The idea behind a bank is that you have this place where you can deposit your money for safekeeping until you need it or, in the case of savings accounts and CDs, a way for you to get paid for letting the bank use your money. Because the bank mostly uses your money to invest, they lend it to businesses and consumers as loans, making a profit from the interest payments. In addition, they also invest a portion of their money directly in assets such as real estate, bonds, and stocks.
Because banks invest their depositors’ money, that cash is not regularly on hand. Banks keep enough on hand to honor normal withdrawals, but if everyone wants their money all at once, the bank will be in trouble because it will not have the funds to fulfill the withdrawal requests and will essentially be forced out of business.
A widespread bank run that essentially shut banks down nationwide is what famously kicked off the Great Depression. To prevent future runs, the Federal Deposit Insurance Corporation was instituted by congress to restore public confidence in banks by insuring depositors’ funds. Currently, banks are covered by the FDIC, which insures your money for up to $250,000 per depositor, per account ownership category. If you have more than $250,000 deposited at any one bank, you will bear any losses beyond $250,000.
Bank runs don’t occur often, but last week served as a stark reminder that what you thought was a safe place to keep your money was not the case. It all started with the failure of Silicon Valley Bank (SVB). It all started on Friday, March 9th, with the collapse of SVB when California banking regulators closed the bank and turned it over to the FDIC. That Sunday, SVB’s collapse was followed by the failure of New York-based Signature Bank. SVB’s second-biggest collapse in U.S. banking history was the largest failure since 2008. Signature’s collapse was the third biggest in U.S. banking history.
SVB imploded last week after it announced a sale of $20bn of securities to mitigate a sharp drop in deposits. This focused investors’ minds on the bank’s vulnerabilities. They dumped its stock, customers withdrew their funds, and the bank was bust by Friday morning.
After initially saying it would not cover deposits beyond the FDIC-insured $250,000, the federal government changed course and said it would make all depositors whole. That bill will go to the taxpayers assuredly. The Feds may be able to bail out two banks, but what about multiple? Not likely, and according to Janet Yellen, the failure of more banks is not off the table.
If you’re skeptical about the government being able to prevent a widespread run on deposits, you’re not alone.
If banks are no longer safe for keeping your money, what is? A different type of bank – a land bank.
Smart investors have long deposited their money in land or commercial properties to preserve their capital and make money simultaneously. Unlike a traditional bank, however, there’s no risk of a land bank going out of business. You’ll always have the land or property, and in the case of pooled funds where you own land or a property with other investors, there is no risk of a run on withdrawals because of the restriction on withdrawals. Most real estate investments have long lockup periods that prevent investors from withdrawing their capital and risk shutting the investment down.
So why land banking?
Because land and properties are ideal for insulating investor capital from the chaos and contagion plaguing the broader markets. These tangible assets are illiquid and shielded from market volatility and confusion that plagues more liquid public equities and bank deposits.
Smart investors bank on land and properties because they have proven to be ideal assets to preserve capital and build value over time. Think of it as a safer bank that pays better returns. Everyone should be doing it, right? The illiquidity turns off some investors, but if you’re willing to leave your money in for a minimum of 3-5 years, you’ll reap serious rewards while keeping your capital safe.
This is a summary of why you should be banking in real assets in times of uncertainty:
Capital Preservation.
Held long-term, real estate is largely unaffected by broader market uncertainty and downturns. It may experience lumps here and there, like in the early days of the pandemic, but it has demonstrated its ability to rebound faster than other asset classes. As a consequence, it is ideal for capital preservation.
Long-Term Appreciation.
Because real estate is a finite resource, it naturally appreciates over time – cash-flowing real estate more so than land. And unlike public equities, where prices are determined by hype and hysteria, real estate has a solid underlying value that grows over time no matter what’s happening in the markets. Holding onto real estate long-term gives investors the luxury of cashing out at a profit when it’s time to liquidate.
Low Risk.
Holding land is low risk because there is little maintenance required and no issues involving tenants. As for properties, assets in high demand, no matter the economy, also entail low risk.
The chaos among traditional banks shouldn’t scare you into putting your money under your mattress. Instead, you should consider a safer and more profitable way to the bank: banking in real assets.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.
