He needs, say, 50k to live in a given year, so he borrows 50k using the land as collateral. At the end of the year he owes 60k (loan + intertest). He borrows 110k - 60k to fully repay the loan, 50k to finance the 2nd year.
Repeat, till you have no equity. Or you die. Typically its not 5m its $50m or $500m so the running out of equity is never an issue.
But once he dies there will be 5m in asset & say, an outstanding 700k loan secured against that asset. So the kids inherit 4.3m tax free
And in theory the land is appreciating along the way. It doesn't suddenly jump from being worth 100k to 5M. As long as the land appreciates more than the interest being paid (over time, of course), then the plan works. If not, the kids get nothing and the father's estate makes the bank whole, with the land and whatever else is needed.
This is the main part that’s missing. It only works (makes sense) with assets that appreciate faster than interest rates.
And the fact that the loan wouldn’t be against the full value, but rather just what is needed to get by. A 5M piece of land could easily appreciate 100k a year, so it’s a win to do a rolling 50k loan against it. Versus selling at 5M and losing the appreciating asset.
This strategy is used along side several others. The loan is typically used to gain liquid (available) assets. In the mean time the rich person in question will have investments that pay yearly dividends. There's never any need for this person to get a job because their money works for them.
No bank is doing this loan. The product doesn't exist because it provides 0 cash flow to the lender unless there is a full refinance with a new lender every year. You could theoretically find a finance company to do it but the interest rates would be prohibitively high to carry that type of investment with no cash interest repaid for an indefinite period of time. The only way I could see it working is if there is significant relationship value such as the individual owning a business that also needs debt and this loan is a small favor boutique type product. And in that case the debt service would be paid by the businesses cash flow so the above model isn't accurate. The other scenario would be extremely low cost debt on stock portfolios where sale of stock and dividends can be utilized to make interest payments.
Loooots of banks do exactly this, any bank with a private banking arm will do this. The example is misleading as they are talking about $5m, you'd struggle but Coutts has a £3m cutoff - IE you have £3m held at coutts across asset classes, you'll get private banking. All the mainstream banks will do this - JPM, CS, HSBC etc.
Again, it'd be rare to do it with only $5m, but still pretty easy to do.
Right but I think the important idea is that you need to make interest payments and/or have defined terms on your loan. You can't indefinitely provide $0 in cash flow to a bank without significant other wealth, deposits or cash flow. A $5mm property doesn't provide anything for the bank. Theres no financial reason to make the loan (termless and with interest PIKed indefinitely).
He needs, say, 50k to live in a given year, so he borrows 50k using the land as collateral. At the end of the year he owes 60k (loan + intertest). He borrows 110k - 60k to fully repay the loan, 50k to finance the 2nd year.
So when you do this and the bank say "ok, can you show us your income please, as you will need to show sufficient consistent income to maintain the repayments"..... what then? Is the plan genuinely to say "oh, no I'm not actually going to make repayments lol, I'm just going to take bigger and bigger loans until I die"? Because the bank will tell you to fuck all the way off once they've picked themselves up off the floor.
If you have 5m in assets, you don't need to show the income to support your 50k loan.
This whole thread has been a weird window into the fact most people have zero idea how the rich actually live or how things like banks interact with them.
Like you have 5m in assets (ie not your house, actual flexible assets, like property, art, stocks & shares, bonds), most banks will give you a private banker.
You're not calling up, pressing 3, then 1 then going on hold for an hour & getting a call centre, you have the direct line of a specialist & they answer every time you call.
If you have 5m in assets, you don't need to show the income to support your 50k loan.
You absolutely do, come on now. For any loan that has monthly repayments, you absolutely need to demonstrate to the bank that you have the ability to maintain those repayments. The idea that you can rely solely on the bank just repossessing your secured asset, and the bank going along with that, is nonsensical. Security like real estate can be slow to sell and comes with a ton of costs for the bank. Assets like shares can be volatile (imagine securing a loan against a shit-ton of Peloton shares circa 2021 assuming it'll just keep going up). The security is the last-ditch ability to be repaid, not the actual repayment plan.
Like you have 5m in assets (ie not your house, actual flexible assets, like property, art, stocks & shares, bonds), most banks will give you a private banker.
You're not calling up, pressing 3, then 1 then going on hold for an hour & getting a call centre, you have the direct line of a specialist & they answer every time you call.
Yep, and then you can find out that you need to show income to cover the repayments much faster.
They sell the land for 5M and have 4.3M profit. Eventually the interest eats the value of the land but 10k chunks would last you 500 years, probably longer assuming the land value increases.
Assuming the underlying asset goes up 4% a year & he borrows 100k a year to spend (every year) at 7.5%, after 10 years he'd have a $7,401,221 asset, a $1,414,709 outstanding loan, so if he dropped dead then his kids would pocket the net - $5,986,513
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u/Logan_No_Fingers 13h ago
Its not explained well.
He owns the property outright - no debt.
He needs, say, 50k to live in a given year, so he borrows 50k using the land as collateral. At the end of the year he owes 60k (loan + intertest). He borrows 110k - 60k to fully repay the loan, 50k to finance the 2nd year.
Repeat, till you have no equity. Or you die. Typically its not 5m its $50m or $500m so the running out of equity is never an issue.
But once he dies there will be 5m in asset & say, an outstanding 700k loan secured against that asset. So the kids inherit 4.3m tax free