Should I Diversify into Non-Real Estate Assets?

By Wealth Wisdom Financial

Many investors like buying rental properties to make passive income. Passive income is money you earn without having to work for it every day. Owning rental homes or apartments means you can collect rent payments each month without doing much active work.

Take the story of Jim and Cindy, for example. A few years ago, Jim inherited a small two-family home from his grandparents. At first, they weren’t sure what to do with it. But after fixing it up, they decided to rent out both units. To their surprise, the rent covered the mortgage payments with some left over. They had stumbled into passive income! 

Motivated by this experience, Jim and Cindy used their savings to purchase another rental property a year later. As the properties started building equity over time, they began exploring ways to diversify their investments and revenue streams.

If you already own a few rental properties like Jim and Cindy, you wonder – should I buy more properties, or try making passive income in other ways too? There are several options to consider beyond just more real estate.

Buying more rental properties has advantages. You already understand how it works. The more properties you have, the cheaper it can be per property for things like repairs and property managers. Real estate also tends to go up in value over time, protecting you from inflation.

However, it’s usually smart to “diversify” your investments across different asset classes, too. That way, in times when real estate doesn’t work well, you still have income from the others.

Too much of your money in just rental properties could be risky. Putting it into different kinds of rental property, or rental properties in different areas, or even strongly real estate-correlated assets like private loans, doesn’t help. If the real estate market suffers, ALL of your investments suffer.

It’s like putting your eggs in different baskets, but then putting all those baskets on one truck. You want multiple trucks so that when one goes off a cliff, the others can carry on with the passive income.

One option Jim and Cindy looked at was a fixed indexed annuity. This is a contract with an insurance company where you give them money upfront. Each year, they credit your account with returns based on a stock market index or a fixed amount, while protecting you from any losses. (Note: if you stopped reading at “annuity”, because you’ve heard annuities are bad investments, you might want to look again. As the baby boomer generation ages, annuities have undergone major upgrades. If you haven’t looked into them in a while, it could solve the stability of your passive income. For Jim and Cindy, they were a great option for their old IRAs.)

Another choice they considered was a high cash-value life insurance policy. You pay premiums, but you also build equity you can use to build your real estate empire. Then, if you’d like, you can one day turn that equity into passive income. For Jim and Cindy, this was a solution for their contingency capital rather than letting it sour in a bank account.

Some other passive income sources Jim and Cindy researched included stocks that pay dividends, lending money through peer-to-peer platforms, or creating digital products like online courses or apps that can earn money repeatedly.

A big factor for Jim and Cindy turned out to be tax advantages. Part of what they love about real estate is all the tax levers they can pull. With fixed indexed annuities, their retirement funds could continue to grow tax-deferred. They got the same tax-deferral of growth with cash value life insurance except with life insurance they got the bonus of tax-free use of funds and a tax-free death benefit (under current law).

In the end, Jim and Cindy decided to invest in a mix of rental properties, a fixed indexed annuity, and a cash value life insurance policy. This diversified approach allowed them to continue growing their real estate portfolio while also creating additional passive income streams. Their mix also worked for them to pay the lowest amount in taxes over their lifetime and beyond.

The right approach will depend on your personal situation and how much investment risk you want to take on. But diversifying across different passive income sources like real estate, annuities, life insurance, and others can help protect your wealth over the long term.

What was Jim and Cindy’s secret to finding their diversified mix? It might surprise you, but they credit everything to working with a financial professional who understands real estate and specializes in creating additional passive income without taking unnecessary risks. Just like the authors who took the time to share their stories with you! Take your first step by scheduling a Discovery Call at www.wealthwisdomfp.com/call.