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.

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