Alternatives to holding reserve funds in savings account?

General Real Estate Investing
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Alternatives to holding reserve funds in savings account?

James Sea
Winnipeg, Manitoba · Member since 2017 · 17 posts · 3 votes
Are there alternatives out there to holding reserve funds in a savings account? Short term bonds? GICs? Anything else? It hurts me to see essentially nothing in interest on my reserve funds when I know there are better savings strategies, but I'm not sure if there are better moves that also maintain sufficient liquidity. Any charge that would eat up reserve funds would either come in the form of an invoice or go on a credit card to be expensed so I can't imagine needing "immediate" access to funds. Thanks for your thoughts!
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Ian IppolitoBusiness Member
Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
7y

Here's how I do it (I call it "high-yield CD chunking"). I will invest it in an FDIC insured five year CD with a relatively low penalty for breaking it. Then on top of that, I will split it up into smaller chunks so that I only have to pay the small penalty on whatever I am using while the rest continues to get the higher interest rate.

For example, if I had $100,000 in cash, I might split it up into 10 CDs of $10,000 apiece. I can easily get 3.1% APY on each of them. (https://www.nerdwallet.com/blog/banking/nerdwallets-best-cd-rates/)

Then say in year three I need to cash out $20,000. I would then break those two CDs, and pay the modest penalty, while the rest continues to get maximum interest.

The Real Estate Crowdfunding Review
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  • Account Closed
    Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
    7y

    I get a 2% rate of interest in high-yield savings accounts. There are several reputable Internet-only banks offering this rate. I keep the bulk of my savings in these FDIC or NCUA accounts.

    Although these companies are startups (and not yet proven through the test of time), you can consider Worthy Financial, which pays a 5% yield on its Worthy Bonds and advertises you can take your money out at any time. Another startup is CNote, which pays a 2.75% yield and advertises a liquidity opportunity every three months. Neither site is insured by the FDIC or NCUA.

    DISCLOSURE: I'm a toe-dip lender on Worthy and CNote. I also invested the $250 minimum in Worthy's Reg CF crowdfunding campaign on StartEngine. I haven't tried to withdraw money from either crowdfunding site because I intend to stay invested for the long-term. Other crowdfunding sites where I have toe-dip money do not offer liquidity, nor are they insured by either the FDIC or NCUA.

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  • Ian IppolitoBusiness Member
    Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    Here's how I do it (I call it "high-yield CD chunking"). I will invest it in an FDIC insured five year CD with a relatively low penalty for breaking it. Then on top of that, I will split it up into smaller chunks so that I only have to pay the small penalty on whatever I am using while the rest continues to get the higher interest rate.

    For example, if I had $100,000 in cash, I might split it up into 10 CDs of $10,000 apiece. I can easily get 3.1% APY on each of them. (https://www.nerdwallet.com/blog/banking/nerdwallets-best-cd-rates/)

    Then say in year three I need to cash out $20,000. I would then break those two CDs, and pay the modest penalty, while the rest continues to get maximum interest.

    The Real Estate Crowdfunding Review
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  • Eric Schultz
    Investor · San Diego, CA · Member since 2016 · 265 posts · 305 votes
    7y
    You might look at AHP Servicing. It’s a debt fund that comes with a 10% preferred return and your initial investment can be liquidated in about 30 days. A more advanced strategy for the long term would be to setup a cash value life insurance policy specifically designed with lower upfront costs than traditional whole life policies. The cash value will typically grow inside the policy between 5% - 8% compounding. Pay your annual premium plus maximum overfunding. Depending on how you structure the policy, you may have the funds needed for a down payment within the first year or two. To access the cash value you simply take out a loan on the policy. It’s typically 1 - 3 business days to receive the borrowed funds. Your cash value will still continue to grow on the amount borrowed as well as the amount left in the policy. The delta cost between the cash value growth and policy loan interest rate is typically 0% - 1.5%. Much cheaper than borrowing from a traditional bank. This strategy is great for many reasons: cash value grows tax free, there’s a death benefit, the death benefit is tax free, creditors cannot access the funds in the policy, the policy loan (debt) does not show up on any credit reports, and so on.
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  • Thomas RutkowskiPro Member
    Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
    7y

    https://www.biggerpockets.com/blogs/7595/47651-are...

    Get a line of credit against an overfunded life insurance policy.

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  • Chuck Bigham
    Member since 2018 · 11 posts · 10 votes
    7y

    Tell me more please about this life insurance and borrowing from it. I have no need for life insurance but I do have a need for say 490k to 560k to earn high interest until I buy another property. What are the penalties if you withdraw from the policy when ready to buy, what are the tax consequences and how safe are these companies in a recession?

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  • Thomas RutkowskiPro Member
    Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
    7y
    Originally posted by @Chuck Bigham:

    Tell me more please about this life insurance and borrowing from it. I have no need for life insurance but I do have a need for say 490k to 560k to earn high interest until I buy another property. What are the penalties if you withdraw from the policy when ready to buy, what are the tax consequences and how safe are these companies in a recession?

    Hi Chuck - Did you read the blog post? The cash value of the policy simply serves as collateral for a line of credit against it. If the cash value is growing at 5% and the LOC is at 5%, it looks like and feels like a withdrawal. That's why I referred to it as a "Magic Checking Account".

    This is the specific Florida statute requiring insurance companies to make loans secured by the cash value of permanent life insurance policies...

    http://www.leg.state.fl.us/Statutes/index.cfm?App_...

    All 50 states have statutes with similar language. 

    You should never surrender the policy. Just keep leveraging it. 

    One downside for you is that you cannot put $500,000 into a life insurance policy in one lump sum. However, you could deposit $100,000 a year each year for 5 years. Each $100,000 premium, would give you about $85,000 of cash value that you could immediately Leverage.

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