GRM is one of many factors when analyzing investment options. Other important factors include appreciation and expenses (maintenance, property management, etc). Cap rates are a better indicator than GRM (because they include expenses) but still not comparable across asset classes due to appreciation (HCOL++) and unaccounted overhead (LCOL--).
I own both (LCOL oil region, HCOL tech region). If the numbers were equal anyone would only choose the tech region, because of urbanization and future expectations for those industries. It's the same reason P/E ratios on tech stocks are so much higher than on oil stocks. So cap rates are higher on my LCOL oil region properties (approx 6, vs 4 in the tech region). But that's just market forces. If cap rates were equal why would anybody buy in the oil region? Even if you exclude the market's predictions for the future (oil vs tech), the LCOL has additional overhead (more properties at equal value).
Reducing the conversation to cap rates and ESPECIALLY reducing the conversation to GRM - relabeling GRM to "exploitation ratio" - shows these prestigious authors (MIT & Princeton) aren't interested in answering any real questions. They're too smart to believe GRM indicates exploitation. They therefore must have an agenda.
The most interesting question raised is who funded their study, else why are they spending their time forging this narrative?
Of course they have an agenda, but I think it's much less nefarious than some think -- it's that they think housing insecurity is a major problem in the United States with knock-on effects in education, health, and household wellbeing. Of course it is a complex issue on how to address this — what mixture of regulation and free market solutions best serves people -- and I think the authors land in a position that is more in favor of regulation.
I strongly recommend Desmond's earlier book "Evicted" — houses, while assets for some, are filled with extremely real people with extremely real challenges as a result of income inequality (and, moreso, differences in household wealth). OP is totally correct in noting the importance of returns in drawing investment; OP is reminded that markets forces can yield exploitative conditions (as simple evidence, consider colonialism).
Attributing the situations in Evicted to inequality or differences in household wealth is pretty off base. It's Milwaukee, not San Francisco. Competition from wealthier households has minimal to zero weight as a factor in the price of low-end housing.
Rather, a bunch of people have incomes that are below or precariously close to the carrying and maintenance costs on the cheapest possible shelter. You can tell that this is a poverty problem and not an inequality problem because the situation is worse, not better, if everyone falls down to that level. (Example: we might be legitimately better off in a world where no one is a billionaire, because billionaires have access to outsized political power that can harm other people. Money in politics is an inequality problem. I don't think you can say we're better off in a world where no one can securely afford good housing).
And if we look at places in the world that deal more successfully with such low economic productivity, one of things you'll find is a regulatory bar for "minimum viable shelter" that's more in line with what people living there can afford.
so let me get this straight: We are saying that there are some people who are doing okay in one place, and in another place, they have poverty.
And this is not inequality?
Honestly though, its been far more clear to me living and working in a country with much better income inequality how much the state of some places having rampant poverty and other places in the same country having massive profits. It seems like a cliché to say, but how is it that in the country with the highest average salary in the world there is so much poverty?
It's because there is a much sharper distribution: the wealthy few make far far more in america than they ever do in europe, but everybody else is better off.
The sharpness of this curve is what indecates inequality to me. I'm sure there are all sorts of fancy ways economists have quantified this, along with economic mobility (also shockingly low in the supposed land where anyone can make it)
Sure, there is inequality. You can remove it by destroying all housing wealth and evicting every American every month. But that makes the situation worse, not better. So the inequality is not the interesting or problematic aspect here.
“Of course it is a complex issue on how to address this — what mixture of regulation and free market solutions best serves people -- and I think the authors land in a position that is more in favor of regulation.”
The interventions we already have are largely responsible for the problem in the first place. Governments intervene massively to increase the cost of housing as a backdoor give-away to incumbent homeowners.
Doubling down on intervention will not work because there are diametrically opposed requirements—-politicians want high and monotonically increasing home prices but low and stable rents.
Thank you for addressing my concern with the claim. My immediate thought on the article title is that low income properties come with a host of extra work and risks that "higher class" areas do not have, and the higher margin on paper is the market's reflection of this fact.
I am an aspiring real estate investor and of course have considered low income properties. The forums online are chock full of the same question and the resounding response is "Yes, on paper you can make more money, if $bad_thing doesn't happen -- e.g. $bad_thing { a, b, c, d, e ... z } happened to me or someone I know and they actually lost money over 5yr. Good luck!"
It’s a well known fact that as property value rises the yield on rental income decreases.
A $180k townhouse can rent for $1600/mo but a $1.8m McMansion isn’t going to rent for $16,000/mo.
The economics of this has to do with marginal utility mainly and nothing to do with exploitation.
There’s also the calculation of fixed rental costs which derive a larger portion of the monthly payment the lower the payment gets. If management costs are $100 per month that’s 10% of a $1,000/mo rent.
Finally, there are costs like interviewing, turnover, payment risk, eviction risk, legal costs, damage exceeding security deposit risk, and trying to factor this in can dwarf the underlying carrying cost of the property. Some of these are likely to be inversely correlated with property value.
This exactly! Also upkeep. Replacing a cheap shingle roof vs a metal or Spanish tile roof are night and day in costs.
Plumbing is cheaper in a cheap small house with simple layout vs. Sprawling multi-level house.
Size of grounds (and expected level care) to maintain are different.
It goes on and on, but the gist is that the total net on a cheap house (ie. houses in cheap areas) is going to be more for the same level of investment.
I don't even see how this is unexpected or controversial!
TFA also makes another good point but somehow makes it sound evil;
In low-cost cities, landlord profit rates rise steeply alongside neighborhood poverty. But in expensive cities, the reverse is true. In expensive cities, landlords make money through appreciation and gentrification (which is bad enough for the poor). In lower-cost, more economically hard-hit cities, they make it on the backs of the poor.
If the home value is flat or even falling, then of course the rent will have to be higher to provide the necessary return on capital to bother owning the rental property in the first place!
It’s not like capital is required to be deployed to rental stock in certain proportions. There is whole world of potential investments, and based on their risk and return will have a whole world of dollars competing for them.
Rental units that appreciate fast enough are just held vacant in some markets, so much so that Vancouver had to abundantly tax it to try to stop it.
Rental property appreciation is an absolutely key variable in the profitability calculation. In many markets it totally dominates the equation over the actual rental income figure.
>of course the rent will have to be higher to provide the necessary return on capital
Rent is set by supply and demand. There's no law - economic or otherwise - saying that it is necessary for landlords or anybody else to yield a return on capital.
In reality if the value of a home is falling or flat landlords do often try to raise rents in order to recoup losses and sometimes this leads to even greater losses as tenants leave and it goes unrented. It's a psychological trap caused by a feeling of entitlement to profit.
This "nightmare" has kind of faded in to distant memory as most governments around the world have decided to provide indirect wealth transfers to property owners via QE and low interest rates. In the last 10 years even an idiot could probably have made capital gains in most housing markets thanks to the government assistance lavished on them.
>Rental units that appreciate fast enough are just held vacant in some markets, so much so that Vancouver had to abundantly tax it to try to stop it.
Vancouver is as much about foreign money trying to find a home as it is about capital investments. A Chinese investor is often okay with a depreciation in capital provided they have A) assurances that their capital is not at risk of confiscation by the Chinese state and B) that they have a place to run away to in case some shit goes down in China.
The headache of renting out the apartment along with the instinctive desire to own something "brand new and untouched" means that they often leave these gold bar proxies/emergency safe houses empty.
> it is necessary for landlords or anybody else to yield a return on capital.
In my town there is a proposal afoot called The Missing Middle,to improve availability of medium density / multi family dwellings.
A vocal group is furious. Furor that the economic impact study showed that their current and predicted home values over the next ten years is expected to decrease from an 11% year over year increase, to a 7% year over year increase (still).
The very definition of feeling entitled to profits.
If home prices were perfectly stable, adjusted for inflation, they could still be a good “investment” in the sense that rents would be much higher, for the tax benefits, due to artificially low mortgage rates, or as a vehicle for forced savings.
I do wonder if the average family could afford to own a home, even at 3.5% interest, if it’s value did not appreciate. And I wonder if the rent had to cover the entire investment return for landlords, what would that do to average rental rates?
> Rent is set by supply and demand. There's no law - economic or otherwise - saying that it is necessary for landlords or anybody else to yield a return on capital.
Investment opportunities are also a market with supply and demand. The demand for a high risk investment with low expected return is approximately zero.
If there are more attractive investment opportunities (higher expected return with lower risk) then money will flow there instead.
US treasuries provide a backstop for the minimum expected return on capital. It’s throwing away money to invest in something non-liquid with an expected return lower than, say, 1 month T-bills, which are currently about 2.5% APY.
Of course it’s possible to lose money renting a particular unit, or over a particular timescale, but we’re talking about the long-term macroeconomics, where this is not the case. Hence expected rate of return, which has an average and variance.
In that sense the long-term macroeconomics dictate that yes there is an “economic law” which says rental properties must provide a positive return on capital. Or else there would be no market for rental properties.
> rental properties must provide a positive return on capital
To new investors.
GP's point is that the causality is from rent to sale price. In any year any owner (or agent) more or less tries to charge the rent they can get. If this declines, there's nothing an individual owner can do about it. Badly wanting more doesn't open up any new channels to charge more rent (and may even lead you to play your hand sub-optimally).
But a prospective new owner certainly looks at the return, and won't bother to invest if T-bills would pay as well, and hence the sale price will adjust. (And of course buyers may pay for things other than rent, like a belief that prices will rise.)
I am definitely not saying that it’s impossible to lose money renting. But if you can’t charge enough rent to cover your costs, then eventually you sell and go buy a unit somewhere else that is profitable, or stop renting entirely, or declare bankruptcy, or....
This puts downward pressure on real estate prices in areas which are unprofitable by increasing inventory and decreasing investor demand for rental property.
Market equilibrium will tend to drive prices to the point where units can be profitably rented, and rent will be higher in areas that are depreciating rather than appreciating. This is not a law in the sense of a inviolable law of physics, but I believe it is generally accepted macroeconomic theory.
>This puts downward pressure on real estate prices in areas which are unprofitable by increasing inventory and decreasing investor demand for rental property.
Yep, and when this happens it opens up a new market - prior renters who were priced out of the mortgage market before can now become homeowners.
There's no economic law stating that middlemen have to take a large cut.
There is a sense it this new socio-political climate that we live in, that people should not invest to actually make money, but only use what money they have to make other people's lives easier or better.
I am not saying that this is a terrible goal, but it is wildly unrealistic for people that are not billionaires.
Sadly, however, this ends up in accusations of exploitation, both because of these (imo unreasonable) thoughts, but also because there is a wild lack of economic literacy.
> wildly unrealistic for people that are not billionaires.
Bullshit. Someone with an invested net worth of $10M exclusive of home value can generate an income of $300k using a conservative safe withdrawal rate of 3%. Anyone making $300k as an individual with a paid off home has more than enough money to be comfortable anywhere in the country, with no real need to invest further. $10M net worth is a large, but not absurd amount, but even if my numbers were somehow off by an order of magnitude, we’re far from billionaire territory.
True, but you can cut those numbers by ~50% and still be very comfortable in most, if not all places in the US. According to https://dqydj.com/net-worth-percentile-calculator-united-sta... there are over 3 million households with a net worth over $4.5M. Relatively speaking, that is a small number, but, collectively, the good those people could do if they came together would be immense. Of course, this will never happen.
this is similar to our experience in commercial properties as well, which removes the emotionally charged aspects of "taking advantage of poor people" - landscaping, interior finishings, painting, etc are all large costs in nice retail properties, and non existent in functional light industrial or trades-oriented buildings, yet rents are generally higher for the later.
Taking GP’s example of a $180k townhouse vs. a $1.8M McMansion, will these costs really be significantly more than an order of magnitude more expensive for the latter, and therefore significantly higher as a percentage of property value? My intuition is that the opposite would be true, i.e., that the difference would typically be less than a factor of 10.
> The economics of this has to do with marginal utility mainly and nothing to do with exploitation.
That's vacuously true when you simply ignore the existence of exploitative landlords (aka slum lords) who fail to maintain their units because they know that vulnerable populations lack the resources to fight back.
So, it’s the existence of “slum lords” that causes the higher profit margins?
Interesting. So, if you buy a home in an area with lots of slum lords, the you make more? Seems like there would be a lot of money pouring into slum lord areas. Seems like that would drive housing prices up...and either rents would have to go up or profits would fall.
Almost all the low-income rentals, esp trailers, down here in Mid-South have predatory or apathetic landlords. The rent is already high for what they offer, there's surprise fee's/fines for petty stuff, people dont get their deposit back for stuff that was already there, renters cant afford lawsuits, and we're told how bad evictions are on our credit report.
Almost every bad operator I knew from over a decade ago is still in business with bigger lots than before. So, this is a factor.
I think a lot of this is also landlords make up a smaller percentage of the market as you go up in price and when you get to a 1.8 million dollar home the rent will never justify costs to a landlord. Two facts cause this.
The first is it's always a better deal to live in a property than rent it out.(100% occupancy, no expenses to find tenants, no evictions, etc). Plus there are non-financial reasons people prefer to own. This means all things being equal owner occupiers almost always outbid landlords.
The second is high income individuals are more likely to be able to buy a home than low income individuals.
Basically what happens is in high income neighborhoods, owner occupiers(or developers) bid up the properties until it doesn't make financial sense for landlords to own them anymore. The returns just don't justify it, but the house might still be worth it for owner occupier because they get a better return and want to own a house or lock in neighborhood.
You don’t even have to go that far to make the argument. As a landlord, I would vastly prefer to be renting out 10 homes worth $180k (preferably in different markets) than one worth 10x as much just to diversify a little and avoid capital concentration issues.
Sure, but I’m willing to sacrifice a little return for diversification. Everyone who invests in index funds is, too. As long as the return is still reasonable, 10 units still Beats 1 unit worth 10x as much.
Buying and selling a home has huge transaction fees which destroy this argument. Worse, economy of scale still applies with apartment complexes paying less for the same services than condo owners.
You very much need to find an owner or tenant when you move out. Further, someone needed to pay to find you when you move in. Move every 3-5 years and home ownership is really expensive.
Landlords sell property far less than people move. Remember, you are arguing home ownership as a strictly better deal for everyone “always a better deal” which would include people who move regularly.
> Averaged over all 13 data points in the figure, the average expected length of stay in a single-family home is 11.4 years for first-time buyers, and 14.8 years for buyers who have owned a home before.
I'm not sure how long the average landlord owns a rental property but I would be incredibly surprised if it was longer than this.
I'm confused. If the marginal utility of a mcmansion is not ten times that of the town house, then why does the mcmansion sell for ten times the price? Are you saying it's being used as a store or value or investment or something?
If it is, is there a better term to reflect the value of comfortable shelter and diminishing returns to increasing square footage per occupant? That sort of thing.
This is a really good point, as someone who has seen first hand exactly how fast cheaper houses rent out vs more expensive ones, this point is very succinct.
"Those are whopping margins, and the reason for this discrepancy is that rental markets have very different dynamics in expensive cities like New York and San Francisco than less expensive cities like Milwaukee. In low-cost cities, landlord profit rates rise steeply alongside neighborhood poverty. But in expensive cities, the reverse is true. In expensive cities, landlords make money through appreciation and gentrification (which is bad enough for the poor). In lower-cost, more economically hard-hit cities, they make it on the backs of the poor."
In expensive cities the underlying real estate appreciates and you make your money on that when you sell. The cash flows are mostly to cover maintenance and property tax but in some hot real estate markets rents won't even cover operating costs. In stagnant areas the property value is either stable or decreasing so you make your money on rent.
Low rent, high appreciation properties are attractive to investors who don't need cash flow. If you need cash flows you have to go the other way. This isn't surprising to anyone.
Small scale operation of rental properties may be the most common small business in America, so if one actually believes this thesis then one has an easy option to compete down the differential while feeling good about oneself, with very low capital and expertise requirements.
Prior to doing so, I would advise one to ask landlords what their experience has been in the neighborhoods you want to sink $X00k into.
This is a very important point and a large reason I got out of landlording. To be successful you have to be tough as nails and evict people when they can't pay their rent for totally understandable reasons. And if you're not emotionally prepared to kick out a mother and son because they lost their job because they couldn't make it to work because of a hurricane your returns won't justify the extra work renting takes over just throwing it into mutual fund.(especially at the hourly rates most of us make)
The point is that, according to that narrative, you could be "less evil" than the other landlords. You can afford to "protect your investment" less than they do and it would still be a "good investment" (just not "an exploitative great investment"). You would be offering a better option and that should be enough to feel good about yourself.
You can’t kick people out immediately if they don’t pay their rent. It’s been awhile so I’ve forgotten all of the terms.
In my relatively landlord friendly state, it is a long process.
1. You have to give them a written notice and they have 7 days to pay rent.
2. Then you have to go and file an eviction notice with the court and wait up to another week for them to send a notice to the tenant.
3. Then you have to wait for a court date. The tenant can basically say anything and buy time.
4. If you are successful, you have to wait for few days to schedule a police officer to come out and you have two hours to put all of their stuff on the street. You have to have at least 5 people(?) to move their stuff out.
At any time the tenant can pay the rent and stop the process. If you do everything right, it can take two or three months and you can’t go into the property while they probably tear it up.
If you want to recoup your costs, you have to go back to court to get a judgement and if they don’t pay you have to go back again to try to get their wages garnished.
I suspect a majority of renters actually aren't aware of the legal protections they have nor do they have the legal resources at their disposal (or even state of mind or time, in many cases) to fully take advantage of them.
On the other hand, some probably do and some probably do take full advantage of their legal rights.
Aggregate margins would probably be a lot thinner if every person being evicted took full advantage of every legal right they had though.
Similarly, the landlords who are straight and honest about the process and don't take advantage of this probably take in lower profits than the ones who don't.
I don't understand the point you're trying to make. Is your claim that even a person trying to be a maximally fair landlord of low-income property has to be a "slumlord"? How is this not a meaningless definition of the term?
The point is that people will see you as an exploitative, greedy slumlord (per the article) unless you open your books to them, and even then I'm sure people can find something objectionable, since the definition of 'fair' varies.
>The point is that, according to that narrative, you could be "less evil" than the other landlords. You can afford to "protect your investment" less than they do and it would still be a "good investment" (just not "an exploitative great investment"). You would be offering a better option and that should be enough to feel good about yourself.
Not a landlord, but know a few - all who do it as a side gig or who started out that way. Everyone tries to be nice up to the point that it makes financial sense.
Say I get into the landlording business as a side. I have a simple equation: I need to make X amount of profit to make the time investment worth it. The alternative is I invest that time in my regular career and try to climb the ladder. If I make less than X a year as a landlord, I should just sell the property and focus on my career.
For people with well paying jobs (e.g. engineers, SW, etc - and I don't mean SV salary - just the usual for, say, a Mechanical engineer in any major city), many/most of the higher income neighborhoods are pointless - they simply cannot make that X amount from them. That leaves the lower income neighborhoods.
Now if they do their work well and pick the right places, they may be making 1.2X (you'll always target making higher than X). Then at times they decide to be "less evil" in the way you think. They're willing to lower their profit down to X. But often that's still not "nice enough" in the eyes of many, and you'll still need to evict, etc.
So they face two choices: Be viewed as somewhat evil in other's eyes and keep the property, or sell it and just stick to the career. In both cases, the tenant suffers.
Landlords can't fix this problem. Legislation can shift the market dynamics. If you want change, don't waste time shaming landlords.
I also didn't mention the obvious other factor: Landlords want to spend Y hours a month on this business. Trying to help tenants who are in trouble suddenly increases the number of hours they spend. That automatically increases the threshold X, pushing their existing business into a zone where it isn't worth the time. And after all that, many/most of those tenants will never really recover.
I have a few coworkers who got into the landlord business and quit after some years. Hearing their complaints, some of them were nice.
A local radio show did a really nice piece where they followed a low income semi-homeless family around for a year and learned their history. The family was fine for a number of years, but as it happens when you are low income, you cannot afford to have a safety net. They had some stressful events, and things cascaded, and they became homeless on and off. After a number of years of this, they managed to get really good housing assistance (state/city - don't recall) - I think almost a 2000 square foot house to live in, albeit in a crappy neighborhood. But their lives changed greatly for the better.
While I was listening to the show, I couldn't think of anything landlords could do to help them. The tenants weren't irresponsible people - they just had life events. Government helped them out, but that has its own problems - for every one they properly help out, many can't get help - not enough tax dollars to go round.
Years ago, before I started thinking of business, I would express sentiments like yours to businessmen - that life isn't all about profits, and they could still have a good life with a lower margin. A common response was they're trying to make a living, and not give charity. When I finally analyzed it from the math above, I see the point. If I can make more money by quitting the business and working in industry, then insisting I stay in the business and make less really is charity. It's pretty much always the case that the person who is suggesting a lower profit margin does not run a business and has a relatively secure, decent job. A lot of businesses, even when making high margins, are suffering existential crises. Yes, the money is good now, but 2 years from now I may be out of business. There's less volatility in a regular job.
tldr: No easy solution, and the current situation is mostly a result of ordinary people doing ordinary (and not greedy) things. I can only see legislation helping.
I think you don’t understand “take more profit.” That means they have considered those costs and still they “take more profit” even considering those costs. That’s what profit means.
My parents' retirement fund consists largely of an apartment building, a substantial portion of which is rented by section 8 (ie low income) tenants. The variance in cash flow is pretty dramatic, from both an expenses and a non-payment of rent perspective. Tenant protections are robust enough that, more than once, they've ended up in a situation where it takes four months of missed rent + legal fees before a non-paying tenant could be evicted, which is a cool $10k chopped right off of their income. To say nothing of the occasional expenses you wouldn't see in higher-income properties: the same tenant protections mean that units can become almost hazardously filthy before the landlord can intervene, and when they leave, they obviously don't tend to clean up.
Higher rents effectively function as an insurance policy for these expenses, and your insurance policy is obviously going to overcover rather than undercover. Higher risk (ie variance) investments mean higher returns, for the simple fact that the value of a high-variance investment will be lower than that of a low-variance one with a given expected return, for obvious reasons.
The only reason to be ignoring variance If your goal is shitty advocacy instead of intellectual honesty, which, as others have pointed out, is obviously the case with the authors of this study.
Ah the variance is a good point. In addition to the these higher average costs (unpaid rent, extensive repairs). Especially since the average landlord is small, an cannot average over hundreds of properties.
Having read "Evicted" - the book positively mentioned in the article - I came to understand how difficult it was to be a landlord in LCOL areas. The effort required to evict or collect on non-paying tenants made it a full time job with significant costs associated (psychological and financial).
The article did not make mention of this in it's accounting of "profit."
Actually... According to the research source landlords do charge more due to increased risk: "Because landlords operating in poor communities face more risks, they hedge their position by raising rents on all tenants."
>Because landlords operating in poor communities face more risks
>Since losses are rare, landlords typically realize the surplus risk charge as higher profits
The author of this study appears to be confused as to what risk is.
Behind a paywall unfortunately, so it's difficult to tell if he's just made two contradictory assumptions in his abstract or if there's something deeper going on.
I suspect slumlords actually yield higher profits because of basic supply and demand - slumlording is a market, after all, that most would find it distasteful to get in to (who wants to evict somebody who lost their job at walmart on to the streets?).
It's sort of like the "low salaries for teachers/charity workers" effect in reverse - there are certain kinds of work (or investments) that people can be proud of and certain kinds that they aren't.
"Risk" sounds more laudable than "there's a restricted supply of investors who are prepared to be assholes to protect their investments, though.
This paper might argue that the risk/reward ratio is lower than other similarly risky investments, which would substantiate the article's argument that landlords are greedy and generally bad. But good point, the abstraction of risk is something like a veil used to make landlords and investors sleep at night.
I read this article with an eye to that as well, but it does not appear such damage was taken into account.
When Wilmers and Desmond control for regular expenses in the form of mortgage payments, property taxes, property insurance, utilities, and property management fees
A new roof, flooding from a busted pipe can be considerable expense even including insurance help. Factor in chemical residue from cooking meth, destroyed fixtures like porcelain toilets and sinks, it can be very expensive to rent to unconscientious people (nothing to do with income!).
I think the poster is referring to the PITA factor. The article's author chose to come at this from the "exploiting the poor" angle. There's a case to be made there, and there's also a case to be made for how people are less willing to take on in these kinds of investments. That will no doubt effect the profit margin that those who are willing are able to take.
But there is an overall expected value premium to be paid on low-risk purchases (or to be gained on high-risk purchases)
On average, you will lose money by purchasing insurance. (That's how insurance derive a profit.) However, people are generally happy to do that, because they value the certainty of it, even if overall it's the arthemtically subpar choice.
I expect that you will make profit from the stock market than a CD, even after averaging bear and bull years.
I'd expect that low-income rental are riskier investments, and that landlords are more likely to lose money, but overall the expected value of return is higher. That's just how markets work.
The efficient market hypothesis posits that you can only make higher returns by increasing your risk. So it would make sense that landlords make higher returns from poor renters than rich renters. They have to price in the substantial risk (volatility of returns).
We are talking about the average profit and risk without knowing the difference in default or move out, vacancy etc. I would think people with housing options would be a higher risk than people without housing options...ie they can afford to just leave if they want to. A person with limited housing options will go without things being fixed right away and can't necessarily afford to defend themselves in court or to just move out.
I’d bet this has to do with vouchers. If you qualify, a city will give you a predetermined amount for rent assistance and then you cover the other 20-30%.
Landlords know this. The housing assistance organization guarantees the payment.
This causes section 8 landlords to inflate their rents. If a regular person had to pay for the apartment, there is no way they would pay these higher prices for these dumps.
However, by subsidizing a majority of the rent, the low income people will live there. The buildings are cheap to buy, are not maintained, boom, lots of profit for the landlords.
> However, by subsidizing a majority of the rent, the low income people will live there. The buildings are cheap to buy, are not maintained, boom, lots of profit for the landlords.
Also the tax laws of CA in particular actively discourage you from improving properties. Rent growth is effectively capped whereas property tax growth (a percentage of property price) is only capped as long as you do not perform major renovations.
That combination incentivizes renters to remain fixed ("I'll lose my years of rent control!") and property owners to do the bare minimum ("Why should I improve the property if it'll cost me more taxes and I can't charge more?").
Regarding the Bay Area (as I’m not familiar with other jurisdictions’ rent control regimes), capital improvements do allow a rent increase beyond what would normally be the case, but I’m not sure if it justifies the investment. Just an FYI.
Any landlord can decide at any time that they will accept Section-8 for a given apartment. If they do accept and a tenant that receives Section-8 assistance is interested in moving into the property, the property must pass a standardized HUD inspection before payment is made from HUD to the landlord.
This article is so silly and the answers so obvious.
It's not some exploitative factors driving a difference in rent. It's other factors driving a difference in price. Every landlord knows you can make more money in low income areas, and especially with section 8. But they still don't buy there because those areas are rougher, many landlords or middle to upper class and don't necessarily understand those neighborhoods, and you have to deal with more evictions.
And the biggest difference is that low income people can't afford/don't have the credit/down payment to buy. So there is a lot less competition for ownership there than a high income neighborhood.
A guy I used to work with once told me that instead of buying a $100k rental house, you should buy three $30k rental houses. We're in a LCOL area, and him and his wife easily made over $200k in salary alone, so why he spent his free time managing all those rental houses is beyond me. He had over 20, and managed them all himself.
That is highly dependent on the quality of renter and quality of your property. One of the key values of having multiple rental is the economies of scale, for example:
* Property advertisement - Preparing material and advertising for 1 property can be more expensive than multiple properties
* Material for fixes - Purchasing material for 1 property can be more expensive than multiple properties
* Vacancy - The cost of vacancy for a single rental is higher than having multiple rentals. The other rentals may off-set the cost of the vacancy lot for a period, without requiring external cash flow.
* Experience - Multiple properties will give you the opportunity to experience different issues and allow you to take proactive steps to diminish certain risks.
That depends on the local market and what you can charge for rent, and what your tolerance for pain is.
When I first started buying houses to rent, I had a rental unit in a LCOL area, and I spent a lot of time dealing with tenants and rent issues. It was a constant problem, so I sold the house. I might have broken even on the venture.
I ended up with a handful of starter homes near nice schools, and had a much higher class of renter as a result. Far less work, vastly fewer headaches.
I also had a FT job, so didn't have the time or energy to chase down rent checks.
I have 29 myself. I self-manage my properties and work a full-time remote job.
A few weekly calls during the workday. A few evenings or weekend daytime meetings with prospective tenants or maintenance staff each month. So, ~$1 to 1.5k per hour of work. Not a bad paying side gig.
You can pay property managers to deal with the day-to-day management of the properties, vetting new tenants, collecting the rent, etc. You can still come out ahead. I know a few people who do this and they don't spend much time on their rental properties.
The price / rent multiple is not analogous to a P/E ratio. Rather, it is similar to an Enterprise / revenue multiple. The distinction is important because, as an investor in apartment properties, I can tell you that the Net operating income margin (roughly analogous to an EBITDA margin for C-Corps is much, much higher in San Francisco than in other places. For example, the NOI margin in San Francisco is usually about 75%. In Merced California, it is about 30%. Once you subtract Capital Expenditures, the 30% is cut almost in half. Basically what I’m saying is that the net cash flow, after Capital Expenditures, in many “C” and below locations is basically zero. Thus, the price has to go very low to entice investors to buy there. This is not irrational behavior.
2007 doesn't have to happen again. It's possible to both make houses affordable for people with lower income and not give irresponsible amounts of debt to people who cannot afford it. It just requires smaller, more affordable houses to be built. I don't know why, exactly, but as a general trend the sizes of houses have just been going [up, up, up](https://www.google.com/url?q=https://www.census.gov/const/C2...) (PDF)! Consider that the [mean, median] square footages of new houses built in the US had gone from [1660, 1525] in 1973 to [2392, 2169] by 2010. Maybe the reason people can't afford to buy houses is that no one wants to build affordable houses.
This is such a ridiculous article. Of course landlords are going to charge a premium in poor neighborhoods, because their risk is higher. They need to match the market's risk adjusted returns, so they need a higher return to balance out the higher risk (volatility) and match the market's Sharpe ratio. This isn't "exploitation" this is an efficient market that is working as it should.
Moreover, there is a reason landlords don't fix up properties: taxes and fines. If you open up the wall, you might discover that your pipes aren't up to code, and the state will make you replace them at great cost. Also, the higher the value of your rental, the more taxes you will pay. So landlords are literally dis-incentivized to invest in their neighborhoods.
Not that citylab would be happy if they did, because then it would be the evil boogeyman gentrification. You know we live in a screwed up time when people actually protest making a neighborhood better (see: Amazon and NYC).
> ... risk is higher. They need to match the market's risk adjusted returns, so they need a higher return to balance out the higher risk.
Risk of what? The greater fall in property values in the 2008 crash proved higher capital risk, and low-income tenants may be more likely to damage the building -- but the two kinds of risk lie on opposite ends of the scales of time and space.
> ... the higher the value of your rental, the more taxes you will pay.
Not so for most in California, where Prop. 13 limits property tax increases to 2%/year.
Risk means a higher standard deviation of returns, also known as volatility.
But you’re right to bring up the exposure landlords have to the real estate market. It’s unclear to me whether low valued properties or high values ones have more beta to the market. If I had to guess, I would venture that lower valued properties are actually less correlated with the market.
If risk is higher, wouldn't expenses also be higher? And wouldn't the higher expenses due to the risk offset the higher rent charged due to risk, so there wouldn't necessarily be much effect on profit?
But the article doesn't seem to have a measure of profit. They look at rent and purchase price, and later throw in something for maintenance.
If they actually had the books, and could count how many employees were needed to deal with stuff, and how often the rent was unpaid, etc, then they would be justified in talking about profit.
Higher expenses and the risk premium are orthogonal to each other. The higher the standard deviation of returns, the more premium will be charged to offset the uncertainty.
If you read Evicted you'll find out what it's like to be a landlord in these places.
I considered it a bit because of the profit margins but it's a nightmare of a thing to do. Low income people have a disproportionate number of behaviours non-conducive to being rented to. They'll do things like put food down the sink, block it, then wash food in the tub and block that and so on. They'll smoke in the place and damage it. They'll stop paying rent because they wanted to treat themselves. Multiply that with the fact that you have to deal with a large number of them because your margins may look good but your absolute return is low and you will have trouble every month.
No moral judgment here. Just that it's not free to compete here. I, for one, do not have the stomach to evict a single mother with four children every month from my rental property that she's wrecked.
Paying one fourth of apartment cost in rent yearly makes no sense. There should be something more in play here the analysis is not going deep enough or simply incorrect
It seems they literally define "exploitation rate" as rent over purchase price. Then later they add in some estimate of costs of repairs.
But it would be much more interesting to actually see the books. I'd bet a lot of money that the tenants in expensive neighbourhoods are much more likely to pay on time, every month, and to leave when the contract is up. And in addition, the labor in dealing with each tenant is paid for out of $2000 not $200 rent, so more is left for the owner.
In other news, payday loans in sketchy parts of town come with higher interest rates than 20%-down home loans in good neighbourhoods. Does anyone think this is because payday loansharks are uniquely greedy human beings? They are just operating a very different business with different costs.
I don't doubt, however, that being really thick-skinned is a necessary trait for surviving in that business. Soft-hearted types also don't last long as drug dealers, surprisingly.
If you think the payday loan industry is not -immensely- profitable, you're wrong. It's an exceptional thing to get into, either running or investing, if you have lower ethical boundaries.
Well, are you really claiming that the cause of high interest rates on payday loans is poor morals? Unusual greed? Which mysteriously descends on all who enter the trade, every time?
That's the whole reason I used the example of loansharks, as I thought everyone understood by now that even if the angels ran that trade, such loans would be very expensive. But see below for other arguments against this bad-morals argument.
I've never seen numbers, but given the abundance of competing outfits, I'd expect that it looks roughly like any other business, once you account for all the costs. It could be a little more profitable if distaste drives some potential competitors to stay out. It also seems like a great front business for laundering, but I wouldn't guess that's a large proportion.
I wonder why you still managed to use the term "loansharks" when trying to defend their quite obviously predatory business practices.
"Higher interest rates" doesn't even begin to define the exploitation of these people who are desperate for cash. The rates for these loans are on the order of 400%, which makes the comparison laughable.
It's almost like saying "the US national debt is $22 trillion, which is more than the average American makes in a year."
My point is that a theory that says their business practices follow from moral failings doesn't explain anything about the world. Some businesses just mysteriously seem to always be run by bad people.
Conversely, assuming that every businessman is about equally greedy forces you to look elsewhere. Their loans are almost by definition high-risk, that's why they are expensive. Low-risk borrowers are a different market.
The fact that we can learn something by thinking about their business does not mean anything like "defending". It's just that sometimes the lessons are clearest with extreme examples. We can learn interesting things from studying drug gangs, pirates, kidnapping schemes, too.
We can also ask questions about whether the world would be made better by prohibiting loansharking, and I actually don't know enough to have an opinion. But it's clear to many that prohibiting drug-dealing has had some nasty side-effects.
The author has one data point and he doesn't even explain: Does this profit include risk, legal expenses, other expenses? I mean, if the average for these three classes is different this suggests one of two things:
1. The free market has failed for some reason; and there exists an arbitrage opportunity. Buy in poor neighborhoods and sell in middle-class.
2. There exists some fundamental reason why investors despise poor neighborhoods: Maybe things are volatile there? Maybe the risk of destroying the property is higher? Maybe it require more expertise?
Can confirm, I work for a company that helps landlords finance the purchase and repair of rental properties.
In certain very LCOL urban areas around NYC and Philadelphia, we have individuals with tens of millions of dollars of property spread out among ~$150k buildings.
They inspect their portfolio with armed bodyguards, and they very often own other businesses in the same neighborhoods that throw off money in small but regular amounts: laundromats, bars, clubs.
An an interesting aside, these individuals are almost all involved with close-knit religious groups to which they contribute great deals of capital.
I have no idea about Philadelphia or the area "around NYC" that kjbfojbejib was talking about. But for NYC itself, here's the official landlord watchlist (ranked by number of violations and complaints) that was compiled by the public advocate's office: https://landlordwatchlist.com/landlords
Good resource for finding where not to rent, if you have the option.
I don't live there, but I've been to the places we're talking about. They don't have grocery stores, and the few stores that sell food cost a lot more than the stores I'm used to, for food that isn't so nutritious. The people there don't make exorbitant amounts of money, but they'd be better off if they had better access to affordable products. They are poor because the areas they inhabit have high costs of living.
They are poor because they don't make enough money. And they can't arbitrarily move, because they can't find jobs just like that, or afford another place, just like that.
They're not some middle class people who because poor because their only store is a Dean and Deluca.
I never suggested that they move; that would have been presumptuous. It's still a fact that their income would go farther if they had access to the wide range of shopping options to which many other Americans have access. To which I and my neighbors have access, and many of them have very low incomes. Nobody here would ever consider any zip code in NYC to have a low cost of living.
I guess I'll just be confused as to why we're so eager ITT to follow the lead of someone who admits to working for these landlords and continue to blur the distinction between "this area has a low cost of living" and "poor people live here". The words we use when discussing such issues matter, and this Overton window should go no further in this direction.
>An an interesting aside, these individuals are almost all involved with close-knit religious groups to which they contribute great deals of capital.
Before an edit, the above comment referred to "close-knit religious groups" surrounded by triple parentheses[0]. These are used by white supremacist and anti-Semitic posters to denote or refer to Jews. They are not, to my knowledge, an idiom commonly used in any other context.
If you're going to go there, "kjbfojbejib," remember that editing your post doesn't also edit people's memories. I assume you were just trying to be funny but that kind of humor is not welcome here. Nor is that kind of prejudice, if you were being sincere.
>Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize. Assume good faith.
(I'm a bit torn about pointing this out in this case, but I've seen way too many people falsely accused of bigotry because people chose to interpret comments in a way different from intended. Still, this is clearly a throwaway account).
I wrote that comment using a new account to avoid being outed at work. To be very clear: your accusation is false, there was never any special parentheses, and I invite an admin to confirm that if they can.
>To be very clear: your accusation is false, there was never any special parentheses, and I invite an admin to confirm that if they can.
There were, I saw them, other people saw them, they were copied into eli_gottlieb's comment. His comment is flagged now, but it's still visible to some users. Whether an admin can or does confirm it is irrelevant.
You made a green account, and you screwed up with some 4chan nonsense. Just reroll and don't do it again.
I'm sure you wrote this in good faith, but there weren't parens in the original comment. They only appeared in https://news.ycombinator.com/item?id=19470714. The odd thing is that eli_gottlieb was making an unrelated point at the time (a strange and almost endearingly paranoid one, but that's another story).
This looks like a case of the internet snark trope where people use quotation marks to put nasty words in others' mouths, leading to misunderstanding and unfairness. That's why we've long asked users not to do that: https://hn.algolia.com/?sort=byDate&dateRange=all&type=comme.... It has never been in the official guidelines but it's been a bit of case law on this site for a long time.
Alright, I checked the logs. There were never any parentheses in that comment. kjbfojbejib made two edits, but only to add to the text. Both additions were to the part about other businesses in the same neighborhoods, i.e. they were not part of the disputed text.
If you had just left the issue alone then everyone would assume his comment was referring to malevolent Christians. As a Jew I find it disappointing that you have chosen to echo the antisemitism he was smart enough to retract from the discourse. These ways of thinking need to be censored and entirely destroyed. Delete your comment immediately.
Now wait just a moment - isn't pointing out things are "too white" exactly analogous? Yet that's somehow acceptable to say at almost any major media outlet [1]. You yourself implied his comment would have been okay if directed at Christians. Why should white people be the only group that's called out for over-representation?
Agreed. It's not right to single out any religion, particularly insomuch as some flavor of this insularity can be found in every stream of religious thought that has ever existed
Generally, I have low tolerance for any group that segregates most of their existence from the greater whole - but then demands accommodation from the greater whole. Most Jews, Christians and Muslims do not - but some do - those communities who refuse to participate in broader society are in my mind inherently forfeiting their place at the table - simply put, you cannot expect broader society to accommodate your particular needs if you don't participate in it.
Calling out anti-semites or their methods is not echoing anti-semitism. I've edited the actual parens out but I'm not deleting the comment. People are free to flag it if they disagree.
I agree with you. Calling out anti-semitic speech as "that's not OK here, even if you first flash it overtly and then make it slightly less obvious" seems to me to be the exact opposite of that accusation.
Funny how we have two fresh accounts posting in this discussion, one of which insists that the study authors must have an "agenda", and another of which gives an "aside" that exploitative slumlords "are almost all involved with (((close-knit religious groups)))".
Sounds like the ruling class is a bit agitated that we're noticing what's going on, and wants to misdirect our attention.
On HN, please don't use quotation marks to make it look like you're quoting someone when you're not. In this case it led to a bad misunderstanding elsewhere in the thread (https://news.ycombinator.com/item?id=19470818).
More seriously, it looks like you've been using HN primarily for political and ideological battle. A certain amount of politics and ideology is unavoidable with many topics that appear on HN, but when this crosses into being the primary reason why someone uses the site, that user has left the realm of intellectual curiosity and shifted to the battlefield—exactly what we're trying to avoid HN turning into. For that reason, we ban accounts when they cross that line. More explanation on that if anyone wants it: https://hn.algolia.com/?sort=byDate&dateRange=all&type=comme....
I mean, one or both of those accounts could be your own alts, as far as anyone knows.
I don't think the "ruling class" are so concerned about people "noticing what's going on" that they sent shills to create a couple of green accounts to post on Hacker News. That the rich exploit the poor is not exactly a shocking revelation to anyone.
Certainly, you're not helping keep things focused by implying shills and saboteurs are at work here.
the "ruling class" would probably be not really interested in dealing with housing at all and would be more worried about people pointing out the lack of diversity at top C-level positions at major influential corporations.
This is a dumb question. But, where did the data come from used to draw up the conclusion that landlords make more profit on average from poorer neighborhoods?
My family was a small-time landlord while I was growing up. We had more fires (plural) and totally thrashed rentals in 2 low-end houses (one SFR, one duplex) than I can remember. The SFR we had to totally rebuild twice over the course of perhaps 15 years. One tenant busted out every single piece of drywall because he was mad about being evicted after not paying rent for 6+ months. Another solved the problem of "please pickup any dog waste in the yard" with the genius plan of not letting the dog outside. Ever. The subfloors were soaked when she moved out. It wasn't just carpets that needed replacing, but all the way down to the joists and all the electric and HVAC outlets from rust.
Non-payment is also a real thing. The time commitment is higher on the lower-end properties (chasing payments, higher turnover, more damage on turnover [often well beyond security deposit, especially since the tenants know they can skip the last month or two's rent because evictions take longer than that and maybe justify themselves "since the landlord already has the security deposit and we need to save up for the next place's deposits anyway...")
People who think there are excessive profits in low-end rentals should totally disrupt that market by buying up all these cheap and easy-money properties and renting them out to undercut the market. Be ready to lose your ass financially, though.
I'm not sure why you are being downvoted, because this is 100% the case. EMH posits that all risk-adjusted returns move toward the market Sharpe ratio. You can then modify the returns/vol by buying or selling at the risk-free rate.
So when renting to a poor person, you are going to demand the market Sharpe ratio by making them pay more in order to keep your risk adjusted returns in line the efficient frontier point.
Interesting article but the Marxist tangent the author went on was unusual.
One wonders how much of this correlation is affected by more people renting properties in low income neighbourhoods combined with the fact that its more economical for landlords to rent low-mid value properties.
I'd say that's the standard actually. Landlords steal whatever they like, including deposits, because with most of these situations the tenants are too busy finding the means to continue existing to have any to spare for litigation.
I am not surprised by how many HN commenters seem to still have their rents sorted by their parents. Landlords are predominately thugs.
I don’t agree with this. But, I bet you anything that most HN readers do have relatives they could call on if they found themselves without a job and not able to pay rent.
If profits resulted solely from land ownership, every landlord would realize the same ROI.
Secondly, if slum landlords made a better ROI, greedy capitalist bastards would invest in nothing but slums (as long as the slum premium persisted).
If there is some extra profit involved it may only be the result of government action - either shitty legislation that bastardizes free market competition or corruption (either internal, or bribes).
In California, you must have a special license to do almost any business, but be a landlord. You need a license to do people nail's (nail technician). And in some cases, there a special taxes applied to that industry (like legal cannabis).
Landlording needs this (not nail techs). Keep up your certification, provide quality living conditions, and pay extra tax to offset the housing problem.
Furthermore, we should have non-profit, non-governmental institutions running low-income housing, not slum lords.
Ctrl+F "exploit", appears 24 times in this 13-paragraph article.
> "Defining exploitation as being overcharged relative to the market value of a property"
The ratio they've based their narrative on is called GRM (gross rent multiplier): https://en.m.wikipedia.org/wiki/Gross_Rent_Multiplier
GRM is one of many factors when analyzing investment options. Other important factors include appreciation and expenses (maintenance, property management, etc). Cap rates are a better indicator than GRM (because they include expenses) but still not comparable across asset classes due to appreciation (HCOL++) and unaccounted overhead (LCOL--).
I own both (LCOL oil region, HCOL tech region). If the numbers were equal anyone would only choose the tech region, because of urbanization and future expectations for those industries. It's the same reason P/E ratios on tech stocks are so much higher than on oil stocks. So cap rates are higher on my LCOL oil region properties (approx 6, vs 4 in the tech region). But that's just market forces. If cap rates were equal why would anybody buy in the oil region? Even if you exclude the market's predictions for the future (oil vs tech), the LCOL has additional overhead (more properties at equal value).
Reducing the conversation to cap rates and ESPECIALLY reducing the conversation to GRM - relabeling GRM to "exploitation ratio" - shows these prestigious authors (MIT & Princeton) aren't interested in answering any real questions. They're too smart to believe GRM indicates exploitation. They therefore must have an agenda.
The most interesting question raised is who funded their study, else why are they spending their time forging this narrative?
Of course they have an agenda, but I think it's much less nefarious than some think -- it's that they think housing insecurity is a major problem in the United States with knock-on effects in education, health, and household wellbeing. Of course it is a complex issue on how to address this — what mixture of regulation and free market solutions best serves people -- and I think the authors land in a position that is more in favor of regulation.
I strongly recommend Desmond's earlier book "Evicted" — houses, while assets for some, are filled with extremely real people with extremely real challenges as a result of income inequality (and, moreso, differences in household wealth). OP is totally correct in noting the importance of returns in drawing investment; OP is reminded that markets forces can yield exploitative conditions (as simple evidence, consider colonialism).
Attributing the situations in Evicted to inequality or differences in household wealth is pretty off base. It's Milwaukee, not San Francisco. Competition from wealthier households has minimal to zero weight as a factor in the price of low-end housing.
Rather, a bunch of people have incomes that are below or precariously close to the carrying and maintenance costs on the cheapest possible shelter. You can tell that this is a poverty problem and not an inequality problem because the situation is worse, not better, if everyone falls down to that level. (Example: we might be legitimately better off in a world where no one is a billionaire, because billionaires have access to outsized political power that can harm other people. Money in politics is an inequality problem. I don't think you can say we're better off in a world where no one can securely afford good housing).
And if we look at places in the world that deal more successfully with such low economic productivity, one of things you'll find is a regulatory bar for "minimum viable shelter" that's more in line with what people living there can afford.
so let me get this straight: We are saying that there are some people who are doing okay in one place, and in another place, they have poverty.
And this is not inequality?
Honestly though, its been far more clear to me living and working in a country with much better income inequality how much the state of some places having rampant poverty and other places in the same country having massive profits. It seems like a cliché to say, but how is it that in the country with the highest average salary in the world there is so much poverty?
It's because there is a much sharper distribution: the wealthy few make far far more in america than they ever do in europe, but everybody else is better off.
The sharpness of this curve is what indecates inequality to me. I'm sure there are all sorts of fancy ways economists have quantified this, along with economic mobility (also shockingly low in the supposed land where anyone can make it)
Sure, there is inequality. You can remove it by destroying all housing wealth and evicting every American every month. But that makes the situation worse, not better. So the inequality is not the interesting or problematic aspect here.
“Of course it is a complex issue on how to address this — what mixture of regulation and free market solutions best serves people -- and I think the authors land in a position that is more in favor of regulation.”
The interventions we already have are largely responsible for the problem in the first place. Governments intervene massively to increase the cost of housing as a backdoor give-away to incumbent homeowners.
Doubling down on intervention will not work because there are diametrically opposed requirements—-politicians want high and monotonically increasing home prices but low and stable rents.
Thank you for addressing my concern with the claim. My immediate thought on the article title is that low income properties come with a host of extra work and risks that "higher class" areas do not have, and the higher margin on paper is the market's reflection of this fact.
I am an aspiring real estate investor and of course have considered low income properties. The forums online are chock full of the same question and the resounding response is "Yes, on paper you can make more money, if $bad_thing doesn't happen -- e.g. $bad_thing { a, b, c, d, e ... z } happened to me or someone I know and they actually lost money over 5yr. Good luck!"
I’m about to start investing. May I please pick your brain a little bit?
It’s a well known fact that as property value rises the yield on rental income decreases.
A $180k townhouse can rent for $1600/mo but a $1.8m McMansion isn’t going to rent for $16,000/mo.
The economics of this has to do with marginal utility mainly and nothing to do with exploitation.
There’s also the calculation of fixed rental costs which derive a larger portion of the monthly payment the lower the payment gets. If management costs are $100 per month that’s 10% of a $1,000/mo rent.
Finally, there are costs like interviewing, turnover, payment risk, eviction risk, legal costs, damage exceeding security deposit risk, and trying to factor this in can dwarf the underlying carrying cost of the property. Some of these are likely to be inversely correlated with property value.
This exactly! Also upkeep. Replacing a cheap shingle roof vs a metal or Spanish tile roof are night and day in costs.
Plumbing is cheaper in a cheap small house with simple layout vs. Sprawling multi-level house.
Size of grounds (and expected level care) to maintain are different.
It goes on and on, but the gist is that the total net on a cheap house (ie. houses in cheap areas) is going to be more for the same level of investment.
I don't even see how this is unexpected or controversial!
TFA also makes another good point but somehow makes it sound evil;
In low-cost cities, landlord profit rates rise steeply alongside neighborhood poverty. But in expensive cities, the reverse is true. In expensive cities, landlords make money through appreciation and gentrification (which is bad enough for the poor). In lower-cost, more economically hard-hit cities, they make it on the backs of the poor.
If the home value is flat or even falling, then of course the rent will have to be higher to provide the necessary return on capital to bother owning the rental property in the first place!
It’s not like capital is required to be deployed to rental stock in certain proportions. There is whole world of potential investments, and based on their risk and return will have a whole world of dollars competing for them.
Rental units that appreciate fast enough are just held vacant in some markets, so much so that Vancouver had to abundantly tax it to try to stop it.
Rental property appreciation is an absolutely key variable in the profitability calculation. In many markets it totally dominates the equation over the actual rental income figure.
>of course the rent will have to be higher to provide the necessary return on capital
Rent is set by supply and demand. There's no law - economic or otherwise - saying that it is necessary for landlords or anybody else to yield a return on capital.
In reality if the value of a home is falling or flat landlords do often try to raise rents in order to recoup losses and sometimes this leads to even greater losses as tenants leave and it goes unrented. It's a psychological trap caused by a feeling of entitlement to profit.
This "nightmare" has kind of faded in to distant memory as most governments around the world have decided to provide indirect wealth transfers to property owners via QE and low interest rates. In the last 10 years even an idiot could probably have made capital gains in most housing markets thanks to the government assistance lavished on them.
>Rental units that appreciate fast enough are just held vacant in some markets, so much so that Vancouver had to abundantly tax it to try to stop it.
Vancouver is as much about foreign money trying to find a home as it is about capital investments. A Chinese investor is often okay with a depreciation in capital provided they have A) assurances that their capital is not at risk of confiscation by the Chinese state and B) that they have a place to run away to in case some shit goes down in China.
The headache of renting out the apartment along with the instinctive desire to own something "brand new and untouched" means that they often leave these gold bar proxies/emergency safe houses empty.
> it is necessary for landlords or anybody else to yield a return on capital.
In my town there is a proposal afoot called The Missing Middle,to improve availability of medium density / multi family dwellings.
A vocal group is furious. Furor that the economic impact study showed that their current and predicted home values over the next ten years is expected to decrease from an 11% year over year increase, to a 7% year over year increase (still).
The very definition of feeling entitled to profits.
This also highlights a simple, mathematically inevitable truth: Homes cannot be both affordable and a good investment at the same time.
If home prices were perfectly stable, adjusted for inflation, they could still be a good “investment” in the sense that rents would be much higher, for the tax benefits, due to artificially low mortgage rates, or as a vehicle for forced savings.
I do wonder if the average family could afford to own a home, even at 3.5% interest, if it’s value did not appreciate. And I wonder if the rent had to cover the entire investment return for landlords, what would that do to average rental rates?
> Rent is set by supply and demand. There's no law - economic or otherwise - saying that it is necessary for landlords or anybody else to yield a return on capital.
Investment opportunities are also a market with supply and demand. The demand for a high risk investment with low expected return is approximately zero.
If there are more attractive investment opportunities (higher expected return with lower risk) then money will flow there instead.
US treasuries provide a backstop for the minimum expected return on capital. It’s throwing away money to invest in something non-liquid with an expected return lower than, say, 1 month T-bills, which are currently about 2.5% APY.
Of course it’s possible to lose money renting a particular unit, or over a particular timescale, but we’re talking about the long-term macroeconomics, where this is not the case. Hence expected rate of return, which has an average and variance.
In that sense the long-term macroeconomics dictate that yes there is an “economic law” which says rental properties must provide a positive return on capital. Or else there would be no market for rental properties.
> rental properties must provide a positive return on capital
To new investors.
GP's point is that the causality is from rent to sale price. In any year any owner (or agent) more or less tries to charge the rent they can get. If this declines, there's nothing an individual owner can do about it. Badly wanting more doesn't open up any new channels to charge more rent (and may even lead you to play your hand sub-optimally).
But a prospective new owner certainly looks at the return, and won't bother to invest if T-bills would pay as well, and hence the sale price will adjust. (And of course buyers may pay for things other than rent, like a belief that prices will rise.)
I am definitely not saying that it’s impossible to lose money renting. But if you can’t charge enough rent to cover your costs, then eventually you sell and go buy a unit somewhere else that is profitable, or stop renting entirely, or declare bankruptcy, or....
This puts downward pressure on real estate prices in areas which are unprofitable by increasing inventory and decreasing investor demand for rental property.
Market equilibrium will tend to drive prices to the point where units can be profitably rented, and rent will be higher in areas that are depreciating rather than appreciating. This is not a law in the sense of a inviolable law of physics, but I believe it is generally accepted macroeconomic theory.
>This puts downward pressure on real estate prices in areas which are unprofitable by increasing inventory and decreasing investor demand for rental property.
Yep, and when this happens it opens up a new market - prior renters who were priced out of the mortgage market before can now become homeowners.
There's no economic law stating that middlemen have to take a large cut.
Yes absolutely. My objection is only to people claiming the opposite causality; apologies if I misread you earlier.
There is a sense it this new socio-political climate that we live in, that people should not invest to actually make money, but only use what money they have to make other people's lives easier or better.
I am not saying that this is a terrible goal, but it is wildly unrealistic for people that are not billionaires.
Sadly, however, this ends up in accusations of exploitation, both because of these (imo unreasonable) thoughts, but also because there is a wild lack of economic literacy.
> wildly unrealistic for people that are not billionaires.
Bullshit. Someone with an invested net worth of $10M exclusive of home value can generate an income of $300k using a conservative safe withdrawal rate of 3%. Anyone making $300k as an individual with a paid off home has more than enough money to be comfortable anywhere in the country, with no real need to invest further. $10M net worth is a large, but not absurd amount, but even if my numbers were somehow off by an order of magnitude, we’re far from billionaire territory.
> wildly unrealistic for people that are not billionaires.
>> Bullshit.
Ok, "wildly unrealistic for people that are not double-digit millionaires!".
My intent was that it was a small amount of people in that group.
True, but you can cut those numbers by ~50% and still be very comfortable in most, if not all places in the US. According to https://dqydj.com/net-worth-percentile-calculator-united-sta... there are over 3 million households with a net worth over $4.5M. Relatively speaking, that is a small number, but, collectively, the good those people could do if they came together would be immense. Of course, this will never happen.
this is similar to our experience in commercial properties as well, which removes the emotionally charged aspects of "taking advantage of poor people" - landscaping, interior finishings, painting, etc are all large costs in nice retail properties, and non existent in functional light industrial or trades-oriented buildings, yet rents are generally higher for the later.
Taking GP’s example of a $180k townhouse vs. a $1.8M McMansion, will these costs really be significantly more than an order of magnitude more expensive for the latter, and therefore significantly higher as a percentage of property value? My intuition is that the opposite would be true, i.e., that the difference would typically be less than a factor of 10.
> The economics of this has to do with marginal utility mainly and nothing to do with exploitation.
That's vacuously true when you simply ignore the existence of exploitative landlords (aka slum lords) who fail to maintain their units because they know that vulnerable populations lack the resources to fight back.
So, it’s the existence of “slum lords” that causes the higher profit margins?
Interesting. So, if you buy a home in an area with lots of slum lords, the you make more? Seems like there would be a lot of money pouring into slum lord areas. Seems like that would drive housing prices up...and either rents would have to go up or profits would fall.
There isn't of course, because of what's required:
1) you must destroy people on occasion, make them homeless
2) crime, violence and cleaning up
Almost all the low-income rentals, esp trailers, down here in Mid-South have predatory or apathetic landlords. The rent is already high for what they offer, there's surprise fee's/fines for petty stuff, people dont get their deposit back for stuff that was already there, renters cant afford lawsuits, and we're told how bad evictions are on our credit report.
Almost every bad operator I knew from over a decade ago is still in business with bigger lots than before. So, this is a factor.
I think a lot of this is also landlords make up a smaller percentage of the market as you go up in price and when you get to a 1.8 million dollar home the rent will never justify costs to a landlord. Two facts cause this.
The first is it's always a better deal to live in a property than rent it out.(100% occupancy, no expenses to find tenants, no evictions, etc). Plus there are non-financial reasons people prefer to own. This means all things being equal owner occupiers almost always outbid landlords.
The second is high income individuals are more likely to be able to buy a home than low income individuals.
Basically what happens is in high income neighborhoods, owner occupiers(or developers) bid up the properties until it doesn't make financial sense for landlords to own them anymore. The returns just don't justify it, but the house might still be worth it for owner occupier because they get a better return and want to own a house or lock in neighborhood.
You don’t even have to go that far to make the argument. As a landlord, I would vastly prefer to be renting out 10 homes worth $180k (preferably in different markets) than one worth 10x as much just to diversify a little and avoid capital concentration issues.
That would actually drive prices in the other direction. Pushing up the price to rent ratio on cheaper homes.
Sure, but I’m willing to sacrifice a little return for diversification. Everyone who invests in index funds is, too. As long as the return is still reasonable, 10 units still Beats 1 unit worth 10x as much.
Sure but this should drive up the price of 10 units over the price of the 1 unit that 10x as big.
Buying and selling a home has huge transaction fees which destroy this argument. Worse, economy of scale still applies with apartment complexes paying less for the same services than condo owners.
Transactions fees don't destroy the economics of supply and demand.
“100% occupancy, no expenses to find tenants“
You very much need to find an owner or tenant when you move out. Further, someone needed to pay to find you when you move in. Move every 3-5 years and home ownership is really expensive.
> You very much need to find an owner or tenant when you move out. Further, someone needed to pay to find you when you move in
But this is true whether you buy to occupy or rent.
> Move every 3-5 years and home ownership is really expensive.
I'm not sure that landlords own homes for significantly longer than buyers.
Landlords sell property far less than people move. Remember, you are arguing home ownership as a strictly better deal for everyone “always a better deal” which would include people who move regularly.
> Averaged over all 13 data points in the figure, the average expected length of stay in a single-family home is 11.4 years for first-time buyers, and 14.8 years for buyers who have owned a home before.
I'm not sure how long the average landlord owns a rental property but I would be incredibly surprised if it was longer than this.
I'm confused. If the marginal utility of a mcmansion is not ten times that of the town house, then why does the mcmansion sell for ten times the price? Are you saying it's being used as a store or value or investment or something?
Is social status a factor in marginal utility?
If it is, is there a better term to reflect the value of comfortable shelter and diminishing returns to increasing square footage per occupant? That sort of thing.
This is a really good point, as someone who has seen first hand exactly how fast cheaper houses rent out vs more expensive ones, this point is very succinct.
It's the same as Henry Ford making a fortune selling Model Ts when car manufacturers for the rich went bust left and right.
"Those are whopping margins, and the reason for this discrepancy is that rental markets have very different dynamics in expensive cities like New York and San Francisco than less expensive cities like Milwaukee. In low-cost cities, landlord profit rates rise steeply alongside neighborhood poverty. But in expensive cities, the reverse is true. In expensive cities, landlords make money through appreciation and gentrification (which is bad enough for the poor). In lower-cost, more economically hard-hit cities, they make it on the backs of the poor."
In expensive cities the underlying real estate appreciates and you make your money on that when you sell. The cash flows are mostly to cover maintenance and property tax but in some hot real estate markets rents won't even cover operating costs. In stagnant areas the property value is either stable or decreasing so you make your money on rent.
Low rent, high appreciation properties are attractive to investors who don't need cash flow. If you need cash flows you have to go the other way. This isn't surprising to anyone.
Small scale operation of rental properties may be the most common small business in America, so if one actually believes this thesis then one has an easy option to compete down the differential while feeling good about oneself, with very low capital and expertise requirements.
Prior to doing so, I would advise one to ask landlords what their experience has been in the neighborhoods you want to sink $X00k into.
>one has an easy option to compete down the differential while feeling good about oneself
Would you really feel good about yourself evicting somebody on to the street who hasn't kept up on their rent because they lost their job at Walmart?
It's difficult to argue that it isn't a necessary part of protecting your investment.
This is a very important point and a large reason I got out of landlording. To be successful you have to be tough as nails and evict people when they can't pay their rent for totally understandable reasons. And if you're not emotionally prepared to kick out a mother and son because they lost their job because they couldn't make it to work because of a hurricane your returns won't justify the extra work renting takes over just throwing it into mutual fund.(especially at the hourly rates most of us make)
The point is that, according to that narrative, you could be "less evil" than the other landlords. You can afford to "protect your investment" less than they do and it would still be a "good investment" (just not "an exploitative great investment"). You would be offering a better option and that should be enough to feel good about yourself.
>The point is that, according to that narrative, you could be "less evil" than the other landlords. You can afford to "protect your investment" less
So, don't kick out people who don't pay their rent immediately?
Sounds like a recipe for achieving all of the "acclaim" for being a slumlord with none of the actual profit...
You can’t kick people out immediately if they don’t pay their rent. It’s been awhile so I’ve forgotten all of the terms.
In my relatively landlord friendly state, it is a long process.
1. You have to give them a written notice and they have 7 days to pay rent.
2. Then you have to go and file an eviction notice with the court and wait up to another week for them to send a notice to the tenant.
3. Then you have to wait for a court date. The tenant can basically say anything and buy time.
4. If you are successful, you have to wait for few days to schedule a police officer to come out and you have two hours to put all of their stuff on the street. You have to have at least 5 people(?) to move their stuff out.
At any time the tenant can pay the rent and stop the process. If you do everything right, it can take two or three months and you can’t go into the property while they probably tear it up.
If you want to recoup your costs, you have to go back to court to get a judgement and if they don’t pay you have to go back again to try to get their wages garnished.
Each step comes with fees.
I suspect a majority of renters actually aren't aware of the legal protections they have nor do they have the legal resources at their disposal (or even state of mind or time, in many cases) to fully take advantage of them.
On the other hand, some probably do and some probably do take full advantage of their legal rights.
Aggregate margins would probably be a lot thinner if every person being evicted took full advantage of every legal right they had though.
Similarly, the landlords who are straight and honest about the process and don't take advantage of this probably take in lower profits than the ones who don't.
Exact rules depend on the state.
In NY a typical eviction process takes about half a year.
In MN we can have someone out 2-3 weeks after filing the eviction. 6 weeks, tops.
Court date 1-2 weeks after filing, Sheriff escort off the property 1-3 weeks after court date. But, it almost never gets to that point.
I don't understand the point you're trying to make. Is your claim that even a person trying to be a maximally fair landlord of low-income property has to be a "slumlord"? How is this not a meaningless definition of the term?
The point is that people will see you as an exploitative, greedy slumlord (per the article) unless you open your books to them, and even then I'm sure people can find something objectionable, since the definition of 'fair' varies.
>The point is that, according to that narrative, you could be "less evil" than the other landlords. You can afford to "protect your investment" less than they do and it would still be a "good investment" (just not "an exploitative great investment"). You would be offering a better option and that should be enough to feel good about yourself.
Not a landlord, but know a few - all who do it as a side gig or who started out that way. Everyone tries to be nice up to the point that it makes financial sense.
Say I get into the landlording business as a side. I have a simple equation: I need to make X amount of profit to make the time investment worth it. The alternative is I invest that time in my regular career and try to climb the ladder. If I make less than X a year as a landlord, I should just sell the property and focus on my career.
For people with well paying jobs (e.g. engineers, SW, etc - and I don't mean SV salary - just the usual for, say, a Mechanical engineer in any major city), many/most of the higher income neighborhoods are pointless - they simply cannot make that X amount from them. That leaves the lower income neighborhoods.
Now if they do their work well and pick the right places, they may be making 1.2X (you'll always target making higher than X). Then at times they decide to be "less evil" in the way you think. They're willing to lower their profit down to X. But often that's still not "nice enough" in the eyes of many, and you'll still need to evict, etc.
So they face two choices: Be viewed as somewhat evil in other's eyes and keep the property, or sell it and just stick to the career. In both cases, the tenant suffers.
Landlords can't fix this problem. Legislation can shift the market dynamics. If you want change, don't waste time shaming landlords.
I also didn't mention the obvious other factor: Landlords want to spend Y hours a month on this business. Trying to help tenants who are in trouble suddenly increases the number of hours they spend. That automatically increases the threshold X, pushing their existing business into a zone where it isn't worth the time. And after all that, many/most of those tenants will never really recover.
I have a few coworkers who got into the landlord business and quit after some years. Hearing their complaints, some of them were nice.
A local radio show did a really nice piece where they followed a low income semi-homeless family around for a year and learned their history. The family was fine for a number of years, but as it happens when you are low income, you cannot afford to have a safety net. They had some stressful events, and things cascaded, and they became homeless on and off. After a number of years of this, they managed to get really good housing assistance (state/city - don't recall) - I think almost a 2000 square foot house to live in, albeit in a crappy neighborhood. But their lives changed greatly for the better.
While I was listening to the show, I couldn't think of anything landlords could do to help them. The tenants weren't irresponsible people - they just had life events. Government helped them out, but that has its own problems - for every one they properly help out, many can't get help - not enough tax dollars to go round.
Years ago, before I started thinking of business, I would express sentiments like yours to businessmen - that life isn't all about profits, and they could still have a good life with a lower margin. A common response was they're trying to make a living, and not give charity. When I finally analyzed it from the math above, I see the point. If I can make more money by quitting the business and working in industry, then insisting I stay in the business and make less really is charity. It's pretty much always the case that the person who is suggesting a lower profit margin does not run a business and has a relatively secure, decent job. A lot of businesses, even when making high margins, are suffering existential crises. Yes, the money is good now, but 2 years from now I may be out of business. There's less volatility in a regular job.
tldr: No easy solution, and the current situation is mostly a result of ordinary people doing ordinary (and not greedy) things. I can only see legislation helping.
You don't necessarily have to feel good or bad. Just evict them out. Whether they lost their job is irrelevant.
I think you also have to take in to account the higher risk of renting to lower income individuals.
They are more likely not to pay. They are probably also more likely to trash the place.
I think you don’t understand “take more profit.” That means they have considered those costs and still they “take more profit” even considering those costs. That’s what profit means.
My parents' retirement fund consists largely of an apartment building, a substantial portion of which is rented by section 8 (ie low income) tenants. The variance in cash flow is pretty dramatic, from both an expenses and a non-payment of rent perspective. Tenant protections are robust enough that, more than once, they've ended up in a situation where it takes four months of missed rent + legal fees before a non-paying tenant could be evicted, which is a cool $10k chopped right off of their income. To say nothing of the occasional expenses you wouldn't see in higher-income properties: the same tenant protections mean that units can become almost hazardously filthy before the landlord can intervene, and when they leave, they obviously don't tend to clean up.
Higher rents effectively function as an insurance policy for these expenses, and your insurance policy is obviously going to overcover rather than undercover. Higher risk (ie variance) investments mean higher returns, for the simple fact that the value of a high-variance investment will be lower than that of a low-variance one with a given expected return, for obvious reasons.
The only reason to be ignoring variance If your goal is shitty advocacy instead of intellectual honesty, which, as others have pointed out, is obviously the case with the authors of this study.
Ah the variance is a good point. In addition to the these higher average costs (unpaid rent, extensive repairs). Especially since the average landlord is small, an cannot average over hundreds of properties.
Having read "Evicted" - the book positively mentioned in the article - I came to understand how difficult it was to be a landlord in LCOL areas. The effort required to evict or collect on non-paying tenants made it a full time job with significant costs associated (psychological and financial).
The article did not make mention of this in it's accounting of "profit."
Actually... According to the research source landlords do charge more due to increased risk: "Because landlords operating in poor communities face more risks, they hedge their position by raising rents on all tenants."
https://www.journals.uchicago.edu/doi/abs/10.1086/701697
>Because landlords operating in poor communities face more risks
>Since losses are rare, landlords typically realize the surplus risk charge as higher profits
The author of this study appears to be confused as to what risk is.
Behind a paywall unfortunately, so it's difficult to tell if he's just made two contradictory assumptions in his abstract or if there's something deeper going on.
I suspect slumlords actually yield higher profits because of basic supply and demand - slumlording is a market, after all, that most would find it distasteful to get in to (who wants to evict somebody who lost their job at walmart on to the streets?).
It's sort of like the "low salaries for teachers/charity workers" effect in reverse - there are certain kinds of work (or investments) that people can be proud of and certain kinds that they aren't.
"Risk" sounds more laudable than "there's a restricted supply of investors who are prepared to be assholes to protect their investments, though.
This paper might argue that the risk/reward ratio is lower than other similarly risky investments, which would substantiate the article's argument that landlords are greedy and generally bad. But good point, the abstraction of risk is something like a veil used to make landlords and investors sleep at night.
Since you haven’t read the article, how do you even know what their definition of “loss” is?
I read this article with an eye to that as well, but it does not appear such damage was taken into account.
When Wilmers and Desmond control for regular expenses in the form of mortgage payments, property taxes, property insurance, utilities, and property management fees
A new roof, flooding from a busted pipe can be considerable expense even including insurance help. Factor in chemical residue from cooking meth, destroyed fixtures like porcelain toilets and sinks, it can be very expensive to rent to unconscientious people (nothing to do with income!).
I think the poster is referring to the PITA factor. The article's author chose to come at this from the "exploiting the poor" angle. There's a case to be made there, and there's also a case to be made for how people are less willing to take on in these kinds of investments. That will no doubt effect the profit margin that those who are willing are able to take.
> even considering those costs
But there is an overall expected value premium to be paid on low-risk purchases (or to be gained on high-risk purchases)
On average, you will lose money by purchasing insurance. (That's how insurance derive a profit.) However, people are generally happy to do that, because they value the certainty of it, even if overall it's the arthemtically subpar choice.
I expect that you will make profit from the stock market than a CD, even after averaging bear and bull years.
I'd expect that low-income rental are riskier investments, and that landlords are more likely to lose money, but overall the expected value of return is higher. That's just how markets work.
The efficient market hypothesis posits that you can only make higher returns by increasing your risk. So it would make sense that landlords make higher returns from poor renters than rich renters. They have to price in the substantial risk (volatility of returns).
...and the reward for taking greater risk is greater profit.
We are talking about the average profit and risk without knowing the difference in default or move out, vacancy etc. I would think people with housing options would be a higher risk than people without housing options...ie they can afford to just leave if they want to. A person with limited housing options will go without things being fixed right away and can't necessarily afford to defend themselves in court or to just move out.
No.... they benefit from cartel pricing based on Section 8 prevailing rent. Being a slumlord is an immensely profitable business.
I’d bet this has to do with vouchers. If you qualify, a city will give you a predetermined amount for rent assistance and then you cover the other 20-30%.
Landlords know this. The housing assistance organization guarantees the payment.
http://www.hacm.org/doing-business-with-us/section-8-landlor...
This causes section 8 landlords to inflate their rents. If a regular person had to pay for the apartment, there is no way they would pay these higher prices for these dumps.
However, by subsidizing a majority of the rent, the low income people will live there. The buildings are cheap to buy, are not maintained, boom, lots of profit for the landlords.
> However, by subsidizing a majority of the rent, the low income people will live there. The buildings are cheap to buy, are not maintained, boom, lots of profit for the landlords.
Also the tax laws of CA in particular actively discourage you from improving properties. Rent growth is effectively capped whereas property tax growth (a percentage of property price) is only capped as long as you do not perform major renovations.
That combination incentivizes renters to remain fixed ("I'll lose my years of rent control!") and property owners to do the bare minimum ("Why should I improve the property if it'll cost me more taxes and I can't charge more?").
Regarding the Bay Area (as I’m not familiar with other jurisdictions’ rent control regimes), capital improvements do allow a rent increase beyond what would normally be the case, but I’m not sure if it justifies the investment. Just an FYI.
> ... are not maintained ...
Section 8 housing must be maintained to minimum standards which are well defined. If not, the renters can report the facilities for being deficient.
That’s not a contradiction. The minimums are low enough to qualify as a dump.
And enforcement is deferent to the landlord.
Is there a public database of section 8 rentals/properties?
It doesn't really work that way.
Any landlord can decide at any time that they will accept Section-8 for a given apartment. If they do accept and a tenant that receives Section-8 assistance is interested in moving into the property, the property must pass a standardized HUD inspection before payment is made from HUD to the landlord.
Re-inspections typically occur annually.
But there are some websites such as https://www.gosection8.com that will let you search section 8 housing.
I'm curious where they get their data from. Do you know?
Perhaps these sites require the landlord to advertise their properties on it (like Craigslist), and there is no public database.
This article is so silly and the answers so obvious.
It's not some exploitative factors driving a difference in rent. It's other factors driving a difference in price. Every landlord knows you can make more money in low income areas, and especially with section 8. But they still don't buy there because those areas are rougher, many landlords or middle to upper class and don't necessarily understand those neighborhoods, and you have to deal with more evictions.
And the biggest difference is that low income people can't afford/don't have the credit/down payment to buy. So there is a lot less competition for ownership there than a high income neighborhood.
A guy I used to work with once told me that instead of buying a $100k rental house, you should buy three $30k rental houses. We're in a LCOL area, and him and his wife easily made over $200k in salary alone, so why he spent his free time managing all those rental houses is beyond me. He had over 20, and managed them all himself.
>so why he spent his free time managing all those rental houses is beyond me. He had over 20, and managed them all himself
How much time do you believe it takes to "manage" those 20 houses? A month a year at most.
(Source: have friends with low 10s of houses).
That is highly dependent on the quality of renter and quality of your property. One of the key values of having multiple rental is the economies of scale, for example:
* Property advertisement - Preparing material and advertising for 1 property can be more expensive than multiple properties
* Material for fixes - Purchasing material for 1 property can be more expensive than multiple properties
* Vacancy - The cost of vacancy for a single rental is higher than having multiple rentals. The other rentals may off-set the cost of the vacancy lot for a period, without requiring external cash flow.
* Experience - Multiple properties will give you the opportunity to experience different issues and allow you to take proactive steps to diminish certain risks.
20 rentals at $1000/mo is $240k/year. Granted, that's definitely not all profit, but it's a lot of cash flow.
That depends on the local market and what you can charge for rent, and what your tolerance for pain is.
When I first started buying houses to rent, I had a rental unit in a LCOL area, and I spent a lot of time dealing with tenants and rent issues. It was a constant problem, so I sold the house. I might have broken even on the venture.
I ended up with a handful of starter homes near nice schools, and had a much higher class of renter as a result. Far less work, vastly fewer headaches.
I also had a FT job, so didn't have the time or energy to chase down rent checks.
I have 29 myself. I self-manage my properties and work a full-time remote job.
A few weekly calls during the workday. A few evenings or weekend daytime meetings with prospective tenants or maintenance staff each month. So, ~$1 to 1.5k per hour of work. Not a bad paying side gig.
You can pay property managers to deal with the day-to-day management of the properties, vetting new tenants, collecting the rent, etc. You can still come out ahead. I know a few people who do this and they don't spend much time on their rental properties.
The price / rent multiple is not analogous to a P/E ratio. Rather, it is similar to an Enterprise / revenue multiple. The distinction is important because, as an investor in apartment properties, I can tell you that the Net operating income margin (roughly analogous to an EBITDA margin for C-Corps is much, much higher in San Francisco than in other places. For example, the NOI margin in San Francisco is usually about 75%. In Merced California, it is about 30%. Once you subtract Capital Expenditures, the 30% is cut almost in half. Basically what I’m saying is that the net cash flow, after Capital Expenditures, in many “C” and below locations is basically zero. Thus, the price has to go very low to entice investors to buy there. This is not irrational behavior.
Skimming the article, an obvious solution seems to be overlooked.
Someone is probably a lot less likely to trash/destroy something they own / are in the process of owning.
Imagine if there was far less rental and much more liquid stock of housing units in markets?
What if everyone who was renting now could actually "buy" livable housing at that same level of rent; rather than lining the pockets of others?
True, but beware the unintended consequences of 2007.
2007 doesn't have to happen again. It's possible to both make houses affordable for people with lower income and not give irresponsible amounts of debt to people who cannot afford it. It just requires smaller, more affordable houses to be built. I don't know why, exactly, but as a general trend the sizes of houses have just been going [up, up, up](https://www.google.com/url?q=https://www.census.gov/const/C2...) (PDF)! Consider that the [mean, median] square footages of new houses built in the US had gone from [1660, 1525] in 1973 to [2392, 2169] by 2010. Maybe the reason people can't afford to buy houses is that no one wants to build affordable houses.
Owning a home then limits mobility. If you need to find a job that requires you to move, it’s going to be a lot harder.
well, this is the general premise of actions like habitat for humanity, to get the owner/occupier to invest sweat equity over purely financial.
It probably works but the cost (and scalability) can restrict how fast/far it can be applied...
This is such a ridiculous article. Of course landlords are going to charge a premium in poor neighborhoods, because their risk is higher. They need to match the market's risk adjusted returns, so they need a higher return to balance out the higher risk (volatility) and match the market's Sharpe ratio. This isn't "exploitation" this is an efficient market that is working as it should.
Moreover, there is a reason landlords don't fix up properties: taxes and fines. If you open up the wall, you might discover that your pipes aren't up to code, and the state will make you replace them at great cost. Also, the higher the value of your rental, the more taxes you will pay. So landlords are literally dis-incentivized to invest in their neighborhoods.
Not that citylab would be happy if they did, because then it would be the evil boogeyman gentrification. You know we live in a screwed up time when people actually protest making a neighborhood better (see: Amazon and NYC).
> ... risk is higher. They need to match the market's risk adjusted returns, so they need a higher return to balance out the higher risk.
Risk of what? The greater fall in property values in the 2008 crash proved higher capital risk, and low-income tenants may be more likely to damage the building -- but the two kinds of risk lie on opposite ends of the scales of time and space.
> ... the higher the value of your rental, the more taxes you will pay.
Not so for most in California, where Prop. 13 limits property tax increases to 2%/year.
Risk means a higher standard deviation of returns, also known as volatility.
But you’re right to bring up the exposure landlords have to the real estate market. It’s unclear to me whether low valued properties or high values ones have more beta to the market. If I had to guess, I would venture that lower valued properties are actually less correlated with the market.
If risk is higher, wouldn't expenses also be higher? And wouldn't the higher expenses due to the risk offset the higher rent charged due to risk, so there wouldn't necessarily be much effect on profit?
But the article doesn't seem to have a measure of profit. They look at rent and purchase price, and later throw in something for maintenance.
If they actually had the books, and could count how many employees were needed to deal with stuff, and how often the rent was unpaid, etc, then they would be justified in talking about profit.
Higher expenses and the risk premium are orthogonal to each other. The higher the standard deviation of returns, the more premium will be charged to offset the uncertainty.
If you read Evicted you'll find out what it's like to be a landlord in these places.
I considered it a bit because of the profit margins but it's a nightmare of a thing to do. Low income people have a disproportionate number of behaviours non-conducive to being rented to. They'll do things like put food down the sink, block it, then wash food in the tub and block that and so on. They'll smoke in the place and damage it. They'll stop paying rent because they wanted to treat themselves. Multiply that with the fact that you have to deal with a large number of them because your margins may look good but your absolute return is low and you will have trouble every month.
No moral judgment here. Just that it's not free to compete here. I, for one, do not have the stomach to evict a single mother with four children every month from my rental property that she's wrecked.
Paying one fourth of apartment cost in rent yearly makes no sense. There should be something more in play here the analysis is not going deep enough or simply incorrect
It seems they literally define "exploitation rate" as rent over purchase price. Then later they add in some estimate of costs of repairs.
But it would be much more interesting to actually see the books. I'd bet a lot of money that the tenants in expensive neighbourhoods are much more likely to pay on time, every month, and to leave when the contract is up. And in addition, the labor in dealing with each tenant is paid for out of $2000 not $200 rent, so more is left for the owner.
In other news, payday loans in sketchy parts of town come with higher interest rates than 20%-down home loans in good neighbourhoods. Does anyone think this is because payday loansharks are uniquely greedy human beings? They are just operating a very different business with different costs.
Yes, some people do think payday loan sharks are greedy.
You missed the "because", see my other answer.
I don't doubt, however, that being really thick-skinned is a necessary trait for surviving in that business. Soft-hearted types also don't last long as drug dealers, surprisingly.
If you think the payday loan industry is not -immensely- profitable, you're wrong. It's an exceptional thing to get into, either running or investing, if you have lower ethical boundaries.
Well, are you really claiming that the cause of high interest rates on payday loans is poor morals? Unusual greed? Which mysteriously descends on all who enter the trade, every time?
That's the whole reason I used the example of loansharks, as I thought everyone understood by now that even if the angels ran that trade, such loans would be very expensive. But see below for other arguments against this bad-morals argument.
I've never seen numbers, but given the abundance of competing outfits, I'd expect that it looks roughly like any other business, once you account for all the costs. It could be a little more profitable if distaste drives some potential competitors to stay out. It also seems like a great front business for laundering, but I wouldn't guess that's a large proportion.
I wonder why you still managed to use the term "loansharks" when trying to defend their quite obviously predatory business practices.
"Higher interest rates" doesn't even begin to define the exploitation of these people who are desperate for cash. The rates for these loans are on the order of 400%, which makes the comparison laughable.
It's almost like saying "the US national debt is $22 trillion, which is more than the average American makes in a year."
My point is that a theory that says their business practices follow from moral failings doesn't explain anything about the world. Some businesses just mysteriously seem to always be run by bad people.
Conversely, assuming that every businessman is about equally greedy forces you to look elsewhere. Their loans are almost by definition high-risk, that's why they are expensive. Low-risk borrowers are a different market.
The fact that we can learn something by thinking about their business does not mean anything like "defending". It's just that sometimes the lessons are clearest with extreme examples. We can learn interesting things from studying drug gangs, pirates, kidnapping schemes, too.
We can also ask questions about whether the world would be made better by prohibiting loansharking, and I actually don't know enough to have an opinion. But it's clear to many that prohibiting drug-dealing has had some nasty side-effects.
So why doesn’t one of these greedy lenders steal market share by writing payday loans at closer to normal rates?
Here's what 675/month gets you in Flint, MI
https://flint.craigslist.org/apa/d/flint-2-bedroom-1405-mapl...
That's $8,100 a year in rent.
That house for rent was probably a $4,000 buy + fix me up, similar to this one:
https://www.realtor.com/realestateandhomes-detail/3401-Herri...
Here's a ready to move in home for $27,500. Less than 4 yers of rent in the first example.
https://www.realtor.com/realestateandhomes-detail/1114-Knapp...
Payday loans make absolutely no sense, either.
I just looked up one single company running this particular swindle-- they have over a thousand locations and do over a billion a year in revenue.
Edit: Again, this is only one company, which currently only exists in a little over half of U.S. states.
In the US, there are more payday loan outlets than McDonalds outlets.
Access to credit?
Isn't that how investing is supposed to work? More risk more profit?
The author has one data point and he doesn't even explain: Does this profit include risk, legal expenses, other expenses? I mean, if the average for these three classes is different this suggests one of two things:
1. The free market has failed for some reason; and there exists an arbitrage opportunity. Buy in poor neighborhoods and sell in middle-class.
2. There exists some fundamental reason why investors despise poor neighborhoods: Maybe things are volatile there? Maybe the risk of destroying the property is higher? Maybe it require more expertise?
Can confirm, I work for a company that helps landlords finance the purchase and repair of rental properties.
In certain very LCOL urban areas around NYC and Philadelphia, we have individuals with tens of millions of dollars of property spread out among ~$150k buildings.
They inspect their portfolio with armed bodyguards, and they very often own other businesses in the same neighborhoods that throw off money in small but regular amounts: laundromats, bars, clubs.
An an interesting aside, these individuals are almost all involved with close-knit religious groups to which they contribute great deals of capital.
I have no idea about Philadelphia or the area "around NYC" that kjbfojbejib was talking about. But for NYC itself, here's the official landlord watchlist (ranked by number of violations and complaints) that was compiled by the public advocate's office: https://landlordwatchlist.com/landlords
Good resource for finding where not to rent, if you have the option.
...certain very LCOL urban areas around NYC and Philadelphia...
That's "Low Cost Of Living", right? That's not a synonym for "poor", so I'm not certain such situations actually exist in those metro areas?
>That's "Low Cost Of Living", right? That's not a synonym for "poor"
It is.
>so I'm not certain such situations actually exist in those metro areas?
Huh?
I don't live there, but I've been to the places we're talking about. They don't have grocery stores, and the few stores that sell food cost a lot more than the stores I'm used to, for food that isn't so nutritious. The people there don't make exorbitant amounts of money, but they'd be better off if they had better access to affordable products. They are poor because the areas they inhabit have high costs of living.
How is it that people don't know this?
They are poor because they don't make enough money. And they can't arbitrarily move, because they can't find jobs just like that, or afford another place, just like that.
They're not some middle class people who because poor because their only store is a Dean and Deluca.
I never suggested that they move; that would have been presumptuous. It's still a fact that their income would go farther if they had access to the wide range of shopping options to which many other Americans have access. To which I and my neighbors have access, and many of them have very low incomes. Nobody here would ever consider any zip code in NYC to have a low cost of living.
I guess I'll just be confused as to why we're so eager ITT to follow the lead of someone who admits to working for these landlords and continue to blur the distinction between "this area has a low cost of living" and "poor people live here". The words we use when discussing such issues matter, and this Overton window should go no further in this direction.
>An an interesting aside, these individuals are almost all involved with close-knit religious groups to which they contribute great deals of capital.
Before an edit, the above comment referred to "close-knit religious groups" surrounded by triple parentheses[0]. These are used by white supremacist and anti-Semitic posters to denote or refer to Jews. They are not, to my knowledge, an idiom commonly used in any other context.
If you're going to go there, "kjbfojbejib," remember that editing your post doesn't also edit people's memories. I assume you were just trying to be funny but that kind of humor is not welcome here. Nor is that kind of prejudice, if you were being sincere.
[0]https://en.wikipedia.org/wiki/Triple_parentheses
From HN guidelines:
>Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize. Assume good faith.
(I'm a bit torn about pointing this out in this case, but I've seen way too many people falsely accused of bigotry because people chose to interpret comments in a way different from intended. Still, this is clearly a throwaway account).
I wrote that comment using a new account to avoid being outed at work. To be very clear: your accusation is false, there was never any special parentheses, and I invite an admin to confirm that if they can.
>To be very clear: your accusation is false, there was never any special parentheses, and I invite an admin to confirm that if they can.
There were, I saw them, other people saw them, they were copied into eli_gottlieb's comment. His comment is flagged now, but it's still visible to some users. Whether an admin can or does confirm it is irrelevant.
You made a green account, and you screwed up with some 4chan nonsense. Just reroll and don't do it again.
I'm sure you wrote this in good faith, but there weren't parens in the original comment. They only appeared in https://news.ycombinator.com/item?id=19470714. The odd thing is that eli_gottlieb was making an unrelated point at the time (a strange and almost endearingly paranoid one, but that's another story).
This looks like a case of the internet snark trope where people use quotation marks to put nasty words in others' mouths, leading to misunderstanding and unfairness. That's why we've long asked users not to do that: https://hn.algolia.com/?sort=byDate&dateRange=all&type=comme.... It has never been in the official guidelines but it's been a bit of case law on this site for a long time.
I guess a troll is going to troll, but the idea that some coded message was in my comment is just insane.
I unequivocally deny any use of “triple parens”. Full stop.
Could an admin with access to edit history please straighten this out?
Alright, I checked the logs. There were never any parentheses in that comment. kjbfojbejib made two edits, but only to add to the text. Both additions were to the part about other businesses in the same neighborhoods, i.e. they were not part of the disputed text.
If you had just left the issue alone then everyone would assume his comment was referring to malevolent Christians. As a Jew I find it disappointing that you have chosen to echo the antisemitism he was smart enough to retract from the discourse. These ways of thinking need to be censored and entirely destroyed. Delete your comment immediately.
If you continue to troll HN we will ban you. Please stop posting unsubstantive comments as well.
https://news.ycombinator.com/newsguidelines.html
Oh shut up and let people disagree you fucking insane sjw.
Now wait just a moment - isn't pointing out things are "too white" exactly analogous? Yet that's somehow acceptable to say at almost any major media outlet [1]. You yourself implied his comment would have been okay if directed at Christians. Why should white people be the only group that's called out for over-representation?
[1] E.g. https://www.theguardian.com/world/2018/aug/29/eu-is-too-whit...
Agreed. It's not right to single out any religion, particularly insomuch as some flavor of this insularity can be found in every stream of religious thought that has ever existed
Generally, I have low tolerance for any group that segregates most of their existence from the greater whole - but then demands accommodation from the greater whole. Most Jews, Christians and Muslims do not - but some do - those communities who refuse to participate in broader society are in my mind inherently forfeiting their place at the table - simply put, you cannot expect broader society to accommodate your particular needs if you don't participate in it.
Calling out anti-semites or their methods is not echoing anti-semitism. I've edited the actual parens out but I'm not deleting the comment. People are free to flag it if they disagree.
I agree with you. Calling out anti-semitic speech as "that's not OK here, even if you first flash it overtly and then make it slightly less obvious" seems to me to be the exact opposite of that accusation.
Funny how we have two fresh accounts posting in this discussion, one of which insists that the study authors must have an "agenda", and another of which gives an "aside" that exploitative slumlords "are almost all involved with (((close-knit religious groups)))".
Sounds like the ruling class is a bit agitated that we're noticing what's going on, and wants to misdirect our attention.
On HN, please don't use quotation marks to make it look like you're quoting someone when you're not. In this case it led to a bad misunderstanding elsewhere in the thread (https://news.ycombinator.com/item?id=19470818).
Also, could you please review https://news.ycombinator.com/newsguidelines.html? You've been breaking them, and we need you to fix that. One thing they ask you not to do is insinuate astroturfing without evidence, as you did in this comment here. Plenty of explanation here: https://hn.algolia.com/?sort=byDate&dateRange=all&type=comme....
More seriously, it looks like you've been using HN primarily for political and ideological battle. A certain amount of politics and ideology is unavoidable with many topics that appear on HN, but when this crosses into being the primary reason why someone uses the site, that user has left the realm of intellectual curiosity and shifted to the battlefield—exactly what we're trying to avoid HN turning into. For that reason, we ban accounts when they cross that line. More explanation on that if anyone wants it: https://hn.algolia.com/?sort=byDate&dateRange=all&type=comme....
I mean, one or both of those accounts could be your own alts, as far as anyone knows.
I don't think the "ruling class" are so concerned about people "noticing what's going on" that they sent shills to create a couple of green accounts to post on Hacker News. That the rich exploit the poor is not exactly a shocking revelation to anyone.
Certainly, you're not helping keep things focused by implying shills and saboteurs are at work here.
the "ruling class" would probably be not really interested in dealing with housing at all and would be more worried about people pointing out the lack of diversity at top C-level positions at major influential corporations.
That's... the exact opposite of how it works.
I wonder if it's about low-income or there are other factors like neighborhood crime rate, education level or the amount of garbage on the streets.
I understand all these correlate with income level, but it would be extremely interesting to see statistics controlled by income.
This is a dumb question. But, where did the data come from used to draw up the conclusion that landlords make more profit on average from poorer neighborhoods?
Well, yes, that's the way the efficient frontier in the risk-yield curve works.
Efficiency in markets usually at least implies closely following the truth, as I understand it. Is the risk higher at the low end of the market?
My family was a small-time landlord while I was growing up. We had more fires (plural) and totally thrashed rentals in 2 low-end houses (one SFR, one duplex) than I can remember. The SFR we had to totally rebuild twice over the course of perhaps 15 years. One tenant busted out every single piece of drywall because he was mad about being evicted after not paying rent for 6+ months. Another solved the problem of "please pickup any dog waste in the yard" with the genius plan of not letting the dog outside. Ever. The subfloors were soaked when she moved out. It wasn't just carpets that needed replacing, but all the way down to the joists and all the electric and HVAC outlets from rust.
Non-payment is also a real thing. The time commitment is higher on the lower-end properties (chasing payments, higher turnover, more damage on turnover [often well beyond security deposit, especially since the tenants know they can skip the last month or two's rent because evictions take longer than that and maybe justify themselves "since the landlord already has the security deposit and we need to save up for the next place's deposits anyway...")
People who think there are excessive profits in low-end rentals should totally disrupt that market by buying up all these cheap and easy-money properties and renting them out to undercut the market. Be ready to lose your ass financially, though.
In a huge way. People don’t pay, people trash the place, people leave and break contract to be never heard of again etc.
On higher risk of any of those is negligible.
That's my understanding, at least.
If the risk wasn't higher, landlords wouldn't make more profit, would they?
I'm not sure why you are being downvoted, because this is 100% the case. EMH posits that all risk-adjusted returns move toward the market Sharpe ratio. You can then modify the returns/vol by buying or selling at the risk-free rate.
So when renting to a poor person, you are going to demand the market Sharpe ratio by making them pay more in order to keep your risk adjusted returns in line the efficient frontier point.
Interesting article but the Marxist tangent the author went on was unusual.
One wonders how much of this correlation is affected by more people renting properties in low income neighbourhoods combined with the fact that its more economical for landlords to rent low-mid value properties.
I'd say that's the standard actually. Landlords steal whatever they like, including deposits, because with most of these situations the tenants are too busy finding the means to continue existing to have any to spare for litigation.
I am not surprised by how many HN commenters seem to still have their rents sorted by their parents. Landlords are predominately thugs.
Can you please read and follow the site guidelines instead of breaking them like this?
https://news.ycombinator.com/newsguidelines.html
We detached this subthread from https://news.ycombinator.com/item?id=19470846 and marked it off-topic.
>Landlords steal whatever they like, including deposits
Kind of like how policemen will shoot who they want to, right?
Most landlords steal and are thugs. Also most HN commenter's rent is paid by their parents.
Did you actually have these thoughts or did you read them in some sort of "Angsty Teen Thoughts" handbook?
Can you please not respond to a bad comment by breaking the site guidelines yourself? Personal attacks are particularly not ok here.
https://news.ycombinator.com/newsguidelines.html
>Also most HN commenter's rent is paid by their parents.
I don't know if I agree with this generalization...
I don’t agree with this. But, I bet you anything that most HN readers do have relatives they could call on if they found themselves without a job and not able to pay rent.
Don’t believe this socialist nonsense.
Comments on the article:
If profits resulted solely from land ownership, every landlord would realize the same ROI.
Secondly, if slum landlords made a better ROI, greedy capitalist bastards would invest in nothing but slums (as long as the slum premium persisted).
If there is some extra profit involved it may only be the result of government action - either shitty legislation that bastardizes free market competition or corruption (either internal, or bribes).
In California, you must have a special license to do almost any business, but be a landlord. You need a license to do people nail's (nail technician). And in some cases, there a special taxes applied to that industry (like legal cannabis).
Landlording needs this (not nail techs). Keep up your certification, provide quality living conditions, and pay extra tax to offset the housing problem.
Furthermore, we should have non-profit, non-governmental institutions running low-income housing, not slum lords.
> Furthermore, we should have non-profit, non-governmental institutions running low-income housing, not slum lords.
Low-income housing run by governments is infamous for its slum conditions.
Landlords do need business licenses in some California jurisdictions, FYI.