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.
The Context
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.
Opportunity Cost
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.
Interest versus Gain
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%.
Understanding the Decision
Two main factors are at play when making significant purchases:
- Should you make the purchase? Is it a good decision?
- What is the most efficient way to finance it?
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's Perspective
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 help people use overfunded whole life insurance as a capital tool: honest design, real numbers, and a straight answer when it does not fit. Our team has structured more than 2,000 policies across all 50 states. If you want an honest read on your situation, book a discovery call.