8 Ways to Invest in Real Estate for Retirement

Happy senior couple retirees homeowners
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This story originally appeared on NewRetirement.

Let’s get real about investing in real estate for retirement.

Investing of any kind can be complicated at any point in your life. However, investing in or near retirement can be especially arduous. At retirement, you need your assets to be relatively free of risk while keeping pace with inflation. In many cases, you need your assets to provide income. And, you want to minimize taxes and costs.

And it is not something you can afford to get wrong. Most of us need the money we have accumulated over our lifetimes to fund our golden years.

So, is real estate a good investment at this stage in your life? It all depends. What are your interests? What kind of money do you have to invest? What are your financial goals? What kind of lifestyle considerations might come into play?

The Key Benefit of Real Estate for Retirement

Happy man with money and a house
Ljupco Smokovski / Shutterstock.com

Real estate is an asset class with high returns. It also usually offers a hedge against inflation. Since real estate has historically been inversely correlated with conventional assets, it can be a good way to diversify your investments away from the stock market.

Let’s take a look at eight ways to invest in real estate for retirement:

1. Own Your Own Home

Happy homeowner
Sean Locke Photography / Shutterstock.com

For most people, their home is their most valuable asset — worth more than their savings.

However, this asset is not always thought of as a way to help fund retirement.

There are so many different ways to utilize your home equity to generate retirement income or hedge against unknown risks — from downsizing to leveraging equity to fund a long-term care need and more.

Learn More: How to Use Your Own Home Equity for Retirement Income, Cash, Leverage or a Back-Up Plan

2. Real Estate Investment Trusts (REITs)

REIT
designer491 / Shutterstock.com

A Real Estate Investment Trust (REIT) is an investment in a collection of properties or other real estate assets. It’s kind of like a mutual fund but instead of a collection of company stocks, it is a collection of properties. REITs have a special tax status that requires them to pay out at least 90% of their income as dividends. There are many types of REITs — some have very high risks (mortgage REITs, which are investments in mortgages) but most are quite stable (equity REITs, investments in actual properties).

Pros:

  • Dividends: The dividends paid by a REIT can offer real income to retirees.
  • Easy to Get Started: It is easy to buy a REIT — it is like buying a stock or fund.
  • No Hassle: With a REIT you get the benefits of real estate without the hassle of buying and managing a property.
  • Less Risk Through Diversification: Instead of owning one or a few units, a REIT allows you to diversify and be invested in multiple properties, which reduces risk.
  • Liquid: You can sell your REIT investment almost instantly, unlike rental properties.

Cons:

  • Taxes: Taxes can sometimes be burdensome on REIT dividends since they are taxed as ordinary income.
  • Low Principal Growth: Because REITs pay out 90% of their profits in dividends, your money is not getting reinvested. Furthermore, real estate is generally not an investment that explodes in growth.
  • Not Much Control: If you are someone who wants hands-on management, a REIT may not be appropriate.

3. Buy, Improve, Flip

Couple involved in home renovation
Zivica Kerkez / Shutterstock.com

“Flip or Flop,” “Love It or List It,” and “Fixer Upper” are just a few of the many popular TV shows that showcase the ins and outs of buying, fixing, and reselling houses for a profit.

Flipping, also called wholesale real estate investing, is when you purchase a property not to use, but with the intention of selling it for financial gain.

Flipping can certainly be a profitable venture. It can also be a very good way to lose money, especially if you don’t have the right assets, skills, and know how. You need real estate knowledge, home improvement skills, access to cash, some financial expertise, and maybe a bit of luck to successfully flip properties.

4. Purchase Residential Property and Rent It Out to Long-Term Renters

Monkey Business Images / Shutterstock.com

This is what most people think of when they think of real estate investing — buying a property and renting it out.

The trick is that you need to consistently have tenants who are willing to pay enough for you to cover any mortgage you have on the property plus: insurance, taxes, and maintenance.

The most important aspects to consider are property location and market rental rates.

Pros:

  • Opportunity for above-average returns on your investment. Rental property can perform much better than investing in the stock market.
  • Cash flow in the form of monthly rent.
  • A hard asset: Real estate almost always has value and usually appreciates over time.
  • There can be significant tax benefits to owning a rental property. Talk with an adviser, but you should be able to deduct interest, taxes, insurance, and other property expenses and usually deduct losses against other income.

Cons

  • Managing a rental property can be time-consuming and stressful. You need to be capable of taking care of problems with the home and deal with your tenants’ ability to pay and any vacancies that might occur.
  • It requires significant upfront capital to purchase a rental property.

5. Purchase Commercial Property and Rent It Out

commercial rental space
SeventyFour / Shutterstock.com

Experts suggest that owning commercial property can be more profitable than residential real estate. However, it can also have more risk, be more complicated (juggling multiple tenants), and require a bigger cash outlay.

6. Purchase Commercial Property and Run Your Own Business

zjuzjaka / Shutterstock.com

Who has dreamed of retiring to an island and running a little grass shack bar in the sand? (It’s not really just me, is it?)

Whether you have ideas about a beachside rum shack, a bed and breakfast in Ireland, a fishing shop in Belize, a bookstore in your home town, or some other retirement business, the real value of your venture can often be in the real estate itself.

The biggest expense of most brick and mortar businesses is the real estate. So, owning the property could increase your long-term wealth and monthly income.

7. Buy a Vacation Home and Rent It Out Part-Time

goodluz / Shutterstock.com

Owning a vacation property as an investment usually means that you rent it out to tenants for shorter time periods. If you have the right house in a desirable location, you might be able to make as much money from a few vacation renters as you could from a year-round tenant elsewhere.

And, maybe you can enjoy some time there yourself!

Besides the general pros and cons of owning rental property, there may be additional considerations for a vacation rental:

Pros:

  • Rentals might be more predictable in highly desirable locations than other types of rentals.
  • You may be able to enjoy the home yourself.

Cons:

  • Vacation rentals can be particularly expensive.
  • Because many vacation rentals are seasonal, your window for making money from the rental may be limited and therefore riskier.
  • If you are not living in the area, you might need to hire someone for maintenance and management.

8. Crowdfunding

Crowdfunding hands with money
Prostock-studio / Shutterstock.com

Crowdfunding is a relatively new way to raise money for a business venture. The idea is that many people invest a small amount into a particular project. The crowdfunding concept is becoming an increasingly popular and low-cost way to invest in real estate.

Let’s say that you want to invest in residential rentals and think the ideal property is a 10-unit building, but you have nowhere near the assets to make that kind of investment. Crowdfunding allows you to participate in that type of venture — without the huge capital outlay or the hassle of buying and maintaining the property yourself.

Matt Rodak, CEO of Fund That Flip, explains crowdfunding like this: “Real estate crowdfunding provides investors the ability to individually select each property they wish to invest in. This allows investors to be more selective on a project-by-project basis and build a custom portfolio aligned to their specific investment objectives.”

Here are a few real estate crowdfunding sites for you to browse: Realty Mogul, FundRise, GroundFloor. And these following options are for accredited investors: Origin Investments, AlphaFlow, and Equity Multiple.

Pros:

  • Investors get access to the real estate market with small amounts of money.
  • You can choose which real estate projects you want to invest in and sometimes have a voice in the project.

Cons:

  • Some crowdfunding opportunities are only available to accredited investors.
  • Crowdfunding requires more industry knowledge than investing in a REIT (though less than investing in a property yourself).
  • The investment risks are the same as for any real estate investor. If the market goes south, an investor will likely lose money.
  • There is far less liquidity in a crowdfunding investment than with a REIT

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

How to Find Private Money for Real Estate Investments

private money lendersI have completed a lot of house flips and bought many rental properties. Over the years, I have established many private-money relationships. Some of the people who work with me are amazed at how much money people are willing to lend me! I was able to attract private-money lenders by being trustworthy, being transparent, and putting myself out in the public eye. I don’t have a fancy presentation or a secret list of lenders. I am myself and honest about everything I do. It is not easy to attract private money, especially when just starting out, but it can be a game changer if you are a real estate investor.

What is private money?

The first thing I want to talk about is what private money is. There is a lot of confusion about hard money and private money. The biggest problem is that hard-money lenders started calling themselves private-money lenders in order to get more business.

A hard-money lender is a company that lends money to real estate investors. They usually lend from 8 to 15%, and the terms are less than one year. The loans are meant for house flipping but can be used for rental properties that are refinanced quickly as well. Hard-money lenders usually require an appraisal, have loan fees, underwriting, and a loan approval process. Hard-money loans can be a pain. They have a lot of fees, and the lenders can change their minds at any time with no real repercussions.

Private money comes from a person who lends money to another person. When I borrow private money, it is not from a company that specializes in lending money—it is from someone I know. I have at least 6 people I borrow money from. Some are friends, some are family, some are investors I know, and some are strangers who found me online. Private-money lenders often have no fees, require no underwriting, and most likely do not need an appraisal or valuation.

When I get a private-money loan, I send a text or an email to my lender and ask them if they want to do this loan. With some of the lenders, I give the address and a few basic numbers like the purchase price, the repairs needed, and the ARV (after repaired value). With other lenders, I say, “Hey, you want to do a loan?”

I love private money because it is so easy to use and I know there will not be any issues once my lender says I can do the loan. I have had many problems with many different hard-money lenders.

Do not confuse hard money with private money!

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Avoid private-money scams!

You may want to get into the heart of how to find private-money lenders, but first a word of warning: do not fall for private-money scams! I personally can’t believe people fall for them, but it happens all the time.

How does the scam work?

Someone posts something on social media about having private-money loans from $50,000 to $5,000,000 at a 5% interest rate and no points, no credit needed, and no income verification. It sounds too good to be true, right? Well, that is because it is too good to be true!

The scammer will charge a small fee to get the application process started, and once they have that, you will never hear from them again. Private-money lenders are not looking to loan their money at rock bottom rates to strangers they find online. Don’t fall for it!

How did I find my private lenders?

When I was flipping houses in the beginning, I did not use private money. I worked with my father, and almost all the money we used was from the bank. This was also before the housing crash when it was much easier to get money from banks for flipping houses. We had a large credit line that we could use for whatever property we wanted.

After the housing crash happened, those lines of credit dried up, and we had to find new financing. We found banks who would lend to us, but we had to put 25% down and finance all of the repairs. We could handle that because we had been in the business for a long time and had a lot of working capital.

Over time, I took over the business and was flipping houses on my own. I was still using bank money, but a couple of people approached me about lending me private money. One was an investor who used to be one of our main competitors in the house flipping business. He had stopped flipping houses but was interested in lending me money when I flipped houses.

I was not sure what to make of the offer since the interest rate he wanted was much higher than the bank’s interest rate. He was also offering to finance 100% of the purchase price. That was intriguing to me because it meant I could flip many more houses. I wouldn’t have to come up with nearly as much cash for each deal. I did one deal with him and then another, and then he became my main source of financing.

I have also borrowed money from family members who saw what I was doing and knew that I could give them decent returns that were safer than other high-risk investments.

Another investor saw my YouTube videos and my blog and wanted to become an investor! I am at a point now where there is no way I can use all the money I have available to me. At the same time, the lenders are not dependent on me to make them money, so there is no pressure to use the private money all the time.

loans for house flips

How are my private-money deals set up?

I very rarely partner with anyone. I almost always set up my loans as a pure interest rate deal. The private-money lender gives me money, and I pay them interest and points. Points are like an origination fee and are based on a percentage of the loan. If I pay 2 points on a $100k loan, I pay $2,000. My lenders charge from 1 to 2 points on the loans. Hard-money lenders charge from 1 to 5 points on loans.

Some investors will share the equity with the lenders, or as I like to call it partners if it is an equity share. They will do all the work, find the deal, and sell the property, while the lender will put up all of the money. Often, the two partners will split the profit 50/50. I hate giving up equity, and I also hate paying people based on the profit I make. There can be a lot of doubt and suspicion about the actual profits, the actual costs, and how the money is being handled on those deals. When I borrow money based on the interest rate, there is no confusion, and it gives me a sense of urgency to get things done so it doesn’t cost me as much money!

When I borrow money for a house flip, I will create a Deed of Trust and a Note for the lender. I sign both documents that describe the interest rate, payments, late fees, etc. and record the Deed of Trust and return the note to the lender. If I can’t repay the loan for any reason, the lenders have the property as collateral. It is not an easy process, but they could foreclose on the property and take the house back if they wanted to after I stop making payments or violate any of the terms of the loan.

I also have some deals set up with family where I borrow money all year round, not on a per-deal basis. These loans also have Deeds of Trusts on rental properties I own. The lender has collateral and a way to get their money back if things go south. Their investment is secured by a real asset.

Why do my lenders trust me?

One thing that surprises many people that work with me (I have no idea why) is how many people want to lend me money! The other day, I mentioned on Instagram that I was starting an opportunity fund. I was starting this fund with my own money, and I was not looking for any investor money. I had multiple people ask how they could invest in my fund. I had no idea who these people were!

I have people ask to invest with me all the time, and the reason is they trust me. Why do they trust me? I think it is because I am very open about what I do, I show the numbers on my deals, I show videos of my properties, and they can verify everything I say. I have also done well for myself and have a few nice cars like my Lamborghini.

Over the years, I have created a blog (what you are reading now), a YouTube channel, an Instagram page, a Facebook page, etc. I have not been afraid to talk about what I do and share what I do. This transparency has been a huge reason why people trust me and want to invest with me.

Not only do I talk about my successes, but I talk about my failures as well. I do not make money on every single deal I do. I think being honest and admitting my mistakes also plays a big part in why people trust me. I think it also helps that I have a credit score over 800, and I have never missed a payment in my life.

How can you find private money?

I have talked about how I was able to find private money, but that might not relate well to people who are just starting out or do not have a public presence. How can the average real estate investor find those private lenders?

The first thing I tell everyone is you cannot be afraid to ask! Many people say they are afraid to ask their family for one because they do not want to lose it. Does that mean it is okay to lose a stranger’s money? Do you intend to lose this money? If you are not confident in your investing and 100% sure you will be able to pay back the money you are borrowing, you may not be ready to borrow it. Sure things happen, but if you are looking to borrow private money simply because you are not prepared enough to get bank money, you may need to do more prep work.

Your family is the first place to state, and it should be mutually beneficial. You are providing them with a superior return, and you are making money using their money in the real estate business. You should not be begging for a favor but providing them with an opportunity.

You can do the same thing with friends, co-workers, or any other contact you have. Remember, that it is an opportunity for them to make a high return with an asset-backed investment.

If you know no one with money, which is very rare (most people know people with money, they are just afraid to ask them), you can start searching for people with money.

  • Look up public records to see who is buying houses without loans. Those are investors with cash, and they may want to lend money as well as invest.
  • Immerse yourself in the real estate world and find the investors who have money but don’t have the desire to hustle as hard anymore.
  • Put yourself out in the public eye. Write a blog, post on social media, start a YouTube channel. No one will find you if you don’t make it easy for them!
  • Attend real estate investor clubs. These clubs often have a lot of newbies, but there can be some experiences investors there as well.

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Conclusion

Private money can be a wonderful tool to help your real estate investing business. However, you must be prepared and know what you are doing if you think private investors will give you money. You have to show how their investment is safe, and you must show that you are trustworthy. If you try to BS people into giving you money, it will be a long and hard battle that will not end well.

Source: investfourmore.com

How Much Can You Put in an IRA This Year?

If you have an IRA, or are considering opening one, you might be wondering how much you can contribute every year. How much you can contribute to an Individual Retirement Account (IRA) depends on your age, your income, the IRA type, and whether you also contribute to an employer-sponsored retirement plan.

There are two types of IRAs: traditional and Roth IRAs. Both have set contribution limits, as well as other guidelines. With an IRA, an investor typically has to find one that fits their needs. A report from 2019 reveals that only 36 percent of U.S. households owned an IRA.

Related: What Is an IRA?

According to the Internal Revenue Service, for tax years 2020 and 2021, investors can contribute a total of $6,000 into IRA accounts. (If you’re 50 or older, you can contribute $7,000.)

What Is an IRA?

An IRA stands for Individual Retirement Account. IRAs allow people to make tax-deferred investments that they can use in retirement. There are several different types of IRAs, including traditional IRAs and Roth IRAs. You can set up an IRA with a bank, insurance company, or other financial institution.

What types of IRAs are available?

Traditional IRA

A retirement investor’s contributions to a traditional IRA are typically tax-deductible. Investors won’t pay taxes on earnings with a traditional IRA. When investors reach retirement age, they’ll pay taxes on withdrawals because they’re taxed like income. It’s almost like paying yourself a salary in retirement and paying income taxes on those payments.

Related: How an IRA Works

Roth IRA

Contributions to a Roth IRA are made after taxes and aren’t tax-deductible. With a Roth IRA, earnings aren’t typically taxed, but investors won’t have to pay taxes on withdrawals from a Roth IRA when they reach retirement age and start using the funds in one of these accounts.

Sep IRA

A Sep IRA is a simplified employee pension IRA. These IRA accounts help small businesses or self-employed retirement investors make contributions to an IRA in the employee’s name.

Simple IRA

A SIMPLE IRA plan (Savings Incentive Match PLan for Employees) is an account that most resembles a traditional 401K. This savings incentive match plan for employees can be set up by small businesses that don’t have any other retirement plans. Like a 401(k), this IRA lets employees and employers contribute, but with lower costs and fewer administration fees than a typical 401(k).

Related: How to Open Your First IRA

How Much Can You Contribute to an IRA Each Year?

If you’re younger than 50, you can contribute a combined maximum of $6,000 annually to a traditional IRA or a Roth IRA.

After 50, you’re allowed to make “catch-up” contributions, so the cap goes up to $7,000 a year. Previously, you could not make contributions to a traditional IRA once you reached the age of 70.5. But starting in 2020, there is no age limit; there’s also no age limit for a Roth IRA.

Limits for Roth IRA and traditional IRA contributions for the tax year 2020 and 2021:

•  Under age 50: $6,000
•  Age 50 and older: $7,000

Related: What Is a Roth IRA?

However, there are a few exceptions to the retirement contribution limits. If you make less than the limit in taxable income, you can only contribute up to that amount. On the other end of the spectrum, if you make too much, you can’t contribute to a Roth IRA or may only be able to contribute a reduced amount.

If you’re younger than 50, you can contribute a maximum of $6,000 annually into any type of IRA.

For 2020, if you’re single, you can put in a reduced amount into a Roth IRA if you make between $122,000 and $137,000; above that, you can’t contribute anything.

Related: Traditional vs. Roth IRA: How to Choose the Right Plan

For a married person filing jointly, you can contribute a reduced amount into a Roth IRA if you make between $193,000 and $205,000. (The limits are based on modified adjusted gross income .)

If you already contribute to a 401k or another retirement plan at work, you can still contribute to an IRA.

However, you may not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.

Related: 3 Easy Steps to Starting a Retirement Fund

Still unsure which IRA account you can contribute to? Use SoFi’s IRA Calculator to help you make an informed decision.

How Do I Open an IRA?

Investors thinking about opening an online IRA may want to consider whether a Roth or a traditional IRA makes sense.
Roth IRAs have some limitations that might preclude investors from getting one.

Investors who make more than $206,000 in adjusted gross income a year filing taxes jointly or $139,000 a year filing single may not be eligible to open a Roth IRA.

Vital information needed to open an IRA includes a driver’s license or ID, Social Security number, banking info like routing numbers to fund the account, name, and address of employer, and beneficiary information. After that, investors choose an asset mix and investment type that makes sense for their goals.

Related: The 7 Most Common Questions About IRAs

How Do I Roll Over Funds into an IRA?

Some investors might be thinking about opening a traditional IRA because they have left a job where they had a retirement account and want to move those funds to a new account (or they want to open a Roth IRA and roll over a Roth 401k). Reasons for doing this include the new investment company offers more investment options or the employee seeks more control over the funds or wants to combine funds from another retirement account with the employer-sponsored account.

Generally, funds from this type of account can be rolled over into a new account within 60 days.
The advantage of rolling over one retirement to another account is that investors don’t lose those funds’ tax-deferred status. If investors don’t roll over the funds, they do become taxable.
There are three ways investors can rollover retirement funds into an IRA.

Related: IRA Rollover Rules

Direct rollover

An investor’s old retirement funds administrator, perhaps at a previous job, sends funds directly to the new to an IRA or new employer-sponsored retirement plan. The investor won’t pay taxes or a penalty on this transfer as long as the transferred funds are going to a similarly classified account (Roth to Roth or 401k to traditional IRA).

Trustee-to-trustee transfer

If an investor is getting funds from an IRA, they can ask the financial institution that administers the old IRA to send funds to the new IRA. The investor won’t pay taxes or a penalty on this transfer.

Late or 60-day rollover

The IRS gives people 60 days from the date they receive a distribution from an IRA or retirement plan to roll it over to another plan or IRA. If you roll over after the 60 days has passed, it’s considered “late,” and the distribution will be taxed—and you’ll have to pay a penalty if you are younger than 59.5 years.

Related: IRA Transfer vs. Rollover: What’s the Difference?

Can You Withdraw from an IRA Before Retirement?

It depends. With a Roth IRA, there are situations–like buying your first home, adoption costs, or paying for higher education–where you can withdraw your contributions with no penalties or taxes. For example, an investor can take out up to $10,000 from a traditional IRA—or in earnings from a Roth IRA—without penalties for expenses associated with buying a first home.

Investors can also withdraw funds penalty-free for qualifying medical or educational expenses. And once you hit the age of 59.5, distributions will always be penalty-free.

Here are all the exceptions for early distributions:

•  Made to a beneficiary or estate on account of the IRA owner’s death
•  Made because you’re totally and permanently disabled
•  Made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary
•  Qualified first-time homebuyer distributions
•  Not in excess of your qualified higher education expenses
•  Not in excess of certain medical insurance premiums paid while unemployed
•  Not in excess of your unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income
•  Due to an IRS levy of the IRA under section 6331 of the Code
•  A qualified reservist distribution
•  Excepted from the additional income tax by federal legislation relating to certain emergencies and disasters (see the Instructions for Form 5329 for more information), or
•  Not in excess of $5,000, and the distribution is a qualified birth or adoption distribution (see the Instructions for Form 5329 for more information)

Related: Should You Use Your Roth IRA to Buy Your First Home?

Are There Ways to Get Around IRA Contribution Limits?

Sometimes. There’s no limit to how much you can put into an IRA when you’re rolling over funds from a 401(k) or 403(b) account.

Some people also use what’s called a “backdoor Roth IRA” to get around the income limits to contribute to a Roth IRA. This involves contributing the maximum to a traditional IRA, then converting it into a Roth. (There’s no income limit for conversions.) Consult a tax professional to understand all the tax implications.

Is an IRA a Replacement for a 401(k)?

American workers have access to a 401(k) retirement plan through their employers. And, some investors might even be able to get additional 401(k) contributions in the form of an employer match. Investors who have access to a 401(k) and an IRA might be able to accelerate their retirement savings and put themselves in a better financial situation when they reach retirement age.

Related: Should You Open An IRA If You Already Have A 401(k)?

The Takeaway

The rules of IRAs can be complicated, but investing in one doesn’t need to be. SoFi Invest® is all about empowering you and your financial future. Prepare for retirement with a SoFi active or automated Roth or Traditional IRA from SoFi Invest.

Need tips on IRAs or saving for retirement in general? SoFi members can schedule a complimentary personal consultation with one of our credentialed financial advisors to answer their questions.

Looking to open a SoFi traditional or Roth IRA? Learn more about SoFi Invest today.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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Source: sofi.com

AI Investing: The Ultimate Beginner’s Guide

With artificially intelligent technology on the rise across industries, learning about investing in AI is top-of-mind for many Americans. As people observe the rapid growth of innovative companies utilizing AI tech, there’s been a natural spike in interest around AI investing. Predictions that the AI market size will be worth $390.9 billion by 2025 motivates people to understand more about this business sector.

From machine learning to pattern recognition and predictive modeling, it’s not easy to keep up with different subsets of artificial intelligence and how they’re impacting businesses. Since AI is such a broad category of technology, sometimes it’s overwhelming to even understand the basics. When you’re considering investing in an AI-driven company, it’s crucial to learn as much as possible about these types of investments. If you’re curious about delving more into the topic of AI investing, check out our guide. 

This guide will cover:

What Is AI Investing?

Artificial intelligence (AI) is a series of programs and algorithms that mimic human intelligence to efficiently perform tasks usually completed by humans. The term “artificial intelligence” was coined in 1956, so AI isn’t a new concept. However, the capabilities of AI have improved drastically over the past two decades, ushering in a new era of technological advancements.   

AI touches almost every aspect of our lives. It’s hard not to notice the influence of AI technology, whether it’s at home with smart devices like Google Home and Amazon’s Alexa, or shopping online with chatbots that recognize our consumer behavior. 

AI investing, or learning how to invest in the AI market, is spiking in popularity thanks to its rapid growth. As AI becomes more integral to various companies and industries, stocks across various industries are becoming more desirable to some investors. 

However, even though research and development in this area are growing exponentially, people still need to be careful about placing bets on developing technology and tools. As with any type of investment, there will always be an element of risk involved when investing in AI.

Trends in AI Investing 

With AI investing rapidly spreading across the globe, it’s no wonder that people are paying attention to its growth more than ever. Across various fields, there are over 400 use cases and applications for AI. Leaders in AI development include tech giants like Google, Microsoft, Amazon, and IBM. At the same time, startup funding for lesser-known AI disruptors has been steadily climbing as well.

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What makes AI investing particularly interesting is its potential to be sustainably lucrative. Banks and financial services firms are building powerful AI strategies and utilizing the technology to streamline fraud detection, wealth management, underwriting, and more. In construction and manufacturing, AI can streamline products and experiences. AI also majorly impacts industries in healthcare, education, and safety. 

Three main signs indicating AI investing trends are the following:

Factors to Consider Before Investing in AI

Before diving into the world of AI investing, it helps to consider both qualitative and quantitative factors. The ability to find quality investments based on market opportunities isn’t enough, because even solid, profitable companies can be a poor financial investment if the stock prices are too high for you. To position yourself to wisely purchase AI stocks with strong return potential, understand performance and valuation metrics. 

Before you decide if an AI-driven company is worth your investment, you’ll probably want to take note of the following:

  • Research companies fully. Understand a company’s business plan and its track record for success so far. What are their guidelines and processes, where are their headquarters and manufacturing facilities, and what are their growth plans for the future?
  • Look for the company’s price-to-earnings ratio. Even if you feel strongly about investing in a company, don’t let those emotions cause you to give them the benefit of the doubt. When it comes to their financials, you need to understand the ins and outs. How much debt do they have? Are they currently profitable? Understand the current share price relative to its per-share earnings, too.
  • Figure out how much risk is involved. How can you tell how much risk is involved with one company’s stock compared to the rest of the market? You can start by determining a company’s beta, or measure of volatility in relation to the broader market, before investing any funds. Calculating a company’s beta isn’t difficult, and it can save you trouble in the long run.
  • Determine if the stock has a high enough dividend to be worth it. Investors can determine which stocks pay dividends by researching financial news websites. Don’t have false expectations — you shouldn’t expect a dividend from a startup.
  • Keep an eye on the company’s stock chart. Look for some of the most simple cues from stock charts to gauge price movement. Also, consider how the company would be affected by different economic factors and potential changes to the market it serves.

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Companies Shaping the Future of AI Technology

Many of the companies providing AI technology through their cloud platforms are household names, like Google, Amazon, IBM, and Microsoft. However, there are still plenty of other companies in other sectors that are shaping the future of AI investing. Below are six of the AI-investing business leaders to keep an eye on. We are not in any way recommending that you invest in these companies, rather these are examples of the leaders in investing in AI. 

1) Amazon. Amazon Web Services offers both consumer and business-oriented AI products and services and many of its professional AI services are built on consumer products. For example, the Amazon Echo brings artificial intelligence into the home through the AI bot, Alexa. 

2) Alphabet. Google’s parent company Alphabet is deeply invested in furthering its AI capabilities, along with acquiring numerous AI startups in the last several years. In addition to using AI to improve its services, a number of AI and machine learning services are sold to businesses via the Google Cloud Platform.

3) IBM. IBM has always been a leader in AI innovation, but its efforts in recent years are around IBM Watson, including an AI-based cognitive service. IBM has been acquiring multiple AI startups over the years as it competes with other industry leaders in this space like Google.

4) Microsoft. Microsoft has a wide range of AI projects that can benefit both businesses and consumers. For example, Cortana, the digital assistant that comes with Windows, is designed for business clients. On its Azure Cloud Service, Microsoft sells AI services such as bot services, machine learning, and cognitive services.

5) Alibaba Cloud. Alibaba is the top cloud computing platform in Asia. It offers business clients a sophisticated Machine Learning Platform for AI, including an intuitive, user-friendly visual interface. 

6) Salesforce. Salesforce developed Salesforce Einstein, their artificial intelligence service. Their latest initiative, which includes an extensive team of data scientists, uses machine learning to help employees streamline various tasks. It looks like this technology will also become more widely available in the near future.

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Additional Resources

There are tons of helpful resources for decision-making about investing in AI. Regardless of how financially savvy you are, there’s always more to learn about how to invest in the most efficient way possible. Your financial portfolio should be as diverse and robust as possible to set you up for long-term success.

One of the best ways to start the process of educating yourself is by reading free insights from reputable technology and finance research publications. Try reading MarketWatch and Morningstar on a daily basis to keep track of the latest and most accurate company information. By analyzing a company’s financials with a critical eye before making investment decisions, you’ll protect your personal financial health.
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We hope this piece could be a solid introduction to some of the concepts and trends that explain why AI has promising potential in the world of investing. AI investing presents various exciting possibilities for the future, but investors should still proceed with caution. When it comes to investing, always do your due diligence to avoid losing money. AI technology is seamlessly integrated into aspects of almost every industry. Focus on budgeting and consider investment decisions that are best for your long-term financial health.

Sources: TechJury | Datamation | Investopedia | AIthority | Forbes | Emerald Group Publishing | Deloitte | Accenture 

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