The 5 Best High Yield Short Term Investing Options
Short term, high yield investments provide many ‘and/or’ benefits for investors. The income from high yield funds is used to support monthly budgets and/or reinvest to accumulate positions. A pooled mortgage fund provides monthly cash flow backed by real property and/or reduces portfolio volatility with a stable NAV.
Investors looking for a place to invest on a short term basis should consider multiple factors including liquidity, interest rates and safety of principle. Given the unpredictability of the market stocks usually aren’t ideal when it comes to short term investing.
From high yield mutual funds to trust deed investments; here are 5 of the best high yield investments with short term maturities:
Searching for attractive yields backed by collateral with low LTVs? Deeds of trust offer high coupons that are not sensitive to interest changes. Unlike a mortgage backed security or REIT, a trust deed stems from a private loan made to real estate investors. Because these real estate investors typically require more speed and flexibility than offered by traditional lenders; borrowers are willing to pay a premium on rate in exchange for quick access to debt capital. The result is high demand and limited supply that translates into big yield spreads to treasuries.
What about repayment risk? Real property with loan-to-values (LTVs) of 65% or less serves as collateral in case of hiccups to repayment. The favorable LTVs are an added margin of principal protection through collateral coverage if home values dip or the borrower has payment issues. This risk is further mitigated by short maturities of 3 years of less. Conversely, the housing crisis in 2008 stemmed from loans with high LTV on properties that were ‘underwater’ in many cases when homes were foreclosed.
In terms of market risk, first deeds of trusts are not securitized and subject to the NAV swings of a REIT or mortgage backed securities. Lenders can also adapt coupons to match prevailing rates, providing competitive returns for both investors and borrowers.
Investors in search of a volatility hedge with monthly cash flow may favor these fixed income investments as a REIT alternative.
Pooled Mortgage Fund
Time is a difficult barrier to investors at all levels to clear. Researching trust deeds and laddering portfolios with staggered maturities is beyond the comfort level or time schedule of most.
A mortgage pool investment is a solution to these hurdles. The buying power from pooled funds enables professional managers to diversify trust deed investments across maturities and size. This facilitates laddering maturities to further dampen interest rate risk and provides the ability to make new loans as the interest rate environment changes.
Similar to individual trust deeds; pooled mortgage funds are not securitized and are insensitive to interest rate changes.
The net asset value (NAV) may be stable, particularly for short maturity portfolios that hold trust deeds to maturity. For instance, The WFP Income Fund has maintained a stable NAV since inception.
The risk-reward of a bond is easily summed up through a coupon rate. Companies with less than stellar credit, balance sheets or operating history must pay more to borrow than stronger companies. Meanwhile, otherwise sound borrowers in certain sectors may carry risk premiums based on their business model, sales cycle or collateral (e.g. cash flow or accounts receivable).
Income investors can gain professional management with low minimums through a mutual fund that buys these high yield investments. Mutual funds make it simple to diversify across maturities, sectors and even countries. Both open ended and exchange traded funds are easily converted to cash for those needing liquidity.
Considerations include interest rate risk as newly issued bonds may may offer higher yields that prompt investors to redeem lower their asking price on outstanding bonds to generate liquidity. Meanwhile, declining rates pose prepayment risk as issuers pay off expensive debt to issue lower coupons.
Real Estate Investment Trust
Investing in real estate requires expertise and capital beyond that of many investors. A real estate investment trust overcomes some of these barriers with professional management and affordable minimums. These income producing securities own and manage income producing real estate or mortgages.
An equity REIT generates rental income on residential or commercial properties, while a mortgage REIT earns interest income by investing in mortgages. Hybrid REITs produce both loan and rental income that is passed on to shareholders.
These pass-through securities distribute at least 90% of taxable income to shareholders in the form of monthly or quarterly dividends.
Aside from income; investors may also add negative correlation to their portfolio through the property markets. Real estate does not move in tandem with equities and may reduce portfolio volatility over different market cycles.
Unlike illiquid real property; through exchange traded securities shareholders can readily buy or sell shares. Economic trends are easily capitalized on as well. For instance, the boom in healthcare could be parlayed into healthcare REITs that own and manage senior care facilities, hospitals and similar properties. An international REIT gives access to property markets that would otherwise be out of reach. In times of U.S. Dollar weakness, dividends from overseas REITs may be higher when converted to the greenback. However, unlike a private pooled mortgage fund, the liquidity in an exchange traded REIT comes at the expense of market risk and volatility; and, an international REIT adds currency exchange risk to a portfolio.
Taxes and credit risk are common concerns for income investors. The net yield of a dividend paying stock may not meet an income bogey after subtracting commissions and taxes. Meanwhile, conservative investors could feel the high yields on junk bonds do not compensate for the level of risk.
For these reasons and more municipal bonds (muni bonds) may be an attractive choice. Local governments turn to debt markets to fund general operations or specific projects. A general obligation muni bond uses general revenue and taxation for repayment, whereas revenue bonds are tied to the earnings received from a project, such as a toll bridge.
High tax bracket investors have long favored muni bonds for cash flow that is exempt from federal taxes. Those living in the issuing city may also be exempt from state and local taxes. These tax benefits often make the tax equivalent yield on lower coupon muni bonds higher on a relative basis than that of other taxable bonds with similar maturities. A properly laddered muni bond portfolio may provide tax free cash flow to complement other strategies to reduce federal liability; which may include tax loss harvesting of underwater stocks, donating stocks with high cap gains to charity and contributions to a retirement plan.
Credit risk may be mitigated by MBIA (formerly known as the Municipal Bond Insurance Association) backed municipal bonds through insurance that guarantees the return of principal in case of default. However, the opportunity costs of time and reinvestment risk are among the reasons for due diligence in choosing muni bonds, regardless of MBIA backing. Prepayment risk should also be accounted for as a city will refinance debt and issue lower coupon bonds when possible.
Looking for a track record of managing high yield investments with short terms and through various market cycles? Please contact Wilshire Finance Partners at (866) 575-5070.
* ADDITIONAL DISCLOSURES:
ADDITIONAL DISCLOSURES FOR TRUST DEED AND MORTGAGE INVESTMENTS:
The information contained on this Website (the “Overview”) is not an offer to sell or the solicitation of an offer to purchase trust deed or mortgage investments, or the securities of the WFP Income Fund, the WFP Opportunity Fund or other securities or investments (individually and collectively, the “Investments”) offered through Wilshire Finance Partners, Inc. (“Wilshire”). The purpose of this Overview is to provide an overview of one or more Investments and its private placement. Persons interested in learning about one or more Investments and their private placement will be provided with the Private Placement Memorandum, Operating Agreement (as applicable), Subscription Agreement and other related documents (collectively and inclusive of exhibits and any supplements thereto, the “Memorandum”) prepared by Wilshire, which provides a description of the particular Investments, the terms of the private placement, a discussion of risk factors, and other information related to such Investments. To the extent that there is any inconsistency between the information provided in this Overview and the Memorandum, the Memorandum shall control. This Overview and the Memorandum contain certain forward-looking statements regarding the Investments. The forward-looking statements are based on current expectations that involve numerous risks and uncertainties which are difficult or impossible to predict accurately and many of which are beyond the control of Wilshire’s management, including, but not limited to, national and international economic conditions, changes in legislation, and other factors that can disrupt economic stability. Although Wilshire believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements, the inclusion of such information should not be regarded as a representation by Wilshire, any placement agent, or any other person, that the respective objectives and strategies of investing in one or more Investments will be achieved. Investments be made solely by accredited investors (which for natural persons, are investors who meet certain minimum annual income or net worth threshold), who are provided with the Memorandum and who complete, execute and deliver the subscription documents included therein. The Investments are securities and each of the Investments are being offered in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), provided by Regulation D, Rule 506(c), and are not required to comply with specific disclosure requirements that apply to securities registered under the Securities Act. Neither the Securities Exchange Commission nor any state securities regulator or agency has passed upon the merits of or given its approval to the securities, the terms of either offering, or the accuracy or completeness of any offering materials. As securities offered in an exempt transaction, each of the Investments are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell the Investments. Past performance is not indicative of future results. The Investments involve substantial risk, including loss of investment, and is not suitable for all investors. Loans are made by Wilshire Finance Partners, Inc., Bureau of Real Estate Broker’s License number 01523207. Loans made by Wilshire Finance Partners, Inc. outside California will be made pursuant to licenses, authorizations or exemptions in each other state.