Investing In Oil and Gas

At Diversified Investment Strategies, we keep you informed on your real estate investment options, and how you can use 1031 exchanges to your advantage. In recent blog posts, we filled you in on DSTs (Delaware Statutory Trusts) and UP-REITS (721 exchanges). Today, let’s discuss oil and gas, and how investors can get involved in gas and oil royalties.

These may be attractive options for investors looking to diversify outside of real estate and to invest in commodities we use daily. When investors partake in a 1031 exchange, they may have the option of including a royalty program for oil and gas.

If you’re anxious about the devaluation of the dollar or hyper-inflation, or if you’re looking to diversify your 1031 exchange with a monthly royalty income, this may be a smart option for you. Even if a 1031 exchange fails, you could use your oil and gas royalties to offset capital gains.

Advantages of investing in oil and gas may include:

Diversification – It is one more way for you to diversify your investments. When gas prices rise, it may cause economies to slow and for other investments, such as stocks and funds, to suffer. Therefore, investing in oil and gas could help improve your portfolio during economic slowdowns.

Profit – If you choose to invest in smaller companies or limited partnerships, and they strike oil, a single well can pay dividends for many years.

Tax Advantages – At tax time, you can deduct for depletion, because of gradual exhaustion of mineral supplies. This is especially true if you buy a membership in a limited partnership.

Disadvantages of investing in oil and gas may include:

Volatility Risk – There can be much volatility of prices for this commodity, so if prices drop dramatically, especially when investing in smaller companies, you could lose out. Diversification is key.

Liquidity – If you invest in a small company or a limited partnership, it will be harder to find a buyer for your shares, or you may have to redeem your interest. It is easier to sell shares with larger companies.

Complexity – There are special tax rules that are in place for oil, gas and mineral investments, especially with limited partnerships, especially when you go to sell shares.

Our team at DIS can help answer your questions about investing in oil and gas, and can help you determine if this is a smart step for you. A note of caution, there are many scammers in this particular investment industry, so be sure to work with a company of financial advisors who have experience in the industry and will know how to spot a scam.

Have questions about real estate investment options? Interested in a 1031 exchange? Want to learn more about DSTs and how you can rid yourself of tenant duties by owning a portion of a trust? We can help you with all of this! Give us a call and set up a complimentary consultation today.

Bryan Hakola 
Diversified Investment Strategies
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