Buy, Borrow and Die
The strategy used by rich people to get even more richer without paying any taxes
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Buy Borrow and Die is a strategy used by rich people to get some money to finance their lifestyle or get even more richer. The advantage of this strategy are:
They don’t have to pay taxes.
They don’t have to sell their assets.
In this post, we will explain how this strategy works and we will explore if we, normal (not rich) people can use this into our own life to create more wealth over time.
How does Buy, Borrow and Die works ?
According to this nytimes article, “ the 25 richest Americans paid relatively little to no taxes”.
When we think of taxes, we think that the richest people paid the most taxes but that is not the case.
We have legal loopholes that let the rich avoid paying large taxes as percentage of their wealth. Buy, Borrow, and Die is an example of how they do this.
These rich people mostly have their wealth on the shares of the company they own.
Amazon founder Jeff Besoz owns lots of Amazon shares. Elon musk owns lots of Tesla shares. Bill Gate owns a lot of Microsoft shares.
When these people needs money to pay for their lavish lifestyle: mansions, cars, party, divorce settlements, alimony or whatever billionaire spend this day , the way you would think is they will sell shares to finance their lifestyle. But that’s not what they are doing.
If they sell their shares or any other assets they own :
They will pay capital gains tax on the sale of their shares.
They will loose their asset. If they believe their stock like Amazon , Tesla or Apple will continue to go up in price, why would they sell it right? The moment you sell it, you loose the potential upside or appreciation.
So to get around this double edge problem of paying taxes and loosing your investment. they instead borrow against their assets.
This is what Buy Borrow and Die is:
You buy the asset that you believe will continually go up forever.
You borrow against it to get money to pay for your lifestyle or living expenses
Then you just repeat until you die.
Here’s is an simplified example to understand Buy Borrow and Die better:
You have shares of ABC company valued at P100,000.
You took a 1 year loan of P100,000 against it. This a collateralized loan. Banks and lenders prefer collateralize loan because in case borrowers cannot pay, they will sell the collateral.
This is a secured loan. In contrast, unsecured loans like personal loans, where the lender has no possession of any collateral, has higher interest rates.
Secured loans like housing loans or auto loans have lower interest rates. It is because the lender can repossess or sell the collateral (house or car) to pay for the loan.
Going back to our example, let’s say that the interest rate is 5%:
ABC shares value = P100,000
Loan amount = P100,000
Interest rate= 5% or P5,000
Assumed that 1 year has passed and you’re about to pay the loan of P100,000 + interest of P5,000.
Your collateral is a share that goes up and down in prices. Let’s assume that your stock goes up in price.
Lets say that ABC shares value is now P200,000
Since your share price has gone up, you can just take another loan of P200,000 and pay the total loan of P105,000 . You will still end up with P95,000.
In contrast to Buy Borrow and Die. If you had sold the shares:
you will pay taxes on the sale of the shares.
you loose the opportunity cost or the upside of the investment. Since the investment doubled in price and you don’t have it anymore, you didn’t have the P100,000 appreciation in price.
This is just an simplified example of how Buy Borrow and Die works. It is not as easy or simple as that.
It certainly has risk. There’s no such thing as free lunch.
In order to utilize buy borrow and die, you need to have the following:
Possession of a pristine collateral. A collateral that has potential to continually go up forever. Example of this in the past are the share of tech companies that has risen in the past like Tesla, Apple, Amazon etc. Another example is a prime real estate like a Manhattan real estate.
Access to cheap credit. Sadly, the cheapest credit with the lowest interest rates are only available to the richest people, it is because these rich people are deemed to be the most creditworthy borrowers because they have lots of money and they have possession of pristine collateral.
Dangers of Buy Borrow and Die
The loan you borrow in this strategy can be used in two ways:
To have fun by spending your money
To get more even richer
Let’s focus on the #2, because this is the most common use case for this strategy.
Buy Borrow and Die can be a powerful strategy to grow your wealth, because it is essentially leverage. In stock trading it’s called margin.
But for the common people like us, it is dangerous because, we don’t have possession of pristine collateral and access to cheap credit.
The takeaway with learning Buy Borrow and Die is how we can look forward into the future to use this strategy once we’ve grown our wealth. You don’t need to be Elon Musk or Jeff Bezos to use this strategy.
If you have a fully paid home. You can actually borrow against the value of you house. It is called Equity Home Loan or like “sangla”.
COL financial, one of the most popular stock brokers in the Philippines also allows their clients who hasP200,000 or more in stocks to borrow against their equity.
Another one which I have done and do not recommend doing, is borrowing against bitcoin.
If you are a reader of this blog, you know that I own bitcoin. I’ve done borrowing against my bitcoin and it is one of the biggest mistake that I did.
I did not loose money but I nearly did because the price of Bitcoin is volatile.
Another important thing that you need to learn on Buy Borrow and Die or collateralized loans is that your subject to a margin call.
Margin call simply means that if you’re collateral goes down in price, you either need to:
add more collateral
repay the loan
If you can’t do either of the two, the lender will sell your collateral. You will loose your collateral and your loan will be extinguish.
This is called being liquidated.
I started borrowing against my bitcoin at $30k. Bitcoin went down to as low as $15k at that time. I repaid the debt so that my Bitcoin won’t be liquidated. Instead of having the money to buy more bitcoin at a lower price, I was forced to pay my loan instead.
This is the risk of using Buy Borrow and Die, so if you will use it, be sure that when the worst happens, you can still pay your loan so that you won’t get liquidated.
It is better also to use collateral that have stable value like a house. Financial assets like stocks or Bitcoin are more volatile.
Buy Borrow and Die is just like fire, it can help you in positive ways like cooking your food or heating your home when cold. But it can also hurt you by burning your house.
