How to Become an Empowered Investor: Go for It!

The Empowered Investor Methodology is a revolutionary way of helping people obtain financial security and transform their lives through alternative real estate investments. This methodology consists of a five-step process: Ethos, Educate, Evaluate, Execute, and Empower.

This article is the fourth of a five-part series on this original methodology.

Step 4 - Execute

“I love quotes … but in the end, knowledge has to be converted to action or it’s worthless.”

― Tony Robbins

Step 1 (link here) of The Empowered Investor Methodology discusses the importance of changing one's ethos and how this puts investors on the right track to succeed. Step 2 (link here) covers why and how investors should broaden their financial education, especially their understanding of alternative real estate and specifically of syndicated commercial real estate investments. Step 3 (link here) digs into how investors should evaluate the merit of a syndicated commercial real estate investment by weighing some of the important variables.

If you are ready to take action, Step 4 is all about putting your money where your mouth is. It is the execution of building a customized and diversified portfolio of income-generating assets with tax benefits, including those that generate passive income.

Passive income is generated from royalties, rental real estate, and non-active participation in businesses and partnerships. The cash flow generated by syndicated commercial real estate investments is defined as passive income. Perhaps the most well-known tax benefit available to real estate investors is depreciation. The concept of depreciation is based on the idea that an asset will experience “wear and tear,” so the IRS allows the asset (except for the land component) to be written off or depreciated over a period of time. In reality, real estate assets do not become obsolete like computers or vehicles, which do have a limited service life and are depreciated in a typical business. This is why depreciation is also known as a “phantom” loss (the terms “paper” or “passive” loss are also commonly used), as this loss can be taken even when the asset is appreciating and producing income. Passive losses offset the passive income from an asset.

When properly executed, it is possible for investors to have little, if any, tax liability due to depreciation and cost segregations, as well as other tax efficiencies and benefits such as business expense deductions, refinances, supplemental loans, 1031 exchanges, and self-directed IRAs. In other words, the tax benefits available to real estate investors are tremendous.

On the other hand, stock investments have very few tax shelters, and with periodic crashes of over 50%, those who invest in these markets will inevitably experience a wild roller-coaster ride. These crashes can force people to delay retirement, as it could take years for the value of their portfolio to recover to pre-crash levels. Between 2009 and 2017, the Russell 3000 Index has increased over 250%, but all this has occurred during a time when several economic conditions and trends present challenges for equity returns over the next decade or so. Stocks, bonds, and other investment classes tend to be cyclical and can experience extended periods of underperformance. For instance, during the Great Recession, the S&P 500 dropped more than 50% from its peak and did not fully recover until five years later in 2013.

The NCREIF Real Estate Index is a metric of privately held (i.e., direct investment) commercial real estate as measured by the National Council of Real Estate Investment Fiduciaries (NCREIF) property index (NPI). The following table is a comparison of the correlation coefficients of the NCREIF Index to the following markets: Russell 3000 Index (equities market), Barclays U.S. Aggregate Bond Index (U.S. bond market), and the NAREIT Index (publicly traded U.S. real estate companies). A correlation coefficient value of “1” indicates a perfect positive correlation, a value of “-1” indicates a perfect negative correlation, and a value of “0” indicates no correlation. Private commercial real estate has low or negative correlations to stocks and bonds because real estate is relatively illiquid, trades infrequently, and not prone to speculation.

This makes private commercial real estate a strong diversifier that dampens the volatility of a portfolio that includes stocks and bonds. Therefore, investors can mitigate concentration risk by including an asset allocation like commercial real estate with traditional investments of stocks and bonds that are as uncorrelated to each other as possible.

With the intent to minimize this concentration risk, the empowered investor builds and scales their own customized portfolio of syndicated commercial real estate investments by selecting diversified assets in several ways. First, investors can diversify across different sectors of commercial real estate, such as multifamily, senior housing, industrial, self-storage, and mobile home parks. Second, investors can diversify across multiple investment strategies, such as core, core-plus, value-add, and opportunistic. Third, the investor can diversify across different geographic markets. These various ways of diversifying a portfolio should align with the investor's risk appetite and investment goals.

Ultimately, an empowered investor takes action by utilizing syndicated commercial real estate investments to obtain above-average returns while simultaneously reducing volatility and maximizing tax efficiency. Ultimately, investors can achieve meaningful investment returns, participate in investments that improve lives and provide societal benefits, and generate multiple income streams to live the life they desire.

Stay tuned for the last article in this series: Step 5 of The Empowered Investor Methodology.

For more information on passive investing in commercial real estate, please check out our free eBook - More Doors, More Profits - by clicking here.

*This article has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Please consult with tax, legal and accounting advisors prior to using any information in this article for tax planning purposes or engaging in a syndicated real estate opportunity.