The Strategy Beside a Property Portfolio

Held beside a rental portfolio, a participating whole life insurance contract is a place capital can wait between purchases, and a place it can be drawn from without asking a lender for permission. That is the whole of the claim. It is not a way to buy property faster, it is not a substitute for a mortgage, and it is not an investment that competes with the properties themselves.

This section was written because the questions an investor asks are not the questions a salaried household asks. A household wants to know whether a contract fits between an RRSP and a TFSA. An investor wants to know where the money sits between the sale of one building and the purchase of the next, what a lender thinks of a borrowed down payment, and what happens to a portfolio on the day the owner dies. Those are different questions and they deserve their own pages.

The strategy described across this site is the Canadian application of the approach known as The Infinite Banking Concept®, originated by R. Nelson Nash; that mark belongs to Infinite Banking Concepts, LLC, with which this practice has no affiliation. After this sentence the pages here say the strategy, because that is what it is.

What the arrangement actually is, for an investor

A participating whole life contract has two figures that matter here. It has a death benefit, which is contractual, and it has a cash value, which is also contractual in its guaranteed column and may grow beyond that where the insurer's board declares participations. Participations are not guaranteed.

The owner of the contract may request an advance from the insurer against that cash value. The insurer advances its own money and takes the cash value as security. The value is not withdrawn: it stays inside the contract and continues to be administered on the contract's terms, which is the point that matters most to an investor and the point most often described incorrectly. The full mechanic is set out on the page for policy loans, and nothing on this page replaces it. Whether the interest on such an advance is deductible is dealt with in interest on a policy loan used for a rental.

What an investor is buying, if the arrangement suits at all, is a pool of capital with four properties a bank account does not have and a line of credit does not have either. It grows on a contractual schedule and not at a rate someone sets each quarter. It can be drawn on by request and not by application. It cannot be reduced or called by a third party because a market moved. And when the owner dies it pays a death benefit that is generally received tax free by a named beneficiary, which is a different subject and is dealt with below, and at length in keeping the properties in the family.

Where does an investor's capital wait between two properties?

Every portfolio has money in motion. Proceeds from a sale waiting for the next purchase. A reserve held against a vacancy or a roof. Deposits accumulated month by month toward a down payment that is still two years away.

The question is not whether that money should exist. It is where it should sit while it waits, and every place has a cost. A chequing account is instantly available and loses ground to inflation. A high interest savings account pays something and is taxed as interest at your marginal rate every year, whether you touched it or not. A guaranteed investment certificate pays a little more and locks the term, which is exactly the wrong property for money waiting on a deal. Unused room on a line of credit costs nothing until drawn and can be reduced by the lender at the worst moment. A participating contract's cash value grows inside the contract without an annual tax bill on the growth, and it is the slowest of all of them to build.

That comparison is set out attribute by attribute, with no verdict column, on where capital waits between properties. There is no winner in that table. There is a fit, and it depends on when you need the money. A lender who advances their own capital to another investor meets the same question between two files, and that case is taken up in private lending between investors.

Can a policy loan fund the next down payment?

Yes, mechanically. The insurer will advance against available cash value and will not ask what the money is for.

Here's the discipline. The advance is limited to a proportion of the cash value available at the time of the request. In the first several years of a contract that figure is modest, because the acquisition costs of a participating contract fall heaviest in the early years. An investor who funds a contract this year and expects to draw a down payment from it next year has misunderstood the timing, and will be told so.

There is a second consideration that belongs to the lender and not to the insurer. A mortgage lender assessing an application will usually ask you to evidence the source of a down payment, will treat borrowed funds as borrowed, and will include the obligation in its debt service calculation. A borrowed down payment is not the same thing to a lender as a saved one. That is factual, it varies by lender, and it is set out on a policy loan for the next down payment. Whether that value can be the source of the down payment once a building crosses into commercial underwriting is taken up on cash value as the down payment on five units, and what the same obligation does to the coverage ratio a commercial lender tests is on what a policy loan does to your coverage ratio.

Policy loan or line of credit?

For a landlord this is the comparison that matters, and it is not close on every attribute. It goes one way on some and the other way on others.

A home equity line of credit is larger, cheaper to establish, and secured against a property. It requires a credit application and an appraisal, its rate typically floats with a published benchmark, and the lender can reduce or freeze it. Lenders tend to do that when property values fall or a borrower's circumstances change, which is the same moment a landlord wants the facility.

A policy advance is smaller, available by request, secured against the contract's own value, priced under the contract's terms, and cannot be withdrawn by anyone. It accrues interest from day one, and unpaid interest is added to the balance on the policy anniversary, so a balance left alone does not sit still.

The page that sets the two side by side, attribute by attribute, is policy loan or HELOC for a landlord. A reader looking for a verdict will not find one there, because the answer depends on which property of the facility you actually need. An advance from the insurer and a loan from a third party secured by an assignment of the contract are two different instruments that are routinely presented as one, and they are separated attribute by attribute on a policy loan or a collateral loan.

Refinancing, and the recycling of equity

The buy, improve, rent, refinance cycle is how most Canadian portfolios were built, and it works because a lender will advance against a property whose value has risen. Nothing here replaces that. A contract funded for a decade holds a fraction of what a refinance releases on a single building. What happens to the proceeds when a building is sold instead is in selling a property and the year of the tax bill.

What a contract can do is sit in the gap: the months between the renovation and the appraisal, the deposit that has to clear before the financing does, the carrying cost of a vacant unit while a lender takes its time. That is a smaller claim than the one usually made for it, and it is the accurate one. The comparison is on refinancing or a policy loan to recycle equity.

What tax lands on a portfolio at death?

Canadian tax law treats most capital property as disposed of at fair market value immediately before death, under section 70(5) of the Income Tax Act as at the date on this page. For a portfolio of rental properties that produces two charges in the same year: a capital gain on the appreciation, and recapture of the capital cost allowance claimed against the buildings over the years it was owned. A rollover to a surviving spouse or a qualifying spousal trust generally defers the charge rather than removing it.

The point for an investor is the timing and not the amount. The bill arrives on a date nobody chooses, it is calculated on values nobody controls, and it is payable in cash by an estate whose assets are buildings. The size of that exposure is a matter of arithmetic on your own holdings, and the arithmetic belongs to your accountant. This page names no product as the answer to it, and neither does the tax at death on a rental portfolio, which sizes it in full.

What a death benefit does about liquidity, where it is used that way, is a separate subject. It is dealt with on what a death benefit does for a portfolio. How large that liquidity has to be is worked out as a method, with no product named, on how much coverage a leveraged portfolio calls for.

What it requires of you rather than of the product

Regularity is the price of admission. A participating contract is funded on a schedule, and a schedule that is abandoned in year three has cost money and bought very little. An investor whose income arrives in lumps, which describes most of them, has to decide what the durable figure is in a normal year and not a good one, and fund to that.

Patience is the other requirement. The early years of a contract are its weakest. The arrangement is judged at year twenty, not year two, and an investor who cannot say what the portfolio will look like in twenty years is being asked to commit to something on a longer horizon than the plan itself. What the discipline looks like month by month is in repaying a policy loan from rent.

Where should the reserve for vacancies and repairs live?

Every landlord holds a reserve, or should. A furnace fails in February, a tenant leaves in a soft month, a municipality reassesses, an insurer non-renews. None of these is unusual. What is unusual is a portfolio that has planned for them in cash and not in optimism.

The method for sizing a reserve is the same whatever holds it: count the carrying cost of the portfolio in a month where nothing comes in, decide how many of those months the household could absorb without borrowing, and hold that. This page states no figure, because the figure belongs to your buildings and your mortgages, and a number published as though it were general would be wrong for almost everybody reading it.

Where that reserve should sit is the question this silo exists to answer, and the answer changes with the horizon. Money needed inside twelve months belongs somewhere liquid and dull. Money that is a reserve in name but has not been touched in nine years is doing a different job, and can reasonably sit somewhere that grows on a contractual schedule. A contract is the second of those two, never the first, and an investor who puts the emergency money inside a contract funded three years ago will find it is not there when the furnace goes. The reserve question in full is set out in the vacancy and the repair.

What does a renovation between tenants actually cost to carry?

A turnover renovation is the most predictable expense in the business and the one most often financed on the most expensive terms available, which is usually a card or a dealer plan taken in the week the work starts. Predictable expenses deserve a funding decision made in advance, and this one almost never gets one.

The routes are the ones the site sets out for paying for a renovation, read here for a rental and not a home: cash from reserve, a line of credit secured against the property, a contractor's own financing, an unsecured loan, or a policy advance where a contract has been funded long enough to carry one. Each has a rate, a security position, an application, and a consequence if the tenant does not arrive on the date the plan assumed.

The reason this belongs in an investor's silo and not a household's is the vacancy. A household renovating a kitchen is spending money. A landlord renovating between tenants is spending money while not receiving rent, and the carrying cost of the empty weeks is usually larger than the interest on the work. The financing routes are compared in renovating between tenants. A whole building repositioned from one class to another has a longer version of the same problem, set out on funding the renovation gap on a repositioning, and the cash a construction loan itself holds back and charges is on the holdback, the surveyor and the interest reserve.

How does a mortgage lender read a premium and a cash value?

Two facts, stated factually, with nothing promised about any lender's decision. What your lender does with them is a conversation to have with your lender.

A life insurance premium is an expense. A lender assessing your capacity will generally treat a committed monthly premium the way it treats other committed obligations, which is to say it reduces the room in a debt service ratio. An investor funding a substantial contract while assembling a portfolio is choosing, whether or not the choice is conscious, to have slightly less borrowing capacity in exchange for the contract.

A cash value is an asset. Where a lender asks for a statement of net worth, the cash surrender value of a contract appears on it, and some lenders will accept a contract as collateral by assignment, which is a different arrangement from a policy advance and has its own consequences. A particular lender may do either of those things, and that is a question for that lender, on that application, and nothing here predicts it. What an underwriter is actually computing, and where each of those two facts lands in it, is set out on how a lender reads the premium. What changes at the line where a building stops being underwritten like a house is set out on four units and five units are two worlds, and the four financings a new building passes through are on financing a new build from land to stabilisation.

Contract first, or property first?

This is the question an investor under forty asks, and there is a principle and not an answer. The principle is that time is the ingredient nobody can buy back.

The principle is that a contract is bought on health and issued at an age, and neither of those improves with waiting. A property is bought on capital and financing, and those usually do improve with waiting, at least for a while. The two clocks run in opposite directions, which is why the sequence question has no single answer and why anyone giving you one without seeing your file is selling something. What the order costs on each side, taught as a principle and never as a projection, is set out on contract first, or property first.

What can be said generally is that the arrangement is a long one, that an early year of funding is worth more than a late one because of how the contract accumulates, and that none of that outweighs an opportunity in front of you today that will not exist next year. No illustration appears on this page, because a document projecting values decades out, produced before anyone knows what the money is for, answers a question nobody asked. The owner of one rental who became a landlord by keeping a first home rather than by deciding to has a different sequence again, and it is set out in the accidental landlord.

What if a partner leaves, or dies?

Most portfolios of any size involve somebody else. A joint venture with a capital partner, a sibling on title, a corporation with two shareholders, a spouse whose name is on half of it. Which of them owns the contract, who is insured under it and who is named to receive it are three separate decisions, treated in who owns the contract when a couple owns property.

The document that governs what happens is the agreement, and the commonest failure in this business is that there is no agreement, or that the agreement names a price mechanism and says nothing about where the money comes from on the day it is needed. A buy and sell obligation without funding is a promise to find capital on a date nobody chooses, from a partner's family who may want out at any price, about a property that cannot be sold quickly without a discount. Where the contract should sit when the properties are incorporated is set out in holding property in a corporation and the contract.

Insurance is one of the ways that obligation is funded and it is not the only one. The agreement comes first, drafted by a lawyer or a notary, and the funding follows the agreement and not the other way round. The general treatment of buy and sell funding sits with business owners, and the investor case is treated in this silo. What the agreement has to say, how a share is valued and which trigger insurance actually funds are set out in the joint venture partner who leaves.

What the guarantees are, and what they are not

The guaranteed column of a participating contract is a contractual obligation of the issuing insurer. It is not a government guarantee and it is not protected by deposit insurance. Policyholder protection in Canada is provided by Assuris within its published limits.

Anything above the guaranteed column depends on participations, which are declared annually at the discretion of the insurer's board and are never guaranteed. A projection showing a portfolio and a contract compounding together for thirty years is arithmetic resting on an assumption held constant, and the assumption is the document and not a footnote to it.

An investor is better equipped than most readers to understand this, because an investor already knows what a pro forma is worth. Apply the same scepticism here that you would apply to a vendor's rent roll.

Who this does not suit

An investor whose properties do not yet carry themselves in a normal month.

An investor who needs every available dollar in the next acquisition. Money that funds a contract is money not deployed, and for a portfolio still being assembled that is usually the wrong trade.

An investor carrying expensive consumer debt, or without a liquid reserve. Both are better dealt with first, and an advisor who does not say so is not being straight with you.

An investor with a horizon under ten years, or who intends to sell the portfolio and leave the business.

An investor who wants a return. This is insurance. It is not an investment, and measured against a portfolio on growth alone it usually compares poorly. That is not a flaw being hidden. It is the wrong measuring stick.

Who it sometimes suits

An investor whose portfolio is established, whose properties carry themselves, and whose problem is no longer acquiring the next one but deciding where the surplus sits. That is a different question from the one that built the portfolio.

An investor who has been refused, reduced or frozen by a lender once, and has decided never to be dependent on a single facility again. The lesson is usually learned the expensive way.

An investor with a family and an estate, who has done the arithmetic on what the portfolio triggers at death and has decided that the liquidity question is real.

An investor who intends to hold for decades and who can fund a schedule through a bad year without stopping.

What a seasonal or short term rental changes

Income that arrives in six months of the year against costs that arrive in twelve is a cash flow problem and not a profitability problem, and the two are treated differently by a lender and by an owner. A profitable year can still end with an empty account in February.

The operating question is how the off season is carried. The answers are the ordinary ones: a reserve built in the strong months, a line of credit drawn and repaid within the year, an advance against a contract where one has been funded long enough, or a second income that does not depend on the property. What distinguishes them is not the rate. It is what happens in the year the season disappoints, because a reserve does not need to be renewed and a facility does.

An owner whose portfolio is mostly seasonal should read the same caution twice: the arrangement described on this site is funded on a schedule, and a schedule funded from irregular income is the commonest way a contract lapses in year four. Fund to the durable figure or do not fund at all. The seasonal case is worked through in short term rental income and the off season.

The condominium assessment, and why it belongs here

An investor holding condominium units meets an expense that a house does not produce: the special assessment. The contingency fund of a Quebec syndicate of co-owners is governed by the Civil Code, and reserve funds elsewhere in Canada are governed provincially, but the pattern is the same everywhere. A building ages, a study is commissioned, the fund is short, and the shortfall is allocated to the units.

The amount is not knowable in advance and the timing is not chosen by the owner, which makes it structurally identical to every other liquidity event in this business. An owner of several units in the same building faces the same assessment several times over on the same day, which is the concentration risk in condominium investing and is rarely priced at purchase.

Nothing here names a product as the answer to an assessment. The point is that the exposure exists, that it is correlated across units in one building, and that an owner who has never asked to see the reserve fund study has not finished the due diligence. The assessment itself is dealt with in the special assessment.

What happens when three mortgages renew in the same year

A portfolio assembled over eighteen months renews over eighteen months. If the rate environment has moved, the whole portfolio meets the new environment at once and not one building at a time.

The exposure is arithmetic: the difference between the payment at the old rate and the payment at the new one, multiplied by the number of doors, for the months until rents can be adjusted where they can be adjusted at all. In a province with rent control the second half of that sentence does much of the work, and the answer is different in Quebec from Alberta.

The method is to run it before it happens and not after. Count the renewal dates, price the payment at a rate materially above today's, and see what the portfolio looks like in the month all three land. Where the answer is uncomfortable, the responses are the ordinary ones: stagger the terms, hold a larger reserve, reduce leverage, or sell a building. This page names no product among them, because a page that sizes an exposure and then presents an answer has stopped being an explanation. The sizing method is set out in renewals in the same year.

The honest case against

The page that sets out the objections is what a policy loan cannot do for an investor, and it is published at the same length as everything above it. The early years, the loan-to-value limit, the interest that accrues whether the property performs or not, the lapse risk on a contract carrying a large balance, and the opportunity cost of every dollar that funded a premium and not a deposit. Read it before you read anything else here if the case in favour is what you came for.

Take from this only what applies to you. If the answer for your portfolio is no, that is a good outcome too, and you will know why. The conditions under which the answer for an investor is no are set out at full strength on when a rental portfolio should say no. What a reduction in the participation scale would do to a plan that depends on drawing against a contract is set out on what a lower dividend scale does to a real estate plan. An investor who intends to borrow back against the contract in the same year it is funded should read the immediate financing arrangement before anything is signed, because the tax case there is narrower than it looks.