Borrow against assets to live off debt

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Just wondering if anyone here that’s not a billionaire or super rich is ACTUALLY using this method of leveraging loans agains owned assets to cover living expenses tax free.

Cheers !!!

In: Economics

6 Answers

Anonymous 0 Comments

And what happens when you have to replay the debt + interest?

They take away the assets “like your home and car”

Anonymous 0 Comments

The method is fuelled by having assets that you can borrow against to fund your living expenses that are either:

* continually increasing in value, so you can keep borrowing more and more against them, or

* so large you can keep borrowing more against them and never run out of value against which to borrow.

Needless to say, this is not true for 99.9% of us. If you try this technique without such assets, all you are doing is burning through your equity and when it comes time to pay interest and/or principal, you will have nothing.

Anonymous 0 Comments

I work with extreme wealth individuals. The thing that should be clarified is that an asset adds to your overall net worth. Lenders care about the net worth because that’s your actual value. There is also liquid wealth. Liquid wealth is actual cash value not just an asset. Let’s take Elon, I haven’t checked recently but when he bought Twitter he did so based on his assets and net worth. His actual liquid wealth is closer to 10 billion not the 300b you hear about.

When you take out a loan against an asset, you are telling the lender, you can take this asset if I don’t pay you. The lender in turn will sell that asset to recoup their loss. This doesn’t generally happen though. There are a few things at play. Many ultra wealth people have stocks and trusts that pay out quarterly and they have such a high value that the dividends are very large. They can use these dividends to pay back on loans. That’s one method. The issue here is that your dividends are taxed. The whole goal is to avoid taxes as much as possible so what is typically done is that a wealthy person will take out a loan against an asset and use that money to purchase another asset, this in turn increases their overall net worth. Generally that asset will be a business that can then generate them money. Any of that money will go to a trust and that trust will be setup to payout. Now that business will generate the money in order to pay back the money they took from the lender. Rinse and repeat. Eventually you have massive amounts of liquid wealth, even larger net worth and multiple businesses generating profit.

This is a very simple version of the process but this is why you hear “good debt”. Good debt means you’re acquiring assets.

I should also mention, loans are not taxed. This again is part of the game of avoiding taxes.

Edit: I’ll also add, this is why art is such a big deal with wealthy people. It’s an asset and particularly with art, its value is based on the last purchase. So if you buy my stick figure drawing for 100mill, the stick figure now acts as a 100mill asset. It’s also why rich people don’t just have someone to create whatever they want, it has to be purchased to be an asset otherwise it would be like printing money. If you want to become very wealthy, find something that the rich want and market it exclusively to them.

Anonymous 0 Comments

It’s pretty common for the elderly. Look into reverse mortgages, you can use the value of your house to live until you sell it.

Anonymous 0 Comments

For the record, this generally doesn’t work for *anyone*, the rich included.

It only works if you have stable assets that will never go down in price–something that, realistically, never happens. Or at least not consistently enough that banks will cover it to make it worthwhile.

For some reason reddit got it in your head that the whole “borrow money from assets, don’t pay taxes, peace out” is common, and it’s really not, because it’s risky for everyone involved and, at the end of the day, you’re still paying taxes and you’re still paying interest, and you’re still no better off than you were before.

Temporarily, or for a short-term project, or as part of a suite of financial decisions? Sure, it’s a useful tool. But just as an accounting gimmick to put one over on the man, it’s a dogshit strategy that very few people use.

Anonymous 0 Comments

This only works when the value of your assets grows faster than whatever interest you can get on those loans. You’re really not supposed to be doing this in perpetuity because it’s not sustainable. It’s just a good option for extra money on hand without closing positions you know will have better returns.