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How to Use Whole Life Insurance to Fund Real Estate Investments · The Academy Presents podcast

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  Did you know that 90 % of the world's millionaires
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  invest in real estate? Well, I'm Angel with the
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  Academy Presents Real Estate Investing Rocks,
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  and I'm here to help you if you want to go for
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  your piece of that pie. Are you new? Are you
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  new to this and you just don't know where to
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  start? It's okay. Are you someone that has invested,
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  but you feel stuck, you feel like you've lost
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  momentum, you don't know where to really head
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  from here? Are you a seasoned real estate investor
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  who is doing great, but maybe you just want to
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  hone a few skills here and there? This is the
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  place for you. The Academy Presents Real Estate
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  Investing Rocks podcast will connect you with
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  industry experts so that you can save time, avoid
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  costly mistakes, and begin living the life you've
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  dreamed of all through real estate investing.
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  You're already taking the first step. just by
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  joining us here today. Why whole life? Well,
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  it's been around for well over 160 years and
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  it has grown. The cash values in these policies
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  have grown on a guaranteed basis every year.
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  that it's been in existence. The dividends have
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  been paid by the companies that I work with for
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  over 100 years, every single year. So that means
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  you think about what's happened in the last 100
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  years, the formation of the Federal Reserve,
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  World War I, the Great Depression, World War
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  II, right? Every crisis in our history, when
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  these companies pay out a dividend, it's because
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  they've performed better than projected. So what
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  would you think about a company who's performed
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  better than projected every single year? for
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  over 100 years of their existence. Very solid
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  companies. The overall yields over the long haul
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  will beat other cash equivalents or other very
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  safe places where you can park cash. And it provides
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  liquid access to cash that you can then use for
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  your investment activities and become your own
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  source of financing. And then of course it's
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  life insurance. So ultimately there's a death
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  benefit that will pass that legacy onto your
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  family. Now I'm not talking about the old fashioned
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  whole life insurance that you may have heard
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  about or you may have heard folks like Dave Ramsey
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  talk about. These are modernized designs where
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  we use special writers that are funded in the
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  right ratios and proportions that create large
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  cash value accumulation even in the very early
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  years of the policy, the first year even. These
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  are mutual companies where you own the profits.
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  That's why you're getting the dividends back.
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  Your gains are locked in and predictable. You
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  know the value of that policy or that plan at
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  any point in time. You can then borrow from the
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  policy and it will grow as if you never touched
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  a dime of it in the background. We'll refer to
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  these as bank on yourself policies as we go through
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  this. Let's simplify it. How exactly does this
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  work? Well, first thing we have is you or I,
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  the policy owner. And we have an insurance company
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  and we're going to buy a whole life insurance
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  policy that has been structured and designed
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  the correct way for the bank on yourself approach.
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  And so then as a policy owner, let's say we identify
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  a real estate investment. It could be anything.
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  It could be multifamily, could be single family,
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  could be a flip. It could be a syndication. It
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  could be virtually any kind of investment. And
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  we now want some funding. for that investment
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  opportunity. So we call up our life insurance
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  company and we say, hey, I hear we can take loans
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  with these policies. So what do I need to do
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  to qualify? Well, the life insurance company
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  is going to say, what's your policy number? You
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  give them the policy number and they say, OK,
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  you have a policy. It has cash value in it. You
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  qualify. That's the only qualification. All right.
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  You have a policy with cash value and you go,
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  okay, great. How much could I borrow? And the
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  insurance company says, well, you can borrow
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  about 90 % of whatever your cash value is. And
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  you say, okay, cool. I'll take a hundred thousand
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  dollars. And they say, okay, great. We're going
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  to send you some forms. You're going to sign
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  the form so that we can direct deposit that into
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  your bank account within about a week. So you
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  say, awesome. When do I have to start paying
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  it back? And the insurance company says, when
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  do you want to start paying it back? Oh, well,
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  I don't know. I'll figure that out. Well, how
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  much do I have to pay back? And the insurance
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  company says, well, how much do you want to pay
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  back? Oh, we'll have to figure that out. And
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  you say, well, how long do I have to pay it back?
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  How many years? And the insurance company says,
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  well, how long do you want to take to pay it
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  back? So you're in complete control of the repayment.
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  You choose when you repay, how much you repay,
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  and over how long you repay, you're in complete
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  control. So this is what we would call a non
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  -recourse loan, which means the only collateral
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  is the policy itself. The insurance company is
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  using the cash value of the policy as the limit
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  of what you can borrow. And the death benefit
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  in the policy is the collateral. And so because
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  you're in control, it makes it a very handy way
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  to finance real estate deals. Because let's say
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  this deal that we're going to do is a flip. Well,
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  we may not make any payments against that loan
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  until we rehab and sell that property. and get
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  the money from the sale and then pay the loan
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  off all at once. Maybe it's a rental property.
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  We might take the rents from that property and
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  pay the policy loan down over time. So it gives
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  you the flexibility as an investor to repay that
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  any way that works for you within the deal that
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  you're making. So we get the policy loan from
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  the insurance company, they direct deposit it
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  into our bank account. We then take that $100
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  ,000 in this example, and we deploy that into
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  whatever the investment is. As I was just describing,
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  that investment is going to create cash flow,
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  whether it's lump sum cash flow when you sell
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  a property you flip or whether it's a stream
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  of payments coming in from rents or notes, payments
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  coming in off of a note, whatever it is, we're
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  going to take that cash flow and we're going
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  to repay that policy loan to the insurance company.
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  Now let's say we do this over, I used seven years
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  before, we'll keep it that way. Let's say we
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  do this over seven years. During that seven years,
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  the cash values in the life insurance policy
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  are going to continue to grow at the same pace
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  as if we did not borrow the 100 ,000. So over
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  that seven years, we're gonna get equity and
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  that policy is gonna continue to grow as if we
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  didn't borrow it. And this is that whole concept
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  where it's going to increase by a larger amount
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  every year for the rest of your life. And there's
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  nothing you can do about it. If you do absolutely
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  nothing, it's going to do that. But we're also,
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  we've made a real estate investment. So now we're
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  also creating. growth or equity or profit in
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  that real estate investment. And so we get the
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  benefit of both. We get the profit from the real
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  estate and the cash value increase or cash value
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  growth within the whole life policy at the same
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  time. And by the way, we pay a little bit of
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  interest to the insurance company for these loans.
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  It'll range anywhere from around 2 % up to 5
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  % depending on how you choose to repay it. So
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  that's in a nutshell how it works. And what I
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  want to do now is get into some specific examples
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  of how you might use this. So first of all, we
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  can fire a real estate banker in six simple steps.
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  We build up cash value in a properly designed
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  whole life insurance policy over time or all
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  at once. There are ways to drop lump sums into
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  these policies and build them up at once. We
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  can use the equity in the policy to finance our
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  real estate deals. The policy grows in the background,
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  even on the capital we've borrowed. We control
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  the repayment schedule 100%. We sell or refi
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  the property and then recycle that money or those
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  profits back into the policy. We accumulate profits
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  from the real estate investments plus the growing
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  equity in the policy. And then, of course, we
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  just rinse and repeat and do this over and over
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  and over and over again. And I'm going to show
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  you a specific example of real life story towards
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  the end here of how that worked. So now we're
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  going to jump into the six specific strategies.
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  I'll start with what I call a starter strategy.
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  So let's say you're just getting started. You've
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  got a little bit of money built up in the policy,
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  but not enough to use for the full investment.
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  So this is where you might start, right? You
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  can use your policy to help pay things like property
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  taxes, homeowners insurance, HOA fees, repairs
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  and maintenance, and get a positive arbitrage
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  on these costs which drag down your property's
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  yield. Strategy number one is the down payment
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  strategy. So we build up the cash value and we've
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  got enough now that we can make a significant
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  down payment by borrowing against the policy.
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  So we can eliminate mortgage insurance and we
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  can mitigate opportunity costs. Well, what in
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  the world do I mean by opportunity costs? So
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  let's take a look at a snapshot of an actual
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  policy illustration. And what I want you to do
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  is watch the column right here. that says annual
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  dividend watch that closely with what happens
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  this set of figures right here is what we're
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  going to focus on right 96 20 through 11 973
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  these are the dividend amounts that are coming
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  into this policy each year now right here we're
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  going to take a loan so we've taken a loan for
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  350 000 in this policy we have these dividends
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  right here so you can see we took the loan and
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  the dividends is the same okay So now we pay
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  back the loan. In this example, we pay back the
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  loan over five years. We pay that loan back.
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  So if this was an investment, we took the profit
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  or the cash flow from that investment and we
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  paid the loan back. But note, after taking the
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  loan and paying the loan back, the policy got
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  the same dividends. And so this is kind of the
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  illustrated example of how the policy continues
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  to grow in the background, even when you've borrowed
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  the money. So in year one, we took 350 ,000 out
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  of this 374 ,000 of cash value out of the policy,
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  but we got the same dividends. There's also a
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  guaranteed growth component here, and we're getting
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  the same dividends and the same guaranteed growth
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  that we would have with or without the 350. So
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  this is a really significant factor in what makes
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  this a powerful, and this is what we mean by
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  mitigating opportunity costs. Had we never put
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  money in this policy, we never would have been
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  able to take this loan and we're giving up. We
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  might have been able to get this money elsewhere,
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  but we'd have been giving up. This is our opportunity
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  costs. We'd have been giving up this extra growth
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  that happens in the policy at the same time.
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  Very powerful concept. So the logical conclusion
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  is strategy number two, and that is we built
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  up enough money now in the policy that we can
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  actually pay cash for the investment. So not
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  just a down payment, we can pay the whole thing.
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  And essentially what we're trying to do is develop
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  a permanent line of credit so that we can be
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  ready for the next opportunity. Who wants that
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  banker's umbrella anyway, right? When we could
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  just do it ourselves. In the full purchase, we'll
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  talk about a property that $350 ,000 alone that
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  we just looked at the example of. We're going
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  to use that as an example of maybe a single -family
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  home that we purchased. If we pay cash, in other
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  words, we don't have a policy, we didn't use
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  the policy, we're just using 350 ,000 of cash
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  that we had in a savings account or wherever.
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  That property appreciates to 405 ,000. that of
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  course we won't pay any interest because we're
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  paying cash but we also won't have any growth
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  in a policy because we're not using a policy
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  and our ROI on that property is about three percent
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  and we make about $55 ,000. If we do that exact
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  same thing but we use the policy we get the same
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  appreciation. Now I don't know if you noticed
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  or not but when I was explaining that policy
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  loan in that that previous slide the annual APR
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  on that loan worked out to about 2 .1 percent.
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  because of the way we repaid it. So it's very
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  low cost financing. The policy's growth over
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  the repayment period is going to grow about $119
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  ,000. So our ROI goes from 3 % to 10%, and we
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  net out between the policy and the investment,
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  we net out $175 ,000. So probably pretty obvious
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  which approach would probably make more sense
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  or that we'd be more interested in. is that scenario
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  where we make instead of 55 ,000, we make 175
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  ,000. Strategy number three we'll call equity
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  harvesting. And this is where we're gonna use
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  either existing properties or maybe we flip a
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  property and use the profits from that to get
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  the policy started. or we do a cash out refi
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  on existing properties and harvest that equity.
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  So the example we'll use is we have four properties,
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  they're each valued at $100 ,000 and they're
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  appreciating at 3 % per year. Every five years
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  we cash out refi, take 60 ,000 out and we lock
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  those real estate gains in by flowing that cash
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  into a policy. The bonus is over time we build
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  up even more cash value and we can leverage that
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  to purchase the fifth property and keep that
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  whole process going. That probably makes really
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  good sense as far as how that works.