• Stephen Gardner

Real estate investing from life insurance

Updated: May 1, 2019

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I think real estate coupled with a properly built cash value life insurance contract can be a powerful weapon. Let me show you why! Recently, one of my long-time clients contacted me to thank me for putting him and his wife into his insurance contract 10 years earlier.


At the time he opened his contract, he was new to the life insurance as something other than death benefit idea and had no clue that down the road he would use his policy to buy a rental property that would end up becoming a profitable flip. This sudden rise in property value would make him an unbelievable triple digit return. Initially, this client was preparing for retirement, wanted to avoid losing money, legally reduce his taxes and have access to these funds to build a future business.


This client sat on his money for 9 years. He was a good saver and consistently socked money away each year as he had committed. As a result of becoming such a good saver, he needed to open 2 other insurance plans along the way. Over time his saving habit had built him over six figures in accessible and liquid money he could use. I had told him and his wife about some real estate I was doing and how he could get involved or do the same on their own. He was intrigued but cautious.


After 9 years of saving and about 6 months of studying his local real estate market place, he and his wife bought a 4 bedroom, 2 bathroom bungalow for $122,000 with the intention of renting it out. They put down $30,000 which they borrowed from his life insurance contract at 5% interest. At the time they believed this would be a long-term investment so they didn’t plan to pay back the loan or interest until the property sold. The interest would accumulate along the way but they could capitalize the loan or in other worlds, eat the interest by the gains in his policy.


The purchase went smoothly and they were able to find a renter and property manager they liked. The property actually cash flowed starting in the second month. As time went by, my client realized he didn’t enjoy owning a rental property and being a landlord. Even with a property manager in place to handle the rental calls, the broken toilet calls and the occasional missed utility bills the renter needed to pay, my client found it to be annoying investment.


But it was cash flowing well and property values were going up. Actually, they were going way up! So much so, that my client figured out that if he sold the property now, he would make 8 years’ worth of rent in one shot and wouldn’t have to deal with the annoying monthly calls and fixes to the property.


So he and his wife listed the property. At the time they sold, the market was starting to soften but the profit was still high enough to accept a below asking price offer at $174,000. I will include a picture of his closing documents so you can follow the math. Because of a refund on county taxes, the client was paid $174,259 total for the property. He had agreed to cover some of the closing costs to sweeten the deal for the buyer.


After paying off the mortgage, realtor and title company fees and closing costs, this client walked away with $69,445 back in his pocket. He and his wife were ecstatic. He mentioned to me that if he and his wife had kept saving in their 401k, they would not have had the freedom and opportunity to participate in this real estate investment. In fact, it probably wouldn’t have even crossed their minds. I’ve found more opportunities available to me as I’ve had more available money inside my own contract. When your money is closed off in a 401k or IRA, your opportunities are closed off, too.



Now before you get too excited about the $69,445, remember $30,000 of that was their own original money used as the down payment. The $30,000 would be repaid to the insurance contract. Along the way, they were cash flowing around $500 a month and saving that in their bank account. They had $5500 in savings at the time of sale from the rental profits.


If we take the $69,445 and subtract the $30,000 down payment, they made $39,445 from the sale of the property. Plus we add on the $5500 from rents for a total of $44,945 in total profit. That is a 149.82% return on their investment. I was blown away when he should me this.


However, it’s actually better than that, but I’m reluctant to show the math because when I first share this with people, they think it is a lie or I’m manipulating the numbers. But I’m not. Once you understand the math and run the calculation for yourself, you will see that this is true. Totally true! These plans become a weapon of math-destruction so follow the math and see how much better the numbers are by being your own source of financing.


Because he used his life insurance contract, his $30,000 was always in his policy and always at work earning interest. He borrowed the life insurance company’s money and paid it back with interest. However, his true cost on this money was only $1500 of interest. That’s 5% on the $30,000 he borrowed. He used OPM (Other People’s Money) to finance this deal just like I taught him. So for a whole year of putting his $1500 of interest cost at work, he earned $44,945 on that money. That’s a 3,196.93% return on the money he actually put to work!


Can you see why I was hesitant to use the real numbers? I’ve been called a liar by people that said this sounds too good to be true. I’ve had top real estate investors tell me these numbers can’t be real. But these same people that called me a liar then ran the numbers themselves, plugged the data into an ROI calculator and checked it with a colleague or their financial advisor and then called to tell me it was true and I was a genius. From liar to genius. The math doesn't lie.


I’m actually not a genius, I just like numbers. And this is how the money and interest really work. You have to look at how using money like a bank can make you wealthy. Once you use other people’s money, the numbers get a lot bigger and the returns enter the triple and quadruple digit return zone. Keep in mind, this is on a small amount of money so it’s probably better just to be happy seeing it as a 149% return on your money. Maybe an example using something smaller and from a banks perspective will help this sink concept really sink in.


I recently read something that was so shocking. It was like being hit between the eyes with lightning. It wasn't even what this person shared, it was the thought and the math I ran afterwards that really caught my attention. The person sharing the information pointed out how willing we are to put money at a bank for very little interest, then turn around and borrow from the same bank for a car or RV or piece of real estate for a much higher interest rate.


He then said, "only a banker can loan your money out and still make money on your money while it is being used."


This is when my curious little mind went to work on the numbers. I happen to be discussing the purchase of a motor home with a neighbor of mine that was walking into this money trap so I'll share his situation. He told me he had enough cash to purchase the motorhome, but wanted to have his savings liquid in case he needed it. The motor home would carry a loan of $100,000.


Here's where it gets interesting! This neighbor had $100,000 sitting in a money market account earning .25%. That means he will earn $250 that year for parking his money at his bank. Crappy, right? But the motorhome loan is going to carry an interest rate of 5.74% each year for the 10 year term. His payment will be $1,097 per month.


At first, I thought the bank was just earning a 5.49% spread on the interest rate. That's the 5.74% minus the .25% he is earning on his money. My first thought was wow that is a great spread for the bank. My friend is getting ripped off! Then it hit me, this would be true if this was an investment of the “bank’s money”, but it’s my friend’s own money with the bank acting as a middle man. The bank doesn't use its own money; it is using customers’ money on deposit to fulfill these loans. The only money the bank is really using of their own is the $250 of interest they will pay.


So then I jumped on a car loan calculator to see what kind of interest my neighbor would be paying. In year 1, he would pay the bank $5,541 in interest. Now, having this information, I could jump on an ROI calculator to see what the banks return would be on their $250 investment.


The bank is making a 2,116.40% return on their $250 investment, while using my neighbor’s money to lend it back to him as the middle man. This is when my eyes bugged out of my head and my jaw dropped open. I’m sure I looked like a funny Warner Brothers cartoon character. I knew banks did well based on how many locations and beautiful buildings they own, but WOW was I shocked by how well they are doing using OUR money.

Each year my neighbor holds the loan, the banks return lowers since more of his money goes to principal and less to interest. However, have you noticed that after your first year of having a bank loan, the bank starts heavily marketing to you about refinancing your car, RV or home? This is to keep you in the heaviest interest time of your loan so they can make more money on you.


It’s brilliant when you are the earner and devilish when you are the one being ripped off. You don’t have to be ripped off by the bank anymore. You just need to follow their lead and build up a base of capital you can use like a bank as fast as you are able. My hat is off to the banks for this, but I’ve chosen to be my own bank through the insurance contracts I own and educate people on the same. Sure, we don’t make 2,116% returns all the time, but we do a whole lot better than the bank and we can actually save on interest and depreciation with major purchases.


Be aware of how banks behave with your money and the profits they are making on you. But also, learn from them; learn not to behave with your money the way they teach you, but learn to behave with your money the way they do. Do as they do, not as they say. That is the key. Success leaves clues and now you know how banks behave with money.


This is why I educate people on owning a properly built cash value life insurance contract that gives them the advantage of being their own source of financing on major purchases as I’ve described in my book and in other areas of my website.


When I show this to clients, they are blown away. I’ll admit it is so counter intuitive to what we know and have been taught that it’s easy to dismiss without letting it sink in, but it is true. Now my client has experienced an incredible benefit of being his own source of financing with real estate. For now he plans to use his money to buy his cars while the real estate market cools off. Then when the market is right again, he’ll have more money to go out and buy several properties, being his own source of money on each of them. To say he is excited for the future would be an understatement. I want to show you how to be a great saver and have a level of excitement for your future like you’ve never had before.

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