Hello everyone!

Banks are great investments. Why? Because they charge customers exorbitant amounts of money. They operate superior business models under the same rules that everyone else does, if at times ethically questionable. But hey, that’s capitalism, and you have the final choice my friend!

So what should you do to offset this? Read on….

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Thank you,

Eddie

Personal Finance

Last week we discussed mortgage insurance through your lender vs term insurance when you get a mortgage. We concluded that simple term insurance for the amount of your mortgage is better than getting the mortgage insurance your lender will offer you when you get the loan.

My mortgage broker responded:

Very interesting thanks for sharing. The other issue with taking the lenders mortgage insurance is if you have health issues for example, and can’t qualify for insurance anymore, you are stuck with that lender to keep the policy… they know it and your offers may be reflected that way (i.e. Major retention strategy). Getting insurance from an independent provider is also portable from one property to the next regardless of who your financing is with. (underlines added for effect)

Let’s unpack the underlines because they are important.

1. If you have health issues, and can’t qualify for insurance anymore, you are stuck with that policy…it is a major retention strategy: fair enough, big banks and lenders are exemplary businesses, and they’ll implement strategies to add more revenue and keep it. Questionable ethics since we’ve agreed that term insurance is better than mortgage insurance, but within the rights of the lender. While the insurance is only offered, it is not mandatory. It is up to you and your broker—hopefully one you trust implicitly—to discuss the pros and cons. A good broker, such as the one I have used for two separate mortgages, will be forthcoming about it (I didn’t take the insurance).

2. Getting insurance from an independent provider is also portable from one property to the next: going with the lenders insurance program means you are stuck. When you sell the property and want to port your mortgage, you can’t port the original insurance to the next property. A new qualification must ensue and another commission is paid to financial institution. But going with an independent, traditional term insurance provider means you can do whatevs you want.

Insurers, Lenders, Wall Street…the financial services industry at large, is there to sell you various products. Sometimes, extremely valuable and important products.

But they will also prey on the uniformed and charge you fees on fees on fees if you’re not careful. Indeed, the returns on equity these business generate are very good—no wonder Buffet owns six (6) banks in Berkshire Hathaway.

Three final conclusions:

1. Educate yourself before signing any financial contract.

2. If you are going to use a broker, get one using a trusted referral.

3. Lastly, if you are a customer of the bank, you might as well own the bank!

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Stock Markets

The last bullet in the previous section is important.

Banks make money by taking your deposits and lending them out to other people and businesses.

They give you essentially no interest on your money, then lend it out long-term at much higher rates.

This is called net interest margin. It's where they make most of their money.

They would much rather you keep your money in a chequing or savings account than invest it in something like an ETF and grow it faster than inflation.

But hey—they’re not going to tell you that.

They also make money charging you insane fees:

• Monthly account fees

• Credit card fees

• Wire transfer fees

• “Waiting in line” fees (your time)

• Some banks even charge you to take your own money out

These businesses are amazing; they generate huge returns on equity—for their shareholders.

So, quick tip for today: as mentioned previously, if you're a customer of the bank, you might as well own the bank, too.

The easiest way to do this is to just buy the broad market ETF—like I’m always telling you. When you buy the total stock market, you also get exposure to the banking sector.

You're now an owner of these businesses, offsetting all those fees you’re paying. And, by the way, growing your money faster than inflation.

Lastly, quick plug for Wealthsimple: no fees for investing, buying and selling ETFs, chequing, visa payments, e-transfers.

Nada.

If you don’t have it yet, you should.

Real Estate

While there are things like location, asset class, building quality, tenancies, re-development potential, etc, there is one thing that matters most in this business:

Relationships.

Unlike the stock market, there are no quoted prices every second of every day.

Whether it’s with brokers or leasing managers or the people that actually own and operate your tenancies, private information is critical in order to give you an edge.

Ultimately this information gets factored into your pricing strategy, on the buy and the sell (most of your future money is made on the buy, by the way).

If you have poor information while another competitor has better information, how can you expect to form a better business plan and pricing strategy. This applies to both acquisitions and dispositions as well as leasing and operations.

You must therefore interact with people as much as people, build that rolodex, hit the phones hard every day, listen to your customers, learn carefully from your superiors and garner as much knowledge as possible.

I’m still relatively new to this “business” of private real estate, but every day something happens that reinforces the important of nurturing good relationships.

1 Quote

“Well you could show a dog money and it’ll dance for you!”

Eddie H. Gudewill, my grandfather.

A Question

Who else hates traditional banking?

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