Earlier this summer Jennifer Lopez, or J-Lo as she’s known to her fans, and her husband Ben Affleck purchased an incredible Beverly Hills mansion for $60.85M. The home is 38,000 square feet, has 12 bedrooms, 24 bathrooms, an indoor sports complex with a pickleball and basketball court, and has a 12-car garage. Their humble abode if you will. The home itself is beautiful, but that’s not what I’m focused on.
Naturally, I’m focusing on the financing end of this purchase, or the lack there of. It’s not shocking to hear that J-Lo and Ben bought the home in cash, and therein lies the problem. This should be shocking and it’s not clear to me why they didn’t finance the purchase. They had a great opportunity to use their mortgage as an asset as opposed to a liability. Allow me to explain. This’ll be fun.
Typically, with a purchase of this size, borrowers would be required to put at least 50% down, so let’s say they took out a loan of $30M. Using average 30-yr fixed jumbo interest rates of 6.75%, as of the writing of this article, that would translate into a monthly payment of $194,579. The property taxes on the property are listed as $416,000 a year, OR, $35,000 per month. And let’s assume the homeowner’s insurance is around $300,000 a year, which comes to another $25,000 a month. This brings their total payment to $254,579 per month. That’s a bit over $3M a year in housing payments. I know, this seems like a big pill to swallow. But considering this on again off again power couple brings in around $60M a year, spending $3M a year on your home is a payment these two can comfortably afford.
So why would they do this? Why take out a loan? I don’t care who you are, $30M is a lot of money. And instead of putting the entire $60.85M down in cash to purchase the property, they could’ve put down $30.85M and saved $30M. With that the $30M of cash, they can seek out investment opportunities to earn a bigger return then the 6.75% they’d be paying on their loan.
They could’ve put the $30M into stocks. As of this writing, the S&P 500 is up 14% for the year, and the Nasdaq is up 28% for the year. Real estate could’ve been another option as well, with certain pockets of the country showing appreciation rates of 10-20%. They’ve could’ve explored alternative investments from art, crypto, playing cards, or other collectibles which can be high risk but potentially yield big returns. They could’ve invested the money in a friend’s business, a new project or even one of their own future projects which can yield high returns as well. Not to mention, looking at impact investing, where they can look at achieving certain social and environmental benefits while also generating financial returns.
I know this is a fun little hypothetical exercise; but at the same time, it highlights the many benefits one can achieve by using a mortgage as an asset as opposed to a liability. Forget about J-Lo and Ben for a second and think about your situation and the people around you. As a result of interest rates increasing this year, we’ve seen a larger percentage of people buying homes in cash. I don’t think that was the wise decision by all those all-cash buyers. Maybe some, but not all. As you can see, there are a plethora of possibilities and strategies you too can use to further advance your whole financial profile by taking out a mortgage.