Borrowing against company stock for living expenses

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
interwebopinion
Posts: 152
Joined: Thu Aug 13, 2020 6:21 pm

Borrowing against company stock for living expenses

Post by interwebopinion »

The recent article about Bezos et al borrowing against company stock to fund their living expenses has me wondering: how exactly does this work?

As far as I can tell, this is more or less the situation:
  • The successful entrepreneur has lots of very valuable equity that they're loath to sell, not just for cap gains reasons, but also for voting control issues
  • They borrow against a 'small' portion of their stock. Because it's a listed public company with a long track record, they get very low interest rates. Banks would bid against each other for the lowest rate so they can get bragging rights to be the lender of choice.
  • Said entrepreneur uses the borrowed money to invest in income producing assets. For example, buy a ritzy hotel on a nice Hawaiian island. Heck maybe buy the island too, for the rental income from the farms.
  • Use a portion of the income produced to pay off the loan interest, and of course write off the interest as an investment expense. This assumes you invest in assets that yield substantially higher than the interest expense, which isn't hard since you got a rock bottom rate from the lender. Let's leave aside the moral issue of whether they should be subsidized on that interest by US taxpayers.
  • Live off the rest of the income.
  • Never pay down the loan itself, just pay the interest service portion. So it works like a perpetual interest-only loan.
So problem solved - no need to sell the stock, and plenty of money for enjoying life.

Do I have this right? If so, why can't us mere mortals replicate this strategy by borrowing against our retirement funds?
tomsense76
Posts: 420
Joined: Wed Oct 14, 2020 1:52 am

Re: Borrowing against company stock for living expenses

Post by tomsense76 »

Many issues. Here are a few:
  • Retirement accounts don't allow margin
  • Not everyone has a taxable account to margin
  • Taxable accounts may be a smaller percentage of portfolio/income (pensions, SS, retirement accounts)
  • Usually retirees hold more in bonds, which don't make very much sense to hang onto with margin (just sell them)
  • For the taxable accounts people have, they are better served paying for Roth conversions for example. Margin will grow relative to a shrink taxable account in that case (risk of margin calls grows)
  • Taxable account may not be large enough for a "safe" amount of margin (unlike ultra wealthy)
  • Retirees are better off buying SPIAs than using margin
  • Behavioral risks associated with margin aren't worth the risk
  • Bad idea for most people to do with individual stocks (broad based index funds are better but still risky)

That doesn't mean leverage doesn't work for people. They just often use it earlier on (think mortgage). Most people want this paid off in retirement

A few authors have discussed reverse mortgages in retirement. These may make sense in some case, but would assume most people would rather avoid these if it is an option
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
bogcir
Posts: 88
Joined: Thu Jan 21, 2021 1:38 am

Re: Borrowing against company stock for living expenses

Post by bogcir »

I've read up on this before and seen the discussions here. I'd love to find a more practical discussion of it, but my impression is that it might make sense if your borrow is a tiny fraction of your total assets. Ironically, to the point where the amounts don't even matter.

But disregarding that, I will point this out.

According to that article, Bezos reported an income of $4.22B from 2014-2018. Paid $973M in taxes. Without borrowing ANY money, he had a net of $3.27B (after taxes) over those 5 years. I suspect that was enough for him to live on without any loans.

Now when he bought his $500M yacht, he perhaps borrowed money that he got a good rate on. Just like any one of us would when buying a house with a mortgage.
MBB_Boy
Posts: 326
Joined: Sat May 12, 2018 4:09 pm

Re: Borrowing against company stock for living expenses

Post by MBB_Boy »

Similar plan, but simpler.

Step 1: Have a large taxable account, and borrow on margin to fund living expenses (M1 premium is 2% right now, IBKR pro is under 1% for larger balances).

Step 2: Pay for living expenses utilizing a strong credit cards rewards strategy (very easy to get at LEAST 2% cashback on everything)

Step 3: Use credit card rewards (which aren't taxed) to pay interest on margin loans.

Step 4: ???

Step 5: Profit? (Perpetual money machine?)

Hold on, I'm going to go start a company and sell seminars about how you can live for free with this ONE amazing trick. The government / banks hate it!

/s (partially?)
User avatar
simplesimon
Posts: 4039
Joined: Mon Feb 25, 2008 8:53 pm

Re: Borrowing against company stock for living expenses

Post by simplesimon »

Is there a poor man's version of doing this with a HELOC?
Lee_WSP
Posts: 4779
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Borrowing against company stock for living expenses

Post by Lee_WSP »

interwebopinion wrote: Thu Jun 10, 2021 2:05 pm
  • They borrow against a 'small' portion of their stock. Because it's a listed public company with a long track record, they get very low interest rates. Banks would bid against each other for the lowest rate so they can get bragging rights to be the lender of choice.
Do I have this right? If so, why can't us mere mortals replicate this strategy by borrowing against our retirement funds?
Unless you can do the quoted part using the bolded part, the rest does not follow.
User avatar
Watty
Posts: 22690
Joined: Wed Oct 10, 2007 3:55 pm

Re: Borrowing against company stock for living expenses

Post by Watty »

interwebopinion wrote: Thu Jun 10, 2021 2:05 pm Do I have this right? If so, why can't us mere mortals replicate this strategy by borrowing against our retirement funds?
The big assumption in all this is that the price of the stock keeps going up at a faster rate than the interest rate you are paying.

Even if the company is keeps doing well if there is a general bear market the stock could go down by 25% or more and very likely your variable rate loan rate would also go up. There are lots of ways things could get ugly real quick for a "mere mortal" that could not unwind the position easily.

Another implied assumption is that the stepped up cost basis for your estate will exist when you die. That is not engraved in stone so if that law changes there could still be a huge tax liability for your estate.
seajay
Posts: 138
Joined: Sat May 01, 2021 3:26 pm

Re: Borrowing against company stock for living expenses

Post by seajay »

Without step-up upon death type benefits in mind, one approach might be to :

Half in 2x, half in bonds can compare to 100% 1x. Consider $1M capital, $1M stock exposure. The first year we might hold $960K of 1x stock, $20K of 2x stock, $20K in bonds. Overall we still have $1M of long stock exposure. The next year we revise that to $920K of 1x stock, $40K of 2x stock, $40K in bonds .. and again have $1M of long stock exposure. And so on, $880K 1x, $60K 2x, $60K in bonds in the third year ... etc. All else being equal after 25 years we'd be holding $0 in 1x, $500K in 2x, $500K in bonds (and still $1M in total long stock exposure).

If we spend the 'bond' value i.e. as our income then that's in effect securing debt at the cost leveraged funds pay to borrow, relatively low cost. In the above case the portfolio is generating a $20K/year income from a constant $1M portfolio value. 2%/year. In practice likely stock values would rise. Would $1M of accumulating stock exposure tend to offset the progressive compounded cost of building up $20K of bonds up to $500K of bonds (average $250K of bonds)? Along with covering $250K of average leveraged ETF debt, over a 25 year period? Quite likely as historically over 20 to 30 year type periods stocks have tended to outperform bonds. But that is playing with fire. Perhaps a safer choice might be to simply start with no house/home mortgage and periodically take-out/increase the mortgage to provide a income stream. 2%/year or perhaps 6% every few years (plus cost of mortgage interest payments).
Rex66
Posts: 704
Joined: Tue Aug 04, 2020 5:13 pm

Re: Borrowing against company stock for living expenses

Post by Rex66 »

For most mortals, one would pay more in interest then they would in taxes with these plans.

This works for them bc they get rates that we can’t get and the moment that interest rates aren’t favorable, they can settle it instantly.
User avatar
TomatoTomahto
Posts: 12602
Joined: Mon Apr 11, 2011 1:48 pm

Re: Borrowing against company stock for living expenses

Post by TomatoTomahto »

My net worth is orders of magnitude less than Bezos has in just “transportation toys,” not counting transportation that can go into space.

I think trying to emulate his form of financing for my life breaks down quickly. I’ll just carry on carrying on. :beer
I get the FI part but not the RE part of FIRE.
dkturner
Posts: 1652
Joined: Sun Feb 25, 2007 7:58 pm

Re: Borrowing against company stock for living expenses

Post by dkturner »

simplesimon wrote: Fri Jun 11, 2021 8:59 am Is there a poor man's version of doing this with a HELOC?
How about using a reverse mortgage?
milktoast
Posts: 389
Joined: Wed Jul 10, 2019 8:17 pm

Re: Borrowing against company stock for living expenses

Post by milktoast »

dkturner wrote: Fri Jun 11, 2021 12:59 pm
simplesimon wrote: Fri Jun 11, 2021 8:59 am Is there a poor man's version of doing this with a HELOC?
How about using a reverse mortgage?
Yeah. Maybe that's the closest example. Or just retaining the property and renting it out. Or any other way to turn it into cash without realizing the capital gains.

But no this isn't a solution for normal amounts of money invested in stocks. And if most of your money is in tax advantaged accounts, it makes no sense at all.

Maybe do this if you can't imagine a scenario where you end up spending more than 1% of your assets per year. Once you are up in the 2-3% range, it seems likely that you'll eventually run out of margin. At that point, you can't continue this scheme. And you'll be at risk for margin call which could cause a huge tax hit all at once.
Post Reply