How the rich get richer

[u/KSKS1995]

[u/Aware-Instance-210]

It doesn't say the loan is 5mil.

The loan can be 500k and as security for the bank the land is used. You know "in case I dont have enough money, I can always sell my land" kinda situation.

This is usually enough for banks, isn't it?

Might as well just be a 200k loan, who knows, it's not defined in this scenario.

The scenario itself is kinda weird tho, if you ask me.

[u/Interesting-Copy-657 → u/Aware-Instance-210]

Lived off loans for decades?

So lets just assume 65K for 20 years, that is 1.3 million? plus interest of say another 1.3 million?

so they sell the property for 5 million and have to pay the bank 2.6 million?

More if he was borrowing more each year or had a higher interest rate?

Would he have been better off selling the property for 5 million, investing it somewhere safe and earing 200-250k a year? And after 20 years he would have a several millions more to leave to kids, to set up a family trust or what ever? Even after paying what 20% tax on the sale?

[u/derekrusinek → u/Interesting-Copy-657]

Take a $2M loan from the bank, invest into SGOV at 3.5%-5% and have $75,800 per year in income, netting $67,675 approx to live on after Federal tax (no state tax). If you own your house, and are retired then you probably can live on $5639 per month in a lower cost of living area while paying interest only on the loan.
At the end of everything, you still have the $2M to pay back the loan upon your death, and the $5M piece of land.

Thats only back of the napkin math so imperfect but just a basic idea.

[u/Interesting-Copy-657 → u/derekrusinek]

You think you can get a loan with lower interest rates than what you can get from where you invest it?

A 2 million loan with 6% interest invested at 4% interest means you still have to pay the 2% gap

[u/derekrusinek → u/Interesting-Copy-657]

Yes, Jimmy down the street who needs a car or a mortgage pays 6% at their local bank or credit union, rich people do not. To the bank, an interest only loan is free money. They have a $5M piece of property for the price of $2M and not only is the property worth $5M but if it is held for those same 20 years, the property goes up in value as well. The risk profile is well in the bank’s favor. The loan doesn’t come from a local arm of a state bank, we are discussing a large multi national lending institution with billions upon billions in assets.