Category: Chaz Guinn

Are Housing Trends Showing Signs of Upcoming 2020 Recession?

Real estate professionals everywhere are warning of our economy heading towards a recession in 2020. Now there might be some housing trends to back up the claims.

Delinquent Mortgages

An area that has not received enough attention, according to Keith Jurow, is the “growing problem of re-defaults on (US home mortgage) modifications.” While 8.7 million permanent modifications were made since 2007, there is a reported 17 million temporary modifications made (according to the non-profit Hope Now consortium).

Even with the modifications, slightly more than half of the borrowers either re-defaulted or continued to remain delinquent according to the OCC.

The Market Watch also shows a graph provided by the Fitch report showing the Cumulative Default Rate by Number of Modifications. The housing trends show that two or even three plus modifications provide a spike in re-default rates.

Miami Housing Trends

Shifting focus to specific cities, the recent housing trends in Miami are also showing evidence of a possible collapse. Harris Kupperman (Moguldom.com) claims the prices South Beach are down 20-35% from peak prices. He continues explaining that the turn a profit on a rental is “mathematically impossible”, and “the only way owning is viable, is if prices go up and allow you to extract capital to fund the carrying costs – though debt service then makes the monthly cash flow much worse.” Kupperman warns that Miami has traditionally been a leader in the national market trends, meaning the national real estate market may be headed towards a similar pattern in the next year. We can compare patterns of the 2008 recession vs a possible 2020 recession.

Manhattan Housing Trends

A new report claims the “prices in Manhattan real estate took their biggest plunge since the 2008 financial crisis (Robert Frank, cnbc.com). The Douglas Elliman Q3 Report found average sales prices decreased 14.1%. Houses are still being sold, however the prices homebuyers will most likely receive at this time fall short of what the prices once were when they got their home for in 2014. There is an increasing number of luxury listings on the market, but a decreasing number of property values.

Foreseeing Economic Activity

Analyzing market trends in the housing industry can traditionally foresee economic activity. When times are good housing demand is high and prices rise, but when times are bad there is a surplus in property listings followed by low-bid offers on homes. What are your thoughts on a the timeline on when/if our country will enter a 2020 recession?

Last week Revolve Capital attended the IMN Opportunity Zones (Midwest) in Chicago.

The conference discussed Opportunity Zones surrounding the Tax Cuts and Jobs Act of 2017. Opportunistic zone areas include neighborhoods infected by factors such as distressed mortgages, lost jobs or boarded up neighborhoods. By building in these areas, investors can actually retain their capital gains tax instead of paying it to the government. What exactly are opportunity zones, who can invest in them and how can you benefit from these incentives?

What are opportunity zones?

According to the IRS, the Tax Cuts and Jobs Act (TCJA) is a “Major tax legislation that will affect individuals, businesses, tax exempt and government entities”. The Act added the IRS Code of 1986, which essentially effects multiple major taxed sectors: individuals, estates, business taxation, corporate tax, churches and nonprofit organizations, distressed communities, and more.

Opportunity Zones are defined as “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment”. These qualified zones were “created by the 2017 Tax Cuts and Jobs Act. Designed to spur economic development and job creation in distressed communities throughout the countries, they provide tax benefits to investors who invest eligible capital into these communities.”

Who can invest into these zones?

These opportunity zones are open to every private investor that has the sophistication and wherewithal, who knows how to structure their fund based on the rules and limitations of the Jobs Act, and who would like to tap into the opportunity zone revenue dollars and concurrently defer capital gains taxes. Historically, these types of opportunities were sometimes available only to accredited investors (typically requiring a net worth of $250-500K+) to invest in these projects. The Qualified Opportunity Zones program can be utilized by investors on any end of the spectrum… whether you are a private investor, a small investor, a new investor or a larger seasoned investor, you can benefit from the advantages of building in these areas.

Note, there are special reporting requirements. Reporting ensures the restabilization of the distressed area is being pursued.

How can investors benefit from these types of investing opportunities?

If you are interested in diversification into other asset classes or are already diversified, then investing in opportunity zones might be a revenue stream you should explore. Sectors such as commercial, strip malls, communities, hotels, gas stations, land, homes, etc. can take part in building in the distressed zones. By looking for ways to invest dollars to A) avoid capital gains taxing and interest from the IRS to be retained into your projects; and B) seeking to find a way to help revitalize these opportunities (by purchasing acres for housing development, revamping strip malls, creating gas stations and hospitals, etc.) you can play a part in this economic development tool. Revolve Capital Group has product (both non-performing and re-performing loans) located across the nation, many assets being directly located in these areas of opportunity.

By utilizing alternative asset class diversification, our investors can segue way into putting single-family home investments into the fund. Meanwhile, making these areas livable, appealing and fundamentally opportunistic. In return, we can expect an influx of first time home buyers, renters, borrowers, and families. When you create charming up-and-coming neighborhoods filled with Walmarts and Targets then people will be incentivized to move there, filling the demand of customers.

There is a big crossover between building in opportunity zones that lasts between 7-10 years and economic growth of communities that have been boarded up, people have moved out, building has been condemned. Communities that might have previously been more attractive, had a larger population, and where investors and developers were once putting their investment dollars. That is the crux of the message… that these opportunity zones create a number of different ways to invest into single-family homes, commercial properties, land, etc. in terms of both long-term and short-term benefits. Now that we are 11 years removed from one of the biggest crisis since 1929, you can tell banks, lenders, communities, developers, builders are not interested in those areas. The government is creating an opportunity to go back to these areas and develop.

Revolve Capital Group has continued to be at the forefront of revamping communities. Our firm and many of our investors purchase homes that are pre-foreclosure all the while helping families avoid foreclosure altogether.

What are the disadvantages?

While anyone can benefit from investing in these areas, the only way to qualify for the tax incentives is by purchasing the investment through a qualified opportunity fund. EIG.com released information explaining “You cannot simply purchase real estate in an opportunity zone, there has to be improvement to the property to ensure it meets the qualifications of the investment and providing economic stimulation. Additionally, the Fund must invest at least 90% of their assets in a qualified Opportunity Zone.”

According to the Economic Innovation Group, Opportunity Zones incentives are “tied to the longevity of an investor’s stake in a qualified Opportunity Fund”. They continue on explaining…

“There are three core tax incentives:

Temporary deferral: A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the Opportunity Zone investment is disposed of or December 31, 2026.

Step-up in basis: A step-up in basis for the deferred capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original deferred gain from taxation.

Permanent exclusion: A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued on investments made through an Opportunity Fund. There is no permanent exclusion possible for the initially deferred gain.”

Essentially, if you choose to invest in qualifying opportunity zones your capital could be tied up for 7-10 reducing additional opportunities to invest in a variety of other asset classes.

The Opportunity Zones is a step in the right direction for the government to stimulate economic growth in underserved areas; however, our company firmly believes it is more advantageous for investors to focus on preforeclosed assets. There is not a requirement to hold a distressed note investment for an extended period of time if it is not providing the expected return, you have the option of investing in any nationally located area, and most importantly you can still revamp communities by choosing to keep families in their homes

For a more passive income stream that provides economic stimulation, potential growth for lower income distressed neighborhoods and multiple exit strategies we suggest considering notes for your future investments. Contact us today to learn more information on how we can help you grow your portfolio.

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Sources:

Economic Innovation Group (2019), Opportunity Zones FAQs
Retrieved from: https://eig.org/opportunityzones/faq

IRS (2019), Tax Reform
Retrieved from: https://www.irs.gov/tax-reform

IRS (2019), Opportunity Zones Frequently Asked Questions
Retrieved from: https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

IMN Opportunity Zones Forum (Midwest) Recap

Last week Revolve Capital attended the IMN Opportunity Zones (Midwest) in Chicago.

The conference discussed Opportunity Zones surrounding the Tax Cuts and Jobs Act of 2017. Opportunistic zone areas include neighborhoods infected by factors such as distressed mortgages, lost jobs or boarded up neighborhoods. By building in these areas, investors can actually retain their capital gains tax instead of paying it to the government.

In the next coming weeks we will be posting content surrounding the opportunities available. Stay tuned for more…

IMN Opportunity Zones Forum (Midwest)

We are one week away from the IMN Opportunity Zones Forum (Midwest) in Chicago, Illinois. Join us September 19th to hear key speakers such as Chaz Guinn and Anthony Scaramucci. Guinn will be discussing “Accessing Creative Financing to Close Deals Outside of Primary Markets”.

The forum will all also provide an update on QOZs from the following perspectives:

• Legal & Regulatory Implications
• Tax & Accounting Considerations
• Investment & Community Impact
• Deal Flow Management & Fund Structuring
• Market Selection & LP Relations
• Risk/Rewards & Deal Due Diligence

To learn more event highlights, please visit our former blog post regarding the conference.

We look forward to seeing you there.

Please visit the IMN’s registration page by CLICKING HERE to purchase your tickets.