Can a $100 Million Home Be an Investment?

Donald Trump's Palm Beach mansion has been sold for $100 million to "little-known Russian fertilizer billionaire, Dmitry Rybolovlev":

"This acquisition is simply an investment in real estate by one of the companies in which I have an interest," Mr. Rybolovlev said in a statement released by Alan Basiev, the head spokesman for Uralkali. It "does not represent a decision by me to live in the U.S."

An investment. Right. I think I understand how residential real estate investment works. You buy a property, rent it out for more than you're paying on the mortgage, make a tidy income, and hope for capital gains at the same time. Except in this case that doesn't seem to work. Rybolovlev's (opportunity) cost of funds can't be lower than, say, 3.6%. In order to make that back renting the place out, he'd need to charge $300,000 a month.

So maybe it's a flip? That seems improbable, given that the property languished on the market for three years before being sold.

Which leaves just one other option: it's a teardown.

Some brokers describe the house as a teardown, saying the property, among Palm Beach's largest parcels, would be more valuable if subdivided.

But even there the math doesn't make a huge amount of sense. Split the parcel into four pieces, each one with 115 feet of beachfront and 1.6 acres of land. Build say a 12,000 square-foot mansion on each parcel. Allow $1 million in demolition costs, $700 per square foot in construction costs, and $100 per square foot for landscaping the rest of the site. That brings the total investment to $162 million, for a project which will take a couple of years at least. What kind of ROI are you looking for? 25%? In that case you need to sell the four properties for more than $50 million apiece. I don't see it.

My feeling is that the house is more of an insurance policy than an investment. Mr Rybolovlev might not intend to live there full time right now. But a Russian billionaire's life is by its very nature always a precarious one, and at some point he might feel the desire to leave the country. At which point he'll have a nice and ostentatious home to which he can retire.

Comments

[Francis Sch...:]

Such an action can only be an investment if you decide to short it!

2008 Jun 21 10:15 AM

[InvestBaboo:]

Oh, c'mon! Do you expect U.S. real estate market to be in a slump 10 years from now? What if we are on an economic upswing and there is plenty of money in the economy then the same $100 m house could go for a price much north of what the Russian paid for. We have this seen happen again and again it is almost amusing to read articles like this.

2008 Jun 21 11:52 AM

[dr sam:]

Did you forget about the low value of the dollar? My guess is this is his retirement home, but treaded as a expense-deducable investment.

2008 Jun 21 04:04 PM

[Dragon Master:]

When polar bear comes. it usually mess things up. They are doing things no biz senses.

2008 Jun 22 07:38 PM

[palmbeach-atty:]

The Town is extremely strict and he would never be allowed to build 12,000 sq ft on the smaller lots. Subdivision into more than 3 parcels is unlikely. The construction costs would be in excess of $1,000 sq ft given the quality demanded for this type home. You are correct he would need to get $50 million for each for 4. Two homes have sold for about $70 mil each this year and numerous others sell for over $20 mil here even in this market. On 3 lots in this neighborhood, he might be able to sell $45 million homes - not enough to even recoup his $100m plus interest.

2008 Jun 24 07:30 PM