OPM Isn't Free Money: Banks Profit From Your Deals Too

The $346,000 Mistake

David bought his first rental property in 2010. $180,000 purchase price, financed with a 30-year mortgage at 5.5% interest. Great deal, he thought. Monthly payment of $1,022, rental income of $1,400. Positive cash flow from day one.

Fast forward to today. David still owns the property. It’s worth about $420,000 now. His tenants have been paying his mortgage for 16 years. He feels like a real estate genius.

Until I showed him the numbers.

Over 30 years, David’s total payments will be $368,000 on that $144,000 loan (he put 20% down). That means he’s paying $224,000 in interest — more than the original purchase price of the property.

But here’s what really shocked him: In today’s dollars, that $224,000 in future interest payments is worth about $346,000.

David thought he was using “Other People’s Money” to get rich. In reality, he was making the bank rich while building wealth at the speed of molasses.

The OPM Mythology

Real estate education is built on a single idea: Other People’s Money.

Use the bank’s money, not your own. Let tenants pay the mortgage. Build wealth without tying up your capital. Leverage amplifies returns.

It all sounds logical. And under certain conditions, it can work.

But here’s what the gurus don’t tell you: Every dollar you borrow makes someone else wealthy before it makes you wealthy.

Banks aren’t lending you money out of generosity. They’re not community partners in your wealth-building journey. They’re for-profit businesses selling you a product: access to capital in exchange for interest payments.

And they’re very, very good at pricing that product profitably.

The Interest Iceberg

Most real estate investors focus on cash flow: rent minus mortgage payment minus expenses equals profit.

But this is surface-level thinking. It ignores the massive transfer of wealth happening below the waterline.

Take David’s property. He sees $378 monthly cash flow ($1,400 rent minus $1,022 payment). Over 16 years, that’s about $72,000 in cumulative cash flow. Not bad, right?

But during those same 16 years, he’s transferred $163,000 in interest payments to his lender. The bank has made more money from David’s property than David has.

The property is generating wealth. The question is: who’s capturing it?

Nelson Nash saw this clearly. In Becoming Your Own Banker, he calculated that the typical American family sends 34.5 cents of every dollar they earn through the books of some banking institution.

Real estate investors? The percentage is often higher.

Mortgage interest, hard money interest, HELOC interest, commercial loan interest, credit card interest for renovation expenses, personal guarantees that create liability beyond the property value.

You’re not just building wealth. You’re building someone else’s wealth faster than you’re building your own.

The Velocity Problem

Here’s where conventional real estate wisdom breaks down completely.

Traditional advice says: Get a 30-year mortgage to maximize cash flow. Keep your payments low. Use the excess to buy more properties.

But 30-year mortgages are wealth-transfer machines.

In the first decade of a 30-year mortgage, roughly 80% of each payment goes to interest. You’re not building equity. You’re paying rent to your lender with a small principal reduction thrown in as a bonus.

David’s first payment: $1,022 total, $660 interest, $362 principal. His 10th year payments: Still about $500 of each payment going to interest.

Even 15 years in, David had only paid down about $40,000 in principal. Meanwhile, he’d transferred $163,000 to his lender.

The velocity of wealth transfer to your lender dramatically exceeds the velocity of wealth accumulation for yourself.

The Refinancing Trap

Real estate investors love to talk about “pulling out equity” through refinancing.

But what are you really doing when you refinance?

You’re resetting the interest clock. You’re extending the period during which most of your payment goes to someone else instead of building your own wealth.

I know investors who’ve owned properties for 20 years and have refinanced multiple times to “access equity” for new deals. Their loan balances today are higher than what they originally borrowed. They’ve made hundreds of thousands in mortgage payments but have less equity than when they started.

The bank loves these customers. Every refinance generates fees. Every refinance extends the period of interest payments. Every refinance keeps the wealth transfer flowing.

“Accessing equity” is often just converting equity into debt — trading an asset you own for an obligation you owe.

The Leverage Lie

“Leverage amplifies returns,” say the real estate gurus.

True. But leverage also amplifies wealth transfer.

When you buy a $200,000 property with $40,000 down and a $160,000 mortgage:

• Your leveraged return looks great when the property appreciates
• Your interest expense flows to the lender whether the property appreciates or not
• Your wealth accumulation is split between you (equity gains) and your lender (interest payments)

Let’s say that property appreciates 3% annually. After 10 years, it’s worth about $268,000. Your equity gain: $68,000 plus principal paydown of maybe $30,000. Total wealth creation for you: roughly $98,000.

Meanwhile, you’ve paid about $95,000 in interest to your lender.

The property created $196,000 in total wealth over 10 years. You kept half. Your lender kept half.

Leverage didn’t amplify your returns. It split them.

The Tax Deduction Distraction

“But interest is tax-deductible!” protest the OPM advocates.

Yes. And that’s exactly the problem.

Think about what a tax deduction actually is. You pay $100 in mortgage interest. If you’re in a 25% tax bracket, you get a $25 deduction. You still sent $75 to your lender — money that’s gone forever.

A tax deduction is a discount on wealth you’re transferring to someone else. It’s not wealth creation. It’s loss mitigation.

Here’s what’s really insidious about the interest deduction: it makes wealth transfer feel like a tax strategy. Instead of asking “How can I avoid paying this interest?” investors ask “How can I pay more deductible interest?”

The tax tail starts wagging the investment dog. Decisions get made to maximize deductions rather than maximize wealth accumulation.

I’ve watched investors keep inefficient debt in place for years because they didn’t want to “lose the tax deduction.” Meanwhile, they’re transferring wealth to lenders at a rate far exceeding their tax savings.

The Compound Interest Trap

Einstein allegedly called compound interest the eighth wonder of the world. “He who understands it, earns it. He who doesn’t, pays it.”

Real estate investors using traditional financing are usually on the wrong side of that equation.

Your mortgage compounds against you. Every month, you pay interest on the full remaining balance. That interest doesn’t help you build wealth. It builds the lender’s wealth.

Meanwhile, if you’d kept that money and invested it in something that compounds for you instead of against you, the difference becomes staggering over time.

David’s $224,000 in lifetime interest payments, invested at 4% annual growth instead of being transferred to his lender, would be worth approximately $500,000 by the time his mortgage is paid off.

The opportunity cost of traditional financing isn’t just the interest you pay. It’s the wealth you could have built with that same money.

The Commercial Lending Reality

Residential mortgages look cheap because they’re subsidized by government-sponsored enterprises. Commercial real estate financing tells the true story of what money costs.

Hard money: 12-18% annually, plus points upfront. Commercial loans: 6-10% annually, often with balloon payments. Construction loans: Prime plus several points. Business lines of credit: 8-15% annually.

These aren’t predatory rates. They’re market rates for unsecured or asset-backed lending to individuals and small businesses.

Banks charge what capital actually costs. Residential mortgages are the exception, not the rule.

When real estate investors scale beyond residential rentals, they discover that money isn’t cheap. It’s expensive. And the larger their operation becomes, the more wealth they transfer to lenders.

The Private Lender Perspective

I know several private lenders — high-net-worth individuals who lend their own money to real estate investors.

They target 8-12% annual returns. They want monthly payments. They want personal guarantees. They want first lien position on valuable assets.

From their perspective, lending to real estate investors is a great business. Steady returns, asset-backed security, minimal management required.

Private lenders understand something most real estate investors don’t: Being the lender is more profitable than being the borrower.

One private lender told me: “I used to flip houses. Made decent money, but it was active income and risky. Now I lend to house flippers. I make more money with less risk and less time investment.”

The capital providers are making more money than the capital users. That should tell you something.

The Institutional Advantage

Large real estate investors — REITs, pension funds, sovereign wealth funds — have access to capital markets that individual investors don’t.

They can issue bonds at institutional rates. They can access credit facilities from multiple banks. They can negotiate terms that individual investors never see.

But even these massive institutions understand something most individual investors miss: Capital costs matter more than asset returns over long time horizons.

A REIT that can access capital at 4% will outperform an individual investor accessing the same properties at 8% financing costs, even if they’re equally skilled at property selection and management.

The cost of capital determines long-term wealth accumulation more than the quality of investments.

The Alternative Calculation

Here’s a thought experiment.

Instead of using David’s $36,000 down payment for a rental property financed at 5.5%, what if he’d used that money differently?

What if he’d put $36,000 into properly structured dividend-paying whole life insurance annually for 5 years — building a pool of $180,000 in capital he could access for real estate deals?

After 20 years, that capital would have grown to approximately $400,000-$500,000 in accessible cash value, depending on dividends and usage patterns.

More importantly: No interest payments to banks. No refinancing fees. No prepayment penalties. No personal guarantees. No credit checks for each new acquisition.

He’d still own the real estate. But he’d also own the banking function.

The Banking Business Model

Banks make money three ways from real estate investors:

1. Interest spread: They pay depositors 1-2%, lend to you at 6-8%
2. Fee income: Origination, underwriting, processing, and refinancing fees
3. Float: They collect payments before crediting your account, earning overnight interest on the float

But here’s the fourth way, which is rarely discussed: portfolio growth.

Every loan a bank makes creates an asset on their balance sheet. As property values increase, the bank’s collateral value increases, but their loan balance decreases (through principal payments). They benefit from appreciation just like property owners do, but with none of the management hassles.

Banks are effectively equity partners in your real estate portfolio, but they get paid whether your investments succeed or fail.

The True Cost of OPM

When you calculate the total cost of Other People’s Money, include:

• Interest payments over the life of the loan
• Origination fees and closing costs
• Ongoing loan servicing fees
• Refinancing costs every 3-7 years
• Prepayment penalties when you want out early
• Personal guarantee liability beyond the collateral
• Opportunity cost of capital tied up in down payments
• Mental energy managing lender relationships

Most real estate investors never do this calculation. When they do, the numbers are sobering.

I helped one investor analyze his 10-property portfolio. Total purchase price: $2.1 million. Total financing: $1.6 million. His projected lifetime interest payments: $1.8 million.

He was going to pay more in interest than the properties originally cost.

The Compared-to-What Question

But compared to what?

Compared to paying cash and giving up leverage? Maybe traditional financing makes sense for certain deals at certain times.

Compared to never investing in real estate at all? Probably OPM beats sitting on the sidelines.

But compared to controlling the banking function yourself? Compared to accessing capital without transferring wealth to institutional lenders? Compared to keeping the interest payments instead of giving them away?

That’s a different calculation entirely.

Nelson Nash spent his career showing people how to recapture the financing function in their lives. Not just for cars and equipment, but for real estate, business investments, and any other purchase requiring capital.

The goal isn’t to avoid debt. The goal is to owe yourself instead of owing strangers.

What This Means for Your Real Estate Business

If you’re serious about building wealth through real estate, you need to think beyond the next deal. You need to think about the cumulative cost of financing dozens of deals over decades.

Traditional financing might make sense for your first few properties while you’re building capital. But as a long-term wealth strategy, transferring hundreds of thousands of dollars in interest payments to lenders is fundamentally inefficient.

Every dollar you pay in interest is a dollar that can’t compound for your benefit.

In the next article, we’ll examine another hidden cost of traditional financing: how slow capital access kills deals. When opportunities move faster than approvals, speed becomes more valuable than price.

But for now, ask yourself this: If Other People’s Money isn’t free, why not use your own?

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This is Article 3 of 6 in the Real Estate Investor’s Path. Continue to Article 4: Speed Kills Deals →

This is educational only and not meant to serve as financial advice.