This is the concluding part of my discussion with a young man who asked how to grow his money.
He earns between $60,000 to $90,000 annually, and his savings are in six figures, but he is only getting 0.06% annually for all his effort. So he wanted to know if he should delegate his fund to someone else to manage for him or do it himself.
Click here to see the first part where we discussed his option if he wants someone else to manage the money on his behalf. You don’t want to miss it. I call this part the DIY investment strategy.
Let’s dive right into it.
Real Estate Investment
Many people assume you need hundreds and thousands of dollars to be a real estate investor; I can tell you right now, that is not a correct assumption. With your little savings, you can start investing in real estate investment property.
Real estate investment properties are tangible assets that can earn you substantial and predictable steady income for a long time. They are also assets that can be passed over to your next generation.
Here are the top reasons I recommended real estate as a possible investment vehicle ahead of others available.
1. Little Equity Requirement
One beauty of real estate investment is that you can be an investor even when you don’t have a dime.
So having up to $60,000 to $90,000 will get you property worth millions easily if you know how to leverage your finances. For example, your $90,000 can serve as a down payment for a mortgage to buy an investment property worth millions.
As you make payments for your mortgage when due, you will be building equity you can use for another property.
Also, with $90,000, you can find properties you can buy and flip within a short period and make good returns.
2. Cash Flow
The main benefit of your investment property is the rent you collect. You know when they are due to be paid to you and how frequently the payments occur.
The rental income you earn can go into paying your mortgage to help offset your outstanding.
A great strategy would be to buy a rental property whose return will be more than enough to pay your monthly mortgage. See more details here.
3. Tax Benefits
The United States tax system offers a lot of incentives to property buyers and owners.
For example, some running costs like maintenance, payment of mortgage interest, and home improvements are tax-deductible. Also, if you sell an investment property, you are supposed to pay capital gains tax. However, if you use the 1031 exchange, you will be allowed to transfer the gain to a new property you are buying.
The more you invest in properties, the more incentives you get to enjoy from the U.S system. It’s designed to help real estate investors grow their wealth.
4. For Personal Use
Having $60k to $90k sitting in your saving is not particularly useful to you. Still, when you invest it in a real estate property, you have an additional benefit of using the property for personal use. You can even decide on an owner-occupier strategy.
In this instance, you occupy a part of the property and rent out other parts to help reduce the mortgage burden.
Better still, you can rent out other parts and still share your flat with one or two tenants. The bottom line is for you to grow your investment in the long run.
5. A Note of Caution on Real Estate
Before you put your money in real estate investment property, it is vital to conduct proper research and analysis of the property and its location.
A market analysis, inspection by experts will also be required to help evaluate the property before you part with your savings. Strategy and due diligence will help you maximize real estate investment.
Invest in Real Estate Investment Trust (REITs)
The U.S. Securities and Exchange Commission defined REITs as “Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing real estate. A REIT is a company that owns and typically operates income-producing real estate or related assets. These may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. Unlike other real estate companies, a REIT does not develop real estate properties to resell them. Instead, a REIT buys and develops properties primarily to operate them as part of its own investment portfolio.”
REITs are more like ETFs but with a strict focus on real estate investment property. As a result, you can buy shares of REITs at a relatively low cost and get diversification into a variety of property types.
Buying and being part of a REIT is not so easy. However, you can buy shares online from the comfort of your mobile device. Another advantage of REIT is, you will not have to worry about the troubles of physical structures and all the challenges that come with them.
That also means that you are forfeiting the opportunity of being in control and enjoying all your profits alone.
Whoever manages the REIT gets to determine what your profits will be and what gets to you at the end of the day. However, you can sell your shares on a REIT faster than getting a physical property sold in the market.
My final recommendation to this person was for him to invest in both physical structures and REITs.
What a saving of, let’s say $60K you can find a property that will not require up to $30k down payment. So, you can invest some of what is left in REITs. After all, the latter only requires little money to start investing.
Investing in the Stock Market
The stock market investment is another great way to diversify your portfolio. It’s a great way to invest in different industries from across the globe. The returns are roughly around 12% per year.
While this is not a guaranteed year income, it gives you an idea of what to expect, all things being equal in the market. It gets more enjoyable when you decide to reinvest your returns.
In this case, you will be enjoying compounding interest in your returns. As a result, your portfolio will keep growing year after year.
There’s more; stock investments are closer to cash in form than physical real estate investment where you have to wait to find a buyer for your property and at an attractive price, and sometimes it takes time to find that great deal.
It only takes a few hours to liquidate your holdings in stock form and access the cash you need.
One of the best features of an individual stock is that you can start investing with a relatively low amount. Did I hear you ask, how low? You can start with only a few dollars.
According to Charles Baddeley of the Scottish Trust Deed, “You don’t need to have a lot of expendable cash to start with, you just need enough to make a difference. If you have less expendable cash, I would suggest that you invest in several smaller investments.” The trick is to get started, and suitable investments will eventually start to compound themselves.
A Note of Caution on Individual Stock Investment
Stock can be pretty volatile. You can watch your portfolio literarily go up and come down following the market’s reaction to what’s happening in the economy. It can be a bit tricky for new entrants to adopt a diversification strategy in the stock market.
That is why I would recommend investing in mutual funds and ETFs over individual stock for a new investor.
Investing in ETFs and Mutual Funds
Mutual funds and ETFs are like individual stocks; the difference is that they are a collection of stocks from different companies and sectors.
More like you are buying a “pre-bundled” stock. This means that your investments in ETFs or mutual funds are buying you a collection of assets or a portfolio of assets already selected for you.
ETFs invest in an index like the S&P 500, while a mutual fund is a collection of individual stocks that experts or managers have carefully selected. So if you must choose between two options because you are risk-averse, I will recommend going with mutual funds.
Both types of investment offer you a hand-off approach to investing in the stock market.
You don’t need any form of analysis or strategizing. Your portfolio managers will handle all that for you. You only need to concern yourself with what will get to you at the end of the period and hoping it’s a profit because that’s all under the control of the managers.
The companies selected by ETF and mutual fund managers are carefully vetted, consequently reducing the risk involved rather than vet individual stocks yourself. These companies carry out adequate diversification, which gives the investor a form of solace.
Although all the troubles they are taking off, you come at a cost like transaction fees, commission, and other charges.
Investing in Peer-to-Peer Lending
Peer-to-peer lending, also known as P2P, is a process where individuals lend money to other individuals or businesses through online services that bring the lenders together to find borrowers.
These online services assume the role of banks. They are responsible for setting the interest rates the borrowers pay. Also, they carry out due diligence on the borrowing individuals and businesses. Lastly, they are responsible for ensuring that the individuals who have pooled their funds together get their capital and interest back when the time comes.
For example, a real estate developer will approach a P2P lender to help complete their property faster so they can put it in the market for a higher rate. The P2P company will be responsible for carrying out all the necessary checks, decide if the developer will get all the money they are requesting for or a portion of it, and in what trenches.
After the property sale, the developer sells the property and pays back the loan plus interest. The rates vary per platform, but it’s usually in the neighborhood of 10% and above.
P2P is fast becoming an attractive way to invest money. So, if you have $60 to 90K saved and are looking for what to invest your money in, this is a great opportunity to consider.
The investment required is usually low because it’s a pool of funds from several investors. Also, if the borrower defaults in paying back, like in the case of the developer in the example, the lending platform moves in to take over the property.
Carrying out due diligence on your own is time-consuming and expensive if you have to do it independently, but these platforms hall these covered for you.
Here are some of the top players in the P2P business. Lending Club, Prosper, and LendingClub Bank.
Invest in Your Retirement
Whatever amount of money you earn, you should plan for retirement. I don’t joke with that at all, and it’s because I know we will not be active forever. The time will come when we are frail and possibly too weak to work. What we have saved up for retirement is what will work for us in those days.
IRAs or individual retirement account are examples of retirement saving accounts explicitly designed for that purpose.
Suppose you work with a company or corporate organization that offers retirement benefits as part of their package. In that case, they are most likely using one of 401K, 403K, or IRA accounts to contribute their portion of pension. Your employer will often match your contributions.
IRAs are a great way to save up for retirement significantly if your employer already contributes to a 401K account. There are two types of IRAs;
1. Traditional IRA
This type of account provides you with a tax credit on all your contribution as they come into the account; however, you will be taxed when you retire.
2. Roth IRA
This account makes you contribute taxable incomes now and allows you tax-free when you are on retirement.
As the name suggests, crowdfunding is the pooling of small funds from many people to finance new business ventures.
Crowdfunding platforms use an easily accessible vast network of people through their websites and social media to connect the investors with entrepreneurs who need the funds.
Depending on the structure of the crowdfunding platform, some wait until the new company becomes profitable to get a percentage of the profit after recouping their investment.
At the same time, others have a specific date when the funds they are lending to those new companies will be paid back. However, entrepreneurs are charged between 12% to 26% to access funds from crowdfunding websites.
Crowdfunding platforms are in three categories:
- Reward crowdfunding
- Debt crowdfunding
- Equity crowdfunding
Investors need to pitch their ideas to these site leaders and hope interested investors will reach out to them after believing in their pitch. This can be another source of investment for someone who may not have all the time in their hands to manage their portfolio.
Here are the top-performing crowdfunding platforms you can consider to put your money to use.
- Best Overall: Kickstarter
- Runner-Up, Best Overall: Indiegogo
- Best for Nonprofits: Causes
- Best for Creators: Patreon
- Best for Personal Fundraising: GoFundMe
- Best for Equity Crowdfunding: CircleUp
- Best for Business Loans: LendingClub
There are several investment opportunities out there that can help you grow your money and investment portfolio in the long run.
However, you need to clean up your lifestyle to ensure that the money you are making from investing is not leaking out through other means. Here’s what I mean.
Payoff Your Debts
Investing and watching your money grow when you earn well is a great position, but when you have debts obligations that sap all your returns, it can be a fruitless effort.
Debt is something that continually weighs on someone’s neck, like your credit card debts, school loans, car loans, and even loans from friends.
You will never feel free when you have debts to pay. Also, debts start to grow faster if you ignore them. So, plan to pay off your debts and be free.
The debts you ignore will grow in size and eat up any returns you are enjoying from your investments.
Set Aside Emergency Fund
When you start to earn good money, make it a duty to set aside an emergency fund for yourself and your family.
It should be a nest egg against unforeseen circumstances like accidents, death in the family, loss of job, wage cuts, natural disasters, and other drastic events that can impact your lifestyle.
Emergency funds should be close to cash form and easily accessible by you and another trusted person.
Terminating your investments to attend to emergencies is not always a great decision because you might lose more than the interest accrued on such investment. Also, the funds might not be readily available to you as quickly as you need them.
Control Your Expenses
According to a study by The Atlantic, an average American spends about a third of their income on housing. So paying full price for housing may have a significant impact on your paycheck.
Apartments in major cities are often a lot higher such that your $60 to $90k income may not look much if you don’t have a great plan for your rent.
For example, you can share an apartment with paying friends instead of bearing all the costs on your own. Having privacy is nice; having money is nicer. If you really must have your privacy, consider living in nearby cities with a great public transport system.
My recommendation for a neighborhood to live in, avoid the hip neighborhoods. Here’s my favorite strategy for finding great rent prices: If there are nice restaurants, art galleries, and realtors on every block, it’s too late — that neighborhood has moved north of your price range. Scrutinize all other expenses and cut off all wastages.
Earning $60,000 to $90,000 and saving up and being ready for investment is an achievement that deserves commendation. Next is to start testing investment waters gradually, but first, you must know your risk tolerance.
Sometimes, when you manage your investments yourself, you get to keep all the returns to yourself, but on the flip side, you will also bear all the risk alone along with all the work. You will spend more time analyzing and strategizing. So, what is the way out?
Take real estate as an example; you can invest in both methods with your saved funds.
Assuming you have saved $90,000 for investment purposes, you may consider investing $10,000 to $20,000 in REITs, another $20,000 in rental investment properties.
If you are left with $50,000, $20,000 can go into individual stock investment, but if you don’t have the time to manage it, you can start with $5,000 and invest $25,000 in ETFs and mutual funds. So you should still be left with roughly $20,000 that can go into P2P lending and retirement account.
In the example above, you would have successfully diversified your portfolio into different sectors management by professionals and yourself. The amount committed to the professional seemed more only because you need to learn the ropes. As you gain more knowledge and expertise, you can divest and move more funds to your care.
If applied properly, with the occasional advice of experts, you will start growing your money in a short time.
I will love to hear more about your challenges and successes at this phase of your personal finance. Reach out to me in the comments section; let’s discuss.