Gordon Gekko, Hollywood’s famous Investment Banker, coined the Term “Money Never Sleeps” in the 2010 Film, Wall Street-Money Never Sleeps. A more specific and enlightening quote came from Jack Heidt, Former President of Union Bank of California during the 1980’s who said when I asked about perspectives on his illustrious banking career, “Interest Never Sleeps”. Let’s take a look at this quote and what it means to Lenders and Borrowers:
A Real Estate Lender’s Perspective:
- Interest on invested capital earned every day, all day and night, adds up. The below table shows how a Trust Deed Investment for $240,500 that earned a 10.00% yield over the course of the 618 day loan provided the Lender with $20,362 of smart passive income.
|Property Address:||Los Angeles, CA|
|Original Loan Amount||$240,500.00|
|Lender Loan Portion %||50.00%|
|Lender Loan Portion||$120,250.00|
|Total Interest Paid for Term||$20,271.80|
|Total Late Charges for Lender||$91.03|
|Total Interest and Fees||$20,362.83|
|Total Days of Loan||618|
|Net Interest Per Day||$32.95|
|Annual Realized Yield||10.00%|
- Remember the Rule of 72: The Rule of 72 says to divide your yield into 72 to determine the amount of time for your money to double in value. So, if you earn 10% on your money, it will take 7.2 years to double your money. (72/10=7.2)
A Borrower’s Perspective:
- Explore Positive Arbitrage: Lower interest rate loans can be invested in a project providing a higher return that provides a positive arbitrage on the capital. Example: A loan at 4% invested at 10% earns a 6% positive return.
- Define and Execute the Exit: Higher interest rates can erode profits for real estate investors. A timely exit of the investment through a refinance to a lower interest rate or the property’s sale can capture the projected return.
Lenders and Borrowers can both make money by remembering that “Interest Never Sleeps”. What is your story for “Interest Never Sleeps”? We would like to know.