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

[V8Bill]

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.

Oh, I see what you're trying to say. Well, I suggest perhaps not choosing a Greek bank. Australian banks are somewhat safe from total collapse. Spending too much is way more of a problem than inflation which is at historic lows at the moment anyway. Not having enough to earn enough interest to cover both my essential expenses as well as enough for some fun and luxury could be a problem I guess but having plenty of cash and therefore plenty of interest flowing in will solve those issues easily and simply.

For example, if I had $20,000,000 in the bank earning 5% that's $20,000 a week forever which is as close to a lifetime supply of cash that I'm going to ever need. Inflation won't ever eat enough into that (in my lifetime) to be of a concern to me. And if it is, then I'll just put more in until I'm well covered...or I"ll make sure that I spend/need less. Those that fly very close to the line (barely having enough interest to cover their "2X") might feel concern for inflation after a few decades though. As for total financial collapse of our banking system/society/all hell breaks loose...I'll worry about that if it happens and keep my money out of weak banks/countries.

 

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[GoGetter24]

Ah I see, you're mostly concerned with long term nominal yield certainty.

Have you considered government bonds then? 15 year is at 3% yield in your country:
Australian Rates & Bonds

Compared to a term deposit: you can sell it at any time pre-maturity (but if interest rates go up, it's price will go down accordingly). If you want to push up closer to 5% (obviously with a higher default risk than the government), you could consider mixing in corporate bonds too.

 

[Elif]

Found a dividend that pays out at 6.9% - though their stock is a rollarcoaster: CLCT

 

[Elif]

Do you have any recommendations on which companies to start studying?

 

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[MattCour]

Do you have any recommendations on which companies to start studying?

Check out https://1.simplysafedividends.com/welcome-to-simply-safe-dividends/ There are some solid articles there to learn more about div paying stocks, REITs and MLPs.( I have no affiliation with the site, just sharing a resource I found helpful)

 

[garyfritz]

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.

How / where are you finding properties with returns like that? In my market (Colorado) rentals only return about 6-7% **gross**, before any expenses. And that's buying fairly carefully, but not bargain-hunting out of foreclosure &etc.

If I could get 15% fully managed, I would dump most of my net worth into those properties and retire very comfortably!!

 

[EvanOkanagan]

How / where are you finding properties with returns like that? In my market (Colorado) rentals only return about 6-7% **gross**, before any expenses. And that's buying fairly carefully, but not bargain-hunting out of foreclosure &etc.

If I could get 15% fully managed, I would dump most of my net worth into those properties and retire very comfortably!!

Is the 6-7% gross return from purchasing these properties outright or leveraged?

In my example I'm talking about buying these at 75-80% LTV. After the monthly cashflow and principal paydown on the mortgages, 15%+ (net) return has been fairly achievable. I live in British Columbia, Canada where the property values are quite high, so I could see this being even easier elsewhere.

 

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[garyfritz]

That was from buying outright.

When I looked at the numbers, I decided leverage doesn't help your return -- it just increases your exposure to the market so you make more cap gains when the market goes up. But given the likely downturn that @JScott's predicting (and I agree), increased exposure is not necessarily a good idea.

And of course it also multiplies your management headaches with more units, for the same return.

Taking my properties as an example: I have two houses that are both worth $330k-$350k. Both rent for $1800-$1900 (and a management company agreed that was about the max I could get for them). 12*$1900 / $350k = 6.5% gross. If I put an 80% loan onto the house at current rates of about 4.3% APR, that's roughly $1575 PI, leaving $1900-$1575 = $325 per month gross (before taxes & insurance, same as above). I'd have 20% = $70k cash down, so 12*325 / $70k = 5.6% gross. In this example my return actually went down a bit. Assuming rates go up, those number will look even worse.

So I don't think running at 75-80% LTV helps you get that 15% return. I think you must have a different market than mine and/or you buy smarter than I can, so the rent you can charge is a much higher % of your purchase price. In my market, at least for single-family homes, 6-7% of purchase price is about all the rent you can get.

Which, together with several minor disasters in the last 2-3 months (new roof, new furnace/AC, renters skipped out on last month's rent and left the place trashed, etc), is making me seriously reconsider how much real estate I want to hold. If my actual net is only going to be about 3%, I can get that and more with way less headaches. I have to decide if the tax benefits and future appreciation are worth it.

 

[CareCPA]

Taking my properties as an example: I have two houses that are both worth $330k-$350k. Both rent for $1800-$1900 (and a management company agreed that was about the max I could get for them). 12*$1900 / $350k = 6.5% gross. If I put an 80% loan onto the house at current rates of about 4.3% APR, that's roughly $1575 PI, leaving $1900-$1575 = $325 per month gross (before taxes & insurance, same as above). I'd have 20% = $70k cash down, so 12*325 / $70k = 5.6% gross. In this example my return actually went down a bit. Assuming rates go up, those number will look even worse.

I think I found your problem. I don't know any real estate investor that would buy a $330-350k house that rents for $1800 or $1900 a month. There is no money to be made after accounting for insurance/taxes/repairs/etc. Are you gambling on appreciation?
Why not sell and invest that money in something that actually brings a return?

 

[EvanOkanagan]

Taking my properties as an example: I have two houses that are both worth $330k-$350k. Both rent for $1800-$1900 (and a management company agreed that was about the max I could get for them). 12*$1900 / $350k = 6.5% gross. If I put an 80% loan onto the house at current rates of about 4.3% APR, that's roughly $1575 PI, leaving $1900-$1575 = $325 per month gross (before taxes & insurance, same as above). I'd have 20% = $70k cash down, so 12*325 / $70k = 5.6% gross. In this example my return actually went down a bit. Assuming rates go up, those number will look even worse.

You're just basing the return on the monthly cashflow though which isn't the whole picture. $1575 PI.... what would your principal paydown be each month? Say it's $575 of the 1575 (it'd likely be more).... 12*575+12*325= $10,800 annual net/70k = 15.4%.

If we relate this to stocks, the cashflow is just the "dividend" that the investment spits off, and then on top of that paying down the principal every month which increases the amount an investor would net. This return isn't even factoring in long-term appreciation.

If this were a long-term hold and added even a 2% annual appreciation (very low for long-term), that adds annually another $7000/70k= 10% additional. Even without appreciation though, in your example this beats the 15% ROI.

 

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[garyfritz]

You're just basing the return on the monthly cashflow though which isn't the whole picture. $1575 PI.... what would your principal paydown be each month? Say it's $575 of the 1575 (it'd likely be more).... 12*575+12*325= $10,800 annual net/70k = 15.4%.

I see your point. Turns out I botched my PI calculation somehow. For an 80% loan on a $350k house, that's a $280k loan with $70k down. Using 4.5% (probably optimistic) on a 30-yr loan, that's a PI payment of $1419. So my gross (just looking at the payment) is 1900 - 1419 = $481. 12*$481 / $70k = 8.2%. Better than I thought. (I'm not sure if I messed up the calculations before, or messed it up now, but when I looked at this before, changing the leverage didn't change the return.)

Of that $1419 payment, it starts at about $370 going to principal. So adding that principal paydown to my return, I'm at $481 + $370 = $851. 12*$851 / $70k = ... 14.6%. How 'bout dat. Hm.

That's BEFORE any expenses, so it's nowhere near the 15% net @EvanOkanagan is getting, but it looks better than I expected. Knock off about $2500 for taxes & insurance and $2500 for a property manager, and you're at about about a 7.4% return before the occasional roof or furnace surprise, or paint or carpet. So I'm still looking at less than half the return Evan is getting.

More importantly, a lot of that 7.4% is going into the loan balance. I only get about ($481*12 - $2500 - $2500) / $70k = 1.1% of income to actually live on. Which looks a lot worse than the (12*$1900 - $2500 - $2500) / $350k = 5.1% I'd get with no loan.

Does that look right?

I think I found your problem. I don't know any real estate investor that would buy a $330-350k house that rents for $1800 or $1900 a month. There is no money to be made after accounting for insurance/taxes/repairs/etc. Are you gambling on appreciation?

Then you must not know any investors in northern Colorado. That's the way it works here. Several realtors, a management company, and several local investors confirm that. When rates were higher, you were doing well if you could get a new property to cashflow. So yes, you're pretty much gambling on appreciation, and eventually having your tenants pay off your mortgage. That's worked well for me so far, but.........

Why not sell and invest that money in something that actually brings a return?

Great question, which I haven't answered yet. If not real estate, or at least if not Northern Colorado real estate, then what? Given Evan's insight above, the return on the real estate is (or can be) a lot better than I realized. But principal paydown doesn't help you with retirement income. So I'll keep looking for that mystical "something."

 

[CareCPA]

I see your point. Turns out I botched my PI calculation somehow. For an 80% loan on a $350k house, that's a $280k loan with $70k down. Using 4.5% (probably optimistic) on a 30-yr loan, that's a PI payment of $1419. So my gross (just looking at the payment) is 1900 - 1419 = $481. 12*$481 / $70k = 8.2%. Better than I thought. (I'm not sure if I messed up the calculations before, or messed it up now, but when I looked at this before, changing the leverage didn't change the return.)

Of that $1419 payment, it starts at about $370 going to principal. So adding that principal paydown to my return, I'm at $481 + $370 = $851. 12*$851 / $70k = ... 14.6%. How 'bout dat. Hm.

That's BEFORE any expenses, so it's nowhere near the 15% net @EvanOkanagan is getting, but it looks better than I expected. Knock off about $2500 for taxes & insurance and $2500 for a property manager, and you're at about about a 8.2% return before the occasional roof or furnace surprise, or paint or carpet. So I'm still looking at less than half the return Evan is getting.

Does that look right?


Then you must not know any investors in northern Colorado. That's the way it works here. Several realtors, a management company, and several local investors confirm that. When rates were higher, you were doing well if you could get a new property to cashflow. So yes, you're pretty much gambling on appreciation, and eventually having your tenants pay off your mortgage. That's worked well for me so far, but.........


Great question, which I haven't answered yet. If not real estate, or at least if not Northern Colorado real estate, then what? Given Evan's insight above, the return on the real estate is (or can be) a lot better than I realized. But principal paydown doesn't help you with retirement income. So I'll keep looking for that mystical "something."

Don't overlook out-of-state investing. If I had spare capital, that's probably where I would be headed.

Hopefully someone with more experience will chime in here, as it's daunting for a new person to search out of state for rentals. When the whole world is an option, how do you narrow it down and select a market?

 

[sparechange]

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

get outta here #banhammer

 

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[Jason "GrandK"]

Once the downturn starts, there will be lots of opportunities to pick up better deals in a lot of markets...

Are there specifics markets you are keeping a close watch on?

 

[unaided]

That was from buying outright.

If my actual net is only going to be about 3%, I can get that and more with way less headaches. I have to decide if the tax benefits and future appreciation are worth it.

Yes, your initial math doesn't account for vacancy (more like 10/12 months) or maintenance costs (much is on renter, but still can occur those bigger costs as you've found - roof, AC, etc).

I personally figure (1% of purchase price) / 12 is what I would save minimally for maintenance.

Also, it depends on your full cash situation, risk tolerance, and how your allocated (as does everything) but I often purposefully take higher deductibles on insurances or self-fund warranty & add those differences into "hedge accounts". So, for instance a $600 warranty cost, I will put back $50 a month rather than paying the company outright (unless I know the AC could go in the next 3 years), and after year 1 I have $600 sitting in that account....If a stove, washing machine, etc go out, chances are it's $600 or less fix. And, if 1 thing happens over 5 years, you have $3000K in an account to deal with it.

When I also account my maintenance/vacancy hedges, I'm fairly protected from just about anything without having to liquidate anything or take out loans. It is risky in the first 2 years while you build up these accounts, but its' worth it in the freed up cashflow & if you have 5+ properties that are all feeding into these hedge accounts....Insurance companies ultimately profit 10-15% on your premiums and they have the best statistical calculators in the world....so I try to "self-insure" where I can. But you must be disciplined and hold this money in relatively liquid savings accounts!

If you do this for all of your insurance types....you become hedged against a lot of risk and often open up cashflow that you can add to debt snowballs, investments, etc. My car insurance hedge helps my home maintenance hedge, and so forth.

It effectively becomes your "6 month" emergency fund as it gets funded fully, and you can take even higher deductibles when it makes sense, etc. So I ultimately save 10-15% on those otherwise "fixed" costs that otherwise would be going to insurance companies. Plus, problems become stress free, and you can enjoy the process. I actually get delighted if our place needs a repair because I have the money in an account already. It's ridiculous how exact those insurance rate tables are - If I need a $500 repair, I usually have $550-575 in the account...the 50-75 difference is what the insurance company would normally be taking as profit

 

[unaided]

No specific markets outside of the several that I already invest in. I'm not smart enough to be able to predict how the downturn will affect any specific market until it happens, so I'm just planning to wait and see what happens.

I've tried to build relationships with other investors in most of the big markets around the country, which allows me to keep tabs on what's going on in different areas, but right now, I'm really just sitting back and waiting at this point to see where things go.

Many investors seem to be sitting back and waiting. My wife is with one of the top luxury real estate groups in Scottsdale and the word from their meetings is that inventory is low because people are staying in their current properties so they keep their favorable interest rates.

You still see some price incline because you also have those who already planned on buying rushing to lock in rates now before they raise again.

So you're starting to get that picture of low inventory, some "not as smart" money overpaying for properties, when the current buyers run out & interest rates tick up another .25-.5%+, that's when you'll start to see the declines.

Most predictions point to 2019-2020 for the decline where these things will peak.

On your comment, it seems like this might be the case a little bit in the other markets, where ETF investors keep dollar cost averaging on relatively high prices, other people are just holding positions and stacking up cash/conservative investments and waiting for the deals to come over the next 3-5 years.

Fair assumption based on your comments?

 

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[unaided]

We may be looking to buy a personal residence in Scottsdale pretty soon...let me know when the market turns and there are some good deals!



It seems to me that there are a lot of investors who are in cash today and just waiting for deals. Especially those doing larger projects with longer time frames -- they tend to be more concerned about starting new projects that won't see an exit for a couple years.

Well, I personally think that when it comes to AZ real estate that things are going to be more of a lateral market.

We live in a townhome that we paid 250, and is worth 300, at the peak of the market in 2006ish, it sold for $400,000 in today's dollars, so there can still be some upswing. We looked at homes where I had valued at $610,000 in the next 5 years, and they were going for $550,000, so there's not smoking deals, but I think that everyone buying now will just be kinda lateral and you'll get closet deals in 3-5 years just based on homes not keeping up with inflation pressure.

We might see a 10% reactionary dip, but we have such a huge demographic of boomers wanting to move here. We have the mass exodus from high-tax states like Illinois, Michigan, California, and even states like NJ. Those are pretty strong tailwinds even with rising rates, and the tail-end of the debt cycle. But I do think that we'll see some overpaying in the next year or two just with those committed buyers grabbing up before rates rise further....things will drop 10-15% and kinda stay lateral with where they are today. That's just my feel for now. It's not sexy enough for us to upgrade to a $550K home, we'd rather wait 3 years, and pay $550K for the same home then and I can reinvest in my online business, and build some non-sexy "5% income" in paper markets /debt repayment with more liquidity than a brick and mortar home.

Have you looked into 4 seasons investing as per Ray Dalio....he's big in TIPS (~15%), commodities (~15%), bonds (~40%), international (10%), emerging markets (5%) and only has like ~15% in US stocks/real estate. My "vision" is to have half of each allocation in individual entities, and half in ETF's, and that gives me kinda half of the stocks doing 3%, half the stocks doing 7%, evens out to 5%. It hedges against some of the ETF risk brewing (everyone passive investing without analyzing individual companies).

When I have the privilege of selling some options, that's how I'll get higher returns.

When you take the dividend rate on that allocation, you honestly get right at 5% if you account for some REITs, MLPs, in your stock/real estate mix or Emerging market bonds as part of that portfolio.

For me, I see TIPS doing well (everyone talks rates, but they forget that usually rates increase to slow down rising inflation, plus to pull out of recessions they make debt cheap and start QE'ing things). I think bonds are still good if you have the right time horizon for the money. I like energy stocks which have been in kind of a restructuring mode so some hidden value there. Even utilities can be sexy.

I've liked CSCO a bit for the whole cloud security play, if they do a 5% drop or so I might consider getting in with them although Amazon is looking to compete now with them. I believe they're around a 3.5% dividend but have some strong appreciation potential for more growth play.

Sin stocks can do well with dividends going into recession-like time periods. International stocks/emerging can give you some rate hedges - and the new/pending tariffs might drive some buy-in prices down for good companies - turn 3% dividends into stable 5% dividends with appreciation potential.

Those are my thoughts for now.

 

[Jason "GrandK"]

I'm a control freak and don't like investing in any asset class where I don't feel like I have the ability to impact the investment.

Have you ever considered cash value life insurance, not as an investment but more as a "safe bucket" to hold assets in a tax favored account?

 

[Jason "GrandK"]

I can get better (non-guaranteed) returns through my other investments. And the guarantee from the whole life policy doesn't overcome the difference in returns, in my opinion.

Just my take, based on my analysis and my situation.

Got it. Other investments being real estate or other alternative investments?

 

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[Jason "GrandK"]

Yup...

I was fishing. Care to elaborate on what "companies, real estate and intellectual property" you focus on?

 

[MJ DeMarco]

inventory is low

You ain't kidding. I can't believe some of the trash that people want $3M for. Sorry, your Toll Brothers tract house ain't worth $2.95M just because it's in N. Scottsdale.

let me know when the market turns and there are some good deals!

Good luck, I've been riding that boat for 5 years. Inventory is so low that it keeps driving prices up, even on the mediocre shit.

 

[unaided]

You ain't kidding. I can't believe some of the trash that people want $3M for. Sorry, your Toll Brothers tract house ain't worth $2.95M just because it's in N. Scottsdale.

Lol, my wife and I were looking at a Toll Brother's neighborhood in Desert Ridge area just two days prior to your reply. She had a laugh about that when I forwarded your reply. (I got her to read Unscripted , so she's a fan!)

We are doing very well financially and we feel a bit in home-buying purgatory. You have the 250K condo with 300+/month HOA. Then you have the 300-400K patio home/townhome with 300+/mo HOA.

Then you jump in the same square footage of a patio home/town home "up" to $450-600K 1800-2300 sq ft "starter home" that needs $30K of updating - we're just not doing it. We're prepared to sit it out, or sell when we get to 2 year mark of our place - take out gains, sit on cash and rent a slightly bigger space until we find the right deal.

I don't think you'd lose your shirt at current prices, but I'd rather sit on cash and throw some in bonds until things chill out.

Realtors need to maintain their listings too - so many have been in rough shape for showings - within just 1-2 weeks of being on the market. That's what happens when the owners are in Chicago for the summer and a 3rd-career friend realtor is passively coat-tailing a commission off their listing.

Yeah, not paying $550K (+$30K of work) for a $400K starter home.

 

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[JunkBoxJoey_JBJ]

I can get better (non-guaranteed) returns through my other investments. And the guarantee from the whole life policy doesn't overcome the difference in returns, in my opinion.

Just my take, based on my analysis and my situation.

QUESTION: @JScott @MJ DeMarco

If you already have a TERM Life Insurance policy and no house, no children, no car payment (i.e. renting to keep saving)...

Would you convert over to a WHOLE policy to at least have some form of Dividends coming in?

Best options or suggestions? Meeting with advisor next week (appointment already confirmed) but looking for insight here first.

Thank you

 

[JunkBoxJoey_JBJ]

If you already have a life insurance policy that you're happy with, why not take the premiums you'd be paying into a whole life policy to generate dividends and instead put that cash into an asset that generates higher returns?

Now, if you can get higher returns from the whole life policy, then perhaps that's a better option. But, I'm fairly certain that you can get higher returns in other asset classes.

Excellent. I understand, and I'll report back with some info. here in case someone does a "search" on it. Thank you.

Update: *Cancelled before 2018 ended. Thank you.

 

[MJ DeMarco]

If you already have a TERM Life Insurance policy and no house, no children, no car payment (i.e. renting to keep saving)...

Would you convert over to a WHOLE policy to at least have some form of Dividends coming in?

If that was the situation, why would you have life insurance in the first place?

 

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[ZCP]

Only pay to insure what you cannot afford to lose.

 

[JunkBoxJoey_JBJ]

If that was the situation, why would you have life insurance in the first place?

Correct.

Cancelled.

 

[Scott Steffek]

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.

I sell investors rentals and also flips. We deal in single family homes as well as small mutli units. My investors are located all over the country as well as overseas. We do everything for them. Find the properties, rehab them, manage them etc. When I send them the "rental" numbers, here's what I include as costs. 1. Cost of insurance 2. 5% of the rent cost for vacancy and maintenance costs. 3. Cost of taxes 4. Cost of property management. The worksheet I send them, calculates all of these numbers and then tells them their "cash on cash return percent". We don't offer properties unless the CCR% is 10% or more. But keep in mind that you need to work with either a quality contractor or a top notch inspector, before you buy a property. If someone tells you a properties roof is in great condition, the hot water heater, the plumbing and furnace are in great shape too, they better be right. Because if they need to be replaced right away, your profits are long gone! Work with someone that can be trusted. I've seen investors buy properties because the price was "incredible". It sure was..... and so was the repair bill! If you're looking at buying a rental property, be sure to calculate the above expenses I mentioned. Those numbers aren't the "entire" puzzle, just 1 important piece of it. Best of luck to you all.

 

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