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Real Estate Investing Examples

 

Real Estate Investing Examples

In this article we are going to explore a case study of the purchase of a rental property, as well as how to pay off a 30 year mortgage in 15 years or less using cash-rich life insurance. We will compare a traditional method of financing with the use of Cash Value Life Insurance, and how the latter is a much more robust solution at the end of the day. We will show how to scale your real estate business by replicating and duplicating this system over and over.
In this example, we will use round numbers. Let’s assume we are buying a home with a purchase price of $150k, holding for 20 years, and the rent on this rental property is $1800 a month. We will assume a 3% inflation rate over the twenty years. The future value of the home in 20 years is $270,000. What is important to the real estate investor is rent because cash flow is king. The rent is going to produce $432,000.00 over twenty years. We will assume there is no increase in rent for our example, but in real life, rent would go up with inflation. For the sake of simplicity, we are not going to look at depreciation or taxes or maintenance or property insurance.


Example 1: Buying the home with cash. This cash could be from a cash out refinance on another property, or from a bank loan, or self-financed. Keep in mind, an important theme that bears mentioning is opportunity cost. When you use cash to finance a project, you are losing out on the opportunity cost of investing in something different that can grow for you. This is a key downfall to using cash to purchase a property, because once you do, that money is only doing one thing, and not many. So the total value after 20 years would be the future value of the home ($270,000) plus the total cash flow of rent ($432,000) minus the initial investment ($150,000.00), which totals $552,000 return on investment over a 20 year period. Not bad, right? This is a great example to illustrate how investing in real estate builds wealth in and of itself. Now lets look at another example that does this and much, much more.


Example 2: Using a policy loan from a Cash Flow Life Insurance policy to purchase the property. When you take a policy loan and coordinate it correctly with your real estate purchases, you will see very quickly how much more valuable your real estate becomes. Whether you pay in cash or take a loan, the market value doesn’t change. It will still grow to $270k. What does change is the cash flow and here’s why: If you take a policy loan you are going to have to pay the insurance company back some interest. The companies we use average 5%. If you take a loan calculator and put the numbers in and take a policy loan from the cash value of your life insurance contract for $150k, they are going to charge 5% interest. We are going to amortize this over same 20 year timeframe which is 240 months. Because you are your own bank, you get to determine how you want to pay the loan back. So if you want to do a balloon payment and pay it off in 3 years you could. If you want to do ten year or 20 year amortization that works too. The insurance company doesn’t really care. So you have control here. Let’s do a 20 year amortization. When you pay down your policy loan that money is immediately available again. You can keep taking loans for whatever net balance is left. Which is a huge advantage over using a piece of real estate to finance. You can’t really utilize that cash again, and this is the concept of double dipping. In this example, the payment going back to the insurance company which is a principal and interest payment would be roughly $990 a month, which we subtract from the $1800 rent for a total of net cash flow of $810 dollars a month. The insurance company payment is not a mortgage. It doesn’t show anywhere else with your creditors. $810 a month times 240 months is $194,400.


You might ask yourself, why would I take a policy loan, when my cash flow is depleted as compared to buying the property using cash. We are not done with the equation. We are only painting half the picture. What is the cash value doing inside of the policy? The $150k policy loan wasn’t physically removed from the cash value (non-direct recognition) The full $150k was still earning interest and dividends, whereas in Example 1, that cash was removed from circulation. Let’s assume a 5% annual growth over 20 years. The $150k grows to $397k. Calculate: $397-$150k to show the net cash value growth increased inside the policy by $247,995. When you add the future value of the home, to the total cash flow from the property, plus the cash value in the policy less the initial investment, you have a total return on investment of $799,000 That is over $247k greater of a return on investment using Cash Value Life Insurance than traditional financing.

 

How to pay off a 30-year mortgage in 15 years or less using cash-rich life insurance.


I have a lot of clients who wish to enter into a 15 year mortgage schedule because they want to pay off their mortgage in an expedient fashion. That is ultimately a good goal to have. But what if the traditional method of accomplishing this goal isn’t the best solution. I stumbled upon a better system, and in this section we will be diving into the hard numbers of how cash-rich life insurance allows for one to pay off their mortgage in 15 years, using a 30 year mortgage. We will review why paying for a home in cash is a bad idea, and why we tell certain clientele to never pay off their mortgage whatsoever.


What is the traditional methodology behind paying off a mortgage more quickly?
This is the pay extra on the principal on a monthly basis. However, if you are paying extra money toward principal, such as paying an extra $1000, we recommend to stop doing that right away. Another strategy is to take a home equity line of credit (HELOC). This is the type of advice your local banker would give you, but there is a better solution out there. For the sake of argument, let’s assume someone is paying a thousand dollars a month into a cash-rich life insurance policy. This equates to $12,000.00 a year toward a policy. This is a hypothetical illustration, as the numbers will vary based on factors such as age and health in the insured. I am using an illustration for a 36-year-old male in good health. The numbers are purely hypothetical, but it is effective in illustrating how this concept really works. Keep in mind, we are utilizing the paid up additions rider (PUA) in this policy to maximize the cash value available to tap into. So what happened here? The client has a fully paid house with $210k in equity. In actuality it is probably much more, but for the sake of argument we will use round numbers. The new loan at 4% interest is amortized over the next 15 years, which lowers the monthly payment from $1200 to $1050. This saves about $1800 a year. That is roughly $27,00.00 savings over a 15 year period of time. The client got rid of $73k of interest they would originally be paying to the mortgage provider. That is 73k that the client has to play with instead of paying it all to interest. And this is huge. This lets the client put that money to better use, such as investing it into the next real estate deal, that in and of itself generates additional cash flow. On top of that, the cash value is still compounding at roughly 5.5% year over year. There are now two assets growing for the price of one. This is the concept of not losing opportunity cost whatsoever. And this is powerful

In summary, as we have spoken about in length, it is all about right company and design. Use a non direct, mutual insurance company that doesn’t recognize the loan. We can take this to the next level. A lot of real estate investors will take a hard money loan. But instead, use the policy loan, pay the loan back at that higher rate, which raises the payment, and that increase in interest going back to the policy holder. The IRS doesn’t want you to put too much in your policy because it’s a good deal. Some real estate investors will use the cash flow to turn around and use as a down payment on another property that cash flows. And so on and so forth. Why not put that money back into another policy or the same policy without it reaching the Modified Endowment Contract limit?


Now you are getting additional compounding on net monthly income which allows for more opportunity in the future for real estate investing. Where else can you get compounding 5% growth? Definitely not in a savings account. Cash Flow Life Insurance is the most robust safe bucket in the market. What if you did 5 deals, 10 deals, 20 deals, you’d really see the compounding. What if you had 20 rental properties and all of this was happening at the same time? The ROI explodes on the life insurance policy side. This illustrates how incredibly powerful this system is. This is something you can do at scale.


There are dozens of other examples our there, so please don’t hesitate to reach out to one of our licensed financial advisors to see how this system fits into your current real estate portfolio and strategy. Thank you for taking the time to make it to the end of this book. As a thank you, we would like to offer a free one-on-one consultation to demonstrate how this system can enrich your life both professionally and personally.

 

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