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Given our current hot housing market you’re probably asking yourself “How can I start using life insurance to buy real estate”? Buying real estate with whole life insurance can really become an asset to your investment strategy. Real estate is a great investment any time, but especially in this economy because it consistently appreciates. It’s also highly tax-advantaged, with deductions for mortgage interest, depreciation, insurance, and property taxes – meaning you get to keep more of the profits. With a market this hot there’s fierce competition among buyers to close the deal.

In this guide, we will delve into the intricacies of buying real estate with whole life insurance.

Whole Life Insurance and Real Estate Investment

While whole life insurance offers some dependable returns on its own, you’ll make the most of your money when you use it as an investment vehicle. And where better to invest that money than in real estate? That’s where whole life insurance and infinite banking make investing in real estate easy.

Buying real estate with whole life insurance can yield significant financial rewards. Real estate is one of the more attractive investments. Not only is it a tangible asset that reliably appreciates, but it also increases your cash flow when you lease it out. The trouble is putting together enough capital to purchase said real estate.

Tax benefits are a significant advantage of using whole life insurance for real estate investments. By building up cash value, you streamline the mortgage process, allowing for more efficient transactions. Once you establish your optimized cash value policy, you can use it for a down payment and reap multiple tax benefits, highlighting one of the three phases of leveraging whole life insurance for investing in real estate.

1. Establish a High Cash Value Whole Life Insurance Policy 

Establish a High Cash Value Whole Life Insurance Policy 

Before investing in real estate, ensure you are on solid ground with your whole life insurance policy. Start by selecting the right one; not all policies are created equal. Start by selecting the right policy. Remember, not all policies are equal.This is especially true when it comes to leveraging your life insurance for investments. With infinite banking, you need a policy with high premiums. This is so you can overfund the whole life insurance policy’s cash value.

On the face of it, high premiums don’t sound great, but remember you’re being your own bank with whole life insurance, and the high premiums are setting aside more money for yourself. The higher the premiums, the faster the cash value builds up and the sooner you can start investing.

Accruing cash value takes time. This can be a few years at minimum. This is why it’s one of the more challenging aspects of leveraged life insurance. Fortunately setting this money aside will pay off many times over when you can use it to your investing advantage.

The good news is that the growth of your cash value is entirely predictable. Unlike the stock market, with its fluctuations and corrections, there’s a guaranteed minimum to your cash value’s growth. This growth is usually between 2-3%. That’s true even if there’s a war or major pandemic that tanks the market. With whole life insurance, you know exactly where you’ll be financially, at any point in time.

Unlike a retirement policy, which might penalize you for early withdrawals, you can access the cash value whenever you need it. Should something catastrophic happen, you have the option of withdrawing all of your contributions, tax-free. Growth within the policy is only tax-deferred though. So, you would owe some if you withdrew everything from the cash value. That’s why a better option is to take out a policy loan. This would mean leaving the cash value where it is, earning dividends, and growing tax-free.

2. Use a Policy Loan to Make a Downpayment

Use a Policy Loan to Make a Downpayment

You can start taking out loans once you establish your cash value. No other type of financing offers the flexibility of policy loans. Once you establish your cash value, you can begin taking out loans. The policy’s death benefit simply gets reduced by the balance. Policy loans from the life insurance company typically have interest rates on par with the returns you’re getting from the cash value. It’s essentially an interest-free loan, but you’re also not making any money on the reserve you’ve built up.

Another option is to take out a cash value line of credit from a different bank with your policy’s cash value serving as collateral. These sometimes have a slightly lower interest rate than your policy’s returns. This can result in creating an arbitrage situation where you can make money while you borrow.

Real estate moves fast, especially in the recent hot market. If you need to work with a traditional bank to get financing, there’s a good chance someone else will scoop you, paying in cash, and you’ll miss out on a great opportunity.

Fortunately, buying real estate with whole life insurance is very similar to paying with cash. Policy loans are approved almost immediately. Your life insurance company isn’t concerned with the projected value of a property or whether it has had a proper inspection. This means the loan is entirely backed by the cash value. There’s no risk to the insurance company like there might be with a typical mortgage loan.

When purchasing an investment property, the biggest hurdle is usually the down payment. Once you own the property, the rental income should cover its mortgage, property taxes, insurance, and maintenance fees. With each repayment of the policy loan, you can leverage yourself even further. You can be buying more properties and increasing your cash flow. That’s why one of the more lucrative uses for a policy loan is to kick off that cycle of investment with the capital needed for a down payment.

Assuming enough funds in your policy, you could purchase real estate outright with cash. However, doing so isn’t always the best course of action. Your mortgage should have a relatively low-interest rate, at least compared to the other types of loans you could obtain to make investments. Secondly, you can deduct mortgage interest as a cost from your rental income. Quite often, it’s better to use the flexibility of policy loans only to make the down payment. This would ultimatley look like leaving the rest of your money available for other income-generating investments.

However, using policy loans solely for making the down payment does cause you to lose some of their benefits. The bank initiating your mortgage provides financing much slower, meaning you could get scooped in a fast-paced real estate market. The bank will scrutinize your finances and the property’s income-generating potential, possibly taking weeks. A life insurance company lets you borrow against the cash value in just a day or two.

3. Take Advantage of the Tax Benefits

Take Advantage of the Tax Benefits

Now once you’ve purchased a property and are generating income from it, the next step is to reduce the taxes on that income. 

If you used a policy loan to make the down payment on an investment property but still financed the mortgage with a traditional bank, the interest on that mortgage is fully tax-deductible. This is only true if you’re buying the property as an investment, not as a residence. The rules are somewhat more complicated for a personal residence, but you can still deduct the mortgage interest up to a certain amount.

When purchasing a rental property the IRS also allows you to depreciate its value to account for maintenance and necessary improvements. Depreciation comes in the form of a tax deduction equivalent to 3.636% of the property’s total value each year for just over 27 years.  If you had a property that costs $300,000 that means you can subtract $10,908 from its rental income each year, which can significantly reduce your tax bill as a landlord.

How Wise Money Helps You Buy Real Estate

Real estate will always be one of the best avenues for investment within the infinite banking system. By harnessing the power of whole life insurance, investors can unlock a wealth of opportunities in the real estate market. Through strategic planning and leveraging the unique features of whole life insurance, investors can diversify their real estate portfolio while maximizing tax advantages and optimizing returns.

With the guidance of Wise Money Tools and a thorough understanding of the process outlined in this free toolkit, investors can embark on a journey towards financial prosperity and long-term wealth accumulation through real estate investments powered by whole life insurance. If you need further assistance, drop us an email and we can take a look at your situation and provide you with more personalized advice.

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