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Income for Life Webinar

How to Buy Rental Real Estate With No Money Down




Tim: Hello, everyone. Tim Mittelstaedt here, Editor-in-Chief at
The Palm Beach Letter. We're back today with another
Income for Life webinar. Glad to have Patrick with us.
Patrick, you there?

Patrick: I'm here, Tim.

Tim: Good. Good to have you back. We're long over to do long
overdue for another webinar, so

[Crosstalk]

Patrick: I hear you. It's been a little bit, but I'm glad to be back.

Tim: Yeah. So I've asked Patrick today to share a little bit more
about the application of investing in real estate with an
Income for Life policy.

This is actually something I've started to do, and now that
I've done it a couple of times with the last two properties I've
purchased, I really don't wanna do it any other way. I think
it's a really powerful strategy, so we're gonna have Patrick
walk through an example to just show a cash purchase of a
piece of real estate and then funneling it through a policy just
so we can see what the case scenarios look like, and,
hopefully, it'll become clear why funneling it through a policy
is so beneficial. Patrick, is that kinda what the plan of
attack you were thinking about for this webinar?

Patrick: Yes. Yeah, that's the plan, and I know you've had a lot of
similar questions in the past in regards how to use the
Income for Life strategy with another investment strategy,
and that's the unique part of it, is that you don't have to
choose between one opportunity and another opportunity.

Using the policy and using this setup allows you to do it and
something else, and so I think the easiest example is gonna
be real estate, and I know that on some of the pieces that you
guys have done with rental real estate, given that we have
some of the lowest interest rates in history, given that there's
a lot more people renting than purchasing a home, I mean
it's kind of a perfect storm for real estate investors, and we
have a lot of clients that are real estate investors, and there's
so many ways you can use this, but we're just gonna go and
talk about something really easy today, which is the
difference between purchasing a property in cash and then
purchasing a property with a policy loan.

Tim: Perfect. Yeah, that this will be a good one, for sure.

Patrick: Okay, so some of the stuff, I think, to just use as a refresher
to build the foundation is the fact that we if you're gonna
purchase a property in cash, the cash has to come from
somewhere. It either it exists already, but if it exists
already it was saved up at some point.

So if you recall looking at one of the webinars that we did,
which is you finance everything that you buy, you really have
two options to purchase or invest. You either use your own
money or you use somebody else's money.

So if you're gonna buy a property with cash, okay, so you're
gonna save up and then go out and purchase a rental
property or what have you, even a syndication or a
partnership interest. I mean anything that you're going to
invest in as far as real estate is concerned.

So if you if that's the case then you save up, whether it's on
a monthly basis or yearly basis, and you keep saving up. You
accumulate money in your bank account to the point where
you're ready to invest, and let's say it's at this point right
here.

When you invest, this being your bank account, you have to
liquidate your bank account to make that investment, so for
the next investment that you make, if you're gonna use the
same strategy, you have to save up again, and if this is a
property that cash flows, you're gonna be able to have more
savings now because it's gonna cash flow and do that, or you
still have to liquidate to be able to purchase it. So this kinda
goes on, and that's your end-game strategy.

As far as using other people's money, you can, of course, go
and get a mortgage. You're still gonna have the down-
payment these days 'cause there's not really conventionally
100% financing for rental property, but still you can borrow
money from your grandma or borrow money from your
neighbor, but still you have to borrow it instead of
accumulate it and then pay back. So, again, this should be
familiar to those that have gone through the Income for Life
series, so it's similar almost identical as far as investing
is concerned as it is with purchasing something.

Tim: Yeah.

Patrick: So the policy is a little bit different because the policy, it's in
it's you're using a loan against the cash value, so cash
value continues to grow, and then you obviously are in debt
to the insurance company and you subsequently repay them
with interest.

So how this would look with a capitalizing or putting
money into an Income for Life policy, you wouldn't
necessarily have 100% in the first year. You could have pretty
close, but then you keep capitalizing, and you have more and
more cash value to the point where everything that you put
into the policy is available in cash value.

Now instead of liquidating, you are able to take a loan
against the policy, so what that means is that the cash value
will continue to grow and it'll compound. It'll grow over time,
and then what you do is you take a loan against the cash
value, and then that loan is subsequently paid back by the
cash flow of the property, from the rental income.

And then as it's paid back, you have additional capital for
future real estate deals. So what we're gonna do is we're
gonna look at the actual numbers associated with purchasing
a property in cash and purchasing a property with a policy
loan.

Tim: Good.

Patrick: Okay. All right, anything you wanna add, Tim, or shall we get
into some of the numbers side of it?

Tim: No, it's good. I'm glad you did this 'cause I think the more
that our readers see it, the more it sinks in, just the power of,
yes, we're using debt like a mortgage, but when you
understand that it's not like the bottom half there that you
drew but the money still keeps growing, it's justit's a very,
very powerful concept.

Patrick: All right, so we're gonna use true concepts again, and this is a
calculator that analyzes our real estate deal, and I'm gonna
make it as easy to understand as possible, so I'm not gonna
use a lot of the fields that are in here. I could use all of the
fields, but they're gonna be almost identical to either
situation, cash or cash value.

So I'm just gonna use $100,000.00 piece of property, so
we're gonna say that the property value is $100,000.00, and
you purchase it for $100,000.00, and let's say that that is out
the door. It includes realtor fees, closing costs, etcetera.

We're not gonna use any depreciation in this example. You,
of course, could, but it's going to be the same benefit whether
you pay cash or use financing.

But we are gonna use some operating expenses and put
those. Now there's many operating expenses with a piece of
real estate. You have taxes, insurance, maintenance, property
management fees, vacancy reserves, etcetera, HOA fee.

But we're just gonna use just two simple ones, which is taxes
and insurance. So we're gonna say that the taxes on this
property are $75.00 a month, and let's say that the insurance
is $45.00 per month.

So that creates a operating expenses of $120.00. Then
we're gonna say that this property rents for $950.00 per
month, and then we're gonna say looking at obviously with
depreciation benefits and so forth, you've had some tax
benefits, but we're gonna say that as this passes through to
your personal tax returns you're in a 28% tax bracket.

Now what we'll do is we can analyze this for however long we
want, 30 years, 5 years, 10 years, so we're just gonna use 120
months or 10 years, and we're gonna say that the property
appreciates by 2% per year. Now at the end of this 10 years
there are several options that you have when you sell the
property. You can sell it and pay long-term capital gains.
You can do a 1031 exchange. You can refinance it.

I mean there's a lot of options that you have at this point in
time. We're just gonna say that you sell it and we won't
incorporate any of the capital gains tax cause, again, they
would be the same whether you paid cash or used a policy
loan.

Tim: Okay.

Patrick: All right, so now what we need to do is calculate the dollar
figure of what you would wind up with as a result of
purchasing this property, so, Tim, I'm gonna ask you to
kinda create some dialogue. What is the first set of revenue
or what's the first amount of revenue, I guess source of
revenue, that this property is going to produce?

Tim: Are you talking about like monthly rent from the tenant?

Patrick: You got it. So you have monthly rent from the tenant of
$950.00. Then you have to pay your operating expenses, 120
bucks, and so it produces a cash flow of $830.00, a net cash
flow, and looking at income taxes you would have to pay,
$232.00, you wind up with a net cash flow of $598.00.

Now the monthly income taxes these are not you don't go
pay the IRS on a monthly basis for rent, but this is typically
what happens at the end of this year, so this just calculates it
on a monthly basis. So that's the first source of revenue,
which is $598.00. So, Tim, this is it needs a question, but
how many months are we analyzing of this $598.00 net cash
flow?

Tim: So that's it's 120 months, so I guess you could times it by
12 and then times it by 10, and then you get your cash flow
for

Patrick: Yep, you could do that or you just go $598.00 times 120.

Tim: 20, right.

Patrick: Right. So, as I said as I was saying before, looking at if you
paid cash for something, to pay cash for something else or to
invest your cash in something else, you have to build up that
cash again, so most likely this $598.00 per month will go
into some sort of deposit account like a checking account or a
savings account. So let's first put in here, so cash purchase
and the first figure is the cash flow, and that cash flow is
going to be $71,760.00. That's the first source of revenue,
okay?

Tim: Okay.

Patrick: Now the second source of revenue is when you sell the
property, and when you sell the property, what is the amount
that you get above and beyond what you paid for it?

Tim: There's no mortgage here, so I guess it would just be like
some closing fees. You pay your realtor, and then I think
you've got some appreciation in there. So is that what that
number is in the bottom right corner?

Patrick: Yeah, it's the appreciation 'cause if you look at yeah, if you
looked at the closing fees and commissions and so forth for
selling the property, it would be equal whether you paid cash
or you did a policy loan.

Tim: Got it.

Patrick: It's right here. Just the the number we're looking for is the
$22,120.00, which, like you said, is the appreciation. That's
the equity that was built over the 120 months.

Tim: Yeah.

Patrick: All right, so now we have appreciation, and appreciation is
$22,120.00, so this is where really your total revenue is from
this deal, so total revenue is gonna be the $71,760.00 plus
the $22,120.00.

So let's go back to the regular calculator and plus
$22,120.00, so $93,880.00 is what you walk away with
$93,880.00. So, Tim, you have any questions about this?
This is pretty cut and dried, pretty simple as far as what you
would walk away with as far as revenue is concerned.

Tim: Yeah, that's clearing a desk. Right.

Patrick: Okay, perfect. All right, so now we're going to use we're
gonna use the policy loan, but I'm actually gonna go back to
my whiteboard and just illustrate how the policy loan works
just so we're all everyone that's listening is on the same
page. I assume that probably not everybody that is gonna
watch this video has gone back and watched all the series,
different series, of Income for Life. But so hopefully we'll
create some kinda common ground with this next
illustration.

Tim: Okay.

Patrick: So let me just I'll edit this, too, but let me pull all this stuff
over. All right. so let's go. I'm gonna do the video magic thing
which is the clap. So basically if you are funding an Income
for Life policy and you're building the cash value, that money
comes the same as it would have come from building up your
savings account to purchase a property with cash. So we're
going assume this little circle is your cash value.

So the cash value has many different characteristics, but the
ones that I'm gonna focus on are it has guaranteed interest,
and it has a dividend, and the dividend is not guaranteed,
but it represents the profitably of the insurance company.

These insurance companies, these mutual companies have
been around for hundreds of years, and they have a very
sound business model. That's why they've paid dividends for
so long.

But one of the huge benefits of Income for Life is not the fact
that you're earning dividends and earning interest and
there's tax favorable growth of that interest and dividend; it's
the fact that you have guaranteed loan provisions.

What that means is that the insurance company guarantees
that they will give you a loan against the cash value. So like
I've done in the past, I'm going to kind of delineate these two
different things that are going on, and up here I'm gonna put
the insurance company.

And then I'm going to draw a line, which is gonna be your
loan, and that is ultimately going to go to you, so we'll just
put Tim. Now the insurance company, the only person they
will lend the money to is you, the owner of the policy. Now
the collateral so, Tim, I'll kinda create some more dialogue.
What's the collateral of this loan?

Tim: So it would be the total amount of cash value that I have in
my policy.

Patrick: Exactly. So as you pull out the policy loan, the only collateral
they require is the cash value, so when you take out a loan,
they don't if you're gonna purchase a piece of property or
you're gonna purchase a put it into your business, you're
going you're not there's no personal guarantee.

There's no recourse to you personally 'cause the only
collateral is the cash value, so when you purchase a piece of
real estate, so if you take that money and you put it into a
property, this property will be unencumbered by the
insurance company. There will be no lien against it.

Tim: Yeah, that's a good point. I never thought about it that way,
but you're right. They couldn't touch it.

Patrick: Nope. So now what you're going to what you're gonna look
at as far as the property is concerned is the revenue that's
coming from it, which is the cash flow, and that is going to go
to you. In the first scenario you would have put it into a
savings account, but now you're going to pay back the policy
loan.

Now one of the awesome benefits of the policy loan is there's
no specific term that the insurance company requires, so it's
like a line of credit with a credit card or a home equity line of
credit because it's open-ended. So open-ended means you
can pay in and then draw it back out; pay in, draw it back
out.

So it works identical to that with one difference, which is the
insurance company does not require that you make the
payment. They will allow the interest that is charged to build
on top of the loan.

So as we pay back this loan, if you use it for a piece of real
estate, will probably pay it back at the same term as a regular
mortgage. That's how I'm going to set it up. I'm gonna set it
up so that it's paid back on a 360-month or 30-year term. So
let's go back to the real estate calculator.

Tim: Okay.

Patrick: Okay. So we're going keep all of this the same 'cause nothing
really changes with the exception of one field which is the
loan, so you're not going to you're not gonna take out a
mortgage, but effectively a policy loan is similar to a
mortgage because it's basically money being lent to you by a
financial institution. It's not a bank. It's going be an
insurance company.

So we'll put in there $100,000.00 as the loan. We'll put in
there an interest rate of, let's say, five percent. Insurance
company policy loans right now are anywhere between 4 3/4
and some as high as 8%, but we'll just use five, which is
common amongst a handful of companies that we prefer.
And then the loan term. The loan term, as I said before, is
very flexible. You can have a 10-year loan term, a 15-loan
term, a 100-year loan term. We're just going use what a bank
traditionally will set you up on as far as a payment term,
which is 360 months.

All right, so now you have a payment of $537.00 per month,
so that loan payment, you're setting that up to go to the
insurance company. All right, so let's look at some of the
differences as far as cash flow is concerned. So first thing we
realize is your cash flow has gone down significantly. It's
gone from I think it was $500.00 and change to $168.00,
so it's much, much lower, and then, as you can see, the net
cash out is also much lower.

So let's analyze these two figures, so the $168.00 is after you
pay the mortgage payment, which essentially is the loan
payment with the insurance company, and then the net cash
out is much lower because when you do sell the property for
$122,120.00, you have to pay off the policy loan balance.

Now you don't have to do that cause, remember, the property
is not encumbered by the insurance company as a lien
against the property, so but this just effectively shows that
you take the proceeds of this $122,000.00 and pay back the
policy loan in full with that dollar figure. Does that make
sense, Tim?

Tim: Yeah. And so just to clarify, the loan balance, the
$81,000.00, is per the schedule that you set up to pay back
the insurance company. That's what you would still owe
them after 10 years, and, like you're saying, you don't have to
pay it back, but if you're you're kinda just comparing it to
keep the same track there.

Patrick: Exactly. Yeah. So basically the $81,342.00 represents a
mortgage at $100,000.00, with the interest rate of 5% over
30 years with a payment of $537.00 for 120 months. So
you've paid down the loan $19,000.00 or so.

Tim: Yeah, I just wanted to point that out.

Patrick: Good question. So now let's look at let's start to calculate
the difference as far as the numbers are concerned, so we'll
bring back our regular calculator as well as the notes that we
had previously. Okay, so looking at this is gonna be a policy
loan purchase, so let's first calculate the cash flow.

So the cash flow is $168.00 per month, so now we're gonna
look at $168.00 times 120 months. That's your net cash flow.

So it's $20,160.00, much less than the $71,760.00
$20,160.00. Then we look at the appreciation. Now it
appreciated by basically the same thing, but you have to pay
off the loan, so the net cash out is only is $40,000.00, so
that's really a negative based on the figure we used up here.

But what we'll do right now is we'll just use the $40,778.00
and consider this the net cash out. So if this was the only if
these were the only numbers we were looking at then you
would be better off paying for the property in cash than using
a policy loan, but the one thing that separates the cash
purchase from using the policy loan to purchase it is that
your cash value continues to earn interest for the entire ten
years.

So if you go back to that original diagram, as opposed to
liquidating your savings account to purchase the property in
cash, your cash value or your savings for the equity of your
Income for Life policy will continue to earn interest and earn
dividends. So now we're going bring in that figure. So this is
just a simple future value calculator, and we're gonna put in
there $100,000.00 as the cash value balance earning 5
percent over 10 years.

Tim: And that 5% is kinda the typical growth rate in an Income for
Life policy. That's where you're getting that number from?

Patrick: Exactly. Now it could go up, but right now given current
dividends, that's what cash value in some instances is
running a little bit more than that, but we'll just use five
percent to be conservative.

Tim: Sure.

Patrick: So as you see here, you have $162,889.00. $62,000.00 of
that is your interest is earned on the policy. There's no taxes
associated with that if it's set up the right way, so as we look
at what to add into this field right here, it's not gonna be the
$162,000.00; it's just going to be the gain, which is
$62,889.00.

All right, which is your cash we'll put in here cash value
growth. All right, so now let's go back and analyze these
three dollar amounts.

So the cash flow, this $20,000.00, came from $168.00 being
put into a savings account for 120 months. This net cash out
is the $122,000.00, which is the value that the property
appreciated to minus the payoff of the policy loan and which
gives you the $40,778.00.

And then the cash value growth at $62,889.00 is the
guaranteed interest and dividend that the policy earned over
the course of 10 years, so that gives us a total figure oops,
let me go down another line here. So total, so $20,160.00
plus $40,778.00 plus $62,889.00, so the total gain is
$123,827.00.

So the difference as far as the dollar amount is concerned is
the $123,827.00 minus $93,880.00, so the difference is
about $30,000.00, so $29,947.00.

Now as far as a percentage difference, so the increase as a
percentage, we'll look at that really quickly. The percentage
difference is $93,880.00 and $123,827.00. It's a 31%
increase, and that's not more than a 31% rate of return, but
$123,827.00 is 31.9% higher than $93,880.00.

Tim: That's incredible.

Patrick: That's the percentage difference.

Tim: That's a great difference in your wealth position if you buy a
property in cash versus going through your policy. That's a
substantial difference, and ____ when I'm thinking about it
and I'm just starting to buy rental properties I mean if I
do this at a rate of, let's say, one or two properties a year, I
mean now you kinda see the compound bulk effect there just
by running these through a policy.

Patrick: Exactly. And if you're instead of saving up in cash you're
putting more money into a policy, but at the same time, you
also have equity of the loan, so if you've taken out a policy
loan and you're paying back at that $500.00 per month,
you're paying down principal on the policy loan, and the
policy loan is like a line of credit, which means you can re-
borrow that money that you've paid down in principal to the
policy loan.

Tim: Yeah. That's a

Patrick: And that could also be used for another property.

Tim: Yeah. Another property, another investment, a car. I mean
that's the thing I like about it. It doesn't even have to be
another piece of real estate, just the flexibility of being able
to tap your policy for that ______.

Patrick: Exactly. Exactly. But I think at the same time what it does is
it helps discipline you to the use of that money because as
you use the policy loan, you don't have to pay it back, but to
be an honest we call it being an honest banker or to treat
your capital the right way as far as what it's going to do for
your lifestyle, one property isn't gonna make much
difference. Individuals that get into real estate don't typically
get into real estate to buy one property. They get in to turn
the five houses into a rent hotel. I mean that's the idea with
Monopoly. Same thing with this.

You're there to increase your portfolio, so this is the most
efficient way to purchase, and the main difference, kinda
going back into the beginning, you do have to capitalize the
policy, so as you would save up for cash to purchase a
property, you would put that money into a policy instead, but
in the first couple of years there's little bit of a lag, but by the
time you would have sufficient money to purchase the
property anyway, that's money is going to the same
amount of money is gonna be there.

Tim: Yeah. I mean that's a good plan. That's kind of where I'm at.
The last rental property I bought was somewhere in that
$100,000.00 range, and I don't have 100 grand in policy, but
I've done a little adaption of what you just did where instead
of paying the $20,000.00 down payment with cash from my
bank account, I took a policy loan out to do that, so there's
kind of an in between there, too, which maybe we could that
on a separate webinar or something else down the road, but,
yeah, you don't have to _____ would have to save up for 15
years for 100 grand before I could use this.

Patrick: No way. Yeah, you can and that is the in my opinion this
is the easiest way to explain it with a cash purchase versus a
purchase with a policy loan, but you can use the policy loan
for the down payment, so you can use conventional first
mortgage financing, and the policy loan can be your second
mortgage as opposed to using cash, and that actually works
out a little bit better just because you have more leverage.

Tim: Yeah. I mean that's exactly what I did on mine is that I go to
the bank for the 80% and then I'm going to the policy, so it's
same position where it's 100% financed like you just went
through, but doing it with the bank mortgage and a policy
loan, so

Patrick: I'm gonna use one just one other simple example as far as
how some of our clients are using this with real estate, and
it'll just take one minute.

Tim: Sure.

Patrick: You know you probably know, Tim, just as well as I do that
over the last couple of years purchasing single-family rentals
has been has become very competitive. There's a lot of
private equity hedge funds that are getting into the single-
family residence market, and so there's oftentimes multiple
offers.

So if you're going into an offer and you're you have to get
conventional financing and there's somebody that is willing
to pay cash, you are gonna be at the bottom end of the totem
pole as far as who the seller is going to negotiate with. If a
person has cash, they can close very quickly as opposed to
somebody that has to wait 30 days, 45 days, 60 days to
purchase the property. And sometimes you'll get a better
deal, and sometimes you'll actually get the property as
opposed to having to go through the quarrel of making an
offer and having the offer rejected because somebody came
in with cash.

So my point is if you have cash, you can go in and you still
wanna use leverage, you still wanna use mortgage financing,
you can go into a transaction and if you have sufficient cash
value, you can make a cash offer to get a good deal, lock the
property up, and then after a few months it'll depend on
the mortgage company you can refinance, and you can
refinance that and get pretty much the same mortgage you
would have got if you purchased the property with financing
from the get-go.

But this allows you the option of being able to go into a
property and get a good deal and then still use leverage and
still use a mortgage after the fact.

Tim: Yeah. So you're saying some of your clients are using this
because they're in competitive markets. They're using their
policies to lock up properties and then later working out the
financing with the bank.

Patrick: Exactly. And sometimes it'll take three months, six months.
At the same time you look at getting a property versus not
getting a property or potentially getting a better deal than
you would have if you went in having to get financing.

Tim: Yeah, I like that. That's a good option to have.

Patrick: Yep.

Tim: So this is a great webinar. I hope it's made sense. Just, again,
a lot of numbers and stuff, but I think, Patrick, you've done a
pretty good job of breaking it down, cash versus using it
through a policy, and I hope it's clear to a lot of you guys.
I'm doing it this way with my own properties, and I don't
think I'm ever gonna go back. Why would I? Just keep
buying stuff and running it through my policy.

Patrick: Leverage is always going to yeah, leverage is always going
to increase your rate of return, and not having to use the
cash that's accumulating in your policy, meaning having to
liquidate it, has a huge benefit because you're gonna be able
to take advantage of that compound interest to leverage the
policy loan to apply your assets, and it goes back to what I
said in the beginning, which is you can use the Income for
Life policy and purchase real estate and get into oil and gas
and put money into your business. You don't have to choose
between the two deals.

Tim: Yeah, exactly. Good stuff. Well, yeah, we probably better cut
it off. I think we're coming up on 30 minutes. I think you've
covered it all pretty clearly, so write in if you guys have
questions.

Send it to palmbeachletter.com/contactus and we'll answer
your questions, and maybe we can do some more webinars in
the future on using your policy with real estate, just going
through some more examples. So, Patrick, thanks again for
hopping on, and we'll have you back soon.

Patrick: Okay, sounds good. It's my pleasure, Tim. Thanks.

Tim: All right. Bye now.

[End of Audio]

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