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  • 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 and if you wanna see more of these video,

  • considering subscribing and clicking on the bell besides it.

  • So that the next video will appear right in your homepage and you won't miss the next

  • video.

  • thanks for watching and until next time!

In July of 2012, Mark Zuckerberg financed his 5.95 million dollars Palo Alto home, that's

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How To Make Money With Debt

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    Summer posted on 2020/10/24
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