Private Lending: Have Your Cake and Eat it Too

How to lend money, without the money leaving your hands.  This method is also called the 2% Rule.

The Banking system allows anybody to borrow against their own money.  When you borrow against your money, the banks can only charge you 2% more than what your money is making.  If your CD is making 1% return, then you can borrow against it for 3%.   If you use this in a practical way to lend money, it will allow you to maintain your money in a CD for example, which is making a certain return and then make a signature loan to yourself for the amount you need.  I know, why doesn’t my banker tell me these things, it’s because they are bankers.

I wanted my private lender to loan me 80,000.00 on a house deal that would make me 25,000.00.  My lender kept his money in his 100,000.00 CD making 0.5% and then he borrowed 80,000 at 2.5% interest. He then loaned me the 80,000.00 for a 12% return. The type of loan the lender gets from the bank is called a signature loan which does not require anything other than a signature, because it’s his money he’s borrowing.   After the transaction was made, and the house made a profit of 23,500.00 in 3 months, I was able to pay back my lender his profit, and returned his 80,000.00 to his account.  Lets look at the numbers:

Lender has 100,000.00 in CD making 0.5% annual return.

Lender borrows his own money of 80,000.00 at a 2.5% annual rate for 3 months costing him 400.00

Investor uses the 80,000 for investment for 3 months and makes his profit of 23,500.

Investor pays back the 80,000.00, the title company wires the back to bank.

Investor pays lender the agreed upon 12% return for a 3 month period of 2,400.00.  Again wired from the title company to lenders bank.

Lender made 2,000.00 in 3 months lending me money that never left his hands, and never touched my hands.  All secured with a Deed of Trust for the Real Estate.

Investor made 21,100 after the lender was paid.  That’s a win win.

How many more deals could you do by showing this example to lenders? And trust me not all people know this basic transaction.

My well to do friend needed a down  payment on a new house but had not sold his old house yet, I explained how he could pay his down payment for 2%, and leave his money alone, he was grateful to know this information.

Some other options:

Some have figured out that while Bank CDs are safe, they don’t pay as well so they go to a brokerage and investing in something a bit more risky.  For example they might have moved their money to a place like Morgan Stanley and invested in stocks, bonds, mutual funds.

They want to keep their money where it is and making their return, but they want to use some of that money for a down payment or to lend to me.  They can do the same as the bank and borrow money against their brokerage account at a very low interest and then relend.

by Donald Tucker

Kim A Tucker

Kim Tucker along with her husband Don and son Scott make up the core kcmoHomeBuyer Team that has been buying homes across the Kansas City Metro since 2000.

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