June 13, 2007
Readers Report: Big Demand For Big Rentals (For Big Money)
While we can’t confirm a reader’s comment yesterday about recently renting 2786 Broadway, it does remind us that we’ve been remiss in publishing another contribution from Seb (a seriously plugged-in reader):
Big Demand For Big Rentals (For Big Money)
If you don’t want to buy in Pacific or Presidio Heights, and you need more than 4,000 square feet or 5+ bedrooms, you can always rent. But beware, properties are now moving fast. Since the beginning of 2007 high-end rentals have on average moved within a couple of weeks. Recent rentals include:
A choice property near the Egyptian Consulate General’s for a little over $10,000/month.
A grand Chateau near the Korean Consulate General’s for around $15,000/month.
And a majestic view home near the Japanese Consulate General’s for $32,000/month.
∙ Comment: 2786 Broadway: Reduced 12.8% (Again) [SocketSite]
∙ Million Dollar Views (For A Million Dollars Less) [SocketSite]
∙ To Rent Or To Buy, That Is The Question (That Only You Can Answer) [SocketSite]
First Published: June 13, 2007 8:14 AM
Comments from "Plugged In" Readers
Maybe its just me, but I can't see why people who have that kind of money to throw around don't just buy something.
Posted by: SFhighrise at June 13, 2007 8:24 AM
Perhaps people with "that kind of money to throw around" ended up that way by making prudent financial decisions. Like carefully considered rent/buy comparisions, for example.
Posted by: gumby at June 13, 2007 8:46 AM
seriously, who is going to rent these places?
While I can imagine a small group of super rich who might want to summer in SF and rent the place for 2-3 months, this pool of people has to be ridiculously small.
Wouldn't those people be better off getting very nice suite at a hotel for a few months?
Posted by: badlydrawnbear at June 13, 2007 8:50 AM
Not everyone feels worthless when they're renting something, as opposed to buying. If you're uber-rich, what is the advantage to buying? You probably have places to put your money with better guaranteed returns, or places with significant potential returns, instead of the small (annual) returns that you'll likely earn on a $10 million + house.
Posted by: Brutus at June 13, 2007 9:03 AM
Could it be possible these rentals could have something to do with completing a 1031 exchange? The equity in these places built up over the years must be astronomical and with a little rental funny business, you could sell a year or two later and tell Uncle Sam to beat it, you're taking your proceeds and dumping it in the next property.
Posted by: Kevin at June 13, 2007 9:09 AM
"Perhaps people with "that kind of money to throw around" ended up that way by making prudent financial decisions. Like carefully considered rent/buy comparisions, for example."
I wouldn't call dumping $32k per month into a rental a "prudent financial decision". Also, I wouldn't consider purchasing a Lamborghini, Ferrari, Bentley, etc a prudent financial decision either. I'd say a more likely scenario is that these people have so much money lying around, that it doesn't really matter if they blow a chunk of it on a rental.
Posted by: SFhighrise at June 13, 2007 9:09 AM
"I wouldn't call dumping $32k per month into a rental a "prudent financial decision". Also, I wouldn't consider purchasing a Lamborghini, Ferrari, Bentley, etc a prudent financial decision either."
Actually, Road and Track magazine once did an article about Rolls-Royce ownership in England. The average new car buyer held the car for 27 years, and compared to financing or leasing a new Ford every 3-5 years, the Rolls owner actually came out ahead.
Posted by: redseca2 at June 13, 2007 9:28 AM
"The average new car buyer held the car for 27 years"
Most luxury car owners probably have that as their 2nd or 3rd car, only using it for weekend drives or hot dates and such. I'd imagine that most probably have another commuter car, although those are still probably nice ones, such as BMW's.
Posted by: SFhighrise at June 13, 2007 9:31 AM
I'm just throwing this out there.. but my guess is that not a few of those renting such homes are likely in the process of remodeling their own multi-million dollar mansions. Since it takes two or three years to (re) build your dream house and you still want to live in luxury, why not rent a mansion in the interim?
My guess is the owner of the Broadway home wants to remodel at some point, but because the permitting process is filled with so much red tape, it makes sense to just rent out the home.
Posted by: Sleepiguy at June 13, 2007 9:36 AM
I don't know if this sheds any light onto the question at hand, but I have rented high end condos (2/2 for $7K+ / Month) to:
Baseball Players, relocating CEOs, consultants, families remodelling their homes, and people getting a divorce.
Posted by: Paul Hwang at June 13, 2007 9:47 AM
There are limits to ownership advantanges.
Caps on tax deductions. People who rent at this level perhaps already have one, two or three homes already. They dont want to worry about the roof or the taxes. Luxury homes have uber tax bills. It is often cheaper to rent then own luxury.
Maybe they do not want to sleep in someone else's bed or eat food that is prepared by someone else's chef. Staying at a hotel would be a step down in lifestyle.
Perhaps their is a need for extra room for beyond family: staff, security, nanny, etc.
If 32,000 a month has the same effect on their budget as 1,000 a month on median income renter, it becomes a no brainer.
When you rent, you walk away when you are done. If you will be in town for no more than three years, why buy with that timeline, if there are no tax advantages? Homes over 5 million can sit on the market for a while, why take the risk?
That is the beauty of a rental at any price, the ease of walking away when you are done, and no large investment in time and capital for the services you are using. The same truth for renters of a small tenderloin studio as a large mansion on the Gold Coast.
If you can afford it, why not?
Posted by: kathleen at June 13, 2007 10:00 AM
Um, don't forget about those people who don't want to buy because they think prices will be lower next year. Given that the cost of renting is about half the cost of buying, if prices even only stay steady, you come out ahead. If they fall, you REALLY come out ahead.
As little as two years ago, rentals at the high end weren't as prevalent as they are today. If you feel you need to maintain that level of lifestyle, you can now rent it or buy it. It used to be that, even if prices were headed down, you had to buy to maintain a certain lifestyle - the SF rentals were almost all dumps inherited by cash poor sons and daughters that just milked the already out-of-date places their parents left them.
That is no longer true. Any new development has rentals in it from day one. I'm living in a completely beautiful place built in 1900s that I'm renting. Professional stove, professional fridge, restored period details, 12 foot ceilings, redone electrical, the works. I didn't have to take the risk that prices would fall in what was obviously the end of a bubble and I'm paying half what it would cost to buy. The question isn't why would I rent, it's why would I buy?
My understanding is that Bill Gross of Pimco is one of those people who sold his home to rent. I have a very high salary, but I wasn't in a position to buy until two years ago. I made a couple of bids on some $2-3+M homes (missed all but one by about $50K) and then backed away when I started seeing signs that the market would not rise, and would probably fall. Just because I can afford the loss if values drop doesn't mean I'm going to sign up for it, especially now that very good alternatives are available. I may have money, but I didn't get it by being an idiot. (Those who think google employees will save you might want to reread that last sentence.)
Just as important is the fact that with so many more of these high end rentals on the market, it tends to skew the averages a bit. "Average asking rents" will rise if there are more high-end rentals on the market this year than last year, even if rents aren't rising. What is happening is a combination of both: it isn't all from increased demand.
Posted by: tipster at June 13, 2007 10:21 AM
They rent these places to capture the rent control benefit. You're talking an increase of only $480 on $32,000/month. Now that's pretty sweet but the threat of an owner move-in eviction also needs to be considered.
[Editor's Note: Keep in mind that rent increases for single family homes rented after 1/1/06 are not limited by rent control (in most cases and as far as we know).]
Posted by: rut at June 13, 2007 10:28 AM
Highrise, let's do the math.
$32K/month .vs. paying 6% interest + 1.12% property tax, let's call it an even 7%.
Keep in mind that you can only deduct $1M mortgages, so the tax benefit goes away.
32000 X 12/0.07 = $5.5M
Do you really think that house would sell for so little?
The 10K rental is equivalent to $2M, which will buy you a small condo in pac heights.
In America most of the wealthy got their money by being smart financially.
Posted by: someone at June 13, 2007 10:47 AM
I don't disagree that you can get more for your money on a monthly basis for a rental. That's not my point.
The point is that with $32,000 per month to throw around, you can get a very nice place in the city (albeit not a $20 million mansion) and begin to earn equity. I can understand why someone wouldn't do this, in that they are filthy rich and want to live in the life of uber-luxury, not just luxury. However, if you were looking at it from a pure investment standpoint, especially if it were long term, purchasing a $3 million residence would make more sense than renting a $20 million mansion.
Posted by: SFhighrise at June 13, 2007 10:53 AM
Highrise, I think that's the point. If someone is paying 32K in rent, they obviously have a significant amount more to invest in other things, which probably have a higher (or at least a higher potential) return than just "earning equity" - that's merely saving, unless you're in a huge up-market (which may still be the case for some properties). Someone who can throw 32K into a housing payment each month probably isn't interested in socking away money - they're probably more interested in growing investments.
Posted by: Brutus at June 13, 2007 11:31 AM
Um, correct me if I'm wrong here, but it's my understanding that rent control does apply to single family homes and condominiums, it's just that the limitations on evictions are different - namely that you can easily owner move-in (OMI) occupy a SFR or condo. However, limits on the annual rent increases are the same and you still have to pay the $4,500 relocation assistance payment for an OMI, even for houses and condos.
[Editor's Note: We should have been more specific, and we could be wrong, but we're under the impression that it's the other way around (no limits on rent increases but standard eviction protection) for move-ins after 1/1/06 (i.e., now).]
Posted by: Miles at June 13, 2007 11:43 AM
As a datapoint, I rented a 4500 sq. ft, 7 bdrm house in SF for $25k / month. I'm senior management in a Fortune 500 firm, am often traveling, and otherwise couldn't be burdened with home ownership.
When I retire in a few years, that's a different story...
Posted by: JVandevoort at June 13, 2007 11:57 AM
Miles, I think you have it backwards.
There is NO rent control on single family homes or condos that have been sold once. Period. After the lease is up, you can charge whatever the market will bear. Search "Costa-Hawkins" for more details. I believe that SF also limits rent controls to buildings having a certificate of occupancy before 1979. Buildings after that date are also not rent controlled. Costa Hawkins uses 1995 as it's date, but the local SF ordinance is more generous to property owners.
There are eviction controls on everything in SF, but because there are no rent controls, the eviction controls have little teeth.
Posted by: tipster at June 13, 2007 1:17 PM
Highrise, if you get more for your money for a rental, you shouldn't buy, period. A 10m mortgage at 7% is 65k, so 32k rent is 50% of that. Let's assume that ratio holds at all prices.
You say that someone should just buy for 32k/month rather than renting, to build equity. But why would they want to if they could rent an equivalent place for 16k/month and keep that extra 16k in cash. 16k in cash per month is a lot better than you're doing building equity, plus there's no downside risk.
Why not just buy for 16k you say? Because you could rent an equivalent place to that for 8k, and bank the rest... you see where I am going. If it's cheaper to rent, it's cheaper to rent, and that will be the better option up and down the price scale (providing the rent/buy ratios are roughly consistent).
Posted by: 99paa at June 13, 2007 3:44 PM
You put it much more gracefully than myself :)
Posted by: Brutus at June 13, 2007 4:08 PM
There is no such thing as "building up equity". It is another word for "saving". People who can afford 32K rent won't be interested in "saving". They will only be interested in "investing".
Posted by: John at June 14, 2007 11:55 AM
Regardless of the rent vs. mortgate discussion, how can it ever be a good investment to put 5 Million or 10 Million etc. into a real estate property which can be gone within a couple of minutes during the next big shake? Beats me. In fact, considering the "risk premium" investors usually demand, San Francisco should be the cheapest real estate in the country.
Posted by: anon at June 14, 2007 5:35 PM
Cheaper than places in hurricane zones? Or tornado zones? How many properties are there in the city that survived the 1906 and 1989 quakes? Thousands? Tens of thousands? But surely, the NEXT quake will level everything, right? And all of those stupid people who bought land cheap in 1906 and became rich because of it will feel really dumb when their properties are wiped out...but they'll feel dumb in their graves. Let's all buy real estate in Detroit! No once-in-a-lifetime natural disasters to worry about there!
Posted by: Brutus at June 14, 2007 7:28 PM
I don't think the threat of natural disasters is typically factored into the prices of real estate to a great extent, not here, not elsewhere.
Case in point, look at Miami. They've had major hurricanes before and they are actually the US city most likely to see future natural disasters (hurricanes). They're actually more likely to see hurricanes than New Orleans, but New Orleans may receive greater damage during these storms, given their below sea level location. With this in mind, you'd expect prices in Miami to be the lowest in the country, but that city has had the most new condo development in the country and tons of overspeculation.
Posted by: SFhighrise at June 15, 2007 8:26 AM