Projected Yield is nice but Current Income Yield is better. Assuming invested Capital is equally safe in both types of investments; this blog describes the nuances of receiving yield through a back-end loaded projected yield where interest is earned at the end of an investment term vs. interest earned through a current income monthly deposit.
An example of a projected yield would be an investment to build a property where the gain on sale (Sale Price minus Acquisition Price + Expenses and Carry) provides the interest earned. An example of a current income yield investment would be a Trust Deed where the borrower’s monthly loan payments are used to pay the Lender.
Projected Yield Characteristics:
- Uncertainty – Any investment that pays the yield at the end of the term is subject to positive or negative fluctuations. Economic, interest rate, political and execution risks all come into play when an investor is waiting for a return on their money.
- Expense Exposure – Expenses for administration of the investment and or expenses in the investment itself like higher construction costs can chew into profits and yield.
- Projection vs. Reality – Real Estate Investors are subject to “Pro-Forma” risk. Did the investment organizer plug in the correct inflation and rental income growth into the fancy spreadsheet? Only time will tell.
- Yield on Sale – Yield achieved by selling an investment at the end of the term is subject to the financing market, economy and desirability of that property type at the time of exit. Accuracy in forecasting a sales price 5, 7, 10 years down the line is very difficult.
Go with the Flow! Monthly cash flow yield provides a margin of safety and enables a person to borrow less, invest more, increase personal satisfaction and meet expense growth demands.
Current Monthly Cash Flow Yield Characteristics:
- Safety – Yields are delivered through monthly payments, not a hope and a prayer that the yield and investment projections will come true.
- Reinvestment – Income earned from cash flow can be immediately reinvested resulting in a potentially higher yield on the original cash invested
- Personal Satisfaction – Cash Flow allows a person to satisfy current needs and desires while improving their lifestyle.
- Positive Feedback – Seeing deposits into a checking or savings account feels good. A cash deposit encourages and bolsters the soul of any investor. I know a Trust Deed Investor that elects to take paper checks vs. ACH transfers because they enjoy receiving the checks in the mail and the personal satisfaction of going to the bank to make the deposit.
