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

• 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

• 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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