Why Rich People Would Rather Rent (+ What You Can Learn From Them)

Once upon a time, only the less affluent rented houses. They rented because they could not afford the deposits to buy, or they couldn’t get a loan, or they were simply priced out of the market.

Then homeownership became easier. Buyers could buy with “no money-down.” Banks’ lending policies became lax. Now everyone could buy a house.

Then came 2008.

Globally, people are looking at homeownership differently since the great housing recession in the U.S.

One segment that has been rethinking homeownership is the rich.

On the outset, it doesn’t make sense. Why rent when you can clearly afford to buy?

If you’re Malaysian, you probably find this to be an act most foul. How can you not aspire to own a home? What evil is this?

Whatever your thoughts on this,  a wind of change is blowing - and with more force in developed countries.

Let’s take a deeper look.

Why Do People Rent Today? (Hint: It’s More Than Just Affordability)

The answer would seem obvious. People rent because they cannot afford to buy. 

House prices in most major cities are just too high. Even for those that can get financing, the deposits and closing costs are quite restrictive.

If you want to buy a RM450,000 house, you’ll need to fork out RM45,000 for the deposit and about RMRM22,000 in closing costs. You’ll also have to cough up at least RM30,000 for renovations.

In total, this is RM97,000 or 21% of the house cost.

Few people have 21% of the house cost saved up in cash. So, yes, the primary reason most people rent is because they lack the financial resources to buy.

But then, why is the fastest growing segment of renters the affluent?

This segment (earning RM645,000 annually) of renters grew by 175% between 2007 to 2017 according to a survey by Rent Cafe.

It gets more interesting.

In the same period,  the increase in homeowners for this segment was only 67%. The verdict is clear: rich households are overwhelmingly choosing to rent.

This begs a more specific question…

Why Do Rich People Rent Instead of Buy?

One explanation for this is that even the rich are finding it increasingly unaffordable to buy. 

In the Rent Cafe survey, cities like New York, San Francisco, and LA had the highest number of rich renters. House prices in these cities are among the highest in all of the U.S.

But, in terms of growth, cities like Seattle, Charlotte, Baltimore, Fort Worth and San Jose came out on top.

These cities are not the least affordable housing markets.

So there must be other reasons the rich rent.

A likely reason for this reason is the 2008 housing market crash or the great recession. This event wiped out the property values of many homeowners. Defaults rose and large financial institutions like Bear Stearns and Lehman Brothers collapsed.

Everyone in the economy learned a bitter lesson and homeowners realised that real estate was not necessarily the safest asset class.

Homeownership is no longer the bedrock of financial security post-2008.

A second reason is that the rich are more sophisticated investors. They have access to a variety of investment options that they can understand and leverage.

For the general masses, homeownership is easy to understand - buy a house, the price appreciates over time and equity is gained. It’s not difficult to understand relative to the stock market, bond market, and ETFs for example.

A 2019 survey by UBS reported that the asset allocation of the super rich was unlike the average household. 32.4% of the super rich’s asset allocation was in the equities markets.

Direct investments in real estate comprised only 17% of their asset allocation.

Source: The UBS/Campden Wealth Global Family Office Survey 2019

Other surveys consistently support this finding; the rich favor a diversified portfolio and real estate is not their top investment instrument.

Rich households today also comprise millennials who have a different perspective on life. The old “get a good job, get married, have children and buy a house” formula does not stick with millennials.

And they’re a big group. Roughly 22% of the U.S population are millennials, making them the 2nd largest group after Generation Z.

Globally, millennials will soon make up 75% of the workforce.

Previous generations may have favored the security of homeownership but a house anchors you to a single place in an era where mobility has never been easier.

People like FIREcracker and the Wanderer, founders of the Millennial Revolution are leading this generation's revolt against the traditional idea of security. They’re gaining traction.

In fact, studies show that the rate of homeownership among millennials is lower than previous generations.

Another reason I believe the rich are the fastest growing segment of renters has to do with financial mathematics.

A buy-to-stay house is more a liability than an asset. When you add the mortgage interest rate, inflation rate, and running costs of maintaining a house, the capital appreciation doesn’t necessarily give you a substantial increase in wealth.

In addition, mortgage repayments are often higher than rental income in affluent areas. 

This creates an opportunity cost for buyers.

Combine all these factors above and you can understand why the rich are the fastest growing segment of renters in the U.S and why this trend will probably spread to other countries.

Why Do Celebrities Rent Houses?

Would you be surprised if I told you that some of the richest celebrities rent their mansions? These are individuals with net worths that exceed RM200 million.

How about I give you some names?

According to The Richest, these are some celebrities who rent their mansions:

  • Justin Bieber

  • Lady Gaga

  • Paris Hilton

  • Rihanna

  • Katty Perry

  • Mariah Carey

Most of them pay exorbitant amounts in rent. So why wouldn’t they buy?

Mobility comes to mind almost immediately. Celebrities are jet setters and love being in vogue. Renting gives them the freedom to move to the latest, newest, or whatever fancies them at the time.

Another reason proffered by The Richest, is that many of them would not want to drop RM80 million in liquid assets in one go.

Do Rich People Buy Homes? (Of Course They Do! But…)

Despite all the reasons for the rich to rent, many do buy their own homes. 

In fact, many celebrities own houses but also rent. Ewan McGregor for example owns a house in Ireland but rents his “Mac Mansion” in Las Vegas.

I’ve pointed out here and in another post that buying-to-rent is a great investment option. The returns are better than buying-to-stay and it’s an attractive option for the rich.

But, the rich don’t necessarily view the purchase of their house as an investment. 

In my experience, rich people aren’t thinking primarily about resale value and appreciation when they buy a house to stay in.

They buy because they love the house, or the neighborhood. Perhaps for convenience. Perhaps to elevate their social status. Perhaps for a combination of all these reasons.