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:
- 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.
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.
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.
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.
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