What would you do with $50,000?

For the last year or so, I’ve been thinking about what investment opportunities are available out there if you have cash available. I don’t have the cash, but interest rates are still low, making the cost of borrowing cheap. Credit cards are easy to come by, home equity loans allow people to borrow against the equity gained during the recent housing boom, and banks are always willing to make personal loans to members for an often-fair fee.

A quick trip to bankrate.com (http://www.bankrate.com/) shows there are several credit cards available for folks with good credit for just over 10% with low or no annual fees.

Chart below from http://www.bankrate.com/:

INSTITUTION	CREDIT CARD TYPE	PURCHASE APR	ANNUAL FEE	CASH ADVANCE APR	CASH ADVANCE FEE
Pulaski Bank & Trust Co.	MasterCard	7.99% F	$35	7.99% F	$0
Pulaski Bank & Trust Co.	Visa	9.50% F	$0	9.50% F	$0
First PREMIER Bank	MasterCard & Visa	9.90% F	$120	19.90% F	3%/$5 min

The question is, if you could borrow say, $50,000 at 10% on a credit card or some other type of loan, what would you do with it? A 10% interest rate may sound high, but if you break it down to a monthly rate, it sounds a bit more reasonable. At 10%, it’ll cost you approximately $5000/year in interest, divide that by 12 months in a year, and you end up with an interest payment per month of about $417. You may or may not have to pay off some principal in the payment. If you plan on paying it off in equal payments over 10 years, your payment would be $660.75/month. So, assuming you are somewhere in the middle (credit cards don’t want you to ever pay off the entire principal because they’ll stop getting interest), what can you do to make that payment every month?

There are a couple ways to look at it. You can either look for an asset that will give you a positive cash flow each month (meaning it brings it more than your payment) or an asset that will bring in the payment, but will appreciate over time so when you go to sell it, you’ll make the bulk of your return then. Real estate is an obvious option, but leverage and risk certainly comes into play. You could put all $50,000 into a piece of land/property, but there are a few other factors to consider there.

1. Do you want to put all of that money down on a smaller piece of property and tie it up just in an effort to reduce your monthly payment? That probably wouldn’t make sense as you could put down far less money and get a mortgage/home equity loan for the the remainder of the cost of the property at a rate much lower than 10%.
2. You could use the money to its maximum leverage potential and either buy one piece of property where $50,000 would satisfy the down payment, or you could buy many pieces of property on a low/zero down plan and mortgage them all with the bank, spreading your 10% cost of capital on the down payment across several properties.

Either way, unless you can manage a positive cash flow over that period, you are betting on appreciation. Over the last 10/15 years, appreciation hasn’t been a bad bet, but if the real estate market stagnated for a few years, you’d be left with a somewhat illiquid investment with a relatively high cost of disposal when you go to turn it over (given taxes, realtor fees, etc).

The other limitation I see with real estate is that there are limited ways to improve the investment and make it more profitable over the course of the investment. If you were to buy some rental residential property for example, outside of increasing rents significantly, you are fairly locked into your cash flow level for the future years of the investment. With a somewhat short time horizon, lets say 5 years, the amount you’ll be able to increase rent will likely be negligible. You cannot really put anything into the property during the period of investment to make it more profitable (without losing your cash flow by ending the lease and spending time to improve the property in an effort to increase rents). Instead, perhaps a better use of capital is to invest in some sort of business.

Assuming you’re likely to be working full time over the course of the investment, it can’t be terribly time consuming for you (the owner) and it must have the potential of becoming more profitable if effort is given. So, at this point the criteria are:

1. Entry cost of approximately $50,000 with low/no ongoing costs
2. Fairly low level of time commitment from the owner (though having employees may be an option)
3. Must have the ability to be expanded if desired to increase profitability

Using these three criteria, I’ll be looking for business opportunities over the next week or two that meet the requirements and seem like somewhat viable opportunities. The ironic thing I find about investing/finance, is the folks with money always look for a place to put it and have a difficult time finding suitable investments, while the folks without money always have great ideas but no exposure to capital.

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