What are different types of investment strategies
Typically, investors that are either employees with W-2 jobs or busy business owners, fall into two categories:
Category I – growth investors: They plan to retire down the road, maybe 5, 10, 20 years in the future, and for the time being they are typically looking to increase their portfolio to pay for their kid’s colleges, their parents’ retirement homes, or buy things they can’t afford with their current income stream.
Category II – income investors: They are close to retirement or have already retired and hence, are looking for immediate passive income.
If I had known what I know now and if my more-experienced present self could advise my younger self about the process of passive investing from Category I – growth investing, I would have instead done the following:
- I would have used my IRA money to invest in real estate to diversify my portfolio.
- I would have invested in more projects that perform cost segregation studies on investment to bring in more opportunities that allow to take greater losses.
- I would have spread out investments into various projects over the years. This would have allowed me to generate multiple passive gains and passive losses, so that the gains would be netted against the losses gradually. The way to make such a balance work in your favor is to:
- invest in a potential “value add” projects that offer passive losses through depreciation. These passive losses carry forward unless they can be netted against passive gains. When the current investment finally sells, hopefully it generates passive gains, and again – this would be a good point to take advantage of any passive losses carried forward from past years to net against passive gains.
If you would rather leave investment research and analysis in points (2) and (3) above to the experts, then select a fund manager (or a couple, to hedge your bets) and invest through their funds.
Investing with a fund manager benefits from a tax perspective. Why? Because the fund management team will hire their own CPA to perform the tax gains and losses calculations and will provide you a single tax form (Federal tax return) with all of the details. Another benefit of investing with a fund manager is that they typically set up their funds with specific investment goals in mind. So, for anyone looking to increase their portfolio down the road, then a growth fund is the answer. Why? Because a growth fund allows investors to experience all the pros of the delayed gratification when the investment finally multiples in X many years. Keep in mind that there is potentially a way to execute backdoor Roth IRA conversions via growth funds. Ask your fund management team if such option is available to investors.
If I could go back many years to guide my novice self when I was just starting out passive investing through Category II – income investing, I would have told me to do the following:
- I would have looked for opportunities that offer immediate distributions.
- I would have invested mostly using self-directed funds – ideally Roth IRA money because this approach allows your investment to grow tax-free.
- I would have invested my IRA money in different commercial real estate classes and in different geographic locations to diversify my portfolio.
Just a final note of advice about income investing; if you are looking for immediate passive income, chances are pretty high that you need this income now. Therefore, the tax consequences are not your highest priority at this point and you may potentially be retired or working part time at this point and hence be in a lower tax bracket than before.
Bottom line, passive investments in real estate are not a new approach, so follow the path that someone else had taken to avoid the repeating the same mistakes.
