Welcome to another episode of Ask Marco. We have a great question today from David, he’s got a hundred thousand dollars to invest and he’s trying to decide whether he should continue buying turnkey rental properties or invest in other passive investments. So David writes in, he says, Hey Marco, I had an interesting question that I wanted to run by you. I am currently 32 and have three rental properties and a handful of other alternative investments, including mortgage notes, syndication funds, et cetera. I am an accredited investor and I am looking to continue to grow my overall investment portfolio from my W2 income. I have about $100,000 per year that I am dedicating towards building my investment portfolio. As I am an accredited investor, would you steer me towards passive funds with larger returns, which require accreditation, or would I still greatly benefit by investing in turnkey rental properties? I would love to hear the pros and cons of each. I love the podcast. Thanks for your help.
Well, David, thank you for the question. So first and foremost, nobody including myself can steer you in any one direction. I can’t do that. I won’t do that. Nobody should do that. You have to obviously make your own decisions and nobody should steer you in any particular direction. However, people can provide you information, education, and knowledge in order for you to make an informed and educated decision with that said, I will say this, that the big question here is, are you after income or are you after capital gains? What is more important to you right now? And you also have to take the longer-term question into consideration here about what is it you’re trying to achieve in the future, down the road, what is your destination and your needs today could change and your strategy doesn’t have to be overly simplistic, where it’s all about income or all about capital gains.
In other words, price growth, because at some point you’re going to want to shift your portfolio to go from one to another strategy. So let me explain that a little bit here. So I break this down into two general categories. There are income investments and there are capital gain investments. So income investments are those that provide predictable income. The income can be variable. The income could be fixed, but it’s predictable because you know that you’re going to get it on an annual, quarterly, or even a monthly basis. And there are different types of income. For example, you could have interest income, which comes of things such as promissory notes, mortgage notes, it’s some types of bonds provide interest income. Then there are dividends. If you hold stocks or some sort of investment that pays a regular dividend, often quarterly, sometimes annually, then you have that dividend income.
Of course there are royalties royalty income. For example, you may be invested in a business or you may have a record deal. Uh, I guess, I don’t know if there are records anymore today, but a music deal or maybe you’re licensing some sort of intellectual property like photographs that photographers do. In that particular case, you will receive royalties oil and gas is also another good example of an investment that produces income based on the production of those oil and gas wells, even mineral rights, those are royalties. So there’s royalty income and last but not least, you can be involved in revenue share. So when it comes to revenue share, often you’re invested in an existing business or a newly launched business. And what you are doing is you’re participating in the income, usually the top-line revenue and getting a percentage of that. So you don’t have to participate in any of the downside risk or the expenses that are often variable.
So you know exactly what you’re getting and it’s generated from sales or top-line revenue. So that’s a revenue share model. And sometimes that can be convertible, meaning that you start off as income and it converts into equity. So those are just some of the different types of income investments that I like to refer to as predictable or at least semi-predictable. The other type of investment that you are looking at potentially thinking about are where you have gains like capital gains. And these are often paper gains, meaning that you don’t necessarily realize them right away. They are on paper, but you can sell or liquidate the investment to get those gains, to realize those gains. But this type of investment doesn’t mean you’re going to have any kind of income. You may not have any income, depends on what the asset is that you’re investing in, but it does increase your net worth.
It does add to your personal balance sheet. So that’s the thing about capital gains is that the taxation may not happen immediately. It’s deferred and it may happen years from now, but it adds to your overall net worth. So you can harvest these gains at some point in time in the future. But another benefit of capital gains is that sometimes you can leverage those gains, which means that you don’t actually have to liquidate those gains in order to take advantage of them. You can leverage them. So here are a few examples. If you have ever invested in stocks or anything in the equities markets, those are forms of investments where you are often benefiting from price growth. And of course, prices can go down as well. But those are capital losses versus capital gains, but those are gains the other type of asset or asset class.
If you will, can include metals like precious metals, commodities, collectibles, like art cars, whatnot. So any type of asset that stands to gain in price or value over time would be a capital gain. And so that just, again, adds to your net worth. It’s something that shows up on your balance sheet, not necessarily your income statement, your profit and loss last but not least. And this is back to your question is the question of real estate. Real estate is a great investment because it will increase in value typically over time, over a long enough period of time. And those are gains. Those are capital gains. And so that’s a beautiful thing about real estate is it is one of the greatest wealth producers because it is a reasonably predictable and a highly controllable investment class or investment asset. Now here’s a really, really nice thing about real estate is it can provide both income and capital gains.
And that’s why I love residential real estate of any kind, but especially in the one to four-unit size. So single families on up through fourplexes, because it gives you a lot of appreciation potential. It does give you equity growth through the amortization of that loan because your tenants are paying down the mortgage. So the capital gains are something that is somewhat predictable. There’s a lot of control, but you also have income because if you have a tenant and you buy, right, and the numbers make sense on that investment, that deal, then you’ll have both income and capital gains. And to go back to some earlier episodes that I had on this podcast, where I talked about real estate as being the ideal investment, there’s several episodes about that. And you can just look it up on our website at passiverealestateinvesting.com. But you’ll remember that I mentioned that real estate is the ideal investment.
I is the first letter of the acronym ideal and it represents income D is the depreciation that you can write off the improvements on that property over 27.5 years. So it lowers your taxable income E means that you gain equity. You grow equity as your tenant pays down your mortgage A is the appreciation, which you gain over time, because it is a natural hedge against inflation. So it has to appreciate over time. And L is the ability that you can leverage your investment capital as little as 20% down, sometimes less, but you can leverage that investment capital as in your down payment to grow that investment and leverage your returns and buy more real estate. So real estate really is the ideal investment. So real estate actually is kind of a hybrid investment because it’s not only well-positioned to be a capital gains investment, but it also is an income-producing investment, how you buy your real estate and something that we help you here with our investment counselors is where you should be focused on in terms of growing your portfolio.
Do you want to lean more towards capital gains or do you want to lean more towards income? And you can make these changes over time as your age changes, your time horizon changes and your investment strategy changes. So that’s kind of a picture if you will, the landscape of income versus capital gains. And the big question was, what is it you’re after today? So the nice thing about all this is that you can reinvest. I actually liked the saying that I like the money that my money makes, but I like the money that my money’s money makes even more. So here’s the bottom line. The question is, is what do you need today? And also, where are you going? Where do you want to be in 10, 20, 30 years from now? So it comes down to two things. One is what is your strategy based on your time horizon and two, what is it you need today?
If you’re making that decision today, are you focused on generating as much passive income as you can then maybe look at promissory notes as an example, or focus on investments that provide equity, growth, potential price gains. And it could be a hybrid of the two. Maybe you’re focused 80% towards real estate, 20% towards, uh, the promissory notes. We have a few investors right now doing exactly that they are working with our investment counselors here. They are building a portfolio of passive turnkey cash, flowing investment properties that generate passive income, but are also growing their equity year after year because of the amortization on that loan, the mortgage loan they have that their tenants are paying for, plus the price growth, the appreciation, but at the same time, these properties are kicking off two, three, $400 net net passive income. In addition to that equity growth.
So they get the best of both worlds, but they’ve chosen to focus 80% of their investment capital on turnkey rentals and the other 20% or so on promissory notes that provide regular fixed income, 12, 15% annual interest. So I can’t specifically answer your question, but I’ve probably given you enough here that you can figure out where you want to go. You use the word steer. I’m not going to use that word, but hopefully, this was helpful. And if not definitely contact me and my team and I can certainly help you figure that out. But hopefully, this was enough. I wouldn’t go as far as saying that there are cons, it’s really what you prefer and what you need. You know, I like to say that you’re looking at fruits, two different kinds of fruits. They’re not exactly the same. They both provide benefits, but different types of benefits.
Okay, David. Well, I hope that was helpful. And if you have any up questions, definitely get ahold of my team here. Thank you for that question for everybody else. If you have a question about real estate investing or finance, that you’d like me to answer on the show, or just directly through replying to your email, simply go to our website, passiverealestateinvesting.com and click on the Ask Marco link, if you haven’t already subscribed. And you’re a new listener here. Remember to subscribe, smash that subscribe button, regardless of whatever podcast player you’re listening to on your phone, help us share the show with other like-minded people. Remember to visit us on iTunes, leave us a rating review. I greatly appreciate it. And yes, I do read every single one. Thank you for listening. And I will see you on our next episode.
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