The Cost of Owning a Luxury Property

Jan 17, 2012 by monarchblog

Those affluent enough to purchase a multi-million dollar property are most likely doing so to enhance their lifestyle; it’s easy for buyers of luxury properties to think in the here and now and neglect the long-term financial implications of their purchase. Mortgage payments, taxes, insurance, and upkeep are all pretty standard costs for homeowners, but in luxury properties these costs can scale up to staggering amounts.

Here is a noteworthy example: Yuri Milner:

Russian billionaire, Yuri Milner, recently made history when he purchased the most expensive single-family home in history for $100 million. It’s a 25,000 sq foot, 11 acre Silicon Valley mansion. Milner is the head of DST Global, an investment company that has prominent equity positions in several notable companies, including a rumored 10% ownership interest in Facebook.  Milner lives in Moscow with his wife and two children, and has stated that he has no immediate plans to move into the residence.  Purchasing the home is one thing… maintaining it is another. So, just how much does it cost to own a home like Milner’s?

(Photo Gallery)

Mortgage:
Milner had enough liquidity to pay $100 million cash for his new home, but that isn’t the case for all luxury home buyers. Let’s pretend that Milner did take out a mortgage, with 25% down, 4% interest, over a 30 year term. In that case, his monthly payment would be a ridiculous $358,061.47! He would be paying more per month than many Americans have in their savings accounts!

Insurance:
Insurance is usually dismissed as a minor cost, as an average premium usually comes out to less than $1000 per year. In the case of a $100 million home, insurance companies will be extremely hesitant to insure the home due to the massive amount of risk they would take on. Obtaining an insurance policy on a property like this would most likely involve going through a specialized company that deals with luxury properties and celebrity homes, and the premium would run you upwards of $250,000 per year.

Taxes:
Though it’s doubtful he cares due to his extreme wealth, Milner’s purchase can serve as an example and a warning to luxury homeowners, as the previous year’s taxes aren’t always a great indicator of what’s to come. When a property is purchased in California, the property is reassessed to reflect the purchase price. This means that Milner’s tax payment would be about $1.1 million… not very reflective of last year’s $304,000 payment. Several luxury homeowners don’t even think about taxes until business takes a turn for the worst and they can’t pay them anymore; staggering when you consider that each payment could purchase a home in and of itself.

Maintenance, Upkeep & Intangibles:
Who wants to pay $100 million for a property and then let it fall to pieces? Well, being as this category, along with the acquisition of luxury properties, is Monarch Estates and Homes specialty. The cost of keeping a property in pristine condition can be staggering for some of these mammoth-sized luxury homes. When you own a property of this size, you simply must account for landscaping, pool maintenance, cleaning, and repairs. A typical suggested minimum amount to allocate for maintenance and repairs is 1% of the home’s purchase price, so in this example, a $100 million property you can expect to pay $1 million per year just to keep the place looking nice!  (Not for our Monarch Reserve clients though, that’s why those in the know, hire Monarch.)

The True Cost of Luxury:
Now that we’ve walked through the different costs, let’s find out just how much it costs per year to own a $100 million property:

Mortgage: $4,296,737 ($358,061.47 per month x 12)
Insurance: $250,000+
Taxes: $1,100,000
Maintenance, upkeep, intangibles: $1,000,000
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Total = $6,646,737 per year

While clearly an extreme example since it’s the most expensive home in history, the cost of maintaining a home like Milner’s certainly demonstrates the financial obligations homeowners in the upper-echelon of the real estate market incur.