The banking world was rocked when news of SVB’s collapse came to light. Stocks plummeted, investors feared, and the government had to step in and assure everyone that they would cover any accounts and nobody was losing any money.

But what happens next time (because you KNOW there will be a next time)?

Adam Schroeder and Zach Lemaster talk about how this situation occurred, what investors can do to protect themselves in this type of environment, and the real way to get ahead.

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Transcription:

Adam
Hey, rent to retirement it’s Adam Schrader here with another episode joined by Zach, the master and no guests today. It is just the two lovely faces sitting here. We’re going to talk about some stuff. And it is something that’s been in the news lately caused a lot of chaos because a lot of turmoil all across the markets, both real estate and stock market and just shook everything up. We’re going to talk about Silicon Valley Bank SBB, with their interesting situation that happened in the last few weeks here. But Zach, good to talk with you again.

Zach
Yeah, us? Well, Adam, obviously, we always have things in the news that we can talk about, I think we always want to have to look at it through the lens of both, and at least in this case, consumers that use the financial banking system. And really what this means as well, as you know how this ties into being a real estate investor. So give us a breakdown of the situation, Adam, and let’s run through it.

Adam
Yeah, so Silicon Valley Bank is a bank, just like any other that’s out there. You know, they have their requirements, they’re federally chartered, you’ve got every bank has to have investments, they’re allowed to invest in, like government backed assets, they can do loans, and they can have cash. And the big thing that happened with them is they were making some loans that maybe they shouldn’t have really been making, a lot of them are the tech companies out there. And then as the interest rates crept up, and they have to mark all of their bonds, and treasury bonds to market. And as that happened, it made their cash lower and lower and lower, because as interest rates go up bonds, you know, the yield drops. And it just kept getting lower and lower and lower. And eventually, they didn’t have the capital to back everything that they needed, which caused a little bit of a run, because a lot of their deposits weren’t federally insured at that point in time. And they couldn’t get the Fed to back him to give them the money they needed. They couldn’t get other banks to do it. And so it just caused the whole mess. I mean, enough to the point where Joe Biden had to come out and tell people, yes, we’re going to back everything, don’t worry, you’re not going to lose your money. You know, payrolls still gonna get made. But I mean it in one day, it shook the stock market, I think about 5%. Just this news about one bank having one issue, hit, I think it was about five, five and a half percent, because I remember my wife called me was like, so I looked at our, at our retirement account, my 401k. And it dropped 5% today. And I was like, fantastic.

Zach
I thought you’re investing in real estate through your 401k.

Adam
Well, because it’s her four is her full time job that she’s currently and you can’t, you know, can’t rollover a 401k, you already have.

Zach
So, so to be more specific in this and kind of, you know, what, what’s happening? I mean, first of all this is this is really important, because this is a second largest bank collapse that we’ve seen in history, right after 2008. And so this causes a lot of concern, I think it’s really important to look at what is happening with the banking system, but more importantly, how people are reacting to this, because that’s really what’s causing this when we talk about I mean, you mentioned a little bank run, this is essentially the definition of a bank run, people run people running to the bank to take out their deposits because they fear insolvency, which is true, it’s insolvent, the bank, you know, does not have the reserves to pay all their all the money that people have given to the bank all at once. And most banks don’t, because they lend it out. I mean, that’s a big part of how banks earn money.

Adam
Yeah well, a big part was from what I read 97% of the funds in there, were not FDIC insured, which is what really caused the concern, because if everything had been FDIC insured, there’s no concern from people, you know, if it’s just a local community bank, and everybody’s under that, that limit, and nobody was worried about it, you don’t need a bank run. But if it’s not FDIC insured, it’s up in the air.

Zach
And the reason because it’s because most of the SPB is different than most banks like a Wells Fargo or just your general bank, right? It’s not really composed of consumers. This was a lot of venture capitalists. This was a lot of companies that had money above the $250,000 FDIC insured threshold. And so that was really the concern here is there’s you know, I think it’s this start started back in 2022. Where, you know, we had this huge tech boom during the COVID era era or the over the past couple of years, where there was massive amount of deposits. And now as tech slows, a lot of these companies were withdrawing large amounts of capital to just run their business. Right. And then there was a concern about and then kind of the word got out. Right. And there’s some recommendations about withdrawing more capital because of this, and all these companies that yeah, had that, above the $250,000 threshold, you know, felt exposed, which, which they should. And of course, we know now that the feds came in to prevent further chaos. Instead, instead, actually, that the government is going to backup all of this money for people. The big question to me is how long this is going to take right? Even at $250,000? That is FDIC insured? The real question is okay, if you can’t withdraw that from the bank, though, what is the timeline to actually access that? I mean, we all know how slow the government moves, this could be a significant amount of time. But the real question that this boils down to is how is this affecting other banking institutions? And really, the big question to me is, should you even keep your money in the bank? Right? I mean, is that really the best place and we’ve seen a couple other banks that have with that are mainly heavily in crypto, and some others that are having issues. But this is not a, you know, nationwide thing where everyone is withdrawing their money and concerns about all now we’re still fairly early into this. But I mean, this is not a scenario where we’re seeing everyone withdrawing their capital from the banks, but I think it does remind us that, you know, maybe keeping your money in the bank is not the best location to keep it in. We all know, with where inflation is out right now. And the low interest rates that banks are paying, I mean, you’re basically losing money keeping your money in the bank. And this adds further complication to the question of, is your money really safe in the bank? My opinion in this scenario is yes, you need reserves. And it’s important to have access to liquid capital. But maybe it doesn’t make sense to have money in excess of that sitting in a bank where you’re losing capital. The other interesting thing I looked at yesterday, is just comparing where, you know, prime rates are in general interest rates relative to what you’re earning in a savings account. And looking back over the past 50 years, this is the largest discrepancy we’ve seen between where interest rates are at and where savings and checking accounts are out as as well earning very low thresholds, you would think that as inflation goes up, and the Feds raising these interest rates at a dramatic hike, that that would also mean, as consumers, you should earn more interest on your money. Right. And I think you need to, to keep up with inflation. And there’s other options, to put your money into an example would be a treasury bill, a T bill, which is a short there’s, there’s T bonds, there’s T bills, and there’s T notes and all those are associated with a different timeline of investing, but to for a short term investment, that could be like a few weeks to a few months, in a T bill, treasury bill. Those rates are, you know, four to four and a half percent right now where you can invest your money for a short period of time, while you’re looking to invest it and still earn a higher interest rate. This is different from a CD account that usually has a little bit longer terms. But we’re seeing those sorts of things. But we’re not seeing saving an interest rate saving interest rates and checking interest rates really creep up there. And this is a reminder of, you know, maybe it makes sense to keep your money in hard physical assets, right and use leverage. I don’t know, what are your thoughts, Adam?

Adam
Yeah, I mean, right. Now, if you’re keeping all of your money, especially in a brick and mortar bank, you are 100%. And getting absolutely crushed. You know, there’s some online banks that have higher rates for money that’s in the bank. But even those I think, are in like the mid threes, and something like that, if you’re keeping an eye on brick and mortar, like a Wells Fargo Community Bank, I mean, most of them your savings account is zero, or no, sorry, your checking account is zero, your savings account is maybe like half a percent, three quarters of a percent. And you’re just getting absolutely reamed in that case. But you do have, you know, a little bit more of a little bit less of a gap in the online banks be I agree, I mean, there’s a certain kind of expense account that you need to have for, you know, big issues that come up, whether it’s in your life or investing. But aside from that, I mean, you just look at this. And if you look at the history of what happened just with SVB, I mean, if you look at what happened here, they were being told to change what they were doing for two years before this happened. Like they were under review, quote, unquote, by the Fed and being told, Hey, this is getting kind of risky. Hey, you guys need to look at what you’re doing for two years before it collapsed. I mean, are they ever were they ever gonna do anything? Are they just gonna say, hey, you know, change, please, please change, you should really change, but not actually doing it. I mean, it’s one of those things that it keeps happening time and time again, we’re told, you know, we’re going to put these things in place and companies are going to follow them and everything ain’t gonna be fine. And then time goes on you forget about it. Companies start doing the same thing over, because let’s be honest, I mean, while it was happening SBB was doing great. You know, they were until things went bad, everything was great.

Zach
I mean, that’s why there was a large conference from the tech companies to be able to put their money with SPV in the first place, right. I mean, there was a large trend of private investors and venture capitalists and tech companies, which made up the vast majority of the banking clients to hold their money in the bank. And that went well, for a long time. I think the the two main things that caused issues, there was one, there was this huge influx during the tech boom of deposits being made. And then as that slowed, people, you know, started to withdraw their money at a higher rate. And then the deposits were coming in, in addition to that, the bank purchased a lot of bonds, government bonds at very low low yields, right, as we’ve seen over the past few years, that historically low interest rates, they bought bonds at one or 2%, or whatever the case is, and they couldn’t sell those, because bonds or have a higher, higher rate of return, right. So you can’t sell a bond for more than you bought it for even what you bought it for when it’s less attractive to what the other buying options are now. So the combination of that which, again, this is not let’s come out of left field, we’ve saw this trend over the past few years. And we’ve we’ve seen, as you mentioned, the regulations tried to impose some changes here. But essentially, it just became sloppy, and a deterioration where the Feds eventually had to come in and take over. But I think that it’s important to, you know, like, well, I guess I like to look at it from from the banking eyes. Right when when banks are when you’re depositing your money in the bank, usually, and this changes over time, but usually they have about a 10% reserve threshold where they can go out and lend if you put $100 into a bank, they can go out and land $1,000 through mortgages, V locks, private loans, whatever the case is, and they need about a 10% reserve threshold. And of course, no one is expecting that everyone’s going to withdraw their money all at one time or in a short period of time. But that’s how a lot of banks make money, right, they take your money and they lend it out. I think it’s important to look at it through their eyes, when we’re thinking about being really being the bank, I’m being a lot of cases with real estate, eventually, as you grow your portfolio is to operate more like your own bank. An example of this would be using a HELOC or something to go out and access capital and then reinvest it go out and lend it or leverage against it. But I think it’s really necessary in times like this to reevaluate where what you’re doing with your money, and how you’re operating, it is important to try to operate like a bank, ultimately, and when you have physical assets that have equity and things like this, like that is a way that you can pull equity and be the bank. But ultimately, it’s important to have your money accessible in hard assets that are going to offset inflation, and use leverage appropriately because there’s a lot of people out there. And usually these are newer investors that don’t like the idea of higher interest rates. But that’s the only metric they’re looking at when they’re taking out when they’re taking out debt because that means a property cash flows less. But actually, when you’re looking at your balance sheet in the bank’s balance sheet of having, you know, what we would refer to as good debt when you’re actually financing a property. There’s a lot more that comes into play than just your your cash flow analysis and what the interest rate is, at that point in time. We know that we’ve covered this immensely. But the the fact that in a high inflationary environment, when you’re taking out money from a bank that you’re paying back with future dollars that are deteriorating at a faster rate due to inflation. This is a time where it’s important to have debt, right. We’re, I don’t know, I could go on these tangents all day, Adam.

Adam
For me, what it reminded me of is, like I said, they, the banks kept getting told you need to change as an investor in the bank. Like if you have your money in the bank, you can’t make them change. You know, there was nothing you could do other than take your account somewhere else. But most likely, you didn’t know what was being done inside the bank, you weren’t aware of all the issues that might have been happening. And so you have absolutely no control over what happens if you’re invested in the stock market. And suddenly this bank goes under and now you’re down 567 percent. Because of that one bank, you have no control over what happens there. Which I mean, to me is absolutely insane. As opposed to if you have an asset you can control like real estate, you know, you get to control when you make these changes to your deal. You can control how much you asked for in rent. I mean, obviously the market is going to tell you whether or not you’re increasing your rent to hire or not. But I mean You are just putting your money into something and hoping for the best. Or you can put it into something that you can control and ends up giving you, you know, much safer thing in your, in your investment portfolio. That’s really what stood out to me is, it was like, No, you would have had no idea that there was a bank run. That was about to happen if you were just a normal person. I mean, if you’d asked me two weeks ago, hey, is sVv going to take down? You know, the stock market? And a lot of the banking industry? I would have been like, I have no clue what you’re talking about. No clue at all.

Zach
Yeah, and the question everyone needs to ask themselves is, you know, the money that I have set in a bank is, you know, 1am I getting an adequate return on investment from that? Secondly, would be, you know, why, why is this money in the in the bank, banking has become such a, you know, a necessity in a lot of cases that people rely on it, to to hold their capital, when I look at real estate, I remember is actually, Kim Kiyosaki that mentioned this is when I was sitting in with one of her lectures, but I remember she said that she doesn’t not use banks that she her real estate is her bank. And that while it’s less liquid, than, say, a savings or checking account, you know, real estate is a holding place for money. And when you need to access it, you can now of course, there’s market dynamics and things like this, if you bought it appropriately, and you have equity, you know, and you need to sell it, you likely will be able to, or you can leverage against it, if you have equity, there are different ways to pull from it. But I thought that was an interesting concept, where she talked about being her own bank. And having using real estate as a holding place for money to work harder for her than being in the bank, using the banking system is easy to put deposits into send wires and things like this. And this could absolutely evolve over time. And I don’t think we’re talking about a scenario where the sky is falling, and we’re going to have all sorts of different bank runs, because the Fed stepped in aggressively and said, okay, all these all this money that was not FDIC insured, were going to actually back at like, do they actually have the ability to do that on a wide scale across the nation? If it comes to it? I don’t know. I think it’s just important to reevaluate it, this will be a wake up call for a lot of us to say, Why am I keeping my money in the bank? To the extent that I am? And is that the best place to keep the money? And what else can I be doing with that capital? I’m not saying you need to put all your money into real estate. I mean, we try to write as much as we can, that’s, that fits our niche. There’s other things you can do, within or outside of the banking system. Like I said, you invest in a T bill that’s paying you 4.3% For a month, you know, while you decide on what you’re going to do with your capital, or maybe earn a little bit higher for a three or six month term. And that’s basically guaranteed by the government, they can always print more money. You know, you don’t even have to worry about this scenario. So it’s just important to educate yourself on other options of where things are going to be. What other investment opportunities are out there. And is the bank the best place to sit on your capital? Maybe? I mean, Adam keeps it in his pillowcase or below his mattress, but you know, I don’t know. That’s blood money.

Adam
Pillowcase though. Yeah, all the loose cash in there. I don’t I don’t bundle them up, because that would be too hard on the head to get that loose. Just kind of sometimes when I move around, it wakes me up.

Zach
Because all those rolls of 100 sign now it’s hard to sleep on. Yep. Yeah.

Adam
I mean, it’s just when you look at it, I just see the banking industry and wonder, you know, why? Why do we keep I mean, we keep some money in the bank, just because my wife wants a bigger reserve fund than I think we should have. But, you know, there is a reason to have liquid cash. But then eventually, you get to the point, like you were saying that? Why do you have that much I mean, it doesn’t make you feel more comfort for some reason. I don’t see how it really can. Because if you’re worried about losing money in the first place? Well, if you’re getting 3% on your money, and you’re being told inflation is at least six 7%. You’re literally staring at your money being worth less every day. Or you can take it and deploy it into things that are going to give you you know, the amount, you know, at least what inflation is bringing you. And most likely more than that. I mean, it’s when you look at it and take a good hard look at it, you will start to wonder, why does it seem like this is the safer thing to do. And it’s usually considered the safer thing to do the smarter thing to do, because it’s the easier thing to do. I mean, putting your money in the bank and saying, yay, I have all this money sitting there is really easy to do. I’m taking the plunge and buying real estate whenever your friends or family are asking what on earth are you doing for the most part, that’s a little bit riskier. I mean, it’s an because until you prove them wrong with your own experience. You’re gonna get a lot of people pushing back and even when you do prove them wrong, I mean, I still have fun Friends who look at me like I’m insane whenever they find out that I own properties in multiple states that I’ve never visited the property. I mean, I haven’t even, I’ve never even been to Georgia in my life. I own properties there. Not only have I not been to Atlanta, I haven’t been to Georgia. And so, you know, people look at you like, you’re crazy until you actually do it. And even then they still don’t really support you. But if you just think about it, if you went up to your friend and said, I have 100 grand in the bank, they would look at you and go, Holy crap, that’s a lot of money in the bank. But if you went up to your friend and said, Hey, I just put down 100 grand on a property in Florida, they would look at you and your why, why, why are you spending 100 grand on a property in Florida that you’ve never been to? It’s just a different world, which is why you need to surround yourself with the right people.

Zach
That that’s huge. And now we’re getting there’s a really the point we’re trying to make, I think in all of this, finally coming around to it is, well, yeah, to your point, maybe surround yourself with better friends, that are a little bit more astute investors. And but people are quick in happy to jump in and criticize what you’re doing with your capital. But usually, those are people that are following the safe, traditional route, that is really not going to get you ahead. And it’s funny, I think it’s ironic that it would be considered safe and the norm to say, keep your money in a savings account, invest in a 401 K, you know, as the only means of retirement and just follow this traditional path, because that is to me is actually not the safe route. Right? That is that is considered the norm, and to your point, the easy route, but that’s really not going to get you ahead, especially in times like this, you always need to be focusing on how you can get ahead and make those financial moves to create the lifestyle and the retirement picture on your timeline, which is always what we’re coming full circle around to. And those are that takes education, right, all of us as real estate investors are, I think, kind of have this entrepreneurial spirit and mindset. And that means swimming upstream and going against the norm. And people are happy to point out when you have a bad experience with real estate, which is inevitable for everyone. Right? You will have it at one point, you know, but it’s almost like you can commiserate with other people and say, Oh, I lost 20% of the stocks, and so did everyone else. So it makes you feel better because misery loves company. But if you’re doing something a little bit against the norm, you know, people will jump in criticize that all day long. But they also don’t celebrate your wins, you know, the same when you are successful. But I’ll leave everyone with with these kind of final questions, not to say that it would come to this. But if tomorrow there was, you know, a national shortage of banks not being in the insolvency and not being able to allow you to withdraw your money. You know, what would you do? And then secondly would be, you know, keeping Why are you keeping money in the bank? And why are you keeping the amount of money in your bank? And what other options do you have out there? And are you really earning the best return on your capital, not only in the bank, but in all investments across the board. If you haven’t actually written out those numbers, I would highly encourage you to do that. Not only over an immediate period, but over a 10 year period. And that may allow you to kind of think outside the box and look, look to do some different things. And the final question would be, what steps can you take to act more as a bank and be your own bank, ultimately, and have control? That’s the biggest thing. That’s the biggest takeaway from this, Adam, I think is actually have control over, you know, your finances and your investments.

Adam
Yeah. And that money in the bank that you have, I mean, who knows, you know, not just your money in the bank. But if you have your retirement account in stocks, you know, we saw get hit by SVB going down. But what happens if another domino falls, and another domino falls, and suddenly we’re in a massive thing where banks are going down and the federal, the federal government eventually says, You know what, forget it, you guys made too many risks. We’re not going to back everything that can get away that can get away pretty quick and not like you were saying, I’m not saying it’s going to happen. But there’s always a chance that one run can lead to another we’ve seen it happen before. So it’s a risk you have to take. So if you want to find something to control on your own, you can head over to rent to retirement.com. See what we have available, see the markets we’re in, you can schedule the time to talk with us. We are happy to talk with you about your investing journey and see how we can help you. It makes sure that you’re pointing in the right direction as you go about controlling your assets. And don’t forget if you want to know where to invest, or at least get advice on where to invest. You can email podcasts at rent to retirement and ask for Zach’s copy of the 20 markets to invest in in 2023 to send that request over to podcast at rent to retirement.com Thank you so much for listening to the show today. Don’t forget if you leave a review on whatever We’re a podcast platform you use and send that same podcast and rent to retirement.com. We will get you a $10 gift card as a thank you and enter you into a $500 closing cost credit raffle. Again, thank you so much for joining us today. We’ll talk to you on the next episode.