How Luxury Homeowners Use Intelligent Debt to Get Richer
There have been many books and thousands of newspaper articles written on good debt and bad debt, which has led to confusion on what exactly debt is. Thomas Anderson, Investment Banker, Private Wealth Manager & bestselling author of “The Value of Debt,” summarizes debt nicely by saying: “Swap the good versus bad distinction for the notion of Intelligent Debt.”
High-Net-Worth households have been using intelligent debt for decades to increase their overall net worth and to minimize taxes. Take Warren Buffet for example – how did he become one of the richest people in the world?
The answer is not so simple. Let’s rephrase the question: Would Warren Buffet have become one of the richest in the world had he not boosted his returns immensely by using intelligent debt?
In the research paper “Buffet’s Alpha” by Andrea Frazzini, David Kabiller and Lasse Pedersen, the authors state: “Warren Buffett has boosted his returns by using leverage, andhe has stuck to a good strategy for a very long time, surviving rough periods where others might have been forced into a fire sale or a career shift. We estimate that Buffett applies a leverage of about 1.6-to-1, boosting both his risk and excess return in that proportion.”
But it’s not just Warren Buffett who embraces leverage investing. Every single major corporation in the world uses debt to grow its business. And leverage investing certainly isn’t a foreign concept to luxury homeowners, many of whom view the equity within their house as capital, to be used to create more capital and ultimately to increase their overall net worth.
Two of the most common ways luxury homeowners use intelligent debt to create more capital are by: a) purchasing investments and b) purchasing rental property. The case study we present in this article illustrates the value of purchasing investments such as bonds or stocks; we will cover the immense value of purchasing a rental property in Part 2 of this article.
Here’s a case study of how a mortgage professional used intelligent debt to close a $3.5M deal from a referral she received from a Financial Advisor.
The client in our case study owns a gorgeous home in Toronto valued at $8.5M. He also owns a cottage in Muskoka worth $3.5M. His total real estate value equals $12M. This client has an investment portfolio of $1.5M earning an average annual rate of return of 6% and has zero mortgage debt on any of his real estate holdings. The advisor ran two scenarios past his client:
Option#1: No Debt