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Opportunity Arises for Income Investors as Property Values Rise in Municipal Bonds

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Income Investors Find Opportunity in Municipal Bonds as Property Values Rise

Income investors have a unique opportunity to invest in municipal bonds that support school projects, potentially earning a yield of around 6% after tax considerations. Local municipal general obligation bonds play a crucial role in funding school operations and specific projects such as renovations or new buildings. These bonds are backed by the full faith and credit of the issuer and offer the benefit of federal tax exemption. In some cases, they are also exempt from state taxes. Currently, local general obligation munis offer historically attractive yields of about 3.7%, with the potential for even higher tax-adjusted yields for those in the highest tax bracket.

Stability and Credit Quality

Local general obligation munis generally exhibit solid credit quality, with approximately 45% of them being AAA rated compared to 21% in the broader municipal bond market. The credit backdrop is relatively stable and may even improve, making these bonds an attractive investment option. The financial shape of most municipal issuers remains strong due to the stimulus received in 2020 and 2021, along with added tax revenue from stimulus money circulating in the economy.

Property Values and Revenue Potential

Stable property taxes contribute to the financial stability of local general obligation bonds. Over the past several years, property values have risen significantly, which could translate into higher revenue from property taxes in the future. Although there is typically a lag before the assessed value catches up to the current market value, the upward trend in property values suggests the potential for increased revenues in the coming years.

Choosing the Right Municipalities

When investing in municipal bonds, it is crucial to conduct thorough research on the creditworthiness of the area, including its reserves and balanced budgets. Areas with stable or rising populations and higher-income earners tend to be favorable for long-term debt service. It is advisable to avoid smaller municipalities with a history of financial problems to mitigate risk. Diversification across multiple states is also recommended, although it's important to note that buying bonds outside of your state may subject you to state income tax.

Investment Options

Investors can choose to invest in municipal bonds through mutual funds or exchange-traded funds (ETFs). It is advisable to select funds with a higher allocation to local general obligation munis compared to the broad index, typically exceeding 15%. Consider factors such as fees charged and the fund's track record when making investment decisions. In conclusion, income investors have an attractive opportunity in municipal bonds as property values rise. The stability and credit quality of local general obligation munis, along with the potential for increased revenue from property taxes, make them an appealing investment option. Conducting thorough research, diversifying across states, and considering investment options such as mutual funds or ETFs can help investors make informed decisions in this market.

Conclusion: Municipal Bonds as a Potential Investment Avenue for New Businesses

The rise in property values and the attractive yield of municipal bonds present a 'hot take' for new businesses, particularly those seeking stable investment opportunities.

Investment Stability and Potential Returns

Investing in local general obligation munis can offer businesses a stable investment avenue with solid credit quality. The potential for a 6% yield after tax considerations further enhances their appeal.
Revenue Potential and Creditworthiness
The rising property values could translate into increased revenues from property taxes, bolstering the financial stability of these bonds. However, businesses must conduct thorough research into the creditworthiness of the area before investing.
Investment Options and Diversification
Investment through mutual funds or ETFs offers an easy entry point into the municipal bond market. Diversification across multiple states can also help mitigate risks. In conclusion, the rising property values and the attractive yields of municipal bonds present a unique investment opportunity for new businesses. By conducting thorough research, diversifying investments, and considering various investment options, businesses can potentially reap significant benefits from this market. As property values continue to rise, the potential for increased revenues makes municipal bonds an even more attractive investment option.
Story First Published at: https://www.cnbc.com/2023/09/07/these-municipal-bonds-offer-an-opportunity-as-property-values-rise.html
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