Many of our readers fit into one of four categories. Does one of these fit you?
- They are getting started investing and do not want to have financial planners take such a big part of their returns or they don’t want to risk their money in the stock market as it’s hitting all time highs. This investment range are their first investment funds.
- They are getting started investing and simply want to have higher returns than index funds or stock market averages. This investment range are their first investment funds.
- They just want to “dip their toes in” to the alternative investing space so that they can start learning and “set sail,” and will increase their allocation once they prove a particular strategy’s success to themselves.
- They have most of their money allocated in investments already (in other alternatives or even stocks and bonds and want some diversification) but have excess investment funds that they want to put to work and these excess funds (of $5k-$10k) aren’t enough to place in, say, a private money loan.
For this investment range ($5000-$10,000), there are many alternative investments that are more difficult to make work. For example, for private money lending for real estate, you probably need at least $50k, if not $100k. So, for this range of funds, here are some options that can work:
- Peer-to-peer lending: Peer-to-peer (P2P) lending is an investment where you loan funds to consumers who need money or are “refinancing” their current debt at lower interest rates. Instead of loaning money to one or two individuals, you can actually diversify your investment in increments of $25. So, for $5000, you could invest in 200 different individuals. Many of the big private equity funds are investing heavily in these platforms. To get started go to Prosper.com or Lendingtree.com.
- Crowdfunded real estate: Here you’re co-investing with others in real estate deals. Go to https://www.realtymogul.com or https://fundrise.com and put your money to work.
- Private Note: You may be able to find a cash-flowing private note for this investment range, especially a car loan/note. Here you buy a promissory note at a discounted price which increases the actual payments to you and turbo-charges the original interest rate of the loan. Of course, you have to do your homework to make sure you’ll get paid back or at least be able to easily take the collateral.
- Crowd sourced angel investing: Here you can co-invest in the hottest new start-ups along side famous angel investors. To get started, go to gust.com or angel.co.
- Tax Liens: When property owners don’t pay their tax bill, after a certain amount of time the local tax authorities place a lien on the property. When the property eventually sells, this tax lien plus interest will be paid off. Once purchased, you just sit back and wait to be paid off. The good news is it’s easy and secure. The bad news is, it can take years to get your pay off.
- For all of these, you can learn more from our post on Getting Started in Alternative Investments.
If you’d like to start generating returns quickly, I would probably rule out tax liens at this point as they often take a long time to pay off. I’d also rule out crowd-sourced angel investing. To get angel investing to work, it’s best to spread your money around several companies. With only $5000-$10,000, it would be difficult to diversify enough to make the risk tolerable. Of the other three options, I’d go with whatever sounds the most fun to you, and that sounds the most interesting to learn about. Of course, you can learn more about each investment class on our website, and always conduct thorough due diligence on all investments you make.
Now, to boost your returns on any investment, there is another “ninja trick:” using a self directed IRA. Most traditional IRA custodians are not set up to handle self-directed IRAs. (Plus, they don’t get all of their fees and commissions, so they are not incentivized to do self-directed IRAs!) There are many self-directed IRAs across the country. One of the largest is Entrust. Another that we have worked with is New Direction IRA in Colorado.
To get started, call some SD IRA companies and see who you like the best. Then, you can set up an account with them and put up to $6000/year into your self-directed IRA. (If you’re self-employed, you may be able to establish a SEP or Simple IRA and contribute up to $25,000/year. There are limits, however. Kriss and I found out the hard way this year that if you make over $191,000, you cannot contribute to an IRA.) Then, you can direct the IRA to invest in one of the alternative investments we talk about and you can enjoy either tax-deferment (traditional IRA) or avoid paying taxes on the gains all together with a Roth IRA. (That alone will boost your return by whatever tax bracket you fall under – typically 28%-34%!) Be sure to discuss this with your CPA.
Now, that you can enjoy savings on your taxes and boost your returns (that you can keep re-investing, using Ben Franklin’s “Eighth Wonder of the World” compounding interest), you should be pointed in the right direction for some possibilities to invest $5k-$10k.
What other options do you other investors see out there for this amount of investment?