If Rich People Can Afford To Buy A Home, Why Do Some Prefer To Rent?

A friend of mine owned an expensive home in Brentwood, CA, with a swimming pool and tennis court. His family decided to rent it out and live in one of their other homes. A rental agency had a prospective tenant who offered them huge rent, provided they move out the same weekend (!) and leave behind all their furnishings! —They moved out the next day.

The tenant turned out to be actor Dustin Hoffman who temporarily rented their home while filming the movie ‘Hook’ at Sony Pictures Studios, close by in Culver City, California. — Dustin ended up buying the home a year later.

Renting allowed Dustin to first try the home and neighborhood. It offered him flexibility without a long-term commitment.

The vast majority of individuals I know do own their primary home. Fact is, the richer people get, the more likely they own their primary home.

After the 2008 financial crisis/great recession, home values dipped by about 10% in Honolulu. That's all. Your market might have been different. Many US housing markets were not holding up as well. The memory of a correction instills lingering fear which for some confirms their preexisting believe ‘home ownership is a bad investment’.

The stock market could correct any day 10% or more for no apparent reason. The long-term trend is up and there has never been a 15-year time period where the US stock market has lost money. The same holds true for Hawaii real estate.

But in spite of the long-term trend for stocks and real estate, human nature tends to focus on short-term fear. For many, the fear of losing is greater than the desire to take on risk for the potential to gain.  

Home ownership is a personal choice. It’s not for everyone. There are many reasons why some prefer to rent vs buy.

I personally prefer to own my home and recommend it when you are committed to staying in the same area for at least 3 to 5 years, provided you can afford it.

Instead of paying rent I rather build equity. I have done it many times since I first bought a tiny 1 bedroom condo I could barely afford many years ago. It required short-term sacrificing, some might not be willing to do.

Perhaps I could have rented a nicer, bigger home instead. I could have bought a brand new car, more restaurant food, flat screen TVs, and spent my money on parties, alcohol, and other foolishness.

I chose short-term sacrifice for long term gain. Whatever excess cash I saved I invested into additional real estate, plus maxing out my SEP & Roth IRA contributions.

When you buy your principal home in the US you get to write off mortgage interest on mortgage loans up to $750K, plus property tax you pay up to a $10K annual limit.

If you have good income you could easily be in the 30+% tax bracket. With today’s mortgage interest rates at ~4%, after a 30% tax write-off, the cost of the mortgage money drops to 2.8%. After adjusting for inflation, currently around 2%, the real cost of the mortgage money is 0.8%! - I call this free money. Warren Buffett seems to agree here.

If I make a sacrificial 20% cash down payment to purchase, and my home appreciates 4+% average per year as it has done since 1980, my initial 20% cash down payment has an average annual ROI of 20%. Plus I get an unmeasurable additional benefit: I get to enjoy living in my own home! - I call this the dividend.

Owning your primary home is a personal choice. I prefer to own.

May you live well and prosper. ~ Mahalo & Aloha

More real estate stuff here:

• How To Buy A Home When The Market Is So Expensive
• Top 5 Tips To Finding Your Dream Home
• Oahu's Housing Affordability - Trying To Time The Market?
• 7 Residential Real Estate Investment Strategies
• Real Estate Tax Benefits - The Ultimate Guide
• Wealth Creation With Real Estate
• Get my book: Buying Paradise - Real Estate In Hawaii: The Ultimate Guide How To Turn Your Dream Into Reality