In July of 2012, Mark Zuckerberg financed
his 5.95 million dollars Palo Alto home, that’s 3 miles away from facebooks headquarter with
a 30-year Mortgage. At that time he was 28 years old and the world’s
40th -wealthiest person, worth an estimated $15.6 billion. The question is, why would you get into debt
when you have billions of dollars and can easily afford it? If he wanted, he could easily buy a dozen
$6 million homes, in cash, without batting an eye. So why get a mortgage? The answer is long and complicated but in
short, it’s- Free Money! Sounds ridiculous, who would give you free
money when you are already a billionaire? Let me explain,
It all has to do with interest rates. The inflation rate in the US is 2.5 to 3 percent,
so any money you borrow that is below the inflation rate is considered free money. Zuckerburgers mortgage rate is just a little
over 1.05 percent but it is adjustable, meaning that, base on the circumstances the rate could
possibly go up for one reason or another. If you do the math, the bank is the loser
since the mortgage rate is below the inflation. You don't have to be the genius to do the
math. For the sake of example, let's say you borrow
1 million dollars at a rate of 1 percent. The average rate of return on the savings
account is 2.4 percent. Meaning that Even if you deposit that million
dollars in another bank, you end up making $24 000 dollars a year while you only have
to make a monthly payment of $10500 to the bank that lent you that money. Imagine if you do that with a hundred million
dollars, or how about a billion dollars! When you can borrow for free, there’s no
point in tying up your own money, when you can use that money for more profitable things. Of course, when we are talking about small
amounts of money, this might not make sense, because the difference isn’t that big, however,
when it comes to large sums, playing around with 1, 2 or half a percent could potential
mean dozens of thousands of dollars if not hundreds. Let's say you are a businessman, and you can
easily afford a million-dollar house, why buy a house when you can finance it for 1
or 2 percent while you invest the rest of that money in your business that could potentially
get you 10, 20 if not 30 percent returns. Even if you are lazy to find a more profitable
way to use money, just throwing it all into an index fund can be much more profitable. Especially when we are talking about 20 or
30 years. Historically an index fund has shown to have
an average return of 8 percent. If you take a mortgage and invest your money
in an index fund, the percentage difference will end up in your pocket. It all comes down to Opportunity cost Economically, it wouldn’t make sense for
Zuckerberg to buy the house in cash when he has been offered a 1 percent mortgage rate. But he is not the only who is so smart to
do that. Take Elon Musk for example, Most of his wealth
is tied to Tesla and SpaceX, to buy a house for 20 million dollars, he probably might
need to sell a considerable chunk of his wealth, pay taxes and incur other expenses, however,
he can take free money and keep his monthly payment under his budget. He took out a 61 million dollar mortgage for
5 properties in California with a monthly payment of 180 thousand dollars. That's not unique to billionaires, its also
practiced by moderately rich people like Jay Z and beyoncé. They took a mortgage to buy their 88 million
dollar house. They put 40 percent downpayment and financed
the other 52.8 million dollars. That leaves the couple with a 149,600 dollars
monthly payment. In comparison, The national median home value
is $200,700. Instead of tidying 53 million dollars in a
house, he defiantly knows where to invest it, to maximize his profit, at the end of
the day, He has made a lot of great investments, and he is on his way to becoming a billionaire. The richer you get, the better ways to find
to make more money. But let's be honest, not everyone gets such
a low mortgage rate, nationwide its around 3 percent, but even at that rate, it still
doesn't make sense to purchase a house if you can finance it. But let's get this clear first! why do the
super-rich get a lower rate than the rest of the country? First of all, when you are a billionaire,
the bank can sleep calmly because no one is worried that you might default on your loan
and in case if something happens, you can easily sell part of your business to pay back
your mortgage, that takes out the risk out of the equation. Compare that to an average employee who could
get sick and not be able to work or just lose his job. Secondly, Paying your mortgage on time every
month helps you build and maintain a healthy credit score, so when you are in trouble next
time, with a strong credit score, it will be much easier to borrow money from the banks. You are basically building trust between you
and the financial institutions. But it could also be the other way around. Banks do offer such a low mortgage rate to
establish a strong relationship with rich people so that when their companies would
need a loan from a bank, they would come to them and not their competitors. It's a win-win situation. But these low mortgage rates are adjustable
which means as I said earlier, they could go up! but no one is worried because if it
stops making sense economically to these ultra-rich people, they easily can pay back their mortgage. But Most people associate debt with something
negative because we usually borrow money that we can’t afford for entertainment and end
up paying a lot more back. In fact, right after getting out of college,
you realize what a burden your student debt is already. and once you calculate how many years you
have to pay back that debt, you immediately create a perception that- DEBT IS BAD.
especially when you cant even default on it. Playing around with debt is not easy, you
are eventually taking a huge risk and a small miscalculation can lead to disastrous consequences. In fact, we have got into so much debt that
most people now can't even afford unexpected 500 dollar bill because we have to make all
of these monthly payments. However, that's what distinguishes bad debt
from the good one. Debt can ruin your life, make you homeless
and cripple your family if you are reckless but it can also make unbelievable rich if
you know how to use it because it is Leverage. Leverage is a superpower that can make you
rich instantly. Let's say for the sake of example, you buy
this phone for ten thousand dollars, go to the market and sell for it 11 thousand dollars,
congrats, you just made a profit a thousand dollars, however that's not much. But what if you use leverage, you go the bank
first, borrow 990 thousand dollars, with your additional 10 thousand dollars, that's going
to be a million dollars. You head to your supplier and buy a hundred
phones now for a million dollars, turn around and sell it to the market for 1 100 000 dollars. But you still owe the bank, so you go back
to the bank again and return them 990 000 thousand dollars that you borrowed and another
10 thousand dollars in interest. Now you are left with a hundred thousand dollars. After you deduct your own 10 thousand dollars,
you are left with 90 thousand dollars of pure profit. That's how you make money when you don't have
money. The bank made their share of the profit and
you made yours. Of course, when you take this formula to the
extreme and it's not regulated by the government and practiced by everyone in the wall street,
it turns into a financial crisis, as it happened in 2008. Remember when home prices crushed?! and then
they took down the entire economy with them?! Well, its because the investment banks used
leverage to maximise their profit to the point where their strategy backfired! Because they began giving mortgage to people
who didn't necessarily had the best credit score and weren’t financially prepared to
make the monthly payments. and then they defaulted on their mortgages,
it was a nightmare for the investors because for the last 40 years, home prices were rising
and suddenly, they were going down. Well, we are not going to get into the details
of the 2008 financial crisis, thats a story for another video but in any ways it's still
a major tool of how rich people make money. Of course, it's risky and you can end up losing
everything, but if you know what you are doing, you can make a fortune overnight. I hope you guys have enjoyed this video and
most importantly found it helpful. And if you did, make sure you give it thumbs
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