077: Are Banks Robbing You Blind?
You’re familiar with a bank, right? When you were young, maybe your parents helped you open your first checking account. And when you were in college, you started to learn how to save more, or not with all the spending you were doing in your early 20s. 🤩🤩
Banks were seen as safe, secure, and well-established environments to hold your money. Back in the day, you never imagined these same institutions might be robbing you blind.
Spoiler alert, they totally are.
We often get asked, “Hey Palm and Nan, should I invest or keep money in the bank? Which is safer?” It’s a common and valid question. Think about it: a lot of us were taught at a young age to go to school, get good grades, and get a well-paying job that will help us save for retirement.
And when most of us think “save” we think “to keep our cash in the bank.” It’s almost impossible to think of an alternative way to keep your money safe. This reminds us of one of our favorite quotes from one of our favorite financial Dad heroes, Robert Kiyosaki who famously said “Most people put money in their piggy bank. I buy a goose that lays golden eggs over and over again. That is what an asset is.”
I love that quote! What Robert Kiyosaki taught us is how important it is to invest in asset classes that will continue to have our money make us money over and over and over again. ❤️️❤️️
Almost like money breeding rabbits. Money-making money babies!
Here’s the true story about how banks manufacture money out of nothing. You see, banks are in the business of cash flow. That is what banks do. They’re in the business of cash flow and thinking about their returns.
It’s pretty obvious too. Next time you walk into a bank, look at its promotional advertisements. On one side of the pamphlet, you’ll see “great returns as high as 1%!” which is what they’re paying you.
But on the other side of that same brochure, it reads “Mortgage rates as low as 5%!” which is what they’re charging you.
So they’re saying “We’re paying you 1% to keep your money with us, but we’re charging you 5% on a mortgage.” By the way, that’s not a 4% return. 😞
If you’re buying an ice cream sundae for $1 and selling them for $5, what’s your rate of return on that? Hundreds of a percent!
Now if they did the same thing they tell most people to do, which is put money in a CD– Certificate of Deposit– they would go bankrupt quickly because there’s zero cash flow in that!
Banks are in the business of cash flow and they get their way through incentivizing you, the borrower. When you pay them back quicker with bi-weekly payments and lower interest rates when you choose a 15-year loan rather than a 30-year loan, it’s because they want their money back faster so they can send out that same money again and again and again. 😲😲
Here’s another truth – we’re always financing. Whether you pay in cash or you borrow, you pay the bank a finance charge. If you pay cash, you forfeit the right to earn interest. Either way, there’s always an interest cost. It’s easier to see the interest we pay rather than the interest we lose. But this is where the wealth is transferred.
And where there’s a huge amount of wealth loss.
Banks manufacture money out of nothing. They pay you 1% interest to keep your money, and if you want your money back, they’re going to charge you 5% to borrow.
Refinancing is a good example of this. You use your hard-earned money to pay down your mortgage and over time you build equity through both the principal and appreciation. And if you want access to your money guess what? You’re going to have to pay the bank for it. Your own money!
Crazy, right?! 🏦 Banks love to use the phrase it takes money to make money. But what they really mean is “it takes your money for them to make money.” If you follow the advice we’re about to give you, you can cut out the bank as long as you and your middleman can boost your returns by hundreds of a percentage.
There’s no easy way to say this, banks are lying to you. They’re telling you one thing and then doing the exact opposite and making money on your money. The bank is your middleman and they are profiting big time with your hard-earned funds.
At the same time, they’re earning interest on that money because they pay you a small amount and then rent that out for a lot more.
Okay, let’s dial it back to that 1% you get back from the 🏦 bank…
Actually, you do know it’s less than 1%, right? 😖😖
Totally, we definitely rounded up. That 1% you supposedly get back from the bank, they actually lending it for 5%– which makes it a 400% markup! They’re paying you $1 for every $100 they borrow, and they’re selling that money for $5. Amazing, right?
Honestly, the bank rate of return is closer to what we call an infinite return. By automatically storing your cash in the bank you get practically nothing back and they charge someone else 5%-6%. So what’s the bank’s rate of return? Infinite. An infinite return.
Why would you give that to a bank when you can give it to yourself?! In case you haven’t caught on by now, putting money in a bank does not make you wealthy– it makes the fat suits at JP Morgan and others like it a little fatter.
And by “fatter” we mean “wealthier.” The banks put their reserve or portion of the reserves in cash value insurance that’s designed with high cash flow and low commission.
Don’t stay poor. Don’t make them rich. Cut out the bank middleman. 🙏🙏
Like we mentioned a little bit ago, why make the banks wealthier when you can be doing this for yourself?
Guess what? You absolutely can. If you’re keeping track with us, and you’re still keeping money in the bank and think it’s a horrible idea, listen up. You’re making 1% or less, and inflation is at 8.6%, the next big question that matters is, if banks are robbing your blind, what do you do with your money next? Introducing Peer to Peer Lending.
Peer to Peer lending or P2P lending is to remove the banker from the loan arrangement. Instead, you as the investor become the banker. Your investment is in loans made to individual borrowers.
Now, before you start freaking out 😜 that you might have to dole out hundreds of thousands’ worth of loans to individuals you don’t know, hear us out for a second. You don’t actually fund an entire loan to a borrower, instead, you invest in what are known as “notes.”
Broken down simply, these are $25 units of a loan. A person who borrows $25,000 from a P2P platform may have his or her loan funded up to thousands of investors at $25 each.
Do you see where the word “peer” makes sense here? 🤔 You’re in this with others similar to you. It also allows you to diversify across many different loans. In addition to that, you can control how much risk you take on. You can invest more aggressively by buying higher risk, higher yield loans.
Orrrr be more conservative with lower risk, lower yield loans. The choice is really yours.
Private Money Lenders
Here’s another way you can stop the banks from robbing you blind, by becoming a private money lender. Private money lenders are used by short and long-term real estate investors to finance single-family flipping properties. Chip and Joanna Gaines style. 🧐🧐
And no we’re not talking about hard money loans, we’re talking fast capital to compete with the timeline of an all-cash buyer. Nan, do you remember our good ol’ house flipping days?
I sure do, and I sure would like to forget sometimes too! Back when we were flipping houses, we were private money lenders as well! You see, in Los Angeles or any other expensive city, a rusty dusty house can be as much as $1 million dollars. And that’s on the low end, it’s impossible to find a hard money lender who would finance the entire purchase plus construction cost.
In order to purchase the house to flip and sell for profit, flippers had to line up their finances as well. For hard money lenders, this meant in order to mitigate the risk they would not finance the entire purchase price because if anything goes south, they wouldn’t have that cushion equity.
In many scenarios, the hard money lender’s term would be something along the lines of 70% of the purchase price plus 100% of the construction cost. That’s when flippers would have to either fund the missing gap themselves or find private money lenders who were more than happy to be the bank themselves.
Of course, these loans aren’t offered by traditional lenders. I mean, you kind of have to be a little off your rocker in order to agree to fast financing in as little as 10 days. These loans will have a higher interest rate than conventional mortgage lenders. But the best way to seal the deal with this type of loan is through a real estate asset. 😊😊
Okay, and now moving on to our favorite way to BYOB– Become Your Own Bank– is through apartment syndication.
We all knew it was going to come to this point, right?! But let’s be clear, when we talk about being your own bank, we’re not talking about being the typical limited partner with a split of 80/20% or 70/30%, but rather you can invest your money for a preferred return. 🤩🤩
We have seen a lot of this type of capital structure lately where investors invest to get a preferred return (8-12%) and sometimes have a shorter investment hold period around 2-3 years.
While it’s all good, you would not be participating in the upside of the apartment sales.
The benefit of this type of investment is if, for some reason, the sponsorship team couldn’t hit the expectation. In that case, the priority of returns goes to the preferred investors first. There’s no right or wrong answer to how you should invest your money. Be sure to always be using your personal investing goals to determine which apartment syndication structure is best for you.
If you’re in the apartment syndication game for more of the ongoing passive income–aka cash flow– apartment syndication with a preferred return might work better as you would likely see greater cash flow distributions during the lifecycle of the project. ✨✨
At the same time, you will likely see smaller returns as you won’t be participating in the upside upon the apartment sales.
Banking your own bank isn’t hard. If we zoom out enough, you might actually realize you’re already the bank to the bank. You’re just not making any money from it. It’s time to take back your power.
Some of you listening now might be thinking you want this, and you want to do this now. While we’re all about enthusiasm and wealth has a need for speed, be sure to always consult professionals in your network as everyone’s financial situation is different.
Long-term wealth building is an art form, there is craftsmanship to this life. You have to utilize the best strategy to make more, and keep more, either by developing some mastery yourself or leveraging your team of experts to compress the timeline.
Here’s what else we know, if this is the life you want, you totally got this. 💪 Our job is to cheer you on and provide you with education at every phase of your journey as you run your race towards financial freedom. 🙌
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