The banker’s traditional lending model pre-dates the history of the United States—in fact, it dates to biblical times at least. That model could be referred to as making money “on margin”.
Essentially, a bank borrows money at one interest rate and, of course, lends it out at a higher rate. If a bank pays you 1% interest for your money in a savings account, but lends it out in the form of mortgages or commercial loans at, say, 7%, it’s clear how they make money. In this example, the six percentage points of “spread” between the cost of their money and what they receive from their borrowers is their margin.
Every American is now aware of the credit crisis currently facing this country. It’s not that banks don’t want to lend money because their spread is too low. They don’t want to lend money period, at any interest rate. Can you see the opportunity for a person with good credit who has the ability to borrow fairly cheaply?
Now, if you had a million dollars of cash to invest that you really don’t need for living expenses right away, you can imagine ways to lend it out for a healthy profit margin just like banks do (or did, at least). But did you ever think that you could “play the bank” even without having a lot of spare cash? You can. I do.
I have bought more than a couple of houses using credit cards or unsecured lines of credit. In recent years, rates on those cards averaged around 8%. But by putting that cash into an appealing rental property, the investment provides up to 20% cash on cash return. After I made my monthly credit card payment, my spread was 12 percentage points. A grand slam by anybody’s standards. If I had used my own money, my return on investment would have been 20%. That means I would get back all the money I invested in 5 years. But because I had to pay the credit card for the use of their money, my return was only 12% (20% minus my 8% cost).
But was it really only 12%? No! My true return was infinite! That’s because I used none of my own money. The investment itself only returned 12% of the capital used. But because NONE of that capital was my own money, my personal return was infinite. I make a small payment, but I receive a big one every month for doing nothing. Powerful stuff.
Now, fast forward to 2009 where credit cards (and debt in general) have gotten a bad name. But that’s all about the “bad” debt that consumers incurred—where they used their credit cards to pay expenses like vacations or buy “assets” like bicycles that obviously provide no cash flow whatsoever. Those people had to pay the 8% or whatever interest rate but how much income did they receive from the thing they funded with it??? Zip, zero, zilch. That’s bad debt and it deserves to have a bad name. That’s not what I’m talking about here.
I’m talking about “good” debt—the banking model. You borrow at one rate, put it into a solid property that will be rented out for a cash flow that is greater than the cost of your debt. Just like banks do.
If you have credit cards or unsecured lines of credit that are not being used, you have two problems. One is that, if you don’t use it you might lose it, even if you have good credit. Credit card companies systematically review accounts and reduce unused credit lines to hedge their risks against people who use them as a lifeline. The other problem is you are not leveraging it to create an income for yourself.
Contact Great Lakes Secured Investments if you would like to explore the opportunity to make money not by using your money—but by using your credit card companies’ money.
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