Imagine turning $61 million into over $976 million. Ladies and gentlemen, that's just short of a billion dollars. In this post, we're going to explore why Elon Musk, despite having the cash, opted for debt when buying property. We'll dive into the math and speculate a bit, but remember, this is not financial advice.
Elon Musk, renowned for his wealth, took out $61 million in 2018 to purchase multiple properties using a mortgage instead of paying cash. Speculations suggest a 5% interest rate, although he likely secured a better deal. Let's explore why this decision makes financial sense.
In January 2018, Tesla's stock was priced at a little over $64. Fast forward to January 2022, and it's over $1,077. That's an average growth of 102% over four years. Investing that $61 million into Tesla stock instead of buying properties with cash could have turned it into nearly a billion dollars.
Do the Math: If Elon Musk had paid cash, the opportunity cost of those properties in terms of unrealized stock investments was nearly a billion dollars.
Critics might point out the costs: $61 million loan with a 5% interest rate results in $12.2 million in interest over four years. However, this $12.2 million in interest enabled the potential earnings of $976 million through stock investments, reflecting a year-over-year cash on cash growth rate of 199%.
Two main factors are at play when making significant purchases:
The rationale behind using debt even when one can pay cash is maximizing efficiency through opportunity costs. With discipline, separating these decisions can open up numerous financial opportunities.
Elon Musk likely possesses an internal opportunity cost calculator, influencing decisions like taking a $61 million mortgage. This situational awareness about financial control and opportunity cost differentiates him and contributes to his success.
Disclaimer: This post is not investment advice. Always consider your own financial situation or consult a financial advisor before making decisions.
We'd love to hear your thoughts and takeaways. What questions do you have, and what insights did you gain from this analysis?