How Debt Can Preserve and Grow Wealth

Why Do Wealthy People Borrow Money?

Doesn't it feel like the super-rich individuals of the world play by a different set of rules? We grow up believing that we'll reach financial prosperity by maximizing our income, saving diligently, and avoiding debt like the plague. This is not necessarily bad advice. But this philosophy teaches us to equate wealth-building with income accumulation—essentially, earning as much as possible while minimizing financial obligations. When we look at the finances of wealthy individuals though, we find they don't typically build their wealth through a regular paycheck and savings habit.

One of the key things the affluent do to grow their wealth is borrow money. But if they have so much money already, why do they need to borrow? Well, these individuals store most of their wealth in assets like stocks, real estate, and operating businesses. When they need cash, instead of selling these assets and having to pay taxes from the realized gains, they borrow against those assets—tax-free—at relatively low interest rates. Often, they pour these funds into purchasing or investing in more assets, ones that appreciate over time or generate passive income to outpace the cost of the debt.

We'll elaborate on strategic borrowing for wealth creation in the coming sections but the key takeaway is that super-wealthy individuals don't work for money, they put money to work for them, using debt as leverage to grow their wealth. While billionaires like Warren Buffet and Elon Musk are known to embrace this philosophy, the knowledge and tools are not reserved for the super-wealthy. Whatever your financial status, you can apply the same principles to build your wealth.

Good Debt vs Bad Debt

First, let's address the stigma associated with debt. Many people see it as a liability. There are indeed forms of debt that should be avoided, e.g. credit card debt that comes with exorbitant interests. However, not all debt is bad. There are plenty of instances of wealthy individuals who leverage "good debt" to preserve and amplify their wealth, while avoiding "bad debt" that erodes their financial stability.

Good debt refers to debt used to purchase an asset that's expected to appreciate or produce income above the debt servicing cost. This type of borrowing usually leads to greater wealth creation when compared to purchasing assets with cash-only (although there is more risk involved). A key feature of good debt is that it carries low interest. The lower the interest, the more gains you accrue. Collateralized loans, i.e. funds borrowed against assets you already loan, are known for offering lower interest rates because the lender is protected against failures to repay.

Bad debt, on the other hand, involves borrowing money to make purchases that do not generate any additional income or value over time. The interest on these loans must be paid back from other sources of income. So bad debt borrows from your present and future wealth. Uncollateralized loans, such as credit card debt and personal loans, often come with high interest rates—sometimes exceeding 20-30% annually—making them a bad form of debt. The high cost of borrowing makes it difficult to generate returns on the proceeds that outpace the interest, which drains your wealth.

If good debt, especially collateralized loans with superior interest rates, can create wealth that exceeds the cost, it's no surprise many affluent individuals take advantage of it. Larry Ellison, founder of Oracle, has borrowed over $4B against his company shares to fund different ventures that have contributed to his net worth. But even if you're not a tech billionaire, good debt is still available to you. Let's look at how you can leverage two popular types of asset-backed loans: Home loans (mortgage and home equity) and securities-backed loans.

Home Loans are the Most Common Form of Good Debt

Many people don't realize it but they are already borrowing against collateral, or using good debt. Taking out a mortgage on a new house (where the house is held as collateral) is a form of good debt. In many situations, it’s not possible to pay for a house outright, but even if you could, there are benefits to taking on debt for a property. Consider the following example:

Tony is looking to buy a $2MM property in Menlo Park. He's worked at Apple for the last 7 years, and through a combination of employer stock grants and wise investments, he's grown his portfolio to $3MM. So the obvious thing Tony can do is sell $2MM worth of his holdings to obtain the cash to pay for the house. This is probably a bad idea. Here's why:

• Tax Liability: The sale of investments would dramatically increase Tony's tax exposure. If the total cost basis for those assets he sold was $500K, he would realize a capital gain of $1.5MM. At a federal long-term capital gains tax rate of 20%, Tony would face a tax bill of $300K—and that doesn't even include state taxes!

• Lost Portfolio Appreciation: By selling off of his portfolio, Tony sacrifices the future growth potential of those investments. If his portfolio yields an average annual return of 7% (consistent with historical stock market performance), the $2MM could grow to approximately $3.93MM in 10 years (compounded annually). Selling now means forgoing nearly $1.93MM in potential gains.

• Reduced Liquidity: Liquidating $2MM leaves Tony with only $1MM in his portfolio (after taxes, closer to $550K). This severely limits his financial flexibility. He not only has less liquidity to cover unexpected expenses, the decline means he has lower capacity to secure good debt, which he can leverage for investment opportunities or diversification.

Instead of buying (with his own money), Tony can borrow. He can secure a mortgage to purchase the home. He'll probably have to put 20% down, but that means selling only $400K of his portfolio, and then taking out a $1.6MM mortgage at 7%. His monthly payment, including principal and interest, would be approximately $10K. As long as Tony's cash flow allows him to meet the borrowing costs (e.g. using his ordinary income), his use of debt here allows him to save on taxes (~$26K), and retain the assets in his portfolio, along with their future growth potential (~$1.15MM)—effectively multiplying his wealth.

A home equity line of credit (HELOC) is another popular form of debt. It's backed by the equity in the real estate you already own. So once again, instead of liquidating assets, like securities or properties, to finance a major purchase (e.g. remodeling a kitchen), you can secure an HELOC. With sufficient cash flow to service the debt—which sometimes comes from the major purchase itself if it's income-generating—your total wealth can ascend to greater heights!

Securities-Backed Loans - A Better Way to Strategically Borrow

A Securities-Backed Line of Credit (SBLOC) allows individuals to borrow against their non-retirement investment assets without selling them. A mortgage loan or HELOC is secured against real estate you own. With an SBLOC, the loan is secured against the assets (stocks, bonds, etc.) in your investment portfolio. It takes a lot of forms, but most of the time, it's structured as a revolving line of credit, meaning you can draw some of the funds or all of the available credit at your convenience. They have flexible repayment terms and you can re-borrow multiple times.

SyntheticFi Loans are an SBLOC with very low interest rates (latest quotes available here). You can choose between floating-rates or fixed-rates. These options are a great alternative to mortgages and other personal loans, which often require lots of paperwork, weeks for approvals, and all sorts of fees.

Let's say that Tony elects to use a SyntheticFi Loan to purchase the $2MM property. He can borrow $2MM with his $3MM portfolio as collateral—with no down payment so he can keep the $3MM fully invested and working for him. Moreover, he can secure a low 5% fixed-rate for 5 years. This strategy comes with several advantages: 

• Tax Efficiency: Not only does Tony save himself from capital gains taxes, the interest he pays on the loan is tax-deductible, with no cap. In the first year, Tony pays approximately ~$100K in interest, which he can use to offset capital gains taxes he incurs during the tax year (rolling any remainder over to future years). This could generate ~$20K in federal tax saving alone. (If Tony decided to combine the SyntheticFi loan with a mortgage, he could save over $200K in taxes over 5 years. This article explains tax-aware borrowing when financing a home.)

• Preserving Portfolio Growth: By keeping his portfolio intact, the $2MM Tony keeps continues appreciating. If it grows at 7% annually, it could reach ~$3.93MM in 10 years. Compare that to the total interest of ~$1MM paid on the loan over the same period. Tony would net a significant positive return.

• Maintaining Liquidity: Tony retains his entire portfolio, providing ample liquidity for other investments, such as starting a business or purchasing additional real estate.

• Leveraging Appreciation: The value of real estate tends to go up, so the loan allows Tony to benefit from the property’s appreciation without putting down any of his own capital upfront. The property can grow ~$700K in value over 10 years, which demonstrates the power of leverage when you use debt combined with rising property values.

If Tony chose to convert the purchased home into a rental property, he could offset some of his interest burden, and possibly even turn a profit. A $2MM property in Menlo Park can be rented out for $8K per month ($96K annually), a realistic rate. After accounting for property management fees, property taxes, insurance, and maintenance, his net annual expenses would total approximately $41K. Factoring in the tax savings ($20K) would reduce his effective out-of-pocket cost to $21K per year, making the investment more affordable. Over time, as rents increase (e.g. 3% annually), the net income could surpass his annual costs, creating positive cash flow for Tony.

This is a great example of utilizing debt to your advantage: Borrow money to buy a cash flowing asset to service the debt (possibly with leftover profits), and then pay little to no taxes on the income earned thanks to interest and other deductions (the borrowed money itself does not count as income, so it is not taxed). Tony's overall wealth builds with the preservation of his capital and appreciation of the underlying assets. Genius!

This is the secret sauce for many HNW and UHNW individuals and families. Morgan Stanley reports that their wealth management clients have taken $68.1 billion in security-backed loans, doubling from 2016-2022, Bank of America's wealth management arm witnessed a 50% rise in such loans from 2019 to 2022. And the borrowed funds aren't just being deployed into real estate. There many other strategic uses of these loans to avoid capital gains taxes and maintain long-term investments:

• Bridge Loan: The flexibility of SBLOC aligns well with the temporary nature of bridge financing. For example, you can borrow funds to purchase a property and renovate it, repaying after flipping the house, while bagging a profit. Or you can use the funds to cover something like a tax bill without dipping into your portfolio.

• Private Investments: You can borrow to fund illiquid, high-return private equity or venture capital investments. For example, you might borrow $1MM at 4.1% interest to invest in a fund anticipating net 15% annual returns, netting you significant gains.

• Portfolio Diversification: Certain professionals who hold a concentrated stock position in a single company can borrow against that concentrated position to buy ETFs and stocks in other companies, making for a more balanced long-term investment strategy. For example, borrowing $1MM at 4.1% interest against a $3MM stock position to buy ETFs that yield 7% annually can offset any interest while stabilizing your wealth.

• Leveraged Investing: You can purchase additional securities, investing in assets with higher returns than borrowing costs, e.g. borrowing $1MM at 4.1% for an 8% real estate fund. (Traditionally, SBLOC products don't permit the use of funds for margin investing, but SyntheticFi Loans don't have this restriction.) 

• Personal Purchases: Funds can be used to pay for a wedding or a luxury vacation. Having a flexible line of credit in place makes it easy to handle recurring or on-going expenses, while keeping interest costs down since your investments are pledged as collateral.

If you're still not convinced by this strategy, note that the 25 richest Americans were able to pay a true tax rate of only 3.4% between 2014 to 2018 by taking advantage of asset-backed loans (according to ProPublica).

This theme of good debt shows up over and over again when you look into the fortunes of ultra-wealthy individuals. They borrow money against their assets at relatively low interest rates and use the income or appreciation from those assets to cover the borrowing expenses. This approach is highly tax-advantaged because borrowed money is not considered income, so it's not subject to income tax, and the interest can be deducted against whatever taxes you do owe. It’s just like the mortgage and SBLOC examples, but wealthy individuals and families apply it on a larger scale.

Buy, Borrow, Die

Now, if you've been interested in this article's subject for a while, you might've already heard of the phrase “Buy, Borrow, Die”. If refers to a tax and estate planning strategy designed to maximize wealth without having to pay taxes. And of course, it takes smart advantage of the debt techniques, like SBLOC, we've covered. This is how it works:

1. First, you "buy" (or create) assets with the potential to grow over time. This can be a house, or securities, or a startup you create that eventually turns into a big corporation.

2. Next, rather than selling these assets when you need funds, which would trigger capital gains taxes, you “borrow” against them using the assets as collateral. This is where financing solutions like SBLOC are essential. Most people own stocks and other securities so they can easily take out a SBLOC for leverage. And SBLOCs are attractive to lenders because of how easily securities can be seized and sold, making them a lower-risk.

3. Finally, when you pass away ("die"), your heirs or beneficiaries receive the assets.  They can then sell the assets (after paying off any loan-balance) without incurring capital gains taxes due to the "stepped-up basis" they received after inheriting the assets. The “stepped-up basis” rule, under the existing tax code, adjusts the cost basis of your assets—the original amount you paid—to their market value at the time of your death. Meaning once you have passed away, your heirs would be able to sell the assets without having to pay taxes on the capital gain.

   For example, if you purchased a home 20 years ago for $1MM and by the time of your passing, the value had risen to $2.5MM, your heirs would inherit the house with the stepped-up cost basis of $2.5MM. So if they decide to sell the property at this valuation, they wouldn’t owe any capital gains tax because their gain is calculated from the $2.5MM, not the original $1MM. By taking advantage of this, families can pass on their wealth without incurring a hefty tax bill.

This strategy wraps the use of good debt into a complete playbook for building a fortune and passing it along across generations. And of course, it's actively used by some of America's wealthy individuals and families.

Risks

Even though it's popular, leveraging debt does involve some risks.

• Borrowing Costs: Since you are borrowing against your assets, interest rates on that loan need to be relatively low, otherwise paying interest is equivalent to taxes and accepting lost appreciation. Higher interest rates can eat into your returns on debt, and past a certain point, this financial strategy becomes ineffective.

• Increased Losses: If borrowed funds are invested in assets that decline in value, losses are magnified because you still have to repay the loan plus interest.

• Collateralization Failure: If the value of the assets used as collateral (e.g. stocks, real estate) decreases, lenders may demand additional collateral to secure the loan. Failure to meet these demands could lead to forced liquidation of assets at unfavorable prices.

• Assumption of Asset Appreciation: Success often relies on the assumption that collateral assets will appreciate over time. If assets stagnate or decline, the strategy may fail to deliver, leaving you with ongoing debt obligations and reduced financial flexibility.

Final Thoughts

Strategic debt, when used judiciously, can be a lucrative tool for individuals and families to preserve and build wealth. By leveraging instruments like SyntheticFi Loans, you can access liquidity, defer or avoid capital gains taxes, and maintain the growth potential of your investment portfolios. The "Buy, Borrow, Die" strategy exemplifies how borrowing against appreciating assets can minimize tax liabilities across generations, while real estate and other income-generating investments can create positive cash flow to service debt and build wealth. However, these strategies require careful financial planning to mitigate risks. If you're interested in building wealth this way, contact us to learn more about how we can help you.

Note: All rates mentioned in this article, including but not limited to, mortgage rates, prime rates, and securities-backed loan rates, are current estimates as of 4/15/2025.