How do billionaires/multi millionaires raise cash for very large purchases like for example a $500 million home?

November 27, 2011 4:06 PM

How do billionaires/multi millionaires raise cash for very large purchases like for example a $500 million home? I ask since most of their net worth comes from their stocks which I presume they don't liquidate.

My guess is they take loans again their stock but paying $400M with interest may not be the most financially prudent thing to do.

Just curious I obviously don't have the millions :)

Millionaires in this community...this question is for you!!

posted by r2d2 to work & money (13 answers total)

Well, for one thing I think that it is rare that any millionaire or billionaire makes a single purchase for personal use that is that large. Estimates put Bill Gate's house at about 150 million, and it would have been less than that when he actually built it; a fraction of the $500 million purchase you were using as an example. Many billionaires would be able to get that much money in liquid assets if they really wanted to.

I think most other projects that would be that expensive would be business ventures where they would be able to attract investors. A millionaire or billionaire willing to invest significant amounts of their own capital (even if it is nowhere near close to $500 million) will have no trouble attracting investors.
posted by Nightman at 4:24 PM on November 27, 2011

I goggled 10 most expensive houses in the world and the most expensive one was $1 billion owned by some Indian billionaire in Mumbai. Bill gates is not into showing off his wealth but there are many others who are very flashy.

Also billionaires presumably buy several houses in different countries and their yachts etc..

So I don't fully agree with you that they don't make such large personal purchases.
posted by r2d2 at 4:30 PM on November 27, 2011

This story from the NY Times this morning discusses ways to get cash from stock holdings (while avoiding or deferring paying income tax).
posted by janerica at 4:34 PM on November 27, 2011 [5 favorites]

I don't know anyone with that kind of money, but the ten-millionaires I know mostly have mortgages just like regular people. At the billionaire scale a lot of structured finance and investment banking services become available. For example, a purchase can be made through a synthetic lease which can have legal and tax advantages.

In terms of financing, my guess is it's mostly via loans from the brokerage / investment banks that manage the billionaire's financing. I don't have any direct citation of that for you, but a common story when billionaires get in financial trouble is how all their homes and yachts and stuff are repossessed. Not because they are truly broke, but because their financial assets have frozen up enough they can't pay the interest on the loans on their real assets.
posted by Nelson at 4:36 PM on November 27, 2011

Billionaires of the hi-tech kind are always selling stock. Generally they have a blind trust that sells a bit on a regular basis in order to avoid insider-trading problems. Millionaires are a more diverse lot. I know some that make a point of having no loans or mortgages of any kind on anything, and so they will sell stock to buy a house or whatever. I know others that manage their finances more like regular people.
posted by w0mbat at 5:34 PM on November 27, 2011

Why would they pay cash and miss out on the mortgage interest deduction? Don't most people with this kind of wealth set up a trust that owns the house?
posted by Ideefixe at 5:41 PM on November 27, 2011

i used to work for someone who owned a trump tower condo in nyc. he had a mortgage which he would periodically refinance. he liked the interest deductions for his personal taxes. he wasn't bill gates wealthy though, or anything like that. he was just a very successful professional.

the real wealth of the world don't own their assets individually/personally. they exist through trusts and corporations and offshore wealth structures. as the NYT articles reference above describes its subject's wealth: "organized in a labyrinth of trusts, limited liability corporations and holding companies, some of which his lawyers acknowledge are intended for tax purposes."

if you have huge stock holdings, you can get a lot of cash without paying tax by setting up an investment account in an offshore corporation's name and accruing dividends. then just use the $ generated to buy a property in the name of the corporation.
posted by zdravo at 6:23 PM on November 27, 2011

I worked on a $25 million high rise renovation and the owner(Doctor) paid cash for the entire job.I believe he was using interest from investments but when the draw got too high one month-it was paid a month late as he waited for beneficial gold stock prices before selling.

So for that millionaire (est $700 million worth) a combination of investment returns and stock itself was utilized.
posted by plumberonkarst at 7:29 PM on November 27, 2011

Leverage assets and look for a bank that thinks you are worth the risk. If the bank believes you will make good on the loan, they will advance the money. Though, these days, they are few and far between unless you have assets that are REAL hard (eg. cash). If you are in this realm of financing you either have a strong bank relationship or possibly own the bank.
posted by bkeene12 at 8:06 PM on November 27, 2011

Why would they pay cash and miss out on the mortgage interest deduction? Don't most people with this kind of wealth set up a trust that owns the house?

Can't tell if that's sarcasm or not, but just to make sure, the mortgage interest deduction is the equivalent of spending a dollar over the course of a year to get back a quarter in April.
posted by hwyengr at 8:10 PM on November 27, 2011 [3 favorites]

I know two people in this price range. One had lots of cold hard cash (sold a dot.com, crazy big money) and paid for it himself. The other had money, built the house, and then went shopping for a mortgage at favorable interest rates on part of it. Both started with the cash in hand.
posted by halfbuckaroo at 9:08 PM on November 27, 2011 [1 favorite]

Also, Mr. Ambani in Mumbai has been working on getting his mansion built for 14 years, so it's not exactly a walk up and buy it kind of a deal, either.
posted by halfbuckaroo at 9:16 PM on November 27, 2011

hwyengr: "Can't tell if that's sarcasm or not, but just to make sure, the mortgage interest deduction is the equivalent of spending a dollar over the course of a year to get back a quarter in April."

At the moment, mortgage interest itself is cheaper than expected returns of investing in the equities market or however it is you earned your millions. So you get an interest only mortgage for whatever sized home you buy, and leave the money you would have otherwise pulled from elsewhere sit.

But I figure the mortgage deduction is a drop in the ocean of their wealth.
posted by pwnguin at 9:07 PM on November 28, 2011 [1 favorite]