Before You Make Your First Investment, STOP and Consider This First

What to spend your money on is a decision that is not often taken lightly. From narrowing down where you can get the best deals on groceries to selecting which bank to open a credit card with, you might consider all of your options when it comes to choosing how to spend your hard-earned cash. So why not put the same amount of thought and consideration into how you choose to invest your money?

In my recent article, “Self-Directed Investing 101: Here’s What You Need to Know,” I offered an introduction to alternative investments and the option to take control of your own investing decisions through utilizing a self-directed account (whether that be an IRA, HSA, or even an ESA). But before you contribute funds or invest in your first deal, consider this first: are alternative investments the right fit for you?

For example, I personally don’t lend money on a property that I wouldn't want to own myself. If my borrower can’t pay me back, then that property defaults to my IRA. I’ve run into investors who weren’t prepared to be landlords, and because of that they experienced issues with their investments. Knowing yourself and what you are capable of investing in or what you are willing to learn about is essential for successfully and safely building your personal wealth.

To help you decide whether investing in non-traditional assets is your next move, check out the five Ws below.

The Five Ws of Alternative Investments

Who: What are your individual strengths when it comes to investing? Do you qualify for the opportunities you’re interested in?

Are you someone who can discipline themselves to keep track of their investments, or would you rather partner your IRA with someone else’s to go in on a deal? Do entities like LLCs, trusts, and partnerships that will handle the management headaches of owning real estate interest you more than buying real estate properties yourself? These are all viable ways you can fund alternative investments, and, as you can see, ways that you can cater to your strengths.

Certain private placements and funds will require you to be an accredited investor. This is someone whose net worth is worth over $1 million (not including personal residence), or makes over $250,000 in two years if they’re single, or makes over $300,000 in combined income over two years if they’re married. If you fit these qualifications, you are eligible to invest in Regulation D funds.

What: What are your hobbies and interests? Or, what investments do you already have knowledge in?

Have you always wanted to invest in precious metals? Would you like to diversify your portfolio beyond stocks and bonds? Most alternative investments require some knowledge from the individual. Typically, people will invest in what they already know and understand, and what is best-suited for one person is not always best-suited for another.

Personally, I grew up around real estate investing. Majority of my family is involved in real estate. I found success in alternative investments because I was well-informed in the real estate market I was buying into and was familiar with the processes and costs of buying, fixing, renting, and selling property. On the other hand, my cousin invests in stocks, bonds, and derivatives because that is what he is well-versed in. I have even seen people who are knowledgeable about the entertainment industry investing in royalties on songs or in Hollywood movies. Once you have a strong grasp on the sphere in which you’re working, keeping up with the maintenance of your investments becomes more manageable.

When: Life can be unpredictable, as can life after retirement. Deciding when you want to start saving and investing in your future is a crucial part of financial decision-making.

Has a new investment opportunity that can be conducted through your IRA come up unexpectedly? Have you learned something new about tax liens that can benefit your retirement funds? Has someone else’s story inspired you or piqued your interest to start exploring a new frontier?

Timing can be important, depending on different variables. The money market will go up and down, and I’ve seen the same thing happen in the real estate market. As an investor, you are tasked with monitoring when the peaks of buying happen, and when they should be avoided. My goal, as well as the goals of many investors, is always to buy low and sell high.

Where: Are you looking to hold all your investments in one place, or can you facilitate multiple assets between multiple custodians? If so, where do you hold those investments? The IRS requires that self-directed IRAs be held by a custodian, so determining where you want your alternative investments to be held is another line of questioning to take into consideration.

On another note, where is your prospective investment going to be located physically? For example, how close to your home is the depository where your precious metals can be held? Is the home you are receiving rental income from located in another region of the country? It’s up to you to decide how important location is to you.

I have most commonly seen investing on what a place can rent for. People overpay for themselves all the time. They want the house on the beach, or with the view of the mountains. But when it comes to being an investor, people will base what they pay on what they will rent a property for. Taking all of this into consideration can factor greatly into your choices as an investor.

Why: Perhaps the most important question you can ask yourself is why? Why do you want to make this investment? Why do you want to put in the work to maintain it? Why do you think you will benefit from alternative investments? Your passion for your investments and belief in what you choose will be the driving force behind your success.

Although the funds from your 401(k) or IRA will be used to purchase or renovate as needed, it is important to remember that your SDIRA is not responsible for deciding which deals are good or bad for you. That responsibility falls on you, the investor. Therefore, it is important to educate yourself when choosing investments.

How to Avoid Future Mishaps

Despite functioning as your own financial adviser by answering these questions and conducting your due diligence on your investments, any further discussion of these questions and your choices should always be consulted with finance and tax professionals in order to ensure compliance with the IRS and to make sure your account is free of any fraud. This way, you can fully assess the risks associated with your transactions. Penalties for missteps can be detrimental, and they can be avoided through proper due diligence and ensuring you have the strongest understanding possible of your investments.

People from all walks of life have found value and success in self-direction. Between the diversity it offers to the confidence it instills, being able to utilize your personal knowledge and expertise to choose tangible investments can be a rewarding experience. With so many investment options at your fingertips, your financial future is unlimited.

Have additional questions about whether self-directed investing is right for you? Share below!