You work hard for your money. You do without luxuries in order to put a little bit away.
Over time, those little bits you put away grow into a nests egg. Now what? The last thing you want is to lose that hard earned and fought-for cash due to a bad investment, especially when the loss is completely out of your control.
First, establish what you want from your investment. Security? Cash flow? Growth? What’s most important to you?
There are 3 main categories of investment:
Obviously, that’s a pretty big overview. Where do commodities fit into that? How about precious metals and cryptocurrency? The idea is to try to break this down into general categories so you can best assess what you want.
For me personally, I want security that comes from being able to control the investment. That’s one reason why we don’t invest much in paper assets. We want to control the outcome. We can make a house worth more by changing its use, the rent we collect or its condition. There isn’t much, if anything, that we can do to personally change the value of a stock.
In the case of precious metals and cryptocurrency, these are ways to hold wealth. You get cash flow when you sell. That is a model, but you don’t get to have both appreciation and cash flow. It’s one or the other. Keep it and hope for appreciation (which you can’t control). Or sell it for cash flow. Of course, you could mine crypto, which is a business model that gives you the possibility of appreciation, cash flow and tax breaks.
My personal focus has always been on just two of the remaining categories: business and real estate.
Real estate investing is generally divided into two categories: residential homes (defined as 4 family and less) and commercial. In the real estate world, an apartment building is considered a commercial investment just like a strip mall would be.
The CARES law provided for 4-6 months of mortgage forbearance for government-backed loans. Private loans and commercial loans would not receive the same provision. Only government backed loans like Fannie Mae and Freddie Mac would receive that.
The recent bill, HEROES, which passed the House called for 1 year of mortgage forbearance for all loans. In the case of single-family residences, there were further provisions on how the forbearance would be paid back. In the case of commercial properties, there is no negotiation. You pay it back in a year or else.
The biggest issue, for me, with the HEROES act is that you cannot get any tenant out of your property for a year. They stay free. And they’re free to change the property with complete impunity, while you deal with planning commissions, the health department and the HOA. If there are penalties, it’s up to you to pay them. And you can do nothing to make them stop. The tenant has complete immunity.
You also have to continue to pay for property tax, insurance, HOA dues, utilities (in some cases), and repairs. Failure to do so, means you pay penalties and put your ownership at risk.
The tenant pays nothing and has no responsibility for a year.
There are also more troubling signs in the real estate sector. A real estate investment’s value is based on capitalized annual rent. If the rents have fallen, then the value has fallen. That means the value of the mortgages that are held on the lender’s books will drop. And then that also means the price of residential mortgage-based securities (RMBS) will drop if there is uncertainty about future payments. The decline in RMBS’s value means the banks are less liquid, which will create shock waves across the financial system.
That’s the residential market.
And now let’s look at commercial real estate. Already 30+ day payments delinquencies have gone from 10% of the total to 20% of the total payments. On April 9th, the Fed finally started purchasing CMBS debt to help fuel liquidity in the commercial real estate sector. However it was only debt that was issued before coronavirus. There is a whole lot that isn’t selling and eventually that means a major constriction in commercial lending.
All of this adds up to looming trouble unless something is done quickly.
So far, Congress seems more intent on making things harder, rather than easier, for the Mom and Pop real estate investor.
And that’s why I’m looking hard at changing my own investment strategy, at least for a while.
Business, especially online businesses, seem to be the only assets that can provide appreciation you control, cash flow and some tax advantages. CoronaTax favors business owners. DAVID: Hyperlink to book.
And the cash flow from an online business can be great, even if you run the business solely with systems and outsourced labor.
For example, here are some real life numbers.
#1: Buy a single-family residence. With 20% down and closing costs, let’s assume approximately $30,000 down. Assuming the net cash flow is $250 per month. That’s actually a pretty good return in the real estate world. It also assumes that you will have a tenant who pays you and doesn’t trash your property with impunity like the HEROES act would allow, if passed into law.
For now, let’s go with these assumptions since those numbers are accurate for some parts of the country before CoronaTax changes.
Now, let’s say you instead buy an existing website business. One a popular sales service, there is one site that is for sale for approximately $31,000. The net income, adjusted for the recent drop in Amazon commissions, is $1,040 per month. The model calls for regular blogs which are all outsourced at current. The cost for the blog writing is factored in the net income.
In one case, you make $250 per month. In another, you make $1,040 per month.
There is likely more work involved with the internet business. For one thing, you should watch traffic on a daily basis. In the case of the rental, there is usually only work once a month provided there are no repairs needed.
You can take more deductions with the real estate, but you need to be a real estate professional to take advantage of the write offs against your other income. And most of those write offs need to be recaptured when you sell.
You don’t need to recapture write offs when you sell an online business and you can take all losses against your other income. Plus, you have a broader range of possible write-offs. And of course, the return on investment is a lot bigger.
For me, though, the real draw is the freedom that comes with online businesses. I am not tied to a geographic location. I can sell the business to anyone, anywhere. I’m not even tied to a particular product or service.
Right now, freedom means a lot to me.