Where to store rental reserves?
Real Estate Agent · Minneapolis, MN · Member since 2017 · 138 posts · 87 votes
We're going on 3 properties, and I'm wondering where others store their reserves for their rental properties? My general rule of thumb was 6 months of PITI, which I have in a savings account. As we go to 3 properties, this amount is now enough to purchase another property! So there has to be a better way to store this money.
So far I've been researching putting it into a:
high yield savings account, very boring, very low yield, very safe, and can be withdrawn quickly.
Mix of a stock/bonds in a taxable investment account, shoot for a 4-6% return. Better return, liquid, but if i needed the money, I'm taxed.
Infinite banking. My understanding is I could over time, fund the policy annually, have a cash balance I'm able to use right away, have an immediate death benefit, and it gains 4-6% growth, and I can take a loan against it.
I am not an insurance salesperson. I've never been licensed in health and life, and none of the below is advice, but a slice of my experience. I own and use whole life policies, and I couldn't be happier.
The fact that you listed infinite banking is game-changing. It can be so frustrating to try explaining why high cash value whole life insurance policies are so powerful. Initially, it puts a small drag on your cash reserves and cash flow, but when the system is at full efficiency, after the third year you have such a profound advantage over other investors.
Any year could theoretically prove this wrong, but my policies have been averaging 6.5% growth after factoring in the dividend. 4% of that is guaranteed, so even if the insurer had a terrible year, I'm 100% certain I get my money. And loans are liquid and easy to get ahold of if you need them to pay for emergencies.
Remember how people were pissed at Elon Musk because he was living on loans from the growth of his stock in Tesla and therefore not paying any taxes? Well, you can do the same thing with your life insurance policy and you don't have to be a billionaire. Remember how Bill Gates lost half his earthly possessions when he divorced Belinda. Well, he'd've been shielded from that loss if it was held in a whole life policy. Remember how companies lose everything when they file bankruptcy? Well, if they have whole life policies, the money can't be surrendered or taken. (Check some of these claims as rules vary state to state, but it's sufficient to say, the protection offered by policies is another great reason to love them.)
@Natalie Schanne this is a well written post. I think we have similar risk positions and thoughts actually. Because the odds of me letting a property sit vacant is 0 and I'll generate income to cover expenses.
The credit cards are a perfect example too, bc you have 30 days to figure out how to cover a roof/hvac expense, which my attitude is to go generate income to fix the problem.
safe to say, you put it into a stock mix, you can take a loan out from it if needed then?
@Adam Widder
Like all things, you should be a good steward of IBC policy. When you take a policy loan you’re not actually taking your own cash value out, you’re taking a loan against your cash value while your money continues to grow. So it’s the insurance company’s money that you take out and like all loans, they want to be paid back as well. That’s a common misconception people have about IBC. Again it’s a very powerful tool if understood how to use it correctly, and efficiently.
My strategy is just holding $5000/door for emergencies. After that I put it in a Fidelity stock account and sell options.
Strategy I use is called the Wheel Strategy. Sell cash covered puts for income, then when you eventually get assigned you sell covered calls for income. Can usually make about 1% yield on your money per month, or 12% return per year.
@Adam Widder
Voyager pays 9% on US dollar coin which is pegged to the dollar and very safe.
They pay 5.75% on Bitcoin which is just a juggernaut.
The 160k i put into crypto(85% of that into bitcoin) early last spring is worth 256k today and I'm earning 1k+ / month in interest.
And it's as liquid as cash in the bank.
@Adam Widder
Infinite banking (only if the policy is designed correctly and specially for an investor) is the best option in my opinion. It definitely depends on your personal financial position and medical profile being that the underlying vehicle is a life insurance policy. Definitely not advice for everyone’s situation though.
One major component of growing wealth is velocity of your capital. Infinite banking allows you to earn a guaranteed interest rate + dividend tax free, all while investing the same cash value in another investment (double dipping as some call it).
Infinite banking is a long term wealth strategy. Don’t use it unless you are committed to investing beyond the policy break even point (usually 3 - 4 years if the policy is designed correctly).
@Adam Widder - you can decrease your reserves when you have more assets because the likelihood of all of your assets failing to perform AND you not generating excess cash flow from your w2 job / other income is very low.
Evaluate your worst case scenario and your backup plans to determine the amount of low return cash reserves that are appropriate for you.
I have determined that 0% interest reserves in savings account beyond about $5000 are unnecessary for me, regardless of how many properties I have. You may decide this amount should be 2 months of PITI per property plus the cost of one roof or one Hvac system (depending on your financing options).
Like Allen said, I can borrow cash money from my stock account (td Ameritrade) without selling. The margin loan is at like 8-10% APY depending on the amount borrowed and I can borrow at least 50%. My VOO (s&p500 index) is up 25% year to date. I look like a genius for maxing my cash out refinances at 3.5% for 30yr fixed. Why wouldn’t I want every spare penny in something that will grow as inflation grows?
I also have 0% credit cards with large available balances or can easily get some with 12-18 month 0% runways if I anticipate a large purchase such as a HVAC system or property turnover-rehab (paint, flooring, etc.)
Over time, my money will grow a lot more than if I’m holding $30-50k in cash at 0% (which with today’s 6-7% annual inflation is actually losing a lot of purchasing power).
If you have other income such as a w2, this also serves as a buffer where you could tighten your discretionary expenses in a worst case scenario to continue to keep current on all your bills, thereby needing less in cash reserves to maintain your portfolio.
I’ll admit I’ve never experienced owning properties and having them vacant (or non paying) for more than two months. So I can’t relate to people losing 10+ houses in the Great Recession. I am super aggressive about putting someone in there. In New Jersey, if you make any kind of payment they will usually defer foreclosure for a long time (24+ months). Ultimately for owners, Vacancy is a killer. Rents are unlikely to fall especially now that inflation is ticking up.
If ameritrade is charging you 8% to 10% for margin loans you need to discuss this with your investment representative as my brokerage is charging me 2.5% (over $500k) to 4.5% (less than $100k). My rates quoted is assuming fed fund rate of 0.25% (current), it goes up the same amount as fed fund rate (ex if fed fund rate is 0.5%, then my rates are 0.25% higher than I stated).
I recognize not everyone will get the same rates, but secured rates of 8%+ is absurd.
Good luck
These are all great posts and I have heard both sides on having a whole life insurance policy and my main purpose on getting a policy was in case something happened to my wife and myself. I love my W-2 job and have no plans on quitting but my job also takes me to places such as Iraq (worked in Kurdistan and Baghdad from 2015-2018), Somalia, CAR, and Pakistan and there is an inherent risk of terrorism, political unrest. Should something happen to me what happens to my family? My wife is expecting our second child while we are in Spanish language training for our next assignment overseas so she doesn’t work. My policy combined with my rental portfolio gives my wife the flexibility to ease back into the workforce without having the additional burden of worrying about money. I also have a policy for me wife and plan on opening one for my daughters….albeit a smaller premium.
The thought of viewing the accessible funds in my policy as cash reserves for my rental properties never occurred to me as I keep my rental cash flow in a credit union account that I never touch ( a chronic cheap shake) . I just looked at my policy as another way to fund BRRRR deals (combined with private money from family/friends and a line of credit from a credit union). That being said thank you all for the post as I might shift some of the excess cash reserves from my rental income into this policy as opposed to simply funding it from the excess cash I earned in previous assignments overseas.
That is what term life is for. Are you going to be going into war zones at age 70? Probably not right? So a 20 or 30 year level term policy is very inexpensive and uncomplicated. Look, insurance is meant to off load risk. Not for investing. There are millions of other options to invest. Why do you need an expensive complicated contract that is hard to get out of bought from a salesperson whose compensation is tied not to your benefit but to the highest fee product they can sell you?
I prefer not to leave money as "dead money" so invest funds at the very least into index funds, but mostly in swing trading.
Term life insurance has its place, but it is an expense as you will not get your money back unless you die prematurely.
Whole Life or Index Universal Life will return much more than what you put in it. There is a certainty of you dying eventually. So there is a certainty of your heir receiving the death benefit.
Permanent life insurance can be used for estate planning, tax optimization, asset protection on top of insuring your loved ones financial security if you are dying earlier than expected.
With a maximum overfunded permanent life insurance, you can also get some living benefit and use it for investment purpose as collateral for loans (while it continues to grow). You can also use it for getting tax free income during retirement. There are multiple ways of using this excellent safe, liquid, tax free, asset protected place to put your money. All life insurance contracts are not the same, and you need to find an agent who knows and is willing to set a properly structured maximum overfunded permanent life insurance contract.
Term life insurance has its place, but it is an expense as you will not get your money back unless you die prematurely.
Whole Life or Index Universal Life will return much more than what you put in it. There is a certainty of you dying eventually. So there is a certainty of your heir receiving the death benefit.
Permanent life insurance can be used for estate planning, tax optimization, asset protection on top of insuring your loved ones financial security if you are dying earlier than expected.
With a maximum overfunded permanent life insurance, you can also get some living benefit and use it for investment purpose as collateral for loans (while it continues to grow). You can also use it for getting tax free income during retirement. There are multiple ways of using this excellent safe, liquid, tax free, asset protected place to put your money. All life insurance contracts are not the same, and you need to find an agent who knows and is willing to set a properly structured maximum overfunded permanent life insurance contract.
Maybe. But I bet you I can find a better less complicated and cheaper way to get all the above benefits with a combination of term life (for actual insurance) and investing the rest in a brokerage in Roth IRAs and taxable accounts invested in simple index funds which you can also borrow tax free against. In general the more complex the contract the less benefit you as a consumer will gain. Term life is a simple contract. You pay a premium and if you die your beneficiaries get paid. It is no different than your car insurance or homeowners insurance. Offloading risk. Anything else is not insurance.
Maybe. But I bet you I can find a better less complicated and cheaper way to get all the above benefits with a combination of term life (for actual insurance) and investing the rest in a brokerage in Roth IRAs and taxable accounts invested in simple index funds which you can also borrow tax free against. In general the more complex the contract the less benefit you as a consumer will gain. Term life is a simple contract. You pay a premium and if you die your beneficiaries get paid. It is no different than your car insurance or homeowners insurance. Offloading risk. Anything else is not insurance.
On the short term, cheaper probably as term life insurance is cheap when you are young. However on the long term, not only will you not be able to find cheap term insurance when you are getting older, but also a permanent life insurance will give you more money back than a term life. So with permanent life insurance you get free insurance as it is paid for by the increasing return.
A Roth IRA has a low limit of $6k premium per year, and if you are a high income earner you can't even pay into it.
A brokerage account is not tax free, and historically the S&P500 returns on the long term has been in the 7%-9% range pre tax. Depending on your tax bracket that could be equivalent to a 4 to 5% post tax. And it is with all the volatility, including correction time when it can drop more than 30%. It takes decade to recover from such a correction, and if you need money during that time you are in a very bad position. In a permanent overfunded life insurance you will not have corrections. Only positive gains.
Margin loans are very risky and subject to margin calls. Of course if you only borrow 20% of the value of your portfolio, you are safer, but in no way can you borrow 90% of it like in a permanent life insurance.
I do have a brokerage account, a Roth IRA, a 401k but I also have an IUL where I put all my cash flow. One is not exclusive to the other, and a wise investor should diversify his assets.
Maybe. But I bet you I can find a better less complicated and cheaper way to get all the above benefits with a combination of term life (for actual insurance) and investing the rest in a brokerage in Roth IRAs and taxable accounts invested in simple index funds which you can also borrow tax free against. In general the more complex the contract the less benefit you as a consumer will gain. Term life is a simple contract. You pay a premium and if you die your beneficiaries get paid. It is no different than your car insurance or homeowners insurance. Offloading risk. Anything else is not insurance.
On the short term, cheaper probably as term life insurance is cheap when you are young. However on the long term, not only will you not be able to find cheap term insurance when you are getting older, but also a permanent life insurance will give you more money back than a term life. So with permanent life insurance you get free insurance as it is paid for by the increasing return.
A Roth IRA has a low limit of $6k premium per year, and if you are a high income earner you can't even pay into it.
A brokerage account is not tax free, and historically the S&P500 returns on the long term has been in the 7%-9% range pre tax. Depending on your tax bracket that could be equivalent to a 4 to 5% post tax. And it is with all the volatility, including correction time when it can drop more than 30%. It takes decade to recover from such a correction, and if you need money during that time you are in a very bad position. In a permanent overfunded life insurance you will not have corrections. Only positive gains.
Margin loans are very risky and subject to margin calls. Of course if you only borrow 20% of the value of your portfolio, you are safer, but in no way can you borrow 90% of it like in a permanent life insurance.
I do have a brokerage account, a Roth IRA, a 401k but I also have an IUL where I put all my cash flow. One is not exclusive to the other, and a wise investor should diversify his assets.
So I currently have a TL policy that will pay out a set benefit to my wife should I die prematurely.
For PL policies, what's the interplay between the cash value and death benefit? If I have a PL policy with a death benefit of $500k, what happens to the cash value that has accumulated when I die? Do the beneficiaries receive both the DB and the CV?
Maybe. But I bet you I can find a better less complicated and cheaper way to get all the above benefits with a combination of term life (for actual insurance) and investing the rest in a brokerage in Roth IRAs and taxable accounts invested in simple index funds which you can also borrow tax free against. In general the more complex the contract the less benefit you as a consumer will gain. Term life is a simple contract. You pay a premium and if you die your beneficiaries get paid. It is no different than your car insurance or homeowners insurance. Offloading risk. Anything else is not insurance.
On the short term, cheaper probably as term life insurance is cheap when you are young. However on the long term, not only will you not be able to find cheap term insurance when you are getting older, but also a permanent life insurance will give you more money back than a term life. So with permanent life insurance you get free insurance as it is paid for by the increasing return.
A Roth IRA has a low limit of $6k premium per year, and if you are a high income earner you can't even pay into it.
A brokerage account is not tax free, and historically the S&P500 returns on the long term has been in the 7%-9% range pre tax. Depending on your tax bracket that could be equivalent to a 4 to 5% post tax. And it is with all the volatility, including correction time when it can drop more than 30%. It takes decade to recover from such a correction, and if you need money during that time you are in a very bad position. In a permanent overfunded life insurance you will not have corrections. Only positive gains.
Margin loans are very risky and subject to margin calls. Of course if you only borrow 20% of the value of your portfolio, you are safer, but in no way can you borrow 90% of it like in a permanent life insurance.
I do have a brokerage account, a Roth IRA, a 401k but I also have an IUL where I put all my cash flow. One is not exclusive to the other, and a wise investor should diversify his assets.
So I currently have a TL policy that will pay out a set benefit to my wife should I die prematurely.
For PL policies, what's the interplay between the cash value and death benefit? If I have a PL policy with a death benefit of $500k, what happens to the cash value that has accumulated when I die? Do the beneficiaries receive both the DB and the CV?
The cash value is part of the death benefit. Its quite literally the policy owner saving up the death benefit for the insured over the insured's lifetime. This cash can be accessed via policy loans secured by the cash value. At the time the insured dies, the death benefit pays off any outstanding loans and the rest of the death benefit goes to the beneficiary.
As an example, a policy with a $1M death benefit and $400,000 of cash value will still only pay $1M to the beneficiary. $400K comes from the cash value and the insurance company kicks in the other $600K from their risk pools.
These are all great posts and I have heard both sides on having a whole life insurance policy and my main purpose on getting a policy was in case something happened to my wife and myself. I love my W-2 job and have no plans on quitting but my job also takes me to places such as Iraq (worked in Kurdistan and Baghdad from 2015-2018), Somalia, CAR, and Pakistan and there is an inherent risk of terrorism, political unrest. Should something happen to me what happens to my family? My wife is expecting our second child while we are in Spanish language training for our next assignment overseas so she doesn’t work. My policy combined with my rental portfolio gives my wife the flexibility to ease back into the workforce without having the additional burden of worrying about money. I also have a policy for me wife and plan on opening one for my daughters….albeit a smaller premium.
The thought of viewing the accessible funds in my policy as cash reserves for my rental properties never occurred to me as I keep my rental cash flow in a credit union account that I never touch ( a chronic cheap shake) . I just looked at my policy as another way to fund BRRRR deals (combined with private money from family/friends and a line of credit from a credit union). That being said thank you all for the post as I might shift some of the excess cash reserves from my rental income into this policy as opposed to simply funding it from the excess cash I earned in previous assignments overseas.
That is what term life is for. Are you going to be going into war zones at age 70? Probably not right? So a 20 or 30 year level term policy is very inexpensive and uncomplicated. Look, insurance is meant to off load risk. Not for investing. There are millions of other options to invest. Why do you need an expensive complicated contract that is hard to get out of bought from a salesperson whose compensation is tied not to your benefit but to the highest fee product they can sell you?
Anish, you made a valid point that insurance to off load risk. Is that not what I am doing? What happens if one of my rentals needs a new roof before a tree went through it? You are saying that is what property insurance is for but what if my insurance is slow to file a claim? I was taught that there should be a primary/secondary/contingency/emergency course of action to take in case of emergencies. That is how I view my policy. The ideas of investing with my money WHICH IS READILY ACCESIBLE sounds great but I did not get my policy with this idea in mind (I didn't even know used their policies in this manner). I would like to learn how to make this money work better for me, who wouldn't? However it will not come at the expense of having effective courses of actions in case of emergencies, whether it be now or in the future.
Should have mentioned that in my previous post, I have a term policy through my employer. You are correct that a whole life policy is more expensive than term but as an mature adult I did my due diligence to include what I was taking home from my current W-2/rental income and came up with set yearly amount I would put in my policy. I had key metrics to that could not be degraded by the yearly allocation to my policy that are as follows 1)I was going to max out my employer Roth IRA and hit the percentage my employer would match in my other retirement account, 2) I would not touch any of my cashflow from my rentals 3) I would set aside 10% of my biweekly pay check into an emergency funds 4) I could pay all of my bills to include putting clothes on my daughters back/food in her belly/a roof over her head. My policy allows me to do items 1-4. I have noticed that every year the amount that I pay for premiums/catch up contributions seems smaller due to house hacking, acquiring more rental. working overtime, per diem for work trips (it adds up), etc but again I came up the set amount to my policy based of numbers when I had less rentals and a was a brand new father. I am fairly certain most of the other members here who have a whole life insurance policy have done something similar and have diversified their investments accordingly......if not then you're question would be posed to those folks.
Can the infinite bank with whole life be set up were I can fund a larger amount when I open it and then decrease that amount in the following years? For example if I have 50k in reserve in the bank can I put that all into the IBC and then the next year go to a more standard rate of contribution like 500-1k a month? Also I have heard people claim they can access some of the money via loans ect in 3 months of opening it but I have heard others claim it takes a couple years. I assume this all has some degree of variability based on how the policy is structured ect.
@Adam Widder
Infinite banking (only if the policy is designed correctly and specially for an investor) is the best option in my opinion.
One major component of growing wealth is velocity of your capital. Infinite banking allows you to earn a guaranteed interest rate + dividend tax free, all while investing the same cash value in another investment (double dipping as some call it).
Don’t use it unless you are committed to investing beyond the policy break even point (usually 3 - 4 years if the policy is designed correctly).
An investment that takes 3-4 years as you put it to, just to finally BREAK EVEN based on initial startup fees is already a fairly poor option right off the bat. From there it earns a safe rate of return, usually in the 5-6% range annually. This makes it a sub par investment account in the long run, as an initial 20k investment will grow to only 205k after 40 years, while if you had invested in a more growth focused account that money would have grown into over 900k at a 10% yield. Had you invested your money for an additional 4 years to 44 years (because you no longer need 3-4 years just to break even with insurance) that money would instead grow to 1.3million. And while there is a time and a place for safe, low yield products, for the majority of people it's not a great strategy for large sums of money unless the person is super adverse to risk. But either way this 5-6% yield is a function of the whole life insurance, and has nothing whatsoever to do with IB.
In IB, it is always touted (including by you) as a way to use the velocity of money to double dip investments. And while it's true that you continue to earn 5-6% on your funds while you take out a loan against your life insurance, the problem is that you are earning 5-6% in interest, but usually PAYING 7-9% in interest to access what otherwise was your own money had you just not put it into the insurance product in the first place.
So anyone who is consistently taking out loans to 'double dip' as you put it, is starting their investment career 3-4 years behind schedule because they need to catch up on fees, and then they are paying interest to access money that was theirs all along. If you are earning 5-6% and paying 7-9%, then net total you are paying 2-3% to access your own money. Just cut out the middle man and save yourself 2-3% interest by not putting your money into the insurance product in the first place.
If you are going to invest in whole life insurance that's fine, there is a reason and a time and place to do so. But that money should generally be left alone. And certainly it should never be your primary goal to put money into the account, just so you can immediately turn around and take money out of the account via a loan and pay interest on it. Any year you utilize IB, is a year you are guaranteed to lose 2-3% of your money for no good reason.
Those IB YouTube videos are almost as bad as the videos showing a super secret hack to repay a mortgage in only 5 years using a HELOC.
In IB, it is always touted (including by you) as a way to use the velocity of money to double dip investments. And while it's true that you continue to earn 5-6% on your funds while you take out a loan against your life insurance, the problem is that you are earning 5-6% in interest, but usually PAYING 7-9% in interest to access what otherwise was your own money had you just not put it into the insurance product in the first place.
When you get a loan from lender that is collaterized by the cash value of the life insurance, you can find rates at prime +- 0.25%. So around 3%, interest only. On top of it, because you are using the proceed of the loan to reinvest, you can deduct the interest as investment expense. So you get 3 to 8% gain a year, tax free, in a safe asset, while at the same time you can use the same money to invest in other more fruitful assets. On top of it, you get a life insurance that will protect your family.
While the initial cost of the life insurance seems to be a hard hit on your money, you need to look at the IRR long term. The IRR does account for the cost of money and can be compared between different investments. When you invest in the construction of a new building, it may take a few years for you to get in the black. Permanent life insurance is no different, you will be in the red for the first few years. But on the long run the IRR is correct, and it does not really matter if the gain was made year 1 or 4.
Please quote me which insurer that allows for a loan at cheaper interest rates than the guaranteed growth rate from the funds inside the insurance policy. Any policy I have ever seen that allows the cash value to continue to grow usually charges between 5-10% interest. The only accounts I've ever seen with loans under 5%, there are very serious side effects of how the cash value in those accounts grows.
At best I've seen companies such as Penn Mutual offer matching loans after a period of 10+ years. Meaning the loan interest rate would match the guaranteed interest income from the policy effectively making it a free loan. But then again a free loan to access what otherwise was your money to begin with isn't exactly a groundbreaking ordeal.
Please quote me which insurer that allows for a loan at cheaper interest rates than the guaranteed growth rate from the funds inside the insurance policy. Any policy I have ever seen that allows the cash value to continue to grow usually charges between 5-10% interest. The only accounts I've ever seen with loans under 5%, there are very serious side effects of how the cash value in those accounts grows.
@Ben Zimmerman
As I mentioned initially, using IB definitely depends on your financial position and health profile. If you are an accredited investor, you are likely well on your way in your investing career and can utilize IB to fund your investment deals without worry of the 3 - 4 year break even on a new policy. Velocity of capital means always having your capital working for you. IB is one of the tools used to do this. If you are just starting out and have a networth of less than $500K than IB is probably not for you yet.
Using the concept of a 10% average compounded return on some lump sum of capital in the stock market over X amount of years is too basic and unrealistic. Sequence of return risk exists and cannot be predicted with the market volatility.
IB strategy is based on a 4% guaranteed interest (until Jan 2022 anyway) + dividend which typically results in a 5 - 7% real return (tax free growth and tax free use of the capital). That 10% average return in the stock market, applying the lower long term capital gain tax vs short term plus expenses, would be about 7 - 8% real return. That’s basically the same real rate of return for much less risk. For my “safe working capital”, I would rather have it in a non-correlated asset like IB than in a more volatile asset. IB also is based on a private contract with a mutual life insurance company (paying dividends for the last 100+ consecutive years) and holds creditor protection in most states, none of which a brokerage account has to offer invested in the stock markets.
The actual cost of money in an IB policy designed correctly is 0.5% - 1%, which is the difference of the policy loan interest (simple interest) less the guaranteed interest + dividend (compounded) on the policy cash value growth. A policy with 2 - 3% cost of money as you have quoted was not designed correctly. That % difference sounds more like a Northwestern Mutual retail whole life policy with cash value and option for policy loan.
When you buy life insurance, you are essentially buying networth for your beneficiaries. The policy death benefit makes the 3 - 4 year break even period all worth it in itself, assuming you want to leave behind some legacy wealth. I plan on it…