Whether you’re investing in real estate, the stock market, mutual funds or loans backed by real estate, you want your money working for you, maximizing your overall financial health. If you’re an investor, at the very least your goal is to find an investment with a rate of return higher than the bank would pay on a Certificate of Deposit (CD) or the U.S. government would pay on a Treasury bill—not too hard considering that the going rate for a CD is less than one percent and T-bills pay about two percent.
In their defense, both CDs and T-bills are extremely safe—a haven for the risk-averse. However, both require you to tie up your money for long periods of time, and at the rates noted above, you won’t even keep up with inflation (which is running at about three percent). Just to be clear, this means you are actually losing money, especially when you factor in paying taxes on those interest “earnings” because inflation is not tax-deductible.
So you want to make sure your hard-earned savings are working as hard as you do. Having said that, you also want to make sure that if an emergency arose, you’d have access to your cash to cover the unexpected. Fortunately, there’s a way to have your cake and eat it, too. By establishing a line of credit, you can tie up virtually all of your savings in profitable ventures and still have access to cash should the unexpected befall you.
Let’s say you have $50,000 in a bank account paying less than one percent. By having a line of credit, even one that charges six or seven percent, you can invest the $50,000 and—even if your investment only pays five percent—still come out ahead because you haven’t tapped the line of credit.
The line of credit acts solely as a security blanket in the unlikely event that you need funds on very short notice. This allows you to keep all of your assets working for you all of the time. And if you need to tap into the line of credit, you can use liquidation proceeds or cash flow to pay down or pay off the line of credit in a timely and orderly fashion.
Depending on your overall financial picture, the rate on your line of credit will vary from three-and-a-half percent on up. The things that influence the cost are what security you put up, your credit rating and your ability to make timely payments on your debts. By the way, even credit cards at an exorbitant rate could provide backup if you need quick cash, but you need to investigate because some are affordable; others are outrageous. Many will offer “teaser” rates as low as zero percent for a short term, so as always, read the fine print.
On the topic of credit cards, shop for them! Virtually all credit card companies today want your business and are literally willing to pay you for it. Most credit cards give you a one-percent rebate, and many provide other perks. For example, some credit cards offer a five-percent rebate that you accumulate over time and can apply to the purchase of a new General Motors vehicle. Others allow you to accumulate miles to travel around the world. Still others have a particular focus like hotels and/or restaurants, giving you a five-percent rebate on those purchases and a one-percent rebate on other purchases. Look at your spending patterns and shop around. Between Visa, MasterCard, American Express, and Discover, you’re sure to find one that rewards your spending habits.
If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.