You’ve decided to grow your passive income by investing in a fixed income investment. But before you invest you should understand how and why your investment is a good one.
The most common fixed income investments are bank savings accounts, money market accounts, bonds (both government and corporate), CD’s (Certificate of Deposit), and promissory notes. They are considered fixed income simply because they promise a steady income that does not change over time.
The FDIC (Federal Deposit Insurance Corporation) is chartered to insure bank savings accounts, money market accounts, and CD’s up to $250,000. The theory is that even if your bank goes bankrupt (hundreds already did in 2008 and 2009, and nearly 5,000 banks did in the first Great Depression), your money is insured. That’s just a theory because at any given time there is only a finite amount of liquidity available through FDIC. Like any insurance, they plan their cash requirements around assumptions that only a certain amount of claims will hit at any given time.
However, there are numerous recent examples in both the USA and abroad where a “run” on the banks created a situation where the theory breaks down and there is not enough cash available to all the people who suddenly wanted immediate access to their cash. We don’t hear much about that problem because so far it’s been limited to regional or foreign banks. However, there are currently many economists who believe in the distinct possibility of a large-scale, even global, run on the major banks that could put your entire balance at risk. Interestingly, the ones warning us now are the same people who predicted our current global financial meltdown several years before it occurred. At that time they were being accused by regulators and Congress of being conspiracy theorists, just like they are now when they warn of the systemic risk and industry-wide insolvency. If you think it couldn’t happen, consider the recent collapse of American Insurance Group (AIG) who most thought was too big to fail. Consider also the situations with Social Security and Medicare who most certainly will become insolvent in the coming years without some type of massive overhaul or bailout.
The security for the GLSI Note is secured by an income-producing asset. You have a first position interest in a house which, as we’ve explained, is located in solid, desirable areas who have proven themselves stable over time. The property cannot be sold, re-financed, or transferred without re-paying you in full first. Even if the company or its owners die, go bankrupt, or anything else Michigan law gives you clear opportunity to become the rightful owner of the building, the land, the rights, and the rental income. And although we certainly don’t plan or expect for any other liens or assessments or claims of interest to be placed against the property, you should know that those are junior liens and will be wiped out completely in the unlikely event you take over as owner (the only exception would be property taxes) and your property would be free and clear. Most of all, as we’ve said numerous times, the income from the property itself has the ability to repay your note.
| Generally speaking, your ROI = | income + gain or loss |
| Initial investment |
Currently, the income portion of your return is less than 1.0% for savings accounts, about 1.75% to 2.25% for money markets, 2.0% to 3.0% for CD’s, and anywhere from 2.0% to 5.75% for bonds, depending on type of bond and terms.
Those are depressingly low levels of income. And yet income alone is not the sole determinant of your total return. For example, suppose you invest $100,000 in a bond that gives you a 5.0% fixed income. That means you receive $5,000 per year in income. But if the value of the asset—the face value of the bond—goes down to $90,000, you’ve actually lost money. When you go to cash in that bond, you receive $10,000 less than you invested up front! The face value of bonds varies inversely with interest rates. Does this also mean that the face value of your bond could go up, assuming interest rates go down? Yes, if interest rates go down, but what are the odds of that happening? In most expert opinions, only conservative AAA rated federal or treasury bonds will withstand the downward bond price declines in the next few years. Corporate bonds, “junk” bonds, and even issuances of local government will likely lose value once the current historic low interest rates start to rise again.
So the interest rate and income is not the only measure of how good of an investment it is. One must also consider what happens if the cash value of your investment goes down.
The GLSI Fixed Secured Note provides a steady income stream of from 8.0% to 10.0% paid monthly. This is anywhere from 2 to 10 times the income of these other investments!
Since CD’s, money markets, and bank accounts are essentially cash, they will not decline in value. (Yet with returns so low, certainly lower than the rate of inflation and cost of living, one needs to realize that the “real” value is declining. In other words, a $10,000 money market account will still be worth $10,000 in a few years, but how much less will you be able to buy with $10,000 than you could today?)
Most types of bonds will almost certainly decline in value if interest rates go up which, as previously discussed, is the most likely scenario over the next several years.
The GLSI Fixed Secured Note is secured by a wonderfully located and maintained home. Now, there is much talk in the media these days about the housing crisis. Most experts will say that housing prices, although having already declined “as much as” 30% from their 2005 peak, still have a little further to fall between now and 2011. This analysis is based mostly on supply and demand factors and we agree with those findings in general. However, those are macro statistics which about the nation as a whole, not specifically about Michigan. The GLSI Note is being secured by Michigan properties being purchased at 70% to 85% below their peak. Price declines in Michigan are far more severe than the rest of the country. The average purchase price is $25,000 for a 1,250 square foot well-built home with a basement—that sold for $150,000 all day long a few years ago. To build that house would cost six times as much as we buy them for! How much lower than $25,000 could the price go, especially when there is so much demand for them? And since we are holding the property for the long-term income, as opposed to speculating on value and trying to “time” the market, we are certain that there is almost no risk the property could decline in value. In fact, we believe prices of your collateral will eventually increase dramatically, particularly if the mortgage industry begins to make mortgages available to create more of a demand for purchasing.
Yes! And, regardless of your age, by rolling your IRA or 401K into a self-directed Roth IRA, you will not be subject to the early withdrawal penalty that would be imposed if you simply cashed out before retirement age! The Roth Self-Directed IRA is simply a different type of retirement account. And profits in your Roth, if left there for at least five years, become tax-free for life!
Most IRA custodians do not allow for investments outside of the stock market. Locate firms that offer truly self-directed IRAs that allow investments outside of the market, such as real estate and promissory notes like those offered by GLSI. The most reputable and experienced such IRA custodian (and the one used personally by the owners of GLSI) is Equity Trust Company of Elyria, Ohio. They will be happy to help you figure out how to make better use of those retirement funds. The whole rollover process will only take 1-2 weeks. Just go to www.trustetc.com.
As discussed previously, CD’s, money markets, and bank accounts are FDIC insured, and you need to determine yourself whether that implies risk. Bonds are another matter altogether because both the face value and the income it provides is subject to the solvency and creditworthiness of the issuer. If the issuer goes bankrupt, obviously the bond and its promised income could evaporate. Conventional wisdom would say that treasury bonds, savings bonds and other federal bonds are therefore much safer because chances are much lower that the federal government will go bankrupt. You also need to do your homework when it comes to bonds issued by local or county municipalities—these governments can and do go bankrupt or insolvent. Often they get bailed out by another branch of state or federal government but it may take years and meanwhile you probably will not be receiving your income.
The GLSI Fixed Secured Note is an investment in an income stream. Because people need to live somewhere, and because neighborhoods are so well chosen, the need is likely to be there long-term. If the property goes vacant or the tenant stops paying, GLSI is still committed to making your payment, and reserves are kept for these types of situations. Just because the property stops generating income temporarily doesn’t mean you won’t receive your payments.
We won’t even attempt to answer this question as it relates to bank accounts, money markets, CD’s, or bonds. The real answer with these types of investments is: who knows? Who knows what are the qualifications or motivations of a bond, money market, or mutual fund manager?
But we know that you realize real estate is just as management intensive and is not done exclusively on a computer by somebody with a day job. Again, when we discuss in person we will be happy to discuss our track records in detail, with documentation. We do this full-time, every day, and for a living, as we have for years. Elsewhere in this site we’ve discussed our 30-year+ track record of managing single family homes for income. While the rest of the country was caught up in “flipping” we were honing our plans for long-term hold. Now that the market is in our favor more than ever, we are clearly prepared in a way that others are not. Re-read the section on “who we are” in this site. Honesty, integrity, and competency are things we are and are willing to prove to you.
We all know what it is like to do business with big companies such as banks, investment brokers, and mutual fund companies. You rarely have a personal, face-to-face experience with anybody. Often there is not even a local office to drive to even if you wanted to. When you call, you’ll get a voice mail menu. The greeting will tell you to go to their website first, implying that they really don’t want to talk to you if they don’t have to (but the greeting makes it sound like you’ll get better service that way). Many of you don’t have a computer or don’t want to do business on the internet, so you proceed to listen to the voice mail menu. None of the choices it gives you are exactly the reason you’re calling; the truth is you just feel better about just talking to a person. And when you finally get a person, you always get the feeling you are a number, and that maybe they are just trying to sell you investments on which they get paid higher commissions. If you invest a lot of money with a company, it seems a reasonable request to be able to talk to a person from time to time. Right?
Hanh Dang Brown and Randy Michael and our associates are committed to a personal service business. Invest with us and you’ll have our home phone numbers, cell phone numbers, personal information, social security numbers, financial information, personal e-mail addresses, and personal guarantees on the Note. Most often we will meet face to face at least once, and preferably on an ongoing basis. As discussed previously, we will keep you in the loop every step of the way. When tax and insurance payments are made, you will get copies. Any repairs or improvements of the property will be documented and photographed for you.
Taken one step further, for investors willing to place $100,000 or more with us, we would consider paying your attorney’s or CPA’s fees should you choose to seek legal or financial counsel beforehand.
Our goal would be for your experience to be so good that you will refer your closest friends and family to us in the future.
With this checklist as a guide, you can now make an informed decision when selecting a fixed income investment.