Once you’ve decided to become an investor, you’ve done the hard part. Now comes the details. Often, someone just starting out doesn’t have a lot of cash. They’ve gone through the process of minimizing expenses and so have a monthly amount of cash left over. Where do they put it? It needs to be ready to go when that great deal comes along, but it ideally should make some money while sitting. Here are a few places to park it and my rating.
- Cash. Put it in a box in your closet. It’s perfectly liquid and ready when you need it. Or is it? The title company won’t accept cash, so you’ll have to deposit the money at a bank first. Then the bank will issue a cashier’s check, which is a bank guarantee of the funds, something the title company will accept. You’ll also be dealing with thousands in cash, which is unwieldy and is at risk of theft. D
- Precious metals like gold. Similar to cash, this stuff will have to be securely held and risks getting stolen. This is even more difficult than cash because it’ll have to be sold to convert to cash as a first step. F
- Checking account. This option is quick to set up and easy to use. The money is available quickly, though if you are using the account for a lot of transactions, the bank may require them to clear before releasing the funds in the required cashier’s check that a title company will want at closing. This makes almost zero interest. B
- Savings account. This one is also quick and easy. Often the bank will impose a minimum balance and maximum monthly transactions, so be aware of these restrictions. This makes a tiny amount of interest, but the money will be ready when you need it. A
- Stock Market. Usually these accounts have a good liquidity, so you can get them sold and converted to money within a week. This category includes money markets and ETFs. Make sure your account allows for this. Each transaction usually has a fee, so be aware that you will lose some of your money. The stocks can go up or go down, so there is risk of loss. B
- Certificate of Deposit (CD). This is a deposit account at the bank that is attached to a timer. The money gets locked up in the bank for a minimum term, like six months or a year. It’s completely illiquid (usually) until the end of the term, so if you find a deal in the meantime, it can’t be accessed. It makes quite a bit more interest than a savings account, which is a plus. This is similar to US savings bonds and treasury bills. Good money, but liquidity issues. D
- Equity in a property with a line of credit. This one is involved, so stay with me. You use the money to purchase property and then you get a line of credit on the equity in the purchase. The property will hopefully appreciate, giving you return on your investment and the line of credit is ready when you need to do the purchase. The only reason this one isn’t rated better is that’s the whole reason for getting the line of credit – to purchase a property, and is a great way to do subsequent properties – so I’ve included it only for completeness. B
Remember your goal – you are not trying to make money off the saving of the money, just looking for a place to park it and get it out quickly. Your goal is to make money on the real estate investment you will purchase. High liquidity is the most important part here. Interest you receive comes second.
