A conversation with a colleague recently led to the topic of investments. Where’s a good place to put money to work in this economy that will achieve a decent return? We talked about various instruments- T Bills (security), equities (growth, income), and I of course brought up Real Estate. As with any situation, each person’s circumstances dictate their own strategy, but I came up with the following as basically an exercise in outside the box thinking. (I’m usually WAY outside the box).
OK, so you have money to invest. Where to invest it? If you don’t manage a hedge fund or aren’t a Wall Street insider, you have a difficult and not particularly attractive set of alternatives. Ten year T Bills are a safe place to park money, but as of November 8, 2012 they were returning a whopping 1.67% that is .0167. How about the Stock Market? As of November 8, 2012 ETF’s for the Dow Jones Industrial Average (DIAMONDS- DIA) were yielding 6.05%. Not bad, but not great. With inflation at 2% as of September 2012, that leaves you 4.05% on the Dow and -.33% on the ten year T bill. These returns are usually taxed as capital gains at a rate of 15%, so that needs to be deducted to get your true returns not counting inflation. On a $1,000,000 investment in ten year T Bills, you’ll net $14,196 at a 15% tax rate and $51,425 on your DIA EFT.
How about a different idea? If you have a million dollars to invest, it’s probable that vacations are important to you, and are part of you annual budget. You have a choice when you go on vacation- rent or buy. Lake Winnipesaukee is one of the most popular resort areas in the world. Let’s say you want to vacation here and want to do so for the summer with your family. Rents for houses in the one million dollar range on the lake range up to $5000 per week. Renting a lake house like this for ten weeks will run you $50,000. OK, so you now send your two kids to summer camp. These camps cost anywhere from $1000 to $1750 a week. The usual summer camp season is eight weeks long. Now with just two kids at camp, that’s $22,400 a summer. The math leads us to total of $72,400 in expenses.
Now say you take your $1,000,000 and buy a lakefront home on Lake Winnipesaukee (this is entirely possible- we have many great waterfronts priced in this range). There is a tax cost to this- property taxes. If you buy in Meredith, the Tax rate is $12.53 per thousand or $12,530. If you buy in Center Harbor, or Moultonborough, its less; but lets pick Meredith because I live here and it’s not the extreme – I don’t want to stretch my credibility too far. So, we have a cost to own (tax consequence) of $12,530 per year.
Here’s the fun part. Assuming you are still with me, if you buy the Lakefront home, you save $50,000 by not renting and you don’t need to send your kids to camp because you own your own camp, saving another $22,400- a total saving of $72,400. Deducting the cost of real estate taxes, you net a total saving of $59,920.
Here’s how the three investments stack up:
Investment amount $1,000,000
10 year T Bill Returns $14,196
Dow Jones EFT Returns $51,425
Winni Lakefront Returns $59,920
This monetizes the use of the property for only the summer season. All the rest of the year is a bonus. Also, remember that the returns on the Real Estate do not rely on appreciation as the Dow Jones EFT does.
Now, I know this is a different approach to real estate investment. It truly is a stretching of the usual thinking, but I think its fun to change the paradigm. Blending investment real estate insights with the residential real estate market (especially in the second home market) can open new ways of thinking about what your money can do for you. The investment in a Lakefront home also pays dividends in other than dollars and cents. Is your family’s happiness increased by spending time at the lake? Do the clean air they breathe and the clear water they swim in improve their health and well being? What is the value of the memories of family time spent on the lake? Putting a monetary value on these benefits is impossible, but the worth of these intangibles will stay with your family forever.