Boosting Real Estate Returns with Smart Financing

Foreign.

You play financing to, to an investment or a strategy, you boost the returns. What do I mean? There's a million dollar piece of real estate that's sitting out there somewhere. Million dollar piece of real estate that's growing by 10% a year. So it's growing by a hundred grand a year. The million dollar piece of real estate.

Great.

Let's say you buy that piece of real estate, all cash, take a million dollars, buy the piece of real estate, it grows by 100,000, you made your 10%. Great. Same piece of real estate, same rate of return, it makes same hundred thousand. But we financed it. So we put 20% down. We took $200,000 for the piece of real estate, it grew by 100,000. What do we make on our money in that situation? 50% of our money. Financing boost returns. That's what financing does. If you hear that, it boosts the returns. So great, what if we'll apply that same logic, that same fact pattern to a guaranteed appreciating asset? What would it do? The same thing it does on real estate. It boosts the returns. So the biggest thing I hear from people is life insurance is not a good, what, investment, whatever. Well, it goes up. It goes up at some point. So what if we then boosted that return? Would that look a little better? And so that's kind of the analogy we try to give to people is, hey, listen, all we're doing here is taking a return that's already contractually guaranteed and boosting it. Cool, Cool.

Well, and more than that, you go back to the business owner who has 100,000, 150,000 of cash on hand sitting on the operating account. They want to deploy it. And so they're trying to figure out, well, how do I get this $500,000 policy, which is one I really want? And what you're doing is you're showing them the capacity to say, look, if they, if they went ahead and got the $100,000 policy and they had that for 10 years, and they had the, the liquidation event and the same scenario applied, great, they still had the liquidation event, they still had the $5 million, they still have a policy. It's just not as big. They don't have as much to deploy, they don't have as much death benefit, they're probably uninsurable, they can't get any more. So still good. But not as good as the person who had a much larger policy and had a few more options. And realistically, to implement that financing strategy, there's some work involved in there there's some qualifying and all that good stuff, some strategizing that's necessary. A lot of, as Jason would say, strategic in the environment that takes place between the advisor and the person implementing. But, you know, for the first couple of years, there might not be the full liquidity on that policy for financing purposes. So you're, you're still going to use some of that operating income or you're going to pledge a secondary asset if you need to. And yeah, it can be. Some of you might look at it and say it's a little daunting to see that big loan accumulate over time, you know, so if that kind of thing comes up, what does the conversation go to, Jason, when you're discussing that with someone who's had this in place for a while and they're saying, man, I've got this, all this built up death benefit, the business is growing. But sometimes I look over and I see that loan balance. Like, oh, man, that's kind of scary. What do you do with that?

Yeah, yeah, it's the dawn.

No, you go ahead, Jason.

Yeah, yeah. Is. I would say, I would say it this way. When we go to the grocery store, I guess back in the day, went to the grocery store and we wrote a check for our groceries. We wrote a check for $100 for our groceries. We put that check to the grocer. Did we worry? Well, no, because we had $1,000 in the bank account, so we knew that the bank account would support that $100 check. But remember that our check is a debt instrument. Just any check. You know, there's some relics out there. Pull it up, it says it's a debt instrument. And so when you put that, that $100 check, you're okay, because you know in the bank account you have enough for that, a loan will grow. But if I could show you how a guaranteed appreciating asset will, will at some point have more cash value than that loan, guaranteed, then it becomes a check vis a vis my checking account. And not a daunting loan.

Yeah, it's it. And it's when you really understand what's going on inside of the contract. Which, which, why when you set something up for anybody, an individual business owner, you've got to affirm that they have clarity on the tool. If they don't have clarity on the tool, then that is going to come up. It's like, oh, especially if they, if you're looking at it where you're examining your numbers as a business and you have maybe somebody within your Professional network, whether it's your accountant or someone who may not have been acquainted with the solution. And they start going, can you do me a favor and pick up every red flag you have on your desk? Because I just need to ask you about why you're putting the bank's money into this thing. You're building up a loan balance. It's like, well, a, we've got ever increasing cash value inside of the contract that can't go backward. B, we have more than enough death benefit to extinguish it. And this is in place to tackle a future event. And my business is growing. If the only thing growing on the balance sheet was the loan balance, then it's perfectly reasonable and probably pretty responsible to sit down and say, hey, whoa, hold on. What do we need to do to get the business moving in the right direction? Has nothing to do with the contractually guaranteed asset.

No, exactly.

Right.

I mean, I guess the, the, the, the best analogy would simply be is how many people listening here have a mortgage on their house? How many people have that?

Most do.

Mortgages a bank has loaned us money on an underlying asset here. Can go real estate go down in value, can it? I was speaking about two months ago in this 34 year old, 35 year old said, no, it cannot. And I realized in his lifetime it hasn't. So, but I'm here to tell you real estate can go down in value. It's happened and yes, it will happen again. So anyway, back to mortgage on your house. Can the real, can your asset go down? Yes. How liquid is real estate? It's the most illiquid asset we know. So if you're okay with a mortgage on a volatile illiquid asset, how would you prefer a mortgage on, on a guaranteed, appreciating, highly liquid asset? To your point, we look at this too, and I guess I'll say it this way, I want to push everyone listening, insurance professional, like, let's be total professionals. What do I mean by that? Think of it. When you bought your car, you bought a car, you picked up the right car. You picked up the Ford, you wanted the pickup, you got the F150, you did the whole thing. But what was the last step in the process? You walk to that office at the end of the hallway and you sat down and the little guy said, said credit officer. And that person said, hey, you picked out the blue F150. Great choice. But let me give you three ways to look at this thing. We've got these lease specials. You could do that. No no, no, no. I want to keep this for a long time. Okay, great. The MSRP is this. But I could get you a little bit off of it maybe. Well, I've got these financing specials. Listen, let's be as good as the used car salesman. Let's not just sell the perfect car. Let's give them the perfect funding options as well. Let's show them the options. There's a right option. Nobody buys something without thinking how I'm going to pay for it. When you guys went home shopping, did you pick your home and your wife says to you, honey, how are we going to pay for this? I don't know, but isn't it a beautiful home? No. We looked at funding and the asset class at the exact same time and that's what I've been pushing on everyone listening. Like, get the right participating whole life contract. You better get that. But don't have a blind eye to how we're going to pay for this thing.

Yeah, it's such a good point.

Very good point. Makes a lot of sense. It's nice to play a devil's advocate on some of these things. I love that. I think the, the description you provided is fantastic and relating it to things that people are aware of because again, there's still a, I don't know if it's a stigma, a lack of education, some fear based thinking. The word loan, you know, it's like, it's like, it's like the letters show up in somebody's brain and there's a flashlight that shines on them and, and they're blinking all of a sudden in bright lead letters and the brain sometimes doesn't comprehend the word loan. We, you know, we've been trained, a lot of consumers have been trained to work look at the word loan as a negative thing in their life. And it brings up sometimes that now obviously the business owner community, they tend to look at it a little bit differently because they're like, look, this is, this is tackling fuel to help grow my business. So they might look at that differently. But a lot of the general public, they still see the word loan as some kind of negative energy. But yet the loan is an asset on a bank's books. Every loan is an asset somewhere else. It might be a, it's a liability to someone, but it's an asset to somebody. Which side of the equation are you on?

Yeah, that's a good point. The insurance companies themselves, if you were to look at, well, pick any insurance company really. If you took a look at, you know, A reputable mutual life insurance company and you examine their balance sheet loans are going to show up as an invested asset on their balance sheet. So why would that be? And if the commercial banks, the conventional banks, the regional banks, whatever lender is going to either a collaterally assign a dividend paying whole life insurance contract or provide a financing arrangement so that a business owner can acquire one of these contracts if they're going to do that. And in the case of like rich, think about a cash surrender value line of credit. Completely different instrument, but the banks will finance 100% of the total cash value of the policy. But yet if that very same business owner said, oh, while you're setting that up, I own my home free and clear and coincidentally it's valued at the very same amount of cash value in the insurance contract and the lender says, doesn't matter, we'll give you 65% loan to value and we might go up to 80 with a principal and interest mortgage payment on top of that. If you get through underwriting and if you qualify for it.

Yeah, once we've gone through the appraisal, we send someone in a double check that the house is what you said it is.

And so what does that tell you about the strength of the asset? It, it should speak volumes. It should be a pretty crystal clear statement. But yet, you know, there's I guess this, like what you said Rich, like this, this, maybe this barrier that goes up when a consumer. And business owners are consumers as well. And business owners get a lot of advice from their accountants around addressing tax related concerns. We're addressing capital related concerns. Big difference. Business owners think in terms of capital and what better place to have it ultimately reside than here?

I think the best way to speak volumes, Jay, is just to get way closer to the microphone.

Yes, that might be a great idea. Thank you, Richard.

Guys, it's not lost on me, by the way. I'm from Franklin, Tennessee and over my window right out there is a big house somebody lives in and his show's listened by a third of the people listen to this show. And, and, and, and I'm fully aware of life insurance and debt in this town. I'll say that. And what I'll say is this. There is debt loans and there's leverage. What's the difference? A loan and a debt is when you finance an asset that could go down in value. You could be quote unquote upside down. That's a debt. You cannot pay the red debt because it went down. What's leverage? Leverage is like my check writing example. I'm giving $100 check. I'm writing a check. I don't have the money. There's nothing to give you today. Here's a hundred dollar check. But I don't stay up at night because I know I have a thousand dollars in my bank account. So when that check is used and that instrument is used, I've got this thousand dollars. If you have a finance. If you're financing a participating guaranteed whole life insurance contract. Yes, I know there's, it's. I get. It's a loan. It's in that space of a loan. I understand that, but it's a difference. When you have a guaranteed appreciating asset versus a volatile asset, that's the difference between loan and debt and leverage.