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How Do Banks Work?

We have been conditioned to deposit money in banks. We save money in our saving account (or checking, money market, CD’s etc.). We are conditioned to think that our money is safe there, and we do so based on trust.   We are then paid a small interest rate, and just in case that tiny interest rate wasn’t bad enough, we have to pay taxes on the interest income.   The bank then uses our money to leverage up to 10 times.   This money multiplier is through the fractional-reserve lending concept.   So our $1000 deposit generate up to $10,000 in loans for the bank.

We then proceed to borrow that money from the bank (our own money) at a much higher interest rate, and we tie up our homes and other collateral just in case we default. Given that we are borrowing money from the banks, they set their own terms: the interest rate, the collateral requirement, the term of the loan etc. We start to complain about the terms of the loan, but it doesn’t really matter. The rules are such that he who has the gold makes the rules.  Banks make the rules and there’s no way around it.  Running out of options, we decide to sign on the dotted line and borrow the money on their terms. If we were to default, they end up taking on all the collateral they tied up.  Remeber we put the high risk money down – which is the downpayment.   That’s when we realize they tied up a lot more collateral than we borrowed.   They sale our collateral for next to nothing  just to recoup their money and we get nothing. We took on a lot more risk than we needed since we feel like we have no choice, because they (the banks) set the rules.

Then they lend the same money again.  However, most people do not default.  When the person pays the loan, the banks re-lend us the same money again and again.  They are moving money fast, taking little risk.  They are making a lot of money.  We realize we are still paying interest long after we have paid them the original loan amount.  More so, they have generated many more loans from the same money we paid them, and we are still paying them more.  We feel we have no choice, but we do. We can become the banker ourselves.  We are conditioned to deposit money into banks. Why not to deposit them into our own personal bank?  Why not lend our own money to others, take on the safer position and make more money?  Why not do our own leveraging?  Take our money, leverage it up to 10 times and lend it out?  You can do everything we’ve talked about above and make a lot of money.  However, we have to start somewhere by getting an understanding of how to create such a system.  Start buy being a private lender on a small loan secured by real estate and learn from doing so.  The secret to bankers’ prosperity is adopting their mindset, their rules, their understanding of how they manage money, use financial strategies and ultimately, leaving a legacy for the next generation of bankers in your own family.

If you would like to be a private lender and make a great return on your money secured by real estate without doing any work, then call 843-754-8174 or email support@wealthblackbox.com for more information.



Using Non-Recourse Notes To Leverage Real Estate

As a IRA investor, many times you find a property that you can get a great deal on but you don’t have enough money in your IRA to buy the property. One way to remedy this issue is to using some funds from your IRA and some funds from other peoples money (OPM). However, there is one very important thing you have to remember when doing so in an IRA. The loan has to be a non-recourse loan which means you are not personally guarantee the payback of the loan but only using the property to secure the loan and sole source of repayment. The non recourse lender cannot pursue other assets owned by the account owner or the IRA itself. The IRS does not allow you to personally guarantee anything with respect to your IRA or use the IRA as collateral in any way.

The differences between qualifying and a non-recourse loan are quite different. The non recourse lender will not look at your income, your W-2s, your employment history, your tax returns or other assets outside your IRA. This makes the loan process faster and simpler for both parties. In addition, the non-recourse note does not close under your personal name but under the name and EIN of the custodian you are using at the time and therefore does not go on your credit report. This is helpful to those investors with many loans under their name since Fannie Mae and Freddie Mac limit the number of properties you can finance in you own name.

The non-recourse loans are underwritten similar to commercial loans. They are looking at the property, the leases, cash flow and equity. The main things these types of lender look at are:

  • The property condition, location, and ability to rent.
  • The ability to cash flow the property and cover the monthly mortgage payment and expenses.
  • The funds available in the IRA for the downpayment and the ability to pay the expenses such as taxes, insurance, repairs, vacancies, etc.

Anyone familiar with real estate understands that the use of debt financing can you the ability to leverage their available cash and therefore get better returns. Your return skyrockets when you use debt financing for buying real estate. For example, you buy a $100,000 property (worth $135,000) and use $100,000 of your IRA funds to purchase the property. You rent it for one year and then sell it at $135,000 for a total return of $47,000 ($12,000 rents and $35,000 equity) less yearly expenses of $7,000 (tax, insurance, repairs, etc) and net $40,000 in your IRA. Your cash on cash return is $40,000/$100,000 = 40%. However, if you did the same deal but only used on $30,000 from your IRA and $70,000 non-recourse note (debt serve cost of ~$5000) would result in a much higher return. You would have only $42,000 in the deal ($30,000 IRA money + $7,000 expenses + $5,000 debt financing for a year), not $100,000. Therefore, your cash on cash return would be $40,000/$42,000 = 95%.