How to Invest Your Money When You’re NOT a High Net Worth Investor

by | BiggerPockets.com

Of all the questions investors ask me, I get this one more than any other.

An investor will reach out to me and ask, “What investments and strategies do you recommend for those who are not accredited?” In this instance, maybe the investor is feeling discouraged, or maybe he/she doesn’t know what to do next or even what to do first.

Before I jump in, I should tell you that I’m not a certified financial planner, nor do I understand your individual strengths and weaknesses enough to recommend a specific investing strategy just for you.

What I can do is break apart the myth that lucrative investments are only accessible to accredited (or high net worth) investors. That’s right, it’s a MYTH!

Although “accredited” status does allow an investor more access, there are still plenty of opportunities available to those with limited capital.

But before we get into that, I’d be remiss if I didn’t cover some of the essential decisions you should consider making with your money before investing it.

who-invests-in-real-estate

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What to Think About BEFORE Investing

All investments involve some level of risk, and it may be wise to build your own financial safety net before taking that risk on. Of course, the same is true about life: The unexpected can happen.

Are you set up financially to weather potential storms? By this, I don’t only mean literal storms and natural disasters, but also life events that can occur within your family unit (i.e. job loss, illness, divorce, or even death).  

Related: What is an Accredited Investor? (And The Arbitrary SEC Rules That Hurt Young Investors)

I was at an event a few years ago, where these two questions were asked, and they’ve stuck with me ever since:

  1. What would you do if you couldn’t work for two months?
  2. What would you do if you could never work again?

Reserves are important at any age and any income level. A common goal is to have enough cash accessible to cover three or more months of expenses should you ever need it. While cash in retirement accounts isn’t impossible to access (and some types of accounts are more liquid than others), a savings account is a good place to start.

If you’re looking to invest your capital and you don’t have life insurance, maybe you should consider buying insurance first, especially if you have a family to support. Plus, your insurance contract can serve as an investment in and of itself. For example, when I was first starting out I only could afford term life insurance, but later on, I was doing much better financially, so a term policy that was convertible to a permanent policy made more sense, since a permanent policy has more potential uses when it comes to an overall financial planning strategy. Many wealthy investors use their policies as a personal or business bank, not just for death benefit. One strategy is to over-fund the policy, borrow money out (at a low rate of 4-5%), and then re-invest in a vehicle that has a significantly higher return (i.e. notes or real estate), thus creating an arbitrage. This scenario often creates a situation where the cost of insurance becomes low-cost or relatively free.

Once you have some of these and all the other necessities covered, the next step is saving up more money to invest.

How to Save Money to Invest

Although I’m a big believer in utilizing OPM (other people’s money) to invest, everyone starts somewhere, and acquiring private money to invest in real estate can be very difficult when you don’t have a track record.

It’s always harder in the beginning. In fact, the hardest $5,000 I’ve ever made and saved was the first $5,000 that I used to buy my first property.

Many folks swear by the strategies mentioned in George S. Clason’s 1926 classic The Richest Man in Babylon, such as living below your means, paying yourself first, and saving at least 10% of your income, regardless of how much you make. I agree, but I also think that one of the easiest ways to save money today is to make it automatic.

You can even funnel smaller amounts of money straight into an investment, especially with the numerous passive investments available online.

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Strategies for the Non-Accredited Investor

As I mentioned before, a one-size-fits-all investing strategy does not exist. Other factors to consider are your age, your goals, and your level of risk-tolerance.

Plus, what are you interested in? What are you good at? The possibilities are endless when you consider that you can also make a lot of money investing in businesses as an entrepreneur (i.e. building wealth through business equity).

As far as what passive investments you can participate in, the list goes on and on. Besides traditional investments like stocks, bonds, and index funds, there are also alternative investments like tax liens, commodities, oil and gas rights, timber and mineral rights, livestock, ticket resales, structured settlements, foreign currencies, U.S. Treasury bills, real estate, notes, etc.

I think the problem isn’t that opportunities aren’t out there. Rather, it’s that education on these areas of investing is hard to find with all the other information competing for our attention. It’s time-consuming and difficult to become an expert in everything. A good place one could start is to look at self-directed IRA custodian websites, as they may host webinars on different types of alternative investments.

The point is, there are almost as many passive investments as there are ideas. My best advice is to get educated in what interests you, do you due diligence, and find a mentor in the space if you can.

Related: 5 Ways to Start Investing in Real Estate With Just $5,000

In the note and real estate world, I think the internet will continue to change things and probably make it easier for the average person to invest. I see crowdfunding for both notes and real estate becoming more of the norm. There are private funds that take unaccredited investors as well. I also have always been fond of P2P lending (i.e. unsecured notes). On sites like Prosper and Lending Club, a person can get started with as little as $25. With such a low price point of entry, a person can really spread out their risk while still making a solid return.

Can you get to a point where your investments are paying off your debts? It’s absolutely possible, but it does takes time.

So, what investments or strategies are you considering for your next step?

If you’re an experienced investor, what advice can you give those just starting out?

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. – an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

13 Comments

  1. Audrey Ezeh

    Great article Dave! I always enjoy your insightful pieces. I love the tip about whole life insurance. I used to turn my nose up at them but my insurance agent handed me a book that was quite eye opening. I love the strategy you presented here as well explaining how to leverage it to make that high cost virtually free.
    I completely agree about having your house in order 1st. We have an emergency fund in place, life insurance as well as long term disability insurance that pays enough to cover all our living expenses if we are not able to perform our own occupation. That kind of security frees me up to take more calculated risks with REI!

  2. Wilson Churchill

    I’m still not sold on this “infinite banking” insurance thing. One can just as easily use the same monthly outflow to buy additional properties. I’d like to see an IRR analysis done, comparing all outflows and inflows of cash in terms of present value. I believe most scenarios will favor buying one or more properties, given leverage.

    • Dave Van Horn

      Wilson,

      I should stress the point of using an insurance policy with a cash value component is not for IRR, or at least IRR alone. You’re investing in it for the ability to access capital (tax free) from a safe bucket (safe from bankruptcy, creditors, etc) at a later date or in retirement.

      It’s not about the IRR that the policy pays, it’s about the IRR you can make with that policy’s capital. It’s just like an IRA account, it’s not the tax break that’s valuable, it’s about what you can make with that tax free capital inside the account.

      Plus it has an insurance component that can be valuable as well especially since the death benefit can pass favorably to heirs.

      Hope my answer could help sway your opinion on infinite banking! But if not, feel free to reach out. I’d be happy to answer any more questions.

      Best,
      Dave

    • Dave Van Horn

      Sure!

      The institutional note space can be capital intensive but if you don’t have much investment capital or IRA savings, you could find a JV partner to purchase notes with. That strategy is discussed quite a bit in the note investing forum.

      You could also invest in a partial note, where you’re buying into another performing notes’ payment stream for a set amount of time. There’s a BP article about that here:

      https://www.biggerpockets.com/renewsblog/2011/11/18/selling-part-of-a-note-how-partial-notes-work/

      Lastly, like I mention in this article, there’s also P2P Lending where you can invest in unsecured notes. You can get started on sites such as Lending Club for as little as $25.

      Hope this helps! If you have any other questions, feel free to PM.

      Best,
      Dave

  3. Dave, thank you for your insight.
    I wants to invest large sum of money into notes, but not the note fund you offer. I believe the 12% return is inadequate. Is it possible to be a direct share holder in your LLC, and / or do you know of investment vehicle where investors can pool money, hire a manager and participate fully in profit/loss of note investments.

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