Be Your Own Bank

In times like these, we all need a bigger balance sheet, especially if it will help repair credit and give us future liquidity. If you are struggling to save as most people are today, try borrowing to purchase a Certificate of Deposit (CD). The results will be like a forced savings account with benefits. Let’s discuss this interesting concept. Start by placing money in the bank and borrowing against it–better yet, put as much money as possible in the bank and borrow against it, say $100,000. You might say, “I have no money” and that’s ok. Borrow money from a friend, place it in the bank, borrow against it and pay your friend back–Got That? Why, you ask, should I do that Herb? There are seven good reasons:

 

(1) It will give you an instant balance sheet especially if the CD is in your name and the loan is in your business name. In this instance, you will have a contingent liability and your business will have the liability
(2) it forces you to save–every time you make a payment you are amortizing the loan and creating equity for yourself;
(3) it gives you interest on your tax return, it proves you are capable of maintaining a savings to a lender once the banks start lending again;
(4) it could be evidence of liquidity which you may need one day;
(5) if you pay according to the terms of the loan, it increases your credit score;
(6) it gives you an important relationship with the bank which you will need if you are going to be successful in the real estate business and most importantly,
(7) it will allow you act as your own bank, affording you an opportunity to replace the collateral perhaps with real estate and release the CD as collateral thus, you have just pulled out non-taxable cash! Remember, you do not pay taxes on borrowed funds and it’s a lot easier to substitute collateral than to borrow new money nowadays.

It is important that you do not pay too much for this opportunity. The spread between the rate you receive and the rate you pay should be no more than 25% if you have a decent credit score. By way of example, say the bank pays you 4% and you borrow at 5%. A $100,000 loan would therefore cost you net interest of only $1,000 annually the first year. This amount would decrease of course each year as you amortize the loan. At one point the loan itself would become self amortizing. As you pay the loan down, the principal balance is accruing interest and going up. When the interest on the CD is greater than the interest on loan, your loan becomes self-amortizing. This could even serve as a retirement account. However, if you use it as a retirement account, your business should be the borrower and you should hold the CD in your name, this way the interest payable may be tax deductible. This is why I am known as “The Master”.

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