Elon Musk is the founder of SpaceX, Tesla and a few other companies. Unsurprisingly, he has become very wealthy through his entrepreneurship. Elon Musk is actually the richest individual in the world today, and his net worth totals over $200 billion.
While Elon Musk obviously has a lot of money and could easily buy a home outright if he wanted to do so, he has opted out of that approach.
In fact, Elon Musk reportedly had a combined total of $61 million worth of mortgages in 2018 for several of his properties in the Bay Area and Bel Air. This included $50 million in the recent mortgage debts, as well as a refinance loan that was used to repay his mortgage that he purchased a property with in 2017. Collectively, all of these mortgages had a monthly payment that totaled around $180,000.
Given the large amount of money that Elon Musk has, it is reasonable to wonder why exactly the billionaire would bother borrowing to purchase properties. But there is one simple reason why his choice to take out loans was most likely a smart one.
The reason why Elon Musk borrows to purchase properties
Musk has likely borrowed to buy his properties for the same reason that some other wealthy people — including the popular investor Warren Buffett — decide to take out loans to buy their homes. Doing so lets them avoid tying up their other assets and to maintain liquidity so they are able to do other things with their money that could produce better returns.
See, mortgage loans have a tendency to have really low interest rates. So although Elon Musk borrowed a fortune, the financing charges that he will pay will be really affordable relative to the amount of money that the bank had loaned him. Mortgage rates are usually well below 5% — even when a large sum of money is borrowed– and the only return on investment that you would get from staying away from this kind of loan is interest savings.
That means if Elon Musk suspects he could make more from his money than what he could save by avoiding interest payments, he’s better off borrowing money for a home and putting his cash elsewhere.
In his particular case, Elon Musk has repeatedly purchased shares of Tesla on the open market to show his confidence in his company. And since Tesla shares have risen substantially in price since 2017, Elon Musk made a great decision by betting on his company instead of tying up his money in a house.
What could be learned from Elon Musk’s example?
The fact that Elon Musk opted to take out a home loans shows why most normal Americans should be doing the same.
While finance professionals such as Dave Ramsey recommend paying cash for a home when possible or having the smallest mortgage possible for the shortest amount of time, doing so will come at a big cost. You are giving up the chance to do other things with that money that might produce a better ROI.
While you will want to put around 20% down on a house if you can — both to avoid the private mortgage insurance and to lower the chances of owing more than what your house is worth — putting down more or paying your loan off early might not pay off for you later on.