John Q. Average isn't the only one who can't afford to buy a house anymore. Some high earners are also having trouble.
They have the cash flow but not necessarily the money to buy. This is one reason higher-priced rentals are becoming more popular.
At least that's what Stephen Shapiro says. Shapiro has been focusing for six years on leasing expensive homes through the Moving Experience, developed from Scan-A-Pad, which he founded in 1970 to help renters like himself find lodging in Los Angeles.
"At one point I was dealing with over 100 requests a day" at Scan-A-Pad, he said, "and it turned into a sweatshop business -- a whole lot of work without a whole lot of income."
Turning from apartments to houses, he found a demand for high-rent accommodations that was not being satisfied because there was little incentive for real estate agents.
"If Paul Newman came to town for three or four months and rented a house for $6,000, the real estate commission was much less than if Newman bought the house for $2 million," he pointed out.
But this didn't stop Shapiro, who is also a real estate broker. "People who rent today, buy tomorrow," he philosophized. He also banks on referrals, but he likes to affiliate with a realty firm that concentrates on sales.
Before he and his Moving Experience joined Jon Douglas nearly three years ago, Shapiro was "too bogged down with management and not out producing," he said. "So the idea came to hook up with a bigger company with a staff to take care of the details."
As Douglas' firm grew, however, Shapiro found he wanted to handle fewer leases. He is now moving himself and the four people who work for him to another office.
"I want to deal with the tightening of the market. I want to skim the cream," he said of his move to an office in Beverly Hills.
Shapiro will not look for properties that would rent for less than $5,000 a month, although his associates will seek some as low as $2,500 a month.
He just rented a house in the Beverly Hills area to a Saudi Arabian prince for $8,500 a month.
"I have one client -- the president of one of the television networks -- who is looking to spend $10,000 a month," he said.
Three years ago, Shapiro rented a 5-year-old home in the West Hollywood area to one of the Rolling Stones for $32,000 a month.
But, he said, "The big-buck leasers now are the people moving from New York or Connecticut who have not sold their homes. They lease until they generate what they need to buy and until they know where they want to live." He leases properties in exclusive areas -- Beverly Hills, Bel-Air, Holmby Hills, Brentwood, Malibu, Encino -- "wherever the big houses are," he said.
Although 75 percent of his business is entertainment-oriented -- with clients such as Richard Harris and George Hamilton -- more business executives are becoming lessees, he noted, adding that a good percentage of his clients are French, Italian and English. "They have been coming here for awhile," he said.
With the tax structure the way it is in England, people can't afford to live there if they make much money, he said, and the French and Italian governments change persuasions so often that people of means are afraid to invest there. However, the French and Italian governments put limits on how much money can be taken out of the countries, another reason for leasing.
Shapiro said the cost of buying as opposed to the cost of renting has contributed to increased leasing. "Today, you buy at retail and lease at wholesale," he said.
"For example, a house that sold 10 years ago for $75,000 to $80,000 and cost $800 a month to carry would now sell for $750,000 to $1.2 million and cost $8,000 a month. You could get about $3,000 a month in rent for that house, so if you bought it 10 years ago and lease it out now, you make some money. But if you buy it now and lease it out, you will lose $5,000 a month.
"People buying now would rent at a negative cash flow."
He also cited the case of a person wanting to buy a $2 million house. The down payment would amount to about $1 million, a sum that then would not earn interest. The rest would have to be financed. To lease the same house would cost $30,000 to move in: $10,000 each for the first and last months' rent and the security deposit.
Those who don't need immediate cash will lease their homes because it changes their tax situation from owner-occupied to income property and they can depreciate furnishings, trade properties and so on," Shapiro said. "In the world of big business, one of the major ingredients is staying power."
In terms of appreciating, he said, "one guy made $100,000 a month [in appreciation] on a house he listed for $1.6 million before [Hustler publisher] Larry Flynt moved in." Instead of selling the house for $1.6 million, the man rented the house to Flynt for $10,000 a month, he said, and then sold it eight months later, when Flynt moved out, for $2.4 million.