Article By: Jim Porter – March 24, 2023
The headline is a quote from a book called “The Wealthy Barber” by David Chilton, written in 1989. However, I am 100% sure I heard this quote at a multilevel marketing seminar in 1987.
At this seminar, the speaker talked about how historically, life insurance companies pay out dividends on cash-value life insurance policies at a rate of 3% to 4% and then invest the policyholders’ cash value in real estate for a rate of return of around 8% to 12%. The seminar theme was about the magic of compound interest and how the difference between 4% and 8% over 36 years is a lot of money, and we should buy real estate and safe stock market investments rather than lend money to a bank or buy cash-value life insurance.
This margin is exactly how life insurance companies and banks make a profit. We lend them our money at a safe low rate and then they invest this dough in income-producing hard assets like real estate, mortgages, stocks and bonds and get a higher rate of return than they pay us.
If you were to invest $1,000 per month today at 4% compounded monthly, you would have $967,000 in 36 years; at 8% you would have $2.5 million and at 12%, $7.3 million.
Net interest margin is the talk of the town on Wall Street lately with a couple of regional banks in a ton of hot water because of what they call a “run on the bank” and poor net interest margins.
Silicon Valley Bank bought a bunch of bonds and mortgage-backed securities from 2019 to 2022 with yields below 4%, and with competitors now offering 4% CDs and the U.S. government selling six-month T-bills at 4% to 5%, SVB couldn’t afford to offer competitive rates to their depositors and so folks ran to their SVB bank teller and said, “Sorry, I want the money I loaned you back right now because I can lend this money out to others and get a better rate.”
SVB has also suffered because the IPO market has dried up this past 15 months, so loan fee volume is down and, like the residential mortgage business, refinancing is dead across the country because most people and businesses refinanced their loans at low rates in 2020 and 2021 and have no need to refinance today.
The key point of this week’s column is for my adult kids, clients, readers and young people I work with in real estate to invest in income-producing assets and be an owner and not a loaner for your long-term investments.
Jim Porter, NMLS No. 276412, is the branch manager of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.
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