Some good advice for the ordinary taxpayer.

Ten Ways to Lower Your Taxes

Angel Investing

For simplicity, angel investing is any investing that is not for one of the purposes listed above. Angels invest in businesses, individuals or even just an idea. The scope of investments is limitless. One common characteristic of an angel investment is it rarely involves a short-term, one-time sale.

The word “angel” investor came originally from wealthy investors to Broadway stage productions that banks and other financial institutions would not finance due to perceived unmanageable risks. The productions would run several weeks to a year or more, depending on its success.

It is through that period of the production run the angel investor earns income that eventually repays, hopefully with a profit. Once the production shuts down, the investment period is over.

Thus, angels typically take on much more risk than a banker. For that risk, angels require a much higher return rate on investment. Not all businesses can promise a high rate of return, so are not suitable for angel investing. Not all businesses are long term, either.

For instance, a company may be founded to promote the Olympics for a specific country. That company may be involved in events planning, marketing initiatives, any number of services. There could be sizable income generated in executing contracts and order fulfillment related to promoting events and services in and around the Olympics. But, that business as a concern essentially comes to an end when the Olympics ends.

This may be a reasonable type of short- to medium-term investment for an angel investor; and one that a bank may not finance due to the short-term and high risk nature of the investment.

But, angel investing involves dealing with businesses that have much less transparency than publicly traded companies, and higher risk than with businesses that have tangible assets like gold or real estate.

Jeff Hamilton’s paper on angel investing gives a much more thorough discussion on how to make angel investing more transparent, in order to be more successful, and is available here at the Technology Leadership website as an instant download: Knowing When Angel Investing is Good for Investor and Business Alike

Real Estate

Real estate is not too different of an investment from some commodities, like gold or oil. The big difference again being the time or duration of the investment. Gold or oil can be exchanged daily. Real estate must be held at least a few weeks for closing, renovations and resale. More likely, a piece of property is held months or years. The biggest similarity is the need to sell the commodity or real estate property at a higher price than what you paid, in order to make a profit.

Like dividends on a stock, unless that property can generate a steady income during the ownership period, such as through sale of raw materials, rental income, or farming, the only way to realize income on real estate is through selling at at a higher price than what you paid. Investing in real estate for its rental, raw material or farming income is called ‘commercial’ real estate.

Owning your own home (or two) for personal use is considered ‘residential’ real estate. Only commercial real estate can generate income outside of (in addition to) the sale of the property. For residential real estate: selling higher is the ONLY way to make it profitable.

A trader can make fractions of a percent each day, and end up with a sizable yearly income. The overall direction of the commodity, up or down, has almost no bearing on a day trader. Similarly, a loss one day can easily be offset by gains the next.

For residential real estate, the only money that can be made is on its sale. And, the turnaround time is in the months or years range, so losses are not so easily offset.

Commercial real estate carries slightly less risk because there is a greater likelihood of earning sufficient income through non-sale activities (e.g. subleasing) to offset the lower sale price of the property.

In the next section we shall look at Angel Investing

US Treasury Bonds

Treasuries, as they are called, are a very safe investment – but safe only at protecting the original principal. In the long run, with any significant inflation, most recent Treasury issues, with their paltry rates of return, will be big money losers.

In the short-term, with extreme volatility in the markets, US Treasuries make an excellent hedge against both equities (long or short) and real estate (discussed below). Treasuries will maintain there value and are backed by the US government, which is critical in this uncertain time.

As the short term problems in financial markets subside, the rewards from Treasuries are far too small to protect against the risk of significant inflation.

In the next section, we will look at real estate.

Exchange Traded Funds

Exchange Traded Funds (ETFs) are traded like equities, but they carry very different risks and rewards to actual shares. They are less risky because they are comprised of a basket of stocks, usually either tracking a popular index like the S & P, 500 or culled from a particular industry sector, like the energy sector.

These funds also pay a dividend. The popular S & P 500 ETF “SPIDER” has a yield, as of August 20, 2009, of 2.71%.

This may be significantly less than what you could have made investing in one stock in the S & P 500. For instance, if you invested in Chesapeake Utilities Corp, you would make 4.2%. At 2.7% it takes 36.9 years to break even; at 4.2% the break-even period is 23.8 years.

But, you have a far greater risk of Chesapeake losing all its share value before 23.8 years has elapsed than you have of every share in the SPIDER losing value in 36.9 years.

In Part 7 of this series, we will look at US Treasury Bonds.