Better Investing
I mentioned yesterday that it’s possible to invest your money and get better than bank rates of return on your money. Most people are not aware of the options available so I thought I’d go through it a little bit more today.
If you’ve got money in a savings account right now, check the rate of return you’re receiving for that money you have “invested” there. Is it higher than 1% ? I’m betting it’s even lower than 1%. Recall the rule of 72.
The Rule of 72
The Rule of 72 states that if you divide your interest rate into 72, the result will be the number of years it will take your money to double at that rate of return.
72 / 1% (let’s be generous) in the current savings account = 72 years.
Many people don’t have 72 years to wait for their investment money to double in value. Let’s check out the CD (Certificate of Deposit) rate of return that is currently being offered. 2.99% (there might be a few places you can beat 3%, but right now 3% is pretty competitive.
72 / 3% = 24 years for this rate of return to double in value.
Bank Rates of Return
The rate that banks offer is nearly always lower than the current rate available. There are only two exceptions. If you lock your money into a long term investment and the prime rate changes significantly during that period of time, you might beat current rates. Back in the late 1970’s you could lock your money into a 3 year CD at 15% or a little more. If you put your money in right before the rates dropped significantly, you would benefit from the lock and make more than you could in some other investments. The other exception is a long term mortgage that is locked low before an inflationary period. The bank is getting less interest because they locked the rate low. Most of the time you won’t get a great return from the bank because the bank understands the time value of money better than you do.
Banks Don’t Make Loans
Tried to borrow money from the bank recently? Even if you have perfect credit and solid employment history, banks just aren’t doing it like they used to. You might be able to borrow money, but the bank will scrutinize you far more carefully and require that you jump through significantly more hoops today than they did a few years ago. Naturally, they’re smarting from the decisions they made a few years ago and should be more careful.
Carefulness affects Rate of Return
Since the bank isn’t making loans and collecting interest on their money like they were several years ago, they can’t offer good rates on the money you have in savings and Certificates of Deposit.
Alternate Banking
During times when banks are not doing their job the way we prefer, an alternate bank becomes more prominent. Private investing bypasses the traditional bank. If I need to borrow funds to do a project and my banker won’t loan me money right now, I can borrow the funds from you, my private investor. You have money sitting in an account that is earning 1-3%. I have a project that will generate a healthy 6-10% return. If I borrow funds from you for a Real Estate project, your investment will be protected by the equity in that Real Estate. When the LTV (loan to value) ratio is favorable, your investment backed by a first position Mortgage or Deed of Trust keeps your investment dollars safe.
Let’s take another look at the property I mentioned yesterday:
If you buy a property for $3,500 and repair it for $5,000 you have invested $8,500. Next you rent the property for $500 per month. What is your cash on cash return for this investment?
Cash flow (annualized) / Cash invested
($500 * 12) / $8,500
$6,000 / $8,500 = 70.58%
Is that better than your CD investment at the bank?
You might prefer to spend a little bit more on the property than $5,000 to get it rented. If you do, you can still easily see that a rate of return higher than 1-3% is more than possible. Let’s say you spent $10,000 to repair the property because $5,000 just wasn’t enough:
Cash flow (annualized) / Cash invested
($500 * 12) / $13,500
$6,000 / $13,500 = 44.44%
Is that better than your CD investment at the bank?
How many years does it take to recoup your cash investment?
72 / 44.44 = 1.62 years
Maybe you’re not too keen on owning property in Cleveland, Ohio? Why not partner with an Investor who manages the risk and just write you a check? Not all of the great returns are in bad areas. Your local Real Estate Investor can provide you with opportunities that far exceed the rates your bank and retirement fund are currently offering. If you don’t have a local investor to work with contact me. I can help you put your investment dollars to work in either long term or short term projects that will benefit both of us. Some projects are as short as 24 hours. Others can be several months to several years.
Real Estate Tip:
- Get yourself lined up with private investors who need you to help them get better returns on their investments. If you have money sitting in a poor quality investment, consider moving it into a self directed IRA or 401K as soon as possible. Make your money work for you.
- After you have done a few short term transactions with your funds, consider the kinds of cash flow opportunities that are available to you through Real Estate.
- Contact me if you have any questions. I can help you.
- There are many kinds of Real Estate investments. Very short term investing can have ZERO risk if you work with an Investor who understands them. The equity that protects your investment is a cushion that keeps your money safe.
