Profit, wages, and rent – the 3 tenets of earning an income whether by an individual or a corporation. The value of a landlord is derived from how much rent they can collect and rent-income happens to be the least ideal of the 3 income models.
1. Profit involves investing in a venture and risking our capital – that could be investing in stocks or index funds.
2. Wages are earned by trading our free time and energy to perform a service for others. Healthcare professionals earn a wage through their job.
3. Rent is another form of income, though the most passive of the three. When pursued in the traditional sense, it provides almost no value to our society.
Rent-seeking is an economic term that describes an endeavor where an entity profits from another without providing any value to society. Money is shuffled around but no wealth is created and no advancement other than self-profit results.
I will take rent-seeking a step further and say that it can be detrimental because those who have money can afford buying more properties than they need to live.
By entering the marketplace, these investors drive up the purchase price of homes and this makes it harder for others to afford their primary residence.
If you’re a jeweler who makes bracelets and have to pay $1,500/month to live in a shack in the middle of the city then you either will go broke or have to resort to procuring parts for your bracelet at subsidized prices from overseas – subsidized by human lives, that is.
Another downside is that a landlord will seek out cheaper material to rebuild a home. Homes will be repaired as inexpensively as possible which means that less sustainable products are used and emergency inefficiency is created.
The Value Of A Landlord
The traditional landlord chose to be one in order to profit. They shopped around for the best deal on a piece of property, then they estimated the highest rental price, screened candidates, and optimized the way they run the business in order to maximize profits and lower overhead.
This is exactly what we’ve done with healthcare. We see the most number of patients, bill at the highest rates possible, source medications from the cheapest manufacturers possible, and shuffle the most resource-intensive patients to the very bottom (mental health, substance addiction).
So should landlords not raise rent?
Should landlords avoid minimizing overhead and maximizing profits?
The value of a landlord, after all, is determined by their CAP rate.
The CAP-orgy on personal finance websites and sites such as BiggerPockets is quite blatant. I didn’t last long on the BP website – something about it didn’t feel right. I’m not against investors profiting but when it comes to landlording, the value of a landlord isn’t apparent to me.
Is All Landlording Bad?
Not all landlording is bad. The value of a landlord is apparent when someone invests in their neighborhood and brings dead properties back to life. Such eye sores are then repurposed to offer housing, bring life back into a neighborhood, and maybe even address a housing shortage.
Innovation is probably the most important talent of a landlord. The value of a landlord is front and center when they develop raw land that solves an actual problem such as Patrick Kennedy has done by fitting more units into one building.
Patrick has built a far more energy efficient apartment complex with a much higher living density which helps everyone even though it may not be everyone’s ideal living arrangement.
Buying A Housing & Renting It
Imagine that I’m a healthcare professional who has paid off his student loans, I have purchased my primary residence and have saved a healthy amount of money in my retirement accounts.
I’m still relatively young and work a full-time schedule. Whether for the sake of more income or a legacy, I would like to get into a side-gig. Starting a business is very time intensive, taking on another job would risk me burning out, but becoming a landlord seems quite possible.
I know I can be approved for a second mortgage. I can have a renter pay that mortgage off for me and hope that the property appreciates enough that I can sell it for a profit down the road.
By entering the real estate buying market I will increase competition, decrease supply, increase demand, and drive the price up for someone who is looking to buy their primary residence.
But it can be argued that, at the same time, I am allowing someone who would otherwise not make a suitable home buyer to stay in a specific neighborhood and in a specific kind of home with just a 12-month lease instead of a 30-year mortgage.
The Sustainable Landlord
I’ve talked about the ideal medical career, where I would work hard the first decade after residency, pay back my student loans, save a healthy amount of money, pay off my primary residence, and then work just enough to pay for my overhead.
The advantage to such an ideal medical career is that I can then work for a lower hourly wage. So I could work for a free clinic or volunteer some of my time for medical groups which provide free healthcare to the community.
I might be less inclined to recommend a bullshit knee scope or prescribe a statin if I’m less starved for more income. I wouldn’t have much to gain to continue by propagating the lies of the medical system.
Similarly, the value of a landlord could go far beyond simply generating more income for themselves. The landlord could take a property and divide it up so that more units become available on the same parcel of land. Or they could rent it at a discount to artists, students, or those in need of housing.
Or, even better, they could stay completely out of the real estate market and just landlord their own property. Got an extra room? Rent it out. Got extra space on your land? Build an ADU.
The Progressive Landlord
Imagine that I own a paid-off condo that I acquired years ago. For whatever reason I have decided to hold onto it. Perhaps because I am hoping that it will appreciate in value or because I may want to move back to that city someday.
I bought it for $100k and now it’s worth $400k. Should I be renting it at the current rental prices of $3,000/month or charge enough to cover my property taxes, maintenance, and HOA fees?
The enlightened landlord would rent their unit out to the ideal candidate at a price that allows them to hold onto their property and still enjoy a profit from its sale.
Of course, I totally understand that this is a hypothetical example. And I immensely appreciate the irony that I’m writing on this topic when I just rented out my own studio on AirBnb for an absurdly high $2,200/month.
Should I Get Into Landlording?
Like most of the stuff on this blog, writing helps me figure things out and a secondary goal is to help others on a similar journey and learn from others who share their stories with me.
Should I get into landlording?
I’ve had an idea of renting out my current condo and settling into a new one. But I just can’t justify this move. What would I be adding to society? What would I be producing?
I don’t always need to be producing but if I’m going to undertake such an exhaustive process as buying a home, I better have a damn good reason. I don’t want to be that person adding to the housing problem.
Renting My Condo When I Travel
Though I don’t care much for traditional travel, I can see myself living in a new place for a few months at a time. This offers me the opportunity to rent my place out while away.
I don’t have any problem with this option.
Though I need to consider whether charging the ‘market rate’ is appropriate. My instinct tells me that I should be charging a fair amount to cover all my overhead and ignore the market rate.
Complaining About Gentrification
The argument that the rich infiltrate a lower-income neighborhood and displace its people is referred to as gentrification.
When people in Portland complain about their city having become too expensive to live in because ‘the rich came and bought up all the land and drove up prices’, they are ignoring the fact that it was Portlanders who sold those homes to these buyers.
There is no hostile takeover when it comes to residential real estate. Someone has to be willing to sell their home in order for someone else to take that home, renovate it and drive up its value.
The point I am trying to make is that landlording isn’t wrong.
It’s just that I don’t see the value of a landlord in my definition of a sustainable society. I don’t find that it will help me build a bigger community in this world. When I buy a piece of real estate that I don’t need and use it to make money, I’m take a resource away from someone else.
Sure, if it’s not me then some other greedy rich person will buy up that house.
It’s like being vegan. I realize that I’m making zero impact in the quality of animal lives by choosing to be vegan. But it doesn’t mean that I should go ahead and eat the shit out of a piece of steak.