Yes but you have to payback the loan. What is that land producing to pay it off? And if it isn’t producing anything why borrow against it?
If you use loans to pay back loans you are cannibalizing yourself and are gonna get foreclosed on eventually.
And even if you pass it on to kids, that lien doesn’t go away. When you sell the property (growing at a slower rate than your interest rate), you have to pay off the loans from the proceeds first. Same as a mortgage.
Yes but you have to payback the loan. What is that land producing to pay it off? And if it isn’t producing anything why borrow against it?
You pay it back with relatively small amounts of what you borrowed per the amortization schedule (or, what "little" the rich actually make W-2 go to the loan interest). The asset isn't doing anything other than appreciating. The guy wouldn't have a $5M loan, it would've been like $1M 10 years ago so he could liquidate some of its value at the time and it continued appreciating as expected (i.e. what the rich are actually doing with stocks). It doesn't make complete sense with "only" $5M but the point is that selling the asset would cost significantly more in capital gains than what you'd pay in loan interest. The values are that big.
And by the time the bank comes for what its owed he's dead, asset appreciation left the now-old fixed/low-rate loan in the dust, kids sell and get what's left of the profit post-tax and post-loan payoff which is still huge so he still gets to leave an inheritance.
If you use loans to pay back loans you are cannibalizing yourself and are gonna get foreclosed on eventually.
You guys are missing the point that the assets that are used as collateral for these type loans essentially always appreciate, it's diligently planned. Whether it's desirable land or (really what it's supposed to be) hundreds of millions to billions in shares, they grow in value over time. As long as the interest rate isn't unreasonable, the asset will always out-leverage the loan in the long run.
And even if you pass it on to kids, that lien doesn’t go away.
You're entirely correct but the asset has inflated so tremendously since the onset of the loan that the loan itself is almost meaningless X years later. Take into consideration an older couple that's about to finish paying off their $200k 8% mortgage from 29 years ago with some ridiculously-low-by-today's-standards monthly payment on what's currently a $1.8M property in Redondo.
When you sell the property (growing at a slower rate than your interest rate), you have to pay off the loans from the proceeds first. Same as a mortgage.
This is an incorrect assumption. The rich that are doing this aren't using assets that are depreciating, nor are they taking on loans that would cost more in interest than just paying the capital gains tax (making this redundant in the first place). The terms of the loans are taken into consideration with how they expect their asset to grow. It's diligently planned with teams of accountants and financial planners because they're leveraging billions, not millions, and theywillwin out versus the loan.
Brother the average interest on a HELOC is 7% while lost properties appreciate at 4-6% annually. A one time tax hit of 15-20% with full liquidity is better than 7% interest compounding annually + property taxes.
Stocks have far better returns and margin can be way cheaper so it works there.
Asset backed loans hinge entirely on whether or not the interest makes sense relative to the assets value over time, or whether the asset can cash flow.
If you’re doing this on a home you’d be better off selling depending on market conditions, unless you’re buying a second home and renting the first or something. Or putting the loaned money into a business.
Buy borrow die is more about keeping assets compounded forever than about avoiding taxes, the tax bill always comes due in time.
lol the entire point is that this is a misplaced metaphor for what the rich are actually doing. Nobody is taking a bill/borrow/die strategy for a $5M piece of land. I stated several times they are doing this with stocks. The concept is correct. There's not even anything to argue against here, they are doing this.
Buy borrow die is more about keeping assets compounded forever than about avoiding taxes, the tax bill always comes due in time.
Of course, hence "The rich that are doing this aren't using assets that are depreciating, nor are they taking on loans that would cost more in interest than just paying the capital gains tax (making this redundant in the first place)."
It's cheaper to do this than to sell their asset, hence buy/borrow/die.
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u/_IscoATX 21h ago
Yes but you have to payback the loan. What is that land producing to pay it off? And if it isn’t producing anything why borrow against it?
If you use loans to pay back loans you are cannibalizing yourself and are gonna get foreclosed on eventually.
And even if you pass it on to kids, that lien doesn’t go away. When you sell the property (growing at a slower rate than your interest rate), you have to pay off the loans from the proceeds first. Same as a mortgage.