Why Rich Celebrities Take Out Huge Loans
The Kardashians have $132 million in combined debt, but why would the wealthy need to that???
Celebrities — they take out mortgages just like us! Hollywood stars like the Kardashians love to show off their lavish lifestyles and seemingly endless wealth, often owning multiple properties, along with all kinds of expensive furnishings and cars to accent them. But recent reporting from The Sun shared that even though the reality TV family are all rich celebrities, they’ve taken out more than $132 million in combined debt for their real estate ventures alone.
Khloé Kardashian, with an estimated net worth of $60 million, is the latest in the famous family to take out a loan. Hers was $7 million loan to finance her $17 million mansion. With all those dollar signs, what’s the deal? You may be surprised to learn however that even rich celebrities and other millionaires take out home loans too.
Just because someone can afford to buy a home in cash, doesn’t mean they need to. Despite their hefty bank accounts and estimated net worth, many of the rich and famous choose to take on debt, especially when it comes to housing. We spoke to Josh Dotoli, principal of DOTOLI Development, a building and construction management group in South Florida that specializes in high-end real estate. He broke down why rich celebs are willing to take on big-dollar debt.
The tax benefits are fantastic
Most homeowners understand the tax benefits that come with real estate. Celebrities are no different, especially knowing their larger investments hold big payoffs in the end. Deductions for mortgage interest and real estate taxes are common, and depending on their property situation (the state it’s located in, for example), there may be credits or points they can deduct as well.
“By deducting mortgage interest payments on their taxes, they can save money in the long run,” Dotoli explains.
Celebrities can also claim a residence as an office or place of work, and installing energy-efficient equipment, like solar panels, can provide further deductions and tax breaks. From the tax standpoint alone, it’s easy to see how taking out a home loan would help a celebrity make more money than they’d spend.
A new “mansion tax” in Los Angeles is rolling back some of those financial advantages, however. Now, sellers of properties “more than $10 million” must pay a “5.5 per cent tax…on top of the city’s current 0.45% transfer tax,” which is no small change, no matter how rich you are. Several celebrities, including Britney Spears, according to the Independent, recently tried to unload their Hollywood properties in a bid to seemingly avoid the increased taxes.
It keeps more money in their investments
Financial diversification is key to building future security, and many celebrities have a significant portion of their wealth tied up in stocks, real estate, and other investments. By taking out a mortgage, says Dotoli, they can keep their cash free to invest in these ventures and potentially earn a higher return than the interest rate they are paying on their home loan.
Dotoli also adds that celebs can use loans to help spread out the cost of a large purchase over time, “making it easier to manage their finances” in general. Taking out a loan for more than half the price she paid could pay off later, since the value is likely to appreciate now that her name is attached to it.
When Kim Kardashian reportedly took out a $48.7 million mortgage to purchase a new home earlier this year, she was likely using the money to take advantage of a depreciating housing market. Even though the loan is large, The SKIMS founder snagged a deal for her latest Malibu home, paying $70.4 million for property formerly owned by Cindy Crawford. It had been on the market originally for $99.5 million, according to The Daily Mail.
Celeb finances are complicated
Managing massive amounts of money and diversified funds is no easy task. If a celebrity isn’t careful with their cash flow, it can be difficult for them to pay for a home outright. Nicolas Cage is the classic example. Back in 2018, his $150 million net worth dwindled down to $25 million and profits from selling off several of his million dollar properties (he owned 15 homes at one point) barely helped keep him out of the red.
Even with a financial planner and team of accountants however, multiple streams of income, like endorsement deals and royalties, can be challenging to track, manage, and access.
Adding on a home loan adds a sense of stability to even the wealthiest of stars, providing a predictable, regular payment that they can plan for.
Real estate is also great collateral. By taking out a mortgage, a high-profile person can leverage their home’s value to secure funding for other ventures or to pay for other expenses. If their project, business, or otherwise goes bust, a bank can seize the property, which may provide enough of a buffer to recoup their losses otherwise.
More properties = more investment security
Just because you’ve made a dozen movies or won a bunch of Grammys doesn’t mean you’ll always be in demand as an entertainer forever. Some celebrities spend more than they earn, and get themselves into trouble financially. Others quit the business for their own reasons and earn less income working in different industries.
A down-and-out celeb has more cash flow options if they own multiple homes purchased with the help of loans. Dotoli notes that lots of high-wealth homeowners rent out their properties, meaning for the right price, you can have a celebrity landlord.
The strategy gives stars “more options when looking for tenants or rental rates, allowing them to tailor their rental strategy to maximize returns” and can help with liquidity issues “since they can choose to rent out one property while leaving the others vacant if necessary.”
Fame might get you a better lending rate
Finally, a celebrity might choose to take out a home loan simply because they can.
“Due to their high incomes, celebrities can also acquire more expensive real estate than the average person,” Dotoli explains. “And they may be able to secure loans with better [interest] rates and terms than regular borrowers can get due to their fame and wealth.”
As the saying goes: money makes money. And it looks like celebs aren’t exactly like us when it comes to home loans. While most of us are trying to pay down or avoid debt, there will always be stars like the Kardashians who make housing debt look cool, showing that the rich and famous especially can benefit from a good home loan.