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Conventional wisdom says that if you get rich in America, buy a big mansion on a hilltop or on the coast. Rich people, however, see money differently and are starting to take that conventional wisdom by ear. A recent article in the Wall Street Journal shows that many of today’s millionaires prefer renting dream homes to buying them. Benzinga looks at the factors that may be driving this trend.
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The average American’s purchasing decisions regarding homeownership are largely driven by affordability. In contrast, the wealthy can choose from a virtually endless selection of communities around the world that offer a different kind of paradise. You probably would if you could afford to commute between Malibu and Monaco or the Hamptons and French Wine Country.
Renting makes that kind of world travel much easier. A rental contract can last from several weeks to several years, while purchasing a home often restricts the buyer. Even if you’re rich, you’ll have to pay millions out of pocket or commit to 30 years of payments to finance a dream home. Renting gives you much more flexibility to change your environment.
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The lack of housing stock across the country is also impacting wealthy neighborhoods. Many of America’s wealthiest communities are populated by long-time residents and there aren’t many homes for sale. If they do, the prestige of the neighborhood and the lack of comparably equipped luxury properties could push the price beyond reasonable.
Rich people don’t get rich by paying too much for possessions. If inventory is lacking and prices are high, it may make more financial sense for a wealthy person to rent until the market cools. Buying a home isn’t the only way they can build wealth or hedge against inflation. They might be better off putting the money in dividend stocks or index funds for a few years.
This is especially true given current interest rates. It’s one thing when prices are rising in neighborhoods like Bel Air and Tribeca, but when interest rates hover around 6%, financing $2,000,000 means $120,000 a year in interest payments. Add in the loan principal and insurance and suddenly it can make sense for a wealthy person to rent and have the property owner pay the ownership costs.
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Homeownership comes with several hidden costs, in addition to the mortgage, property taxes and insurance. The features that make luxury homes luxurious, such as swimming pools and lush landscaped gardens, all cost money to maintain. Everything about a luxury home is more expensive. They are larger, which means they have higher energy bills than regular houses. Repairs to townhomes’ HVAC or plumbing systems can easily cost thousands of dollars.
These are not costs that homeowners can write off. However, a landlord who rents out his house for business purposes can write off all these costs from the rental income. If you’re rich, why not let someone else bear those costs? Renting gives you the full enjoyment of the home without the financial burden of maintenance.
Home ownership has traditionally been the preferred route for Americans to building wealth and prosperity. If you are already wealthy, that is no longer a consideration or motivating factor when purchasing a home. You may be able to grow your wealth faster by diverting the capital you would have spent on a house into a diversified investment portfolio of dividend stocks or REIT stocks. These investments can generate income or grow wealth faster than homes appreciate.
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This article Millionaires are increasingly renting palatial homes instead of buying – here’s why it originally appeared on Benzinga.com
