Los Angeles mansion owners are sweating as they struggle to sell their luxury properties.
Faced with a depressed housing market, punitive sales taxes and a lack of willing buyers, California's billionaires are resorting to renting out their mansions for eye-watering sums, according to Bloomberg.
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Entrepreneur Rob DeSantis, co-founder of software company Ariba and angel investor on LinkedIn, is a prime example of this trend. He has postponed the sale of his 13,000-square-foot Manhattan Beach waterfront home until the luxury housing market improves.
During that time, he put the seven-bedroom, 12-bathroom property on the market for a whopping $150,000 a month with less than 90 days of rent. It's a strategy he believes is a “hedging” to “highlight the value of real estate in a better way” for when wealthy Americans are ready to buy again.
Mr. DeSantis is not alone in seeking cash flow from luxury real estate while waiting for the right time to sell. So what is driving this trend?
Sluggish real estate market
Not all luxury property owners live in these mansions full time. It could be a second home, vacation home, or at some point even an investment property to add to your broader real estate portfolio.
Patrick Michael, founder and CEO of LA Estate Rentals, told Bloomberg: “In an era when lending standards were relaxed, many homeowners were unable to afford a home, a mortgage, or an additional loan. I took over the villa,” he said.
Michael added that there has been a surge in luxury rental properties in recent months.
“It feels like everyone is panicking right now. Even wealthy owners are asking if anyone is living in their homes.”
Like the rest of the country, the Los Angeles housing market has been depressed in recent months as potential buyers struggle with borrowing costs and rising home prices.
According to Bloomberg, citing data from appraisal firm Miller Samuel & Co. and brokerage firm Douglas Elliman Real Estate, home sales in Los Angeles fell 26.6% from January to September 2023 compared to the same period last year.
Luxury homes, with an average price of $13.25 million, are particularly hard to sell, remaining on the market twice as long as the average single-family home.
Part of the problem is that even the very rich don't want to pay taxes, home insurance, or upkeep on mansions they no longer need and can't easily sell. You also don't want to walk away from a low-interest mortgage at a time when borrowing costs are rising, so finding a lender is a great way to keep your options open.
read more: Owning real estate for passive income is one of the biggest misconceptions in investing, but here's how to actually make it work.
Problems for wealthy sellers
One particular problem for LA's wealthy property owners is the so-called “mansion tax” (officially called “Measure ULA”) that went into effect on April 1st.
LA real estate sold for more than $5 million is subject to this special transfer tax over and above the basic transfer tax paid at the final stage of the real estate transaction. For sales of at least $5 million, the additional “mansion tax” is 4%; for sales of $10 million or more, the additional tax is 5.5%.
This tax poses complications for sellers, as they essentially end up losing a lot of money on the transaction. This has led some ultra-wealthy homeowners to look for other ways to make money, such as renting out their expensive properties for staggering amounts.
However, owners are also struggling in the rental market due in part to the recently concluded labor strike in Hollywood. Production stalled, expensive properties were no longer available to rent for filming, and fewer out-of-town actors, directors and producers sought luxury living quarters.
“Because of the strike, that well has dried up,” Zach Goldsmith of real estate brokerage The Agency told Bloomberg.
Finally, high borrowing costs will continue to deter potential buyers, even in the luxury market, at least for the time being.
Indeed, because millionaires typically don't borrow money to buy luxury homes (at least from traditional mortgage lenders), they are often shielded from movements in mortgage rates. You may be able to buy with cash or sell and leverage existing properties in your real estate portfolio to create new deals.
Still, unfavorable market conditions are causing some wealthy homeowners to abandon their plans.
waiting for the storm to pass
It's easy to see why someone like DeSantis would hold onto his property and rent it out instead, even though there appears to be no urgent financial need to sell his Manhattan Beach mansion.
“The people who can afford to lease are probably the people who can afford to buy,” DeSantis said. “I learned a long time ago that everything has a price. If someone were to offer me a billion dollars right now, the answer would definitely be yes. If they offer $90 million, that's a clear no. ”
The Institute for Luxury Home Marketing (ILHM) says Americans who need to buy or sell luxury homes will continue to do so despite market conditions. But those who simply want to buy may remain hesitant until inventory increases, prices fall, and mortgage rates trend downward.
“Likewise, sellers will continue to resist, not only because they don't want to give up their current low mortgage rates, but because they have so little inventory to buy, they see less reason to lower prices,” the group said. is written in a luxury magazine in November 2023. Market report.
Despite this, luxury real estate is still trusted as an investment, and so is the stability of real estate ownership.
“Even if some buyers exit the real estate game during 2023 due to fatigue, frustration, or even hesitation, they may return in 2024 as inventory levels improve,” ILHM predicted.
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