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Conventional wisdom says you buy a big mansion on a hilltop or the coast if you get rich in America. However, wealthy people see money differently and they’re beginning to turn that conventional wisdom on its ear. A recent Wall Street Journal article revealed that many of today’s millionaires prefer renting dream homes over buying. Benzinga looks at the factors that may be driving that trend.
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The average American’s purchase decisions regarding homeownership are largely driven by affordability. By contrast, the wealthy can choose from a nearly endless selection of communities worldwide offering a different brand of paradise. You’d probably do it if you could afford to shuttle between Malibu and Monaco or the Hamptons and French Wine Country.
Renting makes that kind of globe-trotting much easier. A rental contract can run from a few weeks to several years, whereas buying a home tends to tie the purchaser down. Even if you’re wealthy, you’ll have to pay millions in cash or commit to 30 years’ worth of payments to finance a dream home. Renting gives you much greater flexibility to change your surroundings.
The lack of housing inventory nationwide affects wealthy neighborhoods too. Many of America’s wealthiest communities are populated by long-standing residents and don’t have many homes that come up for sale. When they do, the prestige of the neighborhood and the lack of comparably equipped luxury properties can drive the price beyond the point of reason.
Wealthy people don’t get rich by overpaying for assets. If inventory is lacking and prices are high, it might make more financial sense for a wealthy person to rent until the market cools off. Home buying isn’t the only way they can build wealth or hedge against inflation. They might be better off putting the money into dividend stocks or index funds for a few years.
That’s especially true considering today’s interest rates. It’s one thing for prices to be elevated in neighborhoods like Bel Air and Tribeca, but when interest rates are hovering around the 6% range, financing $2,000,000 means $120k per year in interest payments. Add in loan principal and insurance and suddenly it might make sense for a wealthy person to rent and let the property owner pay the cost of ownership.
Homeownership carries several hidden costs beyond the mortgage, property taxes and insurance. The features that make luxury homes luxurious, such as pools and lushly landscaped grounds, all cost money to maintain. Everything about a luxury home is more expensive. They’re larger, which means they carry higher utility bills than regular homes. Repairs to the HVAC or plumbing systems of mansions can easily cost thousands of dollars.
These are not expenses that homeowners can write off. However, a landlord who rents their house out as a business can write all those expenses off against the rental income. If you’re rich, why not let someone else bear those expenses? Renting gives you the full enjoyment of the house without the financial burden of maintenance.
Homeownership has historically been the preferred path for Americans to wealth-building and prosperity. If you’re already wealthy, that’s no longer a consideration or motivating factor behind a home purchase. You may be able to grow your wealth more quickly by diverting the capital you would have spent on a home into a diversified investment portfolio of dividend stocks or REIT shares. These investments might generate income or grow wealth more quickly than homes appreciate.
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