How to use “D.I.A.L.” To Choose the Right Investments for Your Portfolio

So a lot of times real estate can give you three out of four of these categories on the dial spectrum. Welcome to the Next Level Income show where it's our goal to take your income, your investments and your life to the next level. I'm your host, Chris Larsen. If you haven't yet, get a copy of our book for free at our website nextlevelincome.com. that's www.nextlevelincome.com. just click on the book link and I'll even send you a copy if you put your address in on today's podcast. I'm going to give a short tutorial on something I like to call dial and. And dial is a method that you can use and we'll have a little illustration here in the show Notes to evaluate different investments. I was talking to a colleague last week and he mentioned to me that he had an investor that was interested in a few different things for any investments he was looking at. One was he wanted double digit cash on cash returns. Number two, he wanted liquidity. Number three, he also wanted appreciation and he wanted depreciation. And I said, well, normally you gotta pick two of those. And if you take those, income appreciation, liquidity, depreciation, they spell out dial and reorganize them a little bit and you can take them in whatever order that is important for you. But I'd like to touch on what each of these categories is and how different investments may fit in to these categories and in your spectrum of investments. And the reason I want to discuss these is that it's important to understand a couple different things. One, you should understand what type of investments that you are comfortable with. Are you okay being in illiquid investments? Also, are you comfortable being in investments that have high volatility, like the stock market, for instance. Stock market is very liquid, but it can also be very volatile, going up and down in excess of 30% on an annualized basis. Whereas something like our real estate syndications, multifamily, for instance. And I discuss this in my book, by the way, if you haven't gotten a copy, get one at our website. Just click on the book link, put in your address and we'll send you a free copy. But typically, multifamily and other types of real estate by virtue of their characteristics are illiquid. So if you're going to invest in something real estate related, you you should expect that it's not going to be liquid. You can't just sell it on short notice. Now the nice thing is that some of the characteristics of real estate, the low volatility are by virtue of its lack of liquidity. So that's just to give you a couple different ideas. And after I go through these four categories, I'm also going to talk about some different examples of investments that we have out there that fit into these categories. So again, what are the four categories of dial? And again, these are in order of convenience to spell the word. But the first is depreciation. What type of investments are you going to typically see out there that have depreciation? Number one, most types of real estate have depreciation. Why is depreciation nice? Again, I discuss this in my book. I talk about how depreciation is a phantom expense. It's something that can offset income or even potentially appreciation or income in other investments with this loss, this depreciation that flows through on typically your K1 if you have a passive investment or your Schedule E for investors that own and operate their own real estate. So depreciation can be really nice. And it's one of the factors that makes real estate a very appealing asset class. It's one of the reasons that Donald Trump has paid so little in taxes. And it's one of the things that I learned about when I was learning about multifamily and why real estate was so appealing to the rich and the ultra rich. The other investment classes out there or some of the other investment classes out there that have depreciation are things like oil and gas investments. Oil and gas can be a nice investment for those that are seeking to offset active income like your W2 income. If you're a high income professional with depreciation. And that's because the government has rules, the IRS has rules written in that allows you to take the depreciation from those types of assets and offset your income. What's another one? I bought a van for my business and this van qualified for bonus depreciation last year. And this bonus depreciation I was able to utilize in our business and write off that decrease from that quote unquote bonus or section 179 depreciation to offset other income in our business. Now, I typically wouldn't lead with depreciation. And again, I'm using it first in this example to spell out the word dial. But in my opinion, depreciation should be viewed last and in context of an investment that you find appealing for other reasons. I think that depreciation is can be a bonus and not necessarily the number one reason that you invest in something. Number one, in my opinion, is typically income which is the I in dial. And income is something that you can get from things like dividend paying stocks. You can get from loans, you can get from bonds, whether they're government bonds, local or federal, government bonds, or corporate bonds. And income is is terrific. If you are utilizing that for living expenses, for instance, you can also get it from things like annuities or cash value life insurance, which is the foundation of our financial pyramid. You can learn more about the strategy that we personally utilize in our family at the banking link. If you go to nextlevelincome.com and click on the banking link, you learn more about our investment optimizer strategy there. But income can be a significant factor in a lot of different investments, specifically real estate. So real estate oftentimes has income appreciation and depreciation, which makes it a very appealing asset class. But it's not limited to real estate. As I just mentioned, I mentioned oil and gas under depreciation, oil and gas investments typically have income as well. And it's one of those things that can apply to almost any investment out there. But certain types of real estate, certain types of stocks, certain types of oil and gas investments, investments in, in business, for instance, may not have any income during the hold period or may have varying income that varies from month to month or quarter to quarter. Or it may be low at different like initially and then it may increase over time. Take a development project for instance in real estate, where an investor may have to wait one, two or three years before any income comes out of that. And I've seen multiple different types of real estate from venture capital to development. I'm sorry, different investments, not just real estate, from venture capital to development, as well as oil and gas investments that either have low or no income initially and then have some on the back end or just depend entirely on the third part of dial, which is appreciation. Appreciation is going to be more more speculative in some cases. So you're basically betting that your initial investment is going to pay off at some point in the future and that initial investment may have no income through that period. Or it may have a combination of both income and appreciation. Again, using the example of multifamily that I talk about in my book, are you a high income business owner or professional earning 2,300,000 or even more a year, but still feel like you're living paycheck to paycheck? Are you comfortable working until you're 65 or 70 to retire? Or do you want to achieve financial independence and live life on your own terms? You could join myself and Matt4 and learn how we both became financially independent in her early 30s. We will teach you how to make, keep and grow your money, teaching you strategies to maximize your earnings, keep your income that you've earned through tax strategy and legal structures and ultimately teach you how to grow it by determining your personal investing strategy as well as teach you how to analyze investments so you can grow your passive income to the point to live life on your own terms. Our coaching clients reliably do this in seven years or less. To learn more, check out our coaching program@nextlevelincome.com coaching that's nextlevelincome.com coaching typically, multif family investments like the deal that we're we're closing on in Houston currently has income from day one. Our mobile home park portfolio. Our mobile home park fund also has income from day one for investors, but it also has appreciation as well. And that appreciation typically comes from multiple different areas. In my book I talk about the value add strategy. And the value add strategy is where you invest capital into a project. So in a multifamily project, you may put in new hardwood floors, new appliances, you may fix up the exteriors. In a mobile home park, you may bring in new homes or have incentivize new move ins so you can increase the income of that park, the occupancy of that park, also raising rent. So buying a property like we bought an office, a seven unit office in downtown Asheville that was half vacant, by bringing the occupancy up in that property, we were able to force the appreciation in that. Other options are you can buy a property and hold on to it and, and speculate that that value may go up. This happened a lot during the early 2000s where people would buy condos and it would go up $100,000 just during the period that they had that condo under contract before they even closed on it. That's highly speculative. And this is what happens a lot during kind of the, the end stages of a very active real estate market. So we've covered depreciation, we've covered income, we've covered appreciation, which can come from either speculative or forced appreciation in some types of investments like real estate. And then the last one is liquidity. So what is liquidity? Liquidity is the ability to get your capital back, to get your money back on a specific timeline. Something like the stock market is typically highly liquid. A savings or checking account or money market account is, is highly liquid. Something that's a little less liquid. Maybe a bond where you may have to wait three months or a year or five years to you get your money back. But you probably have that on a timeline or something like our debt fund, which is currently paying investors 8%. For investors that have $100,000 or more in that debt fund, they can get their money back within three months and is. Is the stated term there. So that's something that's going to give you a little bit less liquidity than a checking account, but it's going to give you a lot more liquidity than something like multifamily property that you're going to own for five years. Again, the stock market, highly liquid, highly volatile. So a lot of times you're going to see different correlations with a, with a investment that is, that is highly liquid liquidity. If that's something that's important to you, you have to understand what you're giving up for that liquidity. You're typically giving up one of the other categories. And going back to my anecdote of that investor, this is, this is something that you, you should consider. Typically out of those four categories, most investments have about two of those characteristics. So you can have appreciation and income. You can have appreciation and liquidity. For instance, with the stock market, that also can come with volatility. It can also go down in value. If you want income, that's very important to you, you want secure income. Sometimes, like if you buy a bond, you may not count on any appreciation. Now, some people may say, well, Chris, if, if bond, if the bond interest rates go down, bond prices go up, you can get appreciation. It can go up and down, of course, but if you hold it to that duration, you're basically discounting on that income during that period. A CD would have something similar as well. So again, when you look at what's important to you in investments, consider these four characteristics of investments. We'll go backwards now. Liquidity, appreciation, income and debt, depreciation, or dial to help you remember that. And then look at your portfolio on a spectrum and consider, when you look at a new investment, does this fit and help you fill out your portfolio in those terms? You should always have some liquidity in your portfolio in case you need cash for something. You should have appreciation in your portfolio because you want to make sure your assets are rising faster than inflation, which we've seen inflation rise double digits here over the past couple years. You should also consider depreciation when you are looking at investments to optimize your tax situation if available to you. And then as I mentioned before, income, if it's important to you if it's something that you need from your investments today. One, it helps to provide for your living expenses. But two, it also decreases the risk in your portfolio because you're starting to get your capital back over a period of time. So hopefully this little tutorial today will help you as you make investment choices going into the future. A couple options that we have out there that'll be that'll serve as examples. Our debt fund, as I mentioned, pays consistent income over a period of time. It has income, it has liquidity, it does not have appreciation, and there's no depreciation with that compared to our Mobile Home Park Fund. Our Mobile Home park fund has actually three of these characteristics. It has income, it has appreciation, and it has depreciation. So a lot of times real estate can give you three out of four of these categories on the dial spectrum versus, say, the stock market. Our third example. It has liquidity, it has some income, it has some appreciation. Typically no depreciation comes with the stock market, but you can usually only count on a couple of those, or maybe even one of those aspects when it comes to the market. If you have any questions, feel free to reach out to us infoextlevelincome.com, infoextlevelincome.com also be sure to like and subscribe the Next Level Income show if you haven't yet. Thanks for listening today. Hey Chris, here again. I hope you found this episode valuable. Now I have one more thing to gift you. We have a page for my coaching clients where you can get a free copy of my book as well as much more from previous guests on the show. Just check out nextlevelincome.com coaching to get a free copy of my book, audiobook and much more. I'll send you a copy of my book and cover all the shipping costs as a thank you for listening to the podcast. Also, please like share and take just 90 seconds to give us a rating on Apple Podcasts.