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Dr. Kalinda Rose Stevenson
How Much Are You Willing To Pay For Money?
Welcome back!
“Profitability is the sovereign criterion of the enterprise.” Peter Drucker
My question for the day is, “How much are you willing to pay for money?”
Does the question strike you as strange? Do you think of buying money or is money simply something you use to buy other items? In fact, anytime you borrow money, you are actually buying money.
One of the primary distinctions between the mindset of investors and the mindset of consumers is that investors are willing to pay more to buy money. The reason is that investors focus on profits more than costs.
“Money often costs too much.” Ralph Waldo Emerson
Consumers are trained to think cost first. The primary consumer question is, “How much does it cost?” When consumers buy real estate, they think cost first. “What is the price and how much do I have to pay for the property.” Consumers are taught to shop for interest rates, and to refinance when interest rates drop.
The typical consumer hears that private money lenders might charge 15% interest, and says, “Why would I pay 15% interest when the banks are charging 6%?
One of the many reasons why an investor would pay 15% interest rather than buy money at the bank at 6% interest is that banks make it very hard to buy money. The rule seems to be, If you have plenty of money, the banks will let you buy more. If you need money, the banks won’t let you have it.
The harsh truth is that buying money from the bank can be a painful process. You have to beg for money, provide stacks of documents, pass the credit worthiness test, and already have money for a down payment. If you pass all of these tests, the bank might be willing to loan you money at 6% interest.
The problem is that many people cannot meet the bank’s requirements for buying money. In the county where I live, in the San Francisco Bay Area, the percentage of homeowners is less than 14%. Most people simply cannot qualify to buy money from the bank in the form of a mortgage for real estate.
“There are always opportunities through which businessmen can profit handsomely if they will only recognize and seize them.” J. Paul Getty
The alternative to banks is private investors who will loan money to you to buy investment property based on the property itself rather than your money and credit scores. Private investors usually charge a higher interest rate than the banks.
To make the matter even more interesting, here’s another question for you. What’s too high an interest rate for you to pay a private investor to buy investment property? Would you pay 10%? Would you pay 20%? Would you pay 50%?
If you are like most consumers, you hear these percentages and say, “No way would I pay those interest rates.” You probably think that 50% interest sounds completely outrageous.
But imagine that I am a private money lender and will loan you short term money at 50% interest. With my money, you can buy a property with no money of your own. At the end of six months, you sell the property for a million dollar profit. Would you be willing to split that million dollars fifty-fifty so that you end up with half a million dollars in profit on a property you could not have bought without my money? Is it worth it to you to pay 50% interest to make $500,000?
If you are balking at paying such a high interest rate to buy money, remember that the private money lender makes it possible to buy properties you could not afford to buy with the bank’s money.
“It is a socialist idea that making profits is a vice; I consider the real vice is making losses.” Winston Churchill
To an investor, interest rate and cost are not the first questions to ask about borrowing money. The investor’s first question concerns profit. “How much profit can I generate with the borrowed money?”
Interest rates and cost also become significant factors in considering profit. You obviously will have more profit if you buy money at 15% interest rather than 50% interest. And it is entirely possible that there is no room for profit if you pay as 50% interest.
“Any business arrangement that is not profitable to the other person will in the end prove unprofitable for you. The bargain that yields mutual satisfaction is the only one that is apt to be repeated.” B. C. Forbes
Another factor to add to this consideration of profit is that investing is a team sport. Be careful that you don’t begrudge your private money person the opportunity to make a profit on loaning you money.
Don’t count the other person’s profit. Instead of complaining that you had to pay 15% interest to a money lender, step back and say, “If it weren’t for my private money lender, I couldn’t have gotten into the deal in the first place.”
I return to the question I asked at the outset. How much are you willing to pay for money? What if the critical barrier between you and creating abundance in your life is your willingness to pay more for money? Instead of beginning cost first, begin profit first. If you can make a profit, does it really matter that you are paying a high rate of interest?
Kalinda Rose Stevenson
This article was originally published April 5, 2005.
http://www.abundantlyalivenow.com/archive/AANN-2005-04-05.htm
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