Mortgages don’t just make sense for people who can’t afford to buy a home in cash.
- Elon Musk has made billions of dollars and could easily afford to pay cash for a home.
- He still took out $61 million in mortgages in 2018, likely to maintain liquidity and use that money for other investments.
Elon Musk has founded Tesla, SpaceX, and a number of other companies. Unsurprisingly, he has become quite wealthy through his entrepreneurship. Musk is actually the richest person in the world, and his net worth totals more than $200 billion.
While Musk obviously has plenty of money to buy a home outright if he wishes to do so, he’s opted out of this approach.
In fact, Musk reportedly took out a combined total of $61 million in mortgages in 2018 for several properties in Bel Air and the Bay Area. This included $50 million in new mortgage debt, as well as a refinance loan that he used to repay a mortgage that he had used to purchase a property in 2017. Collectively, these mortgages had a monthly payment totaling around $180,000.
Given the amount of money that Musk has, it’s reasonable to wonder why the billionaire would bother borrowing to buy properties. But there’s one simple reason why his decision to take out loans was likely a smart one.
The simple — yet important — reason why Musk borrows to buy properties
Musk likely borrowed to purchase his properties for the same reason that other wealthy people — including Warren Buffett — choose to take out home loans. Doing so allows them to avoid tying up their assets and to maintain liquidity so they can do other things with their money that can produce better returns.
See, mortgage loans tend to have very low interest rates. So although Musk borrowed a fortune, the financing charges that he’ll pay will be very affordable relative to the amount of money the bank loaned him. Mortgage rates are generally well below 5% — even when borrowing large sums of money — and the only return on investment (ROI) that you’d get from avoiding this type of loan is the interest savings.
That means if Musk suspects he can make more on his money than the amount he could save by avoiding interest, he’s better off borrowing for a home and putting his dollars elsewhere.