs to be capital gains, no ordinary income.

So you can go raise, you can go get, you know, money from a partner, someone else do the same thing or just borrow more? Okay. Now, what have you seen? You know, we mentioned that a lot of a lot of funds that are out there that are being done are being kind of syndications. What are some of the things that you think people need to be looking for both positive and negative in the syndications to know that they’re going to follow the rules or are likely to follow the rules, I guess, can’t guarantee it, obviously, and then kind of how they can vet them if they need to. I mean, the main thing, just like with any other type of deal, you know, see their track record. So see the type of deals that they that they put their money in, and the return that those those deals are made. And, you know, make sure they’re legitimate, because you don’t want to you don’t want to invest just for the tax benefit, you still want the deal, you know, to make money. So I’m not I wouldn’t put my money in into any syndication, that doesn’t hit my

normal criteria for whatever I expect my return to be. So make sure that they’re hitting those numbers and see what they’re going to put the money in, whether it’s, you know, a project they’ve identified, or if it’s, you know, we’re thinking about putting it in this and then see what type of returns they’ve had in the past where did this from opportunities on investment or not, because again, nothing should change, the only thing that’s changing is the area where you’re investing, but you should still have a track record to show that you’ve done successful deals. And that’s an error that would have to hold the property for 10 years. So that I mean, that’s a little bit longer than we see a lot of typical funds. So I guess they’d need the investor would need to be prepared for that as well to have their capital tied up for at least that that Long’s. Let’s, let’s talk about the dates a little bit. So, we’ll talk about the important dates of opportunity zones people need to be aware of and also just real quick on the Cost Segregation stuff, though. 2020 To the last year, someone could take 100% bonus depreciation next year, I think it steps down 20% per year, is that right? At least 1% per year? Yes. Okay. Unless that I guess something legislatively happens to reinstate that we don’t know. But as it as it stands right now, that’s, that’s where it’s at. So that also applies, though, to the short term rentals as well. Right? Being active being an active investor, if you’re not a real estate professional, this nothing changes with with those. Oh, that’s just a law that has nothing to do with the the recent legislation. So so let me help me understand that a little bit. Malikai because, okay, if you’re a real estate professional, you take do this cost segregation on whatever asset, you get this 100% bonus depreciation. Typically, I’ve seen mine being 25 to 40% of the actual improved value removing land.

But with a short term rental as an active investor, I’m still trying to understand how can someone that’s not a real estate professional? Like, how do we quantify the amount of depreciate depreciation that they can take that doesn’t apply to the cost SEC rules of this 100% Bonus are? So it does so is I guess you’re conflating the two so think of it two ways, what’s ending or what’s going down 20% Each year, is the bonus aspect of doing the cost sake, okay.

Assuming that the bonus aspect weren’t there, you can still do a call sec. And you can still take normal depreciation. The other part is whether it’s active or passive. So, assume I don’t have a cost day but I’m just taking my normal depreciation of my house.

If, if I’m doing it via short term rental, the only difference is I can now take what is typically considered passive, it now can’t count as active if I’m the one doing most of the work. And now I can take that against my normal I can combine that those losses potential losses with normal active income, do you normally not get depreciation on a short term rental? If you own it, you get depreciation 100% If you arbitrage you do not okay. And explain for the audience arbitrage. What do you mean by that? So there are two ways to really invest in short term rentals. The first way is if I own an actual property of my own and I short term rental, my own property, then I get all the benefits, all the tax benefits that you typically get from owning real estate. You get depreciation, you get to write off your property taxes.

You can write off your interest and that’s your principal, right?

But arbitrage is, I’m making money short term renting your property. So I will come to you and say, hey, I can get you more money than I can. I’m essentially being your tenant. And then I’m really,

I’m sorry, like a master lease type thing, kind of you and I, I’m signing a normal lease with you, just instead of you signing a lease with Malik, classnames, you sign a lease with Malika Sims, short term rental company, or whatever. And then I’m going to short term rental your property, but I’m still paying you a normal monthly amount, just like a regular tenant would. So now I’m making money from doing short term rental, but I don’t own the house, or I don’t own the apartment that I’m doing in. And that’s what’s called arbitrage. Gotcha. So let’s keep going with the timeline. Zach was saying we have the step down in basis, we have the your capital gains tax coming due in 2026. For the things you’re selling today, what are some other key timelines people need to know, in the main key timeline is you have to sale if you’re going to take advantage of the tax free capital gain, you have to sale by December 2014.

Meaning gotta buy it before 2037 to be able to hold it for the tenure. And it’s just again, we’re bouncing back and forth. But this is about the opportunity’s own investing. Yeah, so sell the tech or you have your capital gains, which is due today that you’re putting into this fund, do 2026 right to buy a property by 2037, to hold a 10 years to then at 2047.

You know, that would give you the ability to hold it longer if you wanted to right or sell it capital gains free, correct. And what I typically tell people to do, if you Google opportunity zone timeline, there’s a great website that typically comes up as one of the first links that goes over every single date, including the prior dates that we missed, because you previously if you held it, you know, if you held your if you

made your initial investment of capital gains in there, if you had it in there for five years, and then 2026 hit, you could have gotten a 10% reduction in the capital gains that you originally had to pay, but that time by the time date has passed, you know, but I’m just saying, if you

Google opportunity’s own timelines, it’s a pretty good document that will come up and one of the first few links that goes over all the dates. Now, if somebody invests after 2026, or the capital gains taxes, do that year, pay that tax?

That’s good to know. So what other things should people know about opportunity’s own investing?

The main thing is, it’s something you can do yourself or, you know, with your CPA, you know, you don’t, it’s not complex. It’s really simple to extra forms with the IRS. And the second thing is, it’s really really good real estate. You know, some of the areas like I live in Houston again, and, you know, like a third of all of the tracks, the inner city tracks inside of Houston main city limits or opportunity’s own property.

Most of downtown Houston is opportunity’s own property, every the land around every one of our sports stadiums, raucous Astros, Texans and Dynamo play in all of these, you know, we’re not like some cities where our stadiums are in another city. Yeah, you know, our stadiums are in Houston, in the inner city, in all the areas surrounding that is opportunities on property,
some really, really great real estate, that’s the main thing you like, if you just look at that map, a lot of people really think oh, this is, you know, downtrodden areas, you’ll be surprised at some of the prime real estate that counts for this program. And I was gonna say, if people don’t know, Houston, the areas that he’s talking about are places you would want to invest in. Probably even if there weren’t opportunity zones. Correct.

Correct. Malka just kind of in closing, I mean, if someone that’s hearing this is like, this sounds interesting, I want to learn more about that. I mean, what advice would you give to someone about how to go about starting to, you know, build their plan to invest in opportunity zones, obviously, identifying where those are at and choosing an area what, what from there, identify the area, and then start sourcing where you can pull capital gains from without selling real estate.

So that’s a good idea of actually having your plan, find the area first, have your plan, and then reverse engineer it to plan where you’re going to use that from capital gains, right? Because it also get your you know, which I think applies to anyone just doing real estate in general, but

you know, make sure you’re fine. Make sure you look good on paper, make sure your credit is good. Make sure your debt to income ratio was good because you want to be able to leverage and not have to use

your money. And in this instance, the more you can leverage, the less you need in your capital gains to use. So I really try to focus on just looking looking good on paper to the banks and being able to go out and obtain financing, especially if you’re doing be able to rent well, even if you do a significant rehab, because you don’t want to have to rely on hard money lenders and things like that, you should, you know, want to get to a point where you can be your own bank and have lines of credit in different avenues like that with different lending institutions. Now, the lettering, does the lending change at all? Like do our lenders incentivize to lend to people doing opportunity zones, or is that it’s just the regular loan. Some of them are, because some of the areas qualify, I don’t know the name of the program, but they have some areas that, you know, lenders get credit for, for doing business in those areas. So it might be a possibility.

That’s great. Yeah, and rent to retirement on the build to rent stuff, we do have areas that are in opportunity zones, we don’t set those up for people, that’s something you have to decide if that’s the route you want to go. And obviously, follow all the parameters that Malika has outlined, you know, as far as pulling, where those funds are going to be pulled, making sure those are capital gains, setting up the fund. But from there, I mean, there are areas that you can identify that are opportunity zones to do build to rent in and take advantage of this. Yeah, identify the area.

Make sure identify the area, see where you’re going to pull money from. And then make sure you can get financing on your own and set up the fun. So you don’t find out later after the fact. Yes, you are in an opportunity zone and it’s too late. You haven’t had the money has to be has to flow through that funds and make the investment. And it has to be capital gains.

All right. Well, now it’s simple. But if you mess up those simple things, you’re screwed.

That’s when the federal government isn’t very forgiving when it comes to taxes. It’s not that, you know, they’re like that. Sorry, we know you bought it, you know, three days prior, but you can’t go back and say, Oh, now let’s do it this way. It’s too late. All right, well, Malika, last it has to you can’t buy from a related party. So

yeah, what does that what does that mean? I mean, let’s quantify that a little bit related being like business partnership, family. Yeah. Family, mainly family, someone that’s related to you. So or yourself? Right. And you can already have the house and then say, I’m selling it to this other end of the nosy like that. That doesn’t count.

Sometimes, yeah. New purchase. Got it. independent third party.

All right. Well, thank you so much for joining us today. Malika. I really appreciate you taking the time to educate us and our listeners about this

relatively underutilized opportunity for investors. So for everybody else, check us out at rent to retirement.com. That’s rent to retirement.com. You can see the properties we have you can compare him to opportunities on maps and see if that’s something that fits your investment style. appreciate any reviews you leave on the podcast platform of your choice. And as always, if you have any questions, email them to podcast at rent to retirement.com That’s podcast at rent to retirement.com and we’ll talk to you on the next episode.

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