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Investment #5 – Real Estate

Allison just made $83,000 from a $20,000 investment. Ten years ago, she had bought an apartment as a real estate investment.

Real Estate Investment

Properties that generate income for a buyer and that are bought to make money, not to live in.

When Allison bought the house 10 years ago, she planned to rent it out and then eventually resell it for more than she had bought it. This way, she would make money from the monthly rent payments, and the increase in property value.

So how exactly did she make $83,000 from only $20,000 with this investment? Here’s how:  

Allison bought the house for $100,000 using $20,000 of her own money and $80,000 that she borrowed from the bank at a 3% annual interest rate. This means that until Allison paid back the $80,000 loan to the bank, she’d have to give them $3,000 per year or $200 per month.

But that was easy, because by renting out the apartment, she received $1,000 per month – enough to pay the bank $200 and enough to keep $800 to herself. She continued to do this for 10 years, until she saved up $96,000 to herself ($800 x 12 x 10)!

During this time, the value of the apartment had also gone up from $100,000 to $120,000. She sold the apartment, and ended up with $120,000 + $96,000 = $216,000! Of course, Allison had to pay back the $80,000 she had borrowed from the bank. Also, since she made profit from this investment, she had to pay taxes of $33,000, leaving her with $103,000. After removing the initial $20,000 that Allison had invested of her own money, Allison has made a $83,000 profit from this investment… wow!

Of course, as a property owner, Allison was responsible for maintenance, finding tenants, collecting rent, etc. So there are other difficulties and expenses to consider. Also, the house market can go up or down. So, the risk of the apartment decreasing in value was also possible. Luckily for Allison, everything went as planned and she was able to make a lot of money from this investment.

Investing in real estate is one of the most popular types of investments, as it can provide you with huge returns! But like every investment, there are always risks to consider.

Would you invest in real estate? Let us know in the comments below!

Difference Between Mutual Funds & ETFs

As seen in our previous articles, we learnt that Mutual Funds and ETFs are like very similar cousins. They are both a collective investment – a pool of money from a bunch of different investors that purchases and invests in a variety of securities.

So what are the main differences between the two? Find out below:

Mutual Funds

ETFs

1. Price is set once a day

2. Actively managed by an expert

3. Less research needed from you

4. Purchased from a broker, advisor or fund

5. Higher fees

1. Traded all day – price constantly changing

2. Managed by yourself

3. More research needed from you

4. Purchased on the stock market

5. Lower fees

It’s totally up to you to decide which one you prefer. Up until now, Mutual Funds have been more popular. Today, there are about 13 trillion dollars invested in Mutual Funds compared to 2 trillion in ETFs. However, ETFs are growing in popularity.

Which one would you invest in? Let us know in the comments below!

Investment #3 – Mutual Funds

Every Monday night, Mila and her girl friends get together to watch the Bachelorette. Before the show starts, Mila asks her friends for investing advice. She’s new to investing and wants to start, but she doesn’t have the time to spend hours doing research on her own. Her friend Alexa suggests she checks out mutual funds.

Mutual Funds

A collective investment – a pool of money from a bunch of different investors that purchases and invests in a variety of securities.

Alexa explains that her and the other girls are all currently investing their money in the Super Sexy Finance Fund (SSFF). Here, all of their money is pooled together, and managed by an expert from the Super Sexy Bank. The expert from the Super Sexy Bank takes the money from the fund, and invests it in a bunch of different securities (stocks, bonds, etc.). This is known as the portfolio.

Portfolio:

A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents,

This expert constantly manages the portfolio, buying and selling different stocks and bonds overtime, while the girls sit back and relax. If Mila decides to buy a share in the SSFF, she’ll have a small stake of all investments included in the fund. This is great because it allows Mila to invest in a diversified portfolio, without having to spend a bunch of time doing her own research.

The girls love this type of investment for 3 main reasons:

  1. It’s a simple way to have a diversified investment (less risky)
  2. It’s managed by an expert, therefore saving you time
  3. It allows each girl to invest in a wide variety of investments

So…how do the girls make money? Mila asks.

Well, it’s simple. When the fund’s assets (stocks & bonds) rise in value, so does the value of the SSFF shares. This way, the girls can sell their shares at a profit. The SSFF fund also gives out dividends, which is a portion of the fund’s earnings.

Of course, if the fund’s assets go down in value, so does the value of the SSFF shares. So it’s important to make sure your expert knows what their doing!  It is also important to note that when buying an SSFF share, Mila will have to pay management fees & transactions fees to the Super Sexy Bank expert for his services.

As Mila is looking to invest without spending too much of her own time doing research, this is a perfect investment option for her!

 

What do you think? Is this a type of investment you would like to make?