Why Don't Big Banks Invest in Real Estate?

[Oynas]

Real estate is the best investment ever. Interest rates now are around 6 per cent. You borrow 6 per cent from the bank. Real estate must go up greater than 6% otherwise investing in real estate would not be profitable. Let's say real estate goes up by 7 per cent and adding rental income you get say 10 per cent.

You borrow at 6 per cent, buy a house that goes up in value by 7 per cent and plus you get rent from the tenant who lives in that house, so in total you get 10 per cent from the house.

My question is that because real estate is such a good and perfect investment, why would the big banks bother lending money to investors like you and me? Why don't they just use that money to invest in real estate themselves? By lending to real estate investors or home buyers, the big banks only make 6 per cent on their money. But if the big banks use that same money to invest in real estate, they will make 10 per cent. So by deciding to lend money rather than invest it, the big banks lose 4 per cent.

Perhaps bankers are not as smart as many think they are? Perhaps the big banks are run badly?

 

[Sunfish]

Perhaps bankers are not as smart as many think they are? Perhaps the big banks are run badly?

And perhaps not.

 

[davo6253]

Real estate must go up greater than 6% otherwise investing in real estate would not be profitable

Lol!! This post made my day, as long as it must go up then fair enough.

 

[Bargain Hunter]

Banks do invest in real estate, they also invest in motorways, airports and just about anything that turns a buck. Macquarie even wants in on the new mobile speed cameras in NSW. However they are not that interested in small residential property because to be frank it is a pain in the **** and takes too much effort to manage. Corporate clients pay top dollar and are much easier to deal with on a day-to-day basis.

 

[Token Funder]

Real estate is the best investment ever. Interest rates now are around 6 per cent. You borrow 6 per cent from the bank. Real estate must go up greater than 6% otherwise investing in real estate would not be profitable. Let's say real estate goes up by 7 per cent and adding rental income you get say 10 per cent.

You borrow at 6 per cent, buy a house that goes up in value by 7 per cent and plus you get rent from the tenant who lives in that house, so in total you get 10 per cent from the house.

My question is that because real estate is such a good and perfect investment, why would the big banks bother lending money to investors like you and me? Why don't they just use that money to invest in real estate themselves? By lending to real estate investors or home buyers, the big banks only make 6 per cent on their money. But if the big banks use that same money to invest in real estate, they will make 10 per cent. So by deciding to lend money rather than invest it, the big banks lose 4 per cent.

Perhaps bankers are not as smart as many think they are? Perhaps the big banks are run badly?

Because the returns are far too low relative to the risk and the effort required.

 

[Perp]

The banks get about 2% arbitrage on the funds they lend to you, and it's relatively risk-free. The return is stable, default rates are low, and when there is a default, the debt is backed by property.

Even if a property investor gets the 10% return, they lose about 2% in non-interest outgoings, and another 6% for interest, and thus they're also getting 2% arbitrage.

So the banks get 2% for doing "stuff all" and taking near-zero risk, whereas investors get 2% +/- 20% for having all the capital risk and the hassle of tenants and all the bills.

When we're having a boom, it's great. Times like the past few years, I'm thinking the banks are onto a good thing.

The state governments are onto an even better thing - they get to collect land tax and stamp duties in exchange for providing nothing, even when the value of the land is decreasing and the property is cashflow negative. Not bad work if you can get it.

 

[Trogdor]

Real estate is the best investment ever.

My question is that because real estate is such a good and perfect investment,

Perhaps bankers are not as smart as many think they are? Perhaps the big banks are run badly?

This has to be the most naive post in the history of SS !!

I'm speechless.

 

[Perp]

This has to be the most naive post in the history of SS !!

I'm speechless.

Let's give them the benefit of the doubt and assume it was sarcasm?

 

[Ace in the Hole]

How could they survive if they were heavily invested with negative cashflow?

 

[tom32]

This is kinda a repeat of the above themes, but look at it not from the bank but from the people who give the banks the funds to lend.

Banks need deposits to raise funds to lend to people.

People will not deposit their funds for 6.5% return if they no the institution they have lent it too is simply out and about direct investing.

The depositor wants to know:

a) the bank has its own capital on the table, i.e. shareholder equity.

b) the loan assets of the bank are valued at less to the bank than the assets held as potential collateral behind them are worth, i.e. the bank lends you 500k, for you to buy a house worth 700k.

SO why would a depositor lend money to a bank that was geared liek an IP investor to get a 6.5% nett yield?

It is not the banks that are stupid, it is that depositors are not stupid and would nto give funds to such an institution at that risk.

No doubt lots of developers would quite happily raise funds of depositors in the private retail deposits market at 6.5%, but as you can imagine none would invest in them at 6.5%, at 8 or 9% maybe, not at 6.5% deposit return.

A developer is in essence the kind of institution you are describing above; why not borrow money and just invest in residential development. Unfortunately for said developers they borrow at higher rates than banks because of their risk profile, so your 10% expected return is exactly the kind of return they do need to be braking even on their borrowings.

 

[Jim Goose]

This has to be the most naive post in the history of SS !!

I'm speechless.

Egg f***ing zactly.

 

[Amadio]

Are you for real or having us on!!

This has got to be one of the funniest posts I've read, almost as funny as the one you wrote about investing in real estate by buying your parents' house, bit by bit.

 

[Paul Do]

Real estate is the best investment ever.

Whatever.

Under normal conditions banks wouldn't invest in real estate because then they'd have a position on both the asset and liability side and this can lead to all kinds of conflicts of interests and problems (e.g. Japan in the 90s and noughties).

They are even less likely to invest now due to the high valuations.

 

[attrill]

If banks can borrow money at 4.5% and then lend it out on credit cards at 21% why would you bother with tenants?

I know a guy who owns a night club and he buys Coronas for $1 and then sells them for $9. Next week he picks up his new Lamborghini, and no, he doesn't own any residential real estate.

 

[Dazz]

I know a guy who owns a night club and he buys Coronas for $1 and then sells them for $9. Next week he picks up his new Lamborghini, and no, he doesn't own any residential real estate.

Nice one.

I saw the profits in nightclubs - staggeringly good.

One of the bar managers told me they used to buy spirirts in crates of 20 bottles. Each bottle was 750mL. $ 180.00 per crate, i.e. $ 9 per bottle.

In the evening, they'd turn 'em upside down in their alloted slot and pop the little 30mL shot thingy with the ball in it.

They'd charge $ 4.50 per shot with the mixer free. This is in the late 80's. Big money.

With 25 shots per bottle, that was revenue of $ 112.50 per bottle. Not bad on a $ 9.00 cost.

They would go through crates and crates of the stuff every Fri and Sat night.

Sure there are labour costs and rent and all that other stuff.....but the profit is through the roof.

The customer cannot negotiate, has zero rights, pays thru the nose for everything and if they complain they get thrown down the stairs and smashed across the street.

Bit different to a Landlord / resi tenant relationship.

 

[Neophyte]

Cost to factor in.

Staff time taken to do a deal. Remember it takes a couple of years for a bank to recoup the setup costs of many mortgages.

Managing a massive portfolio. What to keep, what to sell, what to repair, etc... Good staff aren't cheap. Actual cost of a staff member can be as high as double their salary.

Small scale investors often consider their own time to be free.

ResIP is something that does not scale so easily. The economies of scale type efficiencies aren't that good. e.g. a $100M portfolio is close to 100 times the management effort of a $1M portfolio. Whereas Commercial you can have that $100M as a single building that is the roughly the same effort as managing a $1M or a $10M building.

This is why there is good profit to be made in ResIP by little fish like us. Because the bits are too small for the big sharks to bother.

 

[Sunfish]

Read up on "fractional reserve banking" and THEN ask this question.

 

[Piston Broke]

Any investor with a brain would be asking this question at some stage.

The banks have a lot of exposure to RE by way of financing it.
If it goes good, more people buy as "reflexivity" sets in, more loans are taken out and profits increase.
The bank pays bugger all for the loans and has a relatively small risk.
When the risk gets to high, the gov guarantees (on your behalf).
So you have the customers taxes guaranteeing their own loans!
There is no better biz to be in than that which your customers personally guarantee your solvency when your are in fact insolvent.
This allows to take higher risks chasing higher gains elsewhere like for eg being stitched up by the yank merchant banks.
It's a dream bizness.

To answer the question though, Westpac did.