Using the term Renting Shares has got a few people into trouble. It is not the correct legal term. It’s probably because it make too much sense and we can’t have that, can we? Let’s have a go at explaining what the term is used for. What does it mean and why is is called Renting Shares? Well, I’ll run you through a hypothetical example of one years worth of trading to see exactly what it is. This is effectively an example I learned from 21st Century Academy and Jamie McIntyre.
First, to put this into perspective, I’ll use an analogy.
Renting Houses Like a Landlord
A landlord rents out a house. The house may have cost $100,000 and costs $8,000 a year in interest to the bank. The tenant pays $200 per week in rent and there are fees for real estate agents, upkeep, maintenance, rates etc… Here is a very simplified summary :
Cost of house: $100,000
Annual bank interest on a 100% loan: $8,000
Maintenance, upkeep etc: $2,000
Real estate agent fees: $400
Total expenses per annum: $10,400
Rental income: $200 per week = $10,400 per annum
This means your expenses are the same as the income and your house would be cashflow neutral. Not a bad investment considering properties generally go up in value over time. This means you can make money without any real drain to your cashflow. This example will of course vary heavily depending on different financial scenarios.
Renting Shares Like a Sharelord
Now, if you would be Renting Shares Like a Sharelord, you would effectively buy shares and just like a house, you’d simply rent them out to the stock market. You may buy a share at $10.00 and offer to sell it at $10.50. If the share goes above $10.50 you have to sell it at a 50c profit and cash in.
Cost of shares: $100,000
Annual bank interest on a 100% loan: $8,000
Estimated stock market brokerage: $1,000
Options fees, additional brokerage: $700
Total expenses per annum: $9,700
Approximate Share Rental income, non leveraged 2% per month: $24,000
Profit = $14,300
Return On Investment = 14,3% per annum
Should you wish to have a 90% insurance on your shares to cover yourself against a stock market correction, this would cost approximately 4-7% of the share cost, depending on the share volatility. If you want the added security, you can have an insured portfolio and still make around 6-10% on the share portfolio.
Create Wealth Through Renting Shares
In the above example, I haven’t allowed for the fact that you will get forced to sell your shares at a profit every now and again. This adds to your investment profits and there are some extra stock broker fees to consider. This is just a very simple example of how to create wealth through renting shares. Extra cashflow has never hurt anyone. When adding financial discipline to the equation you can benefit greatly.
Covered Calls and Compound Interest
The correct industry term for Renting Shares is Writing Covered Calls. You do this on the stock market and obviously should use a licensed qualified stockbroker. When this strategy is done correctly and the rules are respected, people can make some handsome returns. I don’t know about you but I’m pretty happy with a 2% per month return on investment. That is 24% per annum and is you were to apply compound interest, well that is whole new kettle of fish… We will cover compound interest when talking about building a Millionaire Mindset.
Until next time…
I wish you abundance in the 21st Century
Sean Rasmussen
21st Century Academy
Universal Wealth Creation © 2004 - 2007
