As long as there has been real estate, people have known that owning rental propertiescan be a wise investment.
Unfortunately, the way that individuals typically purchase rental real estate serves as a brake on their long-term wealth creation, even as it enriches their banks. What if, instead of sending principal and interest payments to your mortgage lender every month—never to be seen again—you sent them to yourself?
As an increasing number of real estate investors have learned, that scenario isn’t fantasy. Sophisticated individuals and families have long used custom-designed insurance policies to break their dependence on banks and become their own lenders.
In what I call the “Private Vault” strategy, individuals use permanent life insurance policies that are specifically designed to grow large cash values quickly. Over time, this cash becomes collateral for loans made to the policyholder from the insurance company. Policyholders can use these loans for a range of purposes, including purchasing real estate. As loans are repaid, capital and interest are effectively paid to policyholders’ own accounts.
The Private Vault strategy allows us not only to make purchases, but also to effectively keep and grow the capital used to make those purchases. (To learn more about using insurance to become financially independent, read through the past few months’ entries on my blog page.)
To understand the impact of using insurance to become your own lender, consider the following hypothetical example:
Todd and Joe each decide to purchase a rental property. Each property costs $100,000.
Todd borrows $100,000 from his bank, in the form of a 10-year mortgage at 5% interest. Over the life of the loan, Todd will repay principal and interest to the bank of $132,479. His total interest payments will be $32,479. Once the loan is repaid, Todd will own an asset worth $100,000, and he will have paid $32,479 to finance it. In other words, he will have increased his net worth by $67,521.
Not bad. But consider Joe, who will finance his purchase through his Private Vault. Just like Todd, he will borrow $100,000, over 10 years and at 5% interest. Like Todd, Joe will make total payments of $132,479, which includes total interest payments of $32,479. And just like his fellow investor, he will end up owning a $100,000 property that generates ongoing rental income.
Yet when all is said and done, Joe will have increased his net worth by three times as much as Todd. The reason? His Private Vault strategy.Instead of sending his money to a bank, Joe will repay principal and interest to his insurance company.
What’s more, during the term of the loan, the cash in Joe’s insurance policy will accrue interest—let’s say it’s 6%. At the end of 10 years, the cash value within Joe’s vault will have grown to $133,225. Not only will he have an asset in the form of a $100,000 rental property, but he will have an even greater cash value within his Private Vault than he started with.
By buying that rental property and financing it through his Private Vault, Joe will have increased his net worth by $233,225. Todd, remember, increased his net worth by just $67,521.
The Private Vault strategy requires discipline and financial commitment. But its benefits are real: Successful individuals and families have used the strategy for decades to achieve financial independence. If you’re interested in learning more, don’t hesitate to contact me.
