Why Wealthy People are Choosing to Rent

As a millennial who has lived in the San Francisco Bay Area my entire life, owning a home has been my American dream for as long as I can remember. As a reader on LinkedIn looking to make it big, you are probably thinking the same! However, since the mortgage crisis of 2008, the perception of a home as a stable investment has changed. This factor is common among the reasons why wealthy people are choosing to rent.

Right off the bat, buying a home consumes a lot of capital. This money could be invested in other areas with a potentially greater return. In other words, one of the first problems with owning a home is the opportunity costs you’ll encounter with so much of your cash tied up in your residence. Most wealthy people tend to be entrepreneurial and prefer investing in their businesses. In fact, analysts at Trulia found that in the San Francisco Bay Area, 98 percent of housing has reverted back their peak prices before the the recession hit!

You're probably wondering how you can afford to rent when the rents in your area are absurdly high. Why not just buy? Another consideration is the accompanying costs of owning a home. You’ll pay for property taxes, maintenance, HOA fees (if you live in a planned development community) and you’ll deal with unexpected malfunctions and the like—all on top of the monthly mortgage payment. These are all the hidden costs of buying a home. Meanwhile, when you lease a home, you pay the rent every month (which, granted, can be more than a mortgage payment on a similar property) while all of the other costs of owning a home don’t accrue.

As incomes rise, people tend to spend more for homes, which drives prices upward.  

Many investments outperform home ownership, with the added advantage of being far easier to liquidate. In many cases, the down payment money you’d spend to get control of a property would do just as well were it invested in 10-year Treasury bonds.

Granted, home ownership does work out to be something of a forced savings plan when all goes well. But as the financial crisis taught so many people, sometimes all doesn’t go so well. This makes buying a home a risky proposition too. You’re counting on home values to always increase, but the real estate market is just as prone to corrections as any other.

Related: Renters Now Dominate American Cities

Up Next: Advantages of Being a Renter

Ultimately though, the rich understand using money to make money, while the merely well-off use money to live. The best use for money is to spend it on something that will pay you, as opposed to spending it on something you’ll pay for. With that said, buying real estate investment properties to rent to other people is a sound use of money, but tying up a lot of cash in a principal residence is a poor use of capital. This related back to the age old question of rent vs. sell which you can learn all about here.

Consider this: a $400,000 rental property can be acquired with 25 percent down or $100,000. This means you get four times the leverage for your dollar when you invest in a rental property as opposed to using that money to buy a home. You’ll find very few other investments with that kind of potential. Long story short; rich people don’t get rich buying homes in which to live, they get rich making investments.

Finally, there’s one other reason why many wealthy people are choosing to rent—flexibility. Renting preserves your mobility while owning ties you to a particular location. For all of these reasons, owing a home simply doesn’t have the same luster it once did for high-net-worth individuals.

But don't just take it from me, take it from the thousands of real estate wealth managers who would offer you the same advice as a millennial straight out of college. Learn more on how you can increase your financial well being on the Build With Onerent Real Estate Blog.