Real Estate Investing: Should You Raid Your Insurance Cash Value For A Down Payment?

Are you looking for a great down payment source for your next real estate purchase? Are you otherwise qualified for a mortgage loan, but unable to pull together a down payment? Consider tapping the accumulated cash value in your whole life policy. By doing so, you are merely shifting your investment between two investment vehicles.

In today’s relatively easy mortgage market, getting an 85% -95% mortgage advance rate is not that difficult if you have excellent credit. If your credit standing is less than stellar or if you can not muster a down payment, you may need substantial cash at the closing. An excellent place to look for cash is your whole life policies (or perhaps those of a parent).

The advantages of tapping your accumulated cash value are:

o The loan probably will not affect your credit rating since insurance companies rarely report loans to the credit agencies.

o Policy loan repayment can be very flexible as long as you pay the interest on the loan.

o Unless you borrow the majority of the accumulated cash value, you can even service interest payments for a short while by borrowing more cash against the policy.

o Interest on cash value loans is reasonable, usually between 6%-8% per year.

o If you can service the interest for several years, you might be able to repay the loan by refinancing your real estate (assuming the real estate appreciates).

o In general, because of the financial leverage involved in real estate, the cash borrowed from your insurance policy used to acquire real estate will grow much faster than keeping it in your insurance policy.

There are certainly some drawbacks to borrowing against your policies. Here are a few:

o Whole life policies from stable insurance companies are usually lower risk investments than real estate. Real estate is an illiquid investment that does not always appreciate. In fact, real estate can sometimes drop in value, wiping out your equity position.

o The interest on a policy loan is not tax deductible, while the interest on a second mortgage/home equity loan usually is (if you have either of these choices).

o If you allow the life insurance policy to lapse or default in making loan payments, it can result in a significant tax liability. Any termination in your policy will trigger such an event. If you have borrowed against the policy, you may not have sufficient cash to pay the taxes.

o Loans against a policy reduce the policy’s death benefit. There would be less money available for the policy’s beneficiary.

Notwithstanding the disadvantages of borrowing against cash value to help finance real estate, I think this source represents an excellent opportunity for young would-be homeowners and real estate investors. If you are first time home buyer, this source could be just the one to help you complete your first purchase.

Property Investment – Help, My Property Won’t Sell

It is commonly said that you make money when you buy, not when you sell. However, often this lesson is not learned until you try to sell a property. I remember the first property I tried to sell. It was a two-bedroom unit in a small complex of eight. A lovely unit… only four years old in an upmarket growing suburb. I was moving to another state in Australia and wanted the property sold, to enable me to buy another home in Queensland.

The property took over 12 months to sell. Three contracts fell over due to finance issues for the purchaser. That was my first experience in selling a property. The emotional roller-coaster was challenging. Initial excitement when the offer was negotiated and accepted, followed by confidence when the contract was signed, followed by disappointment when finance was not approved for the purchaser. The final emotion was frustration when the contract fell over. This happened three times.

Prior to this experience I believed properties took on average three months to sell, depending on the current market conditions. A few years later, we decided to sell one of our properties. This time it took close to two years to sell.

The property was a 2000 square metre property in a beautiful coastal holiday town. The property had zoning that allowed for the development of eight two and three-bedroom townhouses. The property was ideally located on the main road, a couple of hundred metres from the shopping precinct and beach, had two street access and was very close to community amenities such as a child-care centre, school and bus stop.

One month after we purchased the property we were offered $70,000 more than what we had paid for it. We had no intentions of selling the property at the time. Later, on realisation that we did not have the experience, contacts or time to develop the property, we decided to sell it. The first two offers we received were from developers. The offered a 12-month settlement contract. They would pay an upfront amount, with the balance paid in 12 months. This contract suited them. They got to hold the property with little money down. Negotiations could not get the terms of the contract suitable to both parties, and both contracts stalled.

In hindsight we should have accepted the contracts. These were the first two offers we received. We expected more offers to come in that didn’t have a 12-month settlement term. The market turned, developers pulled out of the market, residential construction slowed down and our property took an additional 18 months to sell. Holding a property for an additional 12 months to two years is not good from a cash-flow perspective.

It is important to consider the type of investor you are, before you risk buying a property that is wrong for your investment strategy. Don’t assume you can just sell a property if you need to. When selling, the market is in control. The market determines when it wants to buy, what it wants to buy and for how much. This experience provided one of our biggest lessons in property investing… know what type of investor you are, and be that type of investor only.

You’ve Been Lied to About Real Estate Investing

Wholesaling real estate is by far the fastest path to real estate investing wealth. You’ve seen the investors on TV buying, fixing and selling property because it looks good. It looks fast, crazy, risky and exciting – all the reasons why it’s been on TV. What everyone fails to tell you is that it’s very risky, it’s time consuming and it’s not the most profitable residential real estate strategy you can do.

Don’t get me wrong, buying, fixing and flipping real estate is extremely profitable it’s just not for me and it’s most likely not for you. Here’s why you should not look into flipping a house.

Shocking? I know!

Everyone wants to flip a house because they see it on TV but what you don’t see on TV is what you need to be doing. You need to wholesale houses because you can get started today, right now with little to no risk, money and investing experience.

Wholesaling real estate doesn’t make for the best TV so this is why flipping houses has been all the buzz. We love the drama and we love watching to see if the house flippers will flip the house with a profit or will someone go wrong!

Everyone has enough drama in their life that we need to skip and focus on making the money. Focus on businesses that will yield the highest profit without being too risky.

And That Business Is Real Estate Wholesaling

As a wholesaler you’re in the business of connecting someone who is selling a house with someone who is buying a house and you get paid a ridiculous fee for doing so.

Now you’re not a Realtor and you’re not listing houses for sale. That’s not the cash producing strategy of wholesaling real estate.

You want to find distressed properties who are owned by someone who needs to sell the property immediately. The property is a burden and the worse it looks the better the deal you can negotiate.

Evaluate the property and agree to buy the house with the seller. Find a house flipper – someone who we love to watch on TV buy, fix and sell real estate.

Tell them you have a great deal for them. You have a distressed property with a motivated seller and they’re make tens of thousands on the deal when they can flip it, you just want you’re wholesale fee.

The house flipper will gladly pay you a wholesale fee if they’re going to make tens of thousands and the person selling the house gets their house sold. Everyone wins!

You introduce the house flipper as an associate of yours the seller when they actually buy and close on the property.

Everyone Wins

The house is sold – the seller wins!

The flipper gets a solid deal – the house flipper wins!

You brought the two together and made a nice profit – you win!

Wholesaling real estate is easy to do. It’s all about finding deal after deal. Wholesaling house day in and day out. There’s no risk and you can wholesale an extreme amount of houses whereas a house flipper can only flip so many houses and they’re taking on all of the risk.

Rethink your strategy and save the drama for someone else. You know better – become a real estate wholesaler today!