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Real Estate Investing with Keith Weinhold
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Disturbing Facts About Your Bank, Many Millennials Will Rent Forever
• 37 minGet our newsletter free here or text “GRE” to 66866. Storing your money at a bank entails more risk than you think. Your deposit is a bank’s liability. Banks must take risks with your money because they don’t charge you fees. Banks used to have a 10:1 reserve ratio. As of March 2020, all reserve requirements are now eliminated. Rather than storing lots of money at the bank, borrow lots of money from the bank. US households own $41T of owner-occupied property—$29T in equity, $12T in debt. The national LTV ratio is 30%, historically low. That’s 70% equity. Of the five ways real estate pays: one profit source is the market, two are from the tenant’s job, and two come from the government. Many Millennials plan to rent forever. 63% have nothing saved for a down payment. The interest-rate lock in effect keeps constraining the available supply of homes. This forces more homebuilders to build. Last week, NBC Nightly News covered the rise of build-to-rent communities. Resources mentioned: Show Notes: www.GetRichEducation.com/455 Get mortgage loans for investment property: RidgeLendingGroup.com or call 855-74-RIDGE or e-mail: info@RidgeLendingGroup.com Find cash-flowing Jacksonville property at: www.JWBrealestate.com/GRE Invest with Freedom Family Investments. You get paid first: Text ‘FAMILY’ to 66866 Will you please leave a review for the show? I’d be grateful. Search “how to leave an Apple Podcasts review” Top Properties & Providers: GREmarketplace.com Best Financial Education: GetRichEducation.com Get our wealth-building newsletter free— text ‘GRE’ to 66866 Our YouTube Channel: www.youtube.com/c/GetRichEducation Follow us on Instagram: @getricheducation Keith’s personal Instagram: @keithweinhold Complete episode transcript: Welcome to GRE! I’m your host, Keith Weinhold. Do you have any idea what banks do with your money? How home equity is like a bank, hot Millennial rental trends, and the proliferation of Build To Rent real estate, today on Get Rich Education! ___________ Welcome to GRE! From Glens Falls, NY to Klamath Falls, OR and across 188 nations worldwide, the voice of real estate investing since 2014. You’re listening to Get Rich Education. I’m your host, Keith Weinhold. You did not wake up to be mediocre today. So we don’t focus on long-term budgeting here. Correlating financial betterment chiefly with reducing your expenses is just a race to the bottom. You and your peers would just be racing to the bottom. We know that, instead, yes, arbitrage is created when you borrow low and invest high. But the ultimate arbitrage - which is the gap or that spread, is when your quality of life vastly exceeds your cost of living. That’s that gap that you & I pry open ever wider together right here, every week. Savers lose wealth. Stock investors maintain wealth. REIs build wealth. Savers lose wealth because inflation makes holding onto a dollar like a block of ice melting in your hand. Retail stock investors only MAINTAIN wealth because their 9 to 10% long-term return is worn down to less than nothing with inflation, emotion, taxes, fees, and volatility. And real estate investors BUILD real, durable wealth. If you have a mentality of trading time for dollars, then you have a certain way of looking at your life. If you realize that your investing mission in your life is to build things that pay you to own them, then you have a different way of looking at life. The resources that you need to build those things are what we cultivate here on this show. You know something though, by the time that I bought my first rental property, I didn’t have all of that figured out yet. It really wasn’t until I bought my second property. It was also a fourplex, just like the first one. This second one cost $530,000. And check out how I bought it. I bought it with a 10% down payment, interest-only loan, and interest rate of 7⅝%. Yep, I took accumulated equity from my first four-plex and used it as a down payment on the second four plex. Now, that way, I essentially had zero money in the deal - which is an infinite return strategy - and both fourplexes cashflowed. Now, the interest-only loan on my second fourplex there… that gives some people pause. Why would I do that? That kept my monthly payment amount down - since I could pay only interest - and didn’t have to pay principal. That turned a property with a small cash flow into a nice cash flow. Yeah, some people don’t like interest-onlys because then the tenant isn’t paying down your principal for you. I typically take interest-only loans because for every dollar that doesn’t go into your illiquid principal as equity, instead, it becomes a dollar of liquid cash flow that goes into your pocket. In fact, changes are that the reason that you have fat equity in home right now is from market appreciation, not principal paydown. In fact, why don’t I approach the classic GRE principle of “your return from home equity is always zero” from a new and novel angle here today. Gosh, this could make you hundreds of thousands or millions over your investor career. Imagine a bank. We’ll call it a red bank. This bank is offering you zero rate of return, it’s difficult for you to withdraw your money from it, and this red bank might not even let you withdraw your own money at all - it is at their discretion. How motivated are you to hold your money at that bank? Well, you aren’t at all. Well, I just described equity that’s locked inside properties… and that’s why… your properties make terrible banks. Equity is the opposite of you being liquid. Instead, the GRE Way is leverage and arbitrage, but it needs to be supported by cash flow. So, we are not quite on an island here with our strategy, because we’re still connected with the mainstream finance world - but we’re, say, a peninsula then. And, like a peninsula, maybe, real estate keeps you insulated - though not completely disconnected from that more volatile stock and bond shuffle that most people are on - which provides little to zero leverage or cash flow. Do you know what that stock and bond shuffle is - that seesaw? Let’s remind ourselves… that when money flees the stock market, it usually ends up in bonds. As demand for bonds goes UP, interest rates go DOWN. Then, as interest rates go down, investors go back to stocks in pursuit of yield, and everything reverses. It’s an ebb and flow of funds which often provides you with zero real return. That’s how that seesaw goes. So rather than get a part-time job, which is selling your time for dollars, get a few rental properties instead. Whether you manage them yourself or you manage the manager - like I do, I manage managers… you’ve got the income stream of a part-time job with an asset that appreciates at the same time. As time passes, the reason that you will feel satisfied is because you took strategic risk. Now, to stick to the bank analogy theme here, a lot of people still don’t realize that when you take your money to the bank, you are a creditor of the bank, and the bank is now lending your money out. So, just think about what you’re doing - well, you yourself probably aren’t doing so much of this - you’re probably a better than average investor since you’re listening here. But think about those depositors that keep a lot of money at the bank. Yes, we know you’re losing to inflation, but besides that, just think about what happens to your money this way. What about a parking garage and your car? OK, when you park your car at a valet, the valet is supposed to turn around and park it in a garage. The valet does not have the right to take your car and let an Uber driver go make money with it while you’re off having dinner. And then maybe they’ll give you the same make & model back at the end of the night… and they stick YOU with the risk of having a problem with your car - or your money. That’s what banks are doing with your money when you park it there. It’s like a valet letting an Uber driver use it and take risks with it without your knowledge. What isn’t FDIC-insured is… at… risk. Well, what’s the alternative to banks lending out the money that you deposited with them? Well, the alternative to the existing system is that banks, instead, could make money off of fees that they charge you. How is it that you avoid paying fees to your bank right now, like you are? I mean, afterall, banks have capital expenses, technology expenses, and employee expenses. If banks charge fees to you rather than profiting from the spread that they get on lending your money out, we could have a safer system. But most people like the allure of fee-free banking, partly because that’s what they’re used to. Banks used to have to hold onto a dollar for every $10 they had in deposits. That’s also known as a 10:1 fractional reserve ratio. Well, the risks of parking your money at a bank went up in March of 2020. That’s when the Fed just COMPLETELY eliminated reserve ratios for banks. Now, for every $10 they have in deposits, banks can hold zero dollars in reserve. Instead of parking your money at a bank, you do the opposite. You borrow from the bank, pay them their 7% interest and invest it in “Real Estate Pays Five Ways” property that beats 7%. Right there’s… your arbitrage. Now you’re using their money instead of them using your money - like the valet that you entrusted your car with that lent out your car to the Uber driver while you were at dinner. So outside of inflation, why is it risky to keep your money parked
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