Having debt can literally be one of the most strategic things you can possibly do if you’re rich or if you’re smart and understand the strategies to utilize debt, whether you are rich or not, if you don’t understand debt or you don’t use debt to your advantage, you will never reach the highest level of financial freedom that you would otherwise be able to if you did.
The reality is that debt has gotten a really bad rap from financial writers and advice givers such as Dave Ramsey and many others. But in truth, debt is important to understand and has the ability to skyrocket your success, and your wealth in your portfolio to all new levels if you know how to harness it.I’ll start off with a personal example of how I use debt today in my strategies in all investment decisions that I’m looking at day in and day out.
As a matter of fact, the debt opportunities that associate with an asset are one of the biggest considerations that we have at Saint when we’re looking at assets to buy for real estate. I’m looking at purchase money loans, lines of credit, and the likelihood of refinance options for equities. I’m looking at which stocks get the biggest margin and the best terms from lenders in the market.
Even from my own home where myself and my family live, I’m still looking at investment possibilities using debt and ways to leverage my primary residents to get better lines of credit. I learned all of these strategies from ultra-high-net-worth individuals, and the reality is that you can use them.
Also, we are about to hop into some high-octane, high-level strategies that many of the most wealthy people in the world use. But before we jump in here, I need to give a warning and say that although each one of these strategies is a huge opportunity, it involves risk, especially if taken lightly or not understood fully. Please talk to your accountant or financial advisor or whoever else in your financial circle before implementing any of these strategies so that you know it’s a good fit for you and you have the blessing of people that you trust.
TOP WAYS THAT THE RICH USE DEBT TO MAKE EVEN MORE MONEY
- The first is taking a margin loan against your stocks.
This is a type of structure that your brokerage account with your bank will typically offer you where they use your stocks, mutual funds, ETFs, etc.
As collateral for a line of credit. These might be called a PCL, like a Personal Credit Line, or also commonly known as a margin account or a margin loan. If your account is filled with high-quality assets that are very stable like index ETFs and mutual funds, you might get up to 60% or 70% loan to value your assets, and not only that, the rates are typically very beneficial for the borrower, and guess what?
This is another instance where the more money you have, the better you are treated, because when you have even more money in these types of accounts, chances are that your loan to value can increase. Even your rate can significantly improve rather than if you don’t have that much money with the lender.
They want to incentivize you to keep your tons of money with their institution. So if you’re rich, you likely love these types of situations because you can get money for cheap and put up stocks and still own the stocks, but still get the money.
A huge benefit to the wealthy individual. The next way that the rich use debt is for real estate purchases for refinances along the way.
Real estate really is a gem for a lot of reasons, but the organization of financing around the real estate industry is something that we don’t see anywhere else. Banks have created an extremely organized entire industry for this and full systems and developed underwriting guidelines, all these things to streamline the process, and while underwriting has gotten a lot more difficult since the 2008 crisis, it still remains one of the most organized debt lending industries on the planet.
As a quick thought experiment, let’s consider what other industries have such robust financing, e-commerce not really stocks, not much for buying stocks. Once you own the stocks, you can get loans on that, but not so much to go in on stocks as an investment upfront, crypto NFTs, anything in the digital space, not a chance. But then there’s real estate, which has such a super high degree of leverage built into the buying model of real estate, which allows so many benefits, not only from the asset itself but also from the tax advantages, etc.
But that’s just the purchase money side. What about refinances later on down the line? So you’re telling me not only can you get a loan to purchase the assets so you don’t have to pay 100% of the purchase price, but then you can turn around later down the line to refinance to get a better rate on your loan or even pull out more money to invest in more opportunities With that is exactly right.
You take those refinance funds from a cash-out refinance and then go and purchase another property with another purchase money loan. You are really starting to maximize the opportunities by using debt strategically through real estate as an investment. This is what rich people do guys. They are stacking debt strategically, one after another in different opportunities because they’re putting it into safe avenues with consistent success. This is one way that the wealthy can use debt to maximize and grow their wealth even more and very consistently.
Similarly to a refinance, there are other opportunities to use financing with real estate after you’ve already purchased it as well. The biggest example you’re gonna find is a HELOC, a Home Equity Line of Credit. This is a good example of a revolving line of credit that you can draw down, meaning receive your money and pay it back at any time that you want within the loan terms.
This type of flexibility and structure is amazing for investment opportunities. It allows you to pay back on your schedule and get your loan funds on your schedule so that you can be extremely flexible with your investing as needed.
Now we’re gonna add a curve ball of debt, something that most people don’t consider because they’re not ultra-high net worth. They’re not used to playing the game with certain tools that ultra-high net worth have at their disposal that the average people might not.
Let’s talk about leveraging your life insurance policy, specifically your whole life life insurance policy. This is one way that wealthy people absolutely just show that their strategies and sophistication are massively beyond what the average person can comprehend.
So let’s say you’re a wealthy individual and you have a life insurance policy on yourself because when you pass away, you need to make sure that your heirs, your children, and other family members that rely on you, or anyone else are taken care of after you pass away.
Now again, if they’re this wealthy, sophisticated person, it’s probably not a small life insurance policy. As you can imagine, it’s probably multi million dollars in that insurance policy or maybe Decca millions of dollars in that insurance policy.
So in a way, if you understand the financial value behind that, it would be interesting but not impossible to understand that a high net-worth individual can get a loan on that insurance policy with that insurance payout as collateral for their loan. That means that if their insurance policy might pay out, let’s say $10 million, they could get a loan for a big percentage of that, some even at 100% of that value pulling every dollar down, and then they can go do what they want with that money, whether it’s it or give it to philanthropy or whatever that wealthy individual wanted to do, and that when they passed away that insurance policy, they would pay down the debt that they pulled and received the cash on tax-free.
There is so much in this life insurance strategy that it requires at least its own video, maybe multiple videos to go over all the details, and we plan to do that in the future, but I just wanted to share this strategy with you because it’s so high level and because the dollar figures and the opportunity’s very high.
So now we know some of the biggest debt strategies that wealthy people use to make even more money and grow their wealth. The question is how and why?
Let’s say they get the money, what are they gonna do with it? From there, let’s jump into how and why rich people do this. Top of the list is gonna be tax benefits of course because if you’re wealthy and you’re making a ton of money, the last thing you want to do is have a higher tax burden, tax drag as a high-level accountant might call it.
But here’s something interesting. Debt is not taxed like income or regular gains are. So if a wealthy person wanted to sell their stocks and they had a gain on those stocks that went up in value, they would have to pay a tax on the gains that they realized at sale. But instead, if you took a loan against your stocks, like we talked about earlier, that loan, that debt is tax-free. So let me put this a different way.
They take the loan, they get to keep the stocks, and they get the money while still having the stocks. They still have the assets and they got all the money that they needed from that, all of it tax-free. Are you kidding me?
Think about how impactful that would be to get that money to receive that money tax-free and still own the assets. Amazing, and if that wasn’t enough.
Additionally, for many types of debt, in many situations, you can even write off the interest of the loan that you took. For somebody that’s extremely wealthy, this is adding write-offs while getting the money. It is a win-win when you understand it from the perspective of an ultra-wealthy person.
So as a recap, you get to keep the assets, you receive the money tax-free, and you can even get a write-off during the whole process. Do you see how using strategies like the ultra-wealthy can catapult your net worth to entirely new levels?
This is powerful stuff. The next reason that the ultra-wealthy use debt is to fund their lifestyles and their lives and their day-to-day expenses, just like we talked about earlier, using that margin loan or that PCL type loan where you use your stocks as collateral for that loan.
You’ll see many wealthy people use loans like this just to fund their lifestyle. They have bills that they have to pay day in and day out, so using debt for this is a huge advantage for them in a few ways.
Let’s use a real-life example to understand this better and take the example of the daily life of Elon Musk, although he is lit to roll the world’s richest man at this point, it is very common for Elon while he is paying down many bills and obligations to borrow money to pay down these expenses, but not just for living expenses.
Also for things like for purchases of major assets or acquisitions like let’s say Twitter, one of the largest social media companies you’ll see Elon uses holdings of Tesla shares as collateral for his own credit lines, and essentially he’s using the exact strategy we just outlined.
He uses those shares, but he keeps those shares and he receives a line of credit on those shares. So he still has the assets, He receives the cash from the loan that uses those assets as collateral, and he avoids any tax obligation from selling those Tesla shares.
Basically, he can use this like a giant piggy bank because his pledged Tesla shares are basically his personal credit facility, which gives him access to billions of dollars in cash when he needs it. This is powerful stuff and even used by the world’s richest man.
The final and number one best reason, we’re gonna go a little bit more broad and conceptual with it so that you can understand the biggest reason that the wealthy draw down lines of credit, and that is something called arbitrage.
Arbitrage and finance is where you are receiving something like money for one price, and then you can turn around and invest that at a higher price and you could turn around and invest that at a higher return.
So if you’re borrowing at let’s say 5% and then you are taking that money and you are investing at let’s say 8%, then you make that spread of 3% with essentially zero effort. It’s just about setting up those systems in place with your debt and letting the money work for you.
This is what wealthy people are talking about when they say putting their money to work. It’s using their money to make significantly more money, but for minor effort on their part, and the reality is wealthy people have access to one good, cheap, inexpensive line of credit with good terms. We talked about that a little bit earlier, and two good investment opportunities, things like funds and investments and real estate that consistently pay out consistent returns.
So if they have that reliable payout on one side and they know how much their debt costs on the other side, they know what their spread’s gonna be and they can do that every time.
This is exactly what so many wealthy people do with fixed-income investments like an income fund. As a matter of fact, this is exactly what I did in the past and this is exactly what I do today. That’s why we started the income fund because it’s such a high-level strategy for ultra-high net worth and ultra-wealthy individuals.
I mean, that’s where I learned it from to this very day. My lines of credit are typically drawn down and I’m putting my money into that 8% returning our own income fund because I can make that spread and receive the cash. I am always one of our biggest investors because I believe in that strategy the most, and the individuals that I learned that from are so wealthy and successful that I couldn’t pay attention to those strategies. The truth is there is so much more detail that I could go into this video on these amazing topics.
Each one deserves so much explanation on its own, but the truth is, making multi-hour-long videos is very difficult for the viewer, and often people don’t get to absorb the information the best way they can. So to solve this problem, we created a weekly newsletter.
In our weekly newsletter. We dive into these topics in more detail and provide you guys with a better understanding of different strategies and opportunities that you can take advantage of today. If that sounds like something that would benefit you.
Also, we talked a lot about how the rich use debt in this, and only a little bit about where they put that money once they’ve received it. A couple of amazing options that we talked about today are investing in fixed-income opportunities and of course, my favorite, which is real estate.
The best combination of these I’ve ever seen in my lifetime is a real estate income fund. It brings the two together in a very unique way to learn more about what a real estate income fund looks like.
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Frequently Asked Questions:
Rich individuals profit from debt by leveraging debt to invest in assets that provide income or grow in value. For instance, people could utilize debt to acquire real estate, invest in stocks or bonds, or launch a business. Additionally, they can utilize debt to finance assets with the potential for higher returns, such as private equity or hedge funds.
Debt financing is a type of financing in which a company or individual borrows money and promises to repay it, with interest, over a specified period of time. Debt financing can be used to purchase assets, invest in a business, or fund other investment opportunities.
The advantages of using debt to invest include potentially higher returns, increased leverage, and the ability to invest in a wider range of assets.
President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.