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Why Are the Rich Renting—And What Does It Mean for You?

Logan Freeman
3 min read
Why Are the Rich Renting—And What Does It Mean for You?

Investor opportunity typically follows shifting demand, and if one recent development in real estate is any indication, significant opportunities may already be open in one particular asset segment.

This development has to do with the increasingly high number of high-earners renting.

According to a recent MarketWatch article, which cites a 2018 study from the Joint Center for Housing Studies of Harvard University, in 2017, the percentage of renters with incomes topping $100,000 rose 5%, “bringing the cumulative increase in 2012–2017 about 2.6 million,” the report revealed.

Furthermore, the renter rate in that income bracket hit an all-time high (19%) in 2017, with higher-income households accounting “for the vast majority of renter growth over the past five years.”

Not only are more high earners renting, but this class of renter is outpacing all other income brackets.

We assume that renters do so because they cannot afford to buy a home. They can’t afford the down payment, don’t make enough income, don’t qualify for loans, or they’re priced out of their market for a home. For whatever reason, we assume that most people rent because they lack the financial resources to buy.

The rich don’t appear to fit the profile of someone lacking financial resources to buy, so why are they renting?

Rising prices

One reason is that they actually are getting priced out of some markets. In a RENTCafe.com survey, cities such as New York, San Francisco, and Los Angeles had the highest number of high-income renters. As homeownership becomes increasingly unaffordable for the average American, it appears not even the rich are spared.

In the same MarketWatch article, Trulia’s chief economist, Issi Romem, was quoted saying, “The barrier for entry [into the housing market] is higher than it used to be,” adding that, “home prices have risen and lending standards remain tighter than before the recession.”

Demographic shifts

Affordability is not the only reason high earners are renting. Many high earners are millennials, and millennials, who make up roughly 22% of the U.S. population, don’t behave like their parents. Most millennials don’t have the same perspective as their parents about working at one job, getting married, and raising children in one home for their entire lives.

Studies show that the rate of homeownership among millennials is lower than in previous generations. Student loans and affordability have something to do with the low rate of millennial ownership.

Still, millennials are also more mobile than any other generation has been, jumping from job to job and home to home more than any previous generation. With technological advances, millennials can work from anywhere, and owning a home goes against their wanderlust.

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Views on assets

Another interesting reason why the rich rent is that they don’t view a residence as an asset, unlike everyone else. This view was made popular by Robert Kiyosaki in the book Rich Dad, Poor Dad. Until you sell it one day and extract its appreciation, your house is a money pit, continually requiring upkeep, updates, and repairs.

The ultra-rich would rather put their money in something besides a home because the rich invest differently than everyone else. The wealthy, like the members of the social investing club Tiger 21 (minimum $50 million in investable assets to join), consistently allocate more than 50% of their capital to cash-flowing assets like real assets and private equity that also grow over time. A residence is not a cash-flowing asset, so why buy one?

What does this mean?

Whatever the reason for the rich renting instead of buying, the fact is it’s an emerging trend that’s gathering significant momentum. As we have become increasingly a renter nation, the primary impetus for that movement previously occurred at the mid-level to affordable housing tiers. But now, with even high earners turning to renting, investor opportunity exists in every multifamily segment from affordable to luxury.

They say that investor opportunity follows demand. It looks like the demand for rental properties by the rich is opening up a whole new door of investor opportunity in the multifamily segment that’s never been seen before.

These new opportunities spurred on by emerging trends give investors more chances than ever to diversify their portfolios with cash-flowing, appreciating, real assets that appear to be becoming more and more recession-resistant as demand—at all price levels—continually outstrips supply.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.