Acquisition of Real Estate in Canada by Becoming Your Own Banker

The process. This is all about how Ted is going about financing the things in his life. He didn't have to decide between one or the other. Do I put the money in the policy or do I invest in the real estate? He's slowly and gradually taking control of the banking function as it relates to his needs. He has total and absolute control. And most importantly, he became all four characters in the financial play. And so he didn't change his objective, he just changed how he went about financing the investment.

What I want to dive into now is I want to talk a little bit about the acquisition of real estate using this process to meet Ted. This is Ted, And Ted's a 46 year old professional and he's saving $40,000 a year. And he was. Prior to implementing this process, Ted was warehousing his money somewhere else because he didn't have his own warehouse of wealth. He didn't create his own system to accommodate that money. And one of his wealth accumulation objectives is to purchase rental real estate. Now, Ted had a choice. He could have continued storing his money on the books of someone else's bank. So I say that again, the books of someone else's bank. Or he can create his own banking system just like the one that he's already familiar with. So let's help Ted decide which option is preferable. After two years of saving, Ted decides to buy a piece of rental real estate. I want you to think about how Ted is going about financing this purchase and then think about how you can go about financing anything in your life through the implementation of this process. But who pays for all the expenses associated with rental real estate? The tenant is offsetting those expenses because the tenant is paying rent. But of course, the buyer, the owner, is responsible for all of those expenses. Now, Ted had some purchase options. He could withdraw his own cash from someone else's bank to pay for the down payment and then mortgage the balance. Or Ted can access a policy loan on demand and on his own terms for the down payment without interrupting any of the daily growth of his own capital. So let's look at option one, where he just withdraws the money from the commercial bank, from savings. So we have a cash down. We've got a purchase price of 321,000. The down payment is 64,200. The mortgage is 256,800. After the down payment, the gross rent 2,500amonth. The mortgage payments 1,085. And the annual income is 16,980. The gross cash on cash return is 26.44% using option one. That's fantastic. That's a really good gross cash. Cash on cash return. If Ted were to create his own banking system where now he's depositing 40,000 each year into a dividend paying participating whole life policy. In year two, Ted has accumulated $71,759 of total cash value. And that pool of capital is growing every day. It doesn't matter what's going on in the economy, what's happening with the pandemic, what's happening with real estate cycles. Ted's policy is a unilateral binding contract, which means his cash value is growing each day, that he's aging closer to 100. And that cash value cannot go backward, it cannot go down. The total Death benefit is 1,057,000 growing each year. The loan amount available is 64,583. So, same purchase price. But Ted accesses a policy loan from the life insurance company. And when Ted does that, the moment that he accesses that policy loan, the insurance company puts a lien on the death benefit for the loan balance. The entire $71,759 keeps increasing every single day, uninterrupted by the policy loan. And this loan is unstructured. So what that means is that there's no repayment schedule. Ted is in a position of total and absolute control because he's the policy owner. The insurance company itself is just the administrator of the policy, not the owner. So Ted calls the shots. God forbid, if anything happened to him, then the death benefit will extinguish the loan balance, and the remaining death benefit proceeds will be paid to Ted's named beneficiaries income tax free. His family could then use that money to pay off the rental property. Or they can choose not to pay off the rental property. Maybe they want to hang on to it. They want to sell it. It's their choice. But having ready access capital by creating his own banking system, it certainly didn't take away any of his options. He was still able to complete the purchase. This is a process. This is all about how Ted is going about financing the things in his life. He didn't have to decide between one or the other. Do I put the money in the policy or do I invest in the real estate? He's slowly and gradually taking control of the banking function as it relates to his needs. Awesome. And so he's able to complete the purchase. Now, the annual simple interest on the policy loan is 3,980 bucks, which in Ted's case is tax deductible to him per personally. We're not chartered accountants. We do have three chartered accountants actually on our team. And so make sure that you're consulting with your chartered accountant to determine which, you know, items are deductible or not deductible for you personally. But in Ted's case, it's deductible to him personally. So the mortgage is $256,800. The gross rent still the same, 2,500amonth. The mortgage payment unchanged 1,085amonth. The annual income unchanged 16,980. Now, this money can flow through Ted's warehouse of wealth. He can flow that money through his own policy versus flowing the money and redirecting that financial energy to someone else's banking system. The gross cash on cash return is now 427% versus 26% earlier. The total cash value has increased in year three. Now he's got 114,954, which is up $43,000 in just one year. What else can Ted do with more accessible capital? Can he expand his real estate portfolio? Can he become an opportunity magnet where other opportunities track him down, Opportunities that are very high caliber? Absolutely. And the death benefit increased by another 97,200. So his total death benefit now is $1,154,000,000 and still increasing each and every year. Now, the death benefit collateralizes the policy loan, not the property itself. Ted controls the loan repayment, and his entire $71,759 of cash value continued rising uninterrupted every day. Policy loans are not reported to Transunion or to Equifax. As a real estate investor, this is really important to Ted because he's not grappling with debt service ratios, personal guarantees, having to jump through a bunch of lengthy, nosy financial examinations and credit checks and income verifications and all those things. The passive investment income tax on the daily accrual of cash value inside the insurance policy. The insurance policy itself is exempt from the passive investment income tax rules. So all of that accumulation is shielded from tax. Ted's really happy about that. The tax on the daily accrual of cash value, 0. The tax on the death benefit proceeds, 0. The policy also provides a source of insured retirement income. If Ted is a responsible owner of his family banking system, he's going to be able to, for lack of better description, he's going to be able to clip bigger coupons in retirement, meaning he's going to be able to have access to even more money in his retirement years. If it's a corporate owned life insurance contract, then when Ted dies, his death gives rise to the capital dividend account, which allows surviving heirs to access the proceeds in the form of tax free capital dividends. Ted's objective didn't change. What changed was the process and how he went about achieving it. Where the money is flowing to and who the money is being put to work for and for how long. Is there any downside to Ted becoming his own banker? Now, I want to give folks a deeper understanding of the policy that was created for Ted. Now what I want you to see here, I'm going to preface this with something that Nelson shared in his book titled becoming your own banker. He said, this all reminds me of a phenomenon in physics. What I want you to do is I want you to take a pail of water and go down to seaside. So I want you at sea level and I want you to have a pail of water. And what we're going to do is we're going to heat up that water to 210 degrees Fahrenheit. Now once we get to 210 degrees Fahrenheit, all that we have is a really hot pot of water. But the moment that we get to 212 degrees Fahrenheit, we've created live steam. And Nelson went on to say in his book, the steam engine changed the world. But this doesn't happen until you get past 212 degrees. There's a lot of heat that goes into the process up to the boiling point. But the dramatic power comes on suddenly. So let's demonstrate the boiling point and the dramatic power that comes on suddenly. What you're seeing here when Ted's putting 40,000 a year into the policy, this is heating up the pot of water to 212 degrees. So in the first year, the pot of water is heating up. It's heating up even more in year two, even more in year three, year four, year five. We've now reached 212 degrees Fahrenheit. Here's what I mean by that. In the sixth year, Ted decides that he's only going to deposit the minimum required premium into his policy. He had the privilege of depositing 40,000 each year, but he was only contractually obligated to to put in 10,434. If he does that in year six, the annual increase in cash value just in that year is 19,515. That's live steam. He puts 10,434 into the policy, and the annual increase in cash value is 19,515. Now, I want you to think about this. Ted's money must reside somewhere. We know that if he did not put $10,434 into the policy in year six because he was thinking, hey, the premium is a payment. I want to stop making the payment.

Well, Ted needs to re examine his thinking again, because if he takes that $10,434 and he redirects that financial energy into someone else's system, is his policy going to achieve that 19,000 annual increase in cash value? The answer is no. So Ted has a choice. He has a choice. Do I want to heat up someone else's pot of water or do I want to keep the live steam going in my own system? Well, the answer is obvious. He should keep the livesteam going. In fact, he should be putting 40,000 in if he has the capital resources to do so. But at minimum, he's going to keep putting in that required premium from his own capital because he wants to keep the livesteam going. He's got to keep that momentum building and going. Ask yourself this question. If you deposited $10,434 into someone else's bank and 12 months later you had 19,515, would you ever stop putting 10,434 into someone else's bank if you were getting that kind of annual increase? Of course not. So why would you stop doing it in your own system? You would be penalizing yourself. It wouldn't make any sense. This is the key teaching point. When people look at implementing this process, one of the first things that they're thinking about is, how soon can I stop paying the premium? Ted's question was, how long can I pay it for? You see the two different tracks, the two different ways of thinking? This is going to come up for you when you're creating your own policy. You're going to ask the question, hey, Vern, how soon can I stop paying the premium? Vern's going to bring you back to this example, and then your thinking is going to shift and you're going to ask yourself, how long can I pay it for? Because the more capital you put into your system, the more you'll get out. The more financial energy that you redirect back to your own family, the stronger your family's financial outcomes are going to be, not only for the rest of your lifetime, but long after you're gone. Let's go to year 10. So at year 10 he's still putting in the minimum required premium. He deposits 10,004,34 and the annual increase is 23,007. He keeps the livesteam going. The dramatic power came on suddenly after year five. But he keeps that livestream engine going. Now can he purchase more rental real estate? Absolutely. Because take a look at what's happening to his total cash value and his loan amount available. It just keeps going up, it just keeps getting better. Now let's keep scrolling down. Let's go all the way down to age 100. He was only able to deposit a grand total of 699,239 into the policy for 55 years. The dividends paid alone were $1,652,000,652,000. Because he's a co owner of the life insurance company, the total cash value and the total death benefit must be the same $2,915,000. And he was able to utilize $2,600,000. So he puts in $699,000 as a co owner of the company, he receives $1,652,000,000 in sharing in the divisible surplus generated by the company he co owns. He co owns the lender. Right, because he's borrowing from the life insurance company. So he co owns the lender. What a great business to be in and to co own. He has the ability to use $2,623,000,000 which is far more than he ever put in. And if he used all of that when he dies, he leaves behind a significant windfall to his beneficiaries income tax free. He didn't have to worry about what the stock market was doing because it doesn't matter. Tax rates can go up to 80%. Doesn't matter. All of his accrual is shielded from taxation. This is a private contract with a private company. He has total and absolute control. And most importantly, he became all four characters in the financial play. And so he didn't change his objective, he just changed how he went about financing the investment. He had to utilize a commercial bank for the mortgage. But remember the mortgage, when he invested in that piece of real estate, how much was the mortgage? $256,000. So as that mortgage is being paid down from the tenants at some point. At some point. Because when he financed the property, he's got a five year.

Period before the mortgage is recast again. He's got a 25 year amortization schedule, but he's got a five year window before the mortgage recasts again. If Ted wanted to. If he just decided, listen, I want to essentially take over the debt, would he be able to take over the debt.

Inside of his own system? Just take a look at this is the loan amount available column. Would he be able to eventually take over the debt and become the banker completely as it relates to that rental real estate? And then what can he do with all of the money that the tenants are paying? He can flow it back through his system, and he can either flow it back in as loan repayment, or he can flow it back in as additional premium, or he can do a combination of both. The key here is who's in control, who's calling the shots. Whomever has the gold makes the rules. That's the key.