Even the Wealthiest Are Choosing to Rent

There's a fairly new, albeit limited, type of resident in New York City...

They're called "mega renters."

Mega renters are some of New York's wealthiest residents. They can buy just about any property they want... yet they've opted to rent properties at extreme prices.

Rental rates for this market typically start at around $25,000 per month, with some tenants paying double or triple that. Currently, there are more than 50 active rentals in New York worth more than $50,000 per month... 20 of which were rented at $75,000 per month.

Ten years ago, there may have been a handful of these units on the market... But the demand just wasn't there.

Today, things are different. Some of these mega renters, who used to live full-time in New York, moved away during the pandemic. Many chose to work remotely in places like Florida. Now that offices have opened back up, they need a temporary place in the city for when they're in town.

A lot of these rentals are actually corporate leases. And when a corporate lease is given for a residence within five miles of an office and is solely used for business purposes... it's 100% tax deductible.

Not to mention, it's much easier to part ways with a property you've rented than one you own.

More importantly, with interest rates as high as they are, it just makes more sense to rent than own... even for the incredibly wealthy.

Renting is far cheaper than owning today...

Interest rates have been at a two-decade high for nearly a year. (And after the Federal Reserve's announcement last week, they'll likely remain high in the foreseeable future.)

As a result, mortgage rates have surged. It's now way more expensive to pay a monthly mortgage than to rent.

And this isn't just true in expensive real estate markets like New York... It's cheaper to rent than to buy across every one of the top 50 metropolitan areas in the country.

The difference is rather stark, too.

As of February, the average monthly rent was just below $2,000, while the average mortgage payment was more than $2,700. And in areas like the San Francisco Bay Area, it's nearly three times more expensive to buy than to rent.

So it's no wonder that even some of the wealthiest metropolitan residents are opting to rent. It's that much cheaper.

Now, we understand that renting has its drawbacks... Some folks argue that renting is far more expensive in the long term, as you don't end up actually owning the property.

Plus, rent prices can rise every year, whereas mortgage payments are usually fixed over the full term of the loan.

However, that doesn't account for the cost of home maintenance. Maintenance costs can add up beyond what's calculated in the price difference above. And when you're renting, your landlord is responsible for these costs.

As long as interest rates remain elevated, it can be tough to decide between buying and renting today...

The New York Times even has a financial calculator to help you do the math and see which is a better option. And it includes some of the factors we mentioned today, like mortgage rates, maintenance costs, and how long you plan to stay.

You can check out the financial calculator here to see what's recommended for your specific situation.

As we covered, renting likely makes the most sense.

Even the wealthy are finding it hard to swallow home prices today. And from an investing standpoint, that could hurt the housing market in the near term.

If more consumers choose to rent rather than buy, home sellers may have to start lowering prices to keep people interested. And investors get nervous when they see real estate valuations fall.

The last thing the housing market needs is more turbulence, though it might just be inevitable.

Regards,

Joel Litman
June 17, 2024