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

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

“What investments and strategies do you recommend for those who are not accredited?”

In this instance, maybe the investor is feeling discouraged, or maybe they don’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.

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 (e.g., 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:

What would you do if you couldn’t work for two months?
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 3+ 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.

Insurance As an Investment

For example, when I first started out I could only 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.

This is because 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 percent to 5 percent), and then re-invest in a vehicle that has a significantly higher return (e.g., 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 percent 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.

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 (e.g., 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 told you the list goes on and on.)

Educate Yourself

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 your due diligence, and find a mentor in the space if you can.

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—peer-to-peer lending—(e.g., 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 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.

What would you add as advice to those with limited capital?

Share with a comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.