“I would rather earn 1% off 100 people's efforts than 100% of my own efforts.” – John D. Rockefeller
Banks have a simple model. They borrow at a low rate and lend at a higher rate. The funds they "borrow" come from their customer's savings accounts, on which they pay interest of around 1% or less. However, banks actually have the ability to lend out 10 times the amount of funds they've taken in as deposits.
This ability to supercharge their profitability is all thanks to the magic of Fractional Reserve banking practices. Other industries cannot do this – leveraging their product and profiting on a fraction of the commodity. For instance, imagine paying for 100% of a car and only receiving the front half!
The model works.
This is evidenced by The Wall Street Journal's recent reports that Bank of America, CitiBank, Chase, and Wells Fargo are all making a strong comeback following the financial crisis of the late 2000s. Since 2006, more than 380 banks and mortgage lending institutions have failed (The Mortgage Lender Implode-o-Meter), though current numbers suggest that banks are as healthy as they ever have been.
What Lessons Can Investors Learn From Banks?
There are many things that investors can learn from the world's largest banks. One thing they do very well is hedge their investments. Banks are invested in many diverse industries which allow them to balance any risk of loss. In the real estate investing business, you can mimic this strategy by balancing your portfolio by shorting investments in the equities market which strongly correlate to the housing market. This will offer you an upside if the market turns down.
Covering your downside should be your top priority when evaluating an investment. While the upside of an investment can cause many novice investors to view their investment with rose-colored glasses, slowing down and looking at the downside first can help to mitigate these risks. This will in turn make your balance sheet stronger, which can build momentum, confidence, and further success.
Discover more information about how you can maximize your return on investment by contacting our knowledgeable real estate investment experts at The Legacy Group today. With more than 100 years of combined real estate experience, we can guide you towards a sensible investment strategy and help you achieve your financial goals.