In Search of Yield…
Investors and Colleagues,
This is a difficult environment for investors who rely on income from their investment or deposit accounts. Have you seen the interest rates banks are paying on CD’s or savings accounts? Last month, a number of large banks announced plans to start charging customers a fee just to maintain checking accounts.
Yields on 10-year treasuries are now below 2%, and if you’re investing in 5-year municipal bonds, you’re likely getting less than 1% on your money. So for investors who need just $50,000 in annual income, a balance of $2.5 million to $5 million is required to generate this kind of yield.
The low interest rates are no accident. The Federal Reserve is pushing interest rates lower intentionally – in an effort to force investors into more risky positions. The rationale is that if investors put money into corporate bonds, equities, or other high-yielding securities, the capital will help to stimulate the economy and help support the recovery.
A discussion of fed policy is beyond the scope of this letter today (but if you want to know my thoughts on this, shoot me an email or feel free to give me a call). Today, we’re going to talk about what Ashford Capital is doing to offer clients a better alternative for investment yield.
An Attractive “Preferred Rate Of Return”
Since we understand the need our clients have to generate income from their investments, Ashford Capital has constructed our programs to offer an attractive preferred rate of return for our investors.
This means that when you invest in an Ashford Capital deal, the clock immediately begins ticking and your interest starts accruing right away. We pay our investors a 15% annualized rate of return, regardless of the profit on the actual transaction.
Here’s how the deal works for a typical investor:
Let’s say you invest $100,000 in the Ivey Estates deal I mentioned a couple weeks ago. If you remember, our cost per lot is roughly $33k and our conservative expectation is to sell these lots in 12-14 months at $75k each.
For simplicity sake, let’s assume that we meet our goal in 12 months. As an investor, you would receive your payment from three sources:
• First, you would receive your initial $100k back
• Second, you would receive your 15% preferred rate of return ($15,000)
• Finally, you would receive 60% of the remaining revenue with Ashford Capital taking 40%. In this example, the profit sharing portion would be $40,846 (netting out all fees & expenses)
So in this case, the total gain on a $100k investment would be $55,846 ($15,000 from the preferred rate of return, plus the $40,846 profit split). That’s a 55.8% return in just 12 months!
Why Offer a Preferred Rate?
A number of investors have asked me why Ashford Capital would offer a preferred rate of return in addition to a profit split. After all, most investment firms would offer one or the other – but not both sources of income.
From my perspective, this arrangement makes perfect sense. When we set up this structure, I wanted to make sure that Ashford Capital’s interests were aligned with our clients. For our clients, the very best outcome is for us to buy and sell properties with a very attractive profit – in the shortest amount of time possible.
The preferred rate of return starts the clock ticking for us as a company. We realize that we’re on the hook the moment we receive your investment – and we want to offer you a profit as quickly as possible. So the preferred rate of return simply adds incentive for us to get deals done in a short period of time.
The profit split is obvious – we want to make money only when our customers make money. So we benefit when you as an investor makes money. If you aren’t successful, then we’re not going to do well. But if you realize a strong profit, we’re going to succeed alongside our investors.
In today’s low-yield environment, we think a 15% preferred rate of return is very competitive. When you add on the 60% profit split, we think the opportunity becomes even better!
I would love to sit down with you and discuss how we can help you generate yield – and strong returns from your investment capital. Please give me a call so we can schedule a time to grab some coffee or share lunch. I think you’ll be excited about the opportunities we have on the docket right now.
Wishing you every success,
Matt
Matthew J. Riedemann
Founder, President, & Managing Director
Ashford Capital Partners
678-231-4579
[email protected]