Banks Are For Your Perfect Keepers

[Jason Dillard]

It took me years and years for me to get it.  I mean banks are happy to lend on real estate.  Why not just use em?  However, after tons of deals, it finally sunk in.  Unless I plan to keep a property forever, just don't put a bank loan on it.  If the asset's benefits are so good, and the obligations are so low, then borrow from the bank, and set off to the side.  OK, I admit it.  My name is Jason, and I'm a bank borroweracholic. We own some property that we thought were in the "Goldilocks Zone" and they have bank loans.  I chose to give up my ability to be flexible with a percentage of my portfolio that was "just right". In return, we have safe cash flow that pays the bills.

What about the rest of the deals?  Here is what I think:

When you close a deal using a bank, it seriously retards your ability to use your equity.   You are basically allowing the bank to hold 20% or more of your equity hostage just to get the loan.  It's your equity. Soon you may be calling JG Wentworth...."It's my equity, and I want to use it now!"  Don't you want to keep doing deals to increase your net worth, cash flow, depreciation, appreciation, and other benefits?  Use of that equity, that is now stagnant behind that bank loan, could have helped get the future deals done.  If you choose to leverage, why not use another formula that doesn't hinder your ability to grow?  

Math is real.  Yall heard of compound interest?  Earning interest on your interest is compounding.  The frequency of the compounding is the powerful part.  The shorter the time between the compounding, the faster the numbers grow.   As real estate investors, we do deals that create equity all the time.  Most of us created it and then do nothing.  What if you go ahead and get that equity into the next deal quickly?  It starts to compound your equity.  Banks make is harder for me to be able to compound my equity.  

Here is deal we did this year:  One of our tenant buyers unexpectedly paid us off.  The property had a private loan on it.  Since we didn't have a bank loan, we asked our lender to move to another house.  So now we left the closing with all cash and bought another house that rents for more than the previous house.  The new house is where we now secure the same private lender.  Since I had a private lender that would "move", I was a cash buyer on the next deal.  I compounded my equity and increased the benefits(this time cash flow).

What are some of your favorite ways to compound your equity?