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American landlords derive more profit from renters in low-income neighborhoods

131 points by vector_spaces 8y ago

inuhj 8y ago
"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.
Proven 8y ago
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).
hamilyon2 8y ago
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
- ReptileMan 8y ago
  Access to credit?
- iguy 8y ago
  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.
  - DataWorker 8y ago
    Yes, some people do think payday loan sharks are greedy.
    - iguy 8y ago
      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.
  - stoic 8y ago
    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."
Simon_says 8y ago
Well, yes, that's the way the efficient frontier in the risk-yield curve works.
- tobylane 8y ago
  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?
  - Simon_says 8y ago
    That's my understanding, at least.
  - tlear 8y ago
    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.
  - mruts 8y ago
    If the risk wasn't higher, landlords wouldn't make more profit, would they?
  - sokoloff 8y ago
    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.
TheBeardKing 8y ago
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.
- LeifCarrotson 8y ago
  20 rentals at $1000/mo is $240k/year. Granted, that's definitely not all profit, but it's a lot of cash flow.
- coldtea 8y ago
  >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).
  - Gpetrium 8y ago
    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.
- AmVess 8y ago
  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.
spo81rty 8y ago
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.
- Spooky23 8y ago
  No.... they benefit from cartel pricing based on Section 8 prevailing rent. Being a slumlord is an immensely profitable business.
- DataWorker 8y ago
  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.
  - marktangotango 8y ago
    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!).
  - justinalanbass 8y ago
    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 https://www.journals.uchicago.edu/doi/abs/10.1086/701697
    - pytester 8y ago
      >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.
kjbfojbejib 8y ago
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.
- jessaustin 8y ago
  ...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?
  - coldtea 8y ago
    >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?
    - jessaustin 8y ago
      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?
      - coldtea 8y ago
        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.
_nosaj 8y ago
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.
mruts 8y ago
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).
- tzs 8y ago
  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?
  - iguy 8y ago
    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.
  - mruts 8y ago
    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.
- everybodyknows 8y ago
  > ... 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.
patio11 8y ago
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.
- pytester 8y ago
  >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.
  - kgwgk 8y ago
    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.
    - pytester 8y ago
      >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...
      - wutbrodo 8y ago
        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?
bluedino 8y ago
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-landlords 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.
- ratsmack 8y ago
  > ... 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.
  - Retric 8y ago
    That’s not a contradiction. The minimums are low enough to qualify as a dump.
    - pasquinelli 8y ago
      And enforcement is deferent to the landlord.
- magnetic 8y ago
  Is there a public database of section 8 rentals/properties?
  - bequanna 8y ago
    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.
Lndlrd 8y ago
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 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?
- ccvannorman 8y ago
  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!"
- glup 8y ago
  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).
jryan49 8y ago
Isn't that how investing is supposed to work? More risk more profit?
nilskidoo 8y ago
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.
- ryguytilidie 8y ago
  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?
  - hooph00p 8y ago
    >Also most HN commenter's rent is paid by their parents. I don't know if I agree with this generalization...
    - scarface74 8y ago
      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.
  - dang 8y ago
    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 https://news.ycombinator.com/newsguidelines.html
- BeetleB 8y ago
  >Landlords steal whatever they like, including deposits Kind of like how policemen will shoot who they want to, right?
- dang 8y ago
  Can you please read and follow the site guidelines instead of breaking them like this? https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html We detached this subthread from https://news.ycombinator.com/item?id=19470846 https://news.ycombinator.com/item?id=19470846 and marked it off-topic.
soniman 8y ago
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.
mjevans 8y ago
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?
- joelhaus 8y ago
  True, but beware the unintended consequences of 2007.
  - DangitBobby 8y ago
    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/C25Ann/sftotalmedavgsqft.pdf&sa=U&ved=2ahUKEwj27PXP75jhAhWDnFkKHcvUDtwQFjADegQIBxAB&usg=AOvVaw0dWbE8VHwAGuiTGvS63jHD 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.
- privacypoller 8y ago
  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...
- scarface74 8y ago
  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.
zaroth 8y ago
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.
- mhuffman 8y ago
  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!
  - privacypoller 8y ago
    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.
  - zaroth 8y ago
    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.
thegayngler 8y ago
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?
deleted 8y ago
[deleted]
JamesBarney 8y ago
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.
angel_j 8y ago
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.
- twblalock 8y ago
  > 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.
- pmiller2 8y ago
  Landlords do need business licenses in some California jurisdictions, FYI.
AlexTWithBeard 8y ago
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.
scarejunba 8y ago
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.
csomar 8y ago
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?

131 points by vector_spaces 8y ago

"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.

Proven 8y ago

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).

hamilyon2 8y ago

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

ReptileMan 8y ago
Access to credit?
iguy 8y ago
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.
- DataWorker 8y ago
  Yes, some people do think payday loan sharks are greedy.
  - iguy 8y ago
    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.
- stoic 8y ago
  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."

Simon_says 8y ago

Well, yes, that's the way the efficient frontier in the risk-yield curve works.

tobylane 8y ago
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?
- Simon_says 8y ago
  That's my understanding, at least.
- tlear 8y ago
  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.
- mruts 8y ago
  If the risk wasn't higher, landlords wouldn't make more profit, would they?
- sokoloff 8y ago
  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.

TheBeardKing 8y ago

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.

LeifCarrotson 8y ago
20 rentals at $1000/mo is $240k/year. Granted, that's definitely not all profit, but it's a lot of cash flow.
coldtea 8y ago
>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).
- Gpetrium 8y ago
  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.
AmVess 8y ago
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.

spo81rty 8y ago

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.

Spooky23 8y ago
No.... they benefit from cartel pricing based on Section 8 prevailing rent. Being a slumlord is an immensely profitable business.
DataWorker 8y ago
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.
- marktangotango 8y ago
  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!).
- justinalanbass 8y ago
  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 https://www.journals.uchicago.edu/doi/abs/10.1086/701697
  - pytester 8y ago
    >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.

kjbfojbejib 8y ago

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.

jessaustin 8y ago
...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?
- coldtea 8y ago
  >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?
  - jessaustin 8y ago
    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?
    - coldtea 8y ago
      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.

_nosaj 8y ago

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.

mruts 8y ago

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).

tzs 8y ago
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?
- iguy 8y ago
  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.
- mruts 8y ago
  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.
everybodyknows 8y ago
> ... 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.

patio11 8y ago

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.

pytester 8y ago
>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.
- kgwgk 8y ago
  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.
  - pytester 8y ago
    >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...
    - wutbrodo 8y ago
      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?

bluedino 8y ago

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-landlords 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.

ratsmack 8y ago
> ... 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.
- Retric 8y ago
  That’s not a contradiction. The minimums are low enough to qualify as a dump.
  - pasquinelli 8y ago
    And enforcement is deferent to the landlord.
magnetic 8y ago
Is there a public database of section 8 rentals/properties?
- bequanna 8y ago
  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.

Lndlrd 8y ago

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 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?

ccvannorman 8y ago
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!"
glup 8y ago
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).

jryan49 8y ago

Isn't that how investing is supposed to work? More risk more profit?

nilskidoo 8y ago

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.

ryguytilidie 8y ago
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?
- hooph00p 8y ago
  >Also most HN commenter's rent is paid by their parents. I don't know if I agree with this generalization...
  - scarface74 8y ago
    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.
- dang 8y ago
  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 https://news.ycombinator.com/newsguidelines.html
BeetleB 8y ago
>Landlords steal whatever they like, including deposits Kind of like how policemen will shoot who they want to, right?
dang 8y ago
Can you please read and follow the site guidelines instead of breaking them like this? https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html We detached this subthread from https://news.ycombinator.com/item?id=19470846 https://news.ycombinator.com/item?id=19470846 and marked it off-topic.

soniman 8y ago

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.

mjevans 8y ago

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?

joelhaus 8y ago
True, but beware the unintended consequences of 2007.
- DangitBobby 8y ago
  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/C25Ann/sftotalmedavgsqft.pdf&sa=U&ved=2ahUKEwj27PXP75jhAhWDnFkKHcvUDtwQFjADegQIBxAB&usg=AOvVaw0dWbE8VHwAGuiTGvS63jHD 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.
privacypoller 8y ago
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...
scarface74 8y ago
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.

zaroth 8y ago

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.

mhuffman 8y ago
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!
- privacypoller 8y ago
  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.
- zaroth 8y ago
  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.

thegayngler 8y ago

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?

deleted 8y ago

[deleted]

JamesBarney 8y ago

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.

angel_j 8y ago

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.

twblalock 8y ago
> 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.
pmiller2 8y ago
Landlords do need business licenses in some California jurisdictions, FYI.

AlexTWithBeard 8y ago

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.

scarejunba 8y ago

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.

csomar 8y ago

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?