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It’s one thing to worry about your tenant’s ability to pay the rent, but it’s another to know that your tenant could potentially buy your building from you if they wanted.
The number of rental households earning $1 million or more per year reached 1 in 13,692 in 2023, tripling over the previous four years, according to a new report from RentCafé. However, the number of millionaire homeowners earning the same amount trailed behind.
So what do the wealthy tenants—excluding vacation and short-term renters—know that homeowners don’t?
Flexibility and Liquidity Over Ownership
“They’re choosing flexibility and liquidity over ownership,” Glen Stegemann, a broker with The Agency based in Miramar Beach, Florida, told the New York Times. “They don’t want to be bothered with the inconveniences of homeownership, which includes paying real estate taxes and insurance, especially in markets like Florida and California, where we’re seeing a lot of natural catastrophes.”
“Typically speaking, wealthy people are either smart or have very smart advisors,” Douglas Elliman’s Keyan Sanai, who represents luxury real estate in Florida, told the New York Post.
“Why wouldn’t someone who has the disposable income, who can probably find some sort of home office loophole to write off at least a part of it, rent here for $30,000, keep a primary residence elsewhere, and then have no liability?” Sanai added. “For example, if the fridge broke, the building has to fix it. If the dishwasher leaks, call the super. It’s not on you.”
Increased Homeowner’s Insurance Costs Favors Renting
Renting has become particularly prevalent in Florida and California, according to the RentCafé report, where insurance is prohibitively expensive. For wealthy investors, Sanai says that the stock market is currently yielding higher returns than real estate, signaling a shift in investment strategies.
It’s not that most millionaires are cheap. Instead, they have a finely tuned sense of how to allocate their money.
“The market is, on average, returning—even the S&P index—8% over the last couple of years,” Sanai says in the Post article. “Whereas in real estate, if you’re looking at Manhattan over the last 10 years, you’re either losing money if you’re selling right now, or you’re not making money, you’re breaking even.”
For affluent New Yorkers, Sanai adds, fear about the next mayor’s policies is also causing them to press pause.
Reasons Why Many Wealthy Tenants Choose to Rent Rather Than Buy
High home prices and interest rates make luxury homes pricey
High earners generally want to live in expensive homes. Despite having enough for a down payment, some would prefer to keep renting at a lower price until they can either save enough to buy with cash, or so the monthly payment is not an issue, or until they have made moves in their personal lives, such as starting a family, that justify buying an expensive home.
“Many affluent Americans are choosing leases over mortgages because the cost of buying a home has jumped significantly more than the cost of renting one in recent years,” Redfin senior economist Elijah de la Campa said in March. “With mortgage rates near 7%, renting frees up cash for other investments that may be more lucrative than real estate.”
Renting offers flexibility
Employment unpredictability and the difficulty in selling a home allow renters to stay nimble and react quickly to changes in their personal and professional lives.
Amenities and lifestyle
Luxury rental communities offer amenities, a social life, and a low-maintenance lifestyle.
Frees up cash for investments
This is a significant benefit for real estate investors who are themselves renters rather than homeowner-occupants. Owning rental real estate offers multiple tax benefits, which can help offset other income and provide an additional source of cash flow. Unlike owning a home, which typically appreciates over time, owning rental real estate can also generate a steady income.
Popular Cities With Wealthy Tenants
Other popular rental cities are those in the low-tax Sunbelt states, such as Houston, Dallas, Miami, and Atlanta, which attracted many high-earning New Yorkers during the COVID-19 lockdown—when the RentCafé survey was partly conducted.
Unsurprisingly, many high-earning renters also reside in high-earning cities, such as:
New York
San Francisco
Los Angeles
San Jose, California
Boston
Chicago
Miami
Million-dollar-earning homeowners still outnumber renters by a ratio of 10 to 1, says the RentCafé survey. Below the millionaire status, homeowners are generally 43 times wealthier than the typical renter, with a net worth of $430,000 compared to just $10,000, according to the most recent Federal Reserve Survey of Consumer Finance quoted by Realtor.com.
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Lower-Income Tenants Aspire to Homeownership
Interestingly, below the millionaire status, 70% of renters said they would prefer to own a home, compared with less than 15% who said that renting was their preference, according to the Federal Reserve Bank of New York. However, for recently minted millionaires who do not already own their home, renting could be a brilliant short-term move, allowing them to invest capital, receive the tax breaks that come with it, and put off buying a place until the market stabilizes or they have a better take on where the political winds will blow.
Those who are choosing to buy and sidestep traditional high barrier to entry markets, such as New York City and Los Angeles, are instead opting for up-and-coming Southern destinations with attractive pro-business climates, including Salt Lake City; Pensacola, FL; San Luis Obispo, CA; and Chattanooga, TN, according to the RentCafé survey.
Final Thoughts: Attracting Top-Tier Tenants
Attracting wealthy tenants is the goal for all landlords. The good news is that they are there, but they are not looking to rent just anywhere. Updated apartments, contemporary style, convenience, and community often play a significant role in a tenant’s decision-making process. Even if you can’t offer a gym and swimming pool, updated and immaculate single-family houses can still attract affluent tenants.
Here are a few things to keep in mind, according to Forbes.
Make a good first impression
Hit tenants with the wow factor the moment they pull up to the property, thanks to impressive curb appeal. Continue to impress them with stylish entrance details; seamless, easy access; and a welcoming entryway. Make the prospective tenant feel like they are stepping into a high-end, modern home rather than a basic rental.
Offer incentives such as low upfront costs
No tenant wants to empty a sizable chunk from their bank account to move into your home. After meticulously screening them, a rental discount for the first month and flexible lease terms help take the stress out of moving in.
Invest in quality renovations
Go beyond paint and new plank flooring to overhaul the kitchen and bathrooms, install stylish, energy-efficient features, and make the home tech-compliant. An outside deck or well-maintained garden, along with a convenient parking space, is also a winning combination for securing top tenants.
