This is how the super-rich buy housing

Let’s assume that you are a billionaire and you want to buy a house, maybe a penthouse in Manhattan overlooking Central Park, maybe a Victorian house in London, or maybe a luxurious house in Singapore. Maybe let’s talk about vacation homes in Boca Raton (Florida) or on the Cote d’Azur. You would choose the house, you would agree on a price and you would pay it with part of the amount with many zeros that you have in your account, right? Well no, the super-rich are not buying their homes for cash.

The super-rich are buying their houses by mortgaging them, either in their name or in the name of a company in a tax haven, as we have already commented at some point. Many times never amortizing the principal and paying only the interest. But Why are they taking out loans if they have money to spare to buy houses that others can’t even dream of? Well, let’s say various circumstances play a role.

The environment that pushes everyone into debt


The first thing to consider is that in the current environment, both in the US, the Euro Zone or Japan, ** interest rates are on the ground. ** This also happens in smaller economies, such as UK or Denmark. If after the real estate crisis of 2008 and the sovereign debt crises of 2012 the interests had been low, already with the Covid19 crisis, they are on the ground.

It is added at a time when central banks have pumped money into the system like there is no tomorrow. According to the Federal Reserve Bank of San Luis, 35% of the dollars that had been printed in history, were created in 2020. This has pushed, among other things, the price of companies on the stock market, but also the prices of real estate (and it seems that also consumer products).

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The argument that advisers give to the rich is simple, If you buy it on credit, your money will be working in two places at the same time, in your home and where you have it invested. Maybe in your company or maybe in the stock market. So it is better that the house appreciates while the debt remains the same. Many investors are getting into debt and taking mortgages for more than 80% of the value of the house, in 2019 they used to do it for 50 or 75%.

It also has a tax advantage, in countries such as France or the United Kingdom, mortgages reduce the value of the inheritance, which is why it is better to leave a mortgaged property to the children than without mortgaging, they will pay less taxes. In the US you can deduct the interest paid for your first and second home.

Banks happy to lend at very low interest rates why? Mainly because they use them as a claim so that their clients bring them more business managing the rest of their fortune. They agree to lose money with the money they lend to their clients in exchange for managing their fortunes and making up for the losses with the hefty commissions they charge for it.

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In addition, previously there was a “stigma” for leaving debts to children, this has disappeared. It is understood that in the estate of the inheritance there may be debts whose value is less than the total of the estate, so there is no problem in getting into debt. In fact, the average age of people who go into debt to buy a home is increasing. The generation of “Boomers” is borrowing to buy a home, or even to obtain liquidity from it.

It has its risks


Precisely as we discussed last week, there are risks to borrowing to invest. Precisely because the value of the purchased asset may have decreased. This happened with the real estate crisis of 2008, in which many people found themselves unable to afford their housing payments.

It is true that if we are super-rich, the risk is lower. That is, if we have a hundred million and we get into debt for five to buy a house in that city that we love to escape (New York, Paris, Tokyo, etc.) We are running a more controlled risk What if we have a 100% mortgage on the value of a home in a middle-class neighborhood in a provincial capital (because we have skipped the 80% rule) and we go into debt to buy index funds.

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So the next time we see a mortgage payment on our checking account, let’s think we share something with the very rich who have also gone into debt to buy a home. Saving distances.

Readers ask: if you could fully pay for your home in cash Would they go into debt to buy it or would they prefer to leave it paid?

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Via | FT, Reddit

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