A Risk-Free No-Brainer Investment?

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For the first time in over a decade, savings accounts are actually paying something. If you put your money in a 1-year, 3-year, or 5-year CD, HYSA, or T-bills, you can get locked in a respectful 5% annual return, and you are guaranteed to get your money back at maturity.

Seems like a risk-free no-brainer.

Or is it?

Let’s look at an example.

Suppose you buy a $460,000 CD (or HYSA or T-bill) and a $460,000 rental property. What will be the five-year gain if the CD pays 5% and a rental property appreciates at 5%? (Our YTD appreciation is >9%, so 5% is conservative.)

CD gain:

Assuming a 35% marginal tax rate:

• Year 1: $460,000 x 5% x (1 – 35%) + $460,000 ≈ $474,950

• Year 2: $474,950 x 5% x (1 – 35%) + $474,950 ≈ $490,386

• Year 3: $490,386 x 5% x (1 – 35%) + $490,386 ≈ $506,324

• Year 4: $506,324 x 5% x (1 – 35%) + $506,324 ≈ $522,780

• Year 5: $522,780 x 5% x (1 – 35%) + $522,780 ≈ $539,770

Total gain: $539,770 – $460,000 ≈ $79,770

Rental property gain:

• Year 1: $460,000 x (1 + 5%) ≈ $483,000

• Year 2: $483,000 x (1 + 5%) ≈ $507,150

• Year 3: $507,150 x (1 + 5%) ≈ $532,508

• Year 4: $532,508 x (1 + 5%) ≈ $559,133

• Year 5: $559,133 x (1 + 5%) ≈ $587,090

Total gain: $587,090 – $460,000 ≈ $127,090

However, this represents only capital (equity) gain. You’ll also receive cash flow from the property. Let’s assume the cash flow from the property is 5% after all recurring expenses—a common starting figure among our client’s properties. To be conservative, I’ll assume there’s no rent growth. However, appreciation and rent growth are driven by population growth. If there is appreciation, you will have rent growth.

• Year 1: $460,000 x 5% ≈ $23,000

• Year 2: $460,000 x 5% ≈ $23,000

• Year 3: $460,000 x 5% ≈ $23,000

• Year 4: $460,000 x 5% ≈ $23,000

• Year 5: $460,000 x 5% ≈ $23,000

Total cash flow in 5 years: $23,000 x 5 ≈ $115,000

The tax savings will probably shield the cash flow from taxes. Therefore, it will essentially be tax-free. So, the five-year gain from the property, including equity gain and cash flow: $127,090 + $115,000 ≈ $242,090

So, if you want to grow your money faster with limited risk, real estate may be the right answer.

Obviously, not any real estate will do. It has to be real estate in a rapidly appreciating market that attracts reliable tenants (minimizing risks). If you want to explore such an option, please schedule a meeting with me.