Building Wealth Through Infinite Banking

Mike: Welcome to the FlipNerd.com podcast, this is your host Mike Hambright. And on the show I will introduce you to VIPs in the real estate investing industry as well as other interesting entrepreneurs whose stories and experiences can help you take your business to the next level. We have three new shows each week which are available in the iTunes Store or by visiting FlipNerd.com. So without further ado, let’s get started.
Hey, it’s Mike Hambright with FlipNerd.com and welcome back for another exciting VIP interview where I interview successful real estate investing experts and entrepreneurs in our industry to help you learn and grow. Today, I’m joined by Patrick Donohoe. He’s a CEO of Paradigm Life, where his company teaches business owners, investors, and professionals on sound financial principles. As many listening to the show know, most Americans have very little idea on how to create, or more importantly build and grow long term wealth.

So today Patrick is going to share an innovative way that you can create your own bank and build wealth through a concept called, “Infinite Banking.” We are also going to discuss why building wealth is important kind of outside of the obvious and if you are listening to the show right now we are going to discuss some principles today that quite frankly you can’t hear enough time. So I’m excited to have Patrick with us here today to share these important messages. Before we get started though, let’s take a moment to recognize our featured sponsors.

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Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions as real estate investing can be risky.

Hey Patrick, welcome to the show.

Patrick: Hey Mike, it’s good to be here.

Mike: Yeah, yeah. I’m excited to share some of your message today because like I said it’s a type of stuff that we just can’t talk enough about and as we kind of talked about beforehand there is a lot of real estate investors that get caught up in a transaction. The transaction lifestyle and are not necessarily focused on doing what they got into real estate investing floor which is to build wealth so someday they don’t have to work so hard. So I know you’re going to share some great stuff with us today.

Patrick: No, I agree I think, especially of the last few years there has been a lot of people that have been attracted into the real estate investing industry and have been hugely successful. And there is, I mean I don’t think there are better investments out there than real estate if you do it the right way.

Mike: Yeah.

Patrick: And I have seen lot of our businesses conducted remotely so we get to see a lot of different financial situations and it’s awesome. It’s really exciting to see a lot of people that take control of their finances and invest in real estate and really step outside of the box and try to build, as you said, some financial freedom for them and their family.

Mike: Yeah, it’s funny as a friend of both of ours Tom Wheelwright who is a Rich Dad advisor that we had on, in fact he’s the one that connected us we you, its funny, I just thought that he made a comment that I didn’t really think about until someone brought it to my attention afterwards who listened to the show. I can’t quote him here but, so I’m a rehabber, I’m a wholesaler, a lot of people who listen to the show wholesale and rehab and of course he worked with a lot of people of all types, as do you I’m sure.
But he kind of delineated between those that keep properties by and hold as investors and he kind of made a comment that, “For those that rehab and wholesale and so that’s not investing.” He kind of made a comment I didn’t even think about it until afterwards but people are like, “Well, it’s a totally different definition if you are an investor. We call it investing, but it’s a different type of investing than wealth building, if you will.”

Patrick: Yeah, Tom and the entire Rich Dad community have a huge emphasis on cash flow that an investment that doesn’t produce cash flow is… or a financial vehicle that doesn’t produce that cash flow is not an investment.

Mike: Yeah.

Patrick: And I agree with that. I think if you looked at most every financial vehicle out there and it could be basically quantified and measured. Even the value of a business is not based on the computers or the ideas. I mean there is some value to intellectual property, but it’s all based on the income that it produces.
So we are talking beforehand about just rehabbers and flipping, right now there is just an incredible opportunity and there has been for quite a few years. But I saw a lot of situations pre-2008 where individuals were caught with homes that they had intended on flipping and just didn’t have their ducks in a row. And it ended up having to file bankruptcy in certain circumstances and loss of lot of gains they had in the previous years.

So it really depends and I think the most successful and I don’t know a ton about your company and your community, but the successful flippers that I have seen are those that kind of have a few strategies. They go in and they know that if the market crashes or the equity is lost because of the supply and demand during the rehab process, it could cash flow. They could rent it out and it could help them buy their time until there is a rebound, that makes sense?

Mike: Yeah. I mean I always kind of share the message too that, primarily I have been a rehabber and a wholesaler and other things. But I have always done that to fuel the opportunity to stuff some properties away here and there to build up a rental portfolio because it’s pretty common that a lot of people primarily wholesale. But it’s such a hamster wheel that you can never get out of unless you’re doing something to buildup some kind of long term incomes and cash flow whether it’s to run properties or other business opportunities or whatever it might be. But yeah, I know that.

Patrick: I mean it’s an active type of financial plan. I mean you’re heavily involved and you’re managing this, managing that. I think what Tom was referring to is more of the passive vehicles where like you said, you flip a property, you have that capital gains transaction. And then you take that money and turn into a rental property that produces cash flow that is passive, that you don’t necessarily in most cases not even have to worry about tenants or maintenance or anything. It’s all done for you.

Mike: Right, awesome. Well, so today I know you’re going to share some principles on how folks can build wealth and I know that you, through your company primarily use a product called, Infinite Banking that I have listened to some other people talk about in the past; its very fascinating. So I’m excited for you to share some of that with us today.

Patrick: Yeah, it’s one of those things where we have kind of a perfect scenario because there are not many people that actually know about it and there are not a lot of people that are doing what we’re doing online. So it’s great we have been able to create a lot of E-learning resources so that people don’t necessarily have to call us or interact with us. They can learn about it on our website, but I have seen a change the lives of thousands of people. We have 30 advisors that work with us and we have seen every scenario under the sun. And it could benefit literally every scenario and improve whether you’re a real estate investor or business owner. So I’m excited to talk about it. Do you want me to get into the basics or the principles?

Mike: Yeah, absolutely yeah. So tell us about it.

Patrick: Yeah, sure. So the Infinite Banking is not a product, it’s an idea as a concept. It’s a set of principles or rules. It’s essentially treating your financial life as if you were a financial institution. And I think it’s profound because most individual’s financial situation is really driven by their emotions; emotions to buy, emotions to sell. There are several scenarios that are alluded to in the financial media where you’re supposed to buy low and sell high. But what do people end up doing? They end up buying high and selling low because a lot of those decisions are based on emotions. So the Infinite Banking concept is really adopting a set of principles in your financial life, essentially treating the way in which you handle your finances as a bank would.
So an example is you could really look to the corporate world. And so in the corporate world there is a concept that a lot of, Fortune 100, Whole Foods is one of the ones that actually tells people what they do. But they use a concept called, “Economic Value Added” and when Whole Foods actually buys a new building or starts up a new location, they don’t dump cash into it. They actually lend money to that location and for that location to actually break even; it has to pay back corporate with interest.

So we use very similar concepts. And so when you make a financial transaction; you buy a car, or you buy a rental property, put a down payment on a rental property, you send your kids to college, you don’t just write a check and forget it. You actually write that check and then you set up a corresponding payment plan back to yourself. And what that does, it really values what’s called opportunity cost which is the money that goes to college tuition or it goes to a car. It has intrinsic value because if it didn’t go to that transaction it could have earned, it could have earned interest.

Mike: Right.

Patrick: But because it’s not an earning interest now as you payback you can basically quantify your value what the money could have done and make up that opportunity cost. So that’s essentially just the basic principles of the concept. But we do use a specific financial product that works best because you could essentially use a checking account or a savings account to do it.
But we use an insurance product and it’s just a traditional whole life policy that is funded to an IRS regulated maximum. And basically doing that you participate in the gains of an insurance company that is a mutual company. So there are two different types of insurance companies out there. You have mutual companies who are owned by their policy owners and just specific policy owners. And then you have stock companies that are out there. So we choose mutual companies so when you buy a policy and you fund it the way that we do, you essentially become an owner in the insurance company. And at the end of the year the insurance company issues their profit statements and distributed dividend to their policy owners.

So it gives just a really good gain on your savings and your liquid capital. But the best part is the insurance company guarantees you a line of credit against that capital. So as it accumulates, as it’s earning interest, as it’s earning those dividends by the mutual company, the insurance company will actually give you a loan against that money to really purchase anything under the sun.

So the way in which we approach real estate investors with our marketing, our education is that this is an asset which means you can fund this, you can establish reserves, and it’s going to grow with tax benefits. But then the insurance company will give you a loan to use for a real estate investing whether it’s a buy and hold, and a cash flow deal, or it could be a capital gains transaction. It also works with really any other family transaction or a business transaction that business owners use, use capital for. And then the idea kind of going back to the basic principles is when you borrow from the insurance company against this pool of money, you essentially set up a payment plan back to yourself. And that just really makes up for the opportunity cost. So in a nutshell that’s kind of how the concept works.

Mike: So you buy a life insurance policy through which you can borrow against in your business and then pay that policy back with interest effectively?

Patrick: You got it.

Mike: Yeah. So give like an example, like a typical example, a hypothetical example of what maybe even me just say, “Hey, what level of policy can I take out? How much can I borrow against that?” And maybe just give kind of a little bit of a case study?

Patrick: Sure, I mean yeah, so I will give a flip and then I will give kind of a buy and hold scenario.

Mike: Yeah.

Patrick: So yeah, you basically, you fund a policy. There has to be a commitment there. The commitment depending on age and health, is anywhere from five to seven years. So funding that, you’re going to fund up to that IRS maximum and then the majority of what you put in will be available to borrow against immediately. So the idea is, this isn’t necessarily, if you’re going to flip one property and all you have is a $100,000, this may not be the best scenario for you. But if you are having flipping or real estate investing as a part of your overall financial plan, which is the case with most people, then this essentially will become your reserve bucket and your safety bucket. So as you build that when you do have a flip deal that comes up, instead of using your cash reserves you’re going to use the loan against the insurance policy to acquire the property.
Okay. So you go, you buy the property. It’s essentially a cash transaction because the insurance company does not require any collateral; the policy itself is the collateral. So they’re not going to put a lien on the property. So it’s unencumbered, you basically own it free and clear. Then the insurance company, it’s also, this is total tangent and I won’t go into a lot of detail but the insurance company loan is one of the most flexible loans that exist because they don’t require any payback. It’s essentially a reverse or a negative amortizing loan. So essentially any interest that’s charged will accrue against the balance to the loan. It doesn’t show up on your credit report and like I said, you don’t have to make any payments during the rehab process.

Mike: Sure.

Patrick: So once the rehab process is complete and you basically get paid back plus your profit, then you basically pay back the insurance company plus the interest that was charged. And that entire amount of money was earning interest the entire time because it was essentially in the equity of a policy.

Mike: Yeah. So I know it’s difficult to give an example because it depends on health and all the things you have mentioned, age and things like that. Can you give just a scenario, let’s just say, somebody wanted to take out a half million dollar policy on themselves. How much they could draw down from that, I mean what kind of the maximums are, what they could pull out?

Patrick: Sure.

Mike: And what that policy would cost annually and some of the more of [inaudible 00:15:41] economics.

Patrick: So we’ve done business with really small families, we have business with multi-millionaires that put millions of dollars a year into this.

Mike: Yeah.

Patrick: So it really depends. But we go to the other direction. We don’t necessarily look at, “Okay, a half a million dollar death benefit.” We look at the actual capital that you have. So if you have, let’s say, half a million dollars in liquid cash, essentially we would build it so that you would put in between 75 and $100,000 every year for about four to five years. During that period of time, in the first year you’re going to have access to between 70 and 90% of the capital. And then after that four to five years of funding you have access to just a little bit more than what you have put in.

Mike: Okay.

Patrick: And then going forward, there is less commitment as far as the premiums are concerned. You can choose the key paying premiums but you are going to have a very good internal long term rate of return. So we call that the capitalization period between the first year and the fifth year. And then once you get into the fifth year you don’t have to contribute really anymore money, but yet you have a growing balance and you can essentially leverage that for anything under the sun.

Mike: Yeah. And when you borrow money from your own policy, who defines the interest rate and I mean do you define it yourself I guess?

Patrick: No, so yes and no. So essentially you don’t necessarily borrow from your policy. Your policy, it’s a standalone entity; you borrow from the insurance company. So the insurance company writes you a check and it doesn’t come from your policy specifically, it’s all from the general pool of money which includes your policy.
But essentially they write you the check and collateralize it against your policy. So if you don’t pay back your policy over the course of time and you don’t pay anymore premiums, the insurance company is essentially protected. So as far as the interest rate is concerned, if the insurance company is lending to you they understand the idea of opportunity cost because really all capital has a value associated with it. So when the insurance company lends it to you, they are not able to make their investments.

Mike: I see.

Patrick: So what they do is they do charge you an interest rate and it’s essentially the going interest rate of one of their investments and it subtracts out some risk because they have perfect collateral. So right now, interest rates range from about 4 to 6%. And like I said, it’s a private loan, it doesn’t show up on your credit, there is no specific term associated with the loan either. You can pretty much set your term.

Mike: Yeah. So hey, for those listening I know it’s a complicated thing to discuss via podcast for sure but I know it’s a great opportunity. It’s not something that I’m participating in myself right now yet and I’m definitely interested Patrick, so maybe we can talk down the line. But I think for those that are interested…

Patrick: We setup a specific website for real estate investors and it’s beyourbank.com and it’s free. You go on there and then you can watch about a half a dozen videos and really everything that I have just explained, I use kind of like a virtual whiteboard and draw everything out.

Mike: That’s good. I was just going to try to send it to your website. I didn’t know you have the other website there. So beyourbank.com.

Patrick: Yes. So we have our general website but then this one specifically was setup for real estate investors.

Mike: Yeah, that’s great. So yeah, for anybody that’s interested in learning more about this and taking a little more time to kind of understand the ins and outs and how it works, beyourbank.com. So that’s great. Thanks for sharing that.
So let’s talk a little bit about just the concept of wealth building and a lot of people don’t really understand that. They say, “Become richer.” There is some generic kind of definitions of what that means but I mean I think it really requires people to kind of step back and say, “Why do I want to build wealth? What am I going to do with that wealth? What it’s going to give me back in terms of my lifestyle and protection for my family?” or things like that. So maybe kind of share some of the principles that kind of define you and your company.

Patrick: I think you hit the nail on the head. I mean, I think naturally we all have like kind of an instinct to become wealthy. It’s natural in most individuals to progress and to be better than they are right now. And a lot of people look for the quick fix. I don’t know if you read Tony Robbins new book, but he put a statistics in there as far as what the average family pays for in lottery tickets and it’s astounding. It’s like 5% of their income.

Mike: Oh man.

Patrick: It’s incredible and the reason why they do that is because they want to be wealthy. They want to be better off financially than they are right now. And I think there has been cases where people pull the slot machine and put everything on red and hit the jackpot if you will. But the chances of that happening are very slim.

Mike: Yeah.

Patrick: So I mean as far as building wealth there is a lot and I think in our day and age with the amount of information that’s out there, it’s easy to see what successful real estate investors do, what successful entrepreneurs and business owners do. I was researching this the other day but there is $150 trillion of private wealth in the world. It’s an astounding amount of money. And the reason why that money exists is because the people want to spend it on something. So that means a $150 trillion of goods and services and these days like I said, it’s so easy to build online businesses or ecommerce businesses or figure out a way to get online and build value for other people. But really it all comes down to the individual, certain individuals are wired to be an entrepreneur. Certain individuals are wired to just work at 9 to 5 and do some investing on the side.
So it really, it’s all depends on the individuals themselves. But I think there is some wealth building principles that everybody should follow and I don’t want to get into a ton of detail. But if everybody puts their money in a pool that flips property and they have no other money anywhere else even in savings, even in reserves, that’s a really dangerous, dangerous situation.

Also, and I know that you talked a lot about this with Tom Wheelwright, but I know a lot of very wealthy individuals that invest in things where the returns are taxed at ordinary income. And its mind boggling because the risk associated with making that choice for investment is not justified by the net rate of return.

Mike: Yeah.

Patrick: And so you have a lot of things associated with a general wealth plan. So we don’t necessarily say that Infinite Banking and insurance policy that we setup is the end all deal because it’s not. We think it should be a part of a person’s foundation and including, like I said in the beginning, the principles or rules associated with how you treat your capital. I think just that in and of itself will be huge for most any family and most any investor. But the same time there is so many other things that need to be in place whether its asset protection or a tax plan or an estate plan.
And again, it’s a very comprehensive thing but as far as building true wealth it’s about having a plan and having a structure that doesn’t require an emotional set of values to. It’s more a logic set of values and so when it does come to the market crashing or correcting, or something not going the right way, you’re not then making decisions impulsively based on emotion. You’re making decisions based on the principles and values that you have as part of your foundation.

Mike: Yeah, and even better yet, when market crashes or there are down cycles and things like that, you’re better situated to pounce on opportunities that pop up because of it.

Patrick: And it’s like the opposite way of how people think because if you go back to 2009, 2009 I remember it was like, “What am I going to experience today in the office?”

Mike: Yeah.

Patrick: But it was one of the best times. In hindsight it was one of the best times for opportunities.

Mike: Yeah, absolutely yeah. Talk a little bit about, we haven’t talked about this and I bet we are on the same page here about, why we’re kind of in this situation where people don’t really understand wealth building. And a lot of it just kind of comes back to typically the American education system, that there is really no financial principles taught at any level, right?

Patrick: Yeah, I mean and that’s what’s exciting about what I do, is that everybody really hates what I do. They hate the financial product, they hate paying a commission. There’s so much rhetoric out there in regards to what I do and it’s completely false. And we try to prove it on the different videos and tutorials that we do. But that’s what’s exciting to me is I think you are right, people really cling to status quo, they cling to what the crowd is doing. And there are quotes upon quotes, that say if everybody is doing something you better, I think I was reading Mark Cuban, the last quote which is, “You better do the exact opposite associated with what everybody else is doing.”

Mike: Yeah.

Patrick: And that’s why I think people have succumbed to some of the mystery behind the 401k and traditional pensions and traditional financial planning. And they’re starting to wake up and realize, “Everything I have been taught, everything that everybody else is doing is benefiting somebody. But I’m not that somebody.” And I feel it’s great because the internet exists right now, people can go on and do research and get clues into what will make them successful as opposed to clinging to what other people are saying. So yeah, I just think it’s the crowd mentality, everybody wants to be a part of something. It’s one of those other natural instincts that we have but at the same time it’s very dangerous because the collective direction is not always the best direction and you don’t have to think about it either.

Mike: Yeah.

Patrick: So you are making decisions based on somebody else’s logic and initiative and not your own.

Mike: Yeah, maybe you could share some thoughts part of what I do and all. I love interviewing talking to people, I love meeting smart people. I love to educate people, I love people who think outside of the box and benefit from that and based on what you and your company do I know that to be true of you even though we don’t know each other that well. But maybe you could share some thoughts here. And probably one of the most common phrases that I hear when I interview people is “Then I read Rich Dad Poor Dad,” it comes up probably on a quarter of the shows or at least.
But it’s the principles that are in there and I think maybe you could share some advice for other than obviously people come to your websites beyourbank.com or paradigmlife.net which we’ll add down below the video here. But just where people can start better educating themselves or better yet or kind of and/or, teaching their children. There is really not a lot of resources out there to start educating people’s children, your own children on how to be more savvy financially.

Patrick: Yeah, because I have an 8-year-old and 10-year-old and almost 1-year-old, and I’m big on that. I think the generation that’s up and coming is going to change the world because of how they are growing up and with technology. But you still have those, you still have those that status quo, you still have this crowd as far as how kids are supposed to be educated and what they are supposed to do, I was having a dinner with my 8-year-old daughter and she hates dinners with me because I just pepper her with questions. But she’s in the public school system and really I try to drive, “What are you being taught and why are you doing it?” And it all came to a better job, you want to be smarter so that you can get a good job and work for somebody else.

Mike: Right.

Patrick: And I think for some people that might be okay. But like I said, that this generation that’s up and coming, I mean she knows more about an iPad than I do and she’s always changing my wife’s password and they are putting their fingerprint on the iPhone. It drives us crazy but the way in which they are able to take that type of technology and figure things out, the world is always faced problems with the children and what they know and it’s not just in the United States, it’s throughout the world.

Mike: Yeah.

Patrick: As this generation really understands technology and is facing some of the challenges associated with society, I’m excited about the next generation as far as what that’s going to bring. But I’m big on education and education and you could probably attest to this, but doing business online, if you ruin your reputation, I mean good luck. I mean it’s very hard to rebound from that. If you’re in a local community you can move somewhere else but if you’re doing business online your community is the world. And if you don’t do the right thing or you don’t give a good experience for the clients, you have all sorts of websites that will take you down, where people can express their frustrations and express their experience.
So that’s why we are really focused on kind of the Khan, the Khan Academy, if you are familiar with Salman Khan, he is a lot more famous now because he’s doing a bunch of commercials for Bank of America. But Salman Khan in the Khan Academy is really where we modeled our education off of where you’re able to just go and do a screen cast recording and draw things out and talk about things and prove and disprove. And that’s really what we do. The majority of our marketing drives toward education so that people can have their status quo, shaken, their paradigm shaken, and then start to question what they have been taught. And then we kind of get into educating on potential solutions. But going back to Rich Dad, that’s why I love Rich Dad because it was the book that I read that shook my paradigm which is, his father was a teacher, his Poor Dad was a teacher, my parents were teachers, so it resonated with me.

Mike: Yeah.

Patrick: And I just looked at everything that I was taught and I said, “I don’t want to get going and get my MBA. I don’t want to go and get a regular job; I want to work for myself.” And that kind of put me on the path to where I am right now. And one of my first mentors who is one of Rich Dad’s first advisers, her name is Kim Butler, and she’s the one that’s been doing what I do for 20 plus years. And she brought me under her wing and taught me that philosophy. And in 2007 is when we took that and ran with it.
But every issue that I have seen with American families that we’ve worked with could have all been solved with the proper education. So that’s become kind of our mission is to make sure that families do not have to face the difficulties that we’ve seen. They can actually take control of their finances; they can educate themselves, and essentially mitigate the probability of having to go through those experiences.

Mike: Yeah, that’s good I would encourage all the listeners of our show. I mean usually people that are listening to the show are either avid real estate investors or have an interest in it. And I would probably be accurate in saying that everybody listening to the show is open to doing things differently than the mainstream because the mainstream doesn’t teach you to invest in real estate. It teaches you how to work for somebody else. So I would encourage people to be open-minded and learn more about some of the stuff we talked today and go to beyourbank.com to learn about some of the products that are out there that allow you to… basically some vehicles to start building wealth and stuff like that. So awesome. Well hey, Patrick thanks for your time today. I definitely appreciate it.

Patrick: Oh, it’s been a great experience. Thanks Mike, I appreciate it.

Mike: Yeah, any final words of wisdom you want to share with us that you haven’t yet?

Patrick: No, I would say for those who are listening to your show for the first time or just a few times I mean, this is the new way of learning is podcast and video cast. It’s really exciting and also with some of the things that you’re bringing online Mike with your community and the resources that you are building, it’s exciting. I just think of a final word, I’m excited to meet you.

Mike: Yeah.

Patrick: Everything that I have been able to achieve and do, I don’t really consider it because of my intelligence. I don’t think I’m that intelligent. It’s because of relationships. I think you can build really strong relationships these days without having to, you are in Dallas, I’m in Salt Lake, but yet now we have a relationship and I think that’s the asset of the future, is the people, the people that you know.

Mike: Yeah, absolutely. I agree with that. Well, Patrick thanks again, we look forward to talk to you again soon my friend.

Patrick: Okay, thanks Mike. I appreciate it.

Mike: Have a good day.

Patrick: You too.
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