How Millionaires Use Debt to their Advantage
What Debt Really Is: Think of debt not as a burden, but as a tool to buy things that make you money. It's like borrowing $10 to buy a lemonade stand that makes $20.
Three Main Ways Smart People Use Debt:
Using What You Already Own
Real Estate Strategy
Business Growth
Using What You Already Own:
Instead of selling your stocks or house to get cash, you can borrow against them
Example: If you own a $500,000 house, banks might lend you $200,000 to use for other investments
Variety of factors affect this, your equity - how much you’ve paid down, your credit score and current income plus interest rate)
This way, you keep your original investment AND get to use the borrowed money
Real Estate Strategy:
Instead of buying one house with $100,000 cash*
You could use that $100,000 to buy five houses worth $100,000 each (putting $20,000 down on each)
Now you have five tenants paying your mortgages
If the houses go up in value, you gain five times more wealth
*YES, there are houses in the U.S. that you can still buy for $100,000! Check them out here.
Business Growth:
Borrow money at a lower rate (like 5%)
Invest it in something that makes more (like 15%)
Keep the difference as profit
Important Safety Rules:
Always have backup savings
Don't borrow the maximum amount offered
Make sure you can afford payments even if things go wrong
Start small and learn as you go
Make sure the investment produces enough cash to cover the debt payments
Simple Mindset:
Think like a business owner, not a consumer
Focus on buying things that make money
Plan for the long term (10+ years)
Build slowly and steadily
Learn about tax benefits of different investments
Here’s a more detailed explanation, are you ready for it?
Wealthy individuals typically use debt as a financial tool in several key ways:
Asset-based lending: They borrow against existing assets (like stocks or real estate) rather than selling them. This allows them to access capital while keeping appreciating assets and avoiding capital gains taxes. For example, they might use a portfolio line of credit with their stocks as collateral.
Tax deductions: Interest on certain types of debt (like mortgages or business loans) is tax-deductible, effectively reducing the real cost of borrowing. When combined with other tax strategies, this can significantly lower their effective tax rate.
Arbitrage opportunities: They often borrow at low interest rates to invest in opportunities with higher expected returns. For instance, they might take a 3% loan to invest in a business venture expecting 15% returns.
Real estate leverage: Using mortgages to purchase income-producing properties allows them to control valuable assets with relatively little capital down, while tenants effectively pay off the debt.
Business expansion: They use business loans to scale operations rather than diluting their ownership by taking on investors, allowing them to maintain control while growing their wealth.
However, it's important to note that these strategies involve significant risk and require careful management. The key is that wealthy individuals typically have substantial assets to back their debt and can weather market downturns without being forced to sell at inopportune times.
Let me break down how asset-based lending works in practice.
Asset-based lending, often called securities-based lending or portfolio-based lending, allows wealthy individuals to borrow money using their investment portfolio as collateral. Here's how it typically works:
Lending Structure:
A wealthy person with say $10 million in stocks can typically borrow 50-75% of their portfolio value
The loans often have very competitive interest rates (currently around 5-7%) because they're secured by high-quality collateral
No regular payment schedule is required - interest can usually be added to the loan balance
The money can be used for almost anything except buying more securities
Real World Example: Let's say someone wants to buy a $2 million vacation home. Instead of selling $2 million in stocks and triggering capital gains taxes, they might:
Take out a portfolio line of credit for $2 million
Keep their stocks invested and growing
Pay perhaps 6% interest annually ($120,000)
Avoid paying 20%+ in capital gains taxes ($400,000+) on selling stocks
Still receive dividends and appreciation on their stock portfolio
Key Benefits:
Maintain market exposure and investment growth potential
Avoid triggering taxable events from selling assets
Access liquidity quickly without complex approval processes
Interest rates are typically lower than unsecured loans
Flexible repayment terms
The main risk is margin calls - if the portfolio value drops significantly, the bank may require additional collateral or force stock sales at low prices. This is why wealthy individuals typically borrow conservatively against their portfolios and maintain substantial cushions.
Let me explain how using a Home Equity Line of Credit (HELOC) or cash-out refinance to purchase rental property works:
Basic Structure:
Let's say you have a $500,000 home with $300,000 in equity
You could potentially borrow up to 80-85% of your equity (around $240,000-$255,000)
Use this as a down payment on a rental property
The rental income ideally covers both the HELOC payment and the new mortgage
Example Scenario:
Take out a $200,000 HELOC at 8% interest ($1,333/month)
Buy a $400,000 rental property with 50% down
Get a $200,000 mortgage at 7% ($1,331/month)
Total monthly payments: $2,664
Rent it for $3,200/month
Net cash flow before expenses: $536/month
Key Benefits:
Leverage existing equity to build additional wealth
Rental income can cover both loans
Interest on both loans may be tax-deductible
Property appreciation on the full $400,000 asset**
Building additional equity through tenant payments
**What does Property appreciation on the full $400,000 asset mean?
This means you get the benefit of price appreciation on the entire $400,000 property value, even though you only put in $200,000 of your own (borrowed) money. Here's how it works:
Let's say the property value increases by 5% in a year:
5% increase on $400,000 = $20,000 appreciation
Your property is now worth $420,000
You get the full $20,000 in equity gain despite only investing $200,000
This is one of the key benefits of leveraging debt - you can earn returns on the full asset value while only putting in a portion of the capital.
To contrast this:
If you had just invested your $200,000 in stocks and they went up 5%
You would only gain $10,000 (5% of $200,000)
But with the rental property, you gained $20,000 on the same $200,000 investment
This multiplier effect on appreciation is why real estate investing with leverage can be so powerful for building wealth. Of course, the reverse is also true - if property values decline, your losses are also magnified relative to your initial investment.
Main Risks:
Your primary home is now collateral
IMO: Make sure you already have enough mortgage saved for at least two years, don’t do this strategy if you don’t have savings to live off in case of job loss; because if something happens you will need to sell the second home and you have to own it for two years to avoid paying higher taxes
Vacancy periods mean paying both loans yourself
IMO: Again if possible have one to two years savings per house in case you have to pay both mortgages
Interest rates on HELOCs are usually variable (meaning they are not the same so research!)
Property maintenance and repairs eat into profits (research insurance and property management companies)
Housing market downturns could affect both properties
This strategy requires careful cash flow analysis and maintaining emergency reserves for repairs, vacancies, and market downturns.
Let me break down real estate leverage through a detailed example to show how it amplifies returns.
Basic Leverage Example: Let's say you have $100,000 to invest. You have two options:
Buy a $100,000 property with cash
Use that $100,000 as a 20% down payment on five $100,000 properties ($500,000 total)
Scenario with 5% Annual Appreciation:
Cash Purchase (1 property):
Initial investment: $100,000
After 1 year value: $105,000
Equity gained: $5,000
Return on investment: 5%
Leveraged Purchase (5 properties):
Initial investment: $100,000
Total property value: $500,000
After 1 year value: $525,000
Equity gained: $25,000
Return on investment: 25%
Additional Benefits of Leverage:
Mortgage Paydown
Tenants pay your mortgages
Each payment builds your equity
On 5 properties, you're building equity 5x faster
Tax Benefits
Mortgage interest deduction on all properties
Depreciation deductions on multiple properties
Property tax deductions
Maintenance and repair deductions
Income Multiplication Example for 5 properties:
Rent per property: $1,200/month
Total rental income: $6,000/month
Mortgage per property: $800/month
Total mortgages: $4,000/month
Gross monthly cash flow: $2,000
After expenses (~40%): $1,200 monthly net
Key Risks:
Multiple mortgages mean multiple obligations
Vacancy in multiple properties can strain finances
Market downturns affect larger portfolio value
Property management becomes more complex
Maintenance costs multiply
This is why successful real estate investors:
Maintain significant cash reserves
Buy properties with good cash flow margins
Have strong property management systems
Often focus on one type of property or area
Scale gradually to manage risk
Here's a strategic framework for building wealth using leverage:
Think Like a Business Owner:
See debt as a tool for acquiring income-producing assets
Focus on cash flow first, appreciation second
Build a strong credit profile to access better lending terms
Always consider the tax implications of financial moves
Risk Management Principles:
Never leverage yourself to the maximum
Maintain substantial cash reserves
Have multiple exit strategies for each investment
Understand that higher leverage means higher risk
Start small and scale gradually as you learn
Strategic Asset Selection:
Target assets that generate reliable income
Look for properties/investments below market value
Focus on assets that can be improved to build equity
Consider the long-term growth potential of the area/market
Choose assets that perform well in different economic conditions
Wealth Building Hierarchy:
Build strong income streams first
Accumulate assets that can be leveraged
Use good debt to acquire more income-producing assets
Reinvest profits to reduce leverage and build equity
Repeat the process with larger assets
Key Mindset Shifts:
See interest as the cost of opportunity rather than just an expense
Focus on net worth growth rather than debt reduction
Think in terms of return on equity rather than total return
Consider opportunity costs when making financial decisions
Plan in decades rather than years
The core principle is using calculated leverage to control more assets than you could with cash alone, while maintaining enough safety margin to weather downturns.
You can do this, you don’t have to be a millionaire to start planning and act on this goal! You can make this work even if you aren’t a millionaire yet, THIS one strategy CAN LEAD YOU to Millionaire status in the long run! Remember this is not a 1 to 2 year strategy, it could be 3 to 10 years! Lots of factors at play here.