Here’s a money-making idea you perhaps haven’t thought of: Buy a house. But don’t live in it. Rent it.
As business owners, we get really good at all sorts of things, like branding, marketing, sales, account and project management. But one skill many new business owners are lacking in is how to manage their finances.
This isn’t surprising: Nearly two-thirds of us Americans can’t pass a basic financial literacy test (the kind that asks you how much 20 percent interest on a $1,000 loan amounts to). And, as the financial regulator FINRA has reported, things aren’t looking up. FINRA’s surveys of Americans between 2009 and 2015 showed our financial knowledge nationwide growing steadily worse, not better.
In short, we’re laughably bad at counting money and figuring out how to save and invest it.
I myself was definitely in that “clueless” boat when I started out. But I made up for lost time. Though not a financial advisor, I’ve since had extensive experience with investing. So I’m here to report three great ways I’ve found to invest your savings that may work for you if your business hasn’t made you a millionaire (yet):
1. Invest in the three-fund portfolio … but leave room for “fun” investments.
In honor of Jack Bogle, who passed away in January, let’s talk a bit about the Bogleheads. These folks are a group of investing enthusiasts and Vanguard diehards who swear by a single investment strategy: the three-fund portfolio. What’s that mean?
It’s a portfolio divided among just three funds:
- Vanguard Total Stock Market Index Fund (VTSAX)
- Vanguard Total International Stock Index Fund (VTIAX)
- Vanguard Total Bond Market Fund (VBTLX)
The three-fund portfolio, whose funds, by the way, can be obtained through other brokerages, can be split evenly or asymmetrically. Many Bogleheads tweak the percentages depending on market conditions. Some even allocate a percentage of their portfolio for “fun” investments that carry more risk.
However you decide to set up your own three-fund portfolio, you’ll probably end up doing better than 99 percent of stock pickers, who routinely fail to beat the market and may even end up losing money. In fact, variations on the three-fund portfolio have performed very well historically, having earned investors up to 5.62 percent per year over the 20-year period ending in 2018.
The best part of this portfolio? It’s a fire-and-forget strategy, which means you’ll experience much less stress over your investments in the long run.
2. Buy a house with an FHA loan or traditional mortgage; then rent it out.
Personal finance advisor Ramit Sethi would disagree, but I think there are advantages to buying homes as investment vehicles. Granted, picking the right city or town to buy a home in can be like rocket science in this unpredictable economy, but hear me out.
If you have never bought a house before, you can use an FHA loan to pay as little as 3.5 percent down for a 30-year mortgage. FHA loans are easier to obtain if you have great credit (over 700), but you can still apply for them with a minimum 580 credit score.
Let’s say you buy a two-family home for $300,000 near Jersey City. With an FHA loan, you have to put down only $10,500 (3.5 percent), as opposed to $60,000 (20 percent) with a traditional mortgage.
Now, there are obvious downsides to this approach. For one thing, your monthly mortgage bill will be higher. With FHA loans, you also have to pay an up-front mortgage insurance premium (UFMIP) as well as a monthly MIP. So, by the time you pay off the mortgage, you’ll have paid more with an FHA loan than with a traditional mortgage. Thankfully, mortgage calculators exist.
Here’s the very speculative up-side: Depending on where your home is located, renting out as much of it as possible could help you pay off your mortgage in full while you still turn a profit each month. And, just as with a traditional mortgage, you can always sell your home after a few years, ideally after it has appreciated in value. Something to think about.
3. Move to Puerto Rico for a 4 percent tax rate (0 percent capital gains).
Here’s one for all the internet-based business owners out there. If you move to Puerto Rico and establish Puerto Rican tax residency, you can apply for consideration under the Puerto Rican government’s Acts 20 and 22, which reduce your income tax to 4 percent and your capital gains taxes to 0 percent.
Sounds too good to be true? It’s not. But you have to meet specific requirements, namely:
- You have to be able to “export” your services to clients outside Puerto Rico.
- You have to pass the “closer connection test,” which means that having a house or a car in the United States makes things more complicated.
- You have to stay in Puerto Rico for 183 days out of the year (but you can split them up however you want).
- You have to pay the Puerto Rican government and an attorney filing fees for the first year.
- If you file for Act 22, you have to donate $5,000 to a charity of your choosing, annually.
I’m sure I don’t have to go into great detail about why this is such an amazing deal for business owners. Aside from the benefits of living on a Caribbean island, you don’t need any employees in Puerto Rico to get these filings, and you can remain a U.S. citizen. Yet you’ll probably reduce your income tax by anywhere from 30 percent to 40 percent compared to what you’re paying now.
And if you enjoy trading or investing? Normally you’d have to pay short- (30 percent on earnings) and long-term capital gains taxes (15 percent on earnings). Under Act 22, you’ll pay nothing and get to keep all your profits.