The Lucrative Business of Owning Rental Buildings | The Tyee
The Lucrative Business of Owning Rental Buildings | The Tyee
Despite landlords’ complaints, the numbers show apartment buildings are profitable with current rent caps.
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Especially if the building is already paid off, it never made sense that rent needs to match market prices to cover costs. The tiny increase in property taxes and maintenance costs is more than covered by the allowed rent increases.
it never made sense that rent needs to match market prices to cover costs
Because you're not looking at it through the eyes of a greedy landlord that wants to make more money.
You're right. We should be removing their eyes!
Opportunity cost is the cost you have forgotten to account for. Having the building paid off does not reduce the cost.
Nope. Even setting aside rental income, the increase in property value itself has been plenty remunerative. Having the building paid off also allows one to borrow against the value of the asset, which offsets some opportunity costs.
I’m surprised people are actually arguing that real estate investors haven’t been richly rewarded enough. Ridiculous.
Even setting aside rental income, the increase in property value itself has been plenty remunerative.
You are entering personal opinion territory with that remark, which has no place in a discussion, but I will stricken the opinion part and work with what information remains. Given that, I take it to mean that a business seeking profit does not necessarily need to find profit by way of cashflow, but rather asset appreciation. Is that a fair assessment?
That is technically true. Agriculture in particular loves that model – and it has burned many, many, many farmers before. Remember the 1980s? They had to go as far as to have concerts to try and bail farmers out because it got so bad. It is super high risk. Farmers will often put up with that insane risk because they have a passion for farming and will take the risk just so that they can do what they love.
Does anyone have a passion for being a residential landlord? To the best of my knowledge, the answer is no. Landlords are in it purely as a business. And a business is going to focus on income fundamentals to not go down the road of needing concerts to save them when the promise of asset inflation fails.
Of course, with big risk comes the potential for big reward, but it seems there is no reason for residential landlords to take that gamble. It is not a passion project.
I don’t know where you got the idea that profiting off of land value is some exotic and untenable investment strategy, one that requires “insane risk” and “passion”. Your example of landlords being reduced to desperate concerts is very silly.
You dismiss this as “personal opinion” without explanation, but the objective fact is that land value has gone up a lot in Canada, and real estate has tons of arbitrary tax advantages (like the Smith Maneuver). This has made real estate a remunerative investment. That’s been the consensus of the domestic and international investment community, which has poured money into Canadian real estate. This is so obvious, I’m surprised I’m having to say it!
Are you responding to someone named “Rocket” by chance?
I am. What’s going on? Does it not show up that way on everyone’s account?
Nothing nefarious or anything; I blocked them a while ago and I see they’re still being an edgy contrarian and pissing people off. I had noticed a bunch of comments that seemed out of place and had a hunch it was Rocket. Haha
Yes it's very remunerative. But have you stopped to consider it could be even more so? /s
And how much is this "costing" landlords, exactly?
First of all, fuck landlords and double fuck people that buy up single family homes to rent out. This is not an endorsement, just a basic explanation of opportunity cost for anyone interested.
Fuck landlords, in case you missed the first one.
Now that that's out of the way, opportunity cost is what you lose by not doing something else with your capital.
For example:
You assume you could make an average of 10% a year in the stock market.
You have 100k equity in a rental property.
You collect rent, after paying the mortgage, taxes, maintenance, and any other expenses you make 10k in a year.
That's 10% of your 100k in equity, the same you estimate you'd make in the market, no opportunity cost.
Some number of years later between paying more of your mortgage and increase in the value of the property you have 500k in equity.
You only increased rent enough to cover increases in taxes, maintenance, and other expenses so you still only make 10k a year.
That is now 2% of your 500k in equity.
The 8% difference between the 10% you think you could make in the stock market if you sold the place and the 2% you're getting without jacking up the rent, is the opportunity cost.
Of course there are more things to take into account, this is just to give you a basic idea.
Fuck landlords.
Wait. Am I misunderstanding you, are you completely off base, or is opportunity cost really just some handwavy estimation of how much money they maybe could have made in some hypothetical world where they made different investments? The fuck?
Yeah, breaks your heart, don't it?
You're not misunderstanding at all. Opportunity cost is that simple.
If I can get 5% guaranteed on a government bond, and my buddy needs some help to get out of a jam (and I'm as sure as I can be he'll pay me back) and he offers me 3%, if I give him the money I'm not doing a nice thing and making 3%, I'm an idiot that's losing 2%.
At least according to the people that can only think of more more more.
It doesn't always have to be greedy though. If you've got money you don't need anytime soon sitting in your checking account doing nothing what your missing out on by not at least putting it in an interest bearing account is opportunity cost.
I could see maintenance costs increases being not insignificant over time. Parts/appliances had gone up notably, as has materials and the cost of people to do the work. There's also some issues with receivables which may end up needing to be written off, and deliberate damage over time. Generally, these do need to be accounted for on a going-forward basis.
That said, none of these should have increased nearly so much as the cost of property and overall rents. They should account for a reasonable increase over time, instead what we see is increased to cover the cost of the mortgage on additional rental properties etc
Buildings have costs beyond mortgage, especially ones that are old enough to be paid off.
I support rent control, but "no sudden shifts in rent" rent control, not "rent must be frozen in amber and can only be raised below inflation levels" rent control. The market changes over time. Otherwise we get the "f you I got mine" problems we have with homeowners, where nobody has to care about new people looking for housing because every existing owner or renter can ignore market reality.
If we want to eat the rich, just tax them more. I like Jagmeet's idea to increase cap gains inclusion to 3/4 instead of 1/2.
Don’t worry, there isn’t a rent control anywhere in Canada that’s “frozen in amber”. I’m reminded of the economist Lawrence Summers who gave an example of worrying about the wrong thing in policy: “I’m overweight and I need to lose weight. It’s true that if I lose too much, I could starve to death and die, but that’s not my problem.”
Rent being too low is not our problem.
Rent controlled apartments are still capped at 2.5% increase per year.
Yes, while anybody who is not in a rent controlled unit is facing a bloodbath, plenty of people are seeing their rents go down once you figure in inflation. It's just that "dog doesn't bite man" is even less of a news story than "dog bites man".