You may have heard that Diane Sawyer has put her Martha’s Vineyard estate up for sale. According to the Wall Street Journal, she and her late husband, Mike Nichols, paid $5.3 million for Chip Chop (as the compound is known) in 1995 and she’s selling the waterfront property for a mere $24 million.
I thought, hmmm, this might be another perspective to evaluate the economic attractiveness of home ownership as I’ve written about elsewhere.
Has Chip Chop been a good financial investment? At first glance, it sure sounds like one. And, based on the photos, they must have gotten enormous joy from their compound over the years but I’ll just focus on the numbers for this discussion.
Let’s make a few simplifying assumptions to put the investment returns in their best possible light:
She receives her full $24 million asking price and incurs closing costs of ~6%, representing a broker fee, transfer taxes, and other miscellaneous selling expenses so she nets ~$22.6 million. We ignore capital gains taxes.
She invested nothing in capital improvements over the 28 years of ownership beyond the initial $5.3 million. (There have been many expensive upgrades but we’ll ignore them.)
We’ll also ignore the cost of all maintenance, insurance, and property taxes over the 28 years as you can consider that to be the price they paid for the joy of spending time at Chip Chop.
With this simple framework, the annualized rate of return has been ~5% for the 28 years. Not terrible, but about half what she would have received had she taken the $5.3 million and invested it all in an equity index fund and did nothing but reinvest the dividends. Stocks average annual returns of ~10% and her $5.3 million would have compounded to $76 million instead of the $22.6 million.
And, if we were to factor in the capital improvements and expenses associated with owning Chip Chop, her financial returns would be significantly worse.
Like most residential real estate, when you take a closer look, it’s a meh investment.
As I’ve said before, there are lots of good non-financial reasons to own a home; just don’t justify it because you think it offers an attractive investment rate of return. If you look at the numbers carefully, you’ll usually be underwhelmed.
Jimmy- I love you to pieces, but I’m convinced there’s something wrong with your analysis.
Do you include the value of having shelter, ie the “rent”.
Obviously one should purchase wisely- desirable location, etc.
RE has obvious advantages: there’s only so much land, so many good school districts, etc. Home building has not kept up in many places with population growth.
One of the great advantages is leverage. If you buy with 10% down, and the house goes up 10%, you have a 100% profit, usually without a lot of risk.
And tax advantages: a couple is forgiven 500K of profit; an investor can be forgiven millions with a 1031 exchange.
I could go on, but I think you owe it to your readers
to give another POV.
What about rising rents? Rents went through the roof here in Maine. Airbnb decimated the long term rental market since shrinking inventory led to higher rents. Then the pandemic brought wealthier out of state folks here, making it harder for locals to successfully bid on a home. So more would-be buyers had to stick with long term rentals, increasing demand. With rents spiraling out of control, are you still confident renting is the more prudent financial move?