“Baaaaaa” went the sheep as he walked into the mortgage lending office. “Yum!” went the mortgage broker behind the desk…
“Have I got a loan for you!”
There are many times when investors need to take out mortgage loans as leverage to grow their private lending business. And the friendly mortgage broker strongly suggests a loan based on the best interest rate. But that rate is very often the best for him, which means you end up getting fleeced.
Unless you learn the right way to pick an investment loan.
Why interest rates are like sheepskin covering a hungry wolf
Mortgage lenders are businesspeople first and foremost. They may be your friends outside the context of work. But in the mortgage lending office, it’s their primal instinct to protect their best interest, not yours.
Low interest rates seem like a true measure of a good loan, one that will benefit the borrower. But that view is short sighted. Interest rates are really only an external measure of a loan.
The true value a savvy private lender looks for is how the loan will be able to the maximize cash flow to build their wealth.
How to detect loans that are ravenous to your wealth
So how do you measure whether the innocent little loan your broker is offering is a wolf or not? By figuring out whether the loan really makes sense for you, not them.
And how do you measure that?
- Determine the capitalization rate. The percentage of income a property generates against the price paid for it.
- Determine the loan constant. The measure of cash outflow going to pay the loan. The annual loan constant is equal to the annual loan payment/loan amount. It’s the actual cash payment (regardless of the portion of principal to interest).
- Calculate the spread between the cap rate and the loan constant.
Spread = Cap Rate – Loan Constant.
What if you don’t know how to calculate all those things?
We’ve got loads of helpful tools to add to your wolf detection kit in our [Bankers Code program ]. It gives step-by-step examples of how to do all of these. You can also download the free Simple Financial Leverage Calculator and other wolf revealing calculators at www.TheWealthyCodeTools.com.
Once you figure out the loan that will generate the best spread for you, that’s the loan that will generate the best cash flow for you. And guess what? You’ll have just found the loan that makes the most sense for taking your personal wealth to the next level.
Wolf detection kit in action
If you’re like me, one good example is worth a 1,000 hours of figuring something out on your own…
So let’s say you’re interested in investing in an apartment building. It costs $1M, but will generate a monthly rental income of 100K. Thus, Capitalization Rate = 10%.
You consider the best loan constant for the property. You calculate the interest rate loans for the property .
- Loan 1 offers 5.5%, with 5 year fixed amortized. The loan constant calculates to 22.92%.
- Loan 2 offers 8.2% with 10 year fixed amortized. The loan constant calculates to 8.2%.
- Loan 3 offers 6.8% with 30 year fixed amortized. The loan constant calculates to 7.82%.
Remember that Spread = Cap Rate – Loan Constant.
Which gives you the best spread? What’s the best loan here?
Despite what Mr. or Mrs. Wolf on the other side of the table might say, the lowest 5.5% loan is not the best deal for you. Loan 3 is the way a savvy private lender would go.
Can’t I just steer clear of mortgage lenders?
If you want get positive leverage for your business growth you DO need a mortgage lender. So the better question might be — how do you keep up the business relationship while not tolerating their wolf-like loans?
Well, openness, honesty and tact serve as great wolf repellent. Share the formula for spread. Explain this is the key to the right loan for you. Insist on seeing several loan options, not just the one that seems right to the broker.
Remember, it’s BAAAAD loans you want to repel
Would you get upset at a wolf for doing what it’s designed to do: hunt? Then don’t fret when your mortgage lender tries to sell you a loan that’s in their best interest.
You now know the key ingredients for the type of loan you need — capitalization rate, loan constant, spread. When they offer you a baaaad loan, now you can smile your own sheepish smile, and show that your sheepskin is tougher than it looks.
Alex, [ ] mean make that link to the product sales page.
this looks good…