How do you Make Your Money Make Money?

Question

Hey guys, I'm currently saving up for my first real estate purchase and looking for ways to expedite that process. Currently, we are putting our money into a basic savings account at 1.45% interest. Debating putting those funds into a mutual fund account and let them climb at a higher rate. This will come with a tax bill when we do decide to withdraw the funds but it beats 1.45%

Is that a smart idea or are there better ways to get to my goals?

Thanks in advance!

Steve Vaughan · Answer

If you want this money as dry powder to pull down a cash deal quickly, I'd just keep it in a money market account. The rate you're getting is actually pretty good for safety and liquidity. We can't have it all 3 ways!I've had 6 figures dry powder in a mmkt acct since Jan because of stock market volatility. I don't want to worry about a tweet or Korean problem or whatever. Sure enough a deal came up out of the blue and I needed cash. Friends brother died and just got out of probate, he and his 2 siblings want out but repairs prevent a bank loan. Nobody else has that much liquid so I'll get it. Already have a tenant buyer lined up for a 30 month 45% return + cf and I'll brrrr to get my $ back in 6ish months without lifting a hammer.The discussion shouldn't be about earning 1% vs 7% when talking about an RE opportunity fund. It's about earning 1% and 20% plus cf and tax advantages and generational wealth over time. Keep it safe and liquid is my vote.

Caleb Heimsoth · Answer

Ben Volkman so that means it will likely be less than 5 years, hence everyone is saying keep it out of the stock market which is the right call. You cannot get hung up on returns over a short amount of time. With the market you need to put money in it and leave it there for decades. If you do not think this way, statistically speaking you will likely lose money.

Kevin Coggins · Answer

@Ben Volkman There's plenty of stuff you can do, but really depends on if you want a passive investment, or have the time to put into some work. I've never personally done it, but a co-worker of mine bought a pressure washer and does pressure washing on the side...maybe $500-$1,000 investment (less if you don't go commercial grade) and you can get $100 per job on the weekend. I've bought/sold items online with the idea of getting a 20% return, sometimes it works out and other times...not so much. But once you learn and get an idea of what sells at what prices, you can make solid returns.To build on @Caleb Heimsoth statement above, if this is short term money, DO NOT put it in the stock market. I put 11K of savings (non-emergency) into some ETFs in January and currently those are down 3%, were down 5% maybe a month ago. It'd suck to have to pull out your money to use on a purchase and potentially be down 10%.

Caleb Heimsoth · Answer

Ben Volkman the answer to this really depends on how long you will have the money in there. If it’s less then 5 years you should keep it in the high interest account

Ben Volkman · Answer

Thanks everyone for your input, I didn't expect this many responses but very grateful for your wisdom! I will keep it in a money market account and have some patience. As I previously stated, I have plenty of overtime and a side job to increase those funds hopefully to reach my goals within the next 12-15 months

Joe Splitrock · Answer

@Ben Volkman I would keep your down payment money in the high yield savings account. It is FDIC insured so although the return isn't huge, you won't lose it either. The problem with mutual funds (beyond the fees that kill your return) is the investment could go down. Over time the market will generally go up, but what if you want to use the money when the market is down? If you do go the stock market route, I encourage you to look at index funds that have low fees.

Fradel Schaechter · Answer

@Ben Volkman- keeping it liquid sounds like the best plan of action. You are saving at a pretty fast pace, you will hit your goal soon enough that preserving capital should be a higher priority than growth, in my opinion. You'll get that growth you seek when you do your first deal, if you buy right!

Jeremy England · Answer

as an alternatove to savings accounts. I recommend a robo adviser like betterment. I dont have a savings anymore and just invest on autodraft into a bond/stock savings vehicle and easily get over 7pct every year. Just give them your risk tolerance and let them do the rest

Mark S. · Answer

@Ben VolkmanHow would you feel if it dropped 10% and that prevented you from taking down a deal you wanted? That’s another way to look at it. Sacrificing return is the price you pay for safety, certainty, and liquidity.

Paul Allen · Answer

I concur with the previous responses. Taxes are not your biggest concern when it comes to investing in a mutual fund. Loss of principal is a much greater risk - especially in the short term. When it comes to investing, less than 5 years is short term.That leaves the question - what is your tolerance for investment risk with this money? Can you quantify it? For example - would you risk a 50% chance you'd be down 10% for a 50% chance you'd be up 12%? If you can quantify it, then you can build a portfolio that fits your risk profile. It's building an accurate risk profile that most people have trouble with. Even then, you're still dealing with statistical probabilities - meaning there's a chance your results will be better or worse than the models.If you're married, building a joint risk profile can be geometrically more difficult. Best of Luck with Your Real Estate Investing!