Startup Q&A #18: Investing Options for Entrepreneurs

Hey everybody. Matthew Paulson here. Today we are going to complete our three part series on investing for entrepreneurs. We are going to talk about investing for charitable purposes, whether or not you should hire a financial advisor. Why I'm not a big fan of directly investing in real estate and whether or not you should become an angel investor. Let's do this. This is officially episode 18 of Startup Q and A, the online video show that helps startup founders, small business owners and entrepreneurs grow their businesses faster and achieve their dreams of financial freedom. So whether you're still at the idea phase or if you have 100 employees, this is to show that it's going to give you actionable ideas and advice in your business. Now at Startup Q and A, we believe the best way to achieve financial freedom is to build a cash flow generating business and invest the profit into income generating investments. We don't believe in building high growth investments where you take on a bunch of money, don't make a whole lot of profit and sell it to some big company for an exit someday. We believe your business should actually make money. It should make profit that you can take home at the end of the day. Take that money and invest it. We believe you should take the profit from your business and put it into things like real estate and dividend stocks and closed end municipal bond funds that generate cash flow. If you do this for a long enough period of time, your income generated investments will cover your living expenses so that you don't need to work or if you want to work, you're doing it because you like to do it, not because you have to do it for your day job. That's really what we do believe. We believe you should have a business that makes money, you put it into income generated investments and eventually you have enough investments that you can live off of so that you can do whatever you want without the fear of having to create an income from a job or a business. Today we are going to finish up our topic of investing. We've covered a lot of ground in the last few episodes. We've talked about when, when you should start taking money out of your business and putting it into investments. We talked about what types of investments accounts you should have. We Talked about Roth IRAs, 401 s, health savings plans, what I called the tax advantaged investing triad. Still not a good term. We talked about how entrepreneurs should invest differently than normal people. Today we're just going to cover a few questions that have come up throughout this series and try to wrap this session up. Next episode we're going to return to a more normal format of questions that people send in. I've got a big backlog of those, so I'm going to try to work through those in the next few episodes and get back to talking about business growth and some of those things that we haven't talked about for the last couple of episodes. So that's where we're at today. Before we dive into the questions, we're going to do a little bit of a transition. We are going to do the tip of the week. We're going to where I give you a tip idea, a book, a piece of advice that you can follow to grow your business faster or achieve financial freedom. Today's tip is kind of thematic for the money and investing topic we've done in the last few weeks and that is to do your charitable giving through a donor advised fund. Now, this isn't exactly an investing topic, but it is in a way that because when you're giving, you are investing in a nonprofit for a charitable good. I really believe that a donor advised fund really is the best way to do that. Now, a donor advised fund is a special type of an investment account that allows you to set aside money for charitable giving in the future. You receive a charitable deduction up front when you put money into your donor advised fund and then you can take the money out and give it to a charity really at any point in the future that you want. You can also invest inside your donor advised fund for a few years and then take out your profit from your investment and give that to a charity as well. There are a lot of good reasons to do this, but in essence a donor advised fund is simply like an investment account where you're giving money to your investment account that will someday be given to charity. It's a really neat fund and it is something I think you might want to consider for a few different reasons. First, giving through a donor advised fund will simplify your tax receipts. If you give to a lot of different charities, you get a receipt from each charity for tax purposes. At the end of the year you have to go hunt all those down, call up the charities and say please send me my tax receipt so I can put it on my tax return. With the donor advised fund, you only get one receipt because you're effectively giving money to your donor advised fund and then your donor advised fund is giving money to these charities. So that really simplifies collecting that information at tax time. Second, a donor advised fund will allow you to give anonymously. As a Christian, I think most of your giving should be kind of quiet and anonymous in many cases. And a donor advised fund lets you do that because the donor advised fund can mail a check and not put your name on it. As more of a practical reason. A lot of charities send out a ton of mail and email and you might not necessarily want that from them. If they don't have your name and they don't have your mailing address and they don't have your email address, obviously they can't spend a bunch of money sending you mail to get you to give them more money. That is kind of a nice thing that you can do. Third, a donor advised fund allows you to give stocks away and not pay capital gains tax. You can gift an appreciated asset like a stock or a piece of real estate or whatever into your donor advised fund. You don't pay capital gains on it, which can be 20% if you're in the top tax bracket. So maybe you have a stock that you own, let's say it's appreciated in value, maybe you want to sell it, maybe you don't. But instead of giving cash to your donor advised fund, you give an appreciated stock and then effectively you're giving the stock to the donor advised fund. The donor advised fund sells it, then you don't pay capital gains on it and then with the money that you would have given otherwise, you then you can go buy that stock again, which will effectively reset your tax basis to the current price of the stock. If you're going to do charitable giving anyway and you have some stocks, you might as well give your appreciated stocks to the donor advised fund. Rebuy the stocks and you can save on capital gains quite a bit over a long period of time. If you make that your strategy. That's what I've been doing for the last year and a half. You know, it's just a nice long term tax saving that you can do. So there are lots of reasons to love a donor advised fund. Really the only caveat to this actually maybe there are two. One, these really are for larger dollar investors. Most of these have like a $10,000 or $25,000 minimum to open. So if you're not going to do that at least maybe in a year, this might be overkill for your situation. Second, there are also some fees associated with this. I think the one that I have charges an annual management fee of like 50 basis points or 0.5%. So you do pay a little bit of money to get this set up and in place. But I think it's well worth it for the benefits that you get from doing that. There are several companies that do this. Fidelity Charitable, Vanguard, Chep Charitable, Charles Schwab does this. Any big broker, they'll offer this as an option. So definitely check it out. Consider it if you do five figures in charitable giving per year, this could be a great option for you. Let's dive into the questions. We have three questions this week. Every week we take a few questions that are submitted through Facebook or through our website or LinkedIn or Twitter or wherever they come from, or questions that I just make up and we answer them. So if you would like to have your question answered, go to the domain startupqa Co that will take you to my website. In the Startup Q and A show menu item there is a link to ask a question, there is a form that you can fill out and then I will get your question and hopefully answer it on a future show. The first question today is should I hire a financial advisor? That is a good question. There are going to be some financial advisors that don't like me after I answer this question. But really I have to give you the advice that I think is best for you. Here's really what I think about financial advisors. Before we really dive into this, I think it's very important to understand what having a financial advisor costs you. Let's say you're 25 years old and you plan on investing until you're going to retire at age 65. You've got 40 years to invest. Let's say you're going to max out your Roth IRA for you and your wife or your husband for 40 years. And we're just going to assume that's going to be $11,000 per year. So let's say that you put away 11 grand per year for 40 years. Most people that are really thinking about it start investing in their mid-20s. And let's say you retire at a normal retirement age where you've got 40 years to invest and you're doing 11 grand a year. The question is, how does having a financial advisor impact the amount of money that you have at the end of that 40 year period? Let's say the stock market does say a 10% annual return over that long period of time. Just as a nice round number with a financial advisor that charges you a 1% annual management fee at the end of that 40 year period, you would have just under $4.3 million to retire on. Not bad, right? Well, if you didn't have that financial advisor had the same investment that did 10% per year, you wouldn't have $4.3 million. You'd actually have closer to $5.8 million. Having that financial advisor cost you a total of $1.5 million in fees and then lost growth over that 40 year period. So if you are paying that management fee to a financial advisor, it's going to take a significant bite out of your investments throughout your working lifetime. Now, I'm not saying that one should never hire a financial advisor or that they're all crooks, although some of them are. But if you want to read investing books, you want to geek out on this, you want to listen to some investing podcasts, you want to give yourself an education on the topic of investing, you might not need a financial advisor. I don't use a financial advisor for most of the stuff that I do. I do for my backdoor Roth IRA because it's complicated and I don't want to mess with it. But largely I do most of this stuff myself because it's fun to learn about and it's a fun hobby for me. There are some situations where you should consider getting a financial advisor, though, really, if you don't want to learn about investments or you just want somebody else to do it for you. Hiring a good registered investment advisor can be a great way to outsource that. Financial advisors can play a very good role of educator. They can teach you about different asset classes. They can tell you what type of accounts you should have or what you shouldn't have. They also play a really good role of kind of a counselor and a therapist. A lot of people, they tend to sell their investments during a recession because they're afraid of losing more money if the market continues to go down. A financial advisor can slow you down and say, hey, wait a minute, we're at the bottom. It's going to go back up. It's going to be all right. Don't worry about it. They can stop you from doing things that are against your own best interest. So that is a nice role that they do play. They hold your hand, they say, don't worry, the market's down now, but it's going to go back up. It always does. They do play that investment advisor role where they can stop you from doing things like switching asset classes too often or selling during a recession that many people do, even though it's against their own best interest. Now, if you are going to hire a financial advisor, make sure to hire one that has the designation of a registered investment advisor. This means that they are required to invest with your Best interest in mind somebody like a stockbroker or like an insurance salesperson. These people can largely sell you mostly whatever they want. And the products they sell sometimes are okay, but in many cases they're not always the best products for you, and sometimes they have really high fees. So I always recommend that you stick with somebody who has that RIA designation. In most cases, if you find an RIA that you can build a good relationship with, you're going to end up being okay. I'm not on the end of you should never hire a financial advisor, or you should always hire a financial advisor, but you do have to really think about whether or not you need one. Understand what the cost of having a financial advisor are, and then if you do want to hire one, make sure you get one that is a registered investment advisor. The next question is, why don't you like directly investing in real estate? So other than my primary residence, I own exactly one single family home with a few other guys. So about five years ago, we thought it would be a great idea to make a little investment club and to buy a house. We did that. We still own a house. We have great tenants. We've had the same tenants since we bought the house, and we'll do okay with it when we sell it. But it's really a lot of legwork for what it is with a dividend stock or real estate investment trust or municipal bond fund. I can spend a few hours researching it, purchase it through my brokerage account, and then I own it, and then I start to receive dividend payments. At that point, I'm literally done and I can just hold it on as long as it's a good investment. Yeah, I need to keep up with research, which is maybe an hour a quarter, any of these stocks, but it's not a ton of work. When you directly buy real estate, you buy a rental house, you buy a piece of commercial real estate, you have a lot of work to do. You have to identify the property, you have to do the negotiation to buy it. You have to get a mortgage. In most cases, you have to find a tenant or hire a property manager to find a tenant. You have to think about repairs. There's just a lot of different stuff that you have to do when it comes to residential and commercial real estate. And really that's just more work than I want to do with my investments. Being a real estate investor really is much more of a business than it is a passive investment. If you want real estate ownership to be your business, that's fine. It's a perfectly fine business to run. But if you are looking for more of a passive investment because you have your own business to run over here, you don't really want to have another business operating real estate over here. It's too much of a time suck for me. So I don't do that. I really want to separate my economic interests, the money that I get every month from my investments, from my work. I want to be able to work on the things that I want to work on just for fun and not have to worry about whether or not my tenant is paying the bills or whatever. I want those things separated when I hit retirement. I want that money coming in then any work that I do. I just want to be stuff that I actually want to work on and not something I have to work on because that's where the money comes from. Real estate, directly investing in it. Great for some people. Not for me. It's just not a great use of my time relative to working and growing MarketBeat. An hour spent in MarketBeat is going to yield a much higher return on my time than buying a a piece of rental property. So that's kind of my opinion on the situation. I do own real estate, just not. I don't own it directly largely. You know, I've got six figures in real estate a few times over. I buy real estate investment trusts, companies like Wellmark or not Wellmark, Welltower Realty Income Corp. Ventus, I own some of those. And then I also invest in real estate deals that other people put together. So there is a great deal that I did with a local private equity company. They're buying up hotels. You get an 8% preferred return on the money and then you split the profit with them after that. So I'm really happy with that deal. Get checks from them every quarter. I don't have to think about it. They manage it. They have a hotel management group they work with. I get a check in the mail. I don't have to think about it. But I still have some nice exposure to commercial real estate. So I'm a big fan of real estate as an investment, as a cash flow investment. I just don't want to be the guy managing the show. So the next question is who should become an angel investor? This is kind of a very different type of investing than most of the things I do. Normally I invest in cash flow generating investments and angel investing is one that is definitely not cash flow intensive. So you may or may not know. I run a small angel fund called Falls angel fund. We raised $1.35 million to invest in high growth scalable companies in South Dakota and surrounding states. I personally have about 150 grand into the deal and I've also done a few local deals of companies that are growing up around here. Then I've done a few deals through syndicates on Angellist. Now, this is definitely a lot different than dividend stock, real estate or bond and kind of goes contrary to what I teach on the show. The reason that I do this, why do these high risk, high reward, no cash flow investments? It's really just a hobby for me. My angel investments make up less than 10% of my portfolio and they just represent my fun money. I do angel investing because it's a lot of fun and I want to help other entrepreneurs get their businesses off the ground. I want to help other startup owners, startup founders succeed in launching their small business. And being an angel investor, where I give cash and advice, is one way that I can do that and maybe profit in the process. I really want to see the startup ecosystem in my community thrive and grow. Being an angel investor is one way that I can do it that most people cannot. If you think about it, running an angel fund, it's a lot like being the guys that are on the other side of the table on Shark Tank. You're sitting behind a table, somebody comes in, they make a pitch about their company. Then during a pitch and after, through due diligence, you decide if you want to make that investment, then you get to help that company grow and give them advice and money. Over time, hopefully they'll sell to some big company or go public or get bought out or whatever and get a big return, you know, after several years. So if you've ever wanted to play the other side of the table in Shark Tank, you know, being an angel investor is really about as close as you're going to get to that. So I definitely have a lot of fun being an angel investor. So it's not something where I'm going to bank on it for my retirement money, but I do enjoy it as a hobby and it's just kind of a nice way to give back and to help the startup ecosystem here in Sioux Falls kind of grow and thrive. I do think if you're going to be an angel investor, one, don't bank on it for your retirement, and two, it should really be a passion play. If you're really passionate about startups and entrepreneurship, you've got some money, you've had some success in business, you've got some skills and expertise and you want to give back. Being an angel investor is a nice way to do that and maybe get a return in the process. My assumption is that 7 out of 10 of these companies I invest in are going to fail miserably. I've had one exit so far that was Dollar Shave Club. They sold Unilever. I got a healthy return on my money there, but I've also had a few companies that have failed miserably and have just petered out. You get both sides of that table and you just have to be prepared for that. Hopefully I make a decent return on my money, but there's a good chance I could lose everything, which is okay because they're not banking on it for retirement. Once you've had a certain level of success in life for your business, being an angel investor can be just a nice way to give back. But I wouldn't bank on it for my retirement. I think those are the questions for today. If you would like to learn more about investing, specifically in dividend stocks, I've written a book on the topic. It's called Automatic Income how to I forget the subtitle, but it's about dividend investing and how to generate cash flow from investments. If you want to check it out, it's on Amazon. Go to the domain automaticincomebook.com that will take you to Amazon. The book is like $4 in a Kindle format. It's also available as a paperback and an audiobook so you can get it in really whatever format you'd like. So check that out@automaticincomebook.com if you'd like to subscribe to Startup Q and A and get next Monday show delivered to you automatically, go to the domain startupqa.co and there are links to subscribe via email, Facebook, RSS, iTunes, YouTube and Stitcher. We really try to be everywhere where you want to listen so you can follow me personally on facebook@facebook.com matthewpulfonpage if you want to add me as a friend, it's facebook.com MatthewPulfsen Follow me on Twitter. My user ID is MatthewDP Matthew and then D for Dale and P for Paulson. My middle and last name. Go ahead and feel free to follow me there. If you enjoyed the show, please go on itunes. Take a few minutes to leave us a review. Itunes review are a great way to get more visibility on itunes. It will help us spread the message of achieving financial freedom through the power of entrepreneurship. Further, wider, faster and farther. That's the show for today. Next week we will go back to your questions, I guess before I get off the show. If you're watching the video version of this podcast, you'll notice that the background is different than it usually is. I'm actually recording this at the bakery, which is a co working space in Sioux falls. It's at 9:10 North Maine. It's free to come on Fridays. I'm recording this on a Friday. I'm actually a member. But if you want to check it out, feel free to come. If you're ever in Sioux Falls or you live in Sioux Falls, come down, check it out. It's a cool little place. They have lots of great events here. Again, that is the bakery at 9:10 North Maine. That's it for the show. Thanks, everybody.