Renting a $1,500,000 Home in Bridgewater

In the last posting of this blog on Saturday, July 21, we saw how a home in Bridgewater valued at $500,000 and renting for $2,000 monthly would provide a 4.8% yield to the owner. This was based on the criterion that the rent for a home needs to be kept in line with its worth. It was also pointed out that 4.8% is the gross yield, and does not include any estimated costs for grounds maintenance, upkeep, utilities, taxes and mortgage interest, if any.

Now, let’s turn to a $1,500,000 property and its potential rental value. After applying the same computations, I had to catch my breath; because, in order to achieve the same 4.8% yield as that for a home valued at $500,000, the rent needs to be $6,000 monthly. That’s right! It may sound like a great deal of cash – and it is – but prestigious properties don’t come on the cheap, and the economic concept of keeping the rent charged for a home in line with its value still applies.

Hypothetically, if the owner of a home valued at $1.5M wants to be generous, ignore business and economic realities, and decide to charge $2,000 monthly (the same rent as in the previous example for a $500,000 home) the gross yield drops to a mere 1.6%.

Raising the rent on a $1.5M property to one of the following amounts, $2,500, $3,000, $3,500, $4,000, or $5,000, would yield returns of 2.0%, 2.4%, 2.8%, 3.2%, and 4.0%, respectively.

The report issued by Wolff and Sampson implies that certain Somerset County Park employees are being charged below-market rents; it also questions “the circumstances surrounding various improvements, paid for by the Commission.” If so, this begs the question: What other, non-economic factors may be in play for why this is happening?

The photo above is that of a Bridgewater property owned by the Somerset County Park Commission. It is being rented to its director at $500 monthly. If, as has been reported in the press, this home has a value of $1.5M, the yield is only 0.4%.