Sixth largest home sale in Los Angeles history
You might not typically follow the financial news, but if you are a music and pop-culture fan, then you probably came across the story about Jay-Z and Beyoncé purchasing a mansion in Bel Air, California.
While the power couple tends to make the news anytime they leave the house, you may still be wondering why their recent purchase has become such big news in the financial world.
For starters, they paid $88 million for a 30,000-square foot compound that represents the sixth-largest home sale in the history of L.A., a notoriously wealthy area that is home to the world’s most rich and famous.
More importantly, they took out a $52.8 million mortgage to pay for the home. That’s right: Queen B and her king took out a loan, just like you and me.
You might imagine that international superstars only pay in cash, but Jay-Z and Beyoncé have chosen a traditional method to buy an unconventional home.
The couple was able put 40% down on the home and take advantage of historically low mortgage rates the will allow them to have more liquid assets that can be put to better use. They wisely decided to avoid tying up too much of their money in the home and instead concentrate on investing.
What about the monthly payments?
So what exactly does a $52.8 million mortgage look like? According to Business Insider, the mortgage rate is just 3.4%, and the loan is an interest-only 5-year adjustable rate mortgage (ARM).
That means the loan rate is fixed for five years, then adjusts based on market conditions. During that first five years, the couple pays only the interest due, and no loan principal.
And, how does the rate compare to what’s typical? It’s very good. At 3.4%, it’s comparable to the current U.S. mortgage rate for a 5-year ARM, which is 3.15% according to mortgage agency Freddie Mac.
We used a mortgage calculator to do some quick math. Paying only interest, the couple will pay $149,600 per month for the first 5 years. In addition, they would owe:
- $17,857 monthly in taxes (based on amounts from 2016 tax records, which may rise significantly when the county assesses the full value of the new structure)
- At least $10,000 per month in homeowner’s insurance.
According to Insure.com, a $200,000 home costs an average of $100 per month to insure in the U.S. Insurance on an $88 million home, then, would cost $44,000 per month. We’ll assume a big discount, though!
Putting it all together, the couple is expected to pay nearly $180,000 per month on their new residence.
Comparing monthly payments
In L.A. County, the median sales price of a home is $610,000. If you put 10% down on a loan with a 4% interest rate, your monthly payment would be $3,539 per month.
On a national level, the median home price is $200,700. That means that most Americans are spending only about $20,000 more on their entire home than Beyoncé and Jay-Z will pay in a single month.
To further put it into perspective, the monthly payment on a $200,000 home is $1,211 with a 10% down payment.
The cost of upkeep
The sprawling mansion consisted of six structures that all feature a modern design. There is plenty of living space along with four outdoor pools, a media room, separate staff housing, a spa and wellness center and a full-sized basketball court. Not only does the couple have to worry about normal home upkeep, they will also have to spend extra on maintaining specialized facilities and amenities such as the pools.
When it comes to calculating how much you can expect to pay each year on home repairs and maintenance, there are two schools of thought:
- You should save 1% of your total purchase price to put towards maintenance. That means that the couple should expect to pay $528,000 each year in general upkeep.
- Other experts recommend that you save $1 per square foot of the home to pay for upkeep, which would come to just $30,000 per year.
In the case of such an expensive home, it makes sense to calculate costs according to the purchase price. It is hard to imagine that the couple could get away with only paying $30,000 per year to properly maintain six buildings that sprawl over two acres of land.
However, the median size of homes built in the U.S. during 2016 is just 2,422 square feet. For the average homeowner, using either formula to calculate maintenance costs would still come out to about $2,000 per year.
Is a mega mansion a sound investment?
Once you purchase a $88 million home, can you really expect to make money off your investment and be able to sell it for a profit down the road? For the average person looking to buy a single-family home in L.A. County the price of homes has gone up over 76% in the last 5 years. While experts agree that home prices can’t continue to increase at the same pace indefinitely, they don’t see any immediate signs of slowing. In fact, most estimate that the current trend will continue for at least 2 years.
For more expensive homes that are priced above $2 million dollars, it is a different story. These homes are thought to have peaked and may even experience a price drop due to a saturated market. But what about a home that represents the super elite 1% of purchasing power? Ultimately, it is hard to predict how this investment will pan out for the couple. A lot of it depends on how long they stay in the home, whether they invest in additional upgrades and if there is a buying ready to make a move when they sell.
What else can you buy for $88 million?
Beyoncé and Jay-Z’s new home is undoubtedly breathtaking and luxurious, but just think about all the friends and family who will want to show up and never leave. This got us thinking: what else could $88 million buy you?
- You could have your pick of private islands located around the world. Choose your favorite location and enjoy unmatched privacy and seclusion
- A Gulfstream private jet only costs about $4 million. You could purchase 22 private jets and start your own airline
- The town of Johnsonville Connecticut consists of 62 acres and comes with a price tag of just $1.9 million
- For the art connoisseur, you could purchase a Van Gogh or Warhol for around $88 million, but you never know what will happen at auction
It is fun to think about what you might do with your money if your net worth was well over a billion dollars. Not everyone would spend $88 million on a home, but you have to give Jay-Z and Beyoncé credit for being smart with their money. They leveraged their wealth and reputations to partner with large, exclusive banks and secure a massive mortgage that will allow them to continue to build their wealth.
They obviously have big plans for continuing to build their empire a mortgage will allow them to take on new projects while also enjoying one of the most luxurious homes in America.
