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Why Do Women Actually Get Better Investment Returns Than Men

By
Irene Makanga
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0
three beautiful African women chatting

Research has shown that women actually get better investment returns than men on average.

On this day, I thought I should share some information and shed some light on the myth that women aren’t good investors. As it turns out, research has clearly demonstrated that women investors have a slight edge over men when it comes to investing. Women’s investment returns tend to be better than those of men on average.

A few reasons can be attributed to this phenomenon. Why do women actually get better investment returns than men? Here are a few reasons why.

Women Tend to Trade Less

Women do not trade as often as men do and this allows them to ride out market swings and avoid extra fees. They also tend to invest more consistently, which means they are not trying to time the market.

Women Are Less Impulsive

Women don’t tend to react to market fluctuations the same way as men do. They also, do not get swept away by the market noise or obsessively check their investment portfolios several times a week as men do. As such, women who are able to maintain a sober mind over their investment decisions are less likely to change their asset allocation.

Women Tend to be Less ‘Confident’

Despite their better performance, they are still less confident than men when it comes to making investment decisions. They doubt their abilities and feel like they need to learn more to make sound investment decisions, whereas men are more comfortable and jump right into the market.

Though this may seem like a negative, it’s actually a plus. Our conservative nature makes us more detail-oriented, risk-aware and invests for the long haul. A good investor tends to turn to professionals when uncertain about a certain financial decision – it is good practice.

Women Tend to Stay Engaged & Informed

Women tend to talk about money and investing with their friends and consult widely. This allows them to boost their confidence when making financial decisions. Additionally, friends also serve as a support system when things get tough. They offer support when it’s time to make changes to our portfolios or goals and keep us on track throughout our investing journey.

Investing can be quite an emotional affair and we all need someone who understands our journey to lean on and support us when things get tough.

Women Tend to be Cost-Focused

Successful investors are cost-focused. And women, out of habit are always carefully looking at prices more than men. As such, when investing, women tend to not only look at returns but they are also looking for low-cost funds or ways to save on fees and taxes.

Women Are More Disciplined Savers

Despite earning less than men on average, women tend to have a higher savings rate than men. Although a higher savings rate doesn’t necessarily mean that they have higher savings balances women however consistently save and recognize the importance of having emergency savings. By doing so, they have adequate cash reserves that make it possible for them to avoid having to liquidate investments in a pinch – and keep gains locked in.

Women Tend to Invest Early

Women tend to start investing early and invest for the long haul. Starting early typically allows investors to take more risks and have an opportunity to earn better returns. With early investing, it becomes easier to recover from wrong decisions without affecting the long-term financial goals. 

Summary

As we continue to seek out different ways to improve our financial self, remember to tap into those unique qualities – habits and skills – that you’re already made a part of your everyday life. Because, as it turns out, we are model investors that get better investment returns on average. So let’s continue to:

  • Invest with a higher purpose
  • Have an objective view of our investing abilities
  • Are risk-aware and avoid impulsive decisions
  • Are cost conscious
  • Stay on target to meet long-term goals

Image credits: Top by Cleyder Duque from Pexels

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7 Timeless Ways to Protect Your Finances Against Inflation

By
Irene Makanga
-
0

High inflation is here and it doesn’t seem to be going away anytime soon, so we need to step carefully. It is now no surprise to find higher price tags on food products, and many other everyday goods and services. For most of us, inflation has completely run away taking with it our purchasing power and peace of mind. Jeopardizing our financial health, and erasing our hopes for the future.

The government statistics on inflation don’t quite capture the reality of the effects of inflation. They are just numbers after all, not the real faces of those that grapple with it. In the long run, the year-on-year increase will have us see the cost of living actually double more than once. In other words, if a standard of living used to cost Ksh. 100,000, it can cost Ksh. 200,000 or more by the time you enter into your retirement.

All isn’t lost, here are some tried and test ways to tackle your current financial squeeze:

1. Inflation-Friendly Fixed-Income Securities

Treasury bonds are issued by the Kenyan government and some are designed to keep pace with inflation. In practice, the price of these bonds increases with inflation, so they don’t lose their purchasing power. While the fixed interest rate stays the same over the duration of the bond, the value to which it is applied would increase in an inflationary environment. They can be purchased directly through Central Bank. At maturity, the principal amount of the bond is guaranteed by the government.

Alternative, since we do not want to get locked in with low-interest earning fixed-income securities for the long haul, consider focusing on short-term bonds. By focusing on shorter-term bonds, you have less exposure to future inflation. Upon maturity of these short-term bonds, you can easily reinvest at better rates, as interest rates rise.

2. Go Aggressive on Bonds

If rates climb, then certificates of deposit, fixed annuities, bonds and bond funds purchased today will be less attractive in the future. Therefore, it’s best to be more careful about buying these securities when interest rates are anticipated to rise in the near future. Acquiring these assets in an inflation environment means that the income accrued will lose value more quickly with high inflation.

Rather than completely shy away from fixed income securities entirely, go aggressive on some types of bonds. Specifically, high yield bonds. They may provide protection against future inflation as opposed to higher-quality bonds. The reason for this is simple; the yield or the income generated by these high yield bonds is greater than that provided by the high-quality bonds. However, there are downsides. These bonds may provide higher income but they come with greater credit risk. Thus, the stability and protection that bonds offer in diversified portfolios, with aggressive growth assets, will diminish with more bond inflation protection.

3. Investing in Stocks

Historically, stocks have been known to outpace inflation and thus, provide a great hedge against inflation. Stocks provide inflation protection in two main ways: dividend payments and growth.

Dividends

As company profits grow over time, so do the dividends paid out. This translates to higher cash flows in the future for you as an investor. Imagine a scenario in which a company is growing their dividends by 7% a year. If your dividend starts at a Ksh. 1,000,000 investment, it provides a Ksh. 30,000 a year income. Then over a course of a decade, you’ve effectively doubled your cash flow at 7% yearly dividend growth to have Ksh. 60,000 in income. This growth can effectively hedge against inflation or maintain your purchasing power and standard of living; even if inflation is rising.

Growth

Markets in general, tend to move higher over time, thence growth.

If you are able to stash away your money for long periods of time (5 years +), the stock market is a great option for inflation-beating returns. When selecting stocks for your portfolio, consider digging a little deeper. You’ll want to check out stocks that perform best in an inflationary environment. Stocks for consumer staples, energy, utilities, healthcare and building materials typically perform well. However, diversify; a broad-based index is easier, less expensive, more manageable and tends to move higher over time.

4. Investing in Real Estate

If you’ve been paying attention to the real estate market, you may have noticed that property prices have been increasing drastically. Particularly in the last 20 something years. Real estate tends to maintain and increase in value over time. As rents and home values typically tend to increase in inflationary periods. This increase is more or less in line with the rate of inflation, or in some areas, the increase may be greater than the rate of inflation as other factors may have a greater influence on prices in those areas. As a result, real estate is quite a popular option to hedge risk.

Whether you own physical real estate or publicly traded securities, or a real estate investment trust (REIT), the benefits of real estate with those rising cashflows in the future will be felt giving you an inflation hedge if your cost of living commensurately increases.

5. Invest in Commodities

Another way to protect yourself against inflation is through commodities investing. Though a bit tricky, there is a general belief that commodities increase in inflationary environments. Historically, investors have used gold for instance as a hedge against inflation in the long run.

For the everyday investor, commodities can be quite difficult to invest in, as the methods of investing are not readily available. You can invest in commodities through Futures or Exchange-Traded Funds (ETFs) that invest in raw materials and commodities. With futures, they carry a lot of leverage risk and the possibility of total loss. As for ETFs, they do not provide pure exposure as the price movement doesn’t sometimes match the movement of the price of the commodities themselves.

Due to these shortcomings, I think the best way to invest in commodities, is by buying stocks of commodity producers. This way you will be able to take advantage of the inflation hedging protection of commodities. While doing so, also take advantage of owning a company that is actually producing something and hopefully generating profits at the same time.

6. Moderate Debt Exposure

Ensure that you maintain the right sort of debt, such as that with low-interest rates. If inflation takes off, interest rates are likely to rise. In an inflationary environment, great debt is in fixed mortgages with low-interest rates as property prices are likely to climb. This makes the monthly payments more affordable with time. On the other hand, stay clear of credit card debt or forms of short-term debt with floating interest rates. The monthly payments of these forms of debts tend to go up as inflation continues to rise.

7. Follow A Budget

A budget brings focus, especially on the expense categories that inflation might affect such as food, transportation, utilities, education and even healthcare. Having an all-around understanding of your budget, allows you to plan better and stretch your budget further. That is, buying less expensive products and enabling you to consider expenses that you can cut or reduce without affecting your overall quality of life.

While we hate facing price increases, it is best to prepare for it. Since we know that prices of food and other commodities will continue to increase, it will help to mitigate its effects by making big purchases now. For instance, you can take a reasonable amount of debt at low-interest rates now to buy a house if possible. Historically, higher interest rates come with higher inflation. Also, it wouldn’t hurt to prepare your home and your family for cost increases. We cannot control the rise and fall of prices, but we can control our decisions. We can make choices today that will help us manage inflation tomorrow.

Summary

There are many other ways, but these are seven main areas that you can use to protect yourself from inflation.

Protect Yourself Against Inflation By:

  • Approriately invest in inflation-firendly fixed income securities such as inflation protected treasury bonds or short-term bonds.
  • Dip your toes and go a little aggressive on bonds – in a very caustious manner though.
  • Investing in stocks, which over time will offer gorwing dividends and also caputal appreciation to protect against inflation.
  • Invest in commodity producing companies and take advantage of commodity price inflation that passes through in the form of profits.
  • Buy real estate, whether physical real estate or publicly traded securities, and take advantage of rising cashflows.
  • Fixing your budget and any debt to the degree possible to get certainity around your future expenses.

Incorporating these seven steps can help you control your spending, and match any future expense increases with income increases as well. Ultimately, we are seeking more certainty, comfort and peace of mind.

Image credits: Top by Monstera from Pexels

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Are Non-Fungible Tokens (NFTs) a Good Investment?

By
Irene Makanga
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0
NFTs: Are Non-Fungible Tokens a good investment

The global hope and hype around non-fungible tokens or NFTs is ever increasing. Investors are increasingly considering NFTs as an asset class to be included in their portfolios. There is also more and more talk about NFTs being the future of digital transactions, creating a new and augmented form of ownership verified on the blockchain. Millions are being traded in the industry, and more and more investors are being drawn in for a piece of the action.

If you have been wondering about the investment craze in NFTs, here is all you need to know – whether or not you should fear missing out on this investment fad.

What is An NFT?

An NFT or Non-Fungible Token is a one-of-kind digital token that can be used to represent real-world assets like art or digital assets like images. This unique token is therefore linked to a particular asset and encrypted with the creators signature, thereby validating its authenticity and ownership.

Since each NFT is unique and cannot be replicated, it is represented as a non-interchangeable unit of data stored – a uniquely identifiable token. On the blockchain, it is represented in an interactive format with visual representation. The record of ownership of this cryptographic asset cannot be changed since its existence is time-stamped on the blockchain.

What Are Some Examples of NFTs?

Non-fungible tokens can digitally represent any asset – both online-only assets and real word physical assets. Online-only assets represented as NFTs include digital artwork, pictures/images, music, videos, and games/in-game items like avatars, domain names, event tickets and more. Real-world physical goods on the other hand include art, sculptures, memorabilia, real estate, vintage wine and more.

Essentially, and at the end of the day, anything can is tradable as an NFT.

Why Are NFTs Important?

The world of finance keeps evolving and developing even more sophisticated trading and loan systems for different assets. This has further deepened and increased market access. The advent of cryptocurrencies has created a step forward for the reinvention of structures of ownership and utility of assets in the form of non-fungible tokens.

So why are NFTs so important to us as investors?

Digital Representation

The idea of digital representation of physical assets is not new. But, combined with the benefits of a secure blockchain of smart contracts has created a new frontier for change in the industry. Now, we are creating new forms of ownership and utility programmed around objects enabling democratized investing by fractionalizing physical assets like real estate opening access to locked capital and creating a more egalitarian, sustainable society.

Market Efficiency

Increased market efficiency by removing intermediaries/agents, allows artists/traders/investors direct access to markets or audiences in the case of artwork.

Traceability

Non-fungible tokens are also increasing traceability of goods along supply chains, allowing ease of tracking of the provenance of wine for instance through the entire process, from production to sale.

Identity Management

Governments and other stakeholders are using non-fungible tokens for identity management. They are creating identity-based management systems verified on the blockchain to develop NFT based individual passports, vaccine passports, property rights and more. Unique identifying characteristics are programmed around individuals or assets. In the case of individuals, it’s allowing the streamlining of entry and exit in jurisdictions.

Are NFTs Safe?

Non-Fungible tokens that use blockchain technology like cryptocurrency are secure, that is tamper-resistant. The building block of blockchain technology is based on a distributed ledger technology, where everyone has access at the same time. Thus, this makes it difficult to hack or alter the system as the system is distributed and transparent. This creates an immutable record of assets within the blockchain. Full real-time access and public transparency of ledger changes preserve the integrity, which creates trust in the asset.

Notably, blockchain technology has great stamped out fraud, thus reducing some level of investment risk within transactions. However, the greatest risk you may face, just like with any other investment, is the loss of access to your asset, in the following instances:

  1. If the platform hosting your NFT goes under goes out of business, then you will lose asses to your non-fungible token.
  2. If someone gains access to unauthorized accounts (not through hacking). A case exists, where a musician by the name of 3LAU sold his entire album for $11Million using NFTs on NiftyGateway. It later went missing. According the NiftyGateway, this happened through direct access of the users specific account.

If you are sure that your account is secure. The platform you are hosting your NFT with won’t go out of business anytime soon. Then, the biggest question for you remains…are non-fumble tokens a good investment?

Are NFTs A Good Investment?

Investors use NFTs as speculative investments as their value could easily go to zero or turn around 100. The limited and scarce nature of NFTs, where access is only available through being the owner, allows for their value to grow over time.

How to Make, Buy & Sell NFTs

Non-fungible tokens are made, sold and bought on various marketplaces. Popular of which include OpenSea, Rarible, Foundation, SuperRare and more.

Here’s a quick TL;DR before we jump into it. NFTs are digital tokens stored on the blockchain where each NFT is unique and can be sold as a way to prove ownership over a digital file. This is unlike cryptocurrencies, where each coin is the same and thus fungible.

Making & Selling Non-Fungible Tokens

Actual NFT artwork for instance isn’t stored on the blockchain. However, the link to the file where the asset is stored, along with the token that acts as proof of ownership is. Therefore, you can technically make and sell any digital file as an NFT.

To do so, you should be looking at marketplaces with easy minting tools. However, there are a few considerations you may want to take into account before you make an NFT – transaction fees and the blockchain to use.

Transaction Fees

The majority of NFTs are sold on the Ethereum blockchain. Every transaction on the blockchain costs fees that are paid to the miners. Almost everything you do on the blockchain attracts a transaction fee. Transactions range from minting an NFT, bidding, to the actual sale and transfer – which may or may not pull through in the end.

Notably, there are some marketplaces like OpenSea that allow you to create NFTs and put it up for sale for free. These NFTs are placed up for sale without being written on the blockchain. Only upon sale, the NFT attract a bundled fee. The fees are for writing the NFT on the blockchain and transaction fees such as transfer fees to the buyer. However, there is a catch. To use this service, you’ll need to initialize your account which can be quite expensive.

Blockchain of Choice

So, there are a dozen of platforms you can use to make and sell your NFTs. These platforms can be found across a wide variety of blockchains. This industry is big, and you’ll need to read deeply into each blockchain and choose which suits your needs.

Note:

A few things to note about NFT creation.

If you find these fees impossible, you can create your non-fungible token by yourself. Though quite technical, you can create your smart contract and deploy it to the blockchain of your choice. You can also mint your tokens using it.

Also, note that there is no rule that two or more NFTs cannot exist for the same file. That is different editions of the same file or limited copies. Additionally, no rule that stops someone from taking the file you’ve used for your NFT and creating their own. The blockchain will note the creator as them and not you.

Buying & Selling Non-Fungible Tokens

Just like in traditional investing, the principles of buying high and selling low apply to NFTs as well. Investors can buy NFTs early – hold or flip right away – and sell them for a profit. The market value and price of NFTs is driven by the crypto community that is willing to trade them. As such, NFTs have no intrinsic value like stocks or bonds unless they are real-world asset-backed NFTs.

To trade in NFTs you’ll need a few things:

  1. Cryptocurrencies, stored in a digital wallted linked to your markeplace of choice. NFTs are mostly bought and sold with Ether, thus making Ether the most accepted crypto by NFT providers.
  2. A digital wallet to store your NFT.
  3. A marketplace to purchase your NFT such as SuperRare, Rarible or OpenSea for purchase.

Drawbacks

It hasn’t been all rosy for the NFT market, which has now surpassed over $40 Billion in 2021. Most NFTs are created and traded on the energy-intensive Etherium blockchain. This has drawn much criticism to the industry for its negative effects on our planet’s climate. The high energy costs associated with cryptographic assets resulting from validating blockchain transactions has become a major problem.

Are you an environmentally-conscious investor? If you are, know this – the sale of just one piece of NFT consumes as much energy as a studio uses in two years of operation. It’s just unsustainable. Whilst, the NFT industry is just riddled with shenanigans, scams and legal fights; creators are still making millions.

Takeaway

As an investor, here are your key takeaways:

  1. An NFT or Non-fungible Token is a unique digital tokens that exists on the blockchain network and cannot be replicated.
  2. NFTs are mostly written on the Ethereum blockchain, ergo mainly bought and sold using Ether.
  3. There various marketplaces such as OpenSea, Foundation, SuperRare, Rarible that you can use to make, buy and sell NFTs.
  4. The price NFTs is driven by market demand. Thus the value is based on what someone is offering to pay for it.
  5. NFTs are used to represent real-world physical assets or goods like real estate or artwork.
  6. Transforming real-world tangible assets into digital tokens allows them to be efficiently traded, reducing the probability of fraud.
  7. Before you invest, fully understand the market in order to make better and wiser decisions, and avoid getting swept into the NFT craze.

Image Credits: Top by Rostislav Uzunov from Pexels

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3 Ways to Execute Your Dream

By
Irene Makanga
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0

You would not be here if you were not a big dreamer, and just like me, you believe you can actualize your dreams – even the wildest ones. Truth is, you can. Anything is possible. All you need is an attitude adjustment and a set of specific goals – which are essentially your big dream broken down into specific attainable goals.

Here is how to execute your dream.

1. Dare & Dream Big

Some unknown but really wise person once said that “Life holds special magic for those who dare to dream” – remarkable things always happen when we dare to dream. So when you dream, dream big. Each time, broaden your thinking and reach – so that when you aim for the stars, you may touch the sky.

Turning your dream into a reality can be difficult but not impossible, espcially when you know the ‘how’ and ‘where’ to start. We all dream big, small but we stop short due to that one obstacle the seems insummountable. We tire quickly searching for solutions, not remembering that there is more than one way to skin a cat; ultimately, we fail to keep positive and try another method.

Don’t be that person. Be the go getter you were destined to be.

2. Do: Take Action

“Life is inherently risky. There is only one big risk you should avoid at all costs, that is the risk of doing nothing,” – Denis Waitley.

Take inventory of the skills or knowledge that you need to accomplish your goal. If you aren’t sure, seek out information that will help you determine what skills, tools or knowledge you need to help you achieve your goals. Doing this will help you recalibrate your plan, and make things clearer. And, if you need help, get it. It is key to start, TODAY!

You might also want to consider the following:

Mentorship

In life, there is no problem that you may face that is completely unique, that one one else who has lived before or is living hasn’t faced. We humans are more alike than different. Therefore, it’s important to seek out help from those who have walked in the path we want to walk. You can get a person, read a non-fiction book on the subject, listen to a podcast…in whatever shape or form the mentorship is provided – advice, wisdom, ideas are essential to encourage you and empower you along your journey.

Build A Team

Your dream might require having a team with different skill sets to help you get there. A team is a great way to build and grow fast – with a team, you can help each other, be accountable to one another, accomplish more, track progress, share ideas, network and share resources.

Teams in general can serve as a great source of motivation. You really don’t need to do everything on your own.

3. Strengthen Your Resolve

Hustle & Motiviate Yourself

“The most important thing, number one, is you gotta get rid of doubt. If you got doubt in what you’re doing, it’s not gonna work and the way to do that is you have a plan.” – Nipsey Hussle

Confidence and determination. Get comfortable in discomfort. You need to have a really strong resolve to follow through with hard work, sacrifices, aggresiveness and persistance. Dream killers, will come at you with criticism, opposition and its important not internalize their insecurities. Instead, use it as firewood to keep the fire of your dream burning, bigger and brighter. That way it will be easier to get through whatever obstacles that you go through, and on the other side, great blessings await.

Don’t ever give up without a fight.

Learn From Your Mistakes

You will make alot of mistakes. Mistakes come with being human – not because you are inadequate but because you are like a child learning how to walk. So, do not beat yourself up. Forgive yourself and take failure as a chance to become stronger and smarter. For with each fall, each error, loss and missed oppourtunity, the most valuable lessons can be learned.

Believe in Yourself

In the equation of success, you are the greatest variable. Everything else is doable, but you must first overcome yourself. Things like doubt, laziness, excuses, lack of motivation, lack of self discipline are the main contributors to failure. You must have the faith and patience to work consistently in furtherance of your goals. While at it, enjoy the process of growth as your bigger picture comes into to full view. It will be all worth it in the end.

All Things Considered

When it comes to it, you are the only one incharge of your own destiny. It’s your vision, and it’s only you who can paint that picture as you have envisioned. Althought it might be hard, in the end it will be all worth it – for the biggest reward is in knowing that you never gave up in the first place.

Photo by Ylanite Koppens from Pexels

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How to Close The Financial Gap in Your Financial Plan

By
Irene Makanga
-
0
Wealth Architects - How to Close The Financial Gap in Your Financial Plan

There is a pronounced disparity between perception and reality when it comes to financial planning. A plan needs a well-coordinated smart risk and tax methodology to manage and improve outcomes.

Consider this: salaries tend to grow roughly at the same rate as inflation; however, the cost of education in Kenya increases so drastically over the same period of time. If you had taken on an education policy years ago, particularly to cover university fees, with school fees now almost doubled, it’s a losing battle to trying to keep up.

The Current State Of Affairs

Covid-19 has had a massive effect on our economy. We have had to rethink our lives and deal with disruptions. This is the current state of affairs most people are facing as they review their financial plans:

  • A Higher cost of education sparked by Covid-19 as education institution struggle to maintain the same rate of funding to education.
  • Unemployment or less income for most will derail retirement plans, and reduce savings. There is less clarity; choices based on circumstances and outlook are hampered.
  • Deep financial holes for those unable to make payments to creditors. Also, more and more people are getting into debt to meet household expenses.
  • Women tend to generally live longer than men, therefore need to put away more for retirement.

Learn more: 7 Reasons Why You Should Have A Financial Plan

Closing The Gap in Your Financial Plan

Moving forwards, to close the gap in your financial plan you’ll need to invest more. To do so successfully, you need to do the following:

  1. Control your emotions, particularly your fears. This will allow you to make more rational decisions and hence make good investment decisions.
  2. Have a smart investment strategy that takes into consideration all aspects of risk and tax to improve outcomes at the end of the investment horizon.
  3. Preserve wealth. Live within your means, and adopt wealth preservation methodologies.
  4. Close the financial literacy gap. Read. And, read widely – current affairs, biographies and educational materials/books to expend your scope of what is possible and what is available to you.
  5. Take to your financial advisor. Have a progress conversation against your objectives, which reiterates your hopes, fears, dreams and priorities. This will help you better adjust your portfolio, and quality the benefits of your current plan by revealing a clearer roadmap.

Learn more: How to Accelerate Your Personal Financial Growth

The Bottom Line

Understanding the current state of affairs and seeking ways to navigate to close the gaps in your financial plan is key to make informed, impactful decisions over time. Going forward, adjust your circumstances as your outlook changes.

Happy Building!

Image credits: Top by Gabby K via Pexels

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The Importance of Compound Interest And Reinvestment

By
Irene Makanga
-
1
Wealth Architects - The Importance of Compound Interest And Reinvestment

When I was much much younger, I watched an episode of Futurama that really stuck with me. It was episode six, ‘A Fishful of Dollars’, when Fry rediscovers his old bank account. In the year 2000, before the spending 1000 years frozen in a cryogenic tube, Fry had a bank account balance of 0.93 cents working as a Pizza Delivery boy in New York City. Then, he returns in the year 3000 and rediscovers his old bank account with a staggering balance of $4.3 billion, accumulated over 1000 years thanks to compound interest.

Lets do that math: 0.93 Cents, 1000 years, compounds to $4,283,508,449.71 (exact figure revealed in the episode), was actually invested for 2.25% interest.

Well, time machines haven’t been invented yet, but what this episode taught me is that, even with a modest interest great things are possible. It proves that given enough time on your side, even a meagre investment such as 0.93 cents, can grow into something.

Therefore, as savers, we are always looking for ways to grow our money exponentially and beat inflation at the same time. As such, I am not talking about just investing for compound interest, but also reinvesting investments. Reinvesting your returns is key to turning small investments into huge returns. It allows interest to also earn it’s keep by generating interest as well. The more we reinvest, the more money we accumulate over time.

The Power of Compound Interest

Compound interest is a real-world phenomenon famously highlighted by Albert Einstein, who famously said that “Compound interest is the 8th wonder of the world.  He who understands it, earns it; he who doesn’t, pays it.” Compound interest generates exponential growth – something that most of us do not truly understand. In finance, exponential growth is always lurking behind debt, inflation and compound.

Think about how a KES 1000 debt, quickly grows to KES 200 interest after a short-period of time. Also, think about how KES 100 was more than enough to buy several household items back the year 2000 – just 20 years later, you can only buy a bag of flour. This is how the compounding effects creep – higher and consistently – ratcheting up, costing us more.

In spite of its ugly side there is a beauty to it. The to key is to understand it and apply it by garnering enough momentum to break free from the aforementioned opposing powers (particularly inflation). To bear inflation, you’ll need to invest your savings into an investment that pays higher interest. Don’t just park your money in the bank to lose it safely.

Imagine if Fry had bought stocks with his money. We would be talking about an insane amount now.

Learn more: Is the Bank A Place to Save Money?

Time x Interest

The key to reinvesting for savers is to generate interest over interest by applying interest rate on initial capital multiple times as well as on returns that will be generated. The fundamental variable for this is time, as the more time you give your investment, the more money you accumulate

Here is a simple demonstration of the snowballing returns over time upon reinvestment of a coupon:

Let’s say we have a KES 100,000 of a bond, with a annual coupon rate of 10%. Our first coupon is 10% of KES 100,000, KES 100,000. If we reinvest our coupon, the next year we will have KES 11,000 in principal. Our second coupon payment will be 10% as well of KES 11,000, KES 1,100.

  • Total returns with simple interest: KES 100,000 X 10% X 10 Years = KES 100,000 interest plus KES 100,000 capital repaid = KES 200,000 returned.
  • Total return with compound interest: KES 100,000 X (1+10%)10 = KES 259,372 returned (KES 159,372 interest and KES 100,000 capital repaid).

With this example, it is evident that investors who reinvest their coupons reap the most benefits from bonds.

Growing Your investment with Compound Interest

Four things you need to do to grow your investment with compound interest:

  • Invest for longer periods. The more years invested (i.e. compounding periods) the more interest you will generate.
  • Invest for growth. Leave you investment alone – making any withdrawals will not compound effectively
  • Start early. To adequately enjoy growth without taking on too much excessive risk to meet your investment goals, start investing as early as possible.
  • Reinvest all returns. Reinvestment dividends, bonds, rental income and more to keep your money growing. Reinvesting allows us to maximize returns.

Learn more: How to Make 20% On Dividend Yields Every Year

Investments That Give Good Compound Interest

Many different types of investments offer impressive rates of compound interest. However, you need to consider how long you are willing to tie up your money for against what the returns will be.

You can invest in:

  • CDs (Certificate of Deposits)
  • Unit Trusts such as the money markets funds
  • REITs ( Real Estate Investment Trusts)
  • ETFs (Exchange Traded Funds)

All in all, weigh up the risk and rewards, and work out the duration of your investment.

Learn more: How to Save Smart With A Certificate of Deposit Ladder

The Rule of 72

If you want to estimate how long it will take you to double your money through compounding, consider using the rule of 72. You simply divide the number 72 by the yearly interest rate you earn from your investment.

Example – if you are investing your funds at 10% interest, it will take you 7.2 years (72÷10) to double your investment if left untouched.

A few things you need to note:

  • This rule only provides a quick estimates.
  • It tends to only works as long as the interest rate is less than 20%.
  • It doesn’t take into consideration the changes that may take place in the duration of your investment.

Learn more: How Time Can Turn KES 20,000 into KES 10M

The Importance of Reinvesting

A lot of people lack the patience needed to accumulate wealth slowly using compound interest. Though we don’t have 1000 years to spare, a time machine or cryogenics tube to wait things out, all is not lost. We can still take advantage of the power of exponential growth in our lifetime. Therefore, I want to stress the importance of compound interest, particularly in reinvesting your returns to a maximize capital.

The way things are now, as savers, we need to look for all alternatives that allow us to reach our investment objectives in the future. So, if you aren’t already taking advantage of compound interest with your investment, you aren’t maximizing. Maximize, and ensure that you are on track to meet your overall investment goals over the next 10 to 20 years.

Happy Building!

Image credits: Top by Gabby K via Pexels

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Why New Year’s Resolutions Are Pointless

By
Irene Makanga
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0
Why New Years Resolutions Are Stupid

On this day, the 28th day of 2021, Let’s review the year so far.

Have you abandoned you all your New Year’s resolutions yet?

Be honest.

If you haven’t yet, you will soon – I’m sure. Hang in there!

Resolutions are pointless anyway – they are merely phony goals.

Why?

Because we put too much emphasis on the declaration of change and not the actual action of change. Declaring that you will lose weight this year, for instance, turns out to be the actual achievement when we set new year’s resolutions. We look at our goals and feel proud of ourselves for setting them, even before achieving the actual work – which is harder to do.

Thus, goals are merely the willpower to delay gratification (override unwanted thoughts, feelings or impulses) in order to meet our long-term goals – which is very hard to do. Take the case of a smoker trying to quit or someone trying to lose weight. They try for a while, but the pain caused by the delay leads them back to where they started.

That is why 92% of us abandon our new year’s resolutions by the end of January – when reality finally sinks in.

Here is how to never set New Year’s resolutions again and fail:

A: Realize Life Is A Marathon

Every year we disembark to set goals to cross off on a list like writing a book or going on a month-long vacation. In reality, all the stuff that is worth living for is process-oriented – good health, wealth, relationships, spirituality, and happiness. These things cannot be crossed off a list. They never finish because you will live to strive for them until the day you are six feet under.

These things require an entirely different working system for achievement. After all, life is not a sprint, but a marathon. Rather than setting new year’s resolutions, try setting yourself up for a win by mastering the correct process that will produce the desired outcome.

Give me six hours to chop down a tree and I will spend the first four sharpening the axe – Abraham Lincoln.

Learn more: How to Get the Best Value Financial Advice

B: Lead, Don’t Lag

So, let’s skip the New Year’s resolution this year. Instead, let’s strive to learn how the process works to achieve the most important objectives in our lives. That means, we lead our lives, not lag with goals.

What do I mean by this?

Lag means to fail to keep up. The new year’s resolutions (goals) we set are lag goals because they lag behind the efforts we put out today. This makes them harder to control and cannot be achieved instantly. Therefore, they are more like dreams or something you hope to achieve one day unless you really put in the effort.

Lag goals are things like earning a six-figure salary, writing a book and more.

What I am asking, is that you lead your life in the direction you want it to go with leading goals or objectives. These are smaller daily goals, that should ultimately drive you to your lag goals. They are easier to control and often become good habits. For instance, practising gratitude every day leads to better health, better thinking, better decisions and finally better outcomes. The effort you put in each day – today, tomorrow and every day that comes – allows you to actively achieve your lag goals.

For instance, to achieve your weight loss goal, you’ll realize you can only control two things: diet and exercise – unless you opt for cosmetic surgery that is. Recognizing learning to eat right or running every day is a system that substitutes knowledge for willpower.

Learn more: How to Set Effective Financial Goals You Can Actually Achieve

C: Three Things

Going forward, here are three things you need to incorporate into your life:

#1: Prepare yourself for a high-performance life

Take care of your mind and body. Everyday use visualization techniques to image positive life outcomes in everything you do, talk to yourself positively and adopt a good morning routine that will fire you up every day. This will condition your mind to react well under pressure.

Also, consider learning to each healthier – foods that will increase your energy levels – and stay hydrated throughout the day.

#2: Adopt high-performance habits

Let go of bad habits that are not serving you and seek out good habits. Whatever the outcome you are seeking, learn habits that will steer you on the path of your desired outcome. Then practice those habits and master them.

For instance, if you want to be more creative, adopt the habit of reading more to expand the scope of your mind. Non-fiction, in particular will broaden your horizon, help you develop new ideas and offer actionable advice.

#3: Build a high-performance system

A good system that you’ve mastered well will increase your chances of success. A system prepares you for opportunities that are yet to present themselves. It allows you to continuously upgrade and surpass every expectation you may have set for yourself. Thereby, moving you from a place of low odds of success to a place of high odds.

For instance, if your ultimate goal is to network more this year. A great place to start in building a network is building a system that will support that network i.e. effective communication from you. For instance, you’ll need to be a good listener – listening is central to communication and inevitably building a network.

If you practice listening in every conversation you have with people – no matter how big or small – and take note of their non-verbal cues, you’ll learn more and understand them better. With time, it will become a habit that pays off big dividends as the people around you will feel more valued – thereby allowing you to cultivate better personal and professional relationships.

You don’t rise to the level of you goals. You fall to the level of your systems – James Clear, Atomic Habits

Take Action

I sincerely hope that you take action this year. Break down those lag goals to create daily lead goals that will lead you to your desired outcome. If you do that, 2021 will be your best year yet – powerful, productive and purposeful. That is my intention for you but you have to be the one to follow through the three things to make it happen.

Happy Building!

Learn more: 10 Achievable Personal Financial Goals for The New Year

Image Credits: Top by freestocks.org via Pexels

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Easy Real Estate Math Every Beginner Should Know

By
Irene Makanga
-
0
Wealth Architects - Easy Real Estate Math Every Beginner Should Know

Real estate investment has some guidelines every investor needs to follow in order to be successful. There are several math formulas that investors use to identify the best rental property investment opportunities and property management.

Here are some common real estate math formulas every beginner investor should know.

The 1% Rule

This real estate rule of thumb states that your monthly rental income should be equal to or greater than one per cent of the purchase price of an investment property. To find out if a property meets the one per cent rule, you’ll need to apply the following formula:

(Rent ÷ Purchase Price) x 100

For example: Take an investment property that costs Ksh. 5M, and rents for 40,000 per month:

(40,000 ÷ 5,000,000) x 100 =0.8%

This property comes under the one percent rule, and therefore an investor using this as a hardline guide to assess real estate investment deals, would systematically reject this deal.

The 1% rule is a useful tool to quickly estimate how property will generate cash flow. It can also serve as a guide to set rental rates if the property is unoccupied. However, note that this rule doesn’t account for property expenses such as mortgage, repairs and maintenance, insurance, taxes etc.

Learn more: How to Profit With Real Estate Regardless of The Economy

The 2% Rule

A more extreme variant of the 1% rule mentioned above.

The 2% rule is used to assess whether a real estate investment deal is good or not. This rule is applied by multiplying the price by 2% to determine the gross monthly rent the property needs to generate in order to remain profitable.

i.e. Purchase Price x 2% = Monthly gross rent needed to satisfy this rule.

For example, the purchase price of a certain property you intend to acquire is Ksh. 5M, then you’ll need to generate at least 100,000 in gross monthly rent to satisfy the rule.

The aim of an investor utilizing this rule is to only consider extremely cash positive properties that will generate enough cash to cover expenses and provide a cash cushion for vacancies and unexpected maintenance.

However, this rule isn’t without its own limitations. It can be quite difficult to find properties that meet this criteria, unless you are buying a property from a distressed seller or the real estate market is extremely weak.

The 50% Rule

The 50% rule stipulates that you should estimate an expenses ratio of 50%. That is to say that your operating expenses should be 50% of your gross rental income.

Therefore, if your property makes Ksh. 1.2M per year in gross rents, you should assume that Ksh. 600,000 will go towards expenses. This does not include mortgage payments.

Property expenses include, insurance, taxes, maintenance/repairs, utilities, property management fees and reserve funds.

This rule is important for investors as it allows investors to make quick ballpark estimates when analysing deals before making the decisions to do a full-fledged analysis.

The 70% Rule

The 70% rule is typically used in house flipping when determining the maximum price you ought to consider paying for a property. This rule dictates that you should pay no more than 70% of the after repair value (ARV), minus repair costs.

The after repair value of the property is essentially, the esimated value of the property after all the work is done to completion. The value at which you’d sell the property for after doing all the repairs.

Let’s use some simple math.

If a property’s ARV is Ksh. 5M, and needs Ksh 1.25M in repairs, then the 70% rule suggests that the most you should pay for it is Ksh. 2.25M

i.e. [Ksh 5M (ARV) x 70%] – Ksh 1.25M (repair costs) = Ksh. 2.25M

The main idea here is that removing that 30% from its value, will leave room for profits and other miscellaneous expenses.

Note, this is a very loose guideline meant to offer a quick reference when evaluating potential deals. The reality of things can, and may very well be entirely different.

Learn more: How to Make Money in Real Estate

Gross Rent Multiplier

The Gross Rent Multiplier (GRM) is an easy method to estimate the value of any income-generating real estate. It can be used to quickly assess whether a rental property will be profitable or not as, market conditions change.

Here is how its calculated:

Gross Rent Multiplier = Property Price ÷ Gross Rental Income

For example, suppose we have a property priced at Ksh. 5M, and an estimated gross annual income of Ksh. 0.48M, the Gross Rent Multiplier will be as follows:

Ksh. 5M ÷ Ksh. 0.48M = 10.4 GRM

Since the GRM compares a property’s asking price against its gross rental income, its a good way to assess how quickly the property will be paid off from its gross rent. In this example, it will take a little over 10 years.

However, note that this figure doesn’t includes expenses such as repairs, taxes, insurance and more. Therefore, it may actually take longer.

Occupancy Rate

The occupancy rate reflects how much rental space is occupied or the number of days the property is occupied by a tenant (in the case of short-term rentals). This is one of the most important indicators in real estate for success, as low occupancy rates can let you know that you need to do something.

Occupancy Rate = (Total Number of Occupied Units ÷ Total Available Units) x 100

For short-term rental, you can use:

Occupancy Rate = (Number of Days Occupied ÷ Number of Days in a Year) x 100

Debt Service Coverage Ratio

The Debt Service Coverage Ratio (DSCR) is used to measure the ability of a rental property to use its cash flow to pay its debt obligations. It shows you whether you have enough income to pay your debts.

The ratio is computed as follows:

DSCR = Net Operating Income ÷ Debt Obligation

For instance, take a property with net operating income of Ksh. 0.6M per year and an annual debt obligation of Ksh. 0.45M. The DSCR in this case will be:

0.6M ÷ 0.45m = 1.3x

A property with a DSCR of more than 1 is considered profitable, while as one with a DSCR of less than one is losing money. Essentially, if your property has a low DSCR, it will be difficult to pay back the loan on time or even get additional funding.

Learn more: Things You Need to Know About Investing in Real Estate In Kenya

Bottonline

There are many more real estate math formulas used. As you take the time to study more about the industry, you’ll come across them. Here, we only took a look at some of the ones we think are important and maybe helpful as you start your journey.

For any real estate investment you make, ensure that you do not substitute any of these formulas for in-depth analysis. Before, you make an offer, ensure that you do your homework – take additional time and effort to analyze any deal to great detail.

Happy Building!

Image credits: Top by Thirdman from Pexels

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Things You Need to Know About Investing in Real Estate In Kenya

By
Irene Makanga
-
0
Wealth Architects - Things You Need to Know About Investing in Real Estate In Kenya

Investing in real estate in Kenya has a good reputation as a wealth-generating avenue bringing good returns. The great secret of earning good returns in real estate lies in understanding the fundamentals of real estate and focusing on purchasing the best.

But first, let us address the things that could cause you the biggest problems when investing in real estate in Kenya. To avoid any complications when investing in real estate, ensure you do things right – take no short cuts – and check the following:

  • The validity of the title deed. This is a must and shouldn’t be taken for granted.
  • The zoning of the property. Be aware of the zoning laws and take note of your target property’s zone.
  • The land rates and taxes. Ensure that you know the status of land rates and taxes on the property you seek to acquire – paid or not paid.
  • Caveats or pending disputes. Check if they are any caveats against your target property or any pending disputes on ownership.

As always, I will further emphasis on the importance of doing your own research. Save yourself the hustle and headache – just avoid being another case study. Be as thorough as you can be and glean the best advice before buying any investment property. Also note that just like any other investment, there are no guarantees. But, for those of you who prefer investing in tangible things, here are some important facts about investing in real estate in Kenya that you need to know.

Important Facts About Investing in Real Estate in Kenya

Some important facts about investing in real estate in Kenya that you need to know:

#1. Real Estate Makes A Good Retirement Investment

Investing in real estate is one of the best ways to secure early and safe retirement. If you are willing to invest years and patience, then real estate is the best way to build a steady source of retirement income. However, you’ll need to invest some time to build the knowledge, the skills needed and the guts to invest in real estate.

#2. Real Estate Offers Protection Against Inflation

Real estate investment offers the best protection against inflation. As inflation rises, so do property values and rents. This allows you to earn more over time and keep pace with the rise in inflation rates.

#3. Real Estate Has Tax Benefits

Investing in real estate has many tax incentives and benefits. Owning investment real estate allows you to make certain expense deductions such as insurance and mortgage expenses. Additionally, you can depreciate the cost of any income-generating property over time – which unfortunately can be recaptured upon sale and taxed as ordinary income.

However, when you sell an investment property, the profits on sale are taxed as capital gains, which is a much lower tax rate than ordinary income tax.

Learn more: How to Make Money in Real Estate

#4. Real Estate Builds Wealth

Buying real estate is one of the most efficient ways to increase your net worth quickly. However, it is important to note that it isn’t a get rich quick scheme either. It takes time and patience to build serious wealth with real estate.

#5. Real Estates Can Easily be Maximized Through Leverage

With real estate, you can easily use leverage to maximize you returns by putting less cash in each property investment.

Even with little to no income, you can leverage and build wealth with real estate. You can use bank money to acquire properties and your tenants pay your mortgage – which over time will enhance your equity in the market while the market value of the property increase.

Learn more: How to Create Wealth by Investing in Real Estate

#6. Real Estate Has Low Barriers to Entry

The barriers to investing in real estate aren’t as high as most people perceive. You don’t need an extraordinarily huge amount of money to invest in real estate – just the bare minimum down payment and the rest can be leveraged.

The other low barrier is knowledge. This can easily be overcome if you take the time to learn about investing in real estate. There is a lot of information out there – books, podcasts, seminars and so much more – most of which is free.

#7. The One Per Cent Rule

The one per cent rule states that the rent of your target investment property should be equal to or more than one per cent of the total purchase price. Real estate investors utilize this rule when analysing real estate investments, as any property that meets this will have a shorter investment payback period.

Here is how its calculated:

(Rent ÷ Purchase Price) x 100

i.e. (20,000 ÷ 4,500,000) x 100 = 0.4 (This property falls way below the one percent rule)

Note that this rule doesn’t account for property expenses that you may incur – i.e. loan, repairs, insurance and more. It also isn’t and makes of break benchmark for investors. It is quite useful though, as a screening tool and estimating cash flow of a rental property.

At the end of the day, everything boils down to your personal goals and criteria as an investor i.e. how well does the property fit your needs.

#8. Location is Everything in Real Estate

The price of an investment property and the rent it attracts is greatly determined by location. Appraisers consider location when determining a property’s value by comparing it with other similar properties in the same geographical area.

Therefore, if you don’t have much when it comes to buying an investment property in the best locations in the country, consider purchasing the worst property in the best location and upgrade it to meet the standards of the said location.

Learn more: How to Profit With Real Estate Regardless of The Economy

Tips on Getting it Right

  • Ensure that you have a strong grasp of personal finance before investing in real estate. Do your research, read widely and get to know what successful real estate investors do.
  • Network widely with other people who are investing in real estate. This will enable you to gather information and also provide some understanding of what it’s like to actually invest and own real estate in kenya.
  • Do the math well – consider optimistic and pessimistic scenarios. If you are taking a mortgage to finance your buy, ensure you calculate how much profits you need without being above market price. Also, gauge how quickly you will be able to recover your investment. Note that property prices fluctuate depending on location and other unforeseen circumstances.
  • Understand the types of property you want to invest in and the target tenant. Ensure you understand the intricacies of such an investment and also understand what your potential clients are looking for.
  • Get to know your target location. Take note of the various amenities, transport, security, and the possiblities for growth of the area. Also, know the vacancy rates in the area and understand the local average rent rates.
  • Have a cash reserve. Cash research will come in handy when unforeseen circumstances arise. Such times like during property purchase for hidden fees, initial unforeseen maintenance, repairs and other expenses in case there are no occupants or generally other unforeseen circumstances.
  • If you decide to take out a mortgage to finance your purchase, understand the terms and the interest rate. Know the risks and find ways to mitigate them.
  • Finally, decide whether you want to self manage your property or get a professional manager. Self-management is time-consuming but cheaper. Understand that you’ll need to set time aside to do repairs, conduct viewings and advertise for vacancies. Professional management offers access to a great network of service providers (i.e. plumbers, electricians etc) and potential tenants.

Real Estate Investment Options

Here we will only focus on the direct forms of real estate investment options that exist in Kenya. In direct forms of real estate investment, investors can invest in real estate by purchasing:

a. Residential property. You can purchase housing units i.e. apartments, villas, mansions, bungalows and more, then lease it out for dwelling purposes.

b. Commercial property. When the economy is doing fine, commercial real estate offers a more stable income. This is because lease agreements on commercial real estate are for longer periods and include a rent increments clause over the lease period.

c. Land. In Kenya, people mostly buy land for speculative reasons. They purchase the land with the aim to sell it later at a higher price and realize great returns. You can also choose to buy land and construct residential or commercial real estate on the land, for sale or lease.

Learn more: How to Become a Real Estate Investor this Year

Overall

For any time of investment, you should always do your research and plan for the worst-case scenario and devise an exit plan. Investing in real estate in Kenya (or any other type of investment in Kenya) is no different.

All in all, put your best foot forward and invest.

Happy Building!

Image credits: Top by Nataliya Vaitkevich via Pexels

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How to Profit With Real Estate Regardless of The Economy

By
Irene Makanga
-
0
Wealth Architects - How to Profit With Real Estate Regardless of The Economy

Successful investing in real estate requires managing risk, not avoiding it.

Due to the Covid-19 pandemic, the real estate market has tremendously slowed down. Last year, landlords were faced with the continued problem of rents and vacancies, while property prices fell due to the Covid-19 economy fallout. Before that, the real estate market rose year after year. If you were hoping for a breather in the property market after years of continued growth, this is your chance to snatch up a property at a bargain.

Real estate investing has always been a solid investment, despite the hiccups here and there. Most investors invest in real estate to speculate or hedge against inflation. If your goal is to build real wealth after inflation, you’ll need to note risk and balance this risk with reward.

The Risks of Investing In Real Estate

Real estate investing involves risk and reward – and the higher the risk, the greater the potential profits and losses. This does not mean that you shouldn’t invest in real estate, it just means that you should take extra precautions before doing so. Knowing the risks of investing in real estate, makes it easier to identify the trouble spots and minimize any surprises along the way.

Here are four of the main risk factors you should consider when evaluating any investment property:

A: Market Risk

The real estate market has it’s own ups and downs tied to the economy, interest rates, inflation and other market trends. Investors cannot eliminate market risk, but they can hedge it with a diversified portfolio and strategy.

B: Asset Specific Risk

The asset-specific risk is a risk that is unique with each property and independent from another; hence, a risk that can be diversified when combined with another asset. For instance, there is always a demand for apartments in good and bad economies, making them low-risk but yield lower returns.

C: Credit Risk

The length and stability of the property’s cash flow income are what drives its value. The credit risk of a mortgage on an investment property depends on the financial performance of the underlying property. The stronger the ability to turn cash, the less this risk is.

D: Leverage Risk

The more debt you have on your investment, the riskier it is. Leverage is a force multiplier: It can increase your portfolio of properties and increase returns if things are going well but, when they aren’t you’ll lose quickly and a lot.

E: Idiosyncratic Risk

Idiosyncratic risk is a type of asset-specific risk that is inherent. This type of risk can negatively impact the property such as location, environment and more. For example, if a property is located in a bad neighbourhood, this fact will negatively affect its market value and potential. Additionally, environmental factors such as pollution, political risks and even workforce risks for commercial property can affect the potential earnings and value of a property.

Learn more: Ways to Turn Single-Family Homes Into a Cash Cow

Balancing The Risk & Reward of Real Estate Investing

In order to consistently profit in real estate, regardless of the economy, you’ll need to strike a reasonable balance between risk and reward. This means you’ll need to identify the risks you are likely to face and create mitigative solutions to help you strike that delicate balance between that risk and reward.

Here are four basic rules for managing risk to build wealth in real estate, regardless of the economy:

#1: Finance With Fixed-Rate Mortgage

A great way to balance the risk of property devaluation and cashflow problems due to vacancies, long-term fully amortized fixed-rate mortgages is the way to do. If your goal is to build wealth after inflation, a fixed-rate mortgage will protect you from sudden increased in payments if interest rates rise during inflation.

Avoid fancy variables on your mortgage such as balloon payments, adjustable mortgages and short-term loans. These options transfer interest rate risk to you and can destroy your investment.

#2: Invest Well

Real estate investing is typically meant to be a long-term hold deal and require heavy investment. Thus, invest well and be picky about what properties you add to your investment properties. Right now, there are many sellers out there that are hungry to make a sale. Don’t rush your investment deals and don’t accept marginal return deals.

#3: Safety in Cash flows

A good deal is one that provides significant positive cashflows from the day you close on the purchase. Positive cashflows give you an infinite holding period since you’re paid to own and more room for error if things go bad.

When there is inflation, you’ll do extremely well and when there is deflation, the cashflows will help you weather the storm long enough to wait out the eventual return of inflation. This validates this strategy.

#4: Deleverage

When an economy is struggling, leverage tends to be the root cause of the credit problems. Therefore, be wise about it and avoid making the same mistake. The goal is to build wealth in real terms after inflation and to achieve this do not over leverage. Higher leverage may force you to abandon your property before inflation finally returns to validate your investment strategy. In short, decreasing your leverage increases your margin of safety and cashflow.

I would then estimate a good leverage position to lean towards 50%-70%, no more than 75% financing, but the final number is dependent on the quality of deals you get, market conditions and other factors beyond the scope of this post.

Learn More: 7 Common Mistakes to Real Estate Investing to Avoid

Bottom line

It is important for you as an investor to remain focused on your investment goals and strategy. If you are in it for the long-term, you’ll experience several fluctuations over the period of your investment, so just stay rooted. Stick to the basics. Investing in good quality real estate with strong positive cashflows, you’ll be better positioned to weather inevitable economy ebbs and flows.

Happy Building!

Related: 7 Common Mistakes to Real Estate Investing to Avoid

Image credits: Top by Maria Sofia from Pexels

Article Source

Business Daily. “Land, Housing prices decline on Covid-19 slowdown, https://www.businessdailyafrica.com/bd/economy/land-house-prices-decline-on-covid-19-slowdown-2298312.” Accessed on 30th December 2020.

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