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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

by 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.
- mruts 8y ago
  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.

by mruts 8y ago

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.

mruts 8y ago
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.