Aspiring Real Estate Investor Just Starting Out
Member since 2022 · 4 posts · 4 votes
Hey everyone, I'm very excited to start this journey in real estate investing. The 1st thing I know I have to do is get the funds. I'm shopping around for a Life Insurance policy to take out a loan against the policy for the funds. I've learned Whole Life is better Than Term Life for real estate investing. Please correct me if I'm wrong. So I live in NYC & looking to start out in the tri-state area. Being New York, New Jersey & Connecticut. And maybe Pennsylvania. I'd like to start out flipping single family homes and rental properties. I'm looking at homes under $200,000. Some of my questions are
How much of an life insurance policy should I get?
What are those very 1st steps?
Do I start a LLC or a S Corp?
Any & all input is much appreciated. I'm coachable and want to learn this business.
I just had this discussion a few weeks ago with a very knowledgeable Life Insurance advisor. Whole and Universal Insurance allows you to withdraw, since they offer a cash value. This is not an overnight process, it takes years before you can actually withdraw the funds from your policy.
Best of luck!
LT
Hmmm. I wonder what makes someone "very knowledgeable" That doesn't sound like a policy that a real estate investor would want. These are not your typical whole life policies where it takes years to build up cash value. If I design a policy for 5 years of $100,000 of premium, that policy is going to have about $85,000 of cash value that can be leveraged from day 1. Nobody would leverage life insurance to invest in real estate if they had to wait years to build up and access the cash value.
And they certainly wouldn't "Withdraw" it!!! The beauty in this approach i having your money work in two places at one time by Leveraging your cash value.
Hey everyone, I'm very excited to start this journey in real estate investing. The 1st thing I know I have to do is get the funds. I'm shopping around for a Life Insurance policy to take out a loan against the policy for the funds. I've learned Whole Life is better Than Term Life for real estate investing. Please correct me if I'm wrong. So I live in NYC & looking to start out in the tri-state area. Being New York, New Jersey & Connecticut. And maybe Pennsylvania. I'd like to start out flipping single family homes and rental properties. I'm looking at homes under $200,000. Some of my questions are
How much of an life insurance policy should I get?
What are those very 1st steps?
Do I start a LLC or a S Corp?
Any & all input is much appreciated. I'm coachable and want to learn this business.
I don't do Whole Life, but my understanding is that it takes quite a while for the cash value to build up enough to borrow from it, unless you just have the cash to drop a lump sum on a policy to pull right back out as a loan. In which case I would just use that cash to start investing in real estate directly while buying term insurance for the death benefit.
Personally, I'm not a big fan of any of the Permanent Life products, and find them gimmicky. The only people I've found recommending them are also selling them. They may serve a purpose for high net worth individuals using them for estate planning for inheritance, but the middle class average joe is probably better off with a term life policy while systematically investing in a good index mutual fund.
Just my 2 cents from an average Joe.
Not sure if a whole life policy is where you should start, but you have a great idea by borrowing money. Let's link up for a call if you'd like.
It's important to understand that there is no free lunch. You are borrowing against the cash value of the policy. That cash comes from the premiums you pay. So If you have money to get started investing, it will make sense to launder that money through a maximum over-funded policy.
It's important to understand that there is no free lunch. You are borrowing against the cash value of the policy. That cash comes from the premiums you pay. So If you have money to get started investing, it will make sense to launder that money through a maximum over-funded policy.
It "will" make sense to launder his capital through a life insurance product before borrowing it back to invest in real estate? That seems counter-intuitive to me. Can you explain why? (or was that a typo?)
Thank you
It's important to understand that there is no free lunch. You are borrowing against the cash value of the policy. That cash comes from the premiums you pay. So If you have money to get started investing, it will make sense to launder that money through a maximum over-funded policy.
It "will" make sense to launder his capital through a life insurance product before borrowing it back to invest in real estate? That seems counter-intuitive to me. Can you explain why? (or was that a typo?)
Thank you
You are not "Borrowing it Back". The cash value is the collateral for a loan that the client can get from the insurance company or from 1 of many banks. The cash value continues to grow and earn interest/dividends. And whatever you do with the borrowed money will create value separate from that. The combined growth will be better than simply investing in real estate.
I just had this discussion a few weeks ago with a very knowledgeable Life Insurance advisor. Whole and Universal Insurance allows you to withdraw, since they offer a cash value. This is not an overnight process, it takes years before you can actually withdraw the funds from your policy.
Best of luck!
LT
I just had this discussion a few weeks ago with a very knowledgeable Life Insurance advisor. Whole and Universal Insurance allows you to withdraw, since they offer a cash value. This is not an overnight process, it takes years before you can actually withdraw the funds from your policy.
Best of luck!
LT
Hmmm. I wonder what makes someone "very knowledgeable" That doesn't sound like a policy that a real estate investor would want. These are not your typical whole life policies where it takes years to build up cash value. If I design a policy for 5 years of $100,000 of premium, that policy is going to have about $85,000 of cash value that can be leveraged from day 1. Nobody would leverage life insurance to invest in real estate if they had to wait years to build up and access the cash value.
And they certainly wouldn't "Withdraw" it!!! The beauty in this approach i having your money work in two places at one time by Leveraging your cash value.
It's important to understand that there is no free lunch. You are borrowing against the cash value of the policy. That cash comes from the premiums you pay. So If you have money to get started investing, it will make sense to launder that money through a maximum over-funded policy.
It "will" make sense to launder his capital through a life insurance product before borrowing it back to invest in real estate? That seems counter-intuitive to me. Can you explain why? (or was that a typo?)
Thank you
I just had this discussion a few weeks ago with a very knowledgeable Life Insurance advisor. Whole and Universal Insurance allows you to withdraw, since they offer a cash value. This is not an overnight process, it takes years before you can actually withdraw the funds from your policy.
Best of luck!
LT
Hmmm. I wonder what makes someone "very knowledgeable" That doesn't sound like a policy that a real estate investor would want. These are not your typical whole life policies where it takes years to build up cash value. If I design a policy for 5 years of $100,000 of premium, that policy is going to have about $85,000 of cash value that can be leveraged from day 1. Nobody would leverage life insurance to invest in real estate if they had to wait years to build up and access the cash value.
And they certainly wouldn't "Withdraw" it!!! The beauty in this approach i having your money work in two places at one time by Leveraging your cash value.
When I am "leveraging" my cash value (by borrowing from it) don't I also pay interest ("to myself") that subtracts from the yield that cash value is earning?
I've been trying for a while to find any financial advisor who recommends these policies (particularly to middle class investors) who is not also an insurance agent who earns commissions selling these policies. That's not to say they don't truly believe in them, but that naturally creates a bias.
Yes I realize now that life insurance option is crossed out. Lol I guess for funding I would have to take a loan out.
When I am "leveraging" my cash value (by borrowing from it) don't I also pay interest ("to myself") that subtracts from the yield that cash value is earning?
I've been trying for a while to find any financial advisor who recommends these policies (particularly to middle class investors) who is not also an insurance agent who earns commissions selling these policies. That's not to say they don't truly believe in them, but that naturally creates a bias.
Look at it the same way you can use a HELOC on your home. When you borrow some money with a HELOC, your home does not worth less, nor does it accrued capital gain slower than if you didn't have the HELOC. Of course if you sell your home, you will have to pay the HELOC back, so get less money at the sale of your home, but the home has still the same value.
Using a loan from a permanent life insurance is the same. An insurance, or a bank is lending you money using the cash value of your life insurance as collateral. The cash value of your life insurance continues to grow the same way, loan or not. Of course you have to pay interest for the loan, the same way than for a HELOC. So if you reinvest the loan money on something that produces more than the loan interest your money is growing faster as your are getting not only the gain of the life insurance, plus the arbitrage between your investment and the loan interest. On top of that, if you used a separate lender for the loan, you may probably deduct the interest of the loan as investment expense on your tax return.
The issue with an overfunded permanent life insurance, is that the cash value the first few years is lower than the premium that you put in, because of the different front loaded fee (including commission; cost of insurance; state taxes). So you have a few years of drag. A properly set up policy should give you 75 to 85% of cash value/premium the first year, going higher every year. Around year 4 to 6 you should have 100% of your premium available in cash value, and after it should be more than that, growing at an average of 3-8% a year, depending on the product (whole life, Index Universal Life). If you take into account that drag, and if you compare investing your money directly into an investment, or putting instead your money into a life insurance, and reinvesting the loan proceed to the same investment, the cross over is between year 7 and 10. After that, the compounding effect put the later way ahead of the former.
Permanent overfunded life insurance is a complex product, that need proper planing and a good execution. But it has excellent tax advantage, it is secured from creditors, it grows steadily and does not go down with the stock market, is a fantastic wealth multiplicator for your investments and on top of it provides a financial security to your family in case of your early demise.
If you are interested on how to use it properly, you need to find an insurance agent who is knowledgeable on it. You also need to find an agent who is willing to offer it, as to properly set it up, the agent has to lower his commission. Last I would also suggest to use an agent who is also an investor him/herself who uses it too.
Well since a lot of the conversation is about the life insurance policy, let me chime in on the where to begin. This is wholly based on my experience, but I'd say the best formula is the following:
-Learn to underwrite deals. Find a financial model, but a simple one, that helps calculate NOI, based on Income and Expense. In consideration of debt service, understand calculating cash flows. Also consider capex costs, renovation costs, etc.
-Underwrite deals - as many as you can find. Search zillow, find properties that look like a great deal. Then take out the excel sheet and underwrite it. What's the income, what's the expense, what's the debt service, and how much money do I have to put into it?
-Think you have a good deal? Put in an offer. Request actual real life data, utility bills, insurance bills, taxes, etc. During this time take back to your financial model and keep updating it to get it as accurate as possible.
Now at this point you're at the last step of getting into things, which is closing on the deal. Now that you're here, it's about doing the work you set out to do. If it's a turnkey investment that might not be much, but if it's a value add, well get ready to hire your contractors or swing a hammer.
Real estate done right is one of the most rewarding careers. If you have questions lmk :)
You should be asking yourself
1. How do i meet every investor and person in real estate in my area and take them to coffee
2. How am i going to find a killer deal
3. Whats my goal this year
When I am "leveraging" my cash value (by borrowing from it) don't I also pay interest ("to myself") that subtracts from the yield that cash value is earning?
I've been trying for a while to find any financial advisor who recommends these policies (particularly to middle class investors) who is not also an insurance agent who earns commissions selling these policies. That's not to say they don't truly believe in them, but that naturally creates a bias.
Look at it the same way you can use a HELOC on your home. When you borrow some money with a HELOC, your home does not worth less, nor does it accrued capital gain slower than if you didn't have the HELOC. Of course if you sell your home, you will have to pay the HELOC back, so get less money at the sale of your home, but the home has still the same value.
Using a loan from a permanent life insurance is the same. An insurance, or a bank is lending you money using the cash value of your life insurance as collateral. The cash value of your life insurance continues to grow the same way, loan or not. Of course you have to pay interest for the loan, the same way than for a HELOC. So if you reinvest the loan money on something that produces more than the loan interest your money is growing faster as your are getting not only the gain of the life insurance, plus the arbitrage between your investment and the loan interest. On top of that, if you used a separate lender for the loan, you may probably deduct the interest of the loan as investment expense on your tax return.
The issue with an overfunded permanent life insurance, is that the cash value the first few years is lower than the premium that you put in, because of the different front loaded fee (including commission; cost of insurance; state taxes). So you have a few years of drag. A properly set up policy should give you 75 to 85% of cash value/premium the first year, going higher every year. Around year 4 to 6 you should have 100% of your premium available in cash value, and after it should be more than that, growing at an average of 3-8% a year, depending on the product (whole life, Index Universal Life). If you take into account that drag, and if you compare investing your money directly into an investment, or putting instead your money into a life insurance, and reinvesting the loan proceed to the same investment, the cross over is between year 7 and 10. After that, the compounding effect put the later way ahead of the former.
Permanent overfunded life insurance is a complex product, that need proper planing and a good execution. But it has excellent tax advantage, it is secured from creditors, it grows steadily and does not go down with the stock market, is a fantastic wealth multiplicator for your investments and on top of it provides a financial security to your family in case of your early demise.
If you are interested on how to use it properly, you need to find an insurance agent who is knowledgeable on it. You also need to find an agent who is willing to offer it, as to properly set it up, the agent has to lower his commission. Last I would also suggest to use an agent who is also an investor him/herself who uses it too.
Thank you. I've watched dozens of U-tubers on this topic, and this was the single best (and most balanced) explanation of these products. The HELOC analogy is very helpful.
Those up-front fees/commissions, and the sensitivity of the product to finding a good agent to "design" a policy right, are big turn-offs for me. It takes so long to "break even" on the product before it makes sense to use it for leverage. It's definitely designed to be a long-term strategy to minimize risk, which doesn't compete with systematic stock market investing for someone who can tolerate that episodic volatility/risk and is confident of long-term return of 8+ percent. It's real utility seems to simply be an alternative to bond investing. And certainly not a short-term strategy to capitalize for RE investing, to get back to the OP's question.