Author Topic: 5% return, would you do it?  (Read 7472 times)

RecoveringCarClown

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5% return, would you do it?
« on: July 09, 2015, 01:43:09 PM »
I have the opportunity to get a extremely low risk return of 5%.  I know this isn't a very high return, but the risk is practically nil, my gut says it is stupid not to invest a sizable portion.  Am I crazy?

StressLess

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Re: 5% return, would you do it?
« Reply #1 on: July 09, 2015, 01:47:33 PM »
5% risk free??

what is it?

That's a pretty high rate of return for no risk....

waltworks

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Re: 5% return, would you do it?
« Reply #2 on: July 09, 2015, 01:49:36 PM »
Would need more info. Is it liquid? Insured by the federal gov't in some form? Backed by tangible property? Involves family or friends?

For a liquid investment at arms length with a reputable company, I'd probably invest, assuming it really is very safe. If illiquid and/or involving family or friends, no way.

-W

I have the opportunity to get a extremely low risk return of 5%.  I know this isn't a very high return, but the risk is practically nil, my gut says it is stupid not to invest a sizable portion.  Am I crazy?

Financial.Velociraptor

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Re: 5% return, would you do it?
« Reply #3 on: July 09, 2015, 01:54:12 PM »
I use three closed end municipal bond funds in my taxable account: NIO, NEA, IQI.  All are currently yielding above 6% and it is worth 25% more to me due to marginal tax bracket.

Is this investment safer than a broadly diversified bundle of municipal bonds?  I'm doubtful.

thedayisbrave

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Re: 5% return, would you do it?
« Reply #4 on: July 09, 2015, 02:02:01 PM »
30 year treasuries are returning right around 3% currently (the 'risk free' rate).

What does this "extremely low risk" entail? That would be my question. 

There is no free lunch...

BarkyardBQ

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Re: 5% return, would you do it?
« Reply #5 on: July 09, 2015, 02:23:37 PM »
Is this investment vehicle covered in your Investment Policy Statement? http://www.bogleheads.org/wiki/Investment_policy_statement

Yes, invest according to your Asset Allocation.

No:
Opt1: Don't invest.
Opt2: Wait til your prescheduled review to revise your IPS and add it.

Don't have an IPS... you should make one first and see if this investment aligns with your goals and plan.

RecoveringCarClown

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Re: 5% return, would you do it?
« Reply #6 on: July 09, 2015, 02:44:53 PM »
It is a small company 300% asset backed, has year over year growth 15yrs running, zero defaults, leans, or anything bad. This is really my idea, the owner was securing some financing for a small expansion and I know his loan rate is ~6%. He could do better elsewhere but will only deal with one local bank. I briefly talked the idea with him and he is thinking about it.  Term is 5yrs or less, he has never had a loan go to term as he hates debt.  I did do some business with him in past and he paid ahead of schedule. This would be several times more than that amount.  My main hesitation is that I tie that money up, although I have no good plans for it right now, see below.

Does it follow my IPS?  Yes. I have a percentage hold back (outside of my 401k, taxable accounts, pensions, etc.) that I use "if something interesting comes along"  if nothing does, I dump it into my house for the guaranteed 3%, if something does that beats that, I investigate it.  That strategy may not be for everyone, but it has served me very well.

Midwest

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Re: 5% return, would you do it?
« Reply #7 on: July 09, 2015, 02:46:31 PM »
It is a small company 300% asset backed, has year over year growth 15yrs running, zero defaults, leans, or anything bad. This is really my idea, the owner was securing some financing for a small expansion and I know his loan rate is ~6%. He could do better elsewhere but will only deal with one local bank. I briefly talked the idea with him and he is thinking about it.  Term is 5yrs or less, he has never had a loan go to term as he hates debt.  I did do some business with him in past and he paid ahead of schedule. This would be several times more than that amount.  My main hesitation is that I tie that money up, although I have no good plans for it right now, see below.

Does it follow my IPS?  Yes. I have a percentage hold back (outside of my 401k, taxable accounts, pensions, etc.) that I use "if something interesting comes along"  if nothing does, I dump it into my house for the guaranteed 3%, if something does that beats that, I investigate it.  That strategy may not be for everyone, but it has served me very well.

Liquid assets?
How do you plan to secure?

waltworks

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Re: 5% return, would you do it?
« Reply #8 on: July 09, 2015, 02:49:30 PM »
Personal relationship with owner of small business? No way. I'd stay far away.

johnny847

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Re: 5% return, would you do it?
« Reply #9 on: July 09, 2015, 03:03:52 PM »
Personal relationship with owner of small business? No way. I'd stay far away.

This.
More often than not I would value my relationship with the owner far too much to let the relationship possibly blow up if the company can't pay back the loan.

OP, you can get better than 5% return by chasing bank bonuses. However, this is not scalable. http://www.doctorofcredit.com/best-bank-account-bonuses/
One going on right now is a $125 bonus. To avoid fees on the account you're going to have to keep $1500 on deposit for up to 120 days. That's a 8.33% return in 4 months.

Mississippi Mudstache

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Re: 5% return, would you do it?
« Reply #10 on: July 09, 2015, 03:12:08 PM »
I get 5.125% return simply by paying off my mortgage early, but it's not an ideal investment, because it it's not liquid. I end up throwing an extra $50 a month at the mortgage for good measure, and I did drop $20,000 on it last year that was in excess of what I could invest in tax-deferred accounts. Still not sure if that was the right call.

milesdividendmd

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Re: 5% return, would you do it?
« Reply #11 on: July 09, 2015, 03:44:08 PM »
No way.  If it's secured risk free debt why doesn't he get a bank loan for less than 5.25%?

RecoveringCarClown

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Re: 5% return, would you do it?
« Reply #12 on: July 09, 2015, 05:23:28 PM »
No way.  If it's secured risk free debt why doesn't he get a bank loan for less than 5.25%?

See above, he is one of those guys that will not deal with anyone he can't talk to in person and won't travel, thus local small town bank only. Does not really use the internet at all.  Stuff like this kills me and I see it all the time as someone that deals in a lot of different businesses. His would explode if was willing to work outside of any comfort zone at all.  Some guys like to keep it small I guess, less risk, but also less risk of getting filthy rich. :)

milesdividendmd

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Re: 5% return, would you do it?
« Reply #13 on: July 09, 2015, 05:32:01 PM »
The fact remains,  I would trust a bank to underwrite a loan, not a friend.  Will you be writing a loan document with colalateral? Tough to be objective about your actual credit risk when dealing with such an acquaintance.

waltworks

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Re: 5% return, would you do it?
« Reply #14 on: July 09, 2015, 05:33:20 PM »
Loaning money to friends or family is, for me, a Pascal's wager sort of situation. It's unlikely that there will be a problem - but if there is, it will be BAD. So I just flat out don't loan money to friends or family.

-W

innerscorecard

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Re: 5% return, would you do it?
« Reply #15 on: July 09, 2015, 08:55:54 PM »
5% does not seem like an adequate return here, given the circumstances.

a1smith

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Re: 5% return, would you do it?
« Reply #16 on: July 09, 2015, 09:21:02 PM »
I use three closed end municipal bond funds in my taxable account: NIO, NEA, IQI.  All are currently yielding above 6% and it is worth 25% more to me due to marginal tax bracket.

Is this investment safer than a broadly diversified bundle of municipal bonds?  I'm doubtful.

Interesting, just looked at these.  So why have the muni CEF's had discount drop down to -10% to -12% range?  Looks like drop from previous discount level started around 1Q 2013 for all three.  With discounts where they are now the yields are 6.0-6.4%.

clifp

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Re: 5% return, would you do it?
« Reply #17 on: July 10, 2015, 01:34:12 AM »
5% does not seem like an adequate return here, given the circumstances.

Typical hard money lending rates are 10-12%. 
5 year CD are 2.25%
5 year corporate for a large firm with medium credit B+ would be about 7%.

I don't think 2.75% over a CD is enough return to cover the risk. What if the owner gets hit by a car and his idiot son takes over? Are you in position to effectively foreclose on the business.
300% asset coverage is good.  I'm getting 8% on a convertible note that I've made to a small business.

That said I don't think it is the worst idea and 7%-8% I'd probably do it.

uwp

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Re: 5% return, would you do it?
« Reply #18 on: July 10, 2015, 11:18:54 AM »
I use three closed end municipal bond funds in my taxable account: NIO, NEA, IQI.  All are currently yielding above 6% and it is worth 25% more to me due to marginal tax bracket.

Is this investment safer than a broadly diversified bundle of municipal bonds?  I'm doubtful.

Interesting, just looked at these.  So why have the muni CEF's had discount drop down to -10% to -12% range?  Looks like drop from previous discount level started around 1Q 2013 for all three.  With discounts where they are now the yields are 6.0-6.4%.

Nothing against muni bond CEFs, but I wouldn't necessarily call them a "safe."  Those CEFs have durations ~8 and will likely get smacked pretty hard if rates go up.  (I think all three are down YTD.)

BTDretire

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Re: 5% return, would you do it?
« Reply #19 on: July 10, 2015, 02:09:58 PM »
Who's in charge of paying you if he happen to die?
 Maybe a second generation that milks the business until it dies.
 Look into some short term dividend prefered stocks.

Indexer

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Re: 5% return, would you do it?
« Reply #20 on: July 10, 2015, 07:33:08 PM »
It is a small company 300% asset backed, has year over year growth 15yrs running, zero defaults, leans, or anything bad. This is really my idea, the owner was securing some financing for a small expansion and I know his loan rate is ~6%. He could do better elsewhere but will only deal with one local bank. I briefly talked the idea with him and he is thinking about it.  Term is 5yrs or less, he has never had a loan go to term as he hates debt.  I did do some business with him in past and he paid ahead of schedule. This would be several times more than that amount.  My main hesitation is that I tie that money up, although I have no good plans for it right now, see below.

Does it follow my IPS?  Yes. I have a percentage hold back (outside of my 401k, taxable accounts, pensions, etc.) that I use "if something interesting comes along"  if nothing does, I dump it into my house for the guaranteed 3%, if something does that beats that, I investigate it.  That strategy may not be for everyone, but it has served me very well.

No, no, no.  So much is wrong with this.  IMO this is HIGHER risk than VTI.  So just do VTI.

1. For starters it is a small business and you know the guy, and he paid back a previous loan.  So things like emotion, confirmation bias, etc. are clouding logic.  Would you loan him the money if he was a complete stranger you had never done business with before?
2. If the business is in good shape he can get a lower rate with a bank so why would he get it from you?
3. If he insists he only does business with 1 local bank regardless of rates he is either A. lying so run the %$%# away, or B a bad business man so run the $#$# away!

Even if this sounds like a good idea you can take LESS risk and get HIGHER returns just using P2P lending with a diversified portfolio... or take the easy route = VTI + VXUS.
« Last Edit: July 10, 2015, 07:34:48 PM by Indexer »

a1smith

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Re: 5% return, would you do it?
« Reply #21 on: July 11, 2015, 12:15:52 AM »
Another comment about risk - banks have portfolios of loans so if one goes bad it is not a big hit, they are diversified.

Here, you will have one loan.  Even assuming your friend is great businessman and fully intends to repay you there are things that can happen that neither of you can control.  Not to wish any bad luck, but fires, tornadoes, riots (been a few in the news), etc. all could end up destroying his business and put a major crimp on the situation.  Even if insurance eventually rebuilds his business can you go without payments for a long period of time?  Also, if the business is closed for repairs for too long sometimes it is really hard to come back.

dungoofed

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Re: 5% return, would you do it?
« Reply #22 on: July 12, 2015, 03:43:29 AM »
I wouldn't do it. As clifp mentioned the rate should be much higher for this kind of deal.

Having said that, don't throw the baby out with the bath water. You are already talking, and I think that's worth something.

The two options I'd look into are 1) some kind of equity purchase or convertible warrant, and 2) some kind of "finders fee" for you if you can shave a percent off his rate. It might involve you just bringing another bank to the table in order to get his current bank to lower rates.

electriceagle

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Re: 5% return, would you do it?
« Reply #23 on: July 12, 2015, 03:43:39 PM »
5% does not seem like an adequate return here, given the circumstances.

You can get 5% FDIC insured at mango or any of its clones.

johnny847

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Re: 5% return, would you do it?
« Reply #24 on: July 13, 2015, 05:48:19 AM »
5% does not seem like an adequate return here, given the circumstances.

You can get 5% FDIC insured at mango or any of its clones.
As of late, Mango is not open to new sign ups. I think one of its clones also stopped taking new applicants though I could be wrong about that.

And also, to be fair, that is hard to scale. The limit on Mango or any of its clones is $5k.

Scandium

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Re: 5% return, would you do it?
« Reply #25 on: July 13, 2015, 06:50:49 AM »
3. If he insists he only does business with 1 local bank regardless of rates he is either A. lying so run the %$%# away, or B a bad business man so run the $#$# away!

That stuck out to me too. A business owner who will only deal with the (limited) local bank and who refuse to use the internet doesn't sound like one that be able to scale his business all that well, and who will have trouble if his business run into obstacles. So if his local bank shuts down he'll just close shop and give up?
« Last Edit: July 13, 2015, 10:12:05 AM by Scandium »

Retire-Canada

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Re: 5% return, would you do it?
« Reply #26 on: July 13, 2015, 10:09:57 AM »
  Some guys like to keep it small I guess, less risk, but also less risk of getting filthy rich. :)

That's not less risk. It's more risk. He is intentionally limiting the resources he will use to allow his business to be a success.

I wouldn't loan him any money.

codemonkey

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Re: 5% return, would you do it?
« Reply #27 on: July 13, 2015, 11:34:12 AM »
My 401k through Fidelity has an 'Associate Annuity' fund option that currently pays out a fixed 5% a year.  Currently, the only risk I see is that the fund can change at any time to pay less interest (3% being the guaranteed minimum). 

I am still early in my accumulation phase, so I am treating this option like a bond fund and I have almost all of my money in the market.

I'm debating what I will do when I eventually FIRE, assuming the option still exists for a guaranteed 5%.  I would have to keep my 401k open, so I couldn't touch the money until I was 59 1/2, but having the guaranteed growth until, and after, I touch the money is tempting.  My only real concern is that inflation knocks that return down to 1 or 2%, and if inflation takes off, it's like losing money.