To become a bar certified lawyer, it takes four years of undergraduate school, three years of law school, and another one or two years of studying for the “Bar Exam” and passing it. Needless to say it is a lot of work and the reward is even more work! According to the Bureau of Labor Statistics, “…the majority of lawyers work full time and many work more than 40 hours per week. Lawyers who are in private practice and those who work in big law firms often work additional hours, conducting research and preparing and reviewing documents.” With a workload this big, there isn’t much time left in the day for lawyers to dedicate to personal financial planning.
In this article, we are going to describe eight investment ideas for lawyers. For each one, we will describe what it is and why it might be a good idea. By the end, the hope is that lawyer investors will find at least one or two investment ideas that are suitable for their own preferences.
At First National Realty Partners, we specialize in the acquisition and management of grocery store anchored retail centers. This type of investment tends to be a good fit for individuals seeking passive income. If you are an accredited investor and would like to learn more about our current investment opportunities, click here.
First, A Word About Suitability
Every investor has their own individual needs, objectives, and preferences. For this reason, we encourage investors to focus less on finding “the best investment” and more on finding the “most suitable” investment. To identify the most suitable opportunities, we encourage investors to consider the following:
- Risk Tolerance: Each investor has their own comfort level with risk. For those who don’t have the appetite for it, a low risk investment like a treasury bond may be more suitable. For those that are comfortable with higher levels of risk, something like an individual stock or mutual fund may be more suitable. Each investor should take stock of their own risk tolerance and steer towards investments that are suitable for it.
- Return Objectives: Risk and return are highly correlated. Investors who want to achieve a higher return must get comfortable with higher levels of risk and return variability. For investors who aren’t comfortable with risk, they may need to accept lower returns. Most should work to find the sweet spot between lowest risk and highest return.
- Time Horizon: Some investments require a multi-year commitment while others have a high degree of liquidity. For example, a syndicated commercial real estate investment like the type we offer usually requires a 5+ year time horizon. Other investments like those in the stock market can be traded frequently so they tend to be a good fit for those who can’t afford to lock up their capital for a multi-years period.
- Capital Available To Invest: At some level, all opportunities have some level of minimum investment requirement. For some, like an individual share of stock or a bond, it is relatively low (<$100). For others, like a private equity investment, it is much higher (>$25,000). Investors should consider how much capital they have available to invest and choose options that are a suitable fit.
- Time: Some investments, like a single family rental property, require a significant amount of time to manage. Others like a stock or mutual fund are very passive and require little or no time to manage. Investors should consider what time commitment they are able to make and choose an investment option that is appropriate for it.
- Debt Load & Emergency Fund: Law school is incredibly expensive and many future lawyers and paralegals take on a substantial amount of debt to pay for it. Before anyone in the legal profession considers allocating capital to an investment, it is a general best practice to pay down all forms of debt to a manageable level and to establish an emergency fund with three to six months worth of living expenses in it.
Before even thinking about allocating capital to one of the below investment options, investors should first think about each of these factors. This will help them determine the most suitable investment opportunities. If there is any doubt or confusion, it is always helpful to work with a financial advisor or investment advisor to develop a plan and identify suitable opportunities.
With the suitability question addressed, below are eight investment ideas for lawyers.
Idea #1: Real Estate Syndication
A real estate syndication is a deal structure that allows individual investors (like lawyers) to purchase a fractional share of a commercial real estate asset. The structure is possible because there are two parties in the deal, a General Partners who finds, finances, and manages the asset and a group of Limited Partners who provide investment capital, but take an otherwise passive role in the transaction.
For a lawyer, the benefits of a real estate syndication are clear. They get the benefit of real estate ownership without the hassle of managing the property. In addition, it produces passive income and provides some tax benefits.
The downside of a syndication is that it can require investors to tie up their capital for 5+ years and investors have no say in property management decisions.
Real estate syndications tend to be a suitable fit for accredited investors who meet certain income and net worth requirements as well as those with a long time horizon and a moderate to high risk tolerance.
Idea #2: Stocks
A share of stock is a security that represents fractional ownership of a company. Shares of stock can be publicly or privately traded and are usually purchased on a public exchange or through a private offering. For example, a lawyer could purchase shares of stock in Apple, Inc which entitles them to a fractional share of the profits produced by the company.
The benefit of a stock investment is that it is liquid, can be bought or sold at any time, requires a relatively small minimum investment, and can have a long term track record of delivering profitable returns.
The downside of a stock investment is that, in the short term, prices can be volatile and there is some risk that poor management practices can result in declining profitability.
Stocks tend to be the most suitable fit for investors who have a moderate to high risk tolerance and a long term time horizon.
Idea #3: REITs
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances real estate assets. Like stocks, REITs can be publicly or privately traded and shares can be purchased that provide shareholders with fractional ownership of a portfolio of real estate assets.
The major benefit of investing in a REIT is that they are required to pay out a high percentage of their income as dividends, which means that they produce a nice amount of passive income. In addition, they require a relatively low minimum investment and can offer a high degree of liquidity if publicly traded.
The downside of a REIT is that lawyer investors don’t really have any say in which properties their capital is used to purchase. In addition, their share price movements can get caught up in broader market sentiment that doesn’t reflect the performance of the underlying real estate.
REITs tend to be a good fit for investors with a moderate to high risk tolerance, a long time horizon, a desire for passive income, and a preference for liquidity. REITs can be purchased in a taxable brokerage account or in an individual retirement account.
Idea #4: Bonds
In the financial services world, a bond is a debt instrument issued by borrowers to investors who buy a piece of the debt in return for repayment over time. Investment grade bonds are usually issued by corporations to fund operations or a major project (e.g. a new factory) or “municipal” bonds can be issued by state and local governments to fund projects like bridges or roads.
Investors like bonds because they are relatively safe, provide passive income, and can offer a stable, consistent return. In addition, municipal bonds are backed by the full faith and credit of the government issuer, which makes them a safer bet for full repayment, and there may be some tax incentives for purchasing them.
The downside of a bond investment is that the returns are relatively low, usually somewhere in the 2% – 5% range annually, but can vary with interest rates. In addition, a payment default means that there is a risk that investors may not be fully repaid by the bond’s maturity date.
Bonds tend to be a good fit for investors with a low to moderate risk tolerance, a long time horizon, and a desire for passive income.
Idea #5: Direct Real Estate Purchase
In a direct real estate purchase, individual investors or a group of investors come together to purchase a property. The property could be a single family home, vacation rental, or commercial property. For example, a lawyer who lives in New York could purchase a farm upstate and rent it out for wedding parties on weekends for extra income.
The benefit of a real estate investment is that owners can earn supplemental income, derive tax benefits from depreciation, and could achieve significant price appreciation in the right market.
The downside of a direct real estate purchase is that owners are also responsible for all of the investment management activities like collecting rent, maintaining landscaping, or making the loan payments. For some, this is a lot of work.
Direct real estate tends to be a good fit for those with a long term time horizon, significant amounts of investable capital, and plenty of time to manage the asset.
Idea #6: High Yield Savings
A high yield savings account is a deposit account offered by banks and financial institutions that pays a higher than normal amount of interest on the balance. For example, a regular checking account usually pays 0% interest, but a high yield savings account can pay up to 2%, depending on the interest rate environment.
The benefit of a high yield savings account is that it is safe, stable, and liquid. Deposit balances are insured by the government so investors can sleep well at night knowing their capital is safe.
Even though they are advertised as “high yield”, they still don’t provide much of a return. At the time of writing, interest rates on the highest paying accounts are still only in the .50% – .75% range. In addition, these rates can change in response to the interest rate environment (i.e. they can go even lower). So, it takes a significant amount of capital to earn material income from this investment. Even a million dollar balance would earn just $5,000 in interest annually.
High Yield Savings Accounts tend to be the most suitable fit for investors who prioritize capital preservation over everything, have a low risk tolerance, and significant deposit balances.
Idea #7: Startup Investments
A startup investment is an equity investment in a new, fast growing company. The mechanics of this type of investment mean that lawyer investors purchase shares in the company with the hope they will be worth more in the future as the company grows. In a creative scenario, they could even offer their legal services (if the company business model falls within their practice area) in exchange for shares in the company.
The major benefit of this type of investment is explosive growth. An early investment in a company like Facebook, Airbnb, Uber, or Google provided extraordinary returns.
But, this is a high risk, high return proposition. A high percentage of startups ultimately fail and complete loss of investment is a real possibility. In addition, this type of investment is only available to accredited investors under securities and exchange commission (SEC) rules and it can be tough to filter through all of the opportunities to find the best options.
Startup investments tend to be a suitable fit for high net worth investors with significant amounts of investable capital, a high risk tolerance, and a long time horizon.
Idea #8: Cryptocurrency
Cryptocurrency can be tough to define, but in an investment context, it means buying the native tokens of blockchain networks. The biggest, most well known example is Bitcoin, but there are hundreds of other tokens that can be bought and sold on cryptocurrency exchanges.
Again, the major benefit of cryptocurrency is the potential for growth. To illustrate this point, Bitcoin investors like to celebrate “Bitcoin Pizza Day”, which commemorates the first known Bitcoin transaction. In it, a man in Florida paid 10,000 Bitcoin for two pizzas in 2010, an amount equal to about $41. More than a decade later, those 10,000 Bitcoin are worth about $420M! In addition, cryptocurrency has some utility as a medium of exchange or a way to pay for things.
The downside of a cryptocurrency purchase is that the price can be incredibly volatile with movements of 20% or more daily. In addition, the regulatory environment around it is very uncertain and the tax treatment is evolving.
A cryptocurrency investment is a suitable fit for investors with a very high risk tolerance and a level of comfort with a great deal of uncertainty. This is a speculative investment.
Identifying the Best Investment as a Lawyer
Again, when making asset allocation decisions as a lawyer, the “best” investment is the one that is most suitable for each individual’s unique preferences. To determine this outcome, lawyers should take inventory of the elements described above and perform due diligence on each of these opportunities to determine which one will be the best fit for their personal finances.
In addition, it can be a good idea to consult an investment adviser who can help identify suitable opportunities while ensuring that they fit into an individual’s financial goals and estate planning strategies.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.
