[part 1] Full sized image, is clicking the thread link, 804 x 6945
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these rich guys who get there by starting companies and owning lots of stock. They claim they're the richest guys.. yet they don't have cash, because to get some, they'd have to sell some stock, and they don't because it'll be worth more later. They also can't just cash it all out at once, because it would bankrupt the companies. So where do these guys get the money to buy mansions.
You've hit on a common misconception about how the ultra-rich operate! While it's true that their wealth is primarily tied up in illiquid assets like company stock, they don't typically "cash out" large portions to buy things like mansions. Doing so would indeed have significant negative impacts, including:
Massive Tax Bill: Selling stock triggers capital gains taxes, which could mean losing a large percentage of the sale amount to the government.
Impact on Stock Price: Selling huge blocks of shares can depress the company's stock price, hurting their remaining holdings and the company's value.
Loss of Control: For founders, selling too much stock could mean losing their majority ownership or significant influence over the company.
Loss of Future Growth: If the company's stock is expected to continue growing, selling it now means missing out on future appreciation.
So, how do they get the cash for those mansions, yachts, and other extravagant purchases? The answer is often through borrowing against their assets.
Here's how it generally works:
Securities-Backed Lines of Credit (SBLOCs): This is a very common method. Wealthy individuals can use their valuable stock holdings as collateral for a low-interest loan or a line of credit from a private bank. The bank knows that the underlying assets are highly valuable, so they're willing to lend at very favourable rates (often much lower than a typical personal loan).
Benefits: They get the cash they need without selling their stock, avoiding capital gains taxes, maintaining their ownership, and keeping their investments growing. They only pay interest on the amount they actually borrow.
Risks: If the market dips significantly and the value of their pledged stock falls below a certain threshold, they might face a "margin call," requiring them to put up more collateral or sell some stock to cover the loan. However, for genuinely wealthy individuals, their portfolios are often diverse and robust enough to mitigate this risk.
Home Equity Lines of Credit (HELOCs): If they already own significant real estate, they can also use that as collateral for a HELOC. This allows them to borrow against the equity in their existing properties.
Private Bank Loans: For the ultra-high-net-worth, private banks offer highly customized lending solutions. They can use a wide range of assets as collateral, including real estate, art collections, private business interests, and even luxury items like yachts or private jets. These loans are often tailored to their specific needs and come with bespoke terms.
"Buy, Borrow, Die" Strategy: This is a more aggressive, long-term strategy often discussed in the context of tax avoidance. The idea is to:
Buy Assets: Accumulate valuable assets (like company stock) and allow them to appreciate significantly.
Borrow Against Assets: When cash is needed, borrow against these appreciated assets rather than selling them. The loan proceeds are not considered taxable income.
Die: Upon the individual's death, the assets are passed to heirs. Under current U.S. tax law, the "cost basis" of these assets is "stepped up" to their market value at the time of death. This means the heirs can sell the assets without paying capital gains tax on the appreciation that occurred during the deceased's lifetime. The loan can then be repaid from the estate.
In essence, these rich individuals leverage their wealth rather than liquidating it. They understand that holding onto their appreciating assets is key to long-term wealth growth, and borrowing provides a way to access liquidity without disrupting that strategy or incurring immediate tax burdens.
yeah so they borrow against their assets but they still have to make monthly payments.. to get that money, they'd have to sell some of that stock
You've raised a very astute point! While borrowing against assets is a key strategy, loans still have interest payments and, eventually, principal repayment. So, where does that cash come from for the ultra-wealthy, if they're still trying to avoid selling their highly appreciated stock?
Here are several ways they manage those payments without liquidating their core holdings:
Dividends and Interest from Other Investments: While a founder's main company stock might not pay dividends (or might pay a very low one, as profits are often reinvested for growth), the ultra-wealthy typically have diversified portfolios. They own a variety of other assets like:
Dividend-paying stocks: Many mature, stable companies pay regular dividends.
Bonds: Bonds provide regular interest payments.
Rental properties/Real estate investments: These can generate significant rental income.
Private equity or hedge fund distributions: Investments in these types of funds can generate ongoing cash distributions.
Other businesses: They might own stakes in or receive income from other operating businesses. This "passive income" from their other holdings can be substantial enough to cover loan interest payments and lifestyle expenses.
Refinancing/Taking Out New Loans: This is a common strategy, especially with securities-backed lines of credit. If their underlying assets (like their stock) continue to appreciate, they can often:
Borrow more against the increased value: As their stock grows, the amount they can borrow against it also increases. They can take out a new, larger loan or expand their existing line of credit and use a portion of the new proceeds to pay off the interest on the old loan and get more cash for living expenses.
Refinance at lower rates: If interest rates drop, they can refinance their loans for more favorable terms, reducing their monthly payments. This effectively kicks the can down the road, allowing them to continue benefiting from their appreciating assets without triggering a taxable event.
Strategic Small Sales (Minimized Impact): While they avoid large, sudden liquidations, they might occasionally sell a very small, carefully managed portion of their holdings. This could be done for several reasons:
Diversification: To slowly diversify out of a concentrated position.
Tax Loss Harvesting: To offset capital gains with capital losses from other investments, minimizing the tax impact.
Covering a specific large expense: If a very large, immediate cash need arises that isn't easily covered by borrowing or other income streams, a targeted sale might occur. However, these are often planned to minimize market impact and tax implications.
Tax Planning and Deductions: The ultra-rich employ sophisticated tax advisors who help them minimize their taxable income.
Interest Deductibility: In some cases, interest paid on loans used for investment purposes can be tax-deductible, further reducing their overall tax burden.
Depreciation on Real Estate: If they own significant real estate, they can often use depreciation deductions to offset other income, even if the properties are appreciating in value.
Business Expenses: Expenses related to their various business ventures can be used to reduce taxable income.
"Buy, Borrow, Die" (as previously mentioned): In this ultimate strategy, the goal is to never actually sell the appreciated assets during their lifetime. The loans accumulate, and upon their death, the heirs receive the assets with a "stepped-up basis" (meaning the cost basis is reset to the market value at the time of death). The heirs can then sell a portion of these assets to pay off the outstanding loans without incurring significant capital gains tax on the appreciation that occurred during the original owner's life.
So, it's not typically about earning a "salary" in the traditional sense to make loan payments. It's about leveraging existing wealth, generating passive income from a diversified portfolio, and using sophisticated financial and tax strategies to maintain liquidity without realizing capital gains on their primary wealth drivers.
well not all stocks give dividends.. so what do they do then to pay those loans to get the mansions
You're absolutely right to hone in on that! The idea that wealthy individuals simply borrow endlessly without any cash flow to support those loans is a bit of a myth. While they avoid selling their core, highly appreciated, often concentrated stock holdings, they have multiple sophisticated strategies to generate the cash needed for loan payments and their lavish lifestyles, even if those core holdings don't pay dividends.
Here's a deeper dive into how they get that "cash for payments":
Diversified Income Streams (Beyond Core Stock):
Other Investments: Even if their primary company stock doesn't pay dividends, the ultra-wealthy almost always have a highly diversified investment portfolio. This includes:
Dividend-Paying Stocks: They invest in other mature, stable companies that do pay substantial dividends. These dividends provide a steady stream of income.
Bonds: They hold a significant amount of bonds, which generate regular interest payments.
Real Estate: Rental properties, commercial real estate, or even land investments can generate considerable rental income.
Hedge Funds & Private Equity Distributions: Investments in these types of alternative funds often result in regular cash distributions.
Other Businesses: Many wealthy individuals are serial entrepreneurs or investors in multiple businesses. Profits from these other ventures can provide significant cash flow.
Royalties, Intellectual Property, etc.: For some, income can come from intellectual property, licensing deals, or other passive revenue streams.
Strategic, Small-Scale Stock Sales (Carefully Managed):
While they avoid liquidating large chunks of their primary company stock, they might engage in very carefully planned, small-scale sales of other stock holdings or even a tiny fraction of their core stock. These sales are often:
Tax-Loss Harvesting: Selling losing investments to offset gains and reduce overall tax liability, creating "cash" from the tax savings.
Diversification Sales: Slowly selling off a small portion of a highly concentrated position over time to diversify their portfolio and reduce risk, using the proceeds for liquidity.
Pre-planned Sales: Sometimes, a public company founder might have a pre-arranged stock selling plan (known as a 10b5-1 plan in the U.S.) to sell a set number of shares at regular intervals. This provides predictable cash flow while minimizing market impact and insider trading concerns.
Refinancing and Expanding Loans:
As their underlying assets appreciate (the stock they've borrowed against continues to go up in value), the value of their collateral increases. This allows them to:
Borrow More: They can take out a larger loan or expand their existing line of credit. A portion of this new borrowed money can then be used to pay off the interest and potentially some principal on the old loan, effectively "rolling over" the debt and getting additional cash.
Lower Interest Rates: If market interest rates decline, they can refinance their loans at a lower rate, reducing their monthly payment obligations.
Interest-Only Loans / Structured Finance:
Many loans for the ultra-wealthy, especially those from private banks, are structured as interest-only for a significant period. This dramatically reduces the monthly cash outflow compared to a principal-and-interest loan. The principal might only be due at maturity, at which point it could be refinanced again, or paid off via the "Buy, Borrow, Die" strategy.
They might use "structured finance solutions" that are highly customized to their specific asset base and cash flow patterns.
Tax Efficiency:
Their financial advisors work diligently to minimize taxable income. Borrowed money is generally not considered taxable income, so the cash they receive from loans is tax-free.
Interest paid on loans used for investment purposes can sometimes be tax-deductible, further reducing their overall tax burden and effectively lowering the cost of borrowing.
In essence, their strategy isn't about generating a traditional "salary" to pay off loans. It's about a continuous cycle of:
Growing Assets: Their core wealth (often non-dividend-paying stock) continues to appreciate.
Leveraging Assets: They borrow against this appreciating wealth to gain liquidity without triggering capital gains taxes.
Generating Diverse Income: They use other investments and ventures to produce sufficient cash flow for lifestyle and loan interest payments.
Strategic Debt Management: They refinance, manage interest-only periods, and plan for long-term repayment (often via "Buy, Borrow, Die") to avoid major taxable events.
It's a complex, highly specialized approach to wealth management that aims to maximize asset growth, minimize taxes, and provide continuous liquidity.
Full sized image, is clicking the thread link, 804 x 6945
https://media.scored.co/post/65scmxiwLlNo.jpeg
Here's the transcript:
these rich guys who get there by starting companies and owning lots of stock. They claim they're the richest guys.. yet they don't have cash, because to get some, they'd have to sell some stock, and they don't because it'll be worth more later. They also can't just cash it all out at once, because it would bankrupt the companies. So where do these guys get the money to buy mansions.
You've hit on a common misconception about how the ultra-rich operate! While it's true that their wealth is primarily tied up in illiquid assets like company stock, they don't typically "cash out" large portions to buy things like mansions. Doing so would indeed have significant negative impacts, including:
Massive Tax Bill: Selling stock triggers capital gains taxes, which could mean losing a large percentage of the sale amount to the government.
Impact on Stock Price: Selling huge blocks of shares can depress the company's stock price, hurting their remaining holdings and the company's value.
Loss of Control: For founders, selling too much stock could mean losing their majority ownership or significant influence over the company.
Loss of Future Growth: If the company's stock is expected to continue growing, selling it now means missing out on future appreciation.
So, how do they get the cash for those mansions, yachts, and other extravagant purchases? The answer is often through borrowing against their assets.
Here's how it generally works:
Securities-Backed Lines of Credit (SBLOCs): This is a very common method. Wealthy individuals can use their valuable stock holdings as collateral for a low-interest loan or a line of credit from a private bank. The bank knows that the underlying assets are highly valuable, so they're willing to lend at very favourable rates (often much lower than a typical personal loan).
Benefits: They get the cash they need without selling their stock, avoiding capital gains taxes, maintaining their ownership, and keeping their investments growing. They only pay interest on the amount they actually borrow.
Risks: If the market dips significantly and the value of their pledged stock falls below a certain threshold, they might face a "margin call," requiring them to put up more collateral or sell some stock to cover the loan. However, for genuinely wealthy individuals, their portfolios are often diverse and robust enough to mitigate this risk.
Home Equity Lines of Credit (HELOCs): If they already own significant real estate, they can also use that as collateral for a HELOC. This allows them to borrow against the equity in their existing properties.
Private Bank Loans: For the ultra-high-net-worth, private banks offer highly customized lending solutions. They can use a wide range of assets as collateral, including real estate, art collections, private business interests, and even luxury items like yachts or private jets. These loans are often tailored to their specific needs and come with bespoke terms.
"Buy, Borrow, Die" Strategy: This is a more aggressive, long-term strategy often discussed in the context of tax avoidance. The idea is to:
Buy Assets: Accumulate valuable assets (like company stock) and allow them to appreciate significantly.
Borrow Against Assets: When cash is needed, borrow against these appreciated assets rather than selling them. The loan proceeds are not considered taxable income.
Die: Upon the individual's death, the assets are passed to heirs. Under current U.S. tax law, the "cost basis" of these assets is "stepped up" to their market value at the time of death. This means the heirs can sell the assets without paying capital gains tax on the appreciation that occurred during the deceased's lifetime. The loan can then be repaid from the estate.
In essence, these rich individuals leverage their wealth rather than liquidating it. They understand that holding onto their appreciating assets is key to long-term wealth growth, and borrowing provides a way to access liquidity without disrupting that strategy or incurring immediate tax burdens.
yeah so they borrow against their assets but they still have to make monthly payments.. to get that money, they'd have to sell some of that stock
You've raised a very astute point! While borrowing against assets is a key strategy, loans still have interest payments and, eventually, principal repayment. So, where does that cash come from for the ultra-wealthy, if they're still trying to avoid selling their highly appreciated stock?
Here are several ways they manage those payments without liquidating their core holdings:
Dividends and Interest from Other Investments: While a founder's main company stock might not pay dividends (or might pay a very low one, as profits are often reinvested for growth), the ultra-wealthy typically have diversified portfolios. They own a variety of other assets like:
Dividend-paying stocks: Many mature, stable companies pay regular dividends.
Bonds: Bonds provide regular interest payments.
Rental properties/Real estate investments: These can generate significant rental income.
Private equity or hedge fund distributions: Investments in these types of funds can generate ongoing cash distributions.
Other businesses: They might own stakes in or receive income from other operating businesses. This "passive income" from their other holdings can be substantial enough to cover loan interest payments and lifestyle expenses.
Refinancing/Taking Out New Loans: This is a common strategy, especially with securities-backed lines of credit. If their underlying assets (like their stock) continue to appreciate, they can often:
Borrow more against the increased value: As their stock grows, the amount they can borrow against it also increases. They can take out a new, larger loan or expand their existing line of credit and use a portion of the new proceeds to pay off the interest on the old loan and get more cash for living expenses.
Refinance at lower rates: If interest rates drop, they can refinance their loans for more favorable terms, reducing their monthly payments. This effectively kicks the can down the road, allowing them to continue benefiting from their appreciating assets without triggering a taxable event.
Strategic Small Sales (Minimized Impact): While they avoid large, sudden liquidations, they might occasionally sell a very small, carefully managed portion of their holdings. This could be done for several reasons:
Diversification: To slowly diversify out of a concentrated position.
Tax Loss Harvesting: To offset capital gains with capital losses from other investments, minimizing the tax impact.
Covering a specific large expense: If a very large, immediate cash need arises that isn't easily covered by borrowing or other income streams, a targeted sale might occur. However, these are often planned to minimize market impact and tax implications.
Tax Planning and Deductions: The ultra-rich employ sophisticated tax advisors who help them minimize their taxable income.
Interest Deductibility: In some cases, interest paid on loans used for investment purposes can be tax-deductible, further reducing their overall tax burden.
Depreciation on Real Estate: If they own significant real estate, they can often use depreciation deductions to offset other income, even if the properties are appreciating in value.
Business Expenses: Expenses related to their various business ventures can be used to reduce taxable income.
"Buy, Borrow, Die" (as previously mentioned): In this ultimate strategy, the goal is to never actually sell the appreciated assets during their lifetime. The loans accumulate, and upon their death, the heirs receive the assets with a "stepped-up basis" (meaning the cost basis is reset to the market value at the time of death). The heirs can then sell a portion of these assets to pay off the outstanding loans without incurring significant capital gains tax on the appreciation that occurred during the original owner's life.
So, it's not typically about earning a "salary" in the traditional sense to make loan payments. It's about leveraging existing wealth, generating passive income from a diversified portfolio, and using sophisticated financial and tax strategies to maintain liquidity without realizing capital gains on their primary wealth drivers.
well not all stocks give dividends.. so what do they do then to pay those loans to get the mansions
You're absolutely right to hone in on that! The idea that wealthy individuals simply borrow endlessly without any cash flow to support those loans is a bit of a myth. While they avoid selling their core, highly appreciated, often concentrated stock holdings, they have multiple sophisticated strategies to generate the cash needed for loan payments and their lavish lifestyles, even if those core holdings don't pay dividends.
Here's a deeper dive into how they get that "cash for payments":
Diversified Income Streams (Beyond Core Stock):
Other Investments: Even if their primary company stock doesn't pay dividends, the ultra-wealthy almost always have a highly diversified investment portfolio. This includes:
Dividend-Paying Stocks: They invest in other mature, stable companies that do pay substantial dividends. These dividends provide a steady stream of income.
Bonds: They hold a significant amount of bonds, which generate regular interest payments.
Real Estate: Rental properties, commercial real estate, or even land investments can generate considerable rental income.
Hedge Funds & Private Equity Distributions: Investments in these types of alternative funds often result in regular cash distributions.
Other Businesses: Many wealthy individuals are serial entrepreneurs or investors in multiple businesses. Profits from these other ventures can provide significant cash flow.
Royalties, Intellectual Property, etc.: For some, income can come from intellectual property, licensing deals, or other passive revenue streams.
Strategic, Small-Scale Stock Sales (Carefully Managed):
While they avoid liquidating large chunks of their primary company stock, they might engage in very carefully planned, small-scale sales of other stock holdings or even a tiny fraction of their core stock. These sales are often:
Tax-Loss Harvesting: Selling losing investments to offset gains and reduce overall tax liability, creating "cash" from the tax savings.
Diversification Sales: Slowly selling off a small portion of a highly concentrated position over time to diversify their portfolio and reduce risk, using the proceeds for liquidity.
Pre-planned Sales: Sometimes, a public company founder might have a pre-arranged stock selling plan (known as a 10b5-1 plan in the U.S.) to sell a set number of shares at regular intervals. This provides predictable cash flow while minimizing market impact and insider trading concerns.
Refinancing and Expanding Loans:
As their underlying assets appreciate (the stock they've borrowed against continues to go up in value), the value of their collateral increases. This allows them to:
Borrow More: They can take out a larger loan or expand their existing line of credit. A portion of this new borrowed money can then be used to pay off the interest and potentially some principal on the old loan, effectively "rolling over" the debt and getting additional cash.
Lower Interest Rates: If market interest rates decline, they can refinance their loans at a lower rate, reducing their monthly payment obligations.
Interest-Only Loans / Structured Finance:
Many loans for the ultra-wealthy, especially those from private banks, are structured as interest-only for a significant period. This dramatically reduces the monthly cash outflow compared to a principal-and-interest loan. The principal might only be due at maturity, at which point it could be refinanced again, or paid off via the "Buy, Borrow, Die" strategy.
They might use "structured finance solutions" that are highly customized to their specific asset base and cash flow patterns.
Tax Efficiency:
Their financial advisors work diligently to minimize taxable income. Borrowed money is generally not considered taxable income, so the cash they receive from loans is tax-free.
Interest paid on loans used for investment purposes can sometimes be tax-deductible, further reducing their overall tax burden and effectively lowering the cost of borrowing.
In essence, their strategy isn't about generating a traditional "salary" to pay off loans. It's about a continuous cycle of:
Growing Assets: Their core wealth (often non-dividend-paying stock) continues to appreciate.
Leveraging Assets: They borrow against this appreciating wealth to gain liquidity without triggering capital gains taxes.
Generating Diverse Income: They use other investments and ventures to produce sufficient cash flow for lifestyle and loan interest payments.
Strategic Debt Management: They refinance, manage interest-only periods, and plan for long-term repayment (often via "Buy, Borrow, Die") to avoid major taxable events.
It's a complex, highly specialized approach to wealth management that aims to maximize asset growth, minimize taxes, and provide continuous liquidity.