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Hopefully you have started your financial path to, and possibly have already achieved, becoming a Capitalist.

Regardless of where you are in this journey at some point you will have a certain amount of money “sitting on the sidelines” and ready to be deployed as your untiring worker.

One of the scariest decisions is to take that hard-earned, and even harder to save, money and send it out in the world in hopes that not only will it return back to you but also bring more of its friends along in the process.

With so many investing opportunities out there an investor can be overwhelmed and easily suffer what is called analysis paralysis.

In essence a potential investor is paralyzed by indecision due to the fact that there are so many opportunities out there.

“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do.” –Mark Twain

In order to make the investing world more manageable it is crucial to break it down into more manageable components, called asset classes.

The big three asset classes are Stocks, Bonds, and Real Estate, each with it’s own pros and cons for a potential investor.

Before you invest in anything, you truly have to understand it in order to avoid my foolish mistake 4a.

I feel a primer is therefore necessary to give you a very basic overall lay of the land.

Real Estate:

Pros:

• Less volatility than stocks
• Can give you an asset with less correlation to the stock market to help diversify
• US Tax code gives multiple tax incentives to boost return
  • Depreciation write off
    • Allows you to depreciate the property and offset income from property (be aware that this lowers your overall basis in the property meaning higher tax will incur at sale unless you do a 1031 exchange)
  • 1031 Exchange
    • When selling a property can avoid capital gains taxes if proceeds go into a similar type property (strict procedural rules that must be maintained to qualify)

Cons:

• Illiquid investment
  • Unlike most stocks/bonds which can be easily sold and bought online in fractions of seconds, real estate is a more time consuming transaction
• Depending on type of real estate, can have a large upfront cash requirement (such as a 20% downpayment)

Real estate classifications:

1. Single Family Homes/Multifamily Homes (typically 2-4 units)
   • Pros:
     • Direct ownership
       • No one to report to for making investment decisions.
       • Any profits made directly go to you
   • Cons:
     • Direct ownership
       • Prior to purchase must do due diligence
         • Assess local market outlook
         • Inspect home thoroughly to try and minimize unexpected large expense risk
       • Can be a larger time commitment/feel like a 2nd job
       • Unexpected expenses fall directly on you
     • Tighter margins of operation which can cause negative cash flow during vacancies
2. Apartment Complexes
   • Pros:
     • Larger buildings can benefit from property management efficiency driving down cost as well as economies of scale
     • Nonrecourse lending
       • Lenders will give money based on the commercial aspect of the building and can not come after individual investors finances if it fails.
     • Larger margin of operation which can handle unexpected costs/vacancies as large amounts of money still coming in from other units
     • Considered an “evergreen” asset.
       • There will always be a basic need for shelter with no external industry disruptive forces projected
   • Cons:
     • High upfront cost to purchase.
       • Can be overcome by pooling resources via crowdfunding or if an accredited investor, private placement opportunities (will have a separate post dealing with accredited investors)

• Commercial Buildings (Offices, Retail)
  • Pros:
    • Can have longer lease terms in place
  • Cons:
    • Closely tied to overall economy and vulnerable in economic downturns
• Real Estate Investment Trusts (REITs)
  • Pros:
    • Stock like qualities such as low transaction costs and buy in and increased liquidity.
    • Per tax code, REITs have to distribute 90% of their taxable income back to shareholders.
      • A REIT yield can often exceed a bond yield in a low interest rate environment
  • Cons:
    • Are essentially “Real-estate flavored” stocks
      • Higher correlation to the general stock market leading to less diversification
      • Higher volatility than the preceding options.