All Forum Posts by: Mike S.

My management company is a C Corp. That corp is also sponsoring my solo 401k and has a wellness plan that reimburses all my medical expenses. I am expensing most of my purchase through it. The corp has also a separate bank account for security deposits. Monthly, what is left from rents minus utilities, repairs, management fee is transferred to each LLC that owns the property. I have a management contract signed between each LLC and the C Corp.

There is no commingling as the management corp is providing a management service for the the owners LLC. The fact that I own both is irrelevant as it is a legitimate arm length transaction.

@Hoi Lee

In which state is the property?

While in the later years the cost is around 1/4 of a % (way lower than many mutual fund or advisors fee), the 15% hit in the first years is high. There is not a lot of other products that have such a high fee initially. And one can be scared by it if not reminded that it is a life long product and it should be evaluated on its long term Internal Rate of Return, not the initial cost.

Some people argue that the cost of money for these initial years does not make the product worth. It is no different than investing in a syndication where your principal is unavailable for 5 years. With a permanent life insurance, it will take a few years to get the cash value exceed the total amount of premium paid. Again you need to focus on the long term IRR. There is not a lot of other products that are safe (no loss of capital with a minimum guaranteed growth), liquid (you can get loan immediately from the cash value), tax free (no tax on the death benefit to your beneficiary, no tax on loan), and asset protected (can not be touched by creditor).

I am not sure that you will have any tax except the basic recording fees ($15~$30)

When you deed the property to your LLC there is no transfer of final beneficiary as you owned it 100%. So there should be no transfer tax. You will also need to notify the county property appraiser that you are still the beneficial owner to make sure that they won't reset the cap on the assessed value of the property for your property taxes.

Regarding the note, as you are not changing the name of the mortagee, there is no transfer of the note and there should not be any doc stamp.

Also, avoid the quit claim deed, use a warranty or special warranty deed instead. It will help keeping your title insurance. If later down the road you have a title issue that is anterior to the transfer, your LLC can 'sue' you, and you in turn can go back to your original title insurance. If you do a quit claim deed, unless your title insurance specifically allows it, you will have no more recourse as the LLC won't be able to turn against you as you made no warranty that the title was clear.

Last but not least, in Florida we have a great land trust statute. Have you considered deeding the property to a land trust where you are still the initial beneficiary? Then in a second step, just assign the beneficiary to your LLC.

The cash value of your policy growth uninterrupted while you are using it as a collateral for a loan.

That is the same principle as using a cash out refi. You have an asset (the life insurance or a home) that is growing in value every year (in the case of a home, the value can go down). You are taking a loan that is using the asset as collateral. The asset continues to grow, but you have cash that you can use to reinvest in other assets producing more income. The loan that you are taking is tax free, and the interest that you are paying back to the lender may be also tax deductible if the proceed are use for investment.

So your money is growing at two places at the same time.

When you buy a home for cash, you are paying closing cost, broker fee, stamp tax, etc... If you want to get a mortgage cash out, the lender will not give your 100% of the home value. Usually you may get only 70%. So if you refi every year, it will take a few years of increased home value so the 70% that you can cash out will exceed the initial cash that you put in to buy the home. If you die, when you heirs will sell the home, they will get the proceed of the sale, minus the outstanding loan due.

When you buy a permanent overfunded life insurance, instead of paying a one time amount, you need to put a steady amount of money for at least 5 to 7 years to minimize the cost while meeting the IRS guideline. As soon as you put a premium, only 75 to 85% of the premium you payed will go to the cash value (the rest pays the cost of insurance, and the different front loaded fee). You can borrow around 90% of that cash value immediately. Every year your cash value increase (either by a steady 3 to 5% in a Whole Life insurance, or a variable 0 to 13% in an Index Universal Life). When you die, your heirs don't get the current cash value, but will get the current death benefit minus the outstanding loan. The death benefit is higher than the cash value. It is a lot higher when you are younger, and become closer to the cash value when you reach your life expectancy. And that is a great feature, as if you die young you may have put only $50k in premium, have a $40k cash value, but your death benefit may be $2M. When you reach 80 y/o you may have put $500k in premium, have a cash value of $3M but a death benefit of only $3.5M.

The growth in a permanent overfunded life insurance is not fantastic, but it is tax free, so to compare apple to apple, a 6% conservative IRR of an IUL, or a 4% IRR in a WL may be closer to a 9% or 7% in a taxable account. On top of it you have a life insurance that will protect your family if you die early. But also it is a liquid asset that you can use as collateral to reinvest. When you use it that way, because you are not withdrawing the money from the life insurance, but only using it as collateral, the full value of the life insurance continues to grow uninterrupted. And it you use the proceed to reinvest, you can also deduct the interest of the loan from your investment gains. Cash value loan are easy to obtain, and don't need the long and arduous underwriting that you get for a mortgage. You don't need to pay mortgage insurance, it does not affect your credit score. Life insurance are also asset protected and don't count as asset on a financial aid form.

The Infinite Banking (TM) concept use WL life insurance as part of a way of spending your money. I don't personally believe that you should use this for buying non revenue producing asset (ie spending, buying cars, etc...). Like for velocity banking, it is a framework that works for people who have difficulty managing their spending.

However as a real estate investor, I am 100% behind the use of overfunded life insurance policy as part of my wealth building strategy. It is a complex product and some will prefer the lower guaranteed rate of a Whole Life insurance, while others like myself will prefer the more volatile returns of an Index Universal Life insurance that should outperform the return of a WL in the long run. As an heavily front loaded product, you take a small hit of opportunity cost for the first few years, but after year 5 to 8, you are getting ahead. Like most of real estate investments it's a long term play.

You are still paying expenses, however, they are not deducted from the gain, same for the depreciation as there is no tax.

However, you can not actively participate in the management of your property. You have to hire contractor to do any work as any personal work would be a prohibited contribution. Also, if you are in need of sudden amount of cash for a major repair, you better have some cash available in the IRA as you won't be able to add money above your annual contribution.

I have a solo Roth 401k that I am using to invest in real estate deals.

I also have overfunded permanent life insurance policies that I am using as collateral for loans that I am reinvesting in real estate. In my case I am using Index Universal Life instead of Whole Life as I believe that in the long run they outperform Whole Life, but the concept is the same.

With a properly set up WL, you can probably access in the first 30 days 80 to 85% of the premium paid the first year. Expect to get at least 100% of the total premium accessible within 5 to 10 years. In a properly set up IUL, you should expect 75% to 80% available in the first 30 days and 100% or more of the total premium within 4 to 9 years. So you may have initially a slight advantage to the WL the first year, but that the IUL will overpass the WL very shortly after.

But the difference is not major, and you can do well either with a WL or an IUL. On the long term however, I prefer IUL as it has a better growth than WL.

 I would disagree,

WL and IUL can be used for both. The only difference is with WL you have a steady, but lower growth. With IUL you will have an overall better growth, but you may have some years with none.

So in my view, during retirement if you are dependent on the income generated by the life insurance, WL is probably a better choice. However, if you have some reserve and can withstand two or three years of no growth, IUL is probably better on the long term.

When used in conjunction with other investments, IUL is a good fit as if one year I don't have much growth, I just don't have new income to invest. The next year, when the growth is better, I can invest more. But on the long run, the IUL will outperform the WL IRR by 1 or 2%.

You can start with the good content provided by @Thomas Rutkowski. His Youtube channel and webpage are full of good information. There are only a few people in the sector that I would recommend as most of the insurance agents are not familiar, or not willing to minimize their commission to maximize the cash value of a policy.