Hacker News Reader

Comment by pg | Hacker News Reader

A lot of this is wrong. For example, no one rich would "leverage their home equity to finance purchases." And though rich people often have assistants, they're not drawn from a special guild of "concierges" with connections for getting restaurant reservations. Nor would anyone rich rent handbags or Ferraris.

The parts that aren't false read like a description of someone who made money from e.g. developing shopping malls. People who get rich from technology are less likely to be B students, less likely to try to cheat the IRS by routing their personal expenses through their companies, and more likely to be "nice guys."

View on HN

But, as a percentage, what subset of all rich people actually earned their money through technology? Either way, if those people aren't leveraging their home equity, than they don't know much about finance, truth be told. Assume you have good credit and a steady income or assets; there is absolutely no reason to own your house outright. Bill Gates, for example, has a mortgage on his house. The easier way to think about it is that if you're paying 5% interest on your mortgage, but could get 7% return on money elsewhere, you should take all the money out of your house and earn the 2%. Either way, you also get the value increase (or decrease on the equity as whole). This is the same reason that many wealthy college students take out college loans, because with their low interest rate, there is no reason not to have the 40k sitting somewhere else making more money.

I don't know what evidence, other than opinion, you have that rich people don't have a special guild of concierges, or rent handbags or Ferraris. I know several people of the private jet sort who do have an assistant that is not just someone who just takes down their schedule, but rather is someone who can solve problems anywhere, work the network to get a dinner reservation where ever you want, etc. Further, most fabulously wealthy people are very smart with their money, even if they do have ten houses and two yachts, and although they could buy $2000 bags and throw them away in two months, why would they? They could buy a fancy sports car, an asset that radically depreciates and that you can’t drive all the time, or they could rent one whenever they want?

Bill Gates has a mortgage on his house??! Is that real?

It wouldn't surprise me at all:

- His cost of capital is undoubtedly very low. Lending $4-5m to someone with that much money (and secured on property!) is practically risk free.

- He probably has access to a lot of good investment prospects.

- Tax breaks on mortgages will make the gap between cost of capital and likely return even larger.

I didn't say that rich people don't have mortgages, but that that they wouldn't borrow against their house to finance purchases. There may be some tax advantage to having a mortgage, but it wouldn't make sense to borrow against one's house to buy stuff that was going to depreciate in value.

Where did you hear that Bill Gates has a mortgage on his house? It seems very unlikely. You can only deduct the interest on the first million of mortgage debt, so it wouldn't seem worth the trouble.

As for the handbag question, try giving a woman the choice of buying a new handbag or renting a used one, and see what she says.

On the last point, the same applies for cars. The market for used 1 or 2 year old BMWs is very strong. Rich people buy new ones, and dump slightly used ones.

Ya, I would agree with your comment about financing purchases, and I read that slightly incorrectly. My point, even for bill gates, is that if your rate of return on capital, or expected rate of return, is higher than the rate at which you can borrow capital, than you should borrow. That differential is what's important, with the tax break being icing on the cake.

And on the handbag question, haha, I think you're likely correct.

I am less sure about cars, since if you are going to buy and dump a car, it seems like you should lease it, no? I don't know...

I think the other important thing to realize is that the rich aren't, like any large group, unified in their behavior, which is something that article like this always avoid. There is no one way to become a millionaire and there certainly isn't one set of behaviors they exhibit.

Where can one get 7% risk free return?

Where can one get any % risk free?

Well, there are very few risk free returns, obviously. I guess the standard would be US treasury bonds, which don't pay more than mortgages, obviously. But the S&P has an annual rate of return of almost 10% over the last forty years, so if you're risk averse (aren't we all) a good index fund will likely beat your mortgage rate.

Maybe a Swiss bank account?

Hmmm...

I wouldn't say I'm rich, but my accountant is creative when it comes to tax, and rightly so.

I completely agree on the handbags thing, Ferraris are a different matter - if you have a means of moving that cost from being a taxable depreciating asset to a tax writeoff then go for the latter. I know an entrepeneur who leases high end sports cars through his companies as a means of reducing tax liability. YMMV though (pun intended, sorry)

I have been dating someone in the PR biz and these "top 10" style articles are a new PR vehicle. You can pack 10 or more client mentions into one article.

Seems a likely theory. Probably the bits that seem wrong are the client mentions.

* For example, no one rich would "leverage their home equity to finance purchases."*

Is this because rich people don't borrow, or have the found a source of income even lower than a subsidized loan with tax advantages? If someone's home is a small fraction of his net worth, taking a mortgage and using it to invest in a business would probably be a sensible arbitrage.

I've dated the very well off, and I know at the lower levels, they are using those services. American Express operates one, and I knew someone who made a decent living as a personal concierge in Manhattan.

It all depends on the circle, though. Doctors and lawyers seem to be more likely to use these services, while entreprenuers seem to be used to doing things themselves.

If you've ever spent time in Newport, RI, and seen what the old money in this country drives... it's Honda's and Toyota's. You don't see so many Bentley's, Ferrari's or Bugatti's.

I lived in Providence, and this is partially true. Yes, there are many old money that drive cars like this, but if you spend time out in Newport during the summer, you do see many six figure cars.

Money on the east coast is less concerned with flashy cars. Your more likely to see their money invested quietly in their homes and families.

West coast/the South is all about your image, I saw more 6 figure cars in the poorest sections of Miami than I've seen in the richest places in New England.

I grew up in Newport, and the numerous non-rich people driving cars around might fool you...

That said, it looks like Volkswagons and Volvos tend to be the cars of choice among the wealthier. Not Ferraris, sure, but a step above the Toyota.

Why would rich people not rent Ferraris?

Reply on news.ycombinator.com