Three Top Investments 2008

By: Hubert Crowell

I've invested in gold mines in Africa, oil wells in Louisiana, Individual stocks and rental property and lost my shirt on occasions. My dad was a risk taker when it came to investments, opening coal mines, service stations, used car lots, fishing for a living and digging peat. He always encouraged me to make investments and believed that you had to take some risk to get ahead.

There are three investments that have provided the greatest return for me over the years and I would like to share them with you.

2008 has been a disappointment to say the least. The S&P 500 Index had annual return of negative 37% last year. As you might guess it was not one of my top three investments. I have taken large losses like most everyone else in stocks, mutual funds and bonds. My top three investments still remain the same.

Number 3

Rental property in my opinion is the number three top investment. Lets look at a single family house valued at $100,000 and renting for $600 a month. The average value of a home has increased about 3% a year. If the property sat empty you would make about 3% a year on your investment. If you rented it for $600 a month you would be earning 7.2% or $7,200 a year.

But what about the expense of owning rental property?

The three major expenses and just about the only ones for the first five years of a new or remodel home are insurance, property taxes and termite warranties. Depending on the area of the country you are in, the amount you would pay for these would vary. On average you could expect to be out about $1,790.00 a year. Subtract that from the rent income and you have about $5,410 for income or earning 5.4% instead of 7.2% on your investment.

If you are in a 20% income tax bracket and depreciated the property using the MACRS formula, you would have a total deduction from depreciation, and expenses of about $5,274 and a year end savings on your tax bill of $1,054. So add another 1% to your return on your investment and you end with 9.4%. All of the above is assuming that you paid cash for the house, and that would be the best thing to do. However, most of us do not have that much cash available to invest. So say you have $20,000 to put down, I would not recommend buying a house with less than 20% down. You now have a mortgage loan of $80,000 with interest of $4,320 a year. Your tax savings is now $1,918 each year. Your mortgage payment of $454 added to your expenses of $149 takes all your rent income and cost you $3.00 a month. At the end of each year you have $1,900 to apply to the loan or make repairs.

But now look again at your initial investment of $20,000, each year (100,000 X .03 = 3,000), will return 3,000 for an annual return on investment of 15%. If you include the $1,900 savings from taxes, your annual return on investment would be 24.5%! And this could be consistent over the next 27.5 years. For a bonus, if you rented the house for the full 27.5 years, the depreciation is gone and your cost basis reverts to the original cost of the house.

Follow the above advise and not buying anything that you cannot keep if it fails to rent, rental property is still a good investment. With more people out of their homes there should be a greater demand for rental homes.

Number 2

It is true that the value of homes has gone down in the last year, but so have the interest rates. If you do not now own a home, now is the time to start looking. Just stay within your means and remember 20 to 25% of your income for housing is still a good rule to follow. Save up for that 20% down, get the lowest rate and avoid added mortgage insurance cost.

The house that you live in is your second top investment. If you were renting the $100,000 house, you would be out $600 a month in expenses with nothing to show for it at the end of five years. However if you were buying the house, you would have almost the same return on investment as in the above example. With the exception of higher insurance and a lower tax deduction. If you paid 20% down, your $20,000 investment would be returning about 20% each year. But instead of $600 a month in rent, you would be making only $454 a month in mortgage payments. That is another $1,752 a year in savings or 8.76% return. This will give you a total annual return on investment of 28.76% a year. It is hard to find an investment that will give you that rate of return year after year.

Number 1

Although my net worth is down 32% from a year ago, I have not changed any of my investments, therefore I have not yet taken a loss, except for the retirement withdrawals that are getting costly. In the last few years I have become totally debt free and if things continue to decline I could lower my standard of living. But my number one investment keeps me on top.

Are you ready for this, the number one and most important investment, is not really an investment at all. It is returning what was not ours at all. "Return to me, and I will return to you," says the Lord Almighty. (Malachi 3:7)

He goes on to say, "But you ask, 'How are we to return?'" Will a man rob God? Yet you rob me, "But you ask, 'How do we rob you?'" "In tithes and offerings. You are under a curse--the whole nation of you--because you are robbing me. Bring the whole tithe in my house. Test me in this," says the Lord Almighty, "and see if I will not throw open the floodgates of heaven and pour out so much blessing that you will not have room enough for it."

Notice that he says tithes and offerings, we are to pay our tithes first before we pay anything else, this is our first fruit and if God is first in our life we will return to him what is his first before anything else. Then the promise applies not only to our offerings but all of our remaining finances. I don't know about you but I had much prefer to have a blessing than a curse!

I have followed all three investment strategies and others as well and can state without a doubt that I have been blessed in my finances. I cannot measure the return on investment from following Number 1, but it has been greater than all the others combined! If you have any doubt, try it, if not for the blessing, to avoid the curse!