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My spouse and I recently purchased a rental property. We have about $40,000(US) that a recently deceased relative left us and we have decided to use it for our rental business to handle special assessments (the unit is a condo), repairs, upgrades, HOA dues and taxes when not rented, etc. I'd like the money to at least keep pace with inflation but don't want anything too risky.

Today our business bank sent us an offer for a 2.25% CD if we invest $25,000 for 1 year, or 2.0% of we invest $10,000 for a year. Recent trends in US inflation have been around 2%, so this seems close to keeping up with inflation. Are there better ways to keep up with inflation that have relatively low risk? Is there any reason we should avoid CDs?

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The biggest problem with a CD is what happens if you have to cash the CD in before it matures.

  • You may have to sacrifice some of the interest in order to terminate the certificate.
  • CDs also don't generally allow for partial withdrawals. So if you need only some of the money in the CD to pay for the repair or special assessment you will have to cash in the entire CD.
  • CD's also don't generally allow for you to make additional deposits during the term.

All of these shortcomings can be addressed by picking a non-standard CD/ Some do allow early termination, partial termination, or the ability to add funds. When a bank or a credit union does offer these more flexible CDs they do come with costs such as a lower interest rate.

Other people do get flexibility by laddering their CDs, so one matures every quarter. But that will mean that each CD is smaller, and in the example in your question you can miss out on a CD that pays a better rate if you can invest more money in that CD.

Another place you can invest the funds is through treasury direct to invest in US Government T-bills. They are backed by the US government, are 100% online and have terms as low as 4 weeks, with the ability pick longer terms and an easy mechanism to roll over the funds.

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  • "Another place you can invest the funds is" an online high-yield savings account.
    – RonJohn
    Jul 24, 2019 at 12:22
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    @RonJohn: But few of those offer businesses the same interest rate.
    – Ben Voigt
    Jul 24, 2019 at 13:27
  • @benvoight interesting. I didn’t know that.
    – RonJohn
    Jul 24, 2019 at 13:37
  • Thank you for the insights! I wasn't aware of treasury direct. That looks interesting.
    – user1118321
    Jul 24, 2019 at 15:26
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    FWIW we have started moving our emergency fund into 4 week T-Bills. Let's say we have 12 weeks of savings for emergencies. On day 1 we purchase 1/3d of the account in t-bills, then we setup 1/3 to be invested 4 weeks after the first, and then the final third 4 weeks later. Then we can set those to reinvest and cancel if something drastic comes up.
    – Scott
    Jul 24, 2019 at 16:59
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Warning: This is only an answer in the technical sense. Other treasury securities nearly always have higher returns.

The naive solution is to buy Treasury Inflation-Protected Securities. It even says "Inflation-Protected" in the name. What it actually does is set the return based on the consumer price index.

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