I’ve invested in gold mines in Africa, oil wells in Louisiana, individual stocks and rental properties, and at times I’ve lost my shirt. My dad was a risk taker when it came to investments, opening coal mines, gas stations, used car lots, fishing for a living, and digging peat. He always encouraged me to make investments and believed that you had to take risks to get ahead.
There are three investments that have given me the best returns over the years and I would like to share them with you.
2008 has been a disappointment to say the least. The S&P 500 Index had a negative 37% annual return last year. As you might guess, it was not one of my top three investments. I’ve taken big losses like most everyone else in stocks, mutual funds, and bonds. My top three investments remain the same.
In my opinion, rental property is the third major investment. Let’s look at a single-family home valued at $100,000 and rented for $600 a month. The average value of a house has increased about 3% a year. If the property were empty, you would earn around 3% per year on your investment. If you rented it for $600 a month you would be earning 7.2% or $7,200 a year.
But what about the expense of owning a rental property?
The top three and nearly only expenses during the first five years of a new or remodeled home are insurance, property taxes, and termite warranties. Depending on the area of the country you are in, the amount you would pay for these would vary. On average, you could expect to lose around $1,790.00 per year. Subtract that from rental income and you’ll have about $5,410 in income or earn 5.4% instead of 7.2% on your investment.
If you are in a 20% income tax bracket and you depreciated the property using the MACRS formula, you would have a total depreciation and expense deduction of about $5,274 and an end-of-year savings on your tax bill of $1,054 . So add another 1% to your return on investment and you end up with 9.4%. All of the above is assuming you paid cash for the house, and that would be the best you could do. However, most of us don’t have that much cash available to invest. So let’s say you have $20,000 to put down, I wouldn’t recommend buying a house with less than 20% down. You now have an $80,000 home loan with interest at $4,320 per year. Your tax savings is now $1,918 each year. Your mortgage payment of $454 plus your expenses of $149 takes all of your rental income and costs you $3.00 a month. At the end of each year you have $1,900 to apply for the loan or make repairs.
But now look again at your initial investment of $20,000, each year (100,000 X .03 = 3,000), you will return 3,000 for a 15% annual return on investment. If you include the $1,900 tax savings, your annual return on your investment would be 24.5%! And this could be constant for the next 27.5 years. As a bonus, if you rented the house for the full 27.5 years, the depreciation is gone and your cost basis goes back to the original cost of the house.
Follow the advice above and don’t buy anything you can’t keep if it’s not rented out, rental property is still a good investment. With more people out of their homes, there should be a higher demand for rental housing.
It’s true that home values have dropped in the last year, but so have interest rates. If you don’t already own a home, now is the time to start looking. Just stay within your means and remember that 20-25% of your income for housing is still a good rule of thumb to follow. Save for that 20% down payment, get the lowest rate, and avoid the added cost of mortgage insurance.
The house you live in is your second major investment. If you were renting the $100,000 house, you’d be spending $600 a month with nothing to show for it at the end of five years. However, if you were buying the house, you would have almost the same return on investment as in the previous example. With the exception of higher insurance and a lower tax deduction. If you paid a 20% down payment, your $20,000 investment would return about 20% each year. But instead of $600 a month in rent, you’d be making just $454 a month in mortgage payments. That’s another $1,752 a year in savings or 8.76% return. This will give you a total annual return on investment of 28.76% per year. It’s hard to find an investment that gives you that rate of return year after year.
Even though my net worth is down 32% from last year, I haven’t changed any of my investments, so I haven’t had any losses yet, except for retirement withdrawals that are getting expensive. In the last few years I have become totally debt free and if things continue to decline, it could lower my standard of living. But my number one investment keeps me on top.
Are you ready for this? The number one and most important investment is not really an investment at all. It is giving back what was not ours at all. “Return to me, and I will return to you,” says the Lord Almighty. (Malachi 3:7)
He goes on to say, “But you ask, ‘How are we going to get back?'” Will man rob God? Yet you rob me, “But you ask me: ‘How did we rob you?’ my house, test me in this, says the Lord Almighty, and you will see if I do not open the gates of heaven and pour out so much blessing that you will not have left over.
Notice that it says titles and offerings, we must pay our titles first before paying anything else, this is our first fruit and if God is first in our life we will return what is his first before anything else. So the promise applies not only to our offerings but to all of our remaining finances. I don’t know about you, but I’d rather have a blessing than a curse!
I have followed all three investment strategies and others as well and I can say without a doubt that I have been blessed financially. I can’t measure the return on investment of following Number 1, but it has been greater than all the others combined! If you have any doubts, try it, if not for the blessing, then to avoid the curse!