Why Billionaires Like Musk and Zuckerberg Still Take Out Mortgage Loans
If billionaires are so rich, why do they still borrow mortgages to buy homes? Don’t they have enough money to pay cash?
Mark Zuckerberg famously borrowed a 1.05% fixed-interest mortgage when he bought a house after taking Meta (then Facebook) public, as reported by CNBC. Even the world’s first trillionaire, Elon Musk, borrowed mortgages to buy five California houses per the L.A. Times.
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They have the money, of course. Here’s why they choose not to use it that way.
Arbitrage
If you know you can borrow money at 4% and invest it at 10%, then you’d want to max out that credit, because every dollar you borrow earns you a spread of 6%.
That’s the beauty of arbitrage: you leverage other people’s money to earn a return on it.
Liquidity
You never know when you’ll need access to cash and fast. Equity in real estate is notoriously illiquid — it takes lots of time and money to access.
“Billionaires want to be able to move quickly when opportunities arise,” said real estate developer and portfolio manager Ari Rastegar of Rastegar Property. That goes doubly in today’s world of instant capital transfers and lightning-fast opportunity windows. And billionaires have access to lower-risk and bigger-return opportunities than your typical stock market portfolio.
Borrowing a mortgage also lets wealthy people leave their existing investments untouched and continuing to compound. They aren’t forced to sell assets and trigger capital gains taxes, just to pull together the cash to buy a home.
Cash Out Equity Without Taxes
Imagine a billionaire who pays down her mortgage to 50% of the property value. To cash out the huge equity she’s built up, she could sell the property. But then she’d owe Uncle Sam capital gains taxes.
Alternatively, she could borrow the equity to cash it out without paying taxes. Quite the opposite, in fact: she may be able to write off the interest as a tax deduction.
“The strategy is often called buy, borrow, die, which removes capital gains taxes entirely because the tax basis resets when you die and pass the property to your heirs,” said Mark Clark of Prestige Advisors. “When borrowing costs less than the tax bill required to free up cash, borrowing is the rational choice.”
Manage Inflation Risk
Real estate typically outpaces inflation, because it’s a real asset with intrinsic value. Buyers pay the going rate as the value of the dollar drops. Mortgage lender Cody Schuiteboer of Best Interest Financial understands this better than most.
“A 30-year fixed mortgage locks the monthly payment to the same amount tomorrow as she pays today," he said. "Inflation eats away the real value of that payment every year, allowing them to repay the mortgage using depreciated currency.”
Many homeowners in the pandemic borrowed mortgages at 2%-3% interest. Today, inflation has soared the average national mortgage rate to about 6.5%, according to Forbes. Mortgage lenders actually lose money on those cheap loans, as the interest is worth less than the drop in the dollar’s value.
Reduce Concentration Risk
A wealthy person could tie up $20 million in a single house, which may or may not appreciate well. Or they could put down $4 million and invest the other $16 million in many true investments, and not just stocks. With that $16 million, they could invest in hundreds of other properties through joint venture partnerships, real estate syndications or funds. They could buy shares in thousands of companies.
That diversification prevents them from losses if the value of their house dips.
Credit
Making on-time mortgage payments month after month, year after year helps establish your credit history. It boosts your credit score and your ability to borrow cheaply for that juicy arbitrage outlined above.
And as with Zuckerberg's cheap 1% rate, billionaires can get better deals than the average homeowner.
“Banks often offer billionaires below-market rates, as part of a big-picture strategy of cultivating the relationship,” said luxury real estate specialist Bryan Sereny with Douglas Elliman Real Estate.
Sure, paying off your mortgage can feel nice. But billionaires think more mechanically about their money — and they often see far more upside in using debt as a strategic tool.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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