As an investor, like many of you reading this, I always have plenty of irons in the fire. Sure I do notes and invest in hard Real Estate, but I also utilize things like insurance contracts as well as own and run several businesses. The one thing I recommend for all investors or potential investors is not to simply invest in any one of these avenues I listed above but to invest in one’s self. One of my recent projects has been the formation of an accredited investor group called Strategic Investor Alliance (SIA). Now like my note business that originated with a focus on 2nd liens (a marketplace that was barely in existence when we began), I helped to start SIA because a group that my fellow board members and I envisioned didn’t exist. By that I mean a group of like-minded individuals interested in one thing – the pursuit of building and preserving wealth.
Now, although that’s a broad topic, we try to tackle it with focus towards different aspects and strategies at each bi-monthly meeting and at our annual one-day event. For example, last month we dedicated our entire meeting to The Seven Stages of Retirement. The idea behind the group is to not only to enrich others with what you know but to also build credible relationships with those who know investment, tax, and estate planning strategies that you may not even be aware of.
To really preserve wealth, one needs to have wealth so part of our group’s focus and my main goal as an educator is to teach how to build wealth. As an active investor and business owner, I spent much of my career in accumulation mode - finding the next property, the next note deal, always moving and accumulating more and more investments. Now as I’ve become more passive and started planning my future as I get closer to retirement age, I’ve come to realize that more isn’t always the best path toward building wealth. I’ve found there are really five ways to create wealth using synergies between two or more of the following ways is what I think is the key to exponentially do so.
#1. Real Estate
Obviously, real estate is the cornerstone for passive income and wealth building. Between the tax advantages and write-offs, as well as the depreciation and appreciation, it has some investing characteristics that are second to none. Now, how we build this pillar in our portfolio of passive income may vary based on our strategy.
For example, some types of real estate are easier to manage than others (e.g. Garages may be easier to manage than houses, commercial real estate may be easier than residential, etc). Real estate is also the easiest of asset classes to leverage. It’s easier to borrow money for real estate than it is for a business or paper assets.
Now there are many out there who are understandably conservative with their properties, paying off their real estate so as to have little to no debt, especially by retirement. Personally, as long as my real estate has positive cash flow and I have earned income, the debt doesn’t really bother me especially if I’m re-leveraging my properties to purchase other types of investments with equally favorable returns.
Is owning fewer properties that are all paid off better than owning a lot more homes that are carrying debt in retirement? The answer is, it depends. Risk tolerance, comfort level, and the amount of passivity you want in your investment career really are the things that dictate that answer.
#2. Insurance Contracts
Now, insurance contracts are often overlooked, but they’re a valuable tool when trying to build and protect your wealth.
Although there are many different types of insurance, as well as varying strategies depending on how you’re trying to protect loss of income or utilize contracts for retirement income or legacy planning. It rarely can ever lose money, since it has a guaranteed yield regardless of the market, and it throws off tax-free retirement income, as you are able to access the cash value through loans. Keep in mind, these are long-term investment vehicles, but they are very safe and predictable.
Can you beat the yield elsewhere? Absolutely, which is why it is only one of the pillars.
Two other nice features of insurance contracts are that they have built-in asset protection, and money borrowed out doesn’t count as income when you’re filing out a tax-return, applying for social security, etc.
#3. Notes
Now I’m certainly partial to notes because they are my business but I can you tell you why, it’s really because there are very few investments like it. Notes are usually purchased at a discount, and they tend to offer a similar net yield to Real Estate and are backed by collateral (actual properties). With notes, your money can start to work as hard as or harder than you do.
For example, sometimes a note bought at a discount, due to partial equity in the property backing it, could suddenly become more valuable if equity were to come back into the market place. Many times, a note purchased at a discount can be sold a few years later for almost the same asking price that it’s currently at today, either due to the bulk of the monthly payment being mostly interest, or due to the improved track record of a longer pay history.
#4. IRA Accounts
Self-directed IRA accounts are a great vehicle to build tax-free or tax deferred income by retirement age. For example, I once purchased a house for $40,000 in my Roth IRA and flipped it for $80,000. So in that instance I made a $40,000 profit that was entirely tax-free. I’ve also purchased many notes in my IRA account, and besides the tax-free passive income, there’s nothing like the high yield when cashed out with an early payoff.
#5 Business Equity
Business Equity can be a fifth pillar for some, but for business owners it may not always be all that passive. Many business owners, including myself in the past, are guilty of working in the business instead of on the business. Businesses can also the toughest asset class to own, develop, and maintain depending on the type of industry your business is in. But it’s also important to remember that they are also the asset class that has the potential to offer the highest of all returns on investments, in fact it is the investment of choice for nearly all of the world’s wealthiest people. So creating a saleable business or one that can continue on by employees or family generating passive income is usually the end goal by retirement age. And in the meantime, one of the best wealth building strategies is to sweep some of the money out of your every day business and into the other pillars above.
Utilizing many of these pillars, especially synergistically, can really ramp up any one investment’s revenue stream and be the key to building true wealth. So whether you have a day job or a business generating income that can be put towards investing, you can use that money to capitalize on a mixture of any or all of the 5 pillars above. Ideally, you could purchase real estate for the tax breaks (on your earned income), the notes for the little to no hassle revenue stream that is earned passively, place some money in some insurance contracts so as to keep some of your capital in a safe bucket that can pass favorably to heirs, and if any of these strategies are done in your IRA account, all of this builds tax free! So as you can see, any one of these pillars is fine by themselves, but when put together you really can learn how to harness their greatest attributes to build wealth.
Be sure to join Dave at the March 8th MAREI meeting, to learn more about investing in notes . . . get the details and pre-register by clicking here.