You don’t always know when a killer real estate deal will come along. Sometimes you wait months or longer for the right deal.
Plus, it takes time to save up a down payment. Even if you borrow 80% with an investment property loan, you still need $100,000 for a $500,000 property.
All of which means real estate investors need places to park their money while they prepare to buy their next property. So what are your best options for short-term investing? Start here in your search for the best short-term investments.
What You Want in Short-Term Investments
Your goals for short-term investments are different from long-term investments. Rather than chasing the highest possible returns, look for the following when investing short-term:
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- Low Risk/Volatility: Imagine you set aside some money for a down payment on a rental property by investing it in the stock market. Then as soon as you find a good deal on a property, the stock market crashes, evaporating 25% of your funds. Suddenly you no longer have enough cash for the deal, and it slips through your fingers. For short-term investments, you need safe, secure investments, rather than counting on the high historical average returns on stocks.
- Liquidity: With short-term investments, you often don’t know exactly when you’ll need to pull out your money. When the time comes, you may need to move fast. That means you need highly liquid investments that you can access easily as opposed to illiquid but high-return investments like Fundriseand Streitwise.
- No Transaction Costs: If you have to pay hefty fees to move money in and out of your investments, it defeats the purpose of short-term investments. For example, investment properties cost thousands of dollars to buy or sell, in addition to their poor liquidity — which is precisely why they’re long-term investments.
Best Short-Term Investments
As a general rule, higher returns require a higher level of risk. So if you want low-risk investments with strong liquidity, don’t expect massive returns.
But that doesn’t mean every single short-term investment option pays out weak returns.
The following list starts with the lowest risk and returns, with rising risk and returns as the list goes on. Know your needs and risk tolerance and invest accordingly!
1. High-Yield Savings Accounts
The Federal Deposit Insurance Corporation (FDIC) insures all bank accounts and money market accounts, up to $250,000. In other words, these accounts come with virtually no risk, short of a zombie apocalypse.
And they pay accordingly.
Even high-yield savings accounts and money market accounts only pay 1-2% interest currently, maybe 2.5% if you find a unicorn deal. You’ll still lose money to inflation, but that’s the cost of being conservative.
2. Treasury Bills (T-Bills)
The US Treasury Department issues short-term bonds called Treasury Bills, or T-Bills among the cool crowd.
They range from a few days up to a year to count as “T-Bills” rather than “Treasury bonds.” The longer the term, the higher the interest rate, but don’t get excited. Even the longest don’t pay well.
At the time of this writing in June 2022, 4-week T-Bills pay around 1.2% annual rate of return, and interest ranges up to around 2.8% for a 52-week T-Bill. Again, you’ll lose money to inflation in the current environment.
But again, they’re guaranteed by Uncle Sam, so they come with zero risk.
3. Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities, which also come with their own nifty nickname of “TIPS,” are Treasury bonds with a unique trick up their sleeve. The face value adjusts based on the Consumer Price Index (CPI), so the value adjusts by the inflation rate.
These bonds also pay a small interest rate as well, on top of adjusting in value for inflation. For example, imagine you buy a TIPS bond for $1,000, paying 1.5% interest on the face value of the bond. After a year, inflation has risen at 5%, so the face value of your TIPS bond adjusts upward to $1,050, and you collect 1.5% interest on that higher $1,050 face value ($15.75) rather than your original $1,000 purchase price. Upon maturity, the Treasury pays you back the current face value, or your original face value in the unlikely scenario we had deflation.
In high-interest environments like today’s, they’re not a bad place to hold your money.
4. Short-Term Bond Funds
You can buy shares in exchange-traded funds (ETFs) that specialize in owning short-term bonds. That keeps the volatility — and, therefore, risk — low, but it also keeps the returns low. These funds offer instant liquidity, however, as you can buy and sell shares instantly through your brokerage account.
5. Municipal Bonds
Municipal bonds come with a higher risk of default than federal government bonds, but that doesn’t mean much. Most cities in the US are good for the money, and you get some tax breaks on municipal bonds that boost their effective returns compared to taxable investments (more on short-term investment taxes later). Specifically, you pay no federal taxes on municipal bond interest, and in most cities and states, you also pay no state or local income taxes either. If you would otherwise have paid 20% in total income taxes on your bond interest, and the municipal bonds pay 4% in interest, that means you walk away with the same net interest as a taxable investment paying 5% returns. The risk doesn’t come from default so much as changes in interest rates. When interest rates rise, the value of existing (lower-paying) bonds goes down on the secondary market. You can dodge this bullet by buying short-term bonds that mature in under a year, but they also pay lower interest yields.
6. Corporate Bonds
Sensing a theme here? Bonds make good short-term investments for the same reason they make good retirement investments: they’re relatively safe and stable. And while they’ve paid miserably low interest rates for decades now, corporate bonds tend to pay better than government bonds. Because, of course, they come with a higher risk of default. Any given business is a lot more likely to declare bankruptcy than the average city government. Do your due diligence, but if you invest in blue chip companies, your default risk remains extremely low. But rate risk remains, just as with government bonds. When interest rates go up, existing bond prices go down. Buyer beware.
7. Concreit
Finally, getting into some real estate investments! Concreit is a real estate crowdfunding platform that buys investment property loans. Specifically, they use a pooled fund to buy short-term fix-and-flip loans (hard money loans). As a financial investor, you buy shares in this pooled fund. Last I checked, Concreit’s fund owns around 155 loans across the country. Because these loans come with such short terms (6-12 months), they turn over quickly. That in turn lets Concreit offer far greater liquidity than most real estate crowdfunding investments. You can pull out your money at any time, with no penalty on your principal. However, they do ding your dividend payout if you pull out your money within the first year of investing. Still, they pay a 5.5% annual dividend, far higher than most government bonds or high-yield savings accounts. Even if you pull out your money within the first year, you earn a 4.4% dividend yield, which isn’t bad. Oh, and you don’t have to be a wealthy accredited investor either: anyone can invest with as little as $1. I myself park my short-term money with Concreit to earn a decent dividend yield on money I might need to pull out quickly for a real estate deal.
8. Groundfloor
Another real estate crowdfunding investment, Groundfloor acts as a direct lender for similar short-term hard money loans. Unlike Concreit, however, on Groundfloor you pick and choose individual loans to fund. The minimum investment is only $10 per loan.
When the borrower repays their loan, you get your original money back plus interest. When you browse loans to fund, it shows you the remaining term on the loan, and when the borrower has agreed to repay it in full. Most loans repay within 3-12 months, but borrowers don’t always repay the loans on time, and you don’t have any control over when you get your money back.
Groundfloor offers the best returns on this list, paying interest ranging from 6.5-14%. But once invested, you can’t access your money until the borrower repays their loan.
That said, Groundfloor does offer direct notes. You can lend money to Groundfloor at a fixed interest rate for a set period of time, rather than funding a loan to a borrower.
Groundfloor also offers a service similar to Concreit called Stairs, where you invest in a pooled fund and earn returns between 4-6%. Like Concreit, you can withdraw your money at any time, and unlike Concreit, Stairs doesn’t charge any early withdrawal penalty whatsoever.
9. Lex Markets
On Lex Markets, you can buy fractional shares of large apartment buildings or mixed-use commercial properties in cities ranging from New York to Seattle. Single shares typically range from $200 – 300.
You collect dividends on the properties while you own them, but the best part is that you can sell your shares at any time on their built-in secondary market. Like stock markets, it shows what buyers are offering to pay for each share, and what price sellers are willing to sell at.
So, you can buy shares either directly in the “IPO” for a property, or buy and sell shares on the secondary market at any time.
Short-Term Investments Tax
How are short-term investments taxed?
Unfortunately, you pay your ordinary income tax rates on your short-term investments owned for less than one year. That goes for interest, dividends, and profits from selling assets owned less than one year.
In contrast, you pay the lower long-term capital gains tax rate on investments held longer than one year.
The IRS isn’t the only bogeyman treating your short-term investment returns as taxable income either. Most states and some cities also charge income taxes on your short-term investment returns. For a list of states with no income taxes, check out our interactive maps of the states with the lowest tax burden.
Final Thoughts
Real estate investing requires you to save up huge amounts of money and deploy it at a moment’s notice when a good deal comes along.
In other words, you need to find places to park your money short-term and hopefully earn a return on it until you need to pull it out. That’s easier when inflation isn’t raging at 8.5%, but even with today’s white-hot inflation, you can still beat the inflation rate with a few of the options above, including TIPS and Groundfloor.
And, of course, the ultimate hedge against inflation is real estate.
This article originally appeared on Sparkrental.com and was syndicated by MediaFeed.org.
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6 investment risk management strategies
Risk is everywhere, every day. Some people take steps to protect themselves and manage that risk. Others leave it up to luck.
The same holds true when it comes to building wealth for the future. Some investors focus strictly on returns and how fast they can grow their money. Others protect themselves against the inevitability of a correction or a bear market by using various risk management strategies.
That cautiousness doesn’t mean they’re paralyzed with fear, stuffing money under the mattress or sticking only to the safest investments they can find. The purpose of investment risk management is to ensure losses never exceed an investor’s acceptable boundaries.
It’s about understanding the level of risk a person is comfortable taking and building an investment portfolio with appropriate investments that also will work toward achieving that individual’s goals.
An investor’s risk tolerance is usually determined by three main factors:
Risk capacity: How much can the investor afford to lose without it affecting actual financial security? Risk capacity can vary based on age, personal financial goals and an investor’s timeline for reaching those goals.
Need: How much will these investments have to earn to get the investor where they want to be? An investor who is depending heavily on investments may be faced with a careful balancing act between taking too much risk and not taking enough.
Emotions: How will the investor react to bad news (With fear and panic? Or clarity and control?), and what effect will those emotions have on investing decisions? Unfortunately, this can be hard to predict until it happens.
Why is risk management important? Those who are able to preserve their capital during difficult periods will have a larger base to grow from when good times return.
With that in mind, here are some strategies investors sometimes use to manage the risk in their portfolio.
Related: Effective investing as a couple
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You’ve probably heard the expression “don’t put all your eggs in one basket.” Portfolio diversification — allocating money across many asset classes and sectors — could help with avoiding disaster in a downturn. If one stock tanks, others in different classes might not be so hard hit.
Investors might want to consider owning two or more mutual funds that represent different styles, such as large-cap, mid-cap, small-cap and international stocks, as well as keeping a timeline-appropriate percentage in bonds. Those nearing retirement might consider adding a fund with income-producing securities.
But investors should beware of overlap. Investors often think they’re diversified because they own a few different mutual funds, but if they take a closer look, they realize those funds are all invested in the same or similar stocks.
If those companies or sectors struggle, investors could lose a big chunk of their money. Investors could avoid overlap by simply looking at a fund’s prospectus online.
To further diversify, investors also may want to think beyond stocks and bonds. Exchange-traded funds, cryptocurrency, commodities and real estate investment trusts (REITs) are just a few of the possibilities.
Investors could also diversify the way they invest. Long gone are the days when everyone turned to a stockbroker or a financial advisor to grow their money.
An investor might have a 401(k) through work but also open a traditional IRA or Roth IRA through an online financial company.
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One of the easiest ways to help reduce the volatility in a portfolio is to keep some percentage allocated to cash and cash equivalents.
This may keep an investor from having to sell other assets in times of need (which could result in a loss if the market is down).
The appropriate amount of cash to hold may vary depending on an investor’s timeline and goals. If too much money is kept in cash for the long-haul, it might not earn enough to keep up with inflation.
There are other options, however, including:
Rebalancing
The goal of rebalancing is to lower the risk of severe loss by keeping a portfolio well-diversified. Over time, different assets have different returns or losses based on the movements of the market. Rebalancing helps get things back to the mix the investor wants based on personal risk tolerance.
Rebalancing can often feel counterintuitive because it can mean letting go of investments that have appreciated in value (the ones that have been fun to watch) and buying investments that are declining in value.
Forgetful investors may even be able to sign up for automatic rebalancing. Without rebalancing, a portfolio’s mix may become stock heavy or sector heavy, which may significantly increase risk.
Buying bonds
Unless investors are regularly rebalancing their portfolio (or are having it done automatically), their mix may be skewing more toward stocks than they think. Those who are concerned about market volatility might want to rebuild the bond side of their portfolio.
Bonds might not be considered the safe haven they once were, but bonds with a lower duration can still play a defensive role in a diversified portfolio. And bonds often can be used to produce a steady stream of income that can be reinvested or used for living expenses.
Municipal bonds can generate tax-free income. Bonds, bond ETFs and treasuries can all serve a purpose when the market is going down.
Beta
The beta of a stock is a measure of the interrelationship between the stock and the stock market. A beta of one, for example, means the stock will react in tandem with the S&P 500. If the beta is below one, the stock is less volatile than the overall market.
A beta above one indicates the stock will have a more marked reaction. So replacing high beta stocks with lower beta names could help take some of the menace out of market fluctuations.
Credit: Tim Evans / Unsplash
For those looking for quick returns, picking the “right” stock and selling it at the “right” time is everything. Using a dollar-cost averaging strategy is different. It’s all about patience, discipline, and looking at the long term — and it can help investors keep emotions out of the process.
With dollar-cost averaging, investors contribute the same amount at regular intervals (usually once or twice a month) to an investment account. When the market is down, the money buys more shares. When the market is up, it buys fewer.
But because markets generally rise over time, investors who can keep their hands off the stash might build a pretty nice pot of money over the long term — especially compared to what they might get from a savings account or money market account.
Some investors hand over their cash every month and don’t pay much attention to where their 401(k) plan administrator or the bank with their IRA might put it. But carefully choosing the companies represented in a portfolio — focusing on those with sustained growth over time — could help make this strategy even stronger.
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For years, financial professionals have mostly labeled investors’ risk tolerance as “aggressive,” “moderate,” or “conservative.”
Pretty self-explanatory. But it also can be pretty subjective. The term “moderate,” for example, might mean one thing to a young investor and another to an aging financial professional.
An investor might not even know how they’ll react to a market slump until it happens. Or a person might feel aggressive after inheriting some money but conservative after paying a big medical bill.
To help with clarity, many in the financial industry are now using software programs that can help pinpoint an investor’s attitude about risk, based on a series of questions.
They can also better determine how an investor’s current portfolio matches up to a particular “risk score.”
And they can analyze and stress test the portfolio to show just how the client’s investments might do in a downturn similar to the ones in 2000 or 2008.
Identifying an investor’s current position and goals might make it easier to create a more effective plan for the future. This could involve identifying the proper mix of assets and realigning existing assets to relieve any pressure points in the portfolio.
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“Buy low, sell high!” is a popular mantra in the financial industry, but actually making the concept work can be tricky. Who decides what’s high and what’s low?
Value investors implement their own margin of safety by deciding that they’ll only purchase a stock if its prevailing market price is significantly below what they believe is its intrinsic value.
For example, an investor who uses a 20% margin of safety would be drawn to a stock with an estimated intrinsic value of $100 a share but a price of $80 or less per share.
The greater the margin of safety, the higher the potential for solid returns and the lower the downside risk.
Because risk is subjective, every investor’s margin of safety might be different — maybe 20% or 30% or even 40%. It depends on what that person is comfortable with.
Determining intrinsic value can take some research. A stock’s price-to-earnings ratio (P/E) is a good place to start. Investors can find that number by dividing a company’s share price by its net income, then compare the result to the P/E ratio posted by other companies in the same industry.
The lower the number is in comparison with the competition, the “cheaper” the stock is.
The higher the number, the more “expensive” it is.
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A maximum loss plan is a method investors can use to cautiously manage their asset allocation. It’s designed to keep investors from making bad decisions based on their anxiety about movements in the market.
It gives investors some control over “maximum drawdown,” a measurement of decline from an asset’s peak value to its lowest point over a period of time, and it can be used to evaluate portfolio risk.
This strategy calculates a personal maximum loss limit and uses that percentage to determine appropriate asset allocation, but that asset allocation won’t necessarily be a good fit for someone else. It isn’t a one-size-fits-all plan.
Here are the basic steps:
1. Based on historic market numbers, the investor chooses an assumed probable maximum loss for equities in the stock market. For example, since 1926, there have been only three calendar years in which the S&P 500’s total return was worse than -30%. The worst year ever was 1931, at -44.20%. So the investor might choose 40% as a probable maximum loss number, or maybe 35% or 30%.
2. Next, based on personal feelings about market losses, the investor chooses the maximum amount they are willing to lose in the coming year. Again, it’s up to the individual to determine this number. It could be 20% or 30%, or somewhere in between.
3. Finally, the investor divides that personal portfolio maximum loss number by the assumed probable maximum loss number (for example, .20 divided by .35 = .57 or 57%).
In this example, the investor’s target equity asset allocation would be 57% when market valuations are average (or fair value).
The investor might raise or lower the numbers — and be more aggressive or conservative — depending on what’s happening in the market.
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Whatever strategy an investor chooses, risk management is critical to keeping hard-earned savings safer and losses to a minimum.
Remember: As losses get larger, the return that’s necessary just to get back to where you were, also increases. It takes an 11% gain to recover from a 10% loss. But it takes a 100% gain to recover from a 50% loss.
That makes playing defense every bit as important as playing offense.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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