As I write this, markets are increasingly volatile, interest rates are surging, and tax increases are looming. No matter when you’re reading these pages, I bet we haven’t solved the world’s economic problems. We know that real estate can solve economic uncertainty in one’s portfolio, so regardless of your approach to real estate, in this chapter, I will reveal several game-changing strategies to build wealth regardless of market conditions. So, whether you are renting apartments, flipping properties, syndicating deals, investing in structured notes, or just dabbling, keep reading to find out how we’ve helped hundreds of other investors in good times and bad.
Stick with me here, and I will also outline an innovative paradigm to help you prepare for the new economy we’re entering together, including a specific strategy that enables you to fire your real estate banker and become your source of financing!
Troubling times for real estate investing
As I write this, mortgage rates are surging, coupled with the highest inflation in 40+ years. Real estate markets are off their highs, and the world is awash in turbulence and volatility to a degree not seen in many years.
In just under one year, mortgage rates went from 3% to 7%, making homes unaffordable to many. This simple change doubled the monthly payment on a $400,000 home (about the U.S. median house price). Add this to already soaring home values, and millions of real estate investors now must shift their strategy regarding home purchases.
Homeownership is at its lowest in years, which might be good news for landlords looking to rent apartments. But high-interest rates and rent caps—along with rent moratoriums and eviction bans between landlords and tenants—can spell financial doom for landlords.
Real estate requires constant management and upkeep, and famously fickle tenants may or may not bring you a consistent income. And no matter the real estate market you find yourself in, real estate is notoriously illiquid, as it’s almost impossible to access your equity within a day or so.
Amidst the chaos, there is always an opportunity.
Einstein is credited with saying, “one can’t solve a problem by using the same thought process that created the problem in the first place.” So if we want to solve the problems we have with our money, we need to change our thinking.
How do we change our thinking to survive in these turbulent times? What are the critical attributes of where you keep your money? A savings account is different from a hedge fund. Move your money into a new type of account, and its functional characteristics change. So what about you?
What do you truly want your money to do for you?
How would your money act if you could wave a magic wand and create a perfect financial vehicle with all your favorite characteristics and attributes? Considering this newly minted financial parking space for your money, would you say “yes” or “no” to the following questions?
- Can you lose money due to elements outside of your control?
- Are guarantees on your returns offered or received?
- Is the principal safe and protected?
- Are there any penalties for accessing your cash?
- Can you access the money without red tape or delays if you need it?
- Can you use leverage to create the most wealth for the least amount of money?
- Does your money grow tax-deferred?
- Is your money tax-free upon distribution?
- Is your money protected from creditors?
- Can your money be used as collateral?
- Does your money transfer income tax-free to your heirs?
Remember, your money must live somewhere. Given how you answered these questions, where do you want your money? And, most importantly, what are you going to do about it?
Before I go on, I need to tell you about my experience. I got into financial planning right around the 2008 financial meltdown that was getting underway. For three years, I studied hundreds of financial products and strategies used by the average American and the ultra-elite. Complex dynastic trusts, stock options, hedge funds, bond portfolios, mutual funds, raw land, and tax strategies. The list goes on and on.
At the end of that study, I found a specialized variation on a 200+-year-old financial asset that has increased in value every year through booms and busts: High Cash Value Dividend-Paying Whole Life Insurance. The kind that is issued by a mutual life insurance company, offering paid-up additions with non-direct recognition loans. To simplify, let’s refer to these as Bank On Yourself® type whole life insurance policies.
Many have heard of whole life insurance, but usually, it’s misrepresented and unfairly maligned by nay-sayers like Dave Ramsey or Suze Orman. But this type of whole life insurance categorically differs from what most financial pundits love to hate. Unlike traditional whole life, Bank On Yourself type policies dramatically lower the expenses and commissions (a 50–70% expense reduction). In addition, they pack your policy with liquid cash that you own and control, thus allowing you to build wealth right away.
This design means exponentially larger cash value accumulation than older versions of whole life insurance. It’s time to take another look at whole life insurance—not just because we need the insurance but because we need a better way to finance our real estate investments and other major purchases. It is as old as the U.S. Constitution and maybe older, so why should we bother with whole life insurance in our modern age?
Before we get into how it fits into your real estate investing strategy, here’s a quick primer on Bank On Yourself designed whole life. We’ll use the acronym T.G.I.F.
T = Tax Advantages. The policy comes with significant tax advantages. First, you put the money in, and unlike bank accounts and CDs, which are taxed annually, Bank On Yourself designed whole-life policies never get taxed again while your cash remains in the contract. And depending on policy design, your money may be accessible completely and 100% tax-free! In this way, it is like a Roth IRA, except without all the government restrictions. There are no government income phase-out rules and no contribution limits to how much you can put into these policies.
Imagine putting any amount you wish into a policy-protected from the tax man for the rest of your life. Then, imagine pulling five or even six figures a year of tax-free income from your life insurance and not
reporting it on your tax return. In addition, it won’t impact your provisional income for Social Security or other income. Finally, since it is a life insurance policy, the death benefits can be left income-tax-free to your family. Wow! Funds from your life insurance, coupled with real estate, could give you a lifetime of tax-free income. We could stop right there, but there’s more.
G = Guarantees. The cash value is guaranteed to grow every year, regardless of stock or real estate markets. For over 200 years, whole life insurance has increased in value every year through market booms, busts, depressions and recessions, high and low inflation, and multiple pandemics! The guaranteed cash value increases are wonderful, but the principal guarantees are equally exciting. This means that the gains you made last year aren’t at risk of loss this year.
These guarantees are a great buffer against the wild volatility we’re seeing in our world and real estate today. Imagine what it would feel like to know for sure that your policy will grow and hit another all-time record high this year. And next year. And the next!
Take note: Think of your whole life not as an investment but as a replacement for your liquid accessible cash alternatives, i.e., your safe money. We’ll return to the “liquid and accessible” element in just a moment.
I = Insurance. As the name implies, whole-life policies are life insurance. Still, unlike typical term insurance, it never expires, and the gift to my family or favorite charity beats any other estate-creating vehicle I know of. For example, if I paid $10,000 into a mortgage and died tonight, my family only gets
$10,000 of house equity. If I paid a $10,000 premium into my life insurance and passed away this evening, depending on my age and health, my family might get between $30,000 and $100,000!
F = Freedom in Financing. Unlike traditional retirement accounts, where one must wait years and decades to access the money without penalty, the cash value is always yours without any restrictions. You have easy access to your cash for business or personal use. You can access the money to purchase real estate investments or remodel your kitchen. You can use the money for a fix and flip or a vacation to the Bahamas.
You can get your cash with no questions asked, usually in about five to seven business days. No more piles of paperwork to access funds or having to “kiss the ring” of a banker to get approved for a line of credit. You are your own source of financing. And this leaves you more time to run your business, rather than having to placate a banker’s fickle emotions!
It often works even better than paying cash for major purchases. Consider a typical bank withdrawal. When you withdraw money from your bank account, how much interest are you earning on the cash you removed? None, of course. Withdrawals break compound growth forever. This has devastating implications for your finances! But when you borrow from your Bank On Yourself type whole life policy, there is a loan provision in the whole life insurance contract that allows you to borrow against the cash value. And the policy will continue to grow even on the capital you borrowed.
It might be helpful to read the above once more to let it really sink in.
Let’s say you had $100,000 of cash value, and you borrowed $70,000 out of a Bank On Yourself type policy to invest in a real estate property. Your cash value will continue to earn interest as if it had never been borrowed. In other words, even after the loan is taken, you will continue to receive the guaranteed cash value increase as well as dividends on the entire $100,000 as if you hadn’t borrowed a penny!
Compound growth is what financial planners seek out as the Holy Grail for their clients. Policy loans with continued compounding of your money change everything. Policy loans from Bank On Yourself type policies allow true uninterrupted compound growth on your money.
So, now that you know the basics of Bank On Yourself, what does any of this mean to you and your real estate business?
Much like nitrogen and glycerin, Bank On Yourself and real estate investing become more powerful together! By combining the power of both, you catalyze the strength of each. Let’s explore a few strategies where we can implement the Bank On Yourself design in your real estate portfolio.
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.