The most effective strategies for building wealth used by smart investors is to establish numerous sources of revenue. This is the way that someone who does not make enough from their job to earn more income, increase their retirement or achieve financial independence. However, investing comes in different forms, and certain require more time than others. I grew up with real estate, and when I began working in my “day job” launching rockets at the Kennedy Space Center, I made the decision to buy my first home.
In the subsequent 40 plus years, I Diversified my Investment Portfolio, which now includes more than buy-and-hold residential homes, but also retail offices, multifamily homes industrial warehouses, buildable lots as well as other. I’ve even expanded into alternatives, like private loans, tax liens mortgage notes, oil and gas rights.
Although acquiring real estate was a natural progression for me, a lot of individuals are interested in alternative investments without fully understanding what they’re getting themselves into. How do you determine which investment alternatives will be the best for you? What asset types generally require more effort and time?
Active Vs. Passive Investing
The IRS prefers to view income as paid or passive. For instance my day job was regarded as earned income (i.e. you offer a service, and have to pay taxes, including local, state, federal and, sometimes, state taxes, in addition to the social security system or Medicare). There’s also what the IRS refers to as “passive income,” which includes rent, royalties dividends, interest and many more. You are still required to pay taxes however, you won’t need the burden of paying Social Security or Medicare. But there’s more. There are a variety of types of investments in a range of active and passive. It’s based on your role as an investor.
In the syndication model, you can raise capital or create a fund to invest in the money of others (OPM) and then actively use it for investment. But, if you’ve put the capital in funds, and you’re not engaged in making decisions on a daily basis, you’re passively investing. It’s a return regardless of whether you’re relaxing on a sandy beach in Puerto Rico or working in an office for dentists.
Renting property is passive in a degree. As landlords, even if you aren’t able to manage or maintain the property on your own, it is still necessary to engage a property management company and collaborate with them. This isn’t a simple set-it-and-forget it kind of investment. If you are investing in commercial properties that have three net leases, it is more passive as the tenant takes care of all maintenance. Short-term rental properties, also known as Airbnb rental properties, however, typically require more involvement from the owner. Certain states have even mandated the landlord to obtain a business license for the operation of the Airbnb properties.
Long-term lending is much easier than lending short-term. When you’re spending money each year, you’ll need to keep looking for your next borrower. If you’re lending for 30 years it could be inactive. But, the loans are usually paid off before the term of thirty years expires. Notes that are not performing, also known as defaulted loans, are more active. You might need to collaborate with an attorney or a servicer in order to navigate the collections and legal procedure.
If taxes are due on a home, that debt is able to be purchased and sold, just like the selling of a promissory note (i.e. note investment). If you decide to purchase tax-related bonds as an Investment Opportunity, you can either get the money from the property owner, or you would seek to acquire the property. Tax liens are active or inactive, based on the rules and regulations of your state and procedures. States such as Florida, Texas, and Colorado perform a lot of the work and make it a than a passive source of income. You might consider working for it once, or two times each year for just a few hours, but you would not be able to track the money. Additionally, in these states, a lot of the management tasks is done on the internet. Contrary to that, there are states such as Illinois, New Jersey, and Pennsylvania and New Jersey, which are more demanding. This means investors might need to devote more time to investigation and follow-up. Sales of tax lien deeds are much more active, because you will end up with property, as opposed to an interest-bearing tax lien that earns interest.
Bonds and stocks can be active or passive according to your preferences. The long-term investing with indices are more passive than day trading, in which you’re monitoring the market constantly. But, there are computers that will help reduce the time and effort. The majority of investors are constantly monitoring and changing their strategies. Long-term investors usually employ the “watch and see” approach until market volatility gets them thinking of buying or sell. When it comes to 401k plans for companies the majority of investors make a plan and then forget about it in the hope of it doing well when they retire. This is a passive strategy and usually comes up with disappointing results.
Precious metals is a different option that I think is at the passive side of the spectrum. it is utilized in times of uncertain times, like times of war, major economic declines or even political unrest. It’s a means to hold wealth and safeguard it from FIAT currencies. There are a few who actually trade in metals according to the price per category. For instance, silver can rise while gold decreases so it could make sense to trade gold in exchange for silver or even platinum palladium as well as any one of the other precious metals. The gold market is present in over 152 nations across the globe 24/7 and is probably one of the most difficult prices to manipulate due to its long-lasting nature and international presence.
The royalties are another investment that is passive In most cases. Consider the stars from Friends or Seinfeld as an example. They are able to transfer their royalties and rights to an investor and every channel that wishes to air one of these shows will pay the royalties towards the owner who bought the rights. Another option is to purchase royalties for the Beatles song, and later receiving payment directly from the broadcaster. In addition to the list there are a variety of other investment options available, and they all differ between passive and active.
However, there are benefits for each investment style. If you’re active, you’re likely to have more control and have the ability to say about your investments. However, when you invest in a passive manner, you’ll benefit from being able to receive “mailbox money,” or the returns that are delivered to you in a shorter amount of energy and time.
Which Investment Strategies do you like? Tell us with us in the comments!