Bank says bad debt OK, asset not OK

I want to start buying property with the goal of generating passive income from rent. I’ve read a bunch of books, listen to podcasts, did my research and I stumbled upon a good opportunity that needs more money that I have right now but still a very low amount. So, I need a loan.

I went to a couple of banks to ask for a loan and the answer was essentially: no, we cannot lend you the money to buy this asset that will pay for itself, but if you want to blow it up on a holiday and buy some useless toys, sure, here it is!

Mind you, I can easily pay the loan from my salary. I actually save more money every month than the monthly payment of the loans and I have in the bank a third of the money. My salary has been steadily going up and I’m in an industry in which I’m in a lot of demand. Where my plan is a safe bet, betting on me is even safer.

I’m not one to believe in conspiracy theories but it almost seems like their rules are designed for people to be stupid, instead of smart, with their money; to get in bad debt instead of growing their wealth.

Now, for the nitty gritty details: I asked for a personal loan, some banks disqualify me because you are not allowed to use it for business, some banks disqualify because I’m planning on buying property. They say: “we cannot give you a personal loan for property because you may also get a mortgage”

“Ok, can you give a mortgage then?” “No, because your property is in another country”

“Can you do anything?” “No”

Let’s say I take this supposed mortgage they are so afraid of and the plan fails. Whoever has the mortgage will repossess the property and I’ll pay the bank out of my salary the same way I would if I wanted to spend the money on a caribbean cruise or home improvement.

This feels utterly ridiculous.

5 thoughts on “Bank says bad debt OK, asset not OK

  1. I guess the amount you would borrow for holiday or to buy some useless toy is much lower than what you need to buy this property. It seems banks simply consider your loan request too risky. If one rainy London day you decide to quit your job and move to a country where your property is located I guess there is very little they could do to get their money back. That might explain why they don’t want to lend you. Unrelated to this, buying property to rent is in my opinion usually a bad idea. Invest in areas which you understand and have some competitive advantage. What’s your competitive advantage in real estate?

    1. The amounts are the same. I could borrow the money, spend it on a holiday and run away just the same. A cheap property in country in which I cannot leave will not make that easier.

      They were not interested in my competitive advantage, but since you ask: I know where I can get a ridiculous return on investment that’s expected to last based on historical data. I know how to get properties really cheap because nobody else wants them because they are not livable but I have a team that has a lot of expertise in fixing them up and one of the things we would do is buy good quality materials and components, which means a bigger expense on day one but a lower one ongoing as we are less likely to get boiler problems or things like that (they also have long term warranties). Lastly, I know I’m new in this and I don’t have a track record, which is why I’m making a super small move to start to build from there. After all, I was asking just for a personal loan, those do not go that high and I wasn’t even asking for the highest.

  2. >> “No, because your property is in another country”

    The property is the collateral (warranty/security/insurance) for the mortgage, the bank should be able to sell it, if you don’t pay; basically the property title will say something along the lines “belongs to Pablo and Mr.Bank”; if the property is in another country, it would be very difficult and expensive for the bank to ‘get their money back’ in the hypothetical situation you don’t pay. The bank has little legal power on the foreign country (a contract signed in one country -the mortgage agreement-, to be executed in another country… is complex legal thing… we are not there yet in legal world, not to mention translations, etc.) … even if the bank has foreign offices, it will be difficult/expensive for the local branch to arrange it with the foreign office.

    Nevertheless, Banks do lend for buying properties abroad, but I guess it is under very specific cases, i.e. you have to have a local property on your name (so you you can give them a local collateral they can execute easily under local law), they also need to know the country property market will be somewhat ‘stable’. so the person don’t buy for 100 and two months later the property price goes down to 20, encouraging the person to default on the mortgage.

    Finally, I understand banks have very bad reputation lately and I will not disagree with you on that. Still, personal loans vs mortgages are two very different products, one with high interest rates and lower amounts, the later with lower interest and higher amounts, hence the need for a collateral.

    I hope it clarifies a bit. Ed

    1. Hello Ed, thanks for the comment.

      Yes, I wasn’t expecting the bank to give me a mortgage for a foreign property. What I don’t understand is why they would give me a personal loan to spend on a holiday but not on a property abroad. I’m making the decision that the low amount high interest personal loan is enough for my property business and in both cases, holiday or foreign property, there’s no collateral other than my salary and good credit. If it’s good for one, it should be good for the other.

      Anyway, I’m dealing with private lenders now mostly and it’s much better. The fact that I’m making money for friends, family, acquaintances and other individuals instead of banks also feels good.

  3. The banks are oversized, over-regulated, protected from mistakes, filled with stupidity and inefficient. As a result, their procedures are internally inconsistent. Ex falso quodlibet.

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