Money System - What Are You Investing That's Getting 5% Return?

[unaided]

Landlord for residential homes is not passive income. It's a full time job managing sidewalkers and their problems.

I'm in real estate finance, particularly existing mortgages. I consider a low return a 10% yield secured by a property with 50-60% loan to value ratio... meaning $50k-60k loan on a $100k house. I regularly sell to IRA investors who use their self directed IRAs to buy at a 10-12% yield. There are investments out there that will work for you. Nice thing about secured assets are that you have an asset worth MORE than your investment as collateral. You have zero collateral with the stock market.

thanks for the reply. so these properties have 40-50% equity, that you use as collateral to lend and get cash on cash return of 10%+?

If there's defaults, its secured by equal collateral in housing value. So you have minimal downside, and income upside....not a bad business

Where is the risk? Early mortgage repayment?

 

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[fastbo]

thanks for the reply. so these properties have 40-50% equity, that you use as collateral to lend and get cash on cash return of 10%+?

If there's defaults, its secured by equal collateral in housing value. So you have minimal downside, and income upside....not a bad business

Where is the risk? Early mortgage repayment?

#1 yes, sort of. These are existing loans. We buy the loans from the originator. Like when you get a letter from your bank saying they've sold the loan. similar to that.
#2 yes
#3 if you do things right in the acquisitions stage, there really is no risk. not without a systematic collapse of real estate more than 50%.

 

[unaided]

#1 yes, sort of. These are existing loans. We buy the loans from the originator. Like when you get a letter from your bank saying they've sold the loan. similar to that.
#2 yes
#3 if you do things right in the acquisitions stage, there really is no risk. not without a systematic collapse of real estate more than 50%.

How did the strategy fare in the subprime crash? my guess it didn't matter because of the loan to value parameters you work with.

 

[Jakawan]

Unless you have a tremendous amount of experience, you're going to find it extremely difficult to find professional lenders willing to lend at 10%. Most professionals will be at 12%+, and if you want better than that, you'll want to start with friends and family. I lend at 10-12% to investors I know who have a good bit of experience, and I'm pretty much the only person in my area who I know will do that (I have enough experience that I don't mind taking back the property if there is a default) -- most are in the 12-18% range, with 1-4 points tacked on.

So, start with friends, family, professionals in your network, people you know who have IRAs with cash they are looking to invest, etc. That's your best bet...

Hey Jscott! I read your books. I've been wholesaling for about 4 years now. Finally did my first successful flip and made about $40k profit.
I own a couple rentals, wanting to buy more. Started offering sellers a second way to sell their house. They can take the discounted cash offer or I can pay them more if they take payments. I don't even mention interest. I just say what I'd pay per month and for how long. Then they usually ask for a down payment, one guy asked for interest.. got one this way so far.. 20 year fixed at 6% interest with $1000 down.
Offered another lady $620 per month for 10 years, no interest, she's strongly considering it.
And also started asking people who get on my buyers list if they have any interest in lending money backed by a first position mortgage.

Anyways.. numbers game. Someone will say yes. Or I'll just have to pay the 12% interest and then refinance into a 5-6% bank loan.

 

[DustinH]

You may want to be a landlord as part of your business, as it gives you control, 100% return for your efforts, and the barriers of entry are a good thing as we know. It's not a passive freedom strategy, although it can be with management, but also has risks of lawsuits, acts of God, and lack of liquidity - things you may not want to deal with anymore.

Some states have taken away much of your control as a landlord and that would need to be considered in terms of tenant rights and so forth. So when it comes to then investing your $5-10 mil, then yeah a REIT would be a better way with more liquidity, dividends, etc, but you do give up control as someone else is using your money and deciding what to do with it, only 75% of the money has to be real estate involved, and you get 90% of the return so there are trade-offs to both approaches.

What's wrong with being a landlord? The SCRIPTED response from people is the "I don't want to get calls at night or fix broken toilets." That is a typical Sidewalker/Slowlaner response to owning rental property because they are scared to do it themselves. Another one I hear about is someone bought one rental property one time and it didn't work out for them. Yeah, because you only bought one. Buy 5-10 properties and hire a property manager to communicate with the tenants. The tax benefits of rental property are too advantageous to pass up.

REITs are just another way for you to give your money to Wall Street to make them rich. The fund managers make money while the investors get their 5% returns. Also, REIT only has to give 90% of the PROFITS back to the investors, not 90% of the revenue. REITs are taxed the same as stocks/bonds and you have no control. So, can you lose most of the money you invest? It's possible. While on the other hand, if you make the correct purchase, you will not lose most of your money on a rental property. You make money on rentals the day you buy them. Only buy for cashflow. Never buy for appreciation.

 

[EvanOkanagan]

My rental properties that are fully managed are getting 15%+ annual returns (not even accounting for any appreciation, just cash flow and principal pay down).

That's also factoring in misc expenses, maintenance, vacancy loss etc.

Haven't found a better passive way to make money (and it is passive-- my phone doesn't ring unless something major were to happen)

 

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[fastbo]

My rental properties that are fully managed are getting 15%+ annual returns (not even accounting for any appreciation, just cash flow and principal pay down).

That's also factoring in misc expenses, maintenance, vacancy loss etc.

Haven't found a better passive way to make money (and it is passive-- my phone doesn't ring unless something major were to happen)

You are doing things right if you're clearing 15% with management fee, expenses, and maintenance. The problem with most rentals are that one major thing, AC, roof, etc can wipe out your whole year's earnings. You can get a newer or rehabbed house, but that usually reduces your yield. There are certain markets that are better for cash flow rentals, some that are better for appreciation (rentals break even, but appreciation is strong), and some markets that plain suck.

 

[DustinH]

You are doing things right if you're clearing 15% with management fee, expenses, and maintenance. The problem with most rentals are that one major thing, AC, roof, etc can wipe out your whole year's earnings. You can get a newer or rehabbed house, but that usually reduces your yield. There are certain markets that are better for cash flow rentals, some that are better for appreciation (rentals break even, but appreciation is strong), and some markets that plain suck.

You have to factor in the maintenance costs in your yearly budget. If something drastic happens, such as damage to the roof and you must replace it, the homeowners insurance will cover that. You could also look into home warranties to cover unexpected appliances breaking. Although, home warranties are hit or miss and you have to fight with them sometimes to get them to perform.

There are also things you look for when you buy a property. You look at how old the roof, hot water heater, AC unit, and kitchen appliances are. You plan for when those will need to be replaced. If they need to be replaced immediately then you must budget for that. A good home inspector can give you advice about those items. A good roof inspector will advise you on the condition of the roof.

 

[EvanOkanagan]

You are doing things right if you're clearing 15% with management fee, expenses, and maintenance. The problem with most rentals are that one major thing, AC, roof, etc can wipe out your whole year's earnings. You can get a newer or rehabbed house, but that usually reduces your yield. There are certain markets that are better for cash flow rentals, some that are better for appreciation (rentals break even, but appreciation is strong), and some markets that plain suck.

True that. It's hard to say that someone should invest in rentals because it's a good return. It can be a great return--but not necessarily in everyone's area.

Over the years I've added more and more expenses to calculate return. The vacancy rate is .6% in my city but I've calculated with a 10% vacancy allowance. Even with expenses higher than they should I'm getting a 15% or greater return so my actual return is likely higher even.

 

[MTF]

True that. It's hard to say that someone should invest in rentals because it's a good return. It can be a great return--but not necessarily in everyone's area.

It's 15% cash on cash with leverage, right? If so, then it's very different from investing for the sake of wealth preservation (for people who simply want to put their money to work but without the stress of using financial leverage) as non-leveraged you probably won't get more than 7% in most markets (I'm not an expert, simply sharing what I observed in my local market as a guy who wanted to buy with cash).

 

[EvanOkanagan]

It's 15% cash on cash with leverage, right? If so, then it's very different from investing for the sake of wealth preservation (for people who simply want to put their money to work but without the stress of using financial leverage) as non-leveraged you probably won't get more than 7% in most markets (I'm not an expert, simply sharing what I observed in my local market as a guy who wanted to buy with cash).

With leverage, yes.

What other investment but Real Estate will the bank lend you hundreds of thousands of dollars with sub 5% interest rates?

But yeah, without leverage the returns dip a fair bit.

 

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[MTF]

What other investment but Real Estate will the bank lend you hundreds of thousands of dollars with sub 5% interest rates?

Some people just don't want to maximize their ROI at the cost of additional risk and stress of having debt. @V8Bill would probably have something valuable to add here.

Debt - no matter the kind - lowers my quality of life because it stresses me out, so no matter how favorable the terms, I avoid it. I think that this part is often ignored when people praise the opportunities of real estate investments. Yes, you can get high yields, but it mostly comes with a big psychological burden (unless you don't mind debt) because in most cases you're pretty much forced to use leverage to make meaningful returns.

 

[unaided]

With leverage, yes.

What other investment but Real Estate will the bank lend you hundreds of thousands of dollars with sub 5% interest rates?

But yeah, without leverage the returns dip a fair bit.

Anyone using home equity loans at sub 5% to leverage higher returns elsewhere?

As for the AC/Roof examples...I do not own any rentals, but I was under the impression that if you have enough equity somewhere, you can use it to fund that AC/roof repair and now you're spreading that expense out into a loan and your cashflow can generally stay positive. If you're already getting 10-15% returns on a property, you would have the wiggle room to pay 5-8% with leverage rather than just cleaning out cash reserves. It still necessitates making 10-15% on the "buy".

In other cases, it may wash out some of your returns but not give you a full-on loss or clear you of your cash reserves. Also it goes to show that if you're going to own rentals, you kinda need to own like 10 units so as to diversify against these things. If you want 10-15% returns, there's gonna be risk somewhere.

 

[EvanOkanagan]

Debt - no matter the kind - lowers my quality of life because it stresses me out, so no matter how favorable the terms, I avoid it. I think that this part is often ignored when people praise the opportunities of real estate investments. Yes, you can get high yields, but it mostly comes with a big psychological burden (unless you don't mind debt) because in most cases you're pretty much forced to use leverage to make meaningful returns.

It definitely differs from person to person. I personally cannot stand having "bad debt" which I consider debt that isn't paying for itself. If I'm ever in this kind of debt, I'll do whatever it takes to get out of it.

As far as "good debt" which I consider debt that's paid for by others, it's practically never on my mind.

I guess I don't get stressed out by it because I haven't over-leveraged myself and I know multiple exit strategies from being in the biz.

-----------------------

One more thing to ponder about Real Estate debt...

Say you've accumulated a sizeable portfolio over the years that all cash flows at a healthy level and you're not over-leveraged.

You know that over time these assets will continue to appreciate...

You could essentially take out equity (refinance) from the properties that had low loan-to-value ratios (for example: a property is now worth 600k and you owe only 200k). You refi 200k in this property to fund your lifestyle for a couple years (which still doesn't over-leverage you--now you owe 400k on a 600k home)... and since this is considered "debt" you're not taxed on it like income.

Your properties continue to appreciate over the years... and you continue to take out non-taxable money (debt) from the properties that are under-leveraged. Rinse and repeat.

 

[V8Bill]

Some people just don't want to maximize their ROI at the cost of additional risk and stress of having debt.

I agree with this. It depends what you want from your money. If you want to grow a larger return, you have to add risk. If you want to lower risk you need to accept a lower return. Obvious, I know but for me, when I'm looking for safety and relaxation I look for 5% in a solid safe bank that will just keep giving without any risk (at least not here in Australia with one of the government backed deposits guaranteed big 4 banks). When I deposit spare money into my 5% forever account I'm doing it to build a never ending lifetime supply of cash that I never have to worry about. I can go on a 12 month road trip and that money will still come in.

If I'm looking to grow my money I'll add more risk. I can make hundreds percent per day if I want to just by adding enormous amounts of risk (e.g. Forex day trading). 5% is my final resting place for all excess money. My ultimate goal is to have enough money producing 5% (almost entirely) risk free in the bank for me to pay my all my essential expenses and have an equal amount left over for fun and luxury spending. If my 5% can do that (I'll need a few million - not impossible) I'm done with hunting for money forever and I'm out. Drop mic.

 

[illmasterj]

@V8Bill if you can't get 5% in a safe bank in Australia, what countries are you choosing to use? Have you priced in the currency risk? (I'm also an Australian, interested in what you've found).

 

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[V8Bill]

Can't get 5% at the moment - could before, will again. Current walk in rates are about 3% and climbing. Not sure what you mean by "what countries I'm choosing to use" Excuse my obvious ignorance (educate me) but how do you see currency playing a part? I make the money and will put it in the bank and live off the interest forever. Maybe we're talking about different things?

Edit: I mis-read your post. I read "if you CAN" get 5% in Australia. At the moment I wouldn't rest my money anywhere but Australia. The government won't guarantee millions but they'll guarantee $250,000 per person per bank. I think I can go to the four banks and have 1 million guaranteed but I haven't fully read up on how it works and if someone can have 4 accounts; one in each bank. However I'm not a conspiracy theorist and I believe if that Australian banks go under I'll have more serious problems to deal with. Plus, not everything will be in the bank - obviously. But while they're paying interest that gives me 2X I'll be off enjoying my stress free life.

 

[illmasterj]

Thanks for the reply - I thought you were banking abroad to get that 5% yield, that's why I was asking about currency.

I no longer live in Australia and tax is low here, so I'm building a "dividend growth" portfolio with the goal of covering my cost of living. I figure it's good to learn this stuff while in the business building phase so when it sells I know where to put the cash. I know a lot of others are interested in capital gains as you effectively defer the tax, but as MJ and others point out, that's speculating those assets will be worth more in the future, which I can't control.

 

[V8Bill]

Yeah, as soon as I read your question correctly it made sense. The whole 5% rest account for me isn't for growth. It's a final resting place. There are many ways to speculate and gamble for growth. I learned many years ago that anything that doesn't guarantee a return is gambling no matter what people want to call it. That's ok and normal business is based on gambling and I'm a gambler but eventually once I have enough I like to bank and forget. I realise it's not a popular view.

 

[illmasterj]

It's a fair view - after your "asset accumulation phase" you want to focus on asset protection and spin off some income from it. I think most people hold that view, it just looks different depending on the individual. Some like bank interest/CD's, others REITS, others money market funds, bonds, dividend "moat" stocks, etc, etc.

 

[bitcoins]

I'll write in an in-depth post about this, but I've currently made a fair amount of profit from this new crypto social media platform called Steemit. It's great for bloggers and content creators. It's funny how now with the YouTube ad blocks and all that, you're able to make like 10x more on Steemit for the same style of posts. Definitely a nice 5% (or actually way more) each month

 

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[Daniel Newton]

I have been a full time investor for almost 2 decades and have enjoyed solid returns of well above 5% in equities and real estate.

Look at the S & P 500 index fund. The S & P 500 has had a historical return on investment of 11% and that is without counting dividends. Anything with that long of a track record is safe if your time horizon is at least 7 years plus.

Also, I purchase real estate directly from homeowners in preforeclosure. This allows me to acquire homes at a 20–25% discount to market value. This insures a profit if I flip it even if the market is going down because even in the last housing crisis it took many years for homes to lose a quarter of their value. Also, if I hold it as a rental property, even if a downturn occurs, if I hold it long term I will still earn more than a 5% ROI annually.

 

[illmasterj]

Look at the S & P 500 index fund. The S & P 500 has had a historical return on investment of 11% and that is without counting dividends. Anything with that long of a track record is safe if your time horizon is at least 7 years plus.

You haven't read the book, right?

These are fine ways to make money, but this thread is all about a money system that generates 5% income each year. Yield vs a capital gain.

 

[GuestUser241z]

I've been looking at all the Vanguard ETFs and nothing gives around 5%, not the VIG or anything in dividends.

The only things giving 5% would be a really extremely risky bond for corporations or international bonds.

What are you investing in that gives 5% returns for your money system?

FX/currency trading...this is active trading though not a buy & hold strategy

 

[Alexlewter]

Over what period of time? Within the month? Within the year? Within the next ten years?

If it is within the next year, your safest bet is yourself - find 5% to cut out of your current spending.

If you are seeking an average return of 5% over the long-term, a low cost index fund tracking the S&P 500 should average 5%+.

 

[Mckenzie]

I always check the bank rates and generally they're pretty low down here in Australia with many banks offering less than 1% but our reserve bank has set our default interest rates at a historically low 1.75% and yet the bank I trade at is offering...



This is an excellent rate given the low default rate. At 1m deposit that's $25,000 (about $480 a week) which isn't exactly wealthy living but it's double the social security rate down here so it's a start. I'm not sure how much lower "larger amounts" would earn (I'll find out) but as soon as the rates start to come back into the market (at 51 years old I've seen cycles as high as 18% default rates - this is the lowest I've ever seen) the 5% should be easily available. Last year I saw walk-in term-deposit rates as high as 4.35% and that's my ultimate target - to live off bank interest at almost zero risk as soon as possible.

Hi @V8Bill , the bank interest here for Term Deposit is still very low of about 2.3% here Down Under! I wonder if you've found anywhere that have higher and more excellent rates? for short term say 1-2 years Term deposits? Thanks

 

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[V8Bill]

Hi @V8Bill , the bank interest here for Term Deposit is still very low of about 2.3% here Down Under! I wonder if you've found anywhere that have higher and more excellent rates? for short term say 1-2 years Term deposits? Thanks

I haven't checked for a few months but last I checked CBA has a walk in over-the-counter-rate of around or nearly 3% and a CBA banking manager I met a few months ago said she could improve on that and to contact her when I'm ready with more than a million and she can get a better rate for me.

It's still not quite 5% but I can get a solid 5% with a mortgage lender but that's not as "finally secure" as an Aussie "pillar" bank.

I'm not so worried, even at 3.5% I'd be happy. I might need to hold a larger balance if I want a larger lifestyle though. That'll be up to me.

 

[GoGetter24]

Is it wise to be putting money in debt at 2 to 3%, against official inflation of 2%? Doesn't seem particularly 'fast lane'. Surely there are better risk adjusted yields elsewhere.

 

[V8Bill]

Is it wise to be putting money in debt at 2 to 3%, against official inflation of 2%? Doesn't seem particularly 'fast lane'. Surely there are better risk adjusted yields elsewhere.

I'm not sure about others or if you've read the thread in my signature but I'm not talking about borrowing money to put in the bank to collect interest (pretty sure that would never make money anywhere in the world), I'm looking for a "final, secure, end-of-the-fastlane-road, resting place" for the money I created once I get to the end of my money hunting expedition.

Then again, I'm a freak who doesn't think like normal people.

 

[GoGetter24]

Yes putting money in the bank is a debt instrument.
I think the standard advice for securing money is diversification. Mix of gold, debt, stocks, real estate etc.
The problem with viewing cash or debt as a secure asset is all the times people who were in cash or debt got wiped out (defaults, currency devaluations, inflation, etc). Those who had a mix may have suffered somewhat during crashes & booms, but they didn't get wiped out.