Ever wondered why billionaires take loans or mortgage their properties despite massive net worth?
It’s because when done in specific ways, borrowing money makes financial sense. Using debt to generate wealth is a strategy common to many of the world’s wealthiest individuals.
The concept of borrowing to create wealth
If there’s one strategy that’s common to most of the world’s billionaires, it’s that they know how to use other people’s money to generate wealth.
High-net-worth individuals use debt as a tool to get even richer. They borrow to cover the cost of assets that typically appreciate in value, such as profitable businesses, rental properties, blue-chip shares and rare collectibles.
Appreciating assets can be used as collateral for future loans, which, unlike salaries, do not attract income tax. This is “good” debt. It helps build long-term wealth.
In contrast, “bad” debt is borrowing money to fund a lifestyle you can’t afford. It is when you take out a loan to pay for daily expenses, like groceries, appliances and expensive holidays. All that bad debt achieves is making such purchases more expensive.
Reasons why billionaires take loans
Wealthy individuals take out loans for a number of reasons.
Tax implications: by taking out a loan, billionaires get the benefit of their assets without having to sell. In this way, they avoid paying capital gains tax.
Flexibility: borrowing money allows the wealthy to allocate funds to investments or opportunities that can potentially generate more wealth over the long-term.
Liquidity management: high-net-worth individuals seldom have huge amounts of cash lying around in bank accounts. Their money is typically tied up in businesses, real estate and other non-liquid investments. Taking a loan enables access to funds without having to deplete any cash reserves.
Asset diversification: by using one asset as collateral to finance another, billionaires can diversify their portfolios and limit exposure to any one investment asset. It’s a wise risk mitigation strategy that can potentially increase wealth.
Capital preservation: by leveraging their assets, the super-wealthy can preserve their capital to fund unforeseen emergencies or pay for more favourable investment opportunities. Provided the loan has attractive terms, it makes sense to borrow rather than dip into their cash reserves.
The decision to borrow rather than pay for something outright is typically a strategic financial decision based on various factors, such as tax implications, investment opportunities, risk management and liquidity needs.
The ‘buy, borrow and die’ approach to wealth
Many of the wealthiest people in the world successfully exploit the legal tax loopholes created by the “buy, borrow and die” approach.
They “buy” the high-value assets to grow their wealth, “borrow” against the assets’ appreciating value, and use the proceeds of the loan to fund their luxury lifestyles. That way, they avoid paying income tax.
When the individual “dies”, the assets are left to his or her heirs, allowing the family to retain the wealth. The only time an inherited asset is liable for capital gains tax is when the beneficiary disposes of it and realises a profit.
Unique advantages of movable, luxury assets
Modern thinking about investments of passion – from superyachts to cars, fine art or the most sought-after Birkin handbags – has changed.
Yesterday’s “status symbols” are today’s highly liquid and potentially savvy investments. They are recognised as sources of value that can be sold or used as collateral to secure funding, independent of the traditional world of finance.
Luxury assets can be enjoyed by the holder while being leveraged as investments – and can be passed on to future generations, without incurring capital gains tax.
What we offer at LoanAgainst
LoanAgainst specialises in providing short-term asset-based loans to individuals and businesses.
We offer flexible repayment terms, competitive interest rates and the option to extend loan periods if payments are up to date.
If you need a quick loan against a movable asset, from a vehicle through to an artwork or luxury watch, call us on 064 976 7106 for more information or simply complete and submit our online loan application.
