In today’s widely fluctuating economic and financial world, it is quite challenging to find investments that offer any true positive net annual returns. Many U.S. and European banks today are offering their customers anywhere between negative and just 1% savings rates. After factoring in increasingly escalating bank fees, taxes, and inflation rates, more and more people are earning NEGATIVE NET RETURNS each year.
Our planet has numerous economies and financial markets that are all interrelated and connected to one another. The USA (3rd largest populated country) economy is affected by the U.S. Unemployment Rates just as much and it is by trade deficits, import and export numbers, and currency exchange rates with other countries.
Positive and Negative Currency Trends
When foreign currencies are much stronger as compared with the U.S. Dollar, then more foreign investors can afford to buy U.S. Stocks, Real Estate, and American Goods and Services. Conversely, weakening foreign currencies can lead to declining U.S. exports since they are not as affordable abroad.
The Canadian Dollar has risen and fallen in value to the U.S. significantly in both directions since the official start of “The Credit Crisis” back in 2007. The Canadian Dollar reached a peak closer to one (1) Canadian Dollar being exchanged for almost $1.30 U.S. Dollar (or a 1.3 Currency Exchange or Conversion Rate) the last time in 2009. The Canadian Dollar last reached a low near 0.91% (0.91 Canadian Dollar = $1 U.S. Dollar) in 2007.
Why does the strength of the Canadian Dollar matter to U.S. investors interested in Real Estate?
ANSWER: Canadian investors are some of the biggest Real Estate investors for single-family homes in warmer climate regions such as Palm Springs / Palm Desert, Phoenix, Texas, and Florida. A high percentage of Canadian investors are all cash buyers who can close escrow very quickly.
When the Canadian Dollar is strong, then Canadians can afford to pay higher U.S. property prices. On the other hand, a weaker Canadian Dollar typically leads to less demand for U.S. properties. Fortunately, the Canadian Dollar has strengthened in recent months, and is now closer to peak highs than peak lows.
Negative Interest Rates: When Customers pay their Banks
Recently, the governing Danish Central Bank called “The Nationalbank” slashed its benchmark interest rate to well below zero percent (0%). As of February 2015, the Nationalbank benchmark interest rate reached a low of -0.75% (negative .75%) after four recent rate cuts. A few Danish banks have stopped offering any adjustable rate one to three year mortgage-backed bonds due to the wildly fluctuating rates. In February 2015, one-year mortgage bonds in Denmark were trading between -0.3% and -0.4%. How many American investors have ever heard of negative rate mortgage products?
Historically, Swiss Banks are considered the most sound and safest banks worldwide. Yet, the Swiss National Bank has also cut their Swiss National Bank’s key benchmark rates from – 0.25% to -0.75% in recent months. These same negative Swiss rates are making their Swiss Franc “Safe Haven” currency less attractive to investors. Rumors abound that Switzerland, Denmark, Greece, other European nations, and even the U.S.A. may continue onward with their downward interest rate trend.
Bank Bail-Ins: Worse Than Negative Rates
While most investors are usually concerned about generating high interest rate yields, other investors these days are focused on protecting their original principal amounts. Inflation, a hidden form of taxation, is truly a destroyer of a family’s Net Worth. Yet, the loss of principal is even worse than negative interest returns.
Greece, the USA, and several other countries around the world have openly discussed the possibility of “Bank Bail-Ins” should banks run low on cash. A “Bank Bail In” is when the bank grabs their customer’s cash in order to pay the bank’s expenses. The questionable financial solvency of the FDIC (Federal Deposit Insurance Corporation), and their ability to protect depositor’s funds after one or major large banks fails, is another valid cause for concern.
As a result, the number of people who wish to risk both their potential interest and principal amounts with banks continues to decline as more investors seek non-banking alternative investment options like Real Estate as either an Investor or a Lender.
Investment Yields and The Rule of 72
One of the easiest ways to project future compounded returns on various investments is to calculate and divide the annual rates of return offered by the investment options, and then divide it into the number 72. The number calculated will then give the investor a solid idea of how long that it will take to double their original investment amount.
Investment Option: Real Estate Investments as a Private Lender or Investor
1.) 8% Annual Real Estate Investment Returns: Annual Rates of Return: 8% (72 / 8 = 9 years).
The investments will double and compound in size every nine (9) years.
Year 0: $100,000
Year 9: $200,000
Year 18: $400,000
Year 27: $800,000
Year 36: $1,600,000
Year 45: $3,200,000
Year 54: $6,200,000
Year 63: $12,400,000
Year 72: $24,800,000
Investment Option: Bank Savings Plans
For the purpose of this investment scenario, we will use the highest potential current annual rates of return for a bank customer with a mid to large-sized U.S. bank in 2015. This projected annual yield will be 1%.
1% Annual Bank “Investment” Returns: Annual Rates of Return: 1% (72/1 = 72 years). Please be very patient as these investments will double in size every 72 years.
Year 0: $100,000
Year 72: $200,000
Hopefully, the investor will live long enough in order to see their original investment amount grow. With negative returns from the start, then investors can sit back and watch their principal amounts vaporize fairly soon.
Where do so many banks take their customer’s bank deposit funds and invest? ANSWER: Real Estate.
So, banks take your money, make double digit returns in Real Estate, and give you truly nothing to show for it. Why not invest directly in Real Estate, and generate your own positive returns instead?