All Forum Posts by: Jenning Y.

I believe it should be (R)^n vs  [0.85 x(R+2)]^n

Hi mike, I do not mean to offend you because I am also trying to figure out what’s the real value of life insurance. It is safe to say I am also learning now…

In the example that you have given, the actual return of real estate should be higher than the WL. WL’s return is : 0.85*6+0.75*(10-4)=9.6%, which is below the 10% real estate return.

I do not know where you get the data table, I have to say, the table is very misleading, or I can even call it cheating. The main problem is the last column: if anyone has any idea what compounding it is, we should know that in the year 12, real estate’s return should be $28531, here is how to get the number:

a $100k property compounding by 10% annually, by the end of the year 11, the value should be $100k * (1.1 power by 11) = $285,311,  10% return will be $28531.

I understand you also did not compound the return of your borrowed money, BUT you have already compounded the cash value, while you did NOT compound the real estate return at all, which will cause huge difference.

So it is equivalent to annual compounding of 9.6% for WL, while 10% for real estate. Real estate beat WL for pure return without tax consideration in this case.

I know this table may not come from you. But boy, no wonder people do not trust insurance sale people. A loss case can be disguised as a winning case.

First, I have to apologize I did not read the data that you posted carefully before.

But there are two things ( I highlight your quote):

In year two, you are still making $10,000 in your real estate investment, while with the life insurance now you are making $10,271.

The second year real estate investment should make more than $10,000, you compounded cash value but did not compound real estate investment value increase.

Its 100% on one side at 10%, or 85% on the other side making 6% + 10%

No, one side is 10%, another side 0.85*(6+10-4)=10.2%, suppose WL return 6%, interest 4%.

If we assume the outside return (without WL) is R, WL return 6%, interest 4%. We can only get 85% of your initial cash to invest. WL total return rate will be : 0.85*(R+6-4)= 0.85*(R+2)

To Make R > 0.85(R+2), We just need R=11.6%, that means if can get return over 11.6%, it makes no sense to invest in WL. Considering WL’s tax advantage, we may increase a few points to 15%, which as I said before, lots of people can achieve that.

I know WL has other purposes. But from pure wealth building perspective, I think the math is pretty simple.

If you really can not find any other investments which can return much higher than 6~8%, WL may be not a bad choice. However, if you can find investment opportunity which can bring much higher rate than that, For example, with real estate it is not difficult to bring over 15% with leverage ( 3% appreciation with 75% LTV will enlarge the return to 12%, plus rent so get 15% is not that difficult). Will be a fool try to catch the 6~8%, even with tax advantage (real estate also not bad on tax).

Some WL people argue that you can always borrow your money out, but even if you can borrow 90% of your money that you have put in one day before, the 10% wasted money still can bring huge losses with higher opportunity cost. Take myself, in the past 8~9 years, my annual compounding return is over 35%, think about the potential losses if I wasted even one penny of my initial cash. I know I cannot repeat the 35% return in the future, but my point is very clear.

Most people on BP can achieve much higher returns, no wonder lots of them not fans of WL.

I know we can borrow from WL to buy real estate. But if (life insurance + Real estate) ‘s return is less than ( real estate + real estate), from wealth build perspective, why should I invest in WL?

Let’s assume we have $100k, one buy $100k WL with 6%, another buy real estate with 10% return. Then for both cases, we borrow 100k all out (suppose no borrowing cost) and buy 10% return real estate, (life+ real estate) will have a return of 16%, (real estate + real estate) will have 20%.

Just as I said before, from wealth build perspective, we have far better way than WL. I understand WL has other purposes.

 If we assume the borrowed moneys (borrowed from WL or from real estate) have the same earning power ( let’s assume we invest in same asset with 10% yield with the same borrowing cost), Now the only thing left is to compare the yields of two base asset themselves (WL or real estate), which one yield higher. Obviously in most cases real estate should yield much higher than WL.

Of course, WL may have tax advantage

That’s a poor comparison. You assume that you can borrow against the WL but did not mention that you can also borrow the $100k real estate to invest another property or do other investment like stock or fund.

Very interesting topic. I also spent times reading some articles and books and try to get some understanding on it.

Well, WL's so called "double plays", allowing to borrow against the policy so can grow the policy's cash value at the same time also grow the borrowed money. This is nice, but it is not its OWN patent. Other ways such as real estate can do same or even better than that. Take real estate, using either HELOC or cashout refinance can achieve the same: old property is still growing while borrowed money can also grow itself. And considering WL's cash growth rate is only about 3~4%, real estate can do better than that. As some people mentioned before, you can also borrow against your other investment portfolio.

Now I think the only advantage of WL is its tax advantage ( for life insurance we can always buy a cheap term), disadvantages are cost and unexpected withdraw or cancel cost. This is hard to balance for me.

A savvy investor probably can do a far better job with no WL. As someone said before: Do not mix investment with insurance. Buy an insurance if necessary and then focus on your investment. I agree.

I agree with Jonathan and several others.

As long as keeping solvency, in the long run appreciation is a much better bet than cash flow. Cash flow keeps you live, appreciation builds wealth.

If you invest in good neighborhoods in promising cities, in the long run you should expect decent appreciations, probably far more than the cash flow accumulated.

I also disagree with the saying that cash flow is more predictable. We seldom count on those unexpected events such as tenants trash your properties, or leaking cause severe damages etc. Unfortunately, unexpected always happen.

So far for me, the cash flow that I actually got is far less than I projected. And the appreciation that I got is far more than I imagined!

@Ben Kniesly 

I am an OOS Investor. At least it seems to me that dealing with remote local commercial banks is not a good option for me. And I also do not like some characteristics of commercial loans such as balloon feature and higher rates etc. So I decided to well use the only 10 conventional loans.

The first several of my rental properties were all cheap SFR. After I got 6, I did a little math, if each property is $200k, with 10 loans I can only control $2m asset – that's not enough to me. But if I can buy property each worths $700k~1m, with 10 loans I have the potential to control $10m. So starting from the 7th, I started to buy only fourplexs - each worth at least $700k. So far I have always got three, and on the way to the fourth(just signed the contract). And once I reach the 10 loan limit, I will sell the SFRs to make loan space for the fourplex (I already sold two, one with loan and one cash bought). I probably cannot reach the $10m, but I am sure I can reach half of that.

You have lots of equity (far more that I have), just cash out refinance one property can payoff another one so you still have lots of loan limit left. Also, you can choose to sell one once you reach the 10 limit.

Also, do not afraid of cash out each of them ( this year I probably need to do at least 8 loans, some of them were done twice to lower the rates, finished 4, in the middle of 3, need to do one next month, another one not sure ), some of lenders can do several (if not 9 at least can do 4 ) at the same time, you just need to prepare one copy of document but need to sign several copy of loan contracts at the same time. Signing several copy of loan documents at the same time should not be a burden for our hardworking landlords, right? If possible, choose no closing cost loans.

I guess, portfolio loan also have its own problem, like you just want to sell only part of your portfolio.