What's up guys?
My name is Matt Faircloth, and we're gonna talk today about bank runs
and how it will affect real estate investing before we get there.
Again, my name is Matt.
My company's called the DeRosa Group.
And we are a real estate company dedicated to transforming lives through real estate.
And because we're a real estate company, we're obviously paying attention
to what's going on in the world.
We hadn't heard about these banks in the United States that are just
closing down overnight and the reason they're closing down or going bankrupt,
having major financial difficulty, let's say, to to keep it bottom line.
Because of a concept called a bank run.
Something funny going on over there at the bank.
Now what a bank run is the people that have their money on deposit in
the bank all go and say, Hey, out my money out, I'm gonna go take my
money and put it somewhere else.
You got any money in the bank instead?
Now, you might think that if I.
If this is a dollar and I give that dollar to my bank, they just sit there and
hold it and wait for me to come back and say, Hey, could I have that dollar back?
You would think logically that's how it worked, but no, that's not how it works.
Banks take money when you put money on deposit with them.
They take money.
And they put it to work in other things.
They may invest it as S V B did, and as other banks did, invested
in things that maybe didn't work out, and maybe they made some bad
decisions about those investments.
This video's not about discussing S V B or decisions that they
made on their investments, by the way, or they likely do.
What a lot of banks do is they take that dollar and they go and loan
it out, and they can even loan out multiples of that dollar to other
people, meaning they might get approval.
To cut five loans just cuz they have this $1 on deposit.
So that's how banks make money, is they take your deposits and they go and put
it to work through loans and make a, make a spread on their, pay you this
much interest on your, on your dollar.
But they make this much interest from the world, right?
So long story short, the this dollar is at work when the, uh, when
the, when you give it to the bank.
And so if a lot of people go and run on the bank and go and say,
Hey, I want my dollar back with my dollar back, want my dollar?
, the bank very quickly runs out of its deposit reserves that it needs to
keep this side of the business going.
All its loans and its investments and all the other stuff that it does, right?
In a nutshell, that's what a bank run is, and that's what happened with SV
V that a lot of people on social media heard that SV V was having financial
difficulties and then boom, like within 24 hours the bank, you know, went under
cuz a lot of people heard about it and went and took their money out and now
they're in the situation they're in.
Right?
So the question is, Does a run on banks or the potential thereof,
cuz some would say that maybe we haven't seen the end of this.
Maybe the few banks that have gone under for whatever reason it is.
Maybe there's more banks that are gonna go under, which is the point of this video
on how it's gonna affect our industry.
Cuz my company's been investing in real estate for the last 17 years and so.
What's my opinion?
And that's all it is, is my opinion and how a bank run would
affect real estate investing.
So the first thing that fe people wonder is their cash, right?
So my company, of course, has cash that we use for properties that we own.
We own primarily apartment buildings.
Uh, am I gonna lose that cash or are you somebody that owns a duplex or a 10
unit or a 300 unit or whatever you got?
Is your cash at risk?
The short answer to that is maybe, but likely no.
What I mean by maybe, but likely no, is that if you deposit less than the F D I
C insured limit, which is likely gonna increase this, but it's currently 250 K.
So if you have 250 K or less in that checking account.
Then you're okay, you're covered, you're insured by the F DS C.
Now in the case of S V B, the F D I C came in and insured over that amount.
You know, just cuz they're nice guys.
No, they don't want there to be panic in the system for people saying, oh my
God, they wouldn't insured over 250 k.
I've gotta take all my money out, or whatever.
So they insured well over that because they want to see continued confidence
in the United States banking system.
Probably something we should maintain.
Right.
They insured over that number and my speculation is that if there
were a bank run as long as, not like 150 banks get run on all at once.
You know, that's kind of doomsday scenario, right?
But as long as doomsday doesn't happen, the government will, I believe,
will continue to ensure up to the entire deposit amount that the bank
is supposed to have on deposit that happened before the bank run, right?
. So that's my belief.
If you really want to be conservative, then keep all your accounts less than
250 K, which isn't that hard to do, cuz 250 K is still a lot of money.
Right?
The other thing you need to be concerned about is your secure
deposits for your rental properties.
Security deposits are things that a tenant gives you.
It's their money is still their money, it's holding on their behalf.
And then when they move out, , you give it back to them.
If they don't do any damage to the property and don't owe you any rent,
when they move outta the property, then you have to return that money to them.
You kinda hold it.
This collateral, I was like, just in case.
But that's their money, right?
Last thing you want to have happen is if a bank rent happened and have tenant
security deposits become at risk for that.
So you wanna make sure that your security deposit accounts are also insured by
F D I C or other insurance programs, which you can get on bank deposits.
That is the concern with cash and primarily, I don't think you have a.
Again, Matt's opinion, but over 250 k, I still don't think you have a problem.
So that's my opinion on cash deposits, either security deposits
or or your banking deposits.
So the next thing you might ask is, well, Matt, what about my loan?
What if like a major bank, like, I don't know, bank of America, Wells
Fargo has a run, but if there were, or if even a small community bank
in your local community that holds a mortgage on your property that you own.
Here's the thing there, right?
Mortgages own property, it's a liability for us, right?
You think about assets and liabilities, your balance sheet, right?
The things you own.
You know, your assets, your real estate, your cash, and the debts you have.
Your liabilities, right?
Well, that's actually turned the other way around to a bank.
A bank views the loan that you have on your duplex triplex 300 unit apartment.
All that is viewed as an asset to the bank.
So even if the bank has a run on the bank, what the run to a bank is, is a drawdown
of liabilities that they have and they don't have that money sitting there to pay
back the liability to you, the depositor.
Right?
But they still got the asset.
They still got the mortgage on your property and you still have to pay them
a monthly, you know, payment on it.
Think about it.
That's a revenue stream for them, right?
It's a revenue out the door, an expense line for us, but it's
a revenue stream to a bank.
So here's what happens for mortgages that the banks own, if there is a bank
run, like S V B and Signature are both being bought by other banks, right?
The first thing that bank is doing is they're buying it and
they're picking up those assets.
So they're going to get those mortgages and they're going to inherit them, and
they're gonna keep getting the monthly payment that you were paying S V B.
They're gonna take those, those loan payments, and now X, Y, Z
Bank now gets those loan payments.
Pretty plain and simple, right?
So if you have a mortgage with a bank that it, that does have a bank run and
goes under, all that's gonna happen is you're gonna get a letter or a phone call
that says, Hey, you were writing your letter to X, Y, Z, so sorry for them bank.
Now you're gonna write your letter to a, you're gonna write your mortgage
to a b ABC bank, uh, you know, who inherited that loan and is now
servicing the debt and yada, yada, yada.
Even if it's a workout bank or whatever, whatever.
Your debt is not at risk, and that's because your debt is defined and
protected through the mortgage documents that you signed when
you bought the property, right?
So whoever buys that bank and that asset, that mortgage has to abide
by the terms of the mortgage.
They can't say, Hey, Joe Smith, the interest rates have gone up.
And I know this mortgage says you're supposed to pay 4.5%.
Forget that we're gonna charge you 9%.
They can't do that.
The, the confines of your mortgage agreement state how
much they can charge you, right?
You might wanna read that to make sure that you're not a floating
rate mortgage or whatever it is.
But even if you are on a floating rate mortgage, it's gonna define
floating as to what indicator and how much it can float ABO above.
So even your interest rate is gonna be protected as well, even
if it's floating rate, fixed rate, whatever, in your mortgage documents.
So that is not.
. The one thing that's at risk with regards to loans, if the bank that
you're, that you have a loan with, had a bank run would be a line of credit.
So if you got a home equity line of credit on your home, you know I do
and I use it to lend out hard money.
That's, that's what I do.
My home equity line of credit.
You should do that too.
I, we also have business lines of credit for our company that we
use for deposits on new properties or for major renovations.
We're looking to do whatever it is we're.
That's what the business line of credit is there to do.
The way a line of credit works is the bank approves you for Alliance, it's
okay, you can borrow up to X amount of dollars, put it on the shelf and
say a case of emergency break glass.
You want to use it for day-to-day operations of your business.
Home equity lines of credit, credit, business, lines of credit, whatever those
things are, you should certainly look into them because they're great to use.
If you have an e.
And also if you just wanna do some expansion expenses in your company or
use it for earnest money, deposits, whatever, if you have a line of credit,
there is a bank run, your bank is going to go after that line of credit.
Immediately.
They're, what they're gonna do is they're going to convert that
line of credit to a loan if you have anything drawn down on it.
So let's say you got a line of credit for a hundred thousand dollars.
You spend 20 and there's a run on the bank and they, you know, they put the
brakes on and reel everything back in.
They're going to say, , you now owe us 20 K, and we're going to stop any
further borrowing on that line of credit.
So you're gonna freeze the line, that's what that's called.
And then they're going to make you come up with a payback plan to come to
spend that 20 K back to them, right?
So lines of credit are at major risk if your bank has a bank run.
And so I recommend that if you're going to use line of credit, don't
use it for long-term expenses.
Use it for.
Get in, get out for 30 day, 45 day expenses with a clear plan
on how you're gonna get it back.
I've been in a situations where I use lines of credits.
I wasn't sure how I was gonna get it back.
I ended up owing that line of credit for a long period of time, longer than I wanted.
So, side note, if you have a line of credit at all at a bank, make sure that
there is a clear path for you to get the money off that line and over to
a refinance or to a sale or whatever.
If you're concerned about bank runs at the bank that you're at, or even just a
good, this is good business practice to not let a line of credit ride for that
long cuz the rate floats goes up and down.
So I use my line of credit in my home for hard money loans.
As I said, there's a revenue stream that comes in that I've,
I'm making a monthly payment for the hard money loan that I have.
And so I'm covered there.
And even if the rate goes up and up, if that line gets frozen, whatever it is,
I've got a revenue stream that is paying the interest rate on that line of credit.
And when the home hard money loan that I have gets paid back, it pays the line off.
Make sure it's something like that if you're concerned about bank runs.
So those are all the things you need to be thinking about with regards
to direct effects of your business.
Through a run on the bank now about all those things, about
like, is my cash gonna go away?
Is my, you know, uh, my bank loan gonna change or whatever.
Worry about that.
You know, think about that.
Make sure you're protected, but it shouldn't take too long
for you to protect yourself.
Here's what you really need to be worried about.
That is the indirect effects of bank runs, right?
What is a bank run?
And as I said before, it's a bunch of people going to take
their money outta the bank.
Why are they doing that?
They're doing that cuz they're worried that the bank's not
going to be stable anymore.
And if they're worried that bank's not gonna be stable, then they're also worried
that the economy's not gonna be stable.
So there is a level of consumer confidence you need to be
concerned with about bank runs.
If you're raising capital from investors, those investors and those that are working
with you financially are going to become more and more concerned and skittish.
With regards to business in the world and the economy and whatnot, if there
are more bank brands can make people less confident in, you know, the finding in
the, in the financial world, whatever that may mean to you, it's going to
become just more squirrely, more gray, what the future's gonna look like.
With regards to making new commitments to anything, right, to investing
with you, to working with you, partnering with you, selling a
property to you, buying a property from you, whatever that may look like.
It's gonna make the world a little more skittish, right?
So indirect effect, but be, be wary of that, right?
Second thing is if you have tenants, all landlords do, right?
All landlords of folks in the real estate business likely have some sort
of a tenant that are paying them.
Revenue.
Tenants will have financial issues either getting, if they're individuals
getting laid off from their jobs, unfortunately having to find a new job,
or if they work, if they work at one of these banks that has a bank run.
So you should definitely be concerned about.
Your tenant's financial wellbeing, if they get removed from their jobs, if a
lot of your tenants are working in some sort of banking industry or in a subset
or a derivative of the banking industry, be concerned about your tenants losing
their jobs, uh, and your tenants economic stability becoming less because of
the world changing because of economic blowback, stock market crashes, whatever.
That's really what you ought to be thinking about.
And of course, these things are outside of your control, but you should
still be thinking about things like.
So the bottom line guys.
Big thing that a bank run should concern you as a real estate
investor on is consumer confidence.
All consumer confidence, as I said, buyers, sellers, investors, anybody you
interact with and you yourself about where the, where the world's going.
If, if there are more bank runs, understand what that is.
Like I said, it's people pulling their money out of a bank cuz
they're not co, they're concerned that that bank is no longer safe.
If that's what people do more of, then you should be thinking about the global,
where we are emotionally as a country, but we're worried about what we're not worried
about for those things to, to happen.
Not gonna affect your day-to-day business as much as you think that it might.
Again, these are Matt's opinions, my 2 cents on this thing.
Um, so that's what I got guys.
Appreciate you.
If you guys need hear more, what we have to offer both in the education
and the investment side, you can check us out@theoystergroup.com.
I appreciate you guys watching.
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