Purchasing Real Estate with an Annuity

Purchasing Real Estate with an Annuity


Can you use an annuity
to buy a rental property? That’s today’s video. Let’s dive in. Hey, there. I’m Clayton Morris. I’m the founder
of Morris Invest. And I’ve rehabbed
hundreds of houses. And you probably know
the power of real estate. You’ve heard it. You’ve heard that your
friends are doing it. But you’re frustrated
because you don’t know how to take action. You don’t know how
to find properties. You don’t know where to look. Well, that’s what this
channel is all about. It’s our goal to help
you overcome those fears and to take action and to become
a real estate investor just like I did and so many
hundreds of others have. So that’s what this
channel is all about. And today, we’re going
to talk about annuities. I got this question
on my Facebook page from one of our viewers
and asked me this question. Clayton, can I use an annuity
to buy rental properties? And this is a question
that’s very similar to one that I’ve posted about 401(k)’s
and borrowing from your 401(k) in order to buy
rental properties. If you’re curious
about that, I’ve got a whole video
on how to do that. Just click on the card right up
here, and you can watch that. The power of retirement vehicles
in order to buy properties is fantastic. Again, I like to look at
these types of vehicles whether it’s your 401(k)
or an IRA that you have or an annuity as your own money. It’s your money that you’ve put
into these retirement vehicles. You should be able
to tap into them. So can you use an annuity
to buy a rental property? The short answer is yes. I’ll give you the longer
answer in a moment, but I first think
it’s important that we define what an annuity is. We’ll throw this up
here on the screen. So annuities are retirement
investment vehicles created, managed, and maintained
by life insurance companies. So money deposited into
these types of accounts, they accumulate tax-deferred
until it’s withdrawn. Several types of
annuity contracts are available from countless
different insurance carriers out there. I know that I had
in the years past invested in certain life
insurance policies that were set up like
annuities, but often, they have very high fees. And I had I think it was a
whole life insurance policy. We later found out I was
paying I think $15,000 a year. I was like, almost
$16,000 a year to have this particular
annuity or life insurance vehicle for retirement. It was all buried
in the fine print, and we had to get
out of that thing. And you know why
I got out of it? Because the penalty was
worth less to me than was using that money to
acquire rental properties. So that’s what I want to
talk about in today’s video. I don’t know of an
annuity or life insurance company that will let you
borrow from your annuity to buy real estate. But I do know that you can take
that money out of that annuity in order to buy real estate. Now this particular viewer
had written me this question. And she has $50,000 to use. And she has got
that in an annuity. Now, you can take
that money out. Obviously, you wouldn’t
be able to touch it until you’re 59 and 1/2. But under the IRS
guidelines, you can take this money
out at a 10% penalty. And in some cases, it may be
even less than that, maybe 5%. Again, you need to check with
your life insurance company before you take the money out. But in most situations,
as even my tax accountant, Tom Wheelwright, one of the
smartest real estate tax accountants in the
world, has said– he said, look. Very often, these
penalties are way lower than it would be
worth you taking them in order to buy
rental properties. Think about it. If you’re going to pay a 10%
penalty to get this money out but you’re going to be making
12% annualized ROI or return on your rental property. So you take that tax hit
in that first year of 10%, but you’re making 12%
and that every year after that you’re making a
12% annual return, that’s a no-brainer! There’s no way you’re
getting that kind of a return by having it stay in that
life insurance policy and try to make
interest that way. That’s a no-brainer. So for instance, we recently
took the penalty on an IRA that we would have paid
taxes on years later. We ended up cashing out that
IRA and took the 10% tax penalty in this calendar year in order
to buy rental properties. Again, the idea is that I want
to have access to that money now, not when I’m 59 and 1/2. So if it’s worth it to
you to take that money out in order to buy that
first rental property, that 10% penalty may scare you. But I’m telling you,
when you purchase that rental property, that’s
also offsetting your taxes. Now I’ve got a whole
series of videos here on this channel that
talk about the benefits of– having rental
properties and then how to offset your taxes
with those rental properties. So not only are you
buying a rental property, it’s offsetting your taxes. Then you’re also getting the
benefit of the cash flow. So again, to my
knowledge, you can’t borrow from one of these
retirement vehicles, one of these annuities, to buy real
estate and then pay it back. You have to basically
do a withdrawal, take the 10% penalty
on your taxes, and then you’re off Scott free. So it’s not like you’re paying
that back into the annuity. But again, I would check with
your life insurance policy provider because I’m sure there
are so many different vehicles out there right now. And there may be some that
will let you withdraw it, if you pay it back
without a penalty. But take a look at
this penalty issue because I know it sounds
scary to a lot of people. But it comes down to
straight math folks. And if you find out
that you’re making 12% minimum return on a rental
property and the tax penalty is 10%, but it’s probably
going to be offset by the purchase of real estate. So you won’t even
actually end up paying that 10% penalty because
the purchase of real estate will mitigate any other
taxes you have to deal with. So once you start to
understand that it comes down to simple math, as
my wife likes to say, and you’re trading one kind
of interest for another, but one is way more valuable,
then it becomes a no-brainer. So again, get all
your ducks in a row, talk to your insurance
provider, and find out what the deal is with your
numbers if you do a withdraw and what you can expect to pay. If you’ve got a great
rental property, to me, it would be a no-brainer. I would be buying that rental
property in a heartbeat. So can you use an annuity
to buy rental property? The answer is yes. There’s going to be a
small penalty for it, but I think you’ll be
better off in the long run. That’s my take. I’d love to hear your comments. You can post your
comments in the thread below and tell me what
kind of different annuities you guys have and use. Again, I’m not a tax
accountant, so you definitely want to seek the advice of your
own accountant or your lawyer. I want to say that
as a disclaimer. But I would love to know
what different vehicles you guys use out there in order
to save for retirement. Again, please subscribe
to my channel. There’s a big bubble right here. Just tap that and subscribe. And we have tons of other videos
and helpful playlists for you in order to go out there
and take action and become a real estate investor. I’m Clayton Morris. We’ll see you next
time everyone.

7 thoughts on “Purchasing Real Estate with an Annuity

  1. can I set up a custodian account for my IRA account to buy real estate, so that I don't need to even pay the 10 percent penalty.? But off course, the cash flow will go back into my IRA account.

  2. I was lured into a whole life insurance policy but before I signed on the dotted line I watched this video and then looked closer at the numbers and decided not to do it. Thanks Clayton you saved me a lot of stress and worry and money! Rental property will be my vehicle for retirement.

  3. I have a Variable life insurance unfortunately and i pay these hefty fees every yr and i hate it, i pay $2000 every month and they charge $545/month in fees, i would like to stop this and use it for real estate but i'll loose life insurance benefit. Should i get cash surrender or borrow it and then pay it back later. Do i have to pay taxes and 10% penalty or just the penalty portion?

  4. Be aware that it is not just the 10%, it is also taxable starting at your current tax rate. Possibly more if you go into a higher bracket. For example: if you are in a 10% bracket. Set aside 25% for taxes. Run the numbers both ways before withdrawing using the est tax rates for an informed decision. If you plan to be in a higher bracket during retirement however it's a good idea to withdraw at the lower rate now.

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