Protect your Real Estate Empire with Life Insurance
Fan of BiggerPockets or RETipster? Trying to create a ‘passive’ retirement income stream for yourself? You are definitely going to want to see why life insurance is the key to protecting your real estate holdings!
Even if you are a small investor with no real plans for expansion, not having life insurance protecting your real estate can impact your family members, tenants and business partners.
A Quick History
As a burgeoning landlord myself (I own an out of state residential property and would like to eventually purchase a few more), I quickly found BiggerPockets as one of my favorite online resources for knowledge and information about intelligently acquiring and renting out residential property.
They have grown exponentially (to the point where Google Docs now autocorrects bigger pockets into BiggerPockets!) and have helped ordinary investors like you and me learn strategies to quickly and profitably grow their real estate holdings and revenue.
I want to take a look at BiggerPocket’s favorite real estate acquisition strategy and show you how life insurance is a necessity for making sure your empire doesn’t fall apart a day after you’re gone.
BRRRR and Life Insurance
The first of their favorite strategies is BRRRR which stands for Buy, Rehab, Rent, Refinance and Repeat.
This works more or less like it sounds, where you purchase a beat up property with potential, fix it up, rent it out, and use a cash out refinance plan from the additional equity you created with the reno to buy another property.
While this is a great strategy for building the number of your ‘doors’, it leads to a spiraling risk exposure that grows along with your assets.
The blessing and curse of real estate for the last 100 years has been leverage. Leverage is the reason why you see more millionaires AND people declaring bankruptcy due to real estate deals than any other financial instrument!
Leverage is Lethal
-Some smart guy
Now, as an insurance agent, I cannot help you choose which properties are worth rehabbing and which ones are secretly money pits that will drain your time, money, and energy.
For that there are plenty of people way smarter than me who you can connect with at your local REIA – and as a last resort I’m sure Tony Robbins also a seminar that you can attempt (at your own risk).
People fail in the real estate business for all sorts of normal reasons and the only way life insurance can help you there is if you have a cash filled whole life or universal life policy that you can borrow from (and while that is nice, it’s not the point of this article).
People who like leveraged real estate tend not to like the slow stodgy returns of whole life insurance, along with the fact that it eats into their cash flow.
Besides all the normal reasons that you can fail in real estate, there is a common one that most people don’t understand.
As you may have guessed, it’s dying early.
Think About Where the Great Deal Come from
Ever pick up a great property for cash at a below market rate?
It was from a forced seller! Now, forced selling can happen for lots of reasons, but if you’ve done enough deals in real estate I’m sure you’ve run into the widow that needs a property gone yesterday because they can’t afford the mortgage anymore.
Don’t let this happen to you!!
Even if you are a full time landlord cashflowing properly, don’t underestimate the amount of value you are adding to your business.
Can your family members really do what you do? Have you taken out HELOCs or private loans on other properties that contain accelerate on death clauses, and your loved ones have no idea how to get financing in place in 30 days?
Are they going to be able to handle your problem tenants?
Remember, the Leveraged Thing from Earlier?
If you are a smaller landlord – are you trying to refinance everything with positive equity to get more cash for your next deal?
A single month of delayed payments, missed rent or other cash flow impairments can easily jeopardize your whole operation. This is doubly true if you no longer have your finger on the pulse of your business – and in the case of you passing without life insurance protection, your entire real estate investment portfolio is at risk.
For the landlords working in multifamily and small apartment or commercial deals – All those loans you took out in the bank that are probably in your name (or single member LLC or etc) probably have personal guarantees associated with it – especially if you are planning major improvements.
The bank is going to take care of itself, but who is going to take care of you?
You can be certain that the bank is going to protect its loans – so anything that shows up in your estate is potentially game if the bank wants its cash back and you don’t have any spare liquidity.
Now, some of you might not particularly care about what happens to your stuff when you’re not here anymore and that’s fine – but consider three other groups of people.
- Business Partners
Let’s break down how each of these groups will be affected and how life insurance can ease the burden on each.
Life Insurance for your Family
You might be out there conquering the world, but if something happened to you, could your spouse or loved one realistically keep the business going and growing?
Some families can realistically answer ‘yes’ to this, but by far the more common answer is ‘no’.
Using a life insurance policy that covers the combined outstanding debt (or at least most of it) of your real estate properties affords your family the most precious resource out there:
When your beneficiary receives that large pile of cash from the lump sum death benefit, your family now has time to choose whether or not they want to continue to sustain or maybe even build on your portfolio.
In the case that your loved ones choose to wind down your investment properties, they will not be forced to dump them all on the market at the same time in an estate sale.
Your family will be able to sell only when the market is favorable. Alternatively, they can take the cash death benefit, pay down all the mortgages, and just hire a professional with the cashflow that was previously going to debt service.
The most underrated part of what you are doing by purchasing a life insurance policy for your real estate properties AND having a plan isn’t even the potential cash.
The hassle you will save your family by having a plan for how to deal with assets after you’re gone is probably just as important as the cash itself.
Do you know people who became Executors and weren’t prepared for it? It can be a disaster for years on end.
I don’t want to be stereotypical here, but I have found in most cases that most successful Real Estate investors are the classic BSDs.
They make tons of cash but don’t save much of it, and because they like to be in control – they forget to make succession plans because they never stopped to think about the end game.
Life insurance for your Business Partners
If that’s you – rock on! I hope you keep kicking ass and taking names – but I also hope that you recognize the value of a back up plan.
Are paying a private mortgage? Maybe you are part of a multi-round syndication deal or even leading the deal yourself.
Either way, if other co-investors or partners were depending on either your skills or your cash flow, they are now in jeopardy. Besides it being a good and moral thing not to screw your business associates, the cash available will allow your beneficiary to continue in the deal financially unhampered and ensure your continued good name.
If you and your business partners are linked by a formal partnership agreement or LLC, you might want to consider a buy-sell agreement funded by a life insurance cross purchase.
(Just as a quick example, Partner A purchases life insurance on Partner B, and vice versa. If a partner dies, the surviving partner receives enough cash to buy out the half of the business that they didn’t own.)
And Don’t Forget your Tenants
While your family should absolutely come first – it’s also a good reminder that your tenants are decent people too (otherwise, you might want to reconsider renting your property to them). This is probably more appropriate to smaller landlords with a few or less properties.
Let’s say you got hit by a bus this morning without a life insurance plan in place – and your family is unable or unwilling to keep the debt service on your real estate holdings going:
- Are they going to have to throw the renter out?
- Will the bank attempt to foreclose on the property first?
- Is the renter going to sue for breach of contract?
Maybe your family can easily sell the property to another investor at a reasonable price and keep the renter in place, but those are all questions I’d rather not have to know the answer to.
With life insurance, those questions become mere thoughts that you don’t need to worry about, instead of potentially serious issues that you have left your family to deal with.
Life insurance for Landlords is Less Expensive than you Think
The nice thing about investing in rental real estate is that you can derive value from two places – both the cash flow coming from paying renters and the appreciation of the property.
Both of these methods will reduce your leverage (assuming your are using at least some of the cash flow to service debt). Reducing your leverage increases your safety margins, so if something goes less than perfectly (and it always does) you have wiggle room, but this takes time.
During this time you can cover yourself with life insurance – specifically term life insurance.
Why Term Life Insurance is Important for Landlords
Are you going to need coverage for your leverage for 10 years? Get a 10 year policy! Is it going to take you closer to twenty years? There are plenty of 20 year term insurance plans on offer too.
And unlike someone who needs to cover their future potential salary for 30 years or longer, probably only need coverage for 10 or 20 years (assuming you plan on reducing max leverage as you get older). This can lead to huge savings compared to taking out a 30 year term policy.
Think about it like this – a 30 year term insurance policy not only has to cover you for 3 times as long as a 10 year policy, but it’s also a fact that you are more likely to pass away as you get older, and 30 year policies have to be more expensive because a higher percentage of people collect on them.
Let’s take a look at the differences A $2 million dollar policy for a 45 year old male in decent health who’s been building his portfolio for a couple of years.
Here’s the 30 year term first:
$374.83 a month isn’t bad considering that this will guarantee you $2,000,000 of coverage until age 75. However, if you only need it for 10 years, look how much you can save!
By only needing coverage for 10 years, you can spend a third of the price and get the same face amount.
Using multiple term policies as a landlord
Is your portfolio structured with different maturities and repayment schedules? Get more than one policy! Rather than have a $2 million dollar 10 year policy, you can always get 2 $1 million policies of two different term lengths.
There are plenty of different options out there, and as long as you are working with a high quality agent, you should be able to find the right mix of policies that eliminates or minimizes your risk exposure at an affordable price.
Looking to find out more now? Come schedule some time with me! Sign up for a no obligation 15 minute phone call where you can share your personal situation and find out what insurance is best for you right now, or email me directly at [email protected]