“Ninety percent of all millionaires become so through owning real estate.” – Andrew Carnegie
I’m a former registered investment advisor, known as a RIA.
Even though I’m not in that job anymore, I picked up some knowledge that I still carry with me.
One thing I learned is to have a healthy skepticism of Wall Street investing, especially when it comes to retirement.
There are many risks that come with Wall Street.
Counterparty risk, investment risk, volatility, and hidden fees are abundant.
If you’re anything like me, those aren’t things you want associated with your retirement.
There are many reasons you should consider investing in alternative assets.
Today, we’re going to talk about three.
Let’s jump into it!
1. History of Stocks
We’re going to start by talking about the history of stocks.
When I think about traditional investments, I think of stocks and bonds.
This has not always been the case.
I believe traditional assets are called real assets.
They are tangible.
In 1929, the stock market crash caused people to lose 89% of what they invested in the stock market.
The index lost 89% over a few years, and it didn’t recover for 25 years.
Investing in stocks during that time was the most risky, non-traditional choice.
But then something happened:
The Employee Retirement Income Security Act of 1974, or ERISA.
Companies no longer had to provide a defined benefit plan (think a pension).
Now, employees would get paid a certain amount into an account and they had to decide what to do with the money.
You’ve basically become your own investment advisor.
This created a lot of money going into Wall Street assets.
It’s also caused a lot of people to have no retirement at all.
According to this chart, 49.5% of American families have $0 saved for retirement.
One in two households don’t have anything saved for retirement.
Only 0.1% have over $5 million saved.
That’s one out of every thousand households.
Going along with this is the great marketing job that Wall Street has done with their stocks and bonds.
They spend billions of dollars a year telling you they are safe, traditional investments, even though they’re not.
I think it’s incredibly risky.
In my time as an investment advisor, I needed to get people into suitable investments based on risk assessments and where they were at financially.
There are lots of risks in stocks and bonds.
I didn’t feel like I was helping anyone if I recommended investing in them.
In my opinion, real assets are much better.
2. Real Assets Are Better
I’ve had over 1,500 one-on-one phone calls with high-net-worth investors.
Many of them ask how they can get into different types of retirement investments.
Typically, if you have a Fidelity or Schwab or another company plan, you cannot invest in physical real estate through this accounts.
You have to invest in paper real estate such as ETFs or other sorts of stocks.
There are several plans that allow you to invest in real assets.
Rocket Dollar does a self-directed IRA that is pretty low cost.
There’s also something called a QRP, which also allows for investment into these assets.
The best ones I’ve found have something called Checkbook Control, where you don’t have to get approval to invest in certain things.
You’re the administrator.
You can wire money, write checks, and can have full control over your retirement.
That’s a very powerful tool.
You can buy apartments.
You can buy oil and gas.
You can buy gold and silver or even crypto.
Being in cash flowing investments is amazing for retirement accounts because they offer a higher upside.
When you deal with Wall Street assets, you also deal with counterparty risk.
That means if my retirement account is in a stock asset, if that group fails, I don’t have an asset anymore.
If you have a piece of paper or digital certificate that says you own something maybe you don’t own it at all.
An example to counteract this way of investing is owning physical precious metals.
If somebody owns a bar of gold, they actually own the gold.
What happens if you buy an ETF that owns physical gold?
They’ll buy one bar or one coin, and they’ll sell 20 shares off that one purchase.
Wall Street will find a way to sell you stuff, even if they don’t have it.
Then the question becomes, if there’s a run on the asset, who actually gets it?
No one, right?
No one gets it.
And if someone did, it probably won’t be you.
With real assets, you have less counterparty risk.
You have tax benefits with investments like real estate.
Physical assets are also illiquid.
Some may think that’s a disadvantage because you can’t buy and sell when you want.
I think of it this way:
If you can determine the value of an asset every moment of the day, you’ll be more tempted to sell.
If the asset is only valuated at certain intervals, you’re not as tempted to buy and sell as much.
3. Things to Watch Out For
There are some things to watch out for when you invest in real assets using retirement accounts.
The UBIT Tax, or Unrelated Business Income Tax, is very sneaky.
Let’s say you invest $100,000 in a syndication deal that was 20% down.
So, they raised 20% of the money and 80% was made using leverage.
The investment then doubles in five years.
Your $100,000 is now $200,000.
The UBIT tax says 80% of leveraged gains will be taxed at normal income tax rates.
That could be $20K-$40K of taxes!
Somebody could be paying 30-50% or higher on money that is inside of a retirement account.
That’s pretty sneaky, right?
The self-directed IRA will also be subject to the UBIT tax.
If it’s a solo 401k or a QRP, the gains are not subject to that tax.
For that reason, I think those accounts are superior.
If you can qualify for a solo 401k or a QRP, it will help you to avoid the UBIT tax.
While navigating tricky taxes, you should also keep yourself informed.
With real assets, it’s important to have knowledge of the market you’re investing in.
I wrote a book called Fire Yourself (Coming soon!) where I talk about replacing your working income with passive income in three years or less.
In the book, I have a funnel chart that shows the market, the operator, and the deal.
These three slices are equally important.
When you learn about the market, you need to investigate things like: the pros and cons, landlord rights, business rights, and population growth.
For the operator, you need to ask questions such as:
Who is the operating group?
Who are the partners?
What’s their track record?
Lastly, for the deal, you need to look at the specific details.
What is happening within the deal itself?
You want to make sure that you’re hitting each of those levels of diligence to make sure you understand your investment.
The bottom line is that you should use retirement accounts to invest in real assets.
Get an account set up and go for it!
The best time to get that account set up is ahead of a deal.
Some stocks and bonds may be okay, but I’m skeptical of how those will work out long term.
Having some diversity can be okay, but you should get comfortable using retirement to invest in things that have cash flow.
It might even change your entire investment journey.
Now I want to hear from you!
What’s your retirement plan?
Are you going to invest in real assets?
Let us know in the comments.
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.