Founder, CEO of Blue Lake Capital LLC. Helps passive investors grow wealth through real estate. Podcast Host: REady2Scale.
There are many types of investment opportunities available, including angel investing, stocks and real estate. The question is, how do you allocate your money to provide the best return? While there’s no perfect answer, there are pros and cons to each, which I’ll share with you based on my personal experience.
When I was studying for my master’s at MIT, I had an opportunity to work for a startup and see how new companies are formed. While real estate is my first love and passion, angel investing is an exciting and fascinating investment vehicle. By investing in young companies that are on the cutting edge of technology, angel investors help to grow the economy and impact the lives of others.
Angel investing offers no immediate cash flow or liquidity, but the payoff can be huge if you happen to hit a home run and the company is successful. When it comes to angel investing, you have to be willing to risk losing your entire investment, and it might take anywhere from five to seven years before realizing a profit, if ever.
When considering an angel investment, I invest with venture capitalists who vet the deal in the same manner that limited partners invest in real estate syndications. When deciding on a company to invest in, I always assess the team’s prior experience and track record and the product’s uniqueness and desirability. I also learned to focus on the uniqueness of the opportunity and how crowded the market is, as well as the barriers to entry.
The Stock Market
Many investors like putting their money into stocks because they are the most liquid investment. It’s also important to note that liquidity comes with market volatility, which can pose risk.
Conservative investments in the stock market can provide income through dividends and potential appreciation over time. There are risks, of course, and if you don’t have the time or commitment to follow news and market trends, it might be best to keep stock investments at a smaller percentage of your total investment.
Real Estate Investing
Multifamily real estate is my area of expertise and the largest allocation of my investment funds — 70% of my money. However, multifamily investing does have its own pros and cons. While it may not be as liquid as stocks, it may be semi-liquid because there are ways to sell the shares you hold in the limited liability corporation (LLC) that owns the property. With real estate, you do typically enjoy the benefit of immediate cash flow along with the potential for appreciation over time.
Investing in real estate also provides tax benefits. Thanks to cost segregation, which is a form of accelerated depreciation of capital expenditures, you can have losses on paper and still have the ability to lower your taxable income across all of your passive investments. That’s something you can’t do with stocks, and it’s a benefit you don’t have with angel investing unless you lose all of your money.
It should be noted that some things may change with the new administration, but only time will tell how all of this plays out.
Angel investing can be exciting but doesn’t offer any cash flow or liquidity. However, there can be an opportunity for a huge payoff if the startup is successful. I only invest in companies that have been vetted by a venture capitalist, and I pay close attention to the team, the product and the opportunity.
Stocks are liquid, but the market can be volatile, which poses risk. You have to stay on top of news and economic trends to determine the type of companies to invest in and the timing of buying and selling shares. Conservative stock purchases can provide income and appreciation over time.
As a captive real estate investor, syndicator and owner-operator, real estate is where I allocate the bulk of my funds. It offers the benefit of immediate cash flow and the potential for appreciation. However, the biggest benefit of real estate is the tax benefit.
Spend some time looking at the options, and decide how much of your wealth should be allocated to each. It’s not an easy decision determining how to allocate your wealth because each case is unique. If you don’t feel that you have the knowledge or expertise to determine how to allocate your money, you can always hire an investment advisor to help you with your decisions.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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