How to Leverage Life Insurance to Invest in Real Estate
Investing in real estate in Canada is expensive and We're not just talking about the housing prices.
We're talking about all the other costs associated with buying and selling real estate in big markets in Canada like Vancouver and Toronto. In this blog we discuss how to use the cash values inside your participating whole life insurance policy to invest in real estate.
We’re not talking down payment today - but all the other costs associated with buying and selling real estate, such as:
- fees
- charges
- fixing and maintaining
- interest
- taxes
- And more!
We’re going to talk about 5 reasons why you would use your participating whole life policy to pay for costs associated with real estate investing other than the down payment.
When we talk about storing your money inside a life insurance policy for real estate most people immediately think about how much they need to save up for a down payment.
But most people generally aren’t going to be putting a full down payment into their life insurance policy in one shot.
This is usually something you build up over time. What you want to do is start early and start putting your money into the policy so it’s ready to go when you need it.
Number 1: The importance of a bullet fund
The first reason you want to start putting money into your life insurance policy now if you’re investing in real estate is to have the money ready and you can pull the trigger when you need it.
You need to load it up before you can use it. When that opportunity comes up you don’t want to be trying to set up your insurance policy and then go get all the lending and it’s going to take a couple of months.
You want to be ready to go with your policy already fat with cash when the cheque is needed.
We call this having your bullet fund. You have your bullet ready when it’s time to take that shot. Opportunities don’t last forever and a lot of the pieces of real estate transactions are time bound and have due dates.
So it’s best to be fully cashed up and ready to go when it’s time to pull the trigger and write a cheque.
Number 2: Policy Loans
Another reason using a life insurance policy to store your cash is a good idea is that you can take unstructured loans from the insurance company anytime.
These are called Policy Loans and they don’t report to your credit.
If you’ve got cash values in your policy, the insurance company is contractually required to give you a policy loan if you ask for it. You can generally get up to 90% of your cash surrender values.
Some great uses for policy loans is for deposits if you’re doing pre-sales, or paying selling and buying costs like fees and all the extra stuff like lawyers, realtor commissions, appraisers, renovations etc.
These add up and in the real estate game you always need an extra $10k, 20k, 50k, 100k, 500k or more for something. You can always get it from your policy.
And delivery is quick - you’ll get your money deposited within a couple of days of filling out the form request. Maybe 10 days if you ask for a cheque to get mailed out but not many clients are really asking for that anymore - it’s pretty much all direct deposit now.
Number 3: An Emergency Float
Your cash values accessed as a policy loan are also great as a float if your rental property is vacant for a couple of months.
We know this is a big risk of real estate - your property sitting empty but you still have to pay all the costs like mortgage or strata fees or utilities, whatever.
The cash values being there as an emergency float is super valuable when you need it.
Number 4: Privacy
Your use of policy loans is totally private. The insurance company doesn’t report to credit and isn’t going to tell anyone that you’ve leveraged your policy.
So if you’re getting qualified for mortgages and you don’t want anything to touch your credit or cause issues or flags, policy loans are great because they are private and don’t have any connection to your credit.
That being said, of course you should always be open and honest about your financial situation with your banks and lenders including any open credit facilities ... but the insurance company isn’t going to be the one to do it.
Number 5: An Emergency Float, for permitting delays.
This is sort of like number 3 but a bit different reason. We’ve actually had a client use his policy for exactly this.
Here in Vancouver there can be significant delays associated with house renovations and permitting. Things that could take weeks to do in other places take months here in Vancouver.
So having a line out against your policy can give you that liquidity to service the property while waiting for the city to sign off on something and you still need to carry all the costs on the property.
Bonus Number 6: Using your built up Policy for a down Payment
Once you’ve got your policy set up and you’ve been funding it and leveraging it to pay the fees and other costs associated with real estate investing you’ll find that you’ve built up a good amount of cash in your policy.
You could have 100s of thousands or millions of dollars in there, and then it becomes a great source for your next down payment.
When you’ve got 100s of thousands in your policy it also opens up your lending options to more types of lenders.
Conclusion
All in all, using a big life insurance policy to fund the various parts of your real estate investing empire is a good idea. The whole life insurance cash values and real estate really go well hand in hand.
Contact Us
At Safe Pacific Financial, we specialize in helping Canadian business owners, incorporated professionals, and investors structure life insurance for maximum wealth protection, tax savings, and business growth.
If you would like to discuss whole life insurance or investments, we’re happy to chat and see if we can be a good fit to work with you. Fill out our contact form and we will get back to you within 24 hours on business days.
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