Some owners are seeking to lease luxury properties instead of selling as a new mansion tax and entertainment industry turmoil loom over the market.
It’s a tough time to sell a mansion in Los Angeles.
The market for the priciest properties in the city faces challenges such as a new tax on luxury sales and turmoil in the entertainment industry. Now, some homeowners are turning to another path to generate cash: Renting them out.
This week, Rob DeSantis listed his seven-bedroom, 12-bath Manhattan Beach waterfront house for rent at $150,000 a month for leases of 90 days or less. The nearly 13,000-square-foot (1,200- square-meter) property is one of five he owns in California, said DeSantis, a serial entrepreneur who cofounded Ariba and was an early investor in LinkedIn Corp.
He’s not in a hurry to sell in the current market.
“This is a hedge,” DeSantis, 60, said of his decision to put the home up for rent. “I believe leasing it out will highlight the value of the property in a much better way.”
Los Angeles hasn’t been left out of the slowdown that’s gripping the US housing market as soaring borrowing costs sideline potential buyers. Home sales in the area are down 26.6% this year through September compared with the same period a year ago, according to data from appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. Luxury home listings – with a median price of $13.25 million – languished on the market for 73 days, or twice as long as the average single-family house.
But the country’s second-largest city is facing added issues of labor strikes. While the studios and actors tentatively agreed to a new contract this week, the strife in Hollywood has upended production for months. Plus, Los Angeles has a new transfer tax on properties selling for at least $5 million. The so-called “mansion tax” survived a lawsuit recently and now makes selling less profitable. It’s spurring some owners to find other ways to monetize their rarely used palatial properties.
“A lot of owners took on homes and mortgages and extra vacation homes when lending criteria was easier,” Patrick Michael, founder and chief executive officer of LA Estate Rentals, said in an interview. “I feel like everybody’s in panic mode now. Even wealthy owners are asking if I have anybody for their house.”
Michael said he currently represents about 250 short- and long-term rentals and added 10 properties in the last week of October. He estimates about $3 billion of luxury homes are available on the rental market in the LA area, a volume he compared to 2008 when he started managing rentals after the last housing bubble burst.
Hollywood Pullback
Owners are worrying about paying taxes, insurance and maintenance bills for houses they no longer need but can’t easily sell, Michael said. A plastic surgeon has been hounding him to find clients to lease a Hollywood Hills home that often goes for $25,000 a day, mostly for corporate events.
Finding renters who can afford to pay those prices isn’t easy. Zach Goldsmith, a broker with the Agency, said he’s struggled to lease properties in Beverly Hills and the Bel-Air district because there’s so much inventory on the market. The Hollywood strikes also snuffed out productions that rent high-end homes as locations. Plus, fewer out-of-town actors, directors and producers were demanding five- star, hotel-like living quarters for a few months stay during a shoot.
“Because of the strikes, that well dried up,” Goldsmith said.
Asking rents are falling as inventory swells and may drop as much as 35% in the next six to 12 months, according to LA Estate Rentals’ Michael. A five-bedroom, eight-bath modern Bel-Air home with a pool is on the market for $55,000 a month, after commanding a $180,000 price when it was rented to “a celeb client” this summer, he said. A six-bed, six-bath home in Beverly Hills is listed for $38,000 a month, down from $55,000 about six years ago. Most of Michael’s properties also offer reduced prices for leases longer than four or five months.
“We have to be creative to lure in tenants in this market.” Michael said.
The cost of buying is currently about 8% higher than renting in the LA area, according to Ken H. Johnson, associate dean of graduate programs at Florida Atlantic University’s College of Business. That implies prices for both rentals and sales are likely to fall, he said, a trend that may be aggravated if the area’s population decline persists, weakening the pool of potential buyers.
“As the owner of short-term rental, I think you’re going to get a supply shock in LA,” Johnson said. “A lot of people are cashing out of LA now and moving. You’re probably at a peak price.”
But for owners who can find a renter, leasing is a way to keep a foothold in the area, and a particularly lucrative option at a time when borrowing costs have soared. People don’t want to walk away from a low-interest mortgage, according to Rayni Williams, chief executive officer of Beverly Hills Estates.
“People who move, they always come back,” Williams, who’s representing DeSantis’s Manhattan Beach house, said in an interview.
Ultimately, DeSantis said he hopes finding a tenant will help reveal his property’s true value, perhaps by turning a renter into a buyer.
“People who can afford to lease are probably people who can afford to buy,” DeSantis said. “I learned long ago: Everything has a price. If someone offered me $1 billion now, the answer is definitely ‘Yes.’ If they offer $90 million, it’s a definite ‘No.””