Foreword by David Lindahl

Founder, Creative Success Alliance

nker’s

de

The Most Powerful Wealth-Building

Strategies Finally Revealed

GEORGE ANTONE
THE BANKER’S CODE George
Antone
[Link]

SECOND EDITION

© 2014 by George Antone. All rights reserved.

No part of this book may be reproduced or transmitted in any form or by any

electronic or mechanical means, including information storage and retrieval
systems, without permission in writing from the publisher, except by a reviewer
who may quote brief passages in a review.

Printed in the United States of America.

Book design by The 750 Shop

Cover by Alejandro Espinosa

Certain events in this book, although based on a true story, have been
fictionalized for educational content and impact.

ISBN-10: 0982704518
ISBN-13: 978-0-9827045-1-6

This publication is designed to provide information with regard to the subject

matter covered. It is sold with the understanding that the publisher and author
are not engaged in rendering real estate, legal, accounting, tax, or other
professional services and that the publisher and author are not offering such
advice in this publication. If real estate, legal, or other expert assistance is
required, the services of a competent professional should be sought. The
publisher and author specifically disclaim any liability incurred from the use or
application of the contents of this book.
I dedicate this book to Paul, France, Jacqueline, Gisele,
Michel, and Pierre. You have helped shape my life. I also
dedicate it to the many students we have worked with
through the years, who never cease to inspire me.
 Table of Contents

Acknowledgments ..........................................................................
vii
Foreword by David
Lindahl .............................................................ix
The Inspiration for This
Book ..........................................................xi
CHAPTER ONE | …And Then There Was
Banking! ........................1
CHAPTER TWO | It’s Nothing But a Financing
Game! ....................9
CHAPTER THREE | Pick a Team
First ...........................................19
CHAPTER FOUR | Money, Interest, and Being a Private
Lender ..29 CHAPTER FIVE | The Language of
Bankers..................................39
CHAPTER SIX | The Banker’s
Mindset ..........................................51
CHAPTER SEVEN | But Who Would Pay
12%? ............................63 CHAPTER EIGHT | The Finance: It
Gets Better.............................67
CHAPTER NINE | The Banking: The
Parts ....................................79
CHAPTER TEN | The
Steps ...........................................................91
CHAPTER ELEVEN | The Banker’s
Rules ....................................101
CHAPTER TWELVE | Understanding the Banking
System .........107

v
CHAPTER THIRTEEN | Let’s Combine
Everything ......................127
CHAPTER FOURTEEN | “I Want to Be a Real Estate
Investor” ..137
CHAPTER FIFTEEN | “I Want to Invest in the Stock
Market” .....143
CHAPTER SIXTEEN | Build Your
Team .......................................157
CHAPTER SEVENTEEN | Leaving a
Legacy ...............................167
CHAPTER EIGHTEEN | The Secret
Society ................................173
Resources ...................................................................................18
1
Index ............................................................................................ 1
83

vi
 Acknowledgments

Writing my first book, The Wealthy Code, changed my life. I have

since realized that I really enjoy sharing the wealth of information
I’ve learned.
Writing this second book, The Banker’s Code, was an easier
task because of the support of many people. Everyone at
[Link] has helped me in a number of different ways,
especially Stephanie May, who helped in many ways to write this
book. Also, thanks to my business partners, Boomershine, Nazar,
and Dang. Willie Hooks, you are a true inspiration to me and to
others. Coaches Mary, Ray, and Marc, thank you for always being
there and supporting me in times of need. Julia Jordan, I have no
words to describe how amazing you are! Thanks for always being
you. Swanee Heidberg, thank you for allowing me to hassle you
with this book. You are a great friend. And to all of our students
who have taken this information and implemented it, changing
your lives with it—thank you! It’s you that keep us going and you
that help us achieve our goal: to end financial suffering and help
people get the wealth they need to live the lifestyle they desire. It’s
you we celebrate.

viii
 Foreword

Anthony Robbins said it best: “It is in your moments of decision

that your destiny is shaped.” I believe that. I believe that the
decisions we make define the trajectory of our lives and,
ultimately, our fortune.
I made one of those decisions when I began my own
wealthbuilding journey as a struggling landscaper, living in a one-
room apartment. In a little more than three years (and without any
real estate investing experience), I could have retired after building
a successful 400-plus unit portfolio. I now have more than 7,000
multi-units that have provided more passive income every month
than most people make in a year! And I’ve raised more than
$65,000,000 in private money in less than six years. I can say with
confidence that I know more than a thing or two about building
wealth.
And when people ask me what the secret to success is, I simply
tell them: Begin with the decision to change.
I’ve been challenged a lot about what I teach, and I was
genuinely surprised to find my own mindset challenged with this
book. What a treat it was to read a book from cover to cover and
still want more.
I’ve known George Antone for several years now. It’s rare to
find a brilliant financier mind that can also share sophisticated
information in such a simple way. I know that, like me, you’ll
immediately find yourself absorbing sophisticated wealth-building
strategies easily and quickly. You’ll enthusiastically explore new
paradigms, uncovering amazing new possibilities for building
wealth. His simple, down-to-earth style takes complex techniques
and, with George’s unique touch, breaks it all down into a step-
bystep approach that anyone can understand and, more
importantly, implement.
THE BANKER’S CODE

x
 But be warned—The Banker’s Code is truly for individuals
interested in taking their wealth to a whole new level. It’s not a
book that just talks about what could be. This book will change the
way you look at the core of your financial life and will have your
mind reeling with amazing possibilities that can help you create
the life that dreams are made of.
As George shares in the book, investors and private lenders
need each other. This book opens your eyes to a business model
that has been around for a very long time—being the banker
without using your money. Just like the banks do it.
The economic woes of recent years may still be fresh in our
minds, but George’s book comes at a perfect time. I’m betting that
almost every reader will be wishing they’d had this information a
long time ago. The Banker’s Code is a game changer and can be
the difference between struggling with your wealth building—or
not!
Many years ago, I made the decision to change my destiny.
George made the decision to change his destiny. You now have in
your hands a book that can change your destiny. Once again, “It is
in your moments of decision that your destiny is shaped.” Make
that decision to read this book cover to cover. Get ready to be
blown away!
David Lindahl
Founder of Creative Success Alliance

The Secret to the Greatest

Dynasty the World Has Ever
Known . . .
Long ago, in the 1700s, lived a man named Mayer, born
in poverty in the ghettos of Frankfurt.

One day, he discovered a secret—a great secret

powerful enough to make him fabulously wealthy.

xi
 The Inspiration for This Book

Mayer taught his five sons this secret and

then sent them to live throughout Europe.

They, in turn, used the secret to build the greatest

international financial dynasty the world has ever known.

Today, this family continues to pass its secret from one

generation to the next, and the family’s influence and
power have reached every corner of the earth.

They are…the Rothschilds.

The Banker’s Code was inspired by this true story.

Get ready to learn the bankers’ secrets!

xii
 Chapter One

...And Then
There Was
Banking!
I walked into my mentor’s office, loaded with questions.
“Let me ask you this. What’s the most powerful wealth-building
strategy ever known to man?” I asked.
My mentor, a successful, down-to-earth, approachable man,
had built his wealth in real estate. I had met him only a few years
earlier, and he had already changed my life with his wisdom.
“Hello to you, too,” he chuckled, pointing to a chair.
“Sorry! Hello!” I replied with a sheepish grin as I settled into the
chair.
“So, you want to learn about the most powerful wealth-building
strategies known to man?”
“Yep! I’m curious what you think they are. The information you
shared with me a few weeks ago about passive income was
powerful, but I want to know what you think stands out from all the
other strategies you and I have talked about.”
A few weeks earlier we had discussed the code the wealthy use
in generating great cash flow from their investments.
“The absolute, most powerful wealth strategy ever known to
man? I can tell you with certainty what it is,” my mentor
announced with confidence. “It’s not something I think I know, it’s

1
 THE BANKER’S CODE

something I know I know! And the richest people in the world will
tell you the same thing. However, the majority of the population
doesn’t know what it is.”
He eyed me carefully, drawing out his words as he continued.
“I’m not sure you’re ready for it, though. It’s not that it’s difficult. In
fact, it’s quite simple, but that’s also its danger. It gives you
power… but most people can’t handle that power,” he said
mysteriously.
Was he talking about wealth building or something else? I
wasn’t sure.
“Come on, man!” I chuckled.
After a few minutes of listening to me beg while he checked his
e-mail, he swung his chair toward me and replied, “Okay, after I
whet your appetite, I’m going to send you to a friend of mine.
Once you speak to him, come back to me, and you’ll know the
secret. You’ll know the most powerful wealth-building strategy
known to man!”

Have you ever wondered if there’s a secret so great that it can

help you live a much better life financially?
There is, and this information has built dynasties.
Let’s start from the beginning.
Who taught you about becoming wealthy? Parents? Teachers?
Friends? Priests? And where are they financially? The saying
goes that if you want to be a billionaire, learn from a billionaire. If
you want to be a millionaire, learn from a millionaire. If you want to
be broke, learn from someone who’s broke. Most people are
learning about money and about being rich from the wrong people.
The people who know about the “secret” strategies described in
this book have kept this knowledge to themselves, selfishly
passing it from generation to generation. Consider the
Rothschilds, the greatest banking dynasty the world has ever
known, still going strong, still passing these same strategies from
one generation to the next.

2
 …AND THEN THERE WAS BANKING!

And yet, this secret has been “hidden” right in front of us the
entire time. It’s been available to practically everyone. It can be
found on nearly every corner of this country.
Here’s my promise. I will reveal to you, in the pages of this
book, the most powerful wealth strategy known to man. What’s in
this book will almost certainly challenge your beliefs about money.
All I ask is that you keep an open mind while you read, and you
will learn some amazing things.

The Secret Lies in the Game of Monopoly

Many people have played the classic board game Monopoly. As
children, we grew up playing the game with friends and family, yet
most of us never noticed the secret that in real life has created
billionaires. This secret allows you to win Monopoly every single
time. What is that secret?
Take a moment to think about it.
Buying four green homes and a hotel? Nope. There’s no
guarantee you’ll win the game with that.
Buying “Park Place” and “Mayfair”? Nope. There’s no guarantee
you’ll win the game with that, either.
In fact, the secret to winning the game is to be the banker.
Think about it. The banker wins every single time.
Why is that?
It’s because the game players are playing with one set of rules
—the investor’s rules. The banker is playing with a different set of
rules—the banker’s rules. So, there are really two games going
on. The banker’s rules are all about making the most money with
the least risk. The investor’s rules are about making the most
money, but investors incur more risk than do the bankers.
In the board game, one player (investor) wins while all the other
players (also investors) lose. However, the banker always wins.
Obviously, real life is different. Many investors do “win,” but many
also lose. In fact, a lot more investors lose the game because

3
 THE BANKER’S CODE

they’re playing with investor’s rules, rules stacked to the banker’s

advantage. Keep reading to find out why.
The second game in Monopoly is the banker’s game. The
bankers follow the banker’s rules. The banker’s rules are very
different from the investor’s rules—they were written by bankers
for bankers. And here’s the rub. The investor’s rules were written
by the bankers as well! So, which rules do you think are more
favorable to the banks? The bankers have written both sets of
rules to work for them!

Investors and bankers play two different

games with two sets of rules. However, the
bankers wrote the rules for both games.
Whom do you think the rules favor?

The banker plays a safer game and makes more money. If he

needs money, he can create more money. We’ll cover the
banker’s rules later, but it’s important to understand that the rules
of both games were written by bankers.
So, the first step to making money—like the bank—is to adopt
the mindset of the banker and play by the banker’s rules.

The secret is to learn to be the bank—adopt

the mindset of the banker and play by the
banker’s rules.

The Proof
The average person is playing in a game they don’t even know
exists. Sadly, they’re losing that game, too. This reminds me of the
science fiction movie The Matrix, where the main character in the
movie, Neo, is introduced to “…the truth about his world by
shedding light on the dark secrets that have troubled him for so

4
 …AND THEN THERE WAS BANKING!

long: ‘You’ve felt it your entire life, that there’s something wrong
with the world. You don’t know what it is, but it’s there, like a
splinter in your mind, driving you mad.’ Ultimately, Morpheus
illustrates to Neo what the Matrix is—a reality beyond reality that
controls all of their lives, in a way that Neo can barely
comprehend.”
When it comes to our world, we’re also involved in a game that
we have no idea exists. Unfortunately, the reward for that game is
our money. The other team is beating us at this game, and we’re
constantly having to fork over money. This game is called “the
financing game,” and our opponents are the financial institutions.
In fact, we actually have two opponents: the financial institutions
and the government.
Let’s look at the proof.
Of the average American’s income, 34.5% goes toward paying
interest alone. That doesn’t include principal—just interest. Interest
on credit cards, mortgages, car loans, furniture, among other
things. The recipients of that interest are the financial institutions.
Another 30% of the average American’s income goes toward
paying income taxes. The recipient of that revenue is the
government.
And finally, less than 5% of the average American’s income
goes toward savings.
Consider those numbers: 64.5% of the average American’s
income is going to financial institutions and the government. That
means we’re spending two-thirds of our time working to pay the
financial institutions and the government. Put differently, the
average American works from January 1st all the way through
August 31 for financial institutions and the government. Then, we
live on the money we have earned from September 1 to December
31. Or so we think—until we realize that it’s actually worse—a lot
worse.

5
 THE BANKER’S CODE

In The Matrix, Neo discovers that the world he knew is not what
he thinks; it’s actually being controlled, and everyone is basically a
puppet.
Unfortunately, in real life, so are we.
The proof is in the numbers. As noted above, the average
American has become a slave to the financial system. And for
those of you who are “debt free” and pay off your credit cards
every month, you have a lot to learn as well. We’ve been
conditioned to work hard while helping the bankers become rich.
But this book is about to change that for you. You are about to
become “the banker.”

A Basic Look at How Banks Work

We’ve been conditioned to deposit our money into banks,
“saving” money in our savings account (or checking, money
market, CDs, etc.). We’re trained to think that our money is safe in
those bank accounts, because we trust the bankers.
We’re then paid a measly interest rate, and just in case that
measly rate wasn’t enough a slap in the face, we have to pay
taxes on it to the government. The bank then uses our money to
leverage up to 10 times (or more, in certain cases) by using the
fractional reserve system. Our $1,000 deposit generates up to
$10,000 in loans for the bank!
We then proceed to borrow that money from the bank (our own
money) at a much higher interest rate, and they tie up our homes
and other collateral just in case we default. So, because we’re
borrowing money from the banks, they now can set their own
terms: the interest rate, the collateral requirement, the term of the
loan, etc.
We complain that the terms of the loan don’t favor us, but then
we’re reminded of The Golden Rule: “He who has the gold makes
the rules.” Banks make the rules. The extremely wealthy make the
rules. No getting around it.

6
 …AND THEN THERE WAS BANKING!

So, we sign on the dotted line and borrow the money

(remember, it was our money) on their terms.
If we should default, they end up taking all the collateral they
tied up. That’s when we realize they tied up a lot more collateral
than what we borrowed. We are reminded again that they set the
rules—so we have to play by their terms. They “dump” our
collateral for nothing, just to get their money back. And they do get
their money back. We took on a lot more risk than we needed, but
we had no choice. The bankers set the rules.
But most of us don’t default. As we pay the loan, they re-lend us
the same money again and again. They’re moving money fast!
They’re taking little risk and making a lot of money. We realize
we’re still paying interest long after we’ve paid the bank the
original loan amount. Moreover, they’ve generated many more
loans from the same money we paid them, and we’re still paying
them. We feel like we have no choice! But we do.
We can get angry at the bank and play the victim. Or, we can
become the banker.
We’re conditioned to deposit money into banks. Why not
deposit it in our own personal “bank”? Why not lend our own
money to others, taking on the safer position and making more
money? Why not leverage our own money up to 10 times and lend
it out?
You can do all of this—and make a lot of money!
But before you start counting your billions, you need to
understand something about this book. It was not my intent to
provide for you a “how-to” shortcut to wealth; rather, my primary
goal in writing this book was to get you to open your eyes to the
possibilities, recognize opportunities, and help you to see what’s
right in front of you.
With that understanding, let’s jump into building the foundation
to being your own banker.
Being a banker is all about adopting their mindset and their
rules; understanding how they manage money and how they use

7
 THE BANKER’S CODE

financial strategies to make a lot more money; and ultimately,

working to leave a legacy to the next generation of bankers in your
family.

“Is this for real?” I asked. “Is it really possible for just anyone to
be a banker?”
“We’re not talking about opening a real bank, George. We’re
not talking about getting a banking license. But we are talking
about making money just like a bank,” my mentor patiently replied.
“If you adopt the mindset, the rules, and the strategies of a
banker,” he added, “you can have a much better life financially.
Just don’t let the power get to you. Always follow the banker’s
rules.
“And don’t forget: bankers make more money than investors,
with a lot less risk.”

Chapter Summary
• Investors play by the banker’s rules. The bankers play by their
own rules.
• The investor’s rules are stacked to the banker’s advantage.
• Of the average American’s income, 34.5% goes toward paying
interest alone and 30% goes toward taxes. That’s an indication
that the average American is working two-thirds of his time for
bankers and the government.
• This book’s primary objective is to open your eyes to the
possibilities of being “the banker.”

8
 Chapter Two

It’s Nothing but

a Financing
Game
“In fact, let me share one thing with you right now, George. This
15-minute lesson will be an awakening for you,” he predicted
confidently.
“Grab a pen and paper. This—the first secret about banking—
you do not want to miss. So get ready to write; let’s dive in.” I
grabbed a clean sheet of paper.

It’s About Cash Flow First

Why do people invest?
For one of two reasons: cash flow or capital gains.
The wealthy recognize (as I explained in The Wealthy Code)
that they need cash flow to pay for their living expenses and
lifestyle. They also recognize that investments for capital gains are
nothing more than money that will buy more income-producing
assets in the future.
But the middle class and poor tend to invest for capital gains
only. For example, investments, such as buying stocks for the long
term (“buy and hold” strategy), are very typical. The general public
has been conditioned by the financial institutions to think like that.
We’ll cover this later in the book.

9
 THE BANKER’S CODE

Bankers—and other wealthy people—realize that it’s about

cash flow first.

So How Do You Generate Cash Flow?

Cash flow is about arbitrage (creating a spread between the
cost of borrowed money and what an investment pays). Arbitrage
is nothing more than a leveraged strategy.
The figure below illustrates that.

Figure 1: Breaking “wealth” into basic components

To create an arbitrage opportunity, you need to have the

following criteria (a simplified formula for passive income) in place:
1. An income-producing asset (such as an apartment building,
rental property, insurance policy, business, bonds)
2. A lender that is willing to lend against the asset as collateral
(obtain leverage)
3. Income that is larger than the loan payments and expenses
related to the asset
That’s it! That’s the simple formula for passive income. Some
individuals can buy an asset for all cash without leverage, but for
most people, cash is a limited resource. Adding the second step
allows you to scale up your passive income.
An investor buying an apartment building can use the apartment
building as collateral for the loan. The investor puts some money
down, borrows the rest from the bank, and creates the arbitrage.
This meets all three of the criteria above.

10
 IT’S NOTHING BUT A FINANCING GAME

Similarly, an investor buying a small rental property can use the

property as collateral for the loan. The rent is the income. The
investor puts some money down, borrows the rest from the bank,
and creates the arbitrage. This also meets all three of the criteria
above.
For a business owner buying, let’s say, a car wash, the
business is the income-producing asset (criterion no. 1); and
lenders are willing to lend against it to help the business owner
buy it (criterion no. 2); and finally, hopefully, the income is larger
than the loan payments and the expenses of the business
(criterion no. 3).
Obviously, the business owner has to deal with the headaches
of running the business, potential lawsuits, employees, and other
day-to-day issues. Similarly, the landlord in the previous examples
has to deal with the headaches of tenants and toilets.
Let’s suppose you could buy a black box from a retail store and
place it on your shelf at home. Let’s also suppose that the black
box generates $1,000 per month in income for you. That allows
you to meet criterion no. 1 in our formula. Suppose that a lender is
willing to lend you the money to buy it (for example, the retail store
offers financing to buy it). This allows you to meet criterion no. 2.
Now suppose the loan payments are $700 per month. This allows
you to keep a difference (passive income) of $300 per month
(remember, the black box is generating $1,000 per month). This
allows you to meet criterion no. 3. The black box is headache-free
with no hassles. It just sits on your shelf at home and makes you
money.
Now, if you could buy as many of these black boxes as you
want, would you prefer to own the car wash, rental properties, or
this black box? Obviously, the black box.
The point of this is to illustrate that the main reason we buy
some of these assets (the car wash, laundromats, rental
properties, self storage, etc.) is for the sake of generating passive
income first.

11
 THE BANKER’S CODE

We don’t buy them simply for the sake of buying them or owning
them. In fact, when I hear people say how excited they are to own
real estate, I realize they don’t own enough real estate to know
what they’re talking about. We own real estate or these
businesses for the sake of passive income first.
Now, the black box doesn’t really exist, but the question is:
What is the closest thing to this black box? Well, the answer may
surprise you.

Borrower Lender

Figure 2: Borrower signs a promissory note to lender,

which becomes an asset to the lender

Suppose a borrower borrows $50,000 at 10% from a lender and

signs a mortgage to the lender. The lender now has an
incomeproducing asset (the piece of paper—the mortgage—is
now an asset that produces an income—the interest—for them).
This meets criterion no. 1 in our simple passive income formula.
Now the lender can borrow against this asset (the mortgage) at
a lower rate. This is called “hypothecation.” In our example, the
lender pledges this mortgage as collateral for a loan of $50,000 at,
say, 7%. This meets criterion no. 2.
At this point, the lender receives payments at 10% interest and
pays 7% interest, leaving a 3% spread. This meets criterion no. 3.
Let’s step back for a second and think about what just
happened. To generate passive income, you need, at the core of
it, two things: an asset and leverage (borrowed money). You use
the asset to pledge as collateral to get the borrowed money. Most
people have to find a physical structure or a business (as the

12
 IT’S NOTHING BUT A FINANCING GAME

asset) to pledge as collateral to borrow that money. But the banker

simply prints the collateral, the mortgage document, and as long
as someone is willing to sign it, that document is now an income-
producing asset that can generate passive income!
Investors have to buy physical structures,
such as properties or businesses, to use as
collateral to get leverage (borrowed money)
so they can generate cash flow. Then they
are forced to deal with the aggravations of
these
assets, such as tenant problems,
overflowing
toilets, employee hassles, inevitable
lawsuits,
and a myriad of other nightmare scenarios.
Bankers simply print a piece of paper—a
mortgage—and as long as someone is willing
to sign it as a borrower, it serves as the
collateral for borrowed money. This is known
as hypothecation.
The end result is the same: cash flow.

A banker with a filing cabinet of 40 mortgages, each generating

$300 per month, is the equivalent to a landlord with a lot of homes,
each generating $300 per month. So what is the closest thing to
that black box? The banker’s mortgages.
Bankers create collateral out of paper, borrow against it, and
create an arbitrage opportunity immediately. This is power! But it
gets better.

13
 THE BANKER’S CODE

Other investors, as you will find out in upcoming chapters, take

on a bigger risk than the lender. They also play by the lender’s
rules.
You create your own arbitrage opportunity as a lender by
creating collateral out of thin air, shifting the risk to the borrower
(putting you in a safer position), generating the cash flow you’re
looking for, and writing the rules by which the borrower has to
play.
You accomplished the same thing as investors (i.e., arbitrage),
but much more easily with a lot less hassle!

It’s a Financing Game!

Bankers recognize that generating cash flow from spreads is
nothing more than a financing game. Most real estate investors
think it’s about real estate. It’s not. It’s a financing game for them
as well. The only reason they purchase a building is for the sake of
creating a spread. It’s not about the tenants. It’s not about the
physical property. A building is simply collateral that the bank is
willing to lend against so that the investor can make a spread.
Similarly, a business owner buying a business (for example, a
laundromat) for some cash flow thinks it’s about the laundromat.
It’s not. He buys it simply to generate a spread. He uses the
business as collateral for a loan to create a spread. In reality, it’s a
financing game.
Bankers recognize that, and they play it quite well. They create
the collateral from a piece of paper, creating spreads from that all
day long. They know they’re in the business of financing, safety,
and making lots of money. They have the best position.

Let Them Think What They Want.

We Know the Truth.
Bankers know it. They’ve shifted the risk to the borrower.
They’re in position to make money, and they tied up the borrower’s

14
 IT’S NOTHING BUT A FINANCING GAME

collateral just in case. They’re in the business of financing and

safety.
But they need borrowers. They need to use other people’s
money to create spreads.
So they condition the population to borrow money using good
collateral and the banker’s rules. They’ve shifted the risk to the
borrowers (as we shall find out). They’ve conditioned everyone to
invest for capital gains. This allows the invested money to sit with
the bankers and make even more money, because the money is
“dead.” It’s not moving for the rest of us.
They condition the population to “save” their money in their
banks, which then becomes a chunk of their money source they
can use in creating spreads.
They know they have the most powerful wealth-building
strategies ever known to man. But they keep it a secret—
otherwise we all become bankers and no one is left to be a
borrower! Welcome to banking.

I arrived in San Ramon, found the park my mentor had told me

about, parked my car, and walked across the open field he
mentioned.
I noticed Dr. Jazz right away, sitting on the park bench at the
top of the hill, with a commanding view of the San Ramon Valley.
The sun, hidden from view for the past several days, was shining
now, and Dr. Jazz was soaking it in as if he were relaxing on a
Caribbean beach instead of a park bench in California.
I approached him hesitantly, nervous about meeting him. He
was a fastidious man with piercing eyes that radiated intelligence.
In his brown suit, he looked older than I thought (in his 70s, I
decided). When he spoke, his voice calmed me instantly.
“So, your mentor tells me you’re a pretty sharp man. He tells
me he’s very proud of what you have accomplished . . . so far,” he
chuckled. “He asked me to tell you a story that I’ve told to only a

15
 THE BANKER’S CODE

few very close friends. And it is because of your mentor that I

have agreed to do so.”
I think I mumbled, “Wow, thank you.”
After some small talk, he asked, “Have you ever been to New
Jersey? No? Well, the view from this spot reminds me of the
Princeton campus there. I spent many, many hours there with my
own mentor, a friend I think you will be interested in hearing more
about. He was a remarkable man, and he talked to me about
things that he did not talk to most people about.
“He was a genius with numbers, an intellectual who understood
finance at its core and who was able to see things with numbers
that most people could not.”
I was getting interested now and beginning to see why my
mentor wanted me to meet Dr. Jazz.
“He was your mentor?” I asked.
“Yes. In fact, he was—and still is—considered one of the
greatest scientific minds of the 20th century. I cannot reveal his
name at this time, but let’s call him Herbert,” said Dr. Jazz. “And
yes, he was my mentor and my friend, and he changed my life.”
“Scientific mind? You mean he was a scientist?” I asked
incredulously. “I know scientists discover or invent all kinds of . . .
stuff,” I stammered, “but how did he help you? I mean, how did he
help you become so . . .”
“Wealthy?” Dr. Jazz laughed. He got up to stretch, and said,
“Young man, let’s walk a bit and keep things moving.” As we
slowly walked around the park, he began to tell me a story.
“Herbert was a genius with numbers, and he could strategize a
hundred different ways to reach a goal without even thinking about
it. Most people don’t know he was fascinated with finance, and in
fact, he wrote about it quite a bit, most of it in his private
manuscripts.”
Dr. Jazz told me about how he had met Herbert at Princeton
while working on campus, about how the two had formed an
unlikely friendship, and how Herbert had tutored and mentored

16
 IT’S NOTHING BUT A FINANCING GAME

him until his death. He told me more about Herbert’s writings and
how he would draw pictures, notes, and ideas all over the margins
of his books and notebooks.
“My friend,” Dr. Jazz finally said, “the sun has long since left us,
and I’m afraid I must leave, too. But if you would like, we can
continue tomorrow, right here in this beautiful spot.”
The next day, I could hardly wait, and I smiled to myself as I
realized I was an hour early this time. I had armed myself with my
own list of questions, notes, and drawings I wanted to discuss with
this wonderful man.
“Ah, I see you came prepared and eager to know more. That’s
good! Let’s take a walk.” We strolled around the park some more,
and he paused now and again to push a stone or a small branch
to the side of the walkway gingerly and efficiently with the tip of his
shoe.
“Tell me more about Herbert, and why finance?” I blurted out.
By the time we took a small detour to a nearby café, I felt like I
had known this man for a long time. He reminded me of my
grandfather. Once he had doctored his coffee to his liking, he said,
“Herbert was fascinated by numbers, not for the sake of making
money in finance, but for the sake of challenging himself with
discovering something new. He believed that there is something
about finance that could result in wealth while minimizing risk, and
he ultimately discovered the ideal way of doing that.
“Herbert wrote one special book, a manuscript really, that
contains those financial secrets I’m sharing with you,” he said. “He
taught me what was in it. Fascinating information. Beautiful stuff,
George. Then, at his death, his will stipulated that six copies be
made of his original manuscript and that they—including the
original manuscript—be distributed to seven different people. I
received one, his family received one, a young homeless boy
received one, and I am not sure where the others ended up. I
have been the caretaker of mine for many years, telling very few
about it. This manuscript contains some of the most amazing,

17
 THE BANKER’S CODE

fantastic secrets that have given me—and some of the most

powerful people in history—our wealth.”
I was getting more and more excited by the minute.
After several hours of chatting about the fascinating
experiences of his younger years, Dr. Jazz looked at his watch
and sighed. “I’m afraid I must go now,” he said. “Let’s meet again
tomorrow; I’ll bring you a surprise.”

Chapter Summary
• Generating cash flow boils down to following a specific
“formula,” outlined in The Wealthy Code.
• At a basic level, generating cash flow requires two things: an
income-producing asset and the leverage (borrowed money) to
buy this asset.
• For business owners and investors, the income-producing asset
typically turns out to be a physical structure with many
aggravations. For bankers, the income-producing asset
becomes a piece of paper they print and the borrower signs.
• Business owners or investors think they are in the business of
doing what the structures they bought do, but the reality is, they
are in the business of generating a spread using financing.
• That’s what the banker recognizes.
• For more information and additional training about arbitrage,
please refer to the Resources page at the back of the book.

18
 Chapter Three

Pick a Team First

“Yes, it’s the manuscript,” Dr. Jazz laughed. “Here is Herbert’s
work. Look. See for yourself. Are your hands clean?” he chided.
I could see why. The manuscript was very heavy: thick and
covered with leather, darkened now by time and countless
handlings with a thick, braided cord, shiny from wear, tied around
its middle. The pages were of heavy paper, yellowed, with age,
and every page was covered with writings, graphs, and drawings.
But I was more fascinated with the countless abbreviations, notes,
and pictures drawn everywhere in the margins. The title was
etched on the cover: The Book of the Banker’s Code.
In some cases, Herbert had apparently used his own
shorthand, but it all looked like hieroglyphics to me. I hoped Dr.
Jazz could read it all, and more important, that he would tell me
everything!
“Are you ready to find out what some of this means?” he
chuckled.
Dr. Jazz turned the pages of the manuscript gingerly and
pointed to a diagram with three circles. A lot of arrows pointed
back and forth between the circles, which simply said “Consumer,”
“Producer,” and “Banker,” with countless scribbles surrounding the
circles. “You need to start by trying to understand the teams in the
game of finance. They boil down to three. Understanding the
mindsets and the role of each team is critical to your success in
finance,” Dr. Jazz began.

19
 THE BANKER’S CODE

“The better you understand the teams, the more evident it

becomes which one will always win. In fact, it’s almost not fair how
much easier one of those teams has it. You will soon understand
why this team doesn’t want many people joining them,” he
continued.

Pick Your Team

The world is divided into three teams: consumers, producers,
and bankers.
Consumers use products and services. They are the ones who
buy the latest electronics, smartphones, and impressive cars.
Producers provide products and services. They’re the ones who
manufacture and/or sell the latest gizmos: phones, cars,
televisions, food, and more. Everything a consumer uses comes
from a producer. The producers are the ones who create jobs and
hire consumers to work for them. They are masters of systems
that generate profits. Many believe this is the most interesting
position to be in because it is always challenging and, with the
right mindset, can be seen as a game for adults.

The world is divided into three teams:

consumers, producers, and bankers.

Bankers finance both consumers and producers. The consumer

uses that money to buy products and services from the producer,
and the producer uses that borrowed money to produce those
products and services for the consumer. The bankers don’t have
to laugh all the way to the bank. After all, they own the bank, so
they laugh while sitting in the bank! They are masters of shifting
risk to the borrower and financing.
Every person has the option of choosing which side to play on.
But most people think they are limited to being a consumer for the
rest of their lives.

20
 PICK A TEAM FIRST

Figure 3: The three possible teams one can be on

Consumers have to work hard all their lives to pay for the
financing of goods and services. They make up the majority of the
world, and without them, producers and bankers would suffer. So
it’s in everyone’s best interest to have consumers working hard in
jobs and using borrowed money to buy goods and services. They
aren’t aware that they are always being conditioned to buy stuff or
being persuaded into buying certain brands. They aren’t aware of
how producers and bankers team up to influence them into buying.
Producers partner with advertising agencies, credit card
companies (bankers), and the media to condition the consumer to
spend borrowed money on “stuff.” Hundreds of millions of dollars
are spent on conditioning the consumer to spend money. The
biggest companies in the world partner with experts to ensure that
consumers spend.
This is not necessarily a bad thing. The consumer is buying
something of value: a home, a car, a smartphone, food, and the
like.

Producer

21
 THE BANKER’S CODE

Media
Conditioning to buy

Ad
Agencies
Consumer

Credit
Card Co.
(Banker)
Figure 4: Consumers are being conditioned to buy

Producers borrow money from bankers, use it to generate

products and services, and pass on the cost—along with hefty
profits—of the borrowed money to the consumer. They focus on
creating value to the consumers. Whether it’s opening a
restaurant, a nearby mall, a movie theater, or housing, producers
are always looking at the needs and wants of consumers and
providing stuff to satisfy those needs and wants. Producers have
to focus on their systems generating a profit with the borrowed
money; otherwise, it all backfires. Using borrowed money can turn
around and hurt producers if they fail to turn a profit. Many
entrepreneurs go out of business within a few years because they
lack the skills needed to build a business.
Bankers, on the other hand, make the most money. They use
borrowed money to lend out and tie up the borrowers’ collateral.
They cover their downside and let the upside take care of itself.
They are masters of shifting risk to the borrowers. If borrowers fail
to pay, they lose all the collateral to the bankers. The bank ties up
enough collateral to make sure they make enough money.
However, if the borrower is successful in paying back the banker,
the banker still makes money because of interest.
Either way, the banker wins. The best part of being the banker
is that they recognize they don’t need to have money to lend out.

22
 PICK A TEAM FIRST

Through a combination of using borrowed money and “printing”

money, they can make money, and lots of it. I’ll explain this later.
Every person on this planet fits into at least one of these three
teams (producers and bankers are, of course, also consumers).
There is no other choice. By default, people start as consumers,
but producers and bankers become the rich.

Every Producer Needs a Money Person

Consider the diagram below. The producers on the left-hand
side—e.g., property rehabbers, property flippers, business owners,
restaurant owners, Internet companies—all need money. All of
them need to work with the banker (or money person) on the right-
hand side. Producers need to first learn everything they can about
the “job” on the left-hand side, including skills required. For
example, as a property rehabber, a producer needs to build a
team of contractors and learn how to manage such teams, learn
about the real estate business (estimating, making low offers on
properties, selling properties fast once they are fixed up), and
many other things. In addition to all that, they need to learn how to
raise money to get all of it done.
PRODUCERBANKER

Property Rehabber Banker Business Owner

Property Flipper

Restaurant Owner

Income Property Owner

Manufacturing Company

Internet Company

23
 THE BANKER’S CODE

Etc.

Figure 5: Producers need bankers.

Bankers are in the money business.

The banker (the money person) on the right just needs to learn
how to borrow money to lend out and how to make their position
safer by shifting the risk to the borrower. The banker can work with
all these producers without having to learn much about their skills.
And the banker just happens to be the most powerful position in
the equation. The producer does all the work, takes all the risk,
and gets paid last. The banker does the least amount of work,
takes on the safer position, gets paid first, and makes more
money.
Both the producer and the consumer think the banker needs to
have his own money, and lots of it, to make money. Nothing could
be further from the truth. And that’s exactly why the banker wants
to keep it a secret.

For Example
A producer decides to provide a product for consumers. The
producer goes to the bank and gets a loan of $100,000 at 10%
interest annually. In the process, the banker ties up enough
collateral from the producer to cover the payment. By doing so, the
banker has covered his downside.
The producer uses that money to hire experts (creating jobs),
manufacture the product (more jobs created), and sells it to
consumers through retail stores. The producer calculates that a
retail price of $5 per unit will cover the cost of the interest to the
bank, the cost of manufacturing, cost of goods, and other
expenses, and provide a nice profit. He has just over 200,000
units to sell.
The consumer buys the product for $5, and that helps fulfill a
need or want in their lives. It has value to them. The consumer

24
 PICK A TEAM FIRST

uses their credit card to buy that $5 product. That ends up costing
this consumer $5.12 (including interest).
The banker gets their $100,000 back, with interest from the
producer, and makes an additional profit by lending money to
consumers who use it to buy the product!
The producer passed on the cost of interest (including a profit)
to the consumer.
So, finally, the consumer paid: 1) the credit card company
(banker) some interest to buy the product, 2) the producer the
interest they paid the banker, and 3) the producer their deserved
profit.

The Consumer is Blinded

What’s interesting about these three positions is the mind-set of
each. They all think their position is the right one. Very few look at
the other, wishing they were in the other’s position.
The consumer thinks the following:
• I don’t like taking risks.
• Having a business (being a producer) is too risky.
• I’ll save money to become wealthy (taking perhaps 40 or
more years).
The producer thinks the following:
• I can’t imagine working for someone else; I can never be a
consumer.
• Having a job (being a consumer) is too risky.
• I can become rich in 10 years or less.
The banker thinks the following:
• I can’t imagine having a job (consumer) or dealing with
employees (producer).
• I make money off of money.

25
 THE BANKER’S CODE

• I make money by following a very simple model and

keeping my mouth shut about how simple it is.
The producer and banker understand that without the
consumer, they can never make it. So they have to keep
conditioning the consumer to spend money.
People:
Making money
off of people

Money:
Making money
off of money

Figure 6: Producers and bankers using

different types of leverage
The producer and banker also understand it’s a game of
leverage. However, the producer sees it as leveraging other
people. By hiring people and having them follow a system, the
producer makes money off of them. For example, he might pay
someone $10 an hour and make $60 an hour off that person. The
producer’s leverage is about making money off of people. For
example, Microsoft Corp. makes money from its thousands of
employees. It might cost them a million dollars to finance and
support a certain department over the period of a year, but the
company might make four million dollars a year because of that
department.

The producer’s leverage is mainly making

money off of people.

The banker, on the other hand, sees it as making money off of

money. To the banker, every dollar bill is equivalent to an
employee. They can make money off that dollar bill. The banker

26
 PICK A TEAM FIRST

looks at the dollar bill as an employee who doesn’t sue them, take
time off, ask for a raise, or take sick days. So they might make 12
cents for every dollar they have. They prefer it that way, because
making money off of money is a lot easier than having to deal with
employees, scheduling headaches, and more. The dollar bill never
complains.
Consider fund managers—mutual or hedge fund managers, for
instance. They retain a few people to manage millions of dollars.
Fund managers are considered bankers as well. This is an
example of financial leverage. They make money off of money.
The highestpaid hedge fund managers have gotten paid more
than a billion dollars over the past few years!

The banker’s leverage is mainly making

money off of money (financial leverage).

“Once you are very clear on how each player thinks and the
value they bring to the game, it all starts making sense,” Dr. Jazz
said as he carefully turned the page.
I was amazed at the patience and generosity of this man. Our
friendship was growing stronger every day, and I had so much to
ask him, so much to learn from him. I prayed he would never stop
sharing this information with me.
Then I realized my mind had strayed, and I quickly brought it
back!
“It’s not to say that one is any better than the other,” offered Dr.
Jazz. “There are reasons why—and times when—it’s good to be
in any of those positions. But understanding these teams is just
the first step. Picking a team is the second. Then, getting
educated on how to play on that team is the third step. Now, let’s
look at something more interesting,” he suggested as he pointed
to another remarkable stick figure diagram.
I grinned and leaned forward so I could see better.

27
 THE BANKER’S CODE

Chapter
Summary
• The world is divided into three teams: consumers, producers,
and bankers.
• The consumer is conditioned to spend.
• The banker finances the producer and the consumer.
• Producers leverage people’s time, skills, and efforts to
make money.
• Producers (business owners and investors) need bankers.
• Bankers leverage money to make more money.

28
 Chapter Four

Money,
Interest, and
Being a
Private Lender
Dr. Jazz pointed to a diagram made up of two stick figures and
paused for an uncomfortably long time. I could tell he was
struggling to tell me something.
“I’m not sure how to share this information,” Dr. Jazz said
reluctantly. “It might sound bad, but it’s not necessarily so. I’m not
sure if you really need to know this, but…hmmm,” he muttered
without finishing the thought.
I couldn’t figure out what he was about to say, but I kept
thinking. After all, he was pointing at stick figures! How bad could
it be? Well, turns out it was certainly eye-opening!

Imagine a world with two people, Bob and Carl.

Bob has $1,000, and that represents all the money in their world.

29
 THE BANKER’S CODE

$1,000

Bob Carl

Figure 7: Bob and Carl witha $1,000, representing all

the money in their world

Now, Carl needs $500, so he borrows it from Bob at 10%. Carl

agrees to pay Bob a total of $550 (principal and interest).
Sometime later, Carl pays back $500 of the $550. Bob now has
his $1,000 back and is awaiting his remaining $50 in interest. But
the $1,000 represents all the money in their world. Where will Carl
get the remaining $50?
Note: Carl
promises
to pay Bob
$500 plus
$50 in
interest

$500 $500

Bob Carl

Figure 7a: Carl borrowed $500 at 10% from Bob. Carl now owes Bob
$500 in principal and $50 in interest (annually).

30
 MONEY, INTEREST, AND BEING A PRIVATE LENDER

So Carl can do one of two things: He can work for Bob in place
of paying him the $50, or he can borrow the money from Bob to
pay him back.
Let’s consider the latter. Once again, Carl borrows $500 at 10%
interest. He again agrees to pay Bob $550 (principal and interest),
in addition to the original $50 in unpaid interest. Carl now owes
Bob a total of $600.
Sometime later, Carl pays Bob $500 and has $100 of unpaid
interest still to pay. However, Bob has the entire $1,000 that exists
in their world. As before, Carl has no way of paying Bob the
remaining $100, and once again, he has two choices: Work for
Bob or borrow more money.
By now, I hope you see that as long as Carl keeps borrowing
money from Bob, he will owe more and more until the point where
he will have to work for Bob.
The point of the story above is that as long as someone
charges interest, this “created” money does not really exist;
therefore, at some point someone will have to work for it (or keep
borrowing money until they work for it).
One can argue that someone could borrow the money, create
something of value, such as bake some bread, and profit from it.
That is true. But the cost of money (the interest) is being passed
along to the ultimate consumer of that product. So the consumer
ultimately pays for that interest through borrowing more or working
for it. They have to work hard for that “created” money.
I recommend that you think this all the way through. It’s not
easy. But at the core of it, we end up with the three teams:
consumer, producer, and banker.
The consumer borrows money from the banker and pays interest.
The producer borrows money from the banker, creates a
product or service, and passes the interest to the consumer, which
ultimately means the consumer pays for the interest along with
profits to the producer.

31
 THE BANKER’S CODE

Yes, there is value to the consumer. But let’s focus on the

money flow here.
Ultimately, the consumer pays for all scenarios by eventually
working for the banker or borrowing more money, which gets him
into more debt, resulting in him working even more for the banker.
Under these circumstances, it should be no surprise that with
many couples today, both parties have to work and are still barely
making it. It also helps to explain why 34.5% of the average
American’s income goes to financial institutions to cover interest
alone—they’re working for the banker!
Now, that might seem unfair. Well, there are several ways to
look at this. At the end of the day, the consumer is getting
something of value and is willing to work for it. There’s nothing
wrong with that.

Banks create new money with interest.

Someone has to borrow more money or work
to pay this off.

Let’s take this to an extreme. The Federal Reserve system is a

form of a bank. It’s privately held, not a government entity. They
charge interest on money they lend to banks, and this interest is
passed on to the public (consumers and producers). That means
every consumer in the country has to work (or borrow) to pay off
“the Fed” in some way. They are the ultimate bankers.
So, what’s the point of all of this? It’s quite simple.
Every time you charge interest as a private lender, you “create
new money” that did not exist before, and someone has to pay it
off by either borrowing more money or by working for it. This is the
reality of the world.

But Wait! There’s More!

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 MONEY, INTEREST, AND BEING A PRIVATE LENDER

As a banker, it’s important that you spend time to understand

how money works, as described in the previous section. Let’s look
at how the monetary system works.
In the past, a paper dollar was backed by gold or silver. Now,
it’s not; it’s backed by a promise of the government. That’s what is
known as “fiat” currency. A paper dollar can be redeemed only for
another paper dollar.
Money is truly debt, and if there were no debt, there would be
no money. The importance of this is very significant, and the
details are beyond the scope of this book. Please refer to the
Resources page in the back of this book for more information, or
we can refer you to additional videos found on our website.

Money is debt!

Being a Private Lender

Imagine being in this business. Your company:
• Takes little risk and shifts it to others
• Makes more money with less work than most other
companies
• Always gets paid first
• Needs no money of its own
• Borrows all the money it needs at very little cost
• Lends out the money and shifts the risk to the borrowers
• Has consumers fighting to lend it money at 1% or less
when inflation is five times that
• Offers only the belief that the money is safe
What a business!
Obviously, we’re talking about banking. But what if I said you
can mimic the same process and make money like a bank? If you
could make money without having to get a banking license,

33
 THE BANKER’S CODE

without having to be rich, without anyone checking your credit,

would you want to?
People are doing it every day. People who have discovered the
“code” are doing it and generating great passive income, just like
the bank.
The power comes from that one single word that allows the
average person to implement the banker’s code—and it’s 100%
legal! The word is “hypothecation.”
Hypothecation takes place when a borrower pledges collateral
to secure a debt. When a property owner pledges property as
collateral for a mortgage, that’s hypothecation. Now the bank has
a loan that’s secured by the property. They can turn around and
reuse that loan (a piece of paper) and pledge it as collateral for
their own loan. That’s called “re-hypothecation.” And that’s
precisely where banks shine, and anyone that understands that
can as well.

The most important word in banking is

“hypothecation.”
From that comes another word bankers use:
“re-hypothecation.”

Where do you start? Simple. Begin with an understanding of the

three key things all bankers always need to do.

Three Things Bankers Do

Bankers have to do three things. They cannot skip any of these
steps, because that could negatively affect their business. The
steps are:
• Use leverage (OPM—other people’s money).
• Find borrowers. Without borrowers, they can’t make money.

34
 MONEY, INTEREST, AND BEING A PRIVATE LENDER

• Do relatively safe loans secured by assets. Bankers are

always about safety; they’re not in the business of taking
risks.

Find Borrower

Structure Safer
and Profitable Find Money
Loans to Lend

Figure 8: Three things bankers must always do

As a private lender, these things can be automated. But it’s

important that you never miss any of those steps.

The three things lenders do are: (1) find

borrowers, (2) find money to lend out, and (3)
structure safer and profitable loans.

Banker Versus Private Lender

As you are discovering, bankers have a lot of power. They set
the rules, they do the least amount of work, they take the least
risk, and they make a lot of money.
The good news is that average individuals, acting as private
lenders, can implement the same secrets and strategies the
bankers use. A private lender (in this book) is an individual that
implements the Banker’s Code—the same strategies banks use to
make money. A private lender makes money just like the bank, but
without the hassles of having a brick-and-mortar bank, licensing

35
 THE BANKER’S CODE

requirements, and employees. Strip all that away, and what’s left
are the money-making strategies.
If you’re ready, let’s get started.

“So it’s making money just like the bank,” said Dr. Jazz
excitedly. “It’s about using the same finance principles the banks
use. These principles exist, and anyone can use them. You do not
need to open a real bank or get a banking license.”
“Does everyone know that? I mean, I had no idea this was the
case,” I uttered.
“People should know this, but they choose not to. In fact, the
educational system was set up to avoid teaching how money truly
works,” Dr. Jazz said as he stood up. “Let’s walk around the plaza,
and you can ask me whatever you wish.”
“And the charging of interest,” I continued as we walked,
“seems to force others to borrow more money—or work for it.
That’s something I’ve never, ever heard before.”
“Hopefully, you now get what Albert Einstein meant when he
said, ‘Those who understand interest earn it; those who don’t, pay
it.’ He was talking about a banker and consumer. It’s very powerful
information.
“Let’s head to my house for supper,” said Dr. Jazz as he turned
toward home. As we walked I continued trying to absorb all this
information.
“We’ll talk along the way about how to make this work for you,”
he offered.
As we approached his house, Dr. Jazz’s many grandchildren
ran to him. “Les enfants. Allez les enfants,” he laughed heartily
and fondly, introducing me to his many family members as he
walked me to the dinner table, happy to have the children around
him.
The doctor was a man of many surprises. I had no idea he
spoke French!

36
 MONEY, INTEREST, AND BEING A PRIVATE LENDER

Chapter
Summary
• Banks create new money with interest. Someone has to borrow
more money or work to pay this off.
• The most important word in banking is “hypothecation.” From
that comes another word bankers use: “re-hypothecation.”
• Three things bankers do:
– Use leverage
– Find borrowers
– Do safer and more profitable loans
• Private lenders are individuals who can make
justmoney
like
the bank.

37
 Chapter Five

The Language
of Bankers
As supper ended, I joked, “I didn’t realize you speak French, Dr.
Jazz.”
He recited something in French with a smile, but I had no idea
what he said.
“I speak multiple languages. In fact, all my children do as well,”
he replied.
I had just met his wife, France, and his children, Jacqueline,
Gisele, Michel, and Pierre, along with a whole lot of grandchildren,
all with French names. That should have been a hint! In fact, his
wife’s name should have been the first clue.
“So, are you French?” I asked.
He chuckled.
“Actually, I’m Lebanese. We all learned three languages as
children. But the language you need to learn is the language of
bankers. That is your first assignment, and I will give you a list of
basic words to learn. You will not appreciate the power of banking
until you have this foundation,” he said as he wrote some words
on a piece of paper and handed it to me.
It’s important to understand and speak the language of bankers.
In this chapter, we’ll cover these important terms:
• Collateral
• Loan to value (LTV), combined loan to value (CLTV), and
protective equity

39
 THE BANKER’S CODE

• Promissory note
• Secured and unsecured loans
• Security instruments
• Foreclosure
• Leverage
• Arbitrage
• Velocity of money
• Asset-based lender
[Link] defines “collateral” this way: “In lending
agreements, collateral is a borrower’s pledge of specific property
to a lender to secure repayment of a loan. The collateral serves as
protection for a lender against a borrower’s default—that is, any
borrower failing to pay the principal and interest under the terms of
a loan obligation.”
For the purposes of this book, I primarily use real estate as
collateral for our loans. One of the common mistakes is that
people think lenders are in the real estate business. They are not.
They are in the financing business and simply use real estate as
collateral. The collateral does not make the business.
The next terms on the list are LTV, CLTV, and protective equity.
Let’s start with LTV; it stands for “loan to value.”
LTV is simply the loan amount divided by the value of the
collateral or property. For example, if we loaned someone $65,000
against a property worth $100,000 that has no other loans, the
LTV is calculated as follows:
LTV = loan amount/value of property
LTV = $65,000/$100,000
This gives us an LTV of 65%.

40
 THE LANGUAGE OF BANKERS

$100k
$35k Equity 35% Protective Equity

$65k Loan 65% LTV

Figure 9: A low LTV loan

The remaining 35% is called “protective equity.” It’s the cushion

lenders are looking for in case the borrower fails to pay. As a
lender, we want to make sure our LTV is low and the protective
equity is high. The LTVs we look for vary depending on the
collateral. For example, on a single-family residence, we might
decide 65% LTV is the highest we would go. The protective equity
of 35% is good. So if the borrower stops paying, the borrower has
a lot to lose, and the lender can potentially end up with the
property worth $100,000 for which he invested $65,000. The
lender feels safer with that.
CLTV stands for “combined loan to value.” This is similar to
LTV, except the formula looks like this:
CLTV = sum of all loans, including amount to borrow/value of
property
Protective equity is all the equity above that loan amount. The
formula looks like this:
Protective equity = 100%—CLTV
So the CLTV is the sum of all existing loans against a property,
including the amount the borrower is asking for, divided by the
value of the property. For example, if someone borrows $10,000
against a property (single-family residence) worth $100,000 which
has an existing loan of $75,000, the CLTV would be as follows:
CLTV = sum of all loans/value of property

41
 THE BANKER’S CODE

CLTV = ($75,000 + $10,000)/$100,000

CLTV = $85,000/$100,000
CLTV = 85%
Protective equity = 100%—CLTV
Protective equity = 100%—85%
Protective equity = 15%
Given that the CLTV is more than the maximum 65% LTV (from
our example above) and the protective equity is less than 35%, we
as lenders would not make this loan.
Through the rest of the book I’ll use the terms CLTV and LTV
interchangeably. Simply use the formula for CLTV when doing
calculations.
The LTV is one of the most important numbers in lending. It
should be a lower number, typically 65% or lower for residential
properties (1 to 4 units).

The maximum LTV on a single-family home or

residential property (1 to 4 units) should be no
more than 65% in most areas and situations.

Download the free spreadsheet calculator (more instructions

found on the Resources page at the end of the book) that helps
you easily make these calculations, as well as other tools
mentioned in the book.

What is a Promissory Note?

A promissory note is a written promise to pay, or repay, a
certain amount of money at a certain time, or in a certain number
of installments, or on demand to a named person. It usually
provides for payment of interest.

42
 THE LANGUAGE OF BANKERS

A promissory note is “secured” if there is some collateral of

value that secures the loan. For example, let’s say that Joe
borrows $10,000 from Sam and offers his house as security. If Joe
fails to repay Sam, then Sam can go after Joe’s house to get his
money back. That is called “a secured loan.”
An “unsecured” promissory note is simply that: a promissory
note that has nothing tangible to back it up. As a private lender, we
avoid unsecured promissory notes as much as possible.
When lending money to others, private lenders always prefer
secured loans against real estate.

In this book, we will consider only real estate

as collateral for our loans to others.

The person receiving the loan proceeds (borrower) becomes

obligated to repay the debt by signing a promissory note, which
specifies:
• Amount of the loan (principal)
• Interest rate (interest)
• Amount and frequency of payments
• When the borrower must repay the principal (due date,
also known as “maturity date”)
• Penalties imposed if the borrower fails to timely pay or
tender a payment (late charge), or if the borrower decides
to pay a portion or the entire principal prior to the due date
(prepayment penalty)
The promissory note also identifies the borrower and the person
who will receive the payments (lender or note holder).
If you would like to learn more about completing a promissory
note, and more by accessing The Banker’s Code Tools site
(information found on the Resources page).

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 THE BANKER’S CODE

What Secures Your Investment?

Your investment is secured by a security instrument recorded
against the borrower’s property. In real estate, there are generally
two types of security instruments: a deed of trust and a mortgage.
Unlike deposits in a bank or savings and loan, which are generally
insured by a federal agency (such as FDIC) and generally can be
withdrawn with limited notice, the promissory note:
• Involves some risk to principal (a typical feature of all
investments)
• Establishes a specific and predetermined period of time for
the repayment of your investment
• Does not benefit from insurance issued by a federal
agency
The security instrument (deed of trust or a mortgage) works in
conjunction with the promissory note in that it ties the promissory
note to the property (the security). So a promissory note by itself,
even if the property address is mentioned on it, does not tie it to
the property. The security instrument ties the promissory note and
property together.
As shown below, think of the promissory note as a borrower
saying, “I promise to pay you . . .” and the security instrument
saying “. . . and if I don’t pay you, here is the collateral you can go
after.”

Promissory Security
Note: Instrument:
I promise …And if I
to pay... don’t pay, I
Lender pledge…

44
 THE LANGUAGE OF BANKERS

Figure 10: A security instrument goes along

with a promissory note

As I noted above, in real estate the security instrument can be

either a deed of trust or a mortgage. They are essentially the
same, except for the type of foreclosure conducted. Foreclosure is
the legal process by which the lender repossesses—due to
nonpayment, typically—the collateral the borrower pledged. There
are two types of foreclosure processes available in real estate:
judicial and non-judicial.

Judicial Foreclosure: Non-Judicial Foreclosure:

(using courts
) (not using courts
)
Normally associated Normally associated
with mortgage with deed-of-trust

Figure 11: Various types of foreclosures

The first process comes from the word “judge” and it means
“through the courts.” A judicial foreclosure involves the courts and
is generally inefficient for lenders. Non-judicial foreclosure, on the
other hand, is a lot more efficient for lenders in that no courts are
involved and the foreclosure is conducted more efficiently
(depending on the state).
If you would like to learn more about completing a deed of trust,
you can find more information at The Banker’s Code Tools site
(see the Resources page).

What is Financial Leverage?

45
 THE BANKER’S CODE

Financial leverage is the use of borrowed money, normally used

to buy the assets that will generate your cash flow. For example,
getting a mortgage to buy a property is financial leverage.
To understand wealth, you need to understand leverage really
well.

Figure 12: Breaking “wealth” into basic components

The fastest way to gain wealth is through financial leverage—

the right kind of financial leverage. On the other hand, the fastest
way to lose wealth is also with leverage—the wrong kind of
leverage. The problem is that many people are using the wrong
kind of leverage to build wealth, and they are setting themselves
up to lose. In this book, I’ll cover the right kind of leverage—
positive leverage. For more information on leverage, please refer
to my book, The Wealthy Code.

What is Arbitrage?
Arbitrage is “the spread” between the rate at which you borrow
money and the rate you gain from investing that money. For
example, if you borrow money at 6% and invest it at 9%, you will
be making a 3% spread. That’s called “arbitrage.” Cash flow is
generated through spreads (or arbitrage). Arbitrage is known as a
“leveraged” strategy since it involves borrowed money. Arbitrage is
the lifeblood of banking.

Velocity of Money
This is one of those terms that every banker knows and most
consumers have never heard.
According to [Link], velocity of money is “. . . a term
used to describe the rate at which money is exchanged from one

46
 THE LANGUAGE OF BANKERS

transaction to another. Velocity is important for measuring the rate

at which money in circulation is used for purchasing goods and
services. This helps investors gauge how robust the economy is. It
is usually measured as a ratio of GNP to a country’s total supply of
money.”
That’s a definition for the entire economy.
However, another definition applies more specifically to us. I like
to think of velocity of money as the “turning of the same money.” In
other words, for the same money, as you “turn” it, you acquire
more and more assets or profits. By “turning,” I mean investing the
money and then retrieving it.
Let’s consider an example in real estate.
Suppose you have $100,000 in investment capital, and you’re
considering three investments. (To keep things simple, assume all
other things are equal—risk and reward.)
Property A: You can use the $100,000 as a down payment
and collect $400 per month in positive cash flow.
Property B: You can buy and hold for the long term in a
historically strong appreciating area.
Property C: You can buy for $72k and resell immediately for
a small profit.
Let’s consider property A. This looks like a good deal. But, once
your capital is invested, you can’t invest in anything else until you
retrieve it at some point in the future. With property B, it might take
you years to get your money back, but that $100,000 might
translate to a lot more equity in five years.
However, property C allows you to retrieve the money relatively
soon while making an immediate profit. You can keep using the
same strategy for “turning” this money and making small profits,
say $10,000 at a time. With the other properties (A and B), you
also have the potential of lost opportunity cost for not having the
capital in place (i.e., missing out on a great opportunity by not
having the capital on hand).

47
 THE BANKER’S CODE

This applies to a lot more than just real estate. Here is another
example.
You have access to the $100,000 line of credit. You lend it out
secured by real estate at 65% LTV. As the borrower pays you
back, you lend that money out ASAP. You don’t want to keep
money sitting around doing nothing—what we call “dead” money.
What’s the effect of that? Your internal rate of return gets higher.
Even though you might be lending money at a certain interest rate,
your yield (return) for that year is higher because of velocity of
money. The net effect is that as you “velocitize” money, in effect,
you are allowing your money to grow!
With velocity of money, your return (yield) goes up. So if a
borrower is paying you 12% and you keep that money “turning” by
lending it out as soon as you get it, your return over time goes up.
So you will be receiving 13% when they are paying you 12% due
to velocity! This concept is further developed in Chapter 8.
Now, let’s make this a little more interesting.
How can we generate more passive income using velocity of
money?
Imagine a scenario where you can invest money into acquiring
an income-producing asset, get your capital back in 90 days, and
have recurring passive income for years to come from that
incomeproducing asset, with your money comfortably back in your
pocket 90 days later or sooner. Can you do that again and again?
Absolutely. In fact, banks do it all the time.
In conclusion, velocity of money is an important concept to
consider in your investments. Savvy investors consider this first in
their due diligence. “How fast can I get my money back to
reinvest?” You should, too.

Asset-Based Lending
In simple terms, asset-based lending (ABL) is lending money
secured by assets. In general, asset-based lenders look at the

48
 THE LANGUAGE OF BANKERS

asset first and make sure there’s enough collateral to cover the
loan. Many financial institutions lend based on a borrower’s ability
to pay first, which is different.
The lending covered in this book is ABL. We believe it’s a safer
position to take; always make sure there is enough collateral to
cover the loan. With this type of lending, there are two very
important numbers: One is the LTV (mentioned previously in this
chapter), and the second is the value of the asset. These two
numbers serve as the foundation of our lending. Later, we’ll add
our underwriting criteria to help make this an even safer loan.

In asset-based lending, the two most

important numbers are the LTV and the value
of the asset. This is in addition to a good
underwriting criteria.

I reviewed the terms on the piece of paper.

This was a good review, I thought confidently. I had gone
through these last time with my mentor during The Wealthy Code
lessons. I was so excited about all that I was learning from Dr.
Jazz.
But even more, I was fascinated by the manuscript and the
secrets it revealed daily. I loved the way Dr. Jazz handled its
pages and the musty smell that inevitably followed it around.
“You must be ready to accept what I’m going to tell you next,”
the doctor said, “but I’m guessing it will be easier for you than for
most people. Ah, I see you want to look more in the manuscript,
but you will have to wait until later.”
We walked toward his home as the sun set, and I left with
endless possibilities racing through my mind.

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 THE BANKER’S CODE

Chapter Summary

Make sure you know the basic terms of lending, including:

• Collateral
• Loan to value (LTV), combined loan to value (CLTV), and
protective equity
• Promissory note
• Secured and unsecured loans
• Security instruments
• Foreclosure
• Leverage
• Arbitrage
• Velocity of money
• Asset-based lender

50
 Chapter Six

The Banker’s
Mindset
“Why do you think mindset is so important? It just seems that
talking about it is such a waste of time,” I questioned Dr. Jazz.
“George, you have been an entrepreneur since you were 16,
and because you ran several businesses with your dad, you
cannot relate to what many people go through. Mindset is the
difference between success and failure. Most people struggle with
simply taking action, while you might take action, run with this
information, and make it a reality.
“A winning mindset comes from your beliefs. Your beliefs come
from your childhood, and so your limiting beliefs affect your
mindset. However, in this case, we are talking about the banker’s
mindset.
“This is probably the hardest mindset to adopt because it goes
against an investor’s mindset.”

If you want to be successful as a private lender, the thing that

will have the biggest impact is adopting the banker’s mindset.
Many of us bounce between an investor’s mindset and a
consumer’s mindset. A banker’s mind-set is foreign to most of us.
In fact, it takes most people years to adopt; some, however, get it
almost instantly!
As a private lender, the difference between success and failure
starts with the mindset—the banker’s mindset. Investors have a
different reality, different beliefs. That’s why it’s challenging for

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 THE BANKER’S CODE

some to become “bankers.” They’ve been conditioned to think like

an investor or consumer, not a banker. But once they see things
through the banker’s eyes, they see a whole different world.
Let’s start with this. For every dollar you have, you can earn
interest on it, or you can give up the interest you would have
earned on it (if, for instance, you spent it or put it under a
mattress).
Take a minute, read that again, and then put down the book
and think about it. Think about that money you spent earlier on
lunch. That could have earned you a lot of interest over the years.
You gave it up.
This is called opportunity cost. Every time you hold a dollar,
recognize that you can be earning interest on it (it can be working
for you), or you can give up all that money it would have earned
for you by spending it or hiding it under your mattress.
Now, I’m not saying you have to be frugal or anything like that.
I’m simply letting you know that a banker always looks at the
interest everything can make them. That’s it.
Just like business owners think of their employees as working
hard to make them money, bankers see dollar bills as little
employees working hard to make them money.
After all, bankers are in the money business. They are masters
in understanding risk and shifting risk away from them. Bankers
make more money while taking on less risk! They also know how
to use other people’s money to make money.
Bankers also know that they need to keep the money moving.
They use the velocity of money to make even more. They
recommend that we save our money in their savings accounts,
CDs, etc., all of which is dead money, money that’s not moving.
But for the bankers, it’s money they can move—or velocitize.

Bankers want their money to be

moving constantly, i.e., out in loans.
However, they want to make sure

52
 THE BANKER’S MINDSET

depositors don’t move their money on

them, so they ask the depositors to keep
their money idle in the savings accounts
or certificates of deposit (CDs). This allows
the bankers to move that “dead” money and
make more money with it.

Banks need borrowers to borrow their money. They also work

with customers (other people’s money) who trust them. All of this
will make sense as we start combining it a little later.

Bankers Make the Rules

Remember the modern Golden Rule? “He who has the gold
makes the rules.” Here’s an updated version that applies to
bankers: “He who is perceived to have the gold makes the rules.”
Why “perceived”? Because bankers are simply using other
people’s money to lend and are using that power of access to
money to make the rules.
As a banker, you’ll start acting like you make the rules, and then
you will make the rules! You’ll write the rules for other investors to
follow.

The Mindset of an Investor Versus That of

a Banker
Investors hang on to equity—bankers hang on to money. Which
one makes more sense?
If you think the former is more important, please revisit The
Wealthy Code. It’s the latter—money—you need to be hanging on
to.
Bankers never forget this; they’re in the money business.

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 THE BANKER’S CODE

THE INVESTOR’S MINDSET THE BANKER’S MINDSET

Investors hang on to equity to show Bankers want investors to keep their
their net worth. equity because it makes the bankers
shift more risk to the investor and
less to the banker (i.e., they need
that protective equity to keep their
loan safer by having a lower LTV
loan).
Investors like to own properties. Bankers use properties as collateral
to secure their cash flow. They
dislike owning them.

Investors are in the landlording Bankers are in the money business.

business.

Investors generate cash flow by Bankers make money by using

using bankers’ money and owning consumers’ money and
properties. collateralizing the mortgages they
get when lending the money out.

Investors make a down payment to Bankers require a down payment

buy properties and, therefore, shift from the borrowers to shift more risk
the risk away from the lender and to the borrowers and away from the
onto themselves. banker.

Investors are asset rich and cash Bankers are asset rich and cash
poor. rich.
Investors must have good credit and Bankers need not have good credit
financials to qualify for loans. or financials.

Figure 13: Comparing the investor’s and banker’s mindsets

Risk Relationship with Borrower
Assume the following scenario (shown below):

54
 THE BANKER’S MINDSET

20% Homeowner’s
down Equity

80%
loan Lender’s
“Equity”

Given the scenario on the left,

who has higher risk:
lender or homeowner?

Figure 14: Who’s taking the higher risk?

A homeowner decides to buy a $100,000 house. He gets a loan

from a lender for 80% of a property ($80,000), making a 20%
down payment ($20,000). Whose money is at a higher risk: the
homeowner’s or the lender’s?
Let’s consider this. If the homeowner had to sell the property
the very next day, he would have to pay the lender the $80,000
loan first, then pay off closing costs and commissions, leaving him
with $10,000 to $12,000 from his $20,000 down payment.
Therefore, the homeowner’s money is at a higher risk because
their money is affected first, before the lender’s.
The lender was in the safer position. The homeowner took the
higher risk.

A down payment on a property is in a higher

risk position than a lender’s money.

Now, consider the scenario below:

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 THE BANKER’S CODE

10%
down 30%
down

90%
loan 70%
loan

Which of these two deals is

safer for the lender?
LEFT or RIGHT?

Figure 15: Which scenario is safer for the lender?

Assume these two transactions involve the same property. For

the property on the left, the lender provides a 90% loan, and the
homeowner puts 10% down. With the property on the right, the
lender provides a 70% loan, and the homeowner puts 30% down.
Which is safer for the lender?
The answer is that the lender prefers the deal on the right—
lending less money.
The lender in the example at right has more cushion if the
property value goes down. The lender is better off providing a
smaller amount toward the full price of the property. By doing that,
the lender shifted the risk away from them and toward the
homeowner.
The scenario on the left, where the homeowner put only 10%
down, is better for the homeowner because they have less to lose.
By doing that, the homeowner shifted more risk toward the lender.
(Even though the homeowner is still in a riskier position, they
shifted some of the risk toward the lender.)
Now, consider this scenario (below):

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 THE BANKER’S MINDSET

Do lenders like this

scenario:
100%
loan ZERO down by
homeowner and
100% loan by the lender?
Who has the higher risk
now?

Figure 16: Is this a favorable position for the lender?

Do lenders like to put up 100% of the loan while the homeowner

puts nothing down? What happens if the homeowner walks away
from this? The lender gets all the risk. So in this case, the lender
shifted the risk away from the homeowner and toward them.
This is the scenario that happened in the late 2000s and is the
reason many property owners walked away. They had nothing to
lose (they had no down payment). The lenders shifted the risk
away from the homeowners and toward themselves.
Now, consider this scenario:

35%
down
Do lenders like this
scenario?
65%
loan Whose money is safer?

Figure 17: Would lenders like this scenario?

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 THE BANKER’S CODE

What about the situation where the lender provides a 65% LTV
loan? Do lenders like this? Of course they do. If the homeowner
defaults, the lender could potentially get 100% of the property for
65% of the value. The lender could get 100% of the equity, and
the 35% equity is a nice cushion. It’s the protective equity. Once
again, the lender has shifted a lot more risk toward the
homeowner and away from them.
What’s common to all these scenarios? The risk relationship
between the lender and the property owner. The lender and the
property owner both recognize there is risk in such transactions.
Bankers, however, shift most of it to property owners. They are
masters in shifting the risk.

LENDER RISK BORROWER RISK

Figure 18: Borrower/lender risk relationship

If the lender’s risk goes up, the borrower’s risk goes down, and
viceversa. They never go in the same direction.

LENDER RISK BORROWER RISK

Figure 19: Borrower/lender risk relationship

Risk is always being shifted away from, or toward, one of the

two parties. The question to consider is: In which direction do you
want the risk to be pointing? Do you want to take on more risk or
less?
As the lender’s loan to value (LTV) goes down (and the property
owner’s equity goes up), more risk is shifted away from the lender

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 THE BANKER’S MINDSET

and onto the property owner. In the previous example of the 65%
LTV, the lender shifted more risk toward the borrower and away
from themselves.
Bankers are masters in shifting much of the
risk to the borrower.
There is always a risk relationship between
the borrower and the lender. One of the
ways
a lender shifts more of the risk to the
borrower is by lowering the LTV.

Example of Bob and Ivan

Consider the story of Banker Bob and Investor Ivan. Ivan is
considering buying a single-family home, fixing it, and then selling
it in six months for a profit. Ivan then decides to discuss this with
Banker Bob. After about 10 minutes of introducing themselves,
here is how the conversation and their thought processes went:
Ivan: I need to borrow $80,000, Bob. The property is worth
$100,000 right now (“as is” value), and I’m buying it for
$75,000. Fixed up, it’s worth $150,000.
Ivan’s thoughts: I really need this money to be able to
generate a good profit. I wish this banker knew how good
this deal was and how many similar deals I’ve done. He
should just lend it to me, no questions asked.
Bob: Ivan, do you have any other collateral besides this
home that you’re willing to pledge?
Bob’s thoughts: He has good financials. I really want to tie
up everything I can to make sure this is a secure deal for me.
What else can I ask from this guy to make my loan more
secure?

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 THE BANKER’S CODE

Ivan: I have another rental property—a duplex—and it’s free

and clear. I included it in my loan application; it’s on my
balance sheet right here, worth $120,000.
Ivan’s thoughts: Hopefully, that should do it. . . .
Bob: I think we can work this out, Ivan. If you’re willing to
pledge the property you’re buying and the duplex you own
free and clear, with your financials I think we should be able
to make it work. The only caveat is: Are you willing to take
$68,300?
Bob’s thoughts: This is looking good. Let me try to make it
even safer by shifting more risk to him. I’ve tied up extra
collateral; I’ll try to have him put more money into the deal
and me less. I’ve already shifted a lot of the risk to him.
Ivan: Would $75,000 work?
Ivan’s thoughts: I can squeeze my contractors a little and
make it work with $75,000. But I don’t want to share this with
the banker.
Bob: Ivan, let me see what I can do…(takes his calculator to
another room).
Ivan’s thoughts: Should I have accepted the $68,300?
Hmmm. I can make this work with that, and I’d prefer
$68,300 to nothing. Maybe I should wait. But will it be too
late? Bob: Ivan, we can make it work at $72,400, but at 1%
higher. Meaning we can do $72,400 at 8%, not 7%.
The story above depicts the dance between investors and
bankers. Bankers want to shift as much risk to the investor as
possible. Investors want to borrow money for their deals and are
willing to give up a lot for that. Bankers ultimately make the rules—
they tie up all the collateral—and end up making a lot more money
than the investor, and with peace of mind. The investors’ stress
levels go up significantly for the duration of their projects because
they have a lot to lose for the potential money they could make.

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 THE BANKER’S MINDSET

Banking is About Safety

So to summarize, the number one rule of banking is safety. The
bankers shift the risk to the borrower. They are in the financing
game, not the investing game. They dislike risks. And what’s
interesting is that they end up making more money than the
investors they finance.
They finance the risks of others. They allow investors to take
the risks while they themselves tie up all the collateral and take a
safer position.

“This is fascinating. But why wouldn’t they just do a real estate

deal like an investor and make money like that?” I questioned.
“Well, George, you haven’t seen the best part yet. Once you do,
you will understand what I mean when I say that they are in the
financing game, not the investing game,” Dr. Jazz smiled.
“Let me ask you this, George. How would you like to ‘clone’
money and create spreads as much as you want? How would you
like to do all that by simply using paper, without dealing with the
hassles of properties, businesses, or physical structures?” he
continued.
“What do you mean?” I questioned.
He deftly pushed another pebble out of the pathway with the
toe of his shoe and said, “Let’s suppose you have $20,000 in
cash. How would you like to clone this $20,000 three, four, or
even 10 times, in fact as many times as you want, and make a
nice spread off of that?”
“Is this legal?” I asked.
Dr. Jazz threw his head back and laughed aloud.
“Of course. This is the secret to banking. I hope you are starting
to see why bankers keep this a secret. But we’re jumping
aheadChapter Summary . Let’s talk about something
else. Any questions first?”

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 THE BANKER’S CODE

• Bankers are masters in shifting risk to borrowers.

• Bankers focus on covering the downside and letting the upside
take care of itself.
• A down payment on a property is in a higher risk position than a
lender’s money.
• For every dollar you have, you can earn interest on it—or you
can give up the interest you would have earned on it.
• Bankers see every dollar as a little salesperson making them
money (interest).
• Bankers make the rules.

Refer to the Resources page for a free

bonus chapter with Dr. Jazz.

62
 Chapter Seven

But Who
Would Pay
12%?
“Dr. Jazz,” I said hesitantly, “I do have a few questions. You
mentioned that borrowers will pay private investors 10%, 12%, or
even more. Why would they do that when they can borrow money
directly from a real bank?”

Before we go on, let me answer some questions you probably

have.

Why Would Anyone

Pay 10%, 12%, or Even More?
Let’s assume you found a real estate deal worth $500,000 you
could purchase directly from the bank for $250,000. Assume, also,
that you had 10 days to close this deal. You know you could turn
around and sell this property within six months. Only one small
problem: You don’t have the money.
Here are three possibilities:
1. You can ignore the deal because you don’t have the money.
2. You can go to a traditional bank to get financing, knowing
they would take a minimum of 30 days to check all your
financials, credit, and other details, while limiting your
number of loans to four or less, among the million other

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 THE BANKER’S CODE
limitations they have, just to get a loan for 6% that requires
you to put down 30%.
3. You can get the money from a private money lender at 12%,
14%, or even more knowing that you will not have to go
through the same process as a traditional bank (since this
lender is an asset-based lender), and they can close within
the 10 days you need.
Obviously, option no. 3 is a good one, but how much is the
interest truly costing? If the interest is 12% for 6 months, the
interest is $15,000 for that period. For the same amount in
selection no. 2, the 6% interest for the same period would cost
$7,500.
So for a difference of $7,500, this borrower can go with
selection no. 3, close the deal much more easily, and make a
potential profit of more than $200,000. Without that option, the
borrower would have lost the potential profit.
And going back to the question of why someone would want to
pay 12%, 14%, or more: They would because of the potential profit
they can have, knowing the difference in interest is minimal (given
the profit) for such a short-term deal.
Can anyone do this? Yes! As long as they have the right
education.
Is this risky? Look around you. Almost every corner of the
United States, and the world for that matter, holds a bank. The
biggest buildings are banks. That tells you the business model
works. So is it risky? Everything you do without educating yourself
is risky. Most people think putting money in mutual funds is safe
and doesn’t require a lot of education! Think again!
Why haven’t I heard of this before? Banking has been around
for a long, long time. So has private lending. In fact, some of the
top executives in the San Francisco Bay area, where I learned
about this, are doing it. You haven’t heard of it because it’s still the
game of the
BUT WHO WOULD PAY 12%

64
rich. Everyone thinks you have to have money to do this, but you
don’t. It does help to have some money, but it can be done without
it.
Can I do this without money or good credit? Yes! The key to
this whole thing is that word again: “hypothecation!”

“These are good questions,” Dr. Jazz said as he opened the big
leather book.
“One more thing, George. Once you decide to start doing this,
and you want your spouse to listen and pay strict attention to
every word you say, talk in your sleep,” he joked. I laughed,
thinking of his wife, France, and her tolerance of his jokes.
“I know you wish to study this book in more depth. It’s not that I
don’t trust you, my friend,” Dr. Jazz said quietly. “But there is a
time and a place…and it is soon.” He looked off into the distance
and then quickly laughed.
“It’s time for your next lesson and my next supper. Let’s see what
France has for us, and we can play with les enfants while we talk.”

Chapter Summary
• Banking has been around for a long time for a good reason—the
business model works!
• Borrowers are willing to pay more to access money quickly
without going through the traditional banks. To them, it’s not
about the cost of money as much as the speed and ease of
getting the money because of access to opportunities.
• Despite common misconception, you don’t need to be rich to do
private lending.

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 THE BANKER’S CODE
Refer to the Resources page for a free
bonus chapter with Dr. Jazz.

66
 Chapter Eight

The Finance:
It Gets Better
Dr. Jazz slowly opened the manuscript to a page entitled “Ideas
for Widening the Spreads Through Finance.” The page was filled
with diagrams, arrows, calculations, and notes. Dr. Jazz said,
“Herbert was intrigued by how one could increase one’s spread.
That means increasing your returns and lowering the cost of
money without changing either!”
“So what does that mean in English?” I smiled.
“Well, imagine someone pays you 12% and you pay your
source of money 8%. The spread is 4%, the difference between
12% and 8%. Now imagine that the person pays you 12%, but you
receive 13%. And when you pay your source of money 8%, they
receive 8%, but you pay them 7%. The spread now goes from 4%
to 6%. You are making 13% and paying 7%,” Dr. Jazz said
cautiously, checking to make sure I got it.
“Huh? How’s that?”
With a big smile, he said, “I’ll explain. But it gets better.”
And he pointed to the page…
The spread between the cost of borrowed money, i.e., the cost
of money and the return, is typically a small percentage. For
example, if you borrowed money at 6% and loaned it out at 9%,
you would make 3%. However, using some creative finance, it’s
possible to increase that.
Let’s first consider the return on a loan.

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 THE FINANCE: IT GETS BETTER

Return on Investment
Earlier, I explained velocity of money. I mentioned that with
velocity of money, your internal rate of return (think of this as
return) gets higher. Let’s look at an example. Assume two lenders,
David and Steve, lend out $60,000. Let’s assume the loan terms
are as follows: $5,600 per month for 12 months. Here’s what the
schedule will look like.
STEVE
PAYMENT# DAVID
(the smart one)
1 $5,600 $5,600
2 $5,600 $5,600
3 $5,600 $5,600
4 $5,600 $5,600
5 $5,600 $5,600
6 $5,600 $5,600
7 $5,600 $5,600
8 $5,600 $5,600
9 $5,600 $5,600
10 $5,600 $5,600
11 $5,600 $5,600
12 $5,600 $5,600
TOTAL $67,200 $67,200

Figure 20: David and Steve’s streams of income from

private lending
They both started with $60,000 and ended up with $67,200 after
12 months. That’s a 12% return. (Advanced investors will say the
yield is higher, but let’s keep this simple.)
David decides to leave his monthly payments in the bank until
he receives all his payments. So, by the end of the 12 months, he
would have $67,200.
Steve, the smart lender, decides to “turn his money” by lending
it out as soon as he gets it back. When he receives the first

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 THE BANKER’S CODE

payment of $5,600, he lends it out at 12% for 11 months, thus

receiving $56 per month for 11 months (refer to the table below).
STEVE STEVE
PAYMENT # DAVID (stream # 1) (stream #2)
1 $5,600 $5,600

2 $5,600 $5,600 $56

3 $5,600 $5,600 $56
4 $5,600 $5,600 $56
5 $5,600 $5,600 $56
6 $5,600 $5,600 $56
7 $5,600 $5,600 $56
8 $5,600 $5,600 $56
9 $5,600 $5,600 $56
10 $5,600 $5,600 $56
11 $5,600 $5,600 $56
12 $5,600 $5,600 $56
TOTAL $67,200 $67,200 $616

Figure 21: David and Steve’s streams of income from

private lending

Steve ends up receiving $67,200 and the $616, resulting in a

sum of $67,816. That’s a return of 13.03% while David is getting
12%. But Steve doesn’t stop there. He does the same thing for the
next $5,600 payment as well, resulting in another stream of
income of $56 per month. He then does a 10-month loan with that
money.
PAYMENT # DAVID (stream #STEVE 1)(stream #STEVE 2)(stream
#STEVE 3)
1 $5,600 $5,600

2 $5,600 $5,600 $56

3 $5,600 $5,600 $56 $56

4 $5,600 $5,600 $56 $56

70
 THE FINANCE: IT GETS BETTER

5 $5,600 $5,600 $56 $56

6 $5,600 $5,600 $56 $56
7 $5,600 $5,600 $56 $56
8 $5,600 $5,600 $56 $56
9 $5,600 $5,600 $56 $56
10 $5,600 $5,600 $56 $56
11 $5,600 $5,600 $56 $56
12 $5,600 $5,600 $56 $56
TOTAL $67,200 $67,200 $616 $560

Figure 22: David and Steve’s streams of income from private

lending: Steve is using velocity of money to make more money.

Steve ends up receiving three streams of income: $67,200,

$616, and $560, resulting in a sum of $68,376. That’s a return of
13.96% when David is getting 12%. But once again, Steve doesn’t
stop there. He does the same thing for every $5,600 payment he
receives as well, which results in another stream of income of $56
per month for each one. He does that every single month, and in
fact, his return keeps going up as he continues to do so.
PAYMENT # DAVID (stream #STEVE 1)(stream #STEVE 2)(stream
#STEVE 3)(stream #STEVE 4)
1 $5,600 $5,600

2 $5,600 $5,600 $56

3 $5,600 $5,600 $56 $56

4 $5,600 $5,600 $56 $56 $56

5 $5,600 $5,600 $56 $56 $56
6 $5,600 $5,600 $56 $56 $56
7 $5,600 $5,600 $56 $56 $56
8 $5,600 $5,600 $56 $56 $56
9 $5,600 $5,600 $56 $56 $56

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 THE BANKER’S CODE

10 $5,600 $5,600 $56 $56 $56

11 $5,600 $5,600 $56 $56 $56
12 $5,600 $5,600 $56 $56 $56
TOTAL $67,200 $67,200 $616 $560 $504

Figure 23: David and Steve’s streams of income from private

lending: Steve is using velocity of money to make more money.

David: $67,200 (12.00% return)

Steve: $67,200 + $616 + $560 + $504 = $68,880 (14.80% return)
The only difference between David, who is now getting 12%,
and Steve, who is getting a much higher return, is that Steve is
using velocity of money. In fact, his strategy is simple. As soon as
money gets into his bank account, he lends it out. Sometimes the
money might sit idle for a few months, but Steve lends it as soon
as he gets a chance.
In fact, if you think about the above statement carefully, you
realize that Steve is even re-lending the $56 right back out as
soon as he gets it, making money on that money as well!

Velocity of money increases your returns.

Now, the reality is that you might not be able to lend out the
money immediately, as stated earlier. It might sit idle for a few
months. There are two ways to address that.
One reason it sits idle is that the amount of money in the bank
is small. However, one can tap into the new and exciting peer-
topeer lending on the Internet. This allows anyone to lend money
to others for as little as $25 to $50 and get a good return on that.
This type of lending is unsecured lending, meaning there is no
collateral backing up the loan—riskier than lending secured by
collateral, which is the lending I recommend.

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 THE FINANCE: IT GETS BETTER

However, there is a more elegant solution for money sitting idle

in an account until it is lent out. This principle is genius, and it
results in lowering the cost of borrowed money!

Lowering the Cost of Borrowed Money

Let’s go through some scenarios here:
Scenario 1:

You have $5,000 and TWO buckets.

Where would you put the
1% 6%
$5,000?

Figure 24: Into which bucket would you put the $5,000?

Let’s say you have $5,000 and two buckets: one bucket pays
1%, and the other bucket pays you 6% (shown above). In which
bucket would you put your money? This is not a trick question.
Obviously, bucket number two, paying 6%.
Scenario 2:
1% 6%
You have $5,000 and TWO
buckets.

Checking(EARNING) $8,000 debtLOC

(SAVING)

Where would you put the $5,000?

Figure 25: Into which of these buckets would you

put the $5,000?

Let’s say that you have the same $5,000 and two buckets
(above): one bucket pays 1% and the other bucket saves 6%.
Bucket one is a checking account where you’re earning 1%
interest (if you’re lucky) and paying taxes on the interest you earn.

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 THE BANKER’S CODE

The second bucket is a line of credit with $8,000 debt. If you place
the $5,000 there, you’re saving 6% interest on the $5,000 you
would have had to pay. So bucket one earns you 1% while bucket
two saves you 6%.
So where would you put the $5,000? Bucket one or two?
Consider bucket two. If you placed the $5,000 there, is it liquid
(meaning you still have access to the money when it goes into the
line of credit)? It’s better to place the $5,000 into bucket two,
because while it’s sitting there for the few weeks (or months)
before you pay your bills or lend the money again, you’ve saved
6% for those few weeks. You didn’t have to pay taxes on the
savings.
So saving 6% is equivalent to earning 6% tax-free.
Now, let’s see from the bank’s perspective what happened. If
you had deposited the money into the checking account, the bank
would have paid you 1% on $5,000 ($50 per year). But you would
have paid them 6% on the $8,000 ($480 per year). That would
have resulted in the bank making $430 per year from you. On the
other hand, by putting your money in the line of credit, you would
have paid the bank 6% on $3,000 ($180) and received nothing
from the bank from the checking account. In essence, they made
$180, not $480. That $300 went into your pocket! That’s the same
money most Americans are paying the banks without even
knowing it.
But let’s get more detailed here. Let’s see what’s really going on.
Consider the image below. It represents a timeline of 31 days
(the horizontal axis). The vertical axis represents the amount of
debt on the line of credit. In the diagram below, the debt ranges
from $0 to $10,000.
DAILY INTEREST ON LINE OF CREDIT (1 MONTH)

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 THE FINANCE: IT GETS BETTER

Figure 26: Daily interest table

Notice that on day one the debt is $8,000. The interest being
charged on this day is $8,000 x 6% / 365.
The daily interest is calculated as:
Debt x interest / 365
So the daily interest in the diagram is $1.32 for day one.
If the debt were to remain the same for 31 days, the interest
charged for the month would be $40.77. (If you try this on your
calculators, you’ll get $40.92. For the purposes of this book, I
actually rounded up the daily interest rate to $1.32, but I used the
actual numbers in the calculation of the monthly sum for $40.77.)
DAILY INTEREST ON LINE OF CREDIT (1 MONTH)

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 THE BANKER’S CODE

Figure 27: Daily interest table

However, if you deposit the $5,000 on day 2, the debt drops to

$3,000. The daily interest is $0.49. Assume the debt remains the
same (as the $5,000 is sitting idle on the line of credit for 29 days).
On the last day, you lend out the $4,500, and the debt goes back
up to $7,500. So the interest charged on that day is $1.23. The
total for the month is $16.85.
Why is this interesting?
Well, let’s look at what, in the line of credit, is the effective
interest.
The amount charged on the line of credit would have been
$40.77 if the debt had remained at $8,000 and you had deposited
the money in a checking account. Therefore, the effective annual
interest rate would have been 6%.
By depositing the money into the line of credit, the interest
charged was $16.85. This gives you an effective interest of 2.48%
and assumes you deposit the $5,000 that you receive in income
every month for 29 days.

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 THE FINANCE: IT GETS BETTER

DAILY INTEREST ON LINE OF CREDITDAILY

(1 MONTH)
INTEREST ON LINE OF CREDIT (1 MONTH

Figure 28: Additional daily interest table

This is interesting because you effectively lowered the cost of

money by depositing your payments into a line of credit while the
money sat idle, resulting in a wider spread. Even though on paper
our cost of money is 6%, in reality it’s 2.48% because of this
financing trick. The money that would have gone into the bank’s
pocket is now being used to lower the effective interest rate!
Lenders can lower their effective interest
rate from borrowed money by using a line
of

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 THE BANKER’S CODE

credit in a certain way instead of placing their

money in a checking account.

How do you get debt into a line of credit? There are several
ways.
The first method is using the line of credit as the source of
money you lend out. For example, as you get a loan request, you
lend money from that line of credit.
The second method is to borrow the money from another
source and use the line of credit to pay it off. As you pay down the
line of credit to nothing, you simply write another check to pay off
your source of money. In fact, you can use this method to pay off
your mortgage. Imagine owning your home free and clear in eight
years or less by using your borrower’s payments! (Refer to The
Wealthy Code for more information.) Let’s step back.
By lending money and keeping it turning (using velocity of
money), we can increase the yield. Even though our borrower is
paying us a specific interest rate, we are receiving a higher return
due to velocity of money. And by parking the money in a line of
credit at your local bank, you are lowering the effective interest
rate. And even though our money source might be charging us a
certain interest rate, we are paying them a lower effective interest
rate. All this results in a wider spread and more money in your
pocket!

“What do you think of that, George?” chuckled Dr. Jazz.

“I’m simply amazed. It’s brilliant. This has the touch of genius!” I
said as I looked up. I had been hunched over, focused on the
book and the diagrams that Dr. Jazz was pointing to. As I stood up
and stepped back to stretch my back, I knew my life would never
be the same.
“There’s more,” he said. “There’s a lot more, but I’m hesitant to
jump into it right now. Your brain will start smoking!” he laughed.
“If you think this is good, just wait. It gets much better . . . many,

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 THE FINANCE: IT GETS BETTER

many times better! You see why bankers are the richest people in
the world? But soon you will see why they are billionaires.”
Dr. Jazz faced me and somberly said, “Knowledge is only the
beginning, George. Many responsibilities accompany this
knowledge, and soon we will have to talk about them.”
I was startled by the look on his face, and he suddenly laughed.
“Enough of that! Let’s go see what France has cooked for us
and warm ourselves by the fire,” he offered as we began to walk
toward home.

Chapter Summary
• Lenders have access to some powerful financial strategies to
boost more profit from a deal.
• One such strategy involves the use of velocity of money, which
increases the return by “turning” money as it comes in.
• Lenders can lower their effective interest rate from borrowed
money by using a line of credit in a certain way instead of
placing their money in a checking account.
• As private lenders become more experienced, there are other
financial strategies that can help them boost profit from a deal
without charging the borrower more interest.

Refer to the Resources page for a free

bonus chapter with Dr. Jazz.

79
 Chapter Nine

The Banking:
The Parts
The sun climbed higher in the sky as we sipped our tea slowly,
savoring the fragrance.
“Have you heard of BOLIs?” asked Dr. Jazz.
“No.”
“It stands for bank-owned life insurance, and all banks have
them,” he explained. “These are a form of life insurance
purchased by banks where the bank is the beneficiary and/or the
owner.”
“Now, why do you suppose they would do that?” he asked.
“Not sure.”
“Well, George, let’s break the banking system into several
parts. Think of your traditional bank. I want to cover each of those
parts in a little more detail.”
I turned the pages of my notebook to a clean page and grinned
as I began to write.

Banking consists of four parts: vehicle, banking, borrower, and

depositor.

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 THE BANKING: THE PARTS

Figure 29: The four parts to banking

Vehicle: The location of the money (the vault) where the

money resides. It’s where you put your money while it sits in
your “banking system.” You can have your money in a tin
can, in a checking account, in a CD (certificate of deposit);
wherever you decide to place your money for lending is your
vehicle.
Banking: The process—how we lend the money and the
methods (the advanced financial strategies) we use to make
more money.
Borrower: The person or entity to whom we lend the money.
Depositor: The person (or entity) who saves their money in
the bank. This is just one source of money for the bank.

Let’s Begin with the Borrower

As a private lender, you need to realize that without borrowers
you have no business. Banks don’t make money without
borrowers. The question is: to whom do we lend?
The answer is simple.
We lend money to anyone we believe is the lowest risk. In the
examples in this book, we’ll lend money to two types of borrowers:

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 THE BANKER’S CODE

the ones that fit our underwriting criteria and are secured by real
estate at 65% LTV (typically one to four units, non-owner
occupied) and ourselves. The main focus of Chapter 12 is on
lending money to ourselves, which is very different from lending to
others.

We lend money to anyone

we believe is a low risk.

Let’s Talk About the Depositor

Deposits in traditional banks are nothing more than loans to the
banks. When banks pay depositors 1%, they’re really borrowing
that money from them at 1%.
So when talking about depositors, you have to think of them as
sources of money and that you are truly borrowing money from
them. This means you must comply with all Security and
Exchange Commission (SEC) regulations. The SEC is a
government agency that protects investors; maintains fair, orderly,
and efficient markets; and facilitates capital formation. Whenever
you are dealing with raising private money, you have to comply
with federal and state securities regulations. Make sure you
consult with the right attorney in these matters.

When working with other people’s money,

always work with the appropriate attorneys.
You must comply with all federal and state
securities regulations.

Let’s divide depositors into three sources: you, friends and

family, and strangers.
Of course, you can “deposit” your own money into your own
banking system and use that for lending. You can also borrow

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 THE BANKING: THE PARTS

money from friends and family. Remember, though: Be sure that

you comply with all federal and state laws pertaining to borrowing/
lending money (beyond the scope of this book).

Let’s Talk Next About the Vehicle

Where should you put your money when it’s not being loaned
out? Should you use a regular bank account? Should you use a
savings account? You can use any vehicle you choose—a bank
account, a tin can, a piggy bank—but the question is: Which
vehicle will give you the best performance (i.e., where will it be
safest and grow the most?).
It’s important to have the right vehicle. To demonstrate this, let’s
consider the effects of growing money in a compound manner in
three tax environments: taxed, tax-deferred, and tax-free.
Compound interest has been called “The Eighth Wonder of the
World” for a good reason—it has the potential to make you rich…
if you know how to use it. Here’s a question: Which of the two
choices below would you take?
1) A penny today, double that tomorrow, double that the next
day, and so on every day for 30 days.
2) $100,000 today.
Thought about it? Let’s look at the numbers. If you selected the
daily pennies, here’s what you’d get. On day one it’s $0.01; on day
two that penny doubles and you get $0.02, so you now have
$0.03; then on day three it doubles again, so you get another
$0.04. At this point, the $100,000 is looking attractive. But let’s
keep going.

Tax-Free Compounding Growth

DAY GROWTH

1 $ 0.01

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 THE BANKER’S CODE

2 $ 0.02

3 $ 0.04

4 $ 0.08

5 $ 0.16

6 $ 0.32

7 $ 0.64

8 $ 1.28

9 $ 2.56

10 $ 5.12

… …

28 $ 1,342,177.28
29 $ 2,684,354.56
30 $ 5,368,709.12

Figure 30: Tax-free compounding growth table

On day 30 you will receive $5,368,709.12! Now which would

you choose? This is obviously compounding growth. In a tax-free
environment, you would have close to $5.4 million dollars due to
compounding.
At this point, you’re probably thinking you’ve heard this before
and knew the answer. But let’s keep going.
In a taxed environment, assuming a 30% tax bracket, you’d get
only $48,196.86! (See table below.) Suddenly, the $100,000
seems more attractive. You can see how important a tax-free
environment can be.

Taxed Compounding Growth 30%

Tax Bracket

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 THE BANKING: THE PARTS

DAY GROWTH

1 $ 0.01
2 $ 0.02
3 $ 0.03
4 $ 0.05
5 $ 0.08
… …

28 $ 16,677.11
29 $ 28,351.09
30 $ 48,196.86

Figure 31: Taxed compounding growth table with

30% tax bracket

The point of this is that you want your vehicle to be in a

taxadvantaged environment to allow compounding to work
effectively. What I mean by a “tax-advantaged” environment is
something that is either tax-free or tax-deferred. Look for a vehicle
that is a taxadvantaged environment.

A “tax-advantaged” environment is
something either tax-free or tax-deferred.

Now, let’s consider a tax-deferred environment.

Tax-Deferred Compounding Growth 30%
Tax Bracket
DAY GROWTH
1 $ 0.01
2 $ 0.02
3 $ 0.04
4 $ 0.08

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 THE BANKER’S CODE

5 $ 0.16
… …
28 $ 1,342,177.28
29 $ 2,684,354.56
30 $ 3,758,096.38

Figure 32: Tax-deferred compounding growth table with

30% tax bracket

Simply look at the results: $5,368,709.12, $3,758,096.38,

$48,196.86. The only difference was the tax environment! One
single decision affects how much money remains in your pocket!
You could use some of the most advanced strategies in banking
to make your money grow for you, but placing it in the wrong tax
environment will hinder that growth significantly. The vehicle you
put your money in is critical.
One of the requirements for the vehicle, therefore, is the need
for it to be in a tax-advantaged environment. You might also
consider the safety of the money, among other things. The
government has given us some favorable environments to use. In
fact, big institutions—commercial banking systems—use the same
instruments to which we have access. Bank of America, JP
Morgan, Chase, Citibank, Wells Fargo, and others deposit (or
deposited) tens of billions of dollars of their reserves into high-
cash-value life insurance—bank-owned life insurance (BOLI)—for
sound economic reasons.

You could use some of the most advanced

strategies in banking to make your
money grow for you, but placed in the
wrong tax environment, growth will be
hindered significantly.

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 THE BANKING: THE PARTS

It turns out there are a number of vehicles we can use. Which

you select is a matter of individual preference. One of the more
interesting vehicles turns out to be a certain life insurance, of all
things! Banks use BOLI for a reason, so what’s so compelling
about it? The answer is pretty simple. There are two components
to permanent life insurance (whole or universal life): The death
value and the cash value. As we go through life, we’re told that if
someone is trying to sell us whole or universal life insurance, we
should run away as fast as possible. We’ve always been told to
buy term life insurance and invest the rest. The life insurance
companies try to get the death value up and the cash value down.
However, it turns out that the cash value of both whole and
universal life has some interesting advantages. If you minimize the
death benefit and maximize the cash value, you can tap into these
advantages:
• It’s a tax-advantaged environment.
• Whole life pays dividends every year, allowing us to build
cash value quickly; universal life has something similar. Both
pay interest every year.
• In some states, the cash value is not accessible to creditors.
And there are additional compelling advantages.
This insurance is structured differently than a regular life
insurance agent would do. Insurance agents want to market
insurance based on the death benefit. Having a trusted, ethical life
insurance agent structure this for you is key. (See Chapter 12 for
more on this topic.)
Other vehicles exist for qualified retirement accounts, as well.
Many investors are aware they can do lending in their IRAs, but
even better is to invest inside of a qualified retirement plan (QRP).
The QRP has a lot of advantages that most people are not aware
of, as the following table shows.
QUALIFIED
SELF-DIRECTED IRA
RETIREMENT PLAN

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 THE BANKER’S CODE

$5,000 or $6,000 if $50,000 or $55,000

Contribution Limit
age 50+ if age 50+
Income $125k single or
Restrictions $183k married None

Quarterly plus per None after initial

Ongoing Fees transaction setup

Ease of Access to Paperwork every Easy—you have the

Your Cash time checkbook

Speed of Access Instantly—you have

to Your Cash 2 days to 2 weeks the checkbook

No, will be charged

Debt Financing UDFI 35% federal
Debt financing OK
Available tax on % of debt
financing
Unlimited protection
$1 million dollars in
Asset Protection in bankruptcy, IRS,
bankruptcy
and creditors

$50,000 (or 50% of

Borrowing None account, whichever
is less)

Details of the QRP are beyond the scope of this book. To learn
how you can make your private lending tax-free using a QRP,
please talk to the appropriate professional or refer to the
Resources page in the back of the book.
By choosing the right vehicle, you can increase your money
significantly.

Four-Part Harmony
If you create the perfect vehicle but never lend out the money,
you’ve missed the boat. If you do everything else right but place
your money in the wrong vehicle, you’ve missed the boat, as well.
You must have all four components working ideally together. The

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 THE BANKING: THE PARTS

four components together—vehicle (where the liquid cash for

lending resides), depositor, borrower, and banking process—are
what makes this waltz flow. The ideal situation will make double-
digit returns in a tax-advantaged environment grow in a
compounding manner!

Let’s Talk Next About the Process

This is the core of a banking system, and it involves three
activities. All three activities must be done on an ongoing basis;
otherwise, the banking system fails. These three activities are:
1. Finding borrowers. Without a borrower, you have no
business. 2. Finding money to lend. Without a depositor, you
cannot lend.
3. Structuring safer and more profitable deals.

Find Borrower

Structure Safer
and Profitable Find Money
Loans to Lend

Figure 33: The three things private lenders must do

As mentioned before, banking is all about safety. So learning

how to structure safer and more profitable deals is essential in
lending. For example, having underwriting criteria, which might
include low LTV and specific property types, etc., becomes very
important.
“Profitable” can include advanced financial strategies such as
velocity of money, leverage, etc. Suffice to say for now that these

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 THE BANKER’S CODE

financial strategies allow you, the banker, to squeeze huge

amounts of profit out of every transaction.

“So, who profits from this?” asked Dr. Jazz.

“Hmmm. Depositor? Banker? Borrower? Not sure. Banker?” I
offered hesitantly.
“They all profit. However, it’s interesting that you say banker.
Where is the banker here?” he asked me.
“Well, the banker is the one sitting in the bank structuring the
loans and taking the deposits,” I said.
Dr. Jazz smiled and asked, “Have you ever seen the movie,
The Wizard of Oz? Like the wizard behind the curtain, the banker
is really not seen. He or she is the owner of the bank. He or she
makes all the money from the bank, but they have people who
take the deposits and approve or disapprove the loans. Do not
confuse a teller or a loan officer with the owner of the bank.
Tellers and loan officers help the bank owner make money. You
need to be the bank owner. So, you need to have someone who
takes the applications for you, handles the appraisals, etc.”
“I can’t afford all that!” I interrupted. I was angry at the fact that I
couldn’t afford to hire someone like that. “Most people can’t afford
this,” I sputtered.

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 THE BANKING: THE PARTS

Chapter
Summary
• Banking consists of four parts: vehicle, banking, borrower,
and depositor.
– Vehicle: where money physically resides while waiting to be
lent out
– Banking: the process of lending money
– Borrower: the person or entity to whom you lend money
– Depositor: the person or entity that deposits their money in
a bank
• Use a tax-advantaged environment for your money.
• The three activities private lenders do are:
– Find borrowers
– Find money to lend
– Structure safer and more profitable deals

Refer to the Resources page for a free

bonus chapter with Dr. Jazz.

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 Chapter Ten

The Steps
Dr. Jazz leaned back, clearly disappointed in what I had said. He
stood up quickly and began walking. “Come, George. Let’s walk.”
He looked into the horizon as he spoke, searching for the right
words. “Most people are not action-takers, George. Most people
find the reason they can’t do something. These same people live a
life of complaining and whining. They want everything given to
them on a silver platter,” Dr. Jazz pronounced bitterly. “They’re not
willing to work a little harder and a lot smarter for a better life.
“What you just said made me angry. You concluded something
that is not true. You interrupted me with a statement that reflects
your own views, your own self-limiting beliefs.
“Let me ask you this: How bad do you want a better life? How
hard are you willing to work to have that wonderful life?”
Not waiting for an answer, Dr. Jazz continued. “Life has its ups
and downs, its challenges. If you give up when you face a small
challenge, you’ll always be where you are; you’ll never get to that
lifestyle you desire. If getting there were easy, everyone would be
there. But it’s the ones who face their self-limiting beliefs and
these challenges that eventually reach their destinations.”
“Dr. Jazz,” I said, “I still have no money to hire all these people,”
wanting to justify my previous statement. “But I see what you’re
saying.”
Dr. Jazz was clearly disappointed in me.

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 THE STEPS

“George, the borrower pays these people. Not you.” He bowed

his head down, disheartened. “The borrower pays for practically
everything. Let me explain…”

To become a private lender, there are two phases. Phase one

is the one-time setup of the foundation. Phase two includes the
ongoing activities. This is similar to any investment. For example,
during phase one, when investing in stocks, you have to find a
financial institution (such as Charles Schwab), open a brokerage
account, and learn how to effectively invest in stocks. In phase
two, you start buying and selling stocks, monitoring certain
metrics, and making decisions to maximize your portfolio while
minimizing risk.
So let’s do just that for private lending.

Phase 1
In phase one, you set up the foundation to be able to start
lending. Here are the non-recurring steps to building the
foundation to being a private lender:
• Understand private lending, including pertinent laws and
regulations
• Build your underwriting criteria, your policies, etc.
• Build your team
• Get the right training

Phase 2
In phase two, you start lending. Here are the recurring steps in
being a private lender:
• Find borrowers
• Find sources for other people’s money (OPM)
• Structure your deals for safety and profitability Let’s take a
closer look at each of these.

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Understanding Private Lending, Including

Laws and Regulations
Lending is different in every state in the United States, and
every country for that matter. So knowing your state’s and
country’s lending laws and regulations is very important. For
example, lending to owner-occupied borrowers (lending to people
against the house they live in) is a lot more restrictive and
regulated than lending to non-owner-occupied borrowers. The
latter group is borrowing money to buy an investment property
(that they don’t live in) and is easier to lend to.
Furthermore, these laws and regulations change all the time.
Having a team that understands all these laws and regulations is
very important and, in fact, required.
But not to worry. There are people who specialize in dealing
with all these laws and regulations. They specialize in handling
these particular types of deals for private lenders and ensuring
they comply with all pertinent regulations. They are licensed to do
just that and can be found in most states. They are licensed
mortgage brokers that focus on brokering private funds as
opposed to institutional funds (like most mortgage brokers). They
are known in the industry as “hard-money brokers” or “hard-money
lenders.” Most of them have a team of attorneys, title companies,
and appraisers that handle the majority of the work for them.
Because of the negativity associated with the term “hard money,”
most simply refer to themselves as “private money lenders.” They
are licensed (in most states) to broker private funds.
However, individuals who want to become lenders are also
known as private money lenders. So it’s important to distinguish
between a broker and the money person (us). Brokers often refer
to us as “trust deed investors” or “private mortgage investors.”

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 THE STEPS

Loan Broker

Private Lender Borrower

Figure 34: Always use a mortgage broker to do your

real estate loans

DESCRIPTION INDIVIDUAL BROKER BORROWER

• Private lender • Loan broker • Borrower

• Trust deed • Hard-money • Investor
investor broker • Property owner
Also known as…
• Private mortgage • Hard-money
investor lender
• Private lender

They make They make For investors,

money through money primarily they make money
spreads, through charging borrowing the
How do they borrowing points. money to buy
make money? money at a distressed
lower rate and properties and
lending at a selling for higher
higher rate. value.
This is us. These brokers are
Notes typically licensed.

Figure 35: Comparison table of you (as lender), the

broker, and the borrower

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 THE BANKER’S CODE

There are many differences. These brokers are typically

licensed and we are not. They make their money by charging the
borrower points. We make money on spreads. In more advanced
training, you’ll learn about additional income streams, but for now,
let’s keep it simple.
For example, Yogesh is an engineer who works in the Silicon
Valley. He met a hard-money broker named Rich, also a
Californian. Rich makes money by finding and getting borrowers
with their loan applications and all necessary documents to
individuals, like Yogesh, who might be interested in their deal. For
example, Rich found a client who wanted to borrow $200,000
against a property worth $350,000. Rich does the initial due
diligence and thinks this is a good deal. He sends it over to
Yogesh, and Yogesh does his own due diligence. Yogesh also
likes the deal. So Yogesh agrees to fund it. Rich (the broker) and
the borrower agree to the terms of the loan, as follows:
• 1-year loan
• 12% interest-only
• 5 points
• $200,000 loan amount
Yogesh funds the deal by sending the money directly to an
escrow company. Five points of the loan amount, meaning 5% of
the $200,000 (i.e., $10,000), go to the broker, Rich. The borrower
gets the remaining money after paying other miscellaneous fees
for the title and escrow. Now, the borrower starts making
payments to Yogesh directly or through a servicing company
(which is a company that accepts payments from the borrower for
Yogesh). At the end of the first year, the borrower pays off the
lender (Yogesh) the remaining balance of $200,000 and any
remaining interest payments.
In this example, Rich is licensed to broker such loans, and
Yogesh is a working professional who decides to do this to
supplement his income. The confusion here is that the broker,
Rich, calls himself a private money lender because of that
negative connotation with the terms “hard-money lender” and

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 THE STEPS

“hard-money broker” we talked about. When Yogesh contacted

Rich, he had to introduce himself as a trust deed investor;
otherwise, if he had called himself a private lender, Rich would
have thought that Yogesh was a competitor.

Building Your Underwriting Criteria,

Policies, Risk Management, and More
Underwriting criteria are the conditions and standards or
benchmarks you create that all your borrowers must meet and that
will help minimize risk. These parameters are set by the lender
(us) and are designed to filter the type of borrowers we are
prepared to accept. For example, the parameters might include
the types of properties you lend against (such as single-family
residences and duplexes), the location of the property, whether it
is owneroccupied or not, the credit requirements for the borrowers,
the maximum loan to value (LTV), the down payment
requirements, the borrower’s income, and more.
In addition to that, the policies document contains the rules you
set for yourself. For example, always requesting an appraisal of
the property could be included in your policies. Another policy
could be that you always wire money to an escrow company and
never to the borrower directly. Or you always get lender’s title
insurance (which the borrower pays for), and perhaps you should
always be on the borrower’s hazard insurance. Another could be
that you never use the borrower’s appraisal. The policies you
establish should follow what are considered best practices in the
industry.
The other document you need to consider having is a risk
management table. This is typically a three-column document (in
its simplest form) similar to the one shown below.

CONTINGENCY
RISK MITIGATION PLAN
PLAN
Risk description How to minimize or What to do if risk
goes here eliminate risk does happen

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 THE BANKER’S CODE

Figure 36: Your risk, mitigation, and contingency plan

worksheet outline

List all risks in the “Risk” column. Under “Mitigation Plan,” list
ways to minimize or eliminate that risk. In the “Contingency Plan”
column, identify what to do if a risk becomes a reality!

RISK MITIGATION PLAN CONTINGENCY PLAN

Low LTV - make sure Foreclosure - call

Borrower stops borrower has money foreclosure company
paying into deal

Insurance company
Make sure to be added
pays you as loss payee
Property burns down as loss payee on
borrower’s insurance
Market drops fast Low LTV (65%) - do You still have enough
(15% / year) short-term loans protective equity with
(less than 1 year) that drop (still needs to
pay you)

Figure 37: Your risk, mitigation, and contingency plan

worksheet outline example
In the example shown, the risk is that the borrower stops paying
you. The way to mitigate that risk is to make sure that you lend
them a low LTV (perhaps 65% LTV) in the first place, which
means the borrower has a lot of equity to lose. Also, make sure
the borrower has money in the deal, which would make him/her
think long and hard about walking away. The contingency plan is
to call a foreclosure company and initiate foreclosure if that risk
becomes reality.

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 THE STEPS

Once you’ve created the first draft of these documents, you’re

ready to build your team. Team members will also help you update
these documents.
Your team consists of:
• You
• Your mortgage broker (private money lenders or hardmoney
brokers), who specializes in brokering private funds
• Your bookkeeper
• Your accountant
Your mortgage broker obtains the remaining team members,
including a real estate attorney that specializes in private lending,
a servicing company (normally the broker), an appraiser, and
others.
Finally, the right training will get you ready to excel in this arena
without making too many costly mistakes; this is arguably the most
important step in the whole process. As a private lender, you are
the leader of your team. Not knowing how to play the game would
be disastrous. For more information, refer to the Resources page
in the back of this book.

Phase 2
In phase two you begin lending, following the recurring steps to
being a private lender.
First of all, finding borrowers is a lot easier than you think, and
the process can even be automated. One such method is to have
your mortgage broker or private money broker find you the
borrowers and simply e-mail you the deals. You don’t have to fund
every deal, and in reality, you won’t be able to fund most deals.
Funding a couple of deals in the first few months is a good start.
Doing safer and more-profitable deals is about following your
underwriting criteria and your policies, about structuring deals
correctly, and about using strategies to enhance your profits.

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The business will seem relatively simple once you’ve done a

few deals. The broker sends you the loans, you compare to your
underwriting criteria, you follow your policies to fund deals (if you
choose to do them), and you structure the deals in a way that will
be safer and most profitable for you. This whole process might
take a total of 90 minutes or less—per loan! All of this starts with
some education to help shape your success.
And the best part…the borrower pays for your whole team.

I recognized that I had disappointed Dr. Jazz by jumping to

false conclusions. It should have been more obvious to me since
banks have existed from the beginning of time for a reason. The
business model works.
Dr. Jazz then said, “George, lending in every state is slightly
different. That is an advantage in disguise. Only the ones
committed to taking the time to learn are successful; the ones that
expect everything handed to them on a silver platter will surely fail.
I, personally, am glad that each state is a little different. It filters
out 95% of the individuals not willing to spend a few weeks to
learn their state requirements.”

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Chapter Summary

• Becoming a private lender consists of two phases.

• Phase one: one-time setup of the foundation
– Understand private lending, including pertinent laws
and regulations
– Build your underwriting criteria, your policies, etc.
– Build your team
– Get the right training
• Phase two: ongoing activities
– Find borrowers
– Find sources for other people’s money (OPM)
– Structure your deals for safety and profitability

Refer to the Resources page for a free

bonus chapter with Dr. Jazz.

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Chapter Eleven

The Banker’s
Rules
Dr. Jazz gently opened the manuscript to the page titled “Banker’s
Rules.”
“George, as you can see here, Herbert put together some
assumptions. He called them ‘rules.’ He believed that for
individuals using these financing strategies to succeed, these
directives were critical; in fact, without them, he believed one
would eventually fail.
“People have a tendency to make up their minds about
something within the first few minutes of hearing about it. Do not
do that here. Listen. Listen. Listen. You are being exposed to the
greatest secrets on wealth building the world has ever known. But
you must be patient and follow these rules,” said Dr. Jazz sternly.
He paused to make sure I was paying attention, and there was
a moment of silence as I let his message sink in.
“We’ve covered some of this already, but let’s take the time for
a little refresher course.”

Every game has rules. Banking has its own rules.

The biggest challenge to becoming a successful private lender
is the human factor, so we need the banker’s rules, and we need
to make sure that we follow the rules.

102
 The difference between the banker’s rules and all other rules is
that almost all other rules are written by a third party to limit the
benefits of the players in that game. For example, in the board
game of Monopoly, the rules were written to limit the benefits of
the players (investors). However, bankers wrote the banker’s rules
not to limit their benefits, but rather to maximize their own benefits,
safely—an advantage and disadvantage at the same time. It is an
advantage because you have the power to write your own rules
and make money at it. And it is a disadvantage because there is
no one to stop you from breaking your own rules, and that’s a
problem. That’s when lenders start losing money.
Look at what happened to all the banks that started writing
100% LTV and 125% LTV loans. They got too greedy and broke
their own rules, and rewrote new ones that shifted the risk to
themselves. (In reality, they shifted the risk to the ultimate buyers
of the notes—but that’s a different story.)
So it’s in your best interest to follow the rules you write to
maximize wealth and to minimize risk and headaches! Heed them,
and you prosper. Disregard them, and you pay the consequences.
Banking gives you a lot of power, but be careful. Power can
backfire if you misuse it. So manage the power, but don’t let it
overpower you. Stay in control.
Rule No. 1: Banking is about safety. Shift the risk to the
borrowers.
Read that again!
As a private lender, you learn to shift the risk to borrowers and
take less risk when possible. Bankers make more money while
taking on the safer position in a deal. Consider this. Many of the
biggest buildings in cities across the globe have bank names
plastered on the very top for a good reason—more profits with
THE BANKER’S RULES

less risk. Lenders just do not like risk. They make money on the
financing strategies of safer loans.

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 THE BANKER’S CODE
Never forget rule no. 1!
Rule No. 2: Banking is about financing, not about investing.
We do not invest to make money; we make money by lending.
It’s a financing game.
You’ll hear this statement: “We finance the risks of others.”
Consider this sentence for a moment. Simply put, it means that we
finance our borrowers’ risks by tying up all their collateral and
taking on the more secure position. We do not absorb their risk.
Investors (borrowers) are welcome to take as much risk as they
like, but we want to be in a safer position. We do so by tying up
any and all collateral we can get our hands on. We should have at
least 150% of collateral tied up, as we shall find out later. That
means for every $1,000 of money we lend, we need to tie up at
least $1,500 of collateral.
Let me say it again: we finance; we do not invest.
Rule No. 3: Be a disciplined money manager.
Have control over spending habits. The power you get as a
banker is the same power you can abuse. Because as a banker
you have access to money, you can be tempted to spend it on
items like a new car and new clothes. Always remember: You are
not the consumer or the producer. In this equation you are the
banker.
I’m not suggesting you shouldn’t buy these things, but your
“bank” should not buy them for you. Your bank should lend the
money to you to buy them, and then you are obligated to pay back
your own bank. I’ll cover this in more detail in Chapter 12.
So, as a disciplined money manager (i.e., banker), you always
want your money to be lent out, and you want to be receiving
timely payments. Avoid the temptation to use the money for other
activities or “toys.”
Remember: Every dollar can either make you interest (work for
you), or you can spend it and give up the interest you make on it.
Said another way, the real cost of anything includes the interest
you paid and the opportunity cost of not having that money
working for you!

104
 This is, by far, the biggest downfall of a banker. You’ve been
warned.
Rule No. 4: Be an honest banker.
When you lend money to yourself to buy something, pay it back
exactly the same way—at the same rate of interest—as if you had
borrowed it from another lending institution! If you miss a payment
back to your bank, make up that late payment as soon as
possible!
This is a rule that bankers commonly break—because they
have the power not to pay themselves. However, this is the first
step to the demise of your bank! This rule cannot be overstated.
You have to always pay back your bank.
Think of your bank as a separate entity. When you borrow
money from it, treat it as you would any other lender or bank. Pay
on time. If you’re late, ask for an extension. Be “formal” with
yourself.
Recognize that there are two sides to banking. You have the
consumer on one side and the banker on the other. The consumer
is the wealth spender. The banker is the wealth builder. We lend
money to consumers to have them do all the work and pay us on
time. We make the money. The minute we start thinking like a
consumer, we lose the game. Act like a wealth builder (banker)
and become an honest banker.
Rule No. 5: Remember The Golden Rule of banking:
“Whoever has the gold makes the rules!”
Consumers do not save money. As a result, someone else must
provide the capital necessary to sustain their way of life. This
comes at a high cost. As a banker, with access to cash, you
dictate the rules and the terms. In addition, all sorts of good
opportunities will appear, and you can also negotiate favorable
purchase prices.
So overcome the temptation to buy that new luxury car.
Overcome the temptation to buy that mansion. Live within your
THE BANKER’S RULES

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 THE BANKER’S CODE
means, and let your money work for you as you dictate the rules
and the terms by which the borrowers buying these toys have to
follow. They will make you wealthier while they work harder and
harder.
Cash flow is everything! Access to capital is king. Control is
everything.
Rule No. 6: Adopt the banker’s habits.
Most people get into a comfort zone that causes them to lapse
into their old way of doing things—a lifetime of conditioning that
determines how one conducts oneself.
There’s nothing worse than getting trapped in the comfort zone.
Most people are stuck there and never get out. You must learn to
develop new habits. Becoming a banker must become a way of
life. You must use it or lose it! Ingrained habits are like muscle
memory—you will have challenges in making these new habits
work for you. Develop and adopt the banker’s habits.
Rule No. 7: Follow the rules!
The biggest challenge to having a successful “banking system”
is the human problem, so we need the banker’s rules. And we
need to make sure that we follow the rules.
The only thing holding anyone back from being able to develop
this new banker mindset is overcoming human behavior. If you
can control this, you can build wealth.
But if you break any rule, you lose!

“Doctor, these rules seem pretty straightforward,” I said.

“Unfortunately, that’s the downfall of most people who get
involved in banking. The power of controlling money is a
doubleedged sword. It can make you wealthy, and it can also get
you into trouble. It might seem easy now, but when you start
controlling money, and especially lending it to yourself, you will
understand,” cautioned Dr. Jazz.
“If you break any rule, you lose! These rules are thousands of
years old. They have been proven by the test of time! They have
created dynasties!”

106
 I nodded in agreement. I suddenly got a sense of the power of
this secret. Banking has existed from the beginning of time. The
wisdom of the ages was now being passed to me!
Little did I know that this information would eventually shape my
life!

Chapter Summary

Every game has its rules. Banking has its own rules, too.
• Rule no. 1: Banking is about safety. Shift the risk to
the borrowers.
• Rule no. 2: Banking is about financing, not investing.
• Rule no. 3: Be a disciplined money manager.
• Rule no. 4: Be an honest banker.
• Rule no. 5: Adopt the Golden Rule.
• Rule no. 6: Adopt the banker’s habits.
• Rule no. 7: Follow the rules!

Refer to the Resources page for a free

bonus chapter with Dr. Jazz.

Understanding
the Banking
System

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Chapter Twelve

About a week later, Dr. Jazz asked me to meet him at a medical

office. I walked into the office in Danville, California, at exactly
noon. It looked like a dentist’s office—the posters on the walls of
smiling people with dazzling white teeth gave it away. I wasn’t
sure why I was there. Was Dr. Jazz hinting I needed some dental
work?
“Can I help you, sir?” asked the smiling woman behind the
counter.
The only other person in the waiting room was a woman
dressed in blue jeans and a ratty gray T-shirt. Hunched down in a
corner of the room, she looked to be in pain and kept her head
bowed low, her hand on her cheek.
“Ummm. I…I…I was asked by Dr. Jazz to meet him here. Is
there a Dr. Jazz here?” I asked. As I spoke, I realized that he
might be a dentist here. I wasn’t sure.
“Can I have your name, please?” she smiled with teeth that
would get anyone to whiten theirs.
As I gave her my name, I saw Dr. Jazz walking out of an office
with someone I assumed to be a patient.
“George, come in here,” he beckoned. Another doctor walked
into the waiting room and called the woman in the corner. She
grimaced, and I hoped she soon felt better.
After some small talk, I asked Dr. Jazz, “Doctor, are you a
dentist?”
“Yes, of course. I volunteer once a week with Dr. Jordan to help
people who cannot afford a dentist. This used to be my practice,
and we make sure we give back to the community. We do not turn
down any patient,” he said as he walked into an office.
“I asked you to come here so I could show you several things.
First, I wanted to show you that private lending buys you the

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freedom of time to do what you want to do. I wanted to show you
what I love to do. I love being a dentist and putting smiles on
people’s faces. That woman, for example, in the waiting room—
she’ll probably end up with some new teeth and a beautiful smile,”
he said.
“I also wanted to show you something else,” he continued.
He pointed to the other rooms and all the big machines that
looked like they were pieces of very expensive state-of-the-art
medical equipment.
“These machines cost me a lot of money. In fact, all the
furniture, computers, medical equipment, monitors on the walls,
and this whole office cost me a lot. I’ve been paying for this for
years,” he said.
I wasn’t sure where he was going with this.
“Do you know how much money the ‘bank’ I borrowed the
money from is making now?” he asked me. He had a cryptic smile
on his face.
“A lot of money?” I replied.
“That’s correct, George. Most other dentists borrow a lot of
money to buy equipment like this. In fact, everyone borrows
money from banks for all kinds of stuff,” he says. “The reason I’m
telling you this is that I borrowed the money from my own banking
system, and I’m still paying the money back to my banking
system. The

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money I borrowed to buy everything here alone has made me

close to a million dollars over the many years!” he said. “Well, I
should say ‘my banking system’ has made that much money,” he
corrected himself.
“Wow!” I was impressed.
“What exactly is a banking system and how does it work? And
is this yours, as in, you own it?” I asked.

So far I’ve talked about lending other people money secured by

their real estate. I explained how to lend out your (or other
people’s) money.
Now, let’s turn the tables a bit. How about lending money to
yourself?
Before I start providing details, I need to make this clear: all
monies you lend to yourself must be your money and not other
people’s money. Let’s start from the beginning.

All monies you lend to yourself must be your

money and not other people’s money.

What is a Financing System?

Let’s say you decide you want to buy a car. You walk into a
dealership and pick the car you like, with the shiny rims and the
best stereo system available.
There are three ways you can finance that purchase:
• Leasing
• Borrowing the money from a third-party lender, such as a
bank or credit union
• Paying cash

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Figure 38: Three ways to finance the new car

With all three of these methods, you lose money. When leasing
and borrowing from a traditional bank, you lose money (interest) to
the third-party source. In the third traditional way to purchase a car
—paying cash—you lose your opportunity to use that money for
investing in something or buying something else. This is called the
“opportunity cost.” So, in each of the traditional ways of buying/
owning a car, you lose money each month to a third party, or you
lose money you could have used in some other way.
PAYMENT METHOD DESCRIPTION
Lease Lose interest payments

Auto Loan Lose interest payments

Cash Now you have no money to invest,

so you lose the opportunity to make
money with that cash you used to
buy the car

Figure 39: Three ways to finance the new car

A fourth method—another way of financing—is referred to as a

“banking system.” This requires a major shift in mindset. The
problem most people have in understanding this is in trying to
associate this fourth method with one of the other three traditional
methods and not recognizing this as an alternative to the other
three. Don’t confuse this method with the others.

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Assume you own a bank. Your bank lends you the money like
any other bank. You buy the car, and you start making the loan
payments to the bank. This is like any other loan; the difference
now is that you own the bank. So essentially, you’re taking money
from one pocket to pay another. It’s your bank, after all. Are you
really losing this money? The answer is yes, partially, but the
entity gaining the payments is your entity. So the money you
would have paid another bank is now going into your bank.
Obviously, this bank does not exist. But anyone can use the
concept of borrowing money from an entity they control to do this.
It’s not a true bank, but it serves like a privatized bank. Let’s call
this your “banking system.”
• The banking system method allows you to recapture your
interest.
• The other three methods—leasing, borrowing, or paying
cash—cause you to lose money!
• With this new method, you build wealth!
By simply using this financing system, you’re building wealth
automatically. This will become more and more obvious as we go
through this chapter. Follow along closely as I explain each step.

The banking system method allows

you to recapture your interest. By
simply
using your banking system, you’re building
wealth automatically.

Now, let’s suppose you can buy some goods using your credit
card. The credit card charges you 12% interest. Would you prefer
to borrow money from your own banking system or from another
bank? Obviously, if you’re going to pay 12% anyway, why not pay
it to your own banking system? After all, where else can you make

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an easy 12%? This is the same money you were going to pay to
another bank regardless.
Let’s revisit the car example. Instead of borrowing money from
another bank to buy the car, you borrow it from your own banking
system. If the auto loan was going to be 6% with the other bank,
then you pay your banking system the 6%, not less. The cash you
could have used in buying the car can now be used in possible
investments, hopefully earning more than 6%.

Figure 40: Where is the average American income going to?

Let’s suppose you get paid $5,000 per month. As mentioned

earlier, 34.5% of the average American’s income goes toward
paying interest alone. This could include interest on mortgage
payments, car payments, credit cards, etc. Assume in your case
that $1,700 per month of your $5,000 goes toward paying interest
alone. The average American saves very little at the end of the
month, but let’s suppose you’re extremely diligent and that you
save 5%. So, if you’re lucky, you’re left with $250 in your pocket.
Recognize that, as you read this, that money is currently going
out of your pocket to financial institutions.
The average individual is losing money every month in interest
to third-party financial institutions! Utilizing a banking system
allows you to recover at least some of that money. The cost of not
doing this equals the monies paid and lost now and in the future
for as long as you don’t have a banking system in place.

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Now, let’s set up the banking system and see how things
change. Remember that in our example you were paying $1,700
to third-party financial institutions. Let’s replace these institutions
with our own banking system. Also, assume you borrowed all the
money from your own banking system, and now you’re paying
yourself back the $1,700. Your life has not changed. You’re still
paying the $1,700, but the recipient of that $1,700 changed. It’s
not the thirdparty financial institutions; it’s your own banking
system. Think of it as your other pocket.
Your personal life has not changed. You’re still living the same
lifestyle. You’re not saving any less or any more. You’re still
getting $5,000 per month, still paying $1,700 per month in interest,
still able to save $250 per month. The only thing that changed is
that the $1,700 that’s going out of your pocket has been
“redirected” into your banking system, not to a third-party financial
institution.
So by redirecting the interest payments into your financial
institution—your banking system—you’ve recaptured these
monies. You’ve borrowed money from your own banking system,
and now you’re just paying it back to yourself. Because you’re
paying yourself back, you’re building up your own wealth by not
paying for the same debt to an outside financial institution.
At this point you’re probably thinking, “How do I get my banking
system set up, and how does it lend me money? Where does my
banking system get the money?” And a million other questions!
For most people, this is a foreign concept—difficult to accept
and understand. For that reason, I’m going to be redundant in
pressing the point home. I know that I’ll be repeating the same
concept and presenting it in different ways, and that’s because I
really want you to understand this before I go on. This is a
foundational concept to the financing system.
Up to now you had two choices when you purchased anything:
1. You could pay cash.
2. You could finance.

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When you pay cash for something, in a sense you’re still

financing it, and this is where many people fail to understand the
system. Every dollar you pay means you can’t earn money
elsewhere.
If you decide to pay cash for a car, you’re still financing it
because you give up the opportunity to earn money elsewhere,
which could prove more costly over time than actually financing
the car with an auto loan.

What is the
Significance of Having a
Banking System?
Consider that 34.5% of the average American income goes
toward paying interest alone. Over a lifetime, that will be a lot of
money! If that money were placed in a tax-advantaged
environment to grow at a good rate of return, the resulting amount
of money could be significant.
Of course, there’s no way you can redirect that money to your
banking system overnight. However, as you start borrowing money
from your banking system, you slowly start to divert some of that
34.5% back into it. And perhaps over the next six months, you
might redirect 1% of the 34.5% into your system. Perhaps it could
be as simple as borrowing money from your system to pay off your
credit cards, and then start making monthly payments to your
banking system with the same money you would have used to pay
your credit card bills.

Your goal should be to redirect, as quickly

as possible, most of that 34.5% into your
banking system.

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Money Growth in Your Banking System

The money that resides in the banking system can grow in
interesting ways.
1. It has to be growing in a tax-advantaged environment.
2. By using the power of velocity of money (described in
Chapter 8), we start making money work for us and get
higher returns.
3. We gain the opportunity to invest our personal cash (i.e., the
cash we have, not cash already in the banking system) that
we normally would have used to buy stuff. That cash can
now be invested.
4. The money residing in the banking system should be earning
money while sitting there (to be covered later).
5. Depending on the vehicle, you should be able to make a
small spread on that money in the banking system (more on
that to come later).

Setting up Your Banking System

Like any small business, your banking system will need to be
self-funded. Remember, it’s your personal financing source. The
money doesn’t magically appear there. You have to fund it with
your money.
So where does your money come from? There are several
sources. Many people have money lying around earning next to
nothing, such as a retirement account, savings accounts, CDs,
stocks, bonds, etc.
“But I need to invest my money to make money!” you say. The
obvious rejoinder is: Would you pay someone 6% when you’re
making only 1% on the same amount of money?
Take a look at this example.
Assume Bob (with the help of his wife, Julia) makes $100,000 in
income per year. As an average American, $34,500 of that is

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going toward paying interest. Bob might save as much as $5,000

by the end of the year.
Most people end up placing that $5,000 in a savings account or
CD at their local bank. Bob does the same and gets paid very little
in interest. Meanwhile, Bob (like most people) is paying 10% or
more on his other loans. So, instead of saving money or investing
that $5,000, Bob can use it to “buy” some of the $34,500—an
income stream.
He does that by placing the $5,000 in his banking system, then
using part of that to pay off existing loans, which effectively
transfers the loan from a third-party financial institution to his
banking system. Bob continues to make payments on the loans,
but the payments—part of his $34,500 worth of interest payments
—are now going into his banking system. It’s important to
recognize that Bob is not paying off his loan with that $5,000; he’s
essentially having his banking system buy the loan from the other
financial institution while continuing to receive the payments from
the borrower (himself).
Now, instead of earning a small return from a CD or savings
account, Bob’s banking system is earning the same interest rate
he was paying the other financial institution! If he had been paying
8% on the loan, then Bob’s banking system would receive that 8%.
Here’s what happens (refer to the three diagrams below). A
portion of that $34,500 in interest paid per year will start getting
redirected to Bob’s banking system. Notice how, over time, the
amount going to the third-party lender gets lower as the amount
going to Bob’s banking system gets higher.

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Figure 41: 1st day of your banking system.

34.5% still going to traditional bank.

Figure 42: End of 1st year of your banking system (example). A

portion has been redirected to your banking system.

Figure 43: End of 2nd year of your banking system (example).

A bigger portion has been redirected to your banking system.

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What Vehicle Should One Use for

Their Banking System?
The vehicle (refer to Chapter 9) has to have certain
characteristics, the most important of which is the tax-advantaged
environment. Let me expand on that again. You can run your
banking system from a tin can, a checking account, or any one of
many vehicles. However, it turns out that one of the ideal vehicles
is permanent insurance. Now, we’ve been conditioned to stay
away from certain life insurance; however, this is very different.
With permanent insurance, you have basically two options:
whole life and universal life. Both of these have two components,
called the “death benefit” and the “cash value” (or “cash surrender
value”). You can think of the death benefit as going toward
maximizing your death payout when you die. Think of the cash
value as somewhat like a savings account. When you buy
permanent insurance, the life insurance agent sets it up so that
most of the money you pay goes toward the death benefit and less
to the cash value.
Permanent Insurance

Death Benefit
Cash Value

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Figure 44: Two pieces of permanent insurance

The “typical” setup is to maximize the death benefit and

minimize the cash value. However, for our banking system, we
want it the other way around. We like the characteristics of the
cash value, which would work ideally for our banking system. So
we actually want to maximize the amount of money in the cash
value and minimize the death benefit.
Figure 45 below shows the allocated percentage of the
premium payment. In the “typical” setup, a higher percentage of
the payment goes toward the death benefit and a smaller
percentage toward the cash value. With the banking system, it’s
the other way. A higher percentage of the premium payment goes
toward the cash value and a smaller percentage toward the death
benefit.

“Typical” Setup “Banking System” Setup

Death Cash Death Cash

Benefit Value Benefit Value
Figure 45: Comparison of typical insurance setup and banking
system. The bars represent the allocation % of payments.

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The problem is that most insurance agents are not familiar with
how to set up everything correctly; there’s a lot to know and a lot
more to it. Make sure you find a competent insurance agent who
can support your plans correctly. For a list of potential insurance
agents, please refer to the Resources page at the back of this
book.

Find the right insurance agent to set up

your insurance for you. The wrong agent
can cost you a lot!

When you’ve set up the insurance policy, you fund it with the
intention of the money going toward the cash value. Once there,
you can start using it as a banking system. Let’s say that you now
have $50,000 in your banking system. That $50,000 will be
earning a decent return. As an example, let’s say your money is
earning 6%.
When you decide to borrow some of that money, you actually
don’t borrow your money; the insurance company lends you their
money that is secured by your money. So if you decide to borrow
$10,000, they’ll lend you that money at some interest rate, say 5%
for this example. Your $50,000 is still sitting in the cash-value
account earning 6% (in this example).

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“Banking System” Setup

Borrowed
money at
Your 5%
cash
in your
“banking Borrowed
system” Money
earning
6%

Cash
Value
Figure 46: Borrowed money from banking system is
secured by your money (the cash value)

In this example, you’re paying 5% on money earning 6%, giving

you a spread of 1%. You lend that money to yourself at 10%.
Instead of paying another financial institution, you now pay your
own banking system the 10%.
Let’s look at what’s going on in your banking system now. In
this example, the money residing there is growing at 6%, and it’s
receiving 10% from you as a borrower, and that borrowed money
is costing 5%. So all in all, the banking system is getting 10% +
6%—5% = 11%. That money is growing at 11% in a
taxadvantaged environment—in addition to getting the bonus of a
death benefit, just in case!

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“Banking System” Setup

Your
cash
in your
“banking
system”
earning
6%
Borrowed You
money at paying
5% back at
10%
Cash Borrowed
Value Money

Figure 47: Borrowed money from banking system is

secured by your money. The columns represent total
amounts (dollars).

Where else can you get 11% like this, knowing it’s growing in a
tax-advantaged environment? I can almost hear some people
saying, “But who would pay 10% and why?” Open your credit card
statement right now! Seriously, go ahead and open it. Most people
are paying at least 10% to other financial institutions. Some are
paying 12%, 18%, 24%, even as much as 30%! All we’re doing is
redirecting these payments to your own banking system. Think of
the banking system as doing a deal with yourself. It says to you,
“We will pay off your credit card, but we ask that you pay us
whatever you were paying them.” If you’re wondering why you
would pay your own banking system the same interest rate, it’s
simple. You have to start thinking like a banker. Stop thinking like
a consumer! Run your banking system like its own “bank.”
If you thought the 11% from the above example was exciting,
once you start using velocity of money, your banking system will

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start increasing its internal rate of return. All of that is more money
in your banking system.
For more information, refer to the Resources page in the back
of the book.

Review
Assume that your income is $100,000 per year. Now, consider
the following question:
How much would you pay to receive an income stream of
$34,500 of interest per year for the rest of your life?
That’s how much the lending institutions are getting every year
in interest—from your pockets (on average)—if you’re making
$100,000 a year. The banking system allows you to recapture that
income stream leaving your pocket today and redirect it into your
own banking system.
If you’re able to save $5,000 per year, don’t think, “What
interest rate can I get on my $5,000 savings?” Instead, think, “I
need to use this $5,000 to recapture some of that $34,500 in
interest I pay every year!”
First, you get your permanent life insurance policy as a banking
system. You fund it with your own money that’s lying around doing
very little. You start lending yourself money for purchases you
normally make and pay back your banking system, with interest,
just as you would any other financial institution. Over time, you
start paying less and less to third-party financial institutions and
more and more to your banking system.

Warning!
Your own banking system is a great way to build wealth.
However, be aware that getting this structured correctly is very
important. Also, be aware of the importance of the insurance agent
you select. I’ve not had good experience with insurance agents.
Many of them seem honest enough, but I still have had bad

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experiences. I can’t warn you enough against working with the

wrong individual. Many agents position themselves as experts with
banking systems, but please be careful. For example, I worked
with a couple of men from Utah that presented themselves as
experts with banking systems. Unfortunately, they proved to be
dishonest and the worst kind of individuals anyone could work
with. Please, do your due diligence.
Some “experts” are extreme advocates of using the banking
system for any and every loan. I disagree. For example, if you can
get an auto loan for 0% to buy a car, why would you use your
banking system to do that? Use the third-party financial institution.
Some of these “experts” insist on using your banking system to
buy the car loan and charging yourself a higher interest! They’re
not considering the opportunity cost. Just use common sense and
ask a lot of questions!
Your banking system can truly be a great wealth builder. Use it.

Frequently Asked Questions

Q: By being a banker, is Bob keeping more money in his
pocket at the end of the month?
A: Not necessarily. The same amount of money is going out
each month, but if Bob is clever and is allowing that money
to stay in his banking system, he doesn’t necessarily have
more buying power now. He needs to think of the banking
system as a separate entity, even though in truth, his money
is leaving one pocket and entering another. His banking
system is building wealth, but not for himself. At the end of it
all, Bob owns the banking system.
Q: By being a banker (in this context alone), is Bob
“bleeding” less money every month?
A: No, he’s living the same lifestyle with the same amount of
cash available to him.
Q: By being a banker, is Bob and his banking system one
and the same?

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A: Although this question is subjective, the best answer is

that Bob and his banking system are two different entities.
Bob is an individual, and his banking system is a separate
entity.
Q: Is Bob’s lifestyle any different (in the context of this
chapter)?
A: The only thing that has changed is that Bob can borrow
money from his banking system more easily because they
already have a relationship.
Q: What has changed since Bob started his banking
system?
A: The only thing that has changed is that Bob is borrowing
from his banking system rather than from another bank or
credit card lender.

“Doctor, that’s amazing! How much can one make in having

their own banking system?” I asked excitedly.
“Well, it depends on many factors: age, health, how often you
borrow the money, among other things. But here are some things
to think about. If you do this right, at your age…George, I can see
you making seven figures! And keep in mind, this is the same
money that you’re already paying to third-party lenders. We are
not talking about going out and investing. We are simply talking
about money that is leaving your pocket as we speak,” he said as
he pointed to my pocket with a smile.
I was blown away by this.
“So, can we use the banking system to lend money out to other
people, like you talked about before?” I asked.
“Absolutely. The key to remember is that you want to place your
own money in the banking system, not borrowed money. When
you end up lending money to yourself, it comes from your banking
system. When you lend money to others, it could come from one
of three sources: your banking system, your personal cash (not in
the banking system), and other people’s money.”

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I was starting to get [Link] Summary

• At the basic level, the banking system will recapture all of your
interest payments! You then grow your money in your “bank”
using velocity and compounding in a tax-advantaged
environment.
• Banking system is a method of finance.
• Traditional financing methods are:
– Leasing
– Borrowing
– Paying Cash
• Banking system is a fourth method.
• In the first three methods, you either lose money to the finance
source, or you lose the opportunity cost.

Refer to the Resources page for a free

bonus chapter with Dr. Jazz.

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 Chapter Thirteen

Let’s
Combine
Everything
“So, Dr. Jazz, I see how powerful being the bank is. So are you
saying you’re a banker? Or do you own a bank? Or for that matter,
are you a full-time lender?”
“No, George,” he laughed. “Let me ask you this. What are your
dreams in life?”
“Well. I have many, but the big one is this. A hundred years
from now, no one will know who most of the people that are alive
today are. Go to the cemetery and you see names from the past,
most of them unknown to anyone but family. But they all have
their stories; they all came and went. I want to enjoy the journey,
and most important, I want to leave something that makes this
world a little bit better because of my contribution. I wish I could
find a cure for cancer. I wish I could make every child happy. For
me, if someone a hundred years from now could say that I helped
in some way, I’d feel like I had made a difference, especially with
my family and generations to come. I want to help, in my own way,
open people’s eyes, help them to live a better life. I want to help
them understand this amazing information, help educate them
with all of this so they can have a better life. It’s really that simple,”
I laughed as I took a breath.
“But tell me, what are your dreams?” I asked Dr. Jazz as I tried
to change the subject.

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“George, those are great goals!” he said as he paused for a few

seconds. He was transfixed in thought, like he was analyzing what
I had just said.
“Well, George, going back to your question about me owning a
bank or being a full-time lender, here is what you need to know.
Life is more than just money. It’s about enjoying an incredible
journey through life. It’s about giving back, learning, and enjoying
it. The income from lending buys me the time to do so. It buys me
freedom of time to do whatever I want in my life. I know that some
people to whom I’ve passed this information used their time to
become teachers, to build businesses, or to run charities. When
you have enough money to live on, then you need to live! You
need to recognize that life is not about being a lender or being a
business person, life is about the journey.
“So, to answer your question, I’m not a banker or a full-time
private lender. I do not own banks, either. I simply make money
like a bank. I use the same strategies to generate passive income
while I give back to the world in my own way,” he said with a
smile, waiting for a reaction from me.
“How do you do that? How do you give back?” I questioned. He
laughed.

Let’s look at a typical day in the life of an established private

lender. Stella wakes up in the morning, excited about the
possibilities. As a single mom, she’s grateful she gets to fix
breakfast for her two children and then take them to school herself
—unlike the other single moms she knows.
She pours herself some tea and walks over to her laptop on the
coffee table where she left it the night before. She checks her e-
mail and reads a message from her broker about a loan request
from a potential borrower. It looks like a good deal, and this same
property buyer had borrowed private money from her in the past.
He purchased a $200,000 home less than 30 minutes from her
house for $150,000, and she had lent him $120,000 (60% LTV) for

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12%. She borrowed the money at 6%, and within eight months he
had paid her back.
She reviews the new loan request form filled out by her broker.
He’s already reviewed the loan and given his initial blessing, so
she decides to do the loan. She replies to the e-mail and informs
her broker she’s in for 50% of the loan request. She understands
that it’s better to distribute her risk. To minimize the risk, her goal
is to have a greater number of smaller, rather than larger, loans.
She’s taken the time to educate herself about private lending,
thinking like a lender and minimizing risk.
She takes a break and gets some exercise with a brisk walk
around the neighborhood, stopping to chat with her elderly
neighbor next door. She goes to her workshop in the backyard
when she gets home and works on her latest stained glass project.
After an hour or so, Stella goes back inside to check out the
news on the Internet. She logs into her bank account and notices
two smaller deposits—one for $82 and another for $352—that had
gone straight to her line of credit. She knows the money came
from two of the many loans she has, and smiles, knowing what
little work she had to do for that money. She recognizes that as
soon as this money comes in, she needs to lend it back out. It is,
after all, about keeping the money moving.
She had automated the task of finding borrowers, no longer
having to market for them. Her broker was sending her more than
enough! She had also automated the task of doing safer loans and
implemented several layers to minimize her risk. With the help of
her broker, she had developed her underwriting criteria and strictly
followed them. She made sure all her deals went through a
qualified broker who understood the process of qualifying loans
and shifting risks away from the lender. And she always made
sure the loan transactions and money went directly through the
local title company. She had built a great team and was educated
about the business.
She calls her friend, Sylvia, and they chat for awhile, agreeing
to meet for lunch at one of their favorite sushi restaurants. Sylvia is

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another private lender, and they take their time catching up,
sympathizing about the usual family issues, and discussing the
deals they’re doing and additional opportunities they’re working
on. They walk next door, and over their favorite ice cream, they
continue to plan their upcoming trip to Italy. Sylvia is helping Stella
learn Italian, and they laugh frequently at her expense.
Stella pays for their lunch with a card that’s paid for by her own
private banking system. She knows everybody spends money on
“liabilities,” but as long as her banking system is financing it all,
she’ll gladly pay it back with interest, making her system rich
without changing her spending.
They drive around the block to shop in the neighborhood mall
and bump into an old school friend of theirs, Kelly, laden with
shopping bags from a number of stores. Back in the day, Kelly
was the all-American girl, a cheerleader, part of the popular crowd
—you get the idea. Today it sure looked like she was a
shopaholic. Kelly had always lived extravagantly, and by all
appearances, most would think she was rich. Stella and Sylvia
hope their pity doesn’t show on their faces; Kelly doesn’t know that
her husband has called both of them requesting a loan, and they
realize that Kelly and her husband are living a lie. They live
paycheck to paycheck, have $67,000 of credit card debt, and are
barely making it. They’re the ideal consumers who work hard and
send their money to producers and lenders. Stella and Sylvia say
hello, spend a few minutes talking to Kelly, and continue with their
shopping.
Mid-afternoon, Stella receives a text message on her cell
phone, a timely reminder from her debt management software to
pay particular bills. She has her finances automated, so bills are
paid with a click of a button. Her debt management software lets
her know the ideal time to pay specific bills, and she can be
anywhere in the world to do that. She makes a mental note to pay
her bills when she gets back home.
On her way home, she decides to pass by one of the properties
she had lent money against. It’s in a nice upper-middle-class

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neighborhood. The owner (and borrower) is an executive in a

hightech company. She notices as she drives by that all the lights
are off in the house, and the husband and wife are both still at
work. They work long hours at demanding jobs while their kids are
with babysitters to pay for all the debts the parents have incurred.
Stella congratulates herself for taking the time to educate herself,
to adopt the banker’s mindset, and to create the life she always
dreamed of. She was setting the rules for the game most others
were playing, the ones stuck in the consumer trap. She
understood that being on the earning side of interest, especially
compound interest, was the best place to be. She decides to take
the kids out to their favorite restaurant to celebrate when she gets
home.
Later that evening over a glass of wine by the fire, Stella logs
into her automated bill-paying website. She sees that she has to
pay several bills. She pays them from her “wealth account” (her
line of credit), knowing that paying from that account is allowing
her to make her money work for her. She was tired of working
hard for her money and now realizes how amazing it is having her
money do the hard work instead. She also recognizes that her
“wealth account” is allowing her to pay off her debts fast!
Having quickly taken care of business, she spends time with her
children, helping them with their homework and playing a game of
Scrabble. They talk excitedly about the trip to Disneyland they’re
planning with their cousins and her sister, and Stella knows she’ll
need to borrow money for the trip. Her sister will also need to
borrow money on her credit card, but her cards are “maxed out,”
so she’ll have to call the credit card company and request an
increase in her limit.
Stella knows the lender she’s borrowing money from—herself—
the one she sees everyday in the mirror. She decides to lend
herself the money from her banking system and quickly prints a
promissory note for the amount, signs it, and files it. She also
prints a loan repayment worksheet and coupon book.

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She knows her money is growing in a tax-advantaged

environment. She has liquidity and controls her own “economy.”
She’s not dependent on the “real” economy like her sister, whose
request for a credit increase might be denied because of that
same economy. Only Stella can deny her own request; she is,
after all, the banker.
After the kids had been read to and were in bed, Stella’s friend,
Nate, arrives in her driveway with a brand-new Jaguar. The car
looks stunning, and Stella tells Nate exactly that. He’s very proud
of the beautiful leather interior and sunroof, and he has more
features to show her. She knows, though, that Nate has a
consumer’s mindset. He has to work harder now as an engineer to
make up for the higher car payments.
Stella would never buy a car like that by financing it with a
thirdparty lender. If her bank could finance it, and she had enough
money coming in from her borrowers every month, she might then
consider it.
Stella smiles and congratulates Nate, truly happy for him. She
knows that, unlike Nate, her mindset has shifted over the years
from the consumer’s to the banker’s mindset, recognizing
immediately how easy it would be to shift back to that consumer’s
mindset like Nate.
After another amazing day spent with loved ones and good
friends, great food and leisurely fun, Stella goes straight to bed
and rests stress-free. Stella understands that her borrowers are
paying for her lifestyle. She also made a commitment to herself
that anytime she wanted to buy “toys” (cars, vacation homes, high-
tech devices), she would have to lend herself more money and
have the borrowers’ interest payments pay for the bills.
Let’s look at Stella’s portfolio.
• Her money is growing exponentially in a tax-advantaged
environment. It’s also beating inflation.
• Being the banker allows Stella to generate passive income
and some level of liquidity.

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• She owns her primary residence, along with two rental

properties within a 30-minute drive. Both rental properties
were paid off from private money-lending payments and
have a 70% LTV HELOC (home equity line of credit) that
Stella uses to lend even more. The rent coming in is
$2,300 per month.
• In addition to the two rental properties, Stella has bought
two more rental properties using a strategy (taught by her
mentor) on minimizing the risk of rental properties. The
strategy involves spreading the risk among two or more
investors. Given that they thought like bankers and
understood how to minimize risk, Stella and the other
investor had purchased these properties as tenants-
incommon and had agreed to pay down the mortgage.
They had put no money down and, to pay down the
mortgage, they were using private lending money.
• What does her “savings account” look like? One of the
things that stands out is how the banker’s account is
different from that of someone who is “saving” money. This
is not a “forced” savings account. Let’s compare them.

SAVER BANKER
Mindset: “I need to ‘save’ money Mindset: “I need to ‘lend’ money to
and live below my means” live well”

Dead money Moving money

Bank account balance is higher Bank account balance is lower due

to money being “moving” and not
static
Making money on interest from bank Making money from lending money

Lending money to bank Borrowing money from “saver”

Money losing buying power due to Money gaining buying power due to
inflation returns beating inflation

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 LET’S COMBINE EVERYTHING

Works hard for their money Makes money work hard for them

No income stream Consistent cash flow coming in

Loss of a job can be devastating to Loss of job does not have a

savings due to lack of income devastating effect due to cash flow
stream
“I can afford to retire when I have “I can afford to retire when I have
saved enough money” enough cash flow to pay my bills”

“At retirement, I have to make sure I “At retirement, I have enough

do not live beyond my savings” income for as long as I live”

Pays down their mortgage to feel Uses the equity to generate cash
safer—but actually making lender flow and has borrowers pay down
safer and their equity riskier mortgages

Figure 48: The consumer’s mindset versus the banker’s mindset

• And maybe best of all: Stella has more time—and money
— to do what she enjoys.

“Why would you do anything else when you know you can
make more money, take the safer position in a deal, and have
someone else do all the work while they take on the riskier
position?” asked Dr. Jazz.
“George, banking is the greatest wealth-building strategy ever
invented,” he said confidently. “Enjoy life. You never know when
your time is up. You should look back on your life and say, ‘I lived
it!’”
“The truth is, George, it’s never about the money. It’s about the
life.”

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Chapter Summary
• Over time, private lenders start thinking very differently from
consumers or savers.
• A typical day in the life of an established private lender has
much more flexibility and freedom than that of more traditional
workers.
• Adopting a banker’s mindset can result in living the kind of life
many people dream of.
• Over time, private lenders start thinking very differently from
consumers or savers.

Refer to the Resources page for a free

bonus chapter with Dr. Jazz.

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 Chapter Fourteen

“I Want to Be a
Real Estate
Investor”
I called Dr. Jazz four days later. It was about 10 a.m.
“Good morning, Dr. Jazz. Is this a good time?” I asked.
“Good morning, George. How are you doing today?”
Dr. Jazz was a very proper man, particular about many things. I
had learned a lot about him in the short time I knew him. He
always wore a suit with a hat. He always walked everywhere. He
always spoke properly. He insisted on sitting properly and wanted
everybody else to sit properly, too. Shoes must be on the floor,
soles down. He had, on a number of occasions, asked me not to
put one foot over the other.
“I’m doing great, Doctor, thank you. I have a favor to ask. I’m
sitting with a friend of mine, and I was sharing with her what you
told me about lending. But she insists she wants to be a real
estate investor. I was wondering if you could help me change her
mind, please? Her name is Cara,” I said as I switched to
speakerphone.
“Good morning, Dr. Jazz. My name is Cara, and I’ve heard a lot
about you. George has shared so much information with me about
being a private lender, I can tell he’s been transformed. But I’m
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138
not convinced, and I was wondering why you would argue against
being a real estate investor instead?”
“Good to talk with you, Cara. If you want to be a real estate
investor, then I think you should be a real estate investor. I’m a big
advocate of real estate investors. I never said not to be one,
George,” he chided me.
“I thought you told me that being a private lender is the best
wealth strategy there is,” I stammered.
“George, what would happen if everyone out there were a
lender? You’d have no borrowers, and no one would make
money. You need to balance the ratio of lenders to borrowers to
consumers. Without that, you’d have a problem. So, by all means,
you should encourage Cara to be a real estate investor. They, too,
offer value to renters and other homeowners, and they profit from
it. In fact, real estate is one of the most important drivers for
economies, and we all need each other. This is a win-win-win
situation,” he concluded.

Private lenders need real estate investors, and real estate

investors need consumers who are looking for rental properties or
homes to buy. They also need private lenders. Real estate
brokers, appraisers, title companies, attorneys, insurance
companies, and many other businesses benefit from real estate
transactions.
Real estate can be a very profitable business; however,
mastering real estate investing is critical to success.
Understanding the differences between a private lender and a
real estate investor can be helpful. Let’s take a look.
Real estate investing has four profit centers:
• Cash flow
• Appreciation
• Paying down of the mortgage
• Tax benefits
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139
 Most investors rank cash flow as the number one reason they
buy real estate, followed by appreciation.
Let’s focus on cash flow first.
Income property is a property purchased for the purpose of
generating income by renting out units. You can have commercial
tenants or individual consumers. A good income property deal that
is performing will pay approximately 12% cash-on-cash return.
That’s a good-performing deal and does not include a distressed
property that needs major rehabilitation. With private lending, you
can make the 12% cash-on-cash return relatively easily. You don’t
have to look too far. But let’s keep going.
The down payment on an income property is the highest risk
position in which to put either your money or the money you
raised. Would you truly take $1,000,000 of your cash and put it in
a riskier position to make $10,000 per month, knowing that it is in
the riskiest position in real estate? Even worse, would you put
other people’s money in the riskiest position, knowing that they will
make, perhaps, $5,000 per month?
What if you could place your money, or the money raised, in a
safer position, and then pay your private lender more?
So far, we’ve discussed returns and risk. We said that the
returns between private lending and income properties are the
same. In fact, private lending can bring much better returns. As far
as the risk of the money is concerned, private lending can be a
much safer position than ownership of the income property.
Now let’s look at liquidity.
When you use your money (or other people’s money) as a
down payment on a performing property, the money is locked up
in that property for years, typically a minimum of five or more.
However, with private lending, the commitment can be for a
shorter term and is, therefore, relatively liquid. But you can also
borrow against it. (Another instance of hypothecation.) You can
pledge your note as collateral and borrow against it. This makes
the note much more liquid than a down payment.
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 As you can see, in all three areas—liquidity, returns, and safety
— private lending is better.
However, this is not to say that private lending is better than
owning properties. It turns out that a combination of both is ideal.
Owning properties has many advantages. In fact, property
ownership, if done right, is still one of the best wealth-builders.
Combining both private lending for cash flow and property
ownership for the four profit centers (listed above) is a better
portfolio than private lending alone.
In fact, one of the advanced strategies combines private lending
with property ownership, where the private lending payments pay
off the mortgages on the properties relatively quickly. And as
properties get paid, the equity is turned to HELOC (home equity
lines of credit) as a money source for more private lending. It’s not
uncommon for advanced private lenders to own several homes, all
paid off by borrowers from the private money loans.
The key point to remember is that private lending is the most
efficient passive income strategy in existence. By combining it with
other strategies, you start gaining the advantages of other
investment vehicles.
Which of the next scenarios would you prefer to have?
• Owning several rental properties, knowing that you might
have a few bad months and that you may be required to
provide additional capital (which you do not have).
• Or, have passive income coming in first, and then purchase
some rental properties knowing that if you ever have a few
bad months, you can cover them with the passive income.
Which would you prefer? It’s really that simple.

As I hung up the phone, Cara turned to me with a look on her

face like a deer caught in the headlights. Her mind was spinning.
She could say only one word:
“Wow!”
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 Chapter Summary
• Private lenders and real estate investors need each other.
• In terms of returns and cash flow, income properties and private
lending are similar. In fact, private lending can be more
profitable.
• In terms of safety, private lending is safer than property
ownership.
• In terms of liquidity, private lending can be more liquid than the
down payment for property ownership.
• A combination of private lending and owning properties is ideal.
• Advanced private lenders often own several homes, all paid off
by borrowers from the private money loans.

Refer to the Resources page for a free

bonus chapter with Dr. Jazz.

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 Chapter Fifteen

“I Want to Invest
in the Stock
Market”
Three days later, as I was driving down the freeway to San
Ramon, I decided to ask Dr. Jazz about the stock market. My wife
and many others believed the stock market to be a safe
investment vehicle.
“Dr. Jazz, I was talking to my wife about the banking concepts
you shared with me. I’m truly blown away by them, but my wife
feels we should stick to the stock market. What do you think of
that?” I asked.
“George, you can do whatever you want. I never give financial
advice to anyone; I simply share my knowledge and experience.
Investing in the stock market works well for some people. But
would you like my personal opinion on the matter?” he asked.
“Sure. Please tell me.”
“Well, it’s not going to be good. But here goes.”

The stock market is an interesting vehicle, but it’s probably not

exactly what you think it is.

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The Stock Market as a Zero-Sum Game

Do you believe playing poker is investing? If you said no, then
let me ask you this: Isn’t someone at the table making money by
investing a certain amount of money and enjoying returns after
playing the game? Doesn’t that sound like the stock market
“game”?
Nevertheless, poker is not investing; it’s a zero-sum game.
Consider a quote from the main character, Gordon Gecko, of
the 1987 movie Wall Street: “It’s not a question of enough, pal. It’s
a zero-sum game; somebody wins and somebody loses. Money
itself isn’t lost or made; it’s simply transferred from one perception
to another.” He was talking about the stock market!
Let’s imagine a poker game with three players. Each player has
10 chips (30 chips total). By the end of the game, one player ends
up with zero chips, another player has 28 chips, and the third
player has two chips. There are still only 30 chips in the game. No
chips appeared or disappeared. The chips were simply transferred
from one player to another. For the winner to win, someone else
had to lose. All of the chips that came into the game left the game.
This is called a “zero-sum game.”
The NASDAQ glossary gives the following definition of a
zerosum game:
A situation in which one participant’s gains result only from
another participant’s equivalent losses. The net change in
total wealth among participants is zero; the wealth is just
shifted from one to another.
Examples of zero-sum games include checkers, poker, and
gambling, in general. Another example of a zero-sum game is a
Ponzi scheme. In a Ponzi scheme, each “player” pays a fixed
amount to the player who recruits him. This new player then goes
out and recruits more players, and thus profits from their buy-in
payment. Every dollar that the early players take away from the
scheme is paid into the scheme by some other player. Who are
the losers? The last people to enter the game—when there are no

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more people to recruit—lose their entry fee. Meanwhile, their

losses exactly match the profits of the early adopters.
It turns out that the stock market is a zero-sum game, too.
Every dollar that some investor “wins” in a stock market
investment, some other investor lost. As Gecko observes in Wall
Street, money in the stock market is shifted from one person to
another. No wealth is created; it’s simply shifted.
Unlike in poker, however, people investing in the stock market
can’t tell if they’re winning or losing (except for brokerage fees,
which are pure losses) until they cash out. The stock brokerage
fees make the sum non-zero (negative). Many people argue that
the stock market is not a zero-sum game; they want you to believe
the sum is positive, but those brokerage fees actually make it
worse than zero. The broker is like the house in a casino, and the
house always wins.
It’s possible to argue that certain stocks pay dividends, making
the stock market a positive-sum game (a profit). I’m not including
this strategy in this discussion. Most people buy stock for trading;
i.e., buy low, pray it goes up, and sell. I’m also excluding dividend
investors, focusing instead on the investors seeking profits from
capital gains.
There are many commonly believed wrong assumptions about
the stock market. Let’s look at a few.

The Stock Market Creates Wealth

No dollar ever comes out of the market into an investor’s pocket
that didn’t first get into the market from some other investor’s
pocket. (Once again, in this case I’m excluding investors investing
for dividends.) The underlying companies whose stock is being
traded can create wealth, but none of that wealth ever shows up in
the stock market — unless the company buys back its own stock
and goes private. All transactions just move money from one
investor to another. No wealth is created or destroyed in the
process, except for the brokerage fees. Money is simply

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transferred. So the stock market does not create wealth; it simply

shifts wealth.

Total Market Capitalization Increases

This has nothing to do with whether or not the market is a
zerosum game. Imagine 20 games of poker, with four to six
players in each game, and all the money adding up to $1,000,000.
Now imagine that the games were augmented with an additional
sum of $200,000, bringing the total of all money in the games to
$1,200,000. Does it mean poker is not a zero-sum game?
This same argument applies to the stock market. More people
joining the game or adding more money to the game doesn’t make
the stock market a positive-sum game. Each company is still a
zero-sum game, and the sum of many zero-sum games is still
zero. The size of the pot on the table during one hand is irrelevant
to the question of whether the winnings of the winners equal the
losses of the losers.

This Magazine (or Book) Said the Stock

Market is a Good Place to
Invest
Who are the advertisers in the magazine? Do you think they’d
pay to advertise if the magazine promoted information contrary to
their interests? What companies are behind the publishers of that
magazine? It’s probably some financial institution. What about all
those books? Who are the publishers? My first book on investing
was called Guide to Understanding of Money and Investing and
was published by The Wall Street Journal! It should be no surprise
what The Wall Street Journal wants to promote.
To sum up, you’re not investing in the stock market, you’re
speculating. The investment community has long used smoke and
mirrors to make you think you’re investing.

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Professor Lawrence Harris, chairman of the Department of

Finance at the University of Southern California and chief
economist of the Securities and Exchange Commission (SEC),
explains it best in his paper “The Winners and Losers of the Zero-
Sum Game.”
Professor Harris provides an unbiased opinion about the losers.
He admits they are necessary for the market to function efficiently;
the market will not function efficiently without the typical buy-
andhold stock investor!
Another good read on this topic is the book Trading for a Living
by Dr. Alexander Elder, considered the “bible” of trading. The
author shares his experience as a professional trader and claims
that markets are created for most traders to lose money. He says,
“The trading industry keeps draining huge amounts of money from
the markets… Markets need a fresh supply of losers… Losers
bring money into the markets, which are necessary for the
prosperity of the trading industry.” Dr. Elder calls the stock market
a “minussum game,” where winners gain less than losers lose
because the industry takes money from the market to pay the fees
for dealers and brokers. Dr. Elder thinks that being better than
average is not enough; you need to be better than the crowd
playing in the stock market to win a minus-sum game.
Now that you know you’re essentially playing poker with other
players, ask yourself this: Against whom are you playing? Many
investors simply buy and hold stocks, while the financial
institutions hire the best full-time traders to compete against them.
Even more disturbing is the fact that institutions are automating
the trading with computers using very sophisticated algorithms that
trade superfast. So the average investor is now competing with
computers, along with some of the best stock traders in the world!
Am I suggesting not investing in the stock market? No, but I am
suggesting that you need to open your eyes and be aware of the
reality. We are constantly bombarded by financial institutions
encouraging us to invest their way—we assume the risk and they
make the money. This type of investing has become conventional

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wisdom, because the financial institutions have done a great job of

“educating” us through their sponsored magazines, books, and
television programs.

Stock Market Lies

We just exposed the stock market as a minus-sum game,
essentially a big casino. It gets worse when we look at the
numbers we’re being fed by the stock brokers.
“Don’t believe everything you hear or see.” True for politics, but
also for the financial sector. The fact is, when it comes to power
and money, it’s best to keep a healthy distrust of “specialists.”
They all make money from our mistakes, aware that the average
individual without the right specialized knowledge can’t verify what
they sell as the unqualified truth.
Let’s consider this financial “fact” (using the word loosely):
“Statistically, the stock market provides a consistent profit of
10.4%.” In fact, it doesn’t, even if you hope to invest for 76 years in
the stock market index, the only assumption under which this
return is mathematically possible. It’s become the norm for
potential profits to be exaggerated (a lot), when typically we don’t
see any profits at all.
For example, let’s say I invest $20,000 in a mutual fund that has
an estimated 10% return. In the first year, I enjoy a 100% positive
rate of return, so I have $40,000 in my brokerage account. In the
second year, the market drops 50%, bringing me back to my initial
$20,000. The third year brings another 100% rate of returns, and
again I have $40,000. However, year four brings another 50%
decline, and I get back to my $20,000.

$20,000 INVESTMENT PLACED IN MUTUAL FUND FOR 4 YEARS

YEAR % RETURN $ RETURN

1 +100 $40,000
2 -50 $20,000
3 +100 $40,000

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4 -50 $20,000

AVERAGE RETURN: +25%

YIELD: 0%

Figure 49: $20,000 in mutual fund performance outline over 4 years.

Notice “average return” versus “yield.”

In this scenario, the mutual fund proudly announces a 25%

average return, when, in fact, the actual yield is 0%. In the real
world, the returns would be negative if we take into account all the
variables such as inflation, taxes, fund expenses (the fund gets
paid no matter what returns it brings), and lost opportunity costs.
Let’s sum up the reality here. When investment money is lost in
a bad year, the financial institutions continue to show supposed
results of investment performance in the long run to prove that
you’ll make a positive return when all is said and done. Most are
seriously lucky if they didn’t lose any money. No matter how hard
you work and how much you save, if you invest in the stock
market, you’ll probably be worse off than you were before you got
in. Your money is paying for the salaries and bonuses of endless
financial advisors, bankers, brokers, and many more individuals
living off your losses. This means you probably can’t retire in the
lifestyle to which you would like to become accustomed—or even
become financially stable!
Here’s a typical scenario. A young couple decides to open a
new brokerage account. They’re excited about their new life
together, and they were told to start a brokerage account. They
visit their local brokerage office with $20,000 to invest. They meet
with a stockbroker (a salesperson), and are told they can expect
an average return of 10% per year. The couple scribbles furiously
on a piece of paper as they discuss what they just heard. Example
one shows what they calculated (and is, in fact, exactly what most
people expect):

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Example 1: Positive Returns

$20,000 INVESTMENT PLACED IN MUTUAL FUND FOR 4 YEARS
YEAR % RETURN $ RETURN

0
0 $20,000

1 10% $22,000
2 10% $24,200
3 10% $26,620
4 10% $29,282

AVERAGE RETURN: +10%

ACTUAL YIELD: $9,282

Figure 50: $20,000 in mutual fund performance with

positive returns

Examples two and three will show you what they aren’t told.
Both of these generate an average return of 10% per year as well,
although the couple really lost money with example three and only
broke even with example two!
In fact, it doesn’t matter whether you gain, break even, or lose
money; your broker tells you your average return is 10%. It
happens because averages are not a good estimator of real profit.
But you can determine the actual yield with the simple formula:
returns at the final year minus initial investment.
In example one, the annual yield was calculated at $9,282. The
following charts show the performance of $20,000 invested over
four years. All of them have an average return of 10% as well, but
only one of them actually brings positive returns. This means that
two out of three individuals get fooled into thinking they actually
earned money investing in a mutual fund.

Example 2: Zero Returns

$20,000 INVESTMENT PLACED IN MUTUAL FUND FOR 4 YEARS

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YEAR % RETURN $ RETURN

0
0 $20,000

1 58% $31,620
2 -37% $20,000
3 54% $30,701
4 -35% $20,000

AVERAGE RETURN: +10%

ACTUAL YIELD: $0

Figure 51: $20,000 in mutual fund performance with zero returns.

Notice “average return” versus “yield.”

Example 3: Negative Returns

$20,000 INVESTMENT PLACED IN MUTUAL FUND FOR 4 YEARS
YEAR % RETURN $ RETURN

0
0 $20,000

1 150% $50,000
2 -20% $40,000
3 -25% $30,000
4 -65% $10,500

AVERAGE RETURN: +10%

ACTUAL YIELD: -$9,500

Figure 52: $20,000 in mutual fund performance with

negative returns
Another way to assess the real returns on stock market
investments is using the compound annual growth rate (CAGR),
the year-over-year growth rate of an investment over a specified
period of time.

Open Your Eyes!

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 “I WANT TO INVEST IN THE STOCK MARKET”

I’m not saying the stock market is bad. It has its place in the
investing world. However, let’s step back and consider the mantra
my mentor keeps repeating: “Follow the money!”
Who’s really making money from the stock market? Is it the
individuals investing in this “poker” game, or is it the casino?
Who’s the “casino” in this case? The financial institutions—the
bankers—referred to as “shadow banks!” They make money no
matter what happens to the market, whether it goes up or down,
from various money management fees and other charges.
We’re back to the bankers, still building wealth from our
hardearned money. Remember that bankers like to make money
as safely as possible. The stock market provides another perfect
vehicle for them. Consider the following questions:
• Do the bankers make fees every time a stock trade is done,
whether the trade goes up or down? The answer is yes. And
who takes the risk? Answer: the investor. Not the banker!
• Who makes money with mutual or hedge funds, managing
consumers’ money, whether the funds go up or down?
Answer: the fund manager and the financial institution
(shadow bank) they work for.
• Who takes the risk? Answer: the investors.
When investors invest in a hedge fund, they are typically
charged a “2-20”—which means 2% of the assets under
management (2% of the total money being managed) and 20% of
the profit from the fund. So, for example, if a fund is $1,000,000
and that went up 8% to $1,080,000, the fund would charge as
follows:
2% x $1,080,000 = $21,600
20% x $80,000 = $16,000
That equates to $21,600 + $16,000 = $37,600.
That might not seem like a lot. But let’s look at it more closely.
The fund made $80,000: $37,600 went to the financial institution,

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and you kept the remaining $42,400. So you invested $1,000,000

and received a 4.24% return.
Let’s step back and consider this again.

DESCRIPTION BANKER INVESTOR

Risk
(Who is risking none 100%
their money?)
Amount Invested $0 $1,000,000

Profit Sharing ($) $37,600 $42,400

Profit Sharing (%) 47% of profit 53% of profit

Figure 53: Risk analysis of investment

In this example, the investor risks 100% of their money to get a

little bit over half of the profit; the banker keeps the other half. And,
in this situation, the fund actually makes money. Guess what
happens if the fund doesn’t make money? Yep, you guessed it!
The investor loses their money, but the banker still makes their
money by charging the 2% fees.
So, clearly, the shadow banks want us to invest in the stock
market.
Having said that, one can use some elegant ways to invest
wisely in the stock market. As with any advanced financing
strategy, I strongly recommend that you get the right education
before following any investing path.
To summarize, don’t accept things at face value when it comes
to the stock market and mutual funds.
Dr. Jazz adjusted his hat as we walked. “So, George, what’s
the fastest way to end up with a million dollars in the stock
market?” he asked. Not waiting for an answer, he added: “Start
with two million dollars.”

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 “I WANT TO INVEST IN THE STOCK MARKET”

I chuckled before asking, “Doctor, you talked about shadow

banks, and you haven’t mentioned them before. How many types
of banks are there?” I asked curiously.
“Well, there are three types of banks. There’s the corner bank,
which is the neighborhood bank most people go to for their weekly
deposits and withdrawals. This is the bank we all think about when
we hear the word ‘bank.’ But there are two other types, as well.
The first, a shadow bank, doesn’t take direct deposits like your
corner bank. Instead, they run hedge funds, money market funds,
and structured investment vehicles. Many of the exotic investment
vehicles you hear about in the news, such as mortgage-backed
securities, happen within shadow banks. The third type is the
central bank, which is the banks’ bank. For example, the Federal
Reserve of the United States is a central bank. They manage the
creation of a nation’s money supply and lend money to banks and
other financial institutions. Many think of central banks as
government agencies. They’re not. They’re controlled by the
richest families in the world. They are powerful bankers.”
That afternoon, as I drove back home, I realized I was tapping
into some extremely potent information. Dr. Jazz had told me that
some of the strategies I was learning, or would eventually learn,
from his wonderful manuscript were the same strategies that all
three types of banks use. I was very excited and a little nervous.
This was all new to me, and I had the feeling the doctor was
leading up to something big.
The next morning, I decided to visit my mentor and talk to him
about my experiences with Dr. Jazz.
Instead of talking, though, he gave me more homework.

Chapter Summary
• The stock market is a minus-sum game.
• You’re competing with the best of the best and with very fast
computers.

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• The stock market doesn’t create wealth; it simply transfers

wealth from one to another.
• The way returns are calculated in the stock market is not what
you would expect and is not dependable.
• Financial institutions that are involved in the stock market shift
risk to the people. These same financial institutions are known
as shadow banks. They profit from our risks.
• If you’re going to trade stocks, it’s important to spend time
educating yourself how to do it right.

Refer to the Resources page for a free

bonus chapter with Dr. Jazz.

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 Chapter Sixteen

Build Your Team

My mentor leaned toward me and said, “I have good news and I
have bad news. Which one do you want to hear first?”
“Uh-oh! That doesn’t sound good. Let’s start with the bad
news,” I muttered.
“It’s time to build your team, George. Dr. Jazz has shared some
great information with you, but I want you to go ahead and focus
on this, first,” he said.
“What’s so bad about that?” I asked curiously.
“Well,” he laughed, “that’s actually the good news, George. The
bad news is, now you have to start filtering out the trash from the
good. You have to figure out who’s a good partner and who’s out
to hurt you. That’s tough. That’s the bad news. However, your
team will also shape your life. I don’t expect you to understand this
for many years, yet,” he said somberly, and I felt the depth his
statement carried.
He bent his head and wrote down a few things on a piece of
paper. It felt like a doctor’s prescription as he placed it in my hand.
The note included a simple, numbered list—the team members I
needed to go out and find.

Here was my first assignment on the list.

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1. Find the five most active real estate

investors in the San Francisco Bay
Area.
I firmly believed that if I focused on this strongly enough, the five
would jump out at me. It’s like when you decide to buy a specific
car, you start noticing it everywhere.
Active Investor No. 1: Melvin
One day, three weeks after my meeting with my mentor, I was
driving in downtown San Jose on Virginia Avenue to look at a
property I was considering buying. As I drove by all the smaller,
older homes, one house stood out. The house was fixed up, it had
new paint, a beautiful and clean front yard with a new “For Sale”
sign staked in the middle, and a nice Porsche parked in front. It
looked interesting. The front door was open, and I could tell the
house was newly remodeled. It looked like an investor had bought
it, remodeled it, and was about to sell it. I continued driving down
the street.
My mind was racing, “What do I have to lose? What if I’m right,
and this investor, this person, could be one of the five people I’m
supposed to meet? I’ll never know if I keep driving. I have nothing
to lose,” I thought.
I made a U-turn, headed back to the house, and parked my car
behind the Porsche. I walked up the front path and then stepped
through the front door…
“Hello. Anyone here?” I yelled as the sound echoed off the
empty walls. I felt uncomfortable. What the heck was I doing in
here?
“Yes, can I help you?” I heard a voice, and a man walked out
from the kitchen with some electrical wires dangling from his
hands.
It looked like he was fixing some electrical problem.

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He looked friendly enough and reached out to shake my hand.

The man was a slender African American and about 5’9” tall, with
a slight mustache and short hair. He wore shorts and a T-shirt.
I was nervous and started questioning myself. What am I doing
here? Why am I bothering this guy? Finally, I found my voice.
“I was driving through the area and noticed this house. It looks
great, a really excellent job. I assume you’re the owner?” I said as
I shook his hand.
“Yes, thank you. I’m selling it, also. Are you interested?” he
chuckled.
“Well, actually, no, not really. I was so impressed by the work,
though, I wanted to meet whoever did this. I do the same thing—I
buy homes, fix them up, and sell them. And you’ve done such a
good job here. Can I take a look around?” I asked.
I was too unsure of myself to just blurt out that I was a private
lender—since I had never done a loan with anyone! Yet this is
exactly what my mentor had told me. He said I needed to start
introducing myself as a private lender, and that would be awkward
at first. He was right.
As we toured the house, we chatted. I didn’t know it then, but
before long we would become good friends. Melvin is methodical
in his work and a very intelligent man, working as a successful
investor, mainly on high-end homes. I also learned that he’s a
fulltime firefighter.
“What do you do?” he asked.
“Actually, I’m a private lender. I lend money to real estate
investors,” I said. I sighed inwardly and thought, “There, I did it.”
But I felt like a fake. I had never done a private loan, but my
mentor’s words kept echoing in my mind. “You’re a private lender
now!” He had promised that the time would soon come when I
would not feel like a fish out of water. And it did…
Melvin would be the first of dozens of investors I would lend
money to.

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I had my first investor…my first team member…DONE!

Active Investor No. 2: Gary
My phone was ringing, and I rushed from my bedroom to my
office, 20 feet away, to pick it up.
A man named Gary introduced himself and said that two ladies
had suggested he give me a call. (I had completed many private
lending deals by this point, and my name was getting out there.)
Apparently, he had asked them for the name of the most honest
and ethical investor they knew, and they had referred him to me. I
was both honored and embarrassed, but it was nice to know
people saw that in me.
“How can I help you?” I asked Gary.
He had called for some advice. We chatted for more than 90
minutes, and I realized this guy was pretty smart. He was a “go-
getter.” I’m not easily impressed with the type, but this guy was
different.
During the course of our conversation, I discovered we had both
been students at University of California, Davis, at the same time,
had the same major, and had been in the same classes, but didn’t
remember each other. Why not? Because we had only
occasionally shown up for class. I was working on an online
gaming project to sell to CompuServe (an online company in the
1990s) at a time when no one else had online animated games,
and Gary was doing his own thing.
I also discovered that this man had all the skills and knowledge
of a successful marketer and real estate investor. Little did I know
he would eventually become one of the most successful investors
in the area as well as the founder of the country’s largest
directresponse marketing company for real estate investors. As
fate would have it, I would end up making some great money from
a private loan with him months later, and years later we would end
up business partners.
I had my second investor!

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The process actually turned out to be easier than I had

anticipated, and over the years I would find many other borrowers.

2. My second assignment: find an

attorney familiar with laws related to
raising capital and capable of keeping
me in compliance with those laws.
Where would I find this individual? I kept focusing on that. I
interviewed many attorneys and learned a variety of things from
them. I paid hundreds of dollars for their hourly rates, but it was
some of the best money I had ever invested, money I would
recoup many times over. Eventually, in 2005, I found my attorney.
As I turned the pages of a catalog of classes taught in the area,
I came across a listing for a class about raising capital. The
catalog description suggested that the class was what I was
looking for, and the instructor—Jack—was the man I was told to
look for. He had raised money through various funds for his real
estate deals.
“Oh, no!” The class was starting in about an hour, I was in San
Jose, and the class was being held in San Francisco, about an
hour away. This was it; I had to go! I let my wife know where I was
headed (she thought I was nuts for going!), and off I went.
I walked into the class 10 minutes late. As I walked through the
door at the back of the classroom, up front I spotted a tall, slender
guy (about 6’6”) in his early 30s. He was teaching the class of
about 18 students.
“Can I help you?” asked the man I assumed was Jack.
I’m not normally a joker, but it was one of those strange days,
and I felt like cracking a joke.
“I’m here for the adult entertainment class, something about
pole dancing and filming,” I said with as straight a face as
possible.

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I had no idea what I was saying, but I was going to see this
through.
Everyone in the room turned to look at me, and the man I
assumed correctly to be Jack blushed immediately and
uncomfortably. With a bright red face, he stammered, “Uh…I’m
sorry, but I think you have the wrong class.”
“What class is this?” I asked.
“This class is about raising capital for investors,” he said, feeling
embarrassed for me.
“Yep. This is exactly the class I was looking for,” I said with a
mischievous smile. Everyone laughed, and I was relieved the joke
went okay; otherwise, it could have gone downhill pretty quickly.
In spite of my rather disruptive wisecracking arrival, Jack would
eventually agree to introduce me to raising capital. Over time, I
learned a lot from Jack.

3. My third assignment: find

three hard-money brokers.
Hard-Money Broker No. 1: Jim
Walking down the stairs from my office toward the restroom, I
bumped into a tall man with white hair. He was well dressed and
seemed to be a friendly guy with an affable smile. I had seen him
around the business building in which I leased an office.
“Hello. How are you?” I asked cordially as I passed, not
expecting anything more than a simple reply. He responded kindly
in turn, and we walked in and out of the restroom at the same
time. We chuckled about that as we continued our conversation.
“By the way, my name is George. I’m in suite 211,” I said as I
extended my hand (washed, by the way).
“Jim,” he said as we shook hands.
“What do you do, Jim?” I asked.

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He was a hard-money broker, with years of experience. Wow!

What are the chances! We agreed to have lunch soon. Jim would,
over time, teach me a lot about lending from the broker’s
perspective.
I had found my first hard-money broker!
Hard-Money Broker No. 2: Bob
I had searched online for another hard-money broker and found
one named Bob, but I was hesitating, too nervous to call. What if I
sounded like an idiot? Who am I to talk to these people?
Once again I asked myself, “What do I have to lose?” So I
picked up the phone and called Bob. We discussed what he does
as a broker and eventually met for lunch.
Bob was an older, down-to-earth, very kind man. He had been
an extremely successful businessman and real estate investor
(clearly intelligent) in his younger years, and we clicked
immediately. He was retired and enjoyed dabbling in private
money, and before long we were meeting regularly—once a
quarter or so—at a Chili’s restaurant in Cupertino. It was always a
joy to talk to this man with so much experience, and little did I
realize that Bob would teach me so much about private money
lending as well. I had my second hard-money broker! In fact,
before long I had assembled my team of hard-money brokers, and
they were ready to go.

4. My fourth assignment:
find an escrow service.
I had closed real estate deals with several title companies, and so
I decided to talk to them about my lending plans and about some
of the creative things I had learned.
For instance, I had learned that, unfortunately, very few people
wanted to handle anything outside the norm. Their norm was
simple purchase and refinance transactions.

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But I had in mind transactions that were slightly different, and I

was frustrated that no one was even willing to listen.
Escrowservice companies hire staff to handle their “normal”
transactions; I needed to connect directly with the branch
managers, the ones with 10 to 20 years of experience. They would
understand what I was trying to do.
And so I ended up finding a lady named Mary Jane to handle
some of my transactions. MJ was an amazing woman with the
friendliest of faces; she always had a smile. I knew I could depend
on her for guidance and her willingness to handle complicated
escrows. Together, we would learn a lot. I had my escrow person
in place!

5. My fifth assignment: find the

best coach on the planet.
My fifth assignment was the toughest. I found that there were
many coaches. In fact, it seemed that everyone called themselves
a coach. I wasn’t even sure what a coach was supposed to be, or
do, for that matter. I just knew that many of the most successful
individuals had coaches. Tiger Woods had a coach, Michael
Jordan had a coach, and so did many others.
I recall my mentor saying, “A coach sees the potential in you
that you don’t yet see in yourself.”
I tried working with many coaches, but none really worked out.
They just didn’t seem to click. My mentor always reminded me that
a coach “would push me to the limits, where I would come close to
hating them, but that I would come through a muchmore-
successful person. A coach is not your friend. A coach will change
your life. Coaches will push you more than anyone else will
because they believe in you more than you believe in yourself.” I
wanted that.
Eventually, several years later, I would find that person. He was
a well-known and respected man named Willie Hooks. But when I
first met him, it wasn’t obvious he would be the man.

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I walked into a meeting on the 9th floor of a nice building in

Walnut Creek a few minutes late. Except for one gentleman with a
serious look on his face, I knew everyone there, including Gary
(my UC Davis classmate). We all exchanged pleasantries, and I
was introduced to Willie Hooks as we all sat down.
After much discussion about some of the things we were
working on, I noticed this fellow was a man of few words. He
seemed to be observing and listening. He didn’t say much, but the
little he said seemed to carry a lot of wisdom.
After several such meetings, I could see that this very wise man
had what it took to succeed. And he knew how to help others
succeed as well. He had made more millionaires than any other
person I had known, and he would eventually become my coach!
I had gone through a lot of coaches, but this was the one. Now I
was ready.
I had built a team that most people would envy. During the time
I was building my team, I had begun private lending. At last it was
time to really rock and roll!

“I cannot stress enough the importance of having the right

partners in your life. A wrong partner can devastate you, while the
right partner can take you to new heights,” continued my mentor.
“Look at the times where just one principal affected the lives of
everyone in the firm. There are so many stories where one of
these individuals stole or embezzled money, made foolish
decisions, or behaved irresponsibly, negatively affecting the
reputation and integrity of every individual in the company. Make
sure you don’t underestimate the significance of what I’m telling
you,” he said sternly.
He continued, and I listened, believing that nothing like this
would ever happen to me. Little did I know that, many years later,
the same horrible thing would happen to me. It would be a hard
and painful lesson.
My mentor’s advice about building a team changed my life. I
made my share of bad choices along the way, but I also made

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some very good choices. Through dedication and searching, I

learned what my mentor’s intention was. Building a team is a
journey. It’s a part of your wealth life. Individuals we meet during
childhood and beyond, throughout our life—the good ones and the
bad—leave their marks on us. They all help to make us who we
are today.
With this team, I would go on to build my wealth. Over the
years, the team transformed. Some ended up being friends, some
I learned a lot from, others would make me money, while others
would guide me. Along the way they all contributed to my eventual
success.
To them, I say this: Thank you for being part of my life and
success. I’m happy and grateful to call you friends. You have
shaped my life.
I wondered what Dr. Jazz would think of my thoughts.

Chapter
Summary
• Find five, active real estate investors in the area.
• Find an expert in raising capital and have them teach you how to
do it.
• Find three hard-money brokers.
• Find an escrow company.
• Find a great coach.
• Finally, make sure to get the right training.

Refer to the Resources page for a free

bonus chapter with Dr. Jazz.

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Chapter Seventeen

Leaving a Legacy
Dr. Jazz slowly opened the manuscript to a page with a diagram
that looked like a flowchart or family tree. The title at the very top
of the page said, “Leaving a Legacy,” and was subtitled, “Passing
It to the Next Generation.”
“George, I want you to think about something. Did you know
that the wealth most people work hard to accumulate—once it’s
passed on to their children—is gone within two generations?
“Yet, there are certain families that have had ancestral wealth
for many generations,” he continued. “There are several reasons
for that, but it’s important you realize that you have to address that
issue early on,” he said.
I was just interested in putting these concepts to use. I wasn’t
even thinking about my grandchildren yet; my oldest child was
barely a teenager at the time! But I decided to keep listening. After
all, this man was full of wisdom.
“And with banking, it’s easier than you think to pass these
lessons to the next generation.
“It’s believed that the Rothschilds, the greatest banking dynasty
the world has ever known, meet once a year, continuing to pass
their knowledge and experience onto the next generation. They
educate the younger ones, never giving them money, always
lending it to them, helping to ensure that their legacy continues,”
said the doctor.
At first this made no sense to me until I saw it all explained in
the manuscript. He smiled at me and pointed to the open page.

168
 “Have patience and it will all make more sense. I followed the
same principles. For example, when my children began their
schooling, I lent them the money, and they had to pay it back just
as they would any other student loan. At first, my wife was mad at
me…”
I couldn’t believe what I was hearing and interrupted him,
“Doctor, I would be, too! They’re your kids, and I think you should
consider giving them the money for their schooling, not lending it
to them. Where’s the love?” I asked.
He paused for a few moments and just stared at me. The
silence was deafening!
Then he smiled, and I felt better. He continued, “George, that’s
the consumer thinking. I want you to see the banker’s side. Is that
okay with you?” he asked me sarcastically.
“I’ll repeat myself,” he chided and then continued. “When my
children began their schooling, I lent them the money, using my
banking system. They had to pay it back, just as they would any
other loan. At first, my wife was mad at me, but when I explained it
to her, she understood. Here’s what I said to her.
“Whose money is it in the long run? It’s theirs, my children’s.
After I’m gone, all of that money is theirs. But by lending it to them,
I’m passing on the lessons of being the lender. They’re learning
that this money should always be lent and never taken out. If this
lesson is taught early to the young, it becomes part of their reality.
So they, too, will pass these lessons to the next generation, while
LEAVING A LEGACY

their money continues to grow, once again ready to be passed to

future generations.
“Consumers have been conditioned to believe that money in a
piggy bank must be saved and then used to buy something. In
reality, money in a piggy bank must always be borrowed and paid
back with interest. That’s how lessons are learned and wealth is
accumulated for future generations. By lending them money for

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the big purchases, like cars, schooling, and the like, we’re
teaching real-life lessons they’ll never forget.
“This is the best gift you can give your children. That’s why I
believe the Rothschilds are still so dominant,” Dr. Jazz concluded.
The more he spoke, the more I wished I had never opened my
mouth. I was wrong yet again, and I came to the realization that
many times we say things simply to justify our position instead of
listening and being open to new ideas.
“What else would one lend money to their children for?” I
asked. “You talked a little about schooling and cars. What else?” I
was pretty sure I understood, but I wanted to be sure.
“Well, most people buy a car every five years. If your children
start at the age of 20, following that pattern they will have
purchased nine cars by the time they’re 65. Those purchases, by
themselves, if handled correctly with a banking system, could
produce results in the high six to low seven figures! Imagine,
being able to do that for your three kids!
“Next, consider their schooling. Same methods, similar results.
Furthermore, they’ll probably have to rent living quarters at some
point. You can lend them the rent money, and if they rent for
seven years, paying $1,000 a month…well, that will be a very big
number. Of course, they’ll probably want furniture loans and loans
for their pricey electronic toys and other expensive things that
people buy. And one day, when they start their business, they’ll
need loans for equipment and to cover other expenses. These
alone could put seven figures into your banking system that you
can pass along to them.” At this point he stopped and looked at
me keenly.
My mouth dropped! Why didn’t my father know about this and
lend me the money for my school?
I was finally beginning to see things from the banker’s
perspective and understand why they think so differently from
consumers and producers. And more important, I understood how
they make money, keep it, and pass it on to the next generation.

170
 Dr. Jazz chuckled and patted me gently on the back as he went
on to explain how he uses certain entities to manage his wealth
for tax benefits, helping his children and charities capture the
wealth with as little tax burdens as possible.
That evening I shared this information with my wife and found
myself understanding it more and more. Banking is much more
than making money. It’s a major shift in mindset. Bankers just
think differently.
It’s about making money in a safer position, using finance
strategies to increase yields (return), and simply thinking
differently. It’s about adopting the mindset and the rules of the
banker. I recognized that becoming the banker wouldn’t be easy,
but I knew that the persistent ones are the ones earning their
stripes.
The most important thing Dr. Jazz had said to me was this:
“Most people spend their lives searching for a path to follow. Many
find a path too late, and many others simply never find a path.
Now that you know the path, assuming you want to be the lender,
you’re way ahead of most people. Dedicate your life to following
that path and ultimately mastering that skill, for most people are
simply lost and still searching. The information I have shared with
you, George, has allowed you to gain a lifetime of lessons.
Commit to it, recognize there will be challenges along the way,
accept them, and move forward. Making that firm decision of
being the lender and committing to it is 50% of the challenge. Go
out and prosper.”
Dr. Jazz had convinced me that I wanted to be a private lender.
In fact, later that evening, I got a call about some of the rental
properties I had purchased years ago in another state. One
property
LEAVING A LEGACY

had been vandalized and another needed a new roof. That news
made me realize that I really wanted to be a private lender!

171
 THE BANKER’S CODE
Early the next morning my cell phone rang, cruelly awakening
me.
It was my mentor. “George, I’m sorry for calling so early and
waking you, but I have some bad news.”
He had never called me this early before.
“Dr. Jazz has passed away. He went to bed last night and
never woke up. This is terrible news, just horrible. He was such a
great man,” sobbed my mentor.
I fought the tears in my eyes as I sank slowly back onto the
bed.

Chapter Summary
• Consider how financially important it is that you teach your
children to think like bankers. Begin by lending them money that
will ultimately belong to them. You will be leaving them with
money and a lifetime of lessons that they too can pass along.
• The greatest banking dynasty, the Rothschilds, continue to meet
once a year to pass their knowledge down to the next
generation.
• Most people spend their lives searching for a path to follow,
unlike those who dedicate their lives to mastering private
lending.

Refer to the Resources page for a free

bonus chapter with Dr. Jazz.

172
 Chapter Eighteen

The Secret
Society
I pulled on the heavy door and was not surprised to find a room
full of people. I joined them, somberly mourning the loss of Dr.
Jazz. This special man had touched the lives of so many people,
and I was, again, grateful for the precious time I had been given
with him.
I quickly relived the past few months in my mind as uneasy
thoughts assailed me. Thank goodness my mentor had brought
Dr. Jazz into my life. Thank goodness my mentor thought I was
worthy of the meeting. I felt such gratitude that I could barely
breathe. And I was nervous. My mentor had sounded so cryptic on
the phone about today that I was filled with apprehension.
But I was heartened by the voices of his family and the laughter
of his grandchildren celebrating Dr. Jazz’s life, and I turned to see
France’s tear-stained face. We hugged without speaking and
chatted softly with the children.
I stood as I recognized my mentor approaching, his visage
somber.
“George,” he said quietly, “Dr. Jazz would be pleased that you
came. I’m glad you’re here, and as I told you, I have a surprise for
you. Come with me; I want to introduce you to some special
people.”
We walked through a back door, down a narrow hallway, and
entered a back room, inviting and comfortably lit. A private

174
 THE SECRET SOCIETY

celebration of sorts was happening; a couple dozen or so people

were in the room.
“My friends,” my mentor began, “this is Dr. Jazz’s last student,
George.” They greeted me warmly, welcoming me, although to
what I had not yet figured out.
“You remember,” he said to me, “that Dr. Jazz’s special
manuscript was only one of seven copies given to him by
Herbert.” He spread his arms and pointed around the room. “All
these people are here because they, too, were students of Dr.
Jazz’s and Herbert’s. They, too, owe their success to the
teachings in that special manuscript.” I glanced at the others in the
room with a new perspective.
He guided me to a table in the center of the room, and we were
joined by six others as we sat. The rest of the guests quietly
surrounded us.
The room had become hushed, the mood somber. “I asked you
to join us, George, at the special request of Dr. Jazz. He was very
impressed with you, as I knew he would be,” my mentor said
proudly. “He talked to many of us here about you, as well, and
arranged for you to have this before his death. He asked that we
present it to you, along with a very special invitation.” As my
mentor spoke, the tall, elegant woman to my left gingerly placed
the familiar manuscript in front of me.
“This manuscript, and all its secrets, are now yours,” my mentor
continued, and I was unsure of what to say.
I sat there for a moment in the quiet, running my hands over the
weathered leather, taking in the scent of the manuscript,
remembering the lessons with Dr. Jazz. The tears were too close.
I noticed a weathered page sticking out of the manuscript; it had
never been there before. I hoped no one had torn any pages from
my new property and was determined to find out as soon as
possible. “I’m honored,” I began, “and I’ll make sure…”
“You can be honored all you want,” my mentor smiled, “but this
gift comes with great responsibilities, with certain stipulations.” I

175
 THE BANKER’S CODE

noticed the others nodding in agreement, and he grew serious

once again. “I know Dr. Jazz spoke to you briefly about the
responsibilities that accompany this gift. I also know that he was
taken from us before he had time to tell you more.
“You see, George, Herbert wanted to be sure that these secrets
reached as many people as possible and that they would be able
to initiate real change, change that would bring great success to
many. And so he endowed great accountability with those that
learned the manuscript’s secrets.
“Years ago, Dr. Jazz, at the request of his mentor, was asked to
accept a great responsibility. He was asked to create and
coordinate an association of individuals, all bequeathed with the
knowledge found in the manuscripts—to be clear, a ‘Secret
Society.’ All of us in this room, upon receipt of the manuscript,
were invited into the society and accepted the doctrines and
responsibilities that come with it,” my mentor continued.
“As part of this society, this inner circle, we meet twice or more
a year to touch base, exchange lessons learned, share stories,
meet new private lenders, share opportunities, and celebrate each
other’s successes. We call these days ‘Platinum Days,’ and many
of us fly from around the country—the world really—to be
together. Some of us are still apprentices, and others become
mentors and help the newer people. This is about a community
that aims to be not just the most advanced private lenders in the
world, but more importantly, to be a community that helps each
other succeed,” my mentor concluded.
I could feel the sense of passion and community in that room. I
felt so privileged to be amongst these people. It felt genuine and
real.
The gentleman across the table spoke. “When I met Herbert, I
was only 16, homeless, and living in the alley behind the
restaurant where Herbert liked to have his afternoon tea.” I
remembered meeting Mr. Macy minutes before and was
impressed by his quiet dignity and intelligent eyes.

176
 THE SECRET SOCIETY

“I, too, have one of Herbert’s manuscripts, and he made me

promise that I would share this knowledge with at least seven
others. Several of them are here with us tonight, and each one of
them has committed to sharing their knowledge with seven
others.”
“I, too, am an apprentice,” the graceful woman to my left said.
Her British accent was charming, made more so by the kindness
in her smile. “I received mine from my mentor, who received it
many years ago. And I, too, promised to share my awareness with
at least seven others, and each of those promised to share with
seven more. You understand? We learn. We share.” She waved
to a group of people behind my mentor, and they laughed in
unison as they waved back. The others around the table and
throughout the room all began to nod and speak softly in
consensus.
My mentor took my arm, and began to walk me around the
room, introducing me one by one to these amazing individuals
from all walks of life, men and women with stories of their own to
tell. And as we journeyed around the room, I began to recognize
the possibilities my mentor and Dr. Jazz had been teaching me
about were here, all around me. Once again, I thanked my lucky
stars for the tutelage, guidance, and patience my mentor and Dr.
Jazz had given me. I wasn’t sure what I had done to be so lucky,
but I was beginning to understand why I had been feeling nervous
when I got here.
I met a gentleman who had been a penniless drifter when he
met Herbert. He told me of the many things he had been taught
and how he had used that knowledge to build one of the largest
chains of banks on the East Coast. “The possibilities are endless,”
he said. “You were lucky, my friend, to have been guided by Dr.
Jazz as much as you were…but you’re just getting started! There
is so much more to know! Allow us all to help you learn more.” I
was fascinated by his story, how he had literally stumbled into
Herbert, resulting in an ugly mess of hot dogs, relish, and
mustard.

177
 THE BANKER’S CODE

He introduced me to his three daughters, now running their

banking dynasty. They teased me with remarkable stories of
lending, and I laughed as they told me about their own sons and
daughters, some in the business and some not, but all of whom
were continuing the family tradition of sharing this amazing
knowledge.
A small, rotund gentleman excitedly greeted my mentor and
introduced himself. “George, I wanted to talk to you about Dr.
Jazz,” he said. “He called me several weeks ago about you, but I
was out of the country and unable to meet with him. By the time I
got home, well…” He stopped and shook his head. “I live in Palo
Alto and have some interesting connections that the Doctor
wanted me to explore with you. I would be honored if you would
care to join me for lunch next week, and we can talk more about
how I can help you,” and he handed me his card. “We can both
share stories about Dr. Jazz and his fondness for walks,” he
laughed.
We chuckled and my mentor said, “Ah, he’s being modest. Joel
is the CEO of a national restaurant franchise chain, as well as on
the board of several other public companies.” I was surprised. Joel
looked so young, only a few years older than myself.
“I was the manager of a fast-food restaurant in Walnut Creek
when I met Dr. Jazz,” Joel said. He looked off to his right,
remembering another time, and grinned. “It was so funny. He
bought one of those children’s meals, you know, for one of his
granddaughters, and the toy was the wrong one. She wanted one
of the other toys used in the promotion, and he was trying to
explain it all to me, and all the while his granddaughter was having
hysterics, crying and screaming about that darned toy. He was so
patient, so loving and kind to her, and that impressed me. Most
parents would not have been so nice. We became instant allies
and, later, good friends. I’ll miss those walks.”
As we moved around the room, I took a short break to step out
and find a quiet corner to quell my curiosity. I had been worrying

178
 THE SECRET SOCIETY

about that page I had seen sticking out of the manuscript and
reached for it.
“My dear George,” the Doctor had written across the top. “I
have been honored to know you and am a better man because of
it,” he continued. I was surprised and touched to my core. “I have
thoroughly enjoyed your endless questions and strategizing with
you and all the lessons we shared together. But please know, my
friend, that, unfortunately, we only had a short time to share.
“Your goals will guide your actions, and your actions will or will
not guarantee your success. Please keep your word to yourself
and to your goals. You are now part of a powerful society
composed of some of the most remarkable people in the world.
Learn from them. Grow with them…”
There was more, but I couldn’t continue. I made my way to the
restroom to wash my face before I rejoined the others.
As I continued around the room, I instantly recognized from
countless media interviews a successful entrepreneur and
philanthropist. “Yes,” he said in response to my comments and
questions, “Dr. Jazz was an amazing man. Most people have no
idea how much he gave back to the community, to many
communities. George, we all have very big shoes to fill.” I
remembered the recent scene in the Doctor’s office, and he
continued, “That banking system stuff is incredible, isn’t it,
George? That’s how I get to spend so much time with my favorite
projects, you know. Love to talk to you more about that, if you
want. The Doctor showed me some cool strategies I can share
with you.”
Next, my mentor introduced me to an elderly woman in a blue
sequined dress. “George, Mrs. Reilly used to work for Joel at one
of his restaurants. She was his best waitress, and now she has
her own restaurants—and three generations of Reillys she’s
teaching!” he boasted.
“And working on the fourth, now,” she giggled with delight. “I
hear through the grapevine that you have an inquisitive nature, my
boy,” she said. “I hope you never lose that. Here, please sit with

179
 THE BANKER’S CODE

me a minute while I steal you away from your mentor.” She

laughed and patted my hand, fiercely clutching the manuscript.
“There are so many fascinating and wonderful things in that
book you’re holding on to for dear life, George, and I want you to
know that every single one of us here in this room is still learning
its brilliance. And as we learn, we share. That, my new friend, is
one of the very cool bennies, as my granddaughter likes to say,
that comes with being a member of our secret society. You have
much to learn, and that wondering mind of yours will be seeking
answers. Ask for them from all of us here. Keep wondering,
George. Keep asking questions. And have fun along the way!”
I wanted to ask her more, but my mentor interrupted us.
“George, I know you have many questions, but there’s someone
special I want you to meet.” He again took my arm, and we walked
slowly toward a shadowed figure in a dimmed corner of the room.
“I’m so proud of you, George. And so was Dr. Jazz. You’re
asking all the right questions. And now, I’d like you to meet
someone that has more of the right answers, someone who also
was mentored by Dr. Jazz. The professor is one of the more
amazing individuals you’ll meet here. He’s taken this powerful
knowledge, and…well, I’ll let him tell you more.
My body felt numb from racing through so many emotions this
evening, and I wasn’t sure I could handle more surprises, but my
mentor was bursting with excitement.
His energy was rubbing off on me, and we stopped in front of
the very intriguing shadow in the corner. The gentleman was
hunched over the table, writing furiously on scraps of paper. He
barely glanced at me as we were introduced, and I wondered why
my mentor was so excited.
But the information he would share with me over the coming
months could potentially change the lives of millions of people…

180
 Resources

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A Asset-based lending (ABL), 49
Attorneys, 161–62
___________________
_
Arbitrage
creating opportunity for, 10–11
definition of, 10, 47

183
 Index

vehicle for, 118–23

B Banks, types of, 154
Beliefs, limiting, 51, 91
___________________ BOLI (bank-owned life insurance),
_ 79, 85–87
Bankers Borrowers
conditioning of borrowers by, conditioning of, by bankers,
14–15 14–15
habits of, 105 definition of, 80
honesty and, 104 description of, 94
hypothecation and, 34 finding, 98-99
language of, 39–50 low-risk, 80–81
leverage and, 26–27, 28 risk relationship between
mindset of, 26, 51–54, 134 lenders and, 55–59
money made by, 22–23, 25 yourself as, 104, 108–25
needed by producers, 23–24 Brokers, 93–96, 162–63
private lenders vs., 36 Businesses, as financing game, 14
risk shifting by, 21, 22, 58–61,
102–3
rules for, 3–4, 7–8, 53, 101–6 C
skills needed by, 24 ___________________
three things done by, 35
Banking _
business of, 33–34 CAGR (compound annual growth
four parts of, 79–80, 88 rate), 152
overview of, 6–7 Capital gains, investing for, 9, 15
process of, 88–89 Cash flow
safety and, 61, 89, 102–3 generating, 10–14, 47
Banking systems importance of, 9–10
benefits of, 110–11 in real estate, 138–39
cautions about, 123–24 CDs (certificates of deposit), 52,
examples of, 112–13, 116–17 53
money growth in, 115 Central banks, 154
as separate entities, 124–25 Children
setting up, 115–17 leaving a legacy for, 167–71
significance of, 114
 THE BANKER’S
CODE
t, 82–
lendin 84
g to, Consu
168– mers
69,
171 conditi
CLTV oning
(combi of, 21–
ned 22, 26
loan to
value), definiti
41– on of,
42 20
Coach
es, interes
164– t and,
65 31–32
Collate
ral minds
et of,
definiti 24–26
on of,
40 Contin
real gency
estate plans,
as, 40, 97-98
43
Combi
ned
loan to
D
value ____
(CL
____
TV)
, ____
41– ____
42
Comp ____
ound Death
interes benefit

185
, 118– Down
19 payme
Deeds nts
of trust risk
and,
compl 54–59
eting, size
46 of, 56–
58
foreclo
sure zero,
and, 57
45
as
securit E
y
instru ____
ments, ____
44
Deposi ____
tors ____
definiti ____
on of, Einstei
80 n,
Albert,
regulat 36
ions Elder,
and, Alexan
81–82 der,
role 147
of, in Equity
bankin
g, 82– money
83 vs.,
Discipli 53–54
ne,
import protect
ance ive, 41
of, Escro
103–4 w-
serv

186
 ice See
com also
pani Bankin
es, g
163 syste
– ms
164 Financ
ing
F game
____ b
____ a
n
____ k
____ i
n
____
g
Federa
l
a
Reser
s
ve
,
syste
m, 32,
1
154
0
Fiat 3
curren
cy, 33
e
Financ x
ial a
levera m
ge. p
See l
Levera e
ge. s
Financ
ing, o
type f
s of, ,
109
–11, 1
113 4
–14

187
t
e H
a
m
____
s ____
i
____
n ____
,
____
1 Hard-
9 money
– lender
2 s, 93–
3 96,
Forecl 162
osure, –63
types Harris,
of, 45– Lawre
46 nce,
Fund 147
manag Hedge
ers, 27 funds,
27,
152–
53
G HELO
____ C
(ho
____ me
____ equi
ty
____ line
____ s of
The cred
Golde it),
n 140
Rule, Honest
6, 53, y, 104
104–5 Hook
s,

188
Willie
, 164 compo
und,
Hypot 82–84
hecat
ion, consu
12, mers
13, and,
34, 32
65
examp
le of,
31–32
I
____ Fed
____ eral
Res
____ erve
____ Syst
em
____ and,
_ 32
Incom
perc
e
enta
proper
ge
ties,
of
139
aver
Insura
age
nce,
inco
79,
me
85–87,
tow
118–
ard,
20
5,
Interes
32,
INDE
X
t 112,
114
banker
s and, produ
52 cers

189
and, 3–
31 55
Interes
t rates
L___
higher,
63–65, ___
122 ___
loweri
___
ng ___
effecti
___
ve,
72–77 ___
Invest Late
ors charge
s, 44
minds Laws
et of, for
51–54 deposi
in ts, 81–
real 82
estate, for
137– private
40, lendin
158– g, 93–
60 96
Legac
rul y,
es leavin
for, g,
3– 167–
4 71
in Lender
the s,
sto private
ck
ma banker
rke s vs.,
t, 35
14
broker

190
s vs., 198
93–96 –99
real
buildin estate
g invest
founda ors
tion for vs.,
being, 137–
92, 41
93– risk
98 relat
ions
hypoth hip
ecatio bet
n and, wee
34 n
borr
interes owe
t rates rs
and, and,
63–65 55–
59
laws
and trainin
regulat g for,
ions 98
for,
93–96 typical
day
minds for,
et of, 128–
52 35
Levera
ong ge
oing
acti banker
vitie s and,
s of, 27, 28
35,
89, definiti
92, on of,
46

191
produc secure
ers d vs.
and, unsec
27 ured,
43
wrong to
kind yourse
of, 46 lf, 104,
Life 108–
goals, 25
127– Loan
28 to
Life value
insura (LTV)
nce,
79, combi
86–87, ned,
118– 41–42
20
Lines definiti
of on of,
credit 40–41

home import
equity, ance
140 of, 49

low maxim
erin um, 42
g risk
effe and,
ctiv 58–59
e
inter
est
rate
with
,
72–
77
Loans

192
 Mitigati
M on
plans,
____ 97
____ Money
____ creatin
____ g new,
____ 32
The
dead,
Matrix
48,
(film),
52–53
5, 6
as
Maturit
debt,
y date,
33
43
Minds
equity
et
vs.,
of
53–54
banker
s, 26,
growth
51–54,
of, in
134
bankin
of
g
consu
syste
mers,
ms,
24–26
115
import
loweri
ance
ng
of, 51
cost of
of
borrow
invest
ed,
ors,
72–
51–54
77
of
produc
manag
ers, 26
ing,
of
103–4
savers
, 134
velocit

193
y of, Sto
47–49, ck
52–53, mar
68– ket
72
Monop
oly O
board
game, ____
3–4, ____
102
Mortga ____
ge ____
broker
s, 93– ____
96 Opport
Mortga unity
ges cost,
as 52,
collate 104,
ral, 110
12–13

foreclo P
sure
and,
____
45 ____
THE BANKER’S
CODE
as ____
securit
y ____
instru ____
ments, Passiv
44, 45 e
Mutual incom
funds, e
27,
152. formul
See a for,
also 10

194
 Produc
genera ers
ting,
12–13 d
e
import f
ance i
of, 11– n
12 i
t
velocit i
y of o
money n
and,
47–49 o
Peer- f
to- ,
peer
lendin 2
g, 72 0
Platinu
m i
Days, n
175 t
Policie e
s r
docum e
ent, 96 s
Ponzi t
Schem
es, a
144– n
45 d
Prepay ,
ment
penalti 3
es, 43 2
Princip
al, levera
definiti ge
on of, and,
43 26–27

195
 ured,
minds 43
et of,
26 securit
y
money instru
made ments
by, 22, and,
25 45–
46
need Protect
of, for ive
banker equity,
s, 23– 42
24

skills Q
neede
d by, ____
24 ____
Promis
sory ____
notes ____
compl ____
eting, Qualifi
43 ed
retir
definiti eme
on of, nt
43 plan
(QR
inform P),
ation 87–
specifi 88,
ed by, 181
42–43

secure
d vs.
unsec

196
 ment,
R 68–72
Risk
____
____ down
payme
____ nts
____ and,
____ 55–59
Real
manag
estate
ing,
as
96–98
collate
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Isn’t It Time YOU Became The Banker?
This is the story of a brilliant scientist and thinker who shares with the author
—and with you— incredible financial secrets passed down through
generations. It’s a story that chronicles the most powerful wealth-building
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• How and why consumers end up indirectly working
for lenders
• How anyone can become a lender
• What many private lenders around the world know
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• Why Albert Einstein said, “Those that understand
interest earn it, those that don’t, pay it”—and the
true meaning of that very, powerful quote.

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George Antone is a successful investor, educator,

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The Banker’s Code [Link]

1 The Banker's Code

The Bonus Chapter:

It’s Not All About Interest

“So, Dr. Jazz, it sounds to me that the key to banking is charging

higher interest. Is that correct?” I asked.

It was one of those questions I expected him to agree with me.

He did not.

“No, George, it is not," he said sternly. "And before I tell you, let
me ask you this,” he continued. “Let’s say you wanted to build a
building. Would you choose to build a shaky foundation, or a
solid foundation?” he asked.

“Of course, I would pick a safe and solid foundation,” I said

confidently.

“Exactly! So the safety of the income stream is the foundation.

Having a ‘safer’ loan with a lower LTV and a good borrower is
the equivalent to a good, solid foundation for the banker,” he
said, turning the pages of the manuscript to a diagram that
looked something like this one:

“Once the banker has a solid foundation, meaning a safer

income stream, they can do things to it that will increase its
yield. And as you know, a yield is the return.”
2 The Banker's Code

I was lost.

The doctor saw my facial expression and knew. So he

continued…

“Imagine a river flowing. You can now use the water to generate
electricity, you can use the water for farms, you can do many
things with it. The same thing with an income stream. An
income stream, which is equivalent to the river, is the money
being received by the bank. Imagine the bank charged 5%
interest and the bank had borrowed all the money at 4% to fund
it, what is the return for the bank?” he asked.

“So the bank borrowed all the money at 4%, lent it all out at 5%,
then the bank is making a 1% spread, right?” I asked.

“Right. But the return is infinite. Right? Another word for ‘return’
is yield. So the yield in this case is infinite” he said, looking at me
curiously making sure I got it.

“So the river is the income stream coming from the borrower to
the banker. Then you can do all kinds of stuff to the income
stream to make you great money, meaning to increase the yield.
So the interest rate does not matter as much as you think, the
key for the banker is taking a safer income stream and applying
certain strategies to it to generate spreads, which in turn
increases yield. You get all that George?” he asked.

I nodded yes, as I reviewed the image on the page of the

manuscript.
3 The Banker's Code

“So let’s go back to my analogy George. When you are building

a building, you use a solid foundation. The foundation is the
safer income stream. From there, you can add more financial
strategies to increase your yield. Now, your yield gets bigger,
but you feel good that you based this whole thing on a safer
income stream. In the analogy, you can build a bigger building
on a solid foundation.”

This was starting to make sense.

I recalled my mentor teaching me about financial leverage

(covered in the book The Wealthy Code). He had said that
anytime you use financial leverage, you would increase risk, so
his recommendation was to use financial leverage on a safer
investment with little volatility. This was very similar here.

“So back to your question George” said Dr. Jazz. “It is not about
just the interest rate on a loan that the banker cares about, it is
about the safety of the income stream and the spreads made
from that income stream as well. So if you make a 2% spread on
a 5% interest rate or a 7% interest rate, it doesn’t matter as
much. Even though I will show you one day how the interest rate
is important, but for now I want you to realize the more
important issue here – for the bank, it’s about safety of income
stream, and the spreads primarily, and up to a certain extent,
the interest rate secondarily.”
4 The Banker's Code

I was starting to see how a banker thinks different.

It’s always about safety first.

They can take a safer loan with small interest rate, and make a
huge return off of it.

No wonder every corner of the United States, even the world,

has a bank, and they own the biggest buildings in every city. The
business model works!

…And now, I was learning it from Dr. Jazz.