Elon Musk is the founder of many businesses, including Tesla, SpaceX, and others. Unsurprisingly, he has amassed a considerable fortune as a result of his entrepreneurial endeavors. Musk is the world’s wealthiest person, with a net worth of more than $200 billion. He is the founder and CEO of Tesla.
Even while Musk undoubtedly has the financial means to purchase a property altogether, it seems that he has decided against taking this route. Rather than that, Musk is said to have taken out a total of $61 million in mortgages in 2018 for a number of houses in Bel Air and the San Francisco Bay Area. Included in this was $50 million in new mortgage debt, as well as a refinancing loan that he utilized to pay off another mortgage that he had taken out to acquire a house in 2017. These mortgages had a total monthly payment of around $180,000, which was divided among them.
Given the vast sums of money that Musk has, it is understandable to question why the billionaire would take out loans to purchase real estate. However, there is one simple reason why his choice to take out loans was most likely a wise one: the interest rates.
The straightforward — but critical — rationale for Musk’s borrowing to acquire real estate is as follows:
Musk is likely to have borrowed money to acquire his houses for the same reasons that other affluent individuals, such as Warren Buffett, have chosen to take out home loans: to increase their purchasing power. This helps businesses to avoid tying up their assets and to retain liquidity, allowing them to invest their money in new ventures that will provide higher profits.
As you can see, mortgage loans often have very low-interest rates. So, despite the fact that Musk borrowed a large sum of money, the financing costs that he would have to pay will be quite inexpensive in comparison to the amount of money that the bank gave him. Despite the fact that mortgage rates are often far below 5 percent — even when borrowing huge quantities of money — the only return on investment (ROI) you’d obtain from avoiding this form of loan is the savings on interest.
That implies that if Musk believes he can earn more money on his money than the amount he might save by avoiding interest, he would be better off borrowing money to buy a house and investing his money somewhere else rather than paying interest.
In Musk’s specific example, he has acquired shares of Tesla on the open market on several occasions to demonstrate his trust in the firm. Musk made a wise option by investing on his firm rather than putting his money into a property, especially given the significant rise in the value of Tesla shares since the beginning of 2017.
What lessons can the typical house buyer take up from Musk’s success?
The fact that Musk chose to take out a mortgage on his properties demonstrates why the majority of average Americans should do the same. Finance gurus such as Dave Ramsey recommend paying cash for a home wherever feasible or taking out the cheapest mortgage possible for the shortest period of time, but this comes with a significant financial penalty. You forfeit the opportunity to use your money for other purposes that might provide a higher return on your investment.
You should put down roughly 20% on a home whenever possible — both to avoid paying private mortgage insurance and to limit the likelihood of owning more than your property is worth — but putting down more or paying off your loan early may not be beneficial to you in the long run.