Being Your Own Bank in Real Estate Investing
The world of real estate investing, where capital flow dictates growth and success, often puts investors at the mercy of banks, hard money lenders, and private money lenders. These financing avenues, although reliable, come with their unique set of drawbacks. Enter R. Nelson Nash’s concept of ‘Becoming Your Own Banker’, a revolutionary paradigm detailing the ‘Infinite Banking Concept’. For real estate investors, it’s essential to analyze how this strategy might be more advantageous than traditional financing channels.
Traditional Financing vs. Infinite Banking
Most real estate investors are familiar with the process: find a profitable property, negotiate the price, and then hunt for a lender. Traditional lenders, including banks and hard money lenders, charge interests which can sometimes be exorbitant, especially in a volatile market. Moreover, there are approval processes, credit checks, and at times, hidden fees that can eat into the profit margins.
On the other hand, Nash’s Infinite Banking Concept advocates for individuals to leverage their whole life insurance policies. In essence, it’s about utilizing a properly structured policy, borrowing against its cash value, and then repaying it at one’s convenience. In this model, you’re both the borrower and the lender. You control the repayment schedule and, more importantly, you’re recapturing your principle amount time and time again. The key difference here lies in the control and flexibility it offers over traditional methods.
The Numbers Game
To illuminate this concept, let’s delve into a hypothetical scenario using $100,000 with both the bank and your own properly structured policy. To simply the example, we’ve annualized the amounts, so you can see what’s happening on a larger scale.
Borrowing from a Lender: You borrow $100,000 from a traditional lender at an interest rate of 4%. By the end of the year, you owe them $104,000 ($100,000 principal + $4,000 interest).
Costs & Growth: While you owe the bank $4,000 in interest, there’s no growth on your principal. The full cost of borrowing is $4,000.
Borrowing from Your Policy with Dividend-Driven Growth: You have built up a cash value of $100,000 in your policy.
Growth Rate Including Dividends: The policy (principle) grows by a total of 5% that particular year due to dividends, increasing your available cash value by $5,000. By year’s end, without considering the loan, the gross cash value is $105,000.
Taking a Loan: You borrow the same $100,000 from your policy at a rate of 4%, owing $4,000 in interest at the year’s end.
Net Growth: Even after paying off the interest, you’re left with a net positive growth of $1,000.
Contrasting the Two Scenarios:
Interest Cost: With the traditional bank, you’re out $4,000. With the policy loan, after considering the dividend-driven growth, you’re ahead by $1,000. That’s a clear difference of $5,000 between the two borrowing methods.
Asset Growth: In the bank scenario, there’s zero growth on your borrowed money. You borrowed the banks money, and are giving it back to them. In contrast, your policy’s cash value grew, amplifying your assets, even as you utilized it for a loan. You will also be re-capturing that principle balance to be used on something else, without having to apply for another loan and go through the rigorous process again and again.
Flexibility & Control: With the traditional bank loan, you’re bound by their repayment terms and conditions, which might include penalties for early repayment or other unforeseen charges. Borrowing against your policy offers more flexibility, allowing you to control the repayment terms and other dynamics.
Privacy & Credit: While traditional banks will go through a vetting process, including credit checks, borrowing from your policy remains a private transaction. More importantly, taking a loan against your policy doesn’t affect your credit score. This means your borrowing capacity remains undiminished in the eyes of the credit world, allowing you to maintain a strong financial position for other investments or necessities that require a favorable credit score.
Conclusion:
When evaluating the two scenarios, it becomes evident that borrowing from your properly structured, dividend-paying whole life insurance policy is not just about low-interest rates. It’s about holistic financial growth, maintaining control over your assets, and reaping the benefits of compounded growth. Even when the loan interest rates mirror each other, as in this example, the intrinsic growth and compounded benefits of a life insurance policy make it a more advantageous avenue for astute real estate investors.
For real estate investors, the goal has always been to maximize ROI while minimizing costs. Traditional financing avenues, with their rigid structures, have been the conventional route. But as the industry evolves, it’s prudent for investors to seek out novel, efficient strategies for financing. Nash’s ‘Infinite Banking Concept’, applied wisely, could be the gateway to enhanced financial freedom and success in the real estate domain.
—–Jason K Powers is a Multi-Business Owner, Real Estate Investor and an Authorized IBC Practitioner. In an exclusive partnership with the National Real Estate Investor Association, Jason is the go-to expert for all aspects of Infinite Banking and Life Insurance. Jason works with clients across the country showing them how to achieve their financial goals by taking control of the banking function in their life and creating financial velocity that can last for generations. Connect with Jason today to explore how the Infinite Banking Concept can empower you to reach your financial goals.
