For those who love to flip properties, how might you use the strategy of harvesting equity? Simple: take the profits from your first flip and use that profit to fund your policy. This will also work without flipping; if you are into doing the popular BRRRR method (which stands for “buy, rehab, rent, refinance, repeat”) by regularly using a cash-out refinancing of your properties.
Let’s look at what it would be like to use a cash-out refinance on existing property to harvest some equity into your Bank On Yourself type policy.
Let’s say you own four properties. Each property is currently $100,000 in value, appreciating at just 3% a year. That’s an appreciation of roughly $12,000 a year for your real estate portfolio. Let’s say you did a cash-out refinance every five years and pulled out $60,000 ($12,000 times five years) to “harvest” some of the equity.
Harvesting equity would allow you to lock in your real estate gains, which are not guaranteed, into a policy that will grow guaranteed for the rest of your life. As a bonus, the liquid cash in your policy allows you to purchase a fifth property. If the policy was designed the Bank On Yourself way, you could borrow roughly $50,000 within 30 days of starting the policy, which would help you secure a fifth property.
Now you have five properties earning 3% per year, plus your policy grows alongside your real estate on the total cash value—even on the capital you borrowed to make the fifth property purchase. Nice!
Five years after you opened your policy, your total real estate portfolio value is now $595,529 ($537,566 for your first four properties and $57,963 for your 5th property). Alongside your real estate, the policy’s total cash value has grown to $69,698, even though there is a loan balance on the policy. (The loan balance collateralized by the cash value has grown to $60,040 over five years. That’s a 4% APR, but the policy grows on the entire $69,698. Read on for how to pay off the loan.)
Bottom line: Using this equity harvesting strategy, your total asset value (policy + five properties) is
$665,227. Which would you rather have, $537,566 or $665,227? And don’t forget; there is a substantial death benefit on the life insurance policy, which is not even factored into these numbers and something your family wouldn’t have if you keep your equity in four real estate properties.
You might be asking, “What if real estate prices crash?” Good question—your properties could be underwater (i.e., you owe more than the property value) if you harvest equity and then prices drop. During the above example, they grow at a boring 3% a year, but what if they were to crash 30% or worse like they did in 2008?
There’s nothing guaranteed about the equity in your properties until you move it over to a policy; it’s up to the whims and fickleness of the local real estate market. However, by locking in your equity into a policy, you’re protecting it from ever being taken away from you. If housing prices crash, you’ll thank your lucky stars for moving your equity into a policy before your equity vaporized!
But what about that loan balance on the policy? Great news—you are in control of when you repay that loan, so when house prices recover, you can sell one of your properties and use the proceeds to either start new policies or pay off existing policy loans. Since there is no required loan repayment on policy loans, you can wait for housing prices to recover and sell at a reasonable price. After all, when you’re the banker, you’re in control!
Bank On Yourself® is a registered trademark owned by Hayward-Yellen 100 Ltd Partnership and is used with permission of the trademark owner here. This information represents the opinions of Mark Willis, of Lake Growth Financial Services and not of Bank On Yourself or Pamela Yellen. Pamela Yellen and Bank On Yourself and its affiliates, directors, officers, and employees are not responsible for any errors and omissions or for the results obtained from the use of this information and will not be held liable for any direct, special, indirect, incidental, consequential, punitive, or other damages related to the use of this information.
Neither Mark Willis, Lake Growth Financial Services, Bank On Yourself, or Pamela Yellen are engaged in rendering legal, investing, accounting, or other professional services. If accounting, financial, legal, or tax advice is required, the services of a competent professional should be sought.
Mark Willis, CFP® is a man on a mission to help you think diﬀerently about your money, your economy and your future.
Mark is a CERTIFIED FINANCIAL PLANNER™, a three-time #1 Best Selling Author, and the owner of Lake Growth Financial Services, a ﬁnancial ﬁrm in Chicago, Illinois. As co-host of the Not Your Average Financial Podcast™, he shares some of his strategies for investing in real estate, paying for college without going broke, and creating an income in retirement you will not outlive. Mark works with people who want to grow their wealth in ways that are safe and predictable, to become their own source of ﬁnancing, and to create tax-free income in retirement.