99K Challenge Update
I’ve got 5K cash – what to invest in?
I want to invest in something, but, I’ve exhausted all of my tax-advantaged options. I’ve already committed $11K to my Roth IRA and have invested in stocks and peer 2 peer lending. Unfortunately, I won’t be able to invest in my company 401K until this July, (my 1 year anniversary), so my only option is to invest in a taxable account.
Now, here’s my problem
I hate paying taxes more than the average person, but I also want to earn a decent return on my money. Here’s an option that may be able to do both:
Leveraged Municipal Bond ETFs
Imagine an investor that has a lot of money. He decides to use that money to purchase a bunch of different municipal bonds, which basically means that he lends his money to a city for public works like roads or bridges. However, the municipal bonds don’t pay a lot of interest. So, the investor decides to borrow money from someone else and use that money to purchase more municipal bonds. Basically, that’s what a leveraged municipal bond fund is.
The benefit of a municipal bond is that you pay ZERO taxes on it if the issuer of the bond is in the same state that you live in. For me, if I purchase a california bond, I’ll pay no income tax on its earnings. The downside is that the earnings are actually pretty small. That’s why I’ve decided to look into some leveraged funds to see if I can earn a better return. The fund that I’m currently eyeing is NAC:
The main issue with leveraged funds is that they are extremely expensive! This fund is charging me 1.42% a year! Looking at this funds distribution yield, its after-tax value to me is its distribution rate minus its expense ratio, or (5.67 – 1.42) 4.25%. Now, that’s actually a respectable yield given that I won’t be paying a single penny of tax on this since this fund is composed of solely California municipal bonds! Unfortunately, that’s not enough for me. I need more than a measly 4% return. In addition, its a bad idea to purchase bonds in a rising interest rate environment. That’s why I decided to look into crowdfunding real estate.
Crowd-Funding Real Estate – Invest with as little as $5K
Crowd-funding is something that interests me a lot. Basically, whenever you scale something up, you gain efficiency. What crowd-funding does is pool together a lot of people’s money in order to gain efficiency. Since real-estate is typically very expensive, the average American can’t actually afford to invest in a property of their own. However, the average American CAN pool their money with other Americans to invest in real estate. Unfortunately, most of these websites require that you be an accredited investor (1 million net-worth or earn $200K a year). However, most of the websites don’t actually check to verify that you are an accredited investor, they simply take your word for it.
Essentially, the thing that’s really interesting to me about this niche is that I can invest into many different real estate deals with my money. For example, should I invest $5K with realtyshares, I can potentially join in 5 deals with $1K each.
Most of the deals seem to offer around 10% annual interest. However, that’s probably closer to 9% since realtyshares will probably have a fee of around 1% (although I don’t know for sure since I have not done my research). In addition, the interest gained from these investments will be taxed at full blast, which means that I’ll lose 35.3% of any profits I earn on this investment to the government. Combine all of those factors along with the fact that investing in realty shares entails significantly more risk compared to a municipal bond fund, it becomes tough to see if the risk-adjusted return from realty shares is better than the municipal bond fund.
I’d rather invest in something rather than nothing at this point considering that I have a healthy opportunity fund of $5K cash in an I-bond. (I’m also planning on putting another 5K this April, to have a total opportunity fund of ~$10K). The return on my cash is going to be negative given inflation is larger than the current interest rates that the banks pay. All in all, I’m actually leaning towards crowd-funding real estate, but am hesitant to proceed further without knowing what I’ll actually end up with after taxes, fees, and any potential losses. At least with the bond I’ll know that I’ll be receiving a fixed payment each month!