I once had a conversation with a banker. The following is a true and accurate accounting of the conversation, even though none of these words was actually spoken:
Me: Hello*, Mr. Banker.
Banker: Hello, Mr. Peterson. What can I do for you today.
M: Well, I’ve found a property that I think you should invest in.
B: Oh? tell me about it.
M: Well, it’s an inexpensive house in a very desirable neighborhood and the value is unlikely to ever go down regardless of what the market does†. This paper has details.
B: (Looks at the details). This does look like a very good investment‡, but I’m not seeing how the cash flow would work. How do we know this asset will generate income?
M: I’ve already thought of that for you. How about if I sign a long-term lease, agree to be your tenant and pay you monthly rent that will provide you with the cash flow you want? I’d be willing to do this if, once the asset is fully depreciated by you, you agree to transfer any residual value of the asset to me or my heirs.
B: That is an interesting proposal. But I’m not really interested in being in the property management business.
M: That’s ok. I’ll manage the property for you. I realize it’s your asset, but I will bear the financial and legal responsibility for it’s maintenance and upkeep.
B: I don’t know; that would be like hiring you to be our property manager. If everybody decided to do this we could have thousands of property managers that we would need to pay.
M: Um…ok. I’ll do the property management job for free.
B: (smiling) Well that’s really generous of you. I’ll take this to our committee and see if buying this asset makes sense.
M: Great, I’ll look forward to hearing from you.
B: Oh, I just remembered. Assets like this are taxed by the county government. I’m sure the committee is going to be reluctant to take on the taxes for this.
M: But you would own the asset.
B: Yes, but if we start making deals like this for everyone, that is a lot of paperwork to keep track of. Keeping track of taxes seems like a property management job. We’re a bank; our primary business is keeping track of money, not tax issues.
B: Oh, I have an idea, why don’t we estimate the amount of the tax and you can add it to the rent you’re paying and we’ll put that money in an account so it will be easy for you to send the county a check.
M: Well, that doesn’t seem…
B: You’re right; we can make that more convenient. You’ve already done so much. How about you have the county send us a copy of the tax bill and we will send the check for you out of that tax account. We’re a bank after all; handling money is what we do.
M: Ok…that…makes sense.
B: Great. Mr. Peterson, you’ve gone to a lot of work and taken on some significant responsibility to put this make this investment work for us. Would you mind telling me why you’re willing to go to all this trouble on our behalf?
M: My family and my society has convinced me that I need to have a house. I can’t afford one right now, so I thought if I could get you to buy one and let me live in it, it would look to society like I was doing what they expect, and eventually, this deal will result in my having a house.
B: That’s very clever of you. Thank you for bringing this deal to us. We’ll be in touch.
*This word was actually spoken.
†This is also true, even through the recession of 2008 the house increased in value.
‡The actual truth is that this is also a terrible investment for the bank, but social conditioning and regulatory interference obscure that fact as well.