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> The real solution to a housing problem is to incentivize and facilitate the building of more housing. You need to have some degree of control. I live in a su

> The real solution to a housing problem is to incentivize and facilitate the building of more housing. You need to have some degree of control. I live in a suburb close to a tech hub in WA. They built a lot of housing in the past 3 years. And I mean a lot. At least a couple of hundred of apartments on the market every year, after raising 3-4 buildings at the same time, in a town of 20k people. One would think that the price would go down based on supply and demand, right? More than half of the apartments were empty while the management companies were not budging on the price. Nobody wanted to go below 2k/month for a one bedroom and they were sitting around with empty apartments. Finally they managed to reel in some suckers by offering 2-3 months free rent but again, no rent was going below 2k so the next year, you pay up or move out. Right now, people are moving out and the apartment buildings aren't what you'd call full but again, the rent is not going down. It actually increased. Because what happens is that they're owned by large landlord corporations which can take the hit for a year or two to keep the prices up. I know this because I used to live in one. They increased my rent (years ago) from 1.2k to 1.7k and I moved out. The apartment was on the market afterwards for about a year and they didn't try too hard to get new tenants, they just posted it periodically on Craigslist. I tried to negotiate to bring it down to 1.4k and they said no. It was way profitable for anyone to keep the price up, although they lost a year of rent from it.

epistasis 7y ago
For a town of 20k people, a couple hundred apartments doesn't seem like much at all to me. That's probably less than 5% population growth, right? A big big problem is that we have underbuilt for decades, which has normalized underhousing for younger people.
tolmasky 7y ago
Losing an entire year of 1.2K rent breaks even with 1.7K rent after roughly 3.3 years, breaks even (1.7(x-12)=1.2x, x = 40 months). And that’s if the new tenants stay with no churn and you don’t play the same game forcing them out for another year. Had they just raised your rent $200, the break even point becomes almost 6 years. I don’t understand your landlords at all. With regard to the story before it, it sounds like they actually lowered rent to about $1600 (2 months free is a 17% reduction, which is pretty hefty. Sure, you’re betting on them staying after, but it switches to month to month usually after a year so it’s risky).
- bsder 7y ago
  There's some weird legal implications that I know that I don't understand. I see this all the time where a large ownership company will leave apartments or commercial real estate totally unoccupied rather than allow a cheaper rent. I don't understand what they gain.
  - ac29 7y ago
    Losses on rental, including depreciation and fixed costs like property tax can be counted against profits on other units. These losses can be carried forward and applied against future taxes indefinitely in the US. So, leaving an apartment empty that could be rented for $X isnt quite a straightforward loss of $X, since you also gain the ability to offset future taxes.
- jurassic 7y ago
  I believe part of the explanation for this is that big landlords have more ways to make money off property than just collecting rent over long periods of time due to the way buildings are valued in the commercial real estate market. Building net operating income has a direct relationship to market value; the ratio of these things gives you the capitalization rate, which tends to be known for a given type of building in a given market. If the unit sits vacant for a while but they do eventually succeed in growing building revenue through rent increases, they don't have to wait out the full breakeven timeline to make money since they can sell it on to the next buyer at the newer higher price indicated by the latest year's financials. Let's take an example building where the local market has apartments trading at a 3% cap rate. If there are 30 units renting at 1.2k with no vacancy, that's $432k in annual rent. Let's say running this property requires a $80k property manager, $80k in property taxes, $40k in utilities, $40k in insurance, and $25k in miscellaneous expenses for a total of $265k/yr in expenses. The net operating income is $432k - $265k = $167k/yr. The market value of this building to a prospective buyer would be $167k/0.03=~$5.56M Renting the 30 units at $1.7k (41% rent increase), gross rents would be $612k. Expenses constant at $265k/yr (taxes would go up, but this is napkin math), the NOI is now $347k and the building is worth $347k/0.03=$11.56M . In this example, a 41% rent increase more than doubled the value of the building. For an investor with deep enough pockets, the $6M of equity created by renting units at the higher price is enough to cover the cost of a long vacancy / rehab process. But they can't get too greedy or the units will never rent and they're just stuck holding the bag on a high-vacancy underperforming property. These dynamics amount to what is basically a slow-motion flip playing out over 4-10 years. Some REITs do this across their entire portfolio to achieve healthy annualized returns.
tmh79 7y ago
This tends to happen with new apartment buildings for the first 2 years or so, and its an artifact of real estate finance. For finance purposes, the building is valued on the theoretical sum of its leases when its at full capacity. If you have a 100 unit building where each unit rents for exactly 2.5k/month, then your building is valued on a multiple of of the $250000/month it generates. That value is used as capital for the real estate company that owns the building to use to get a loan to build another apartment complex. Where this gets tricky is that the max cashflow a building can generate is decreased when you lower rents in leases for for finance and accounting purposes,but when you give someone 1/2/3 months free rent the "max theoretical monthly rent" remains the same as if you hadn't given them the free rent. Thus, while the 2 months free rent is an effective ~18% rent decrease for the tenant, it doesn't impact the ability for the development company to borrow, and thats why it is widely used.
- mbajkowski 7y ago
  This seems about right. Also, there is a time frame when a new complex after completion transitions from a short term builder/construction loan to a long term permanent loan. For that loan as mentioned above the building is valued at theoretical sum of it leases by the bank. Thus for that loan it is better to show high actual rents and extrapolate to secure a better loan value / term.
matchbok 7y ago
Nobody says the rent will go down. That's not the argument. Increasing supply simply ensures tomorrow's rent is lower than it would be otherwise.
PorterDuff 7y ago
Perhaps it's similar to the economics of retail gasoline prices at gas stations.

epistasis 7y ago

For a town of 20k people, a couple hundred apartments doesn't seem like much at all to me. That's probably less than 5% population growth, right? A big big problem is that we have underbuilt for decades, which has normalized underhousing for younger people.

tolmasky 7y ago

Losing an entire year of 1.2K rent breaks even with 1.7K rent after roughly 3.3 years, breaks even (1.7(x-12)=1.2x, x = 40 months). And that’s if the new tenants stay with no churn and you don’t play the same game forcing them out for another year. Had they just raised your rent $200, the break even point becomes almost 6 years. I don’t understand your landlords at all. With regard to the story before it, it sounds like they actually lowered rent to about $1600 (2 months free is a 17% reduction, which is pretty hefty. Sure, you’re betting on them staying after, but it switches to month to month usually after a year so it’s risky).

bsder 7y ago
There's some weird legal implications that I know that I don't understand. I see this all the time where a large ownership company will leave apartments or commercial real estate totally unoccupied rather than allow a cheaper rent. I don't understand what they gain.
- ac29 7y ago
  Losses on rental, including depreciation and fixed costs like property tax can be counted against profits on other units. These losses can be carried forward and applied against future taxes indefinitely in the US. So, leaving an apartment empty that could be rented for $X isnt quite a straightforward loss of $X, since you also gain the ability to offset future taxes.
jurassic 7y ago
I believe part of the explanation for this is that big landlords have more ways to make money off property than just collecting rent over long periods of time due to the way buildings are valued in the commercial real estate market. Building net operating income has a direct relationship to market value; the ratio of these things gives you the capitalization rate, which tends to be known for a given type of building in a given market. If the unit sits vacant for a while but they do eventually succeed in growing building revenue through rent increases, they don't have to wait out the full breakeven timeline to make money since they can sell it on to the next buyer at the newer higher price indicated by the latest year's financials. Let's take an example building where the local market has apartments trading at a 3% cap rate. If there are 30 units renting at 1.2k with no vacancy, that's $432k in annual rent. Let's say running this property requires a $80k property manager, $80k in property taxes, $40k in utilities, $40k in insurance, and $25k in miscellaneous expenses for a total of $265k/yr in expenses. The net operating income is $432k - $265k = $167k/yr. The market value of this building to a prospective buyer would be $167k/0.03=~$5.56M Renting the 30 units at $1.7k (41% rent increase), gross rents would be $612k. Expenses constant at $265k/yr (taxes would go up, but this is napkin math), the NOI is now $347k and the building is worth $347k/0.03=$11.56M . In this example, a 41% rent increase more than doubled the value of the building. For an investor with deep enough pockets, the $6M of equity created by renting units at the higher price is enough to cover the cost of a long vacancy / rehab process. But they can't get too greedy or the units will never rent and they're just stuck holding the bag on a high-vacancy underperforming property. These dynamics amount to what is basically a slow-motion flip playing out over 4-10 years. Some REITs do this across their entire portfolio to achieve healthy annualized returns.

tmh79 7y ago

This tends to happen with new apartment buildings for the first 2 years or so, and its an artifact of real estate finance. For finance purposes, the building is valued on the theoretical sum of its leases when its at full capacity. If you have a 100 unit building where each unit rents for exactly 2.5k/month, then your building is valued on a multiple of of the $250000/month it generates. That value is used as capital for the real estate company that owns the building to use to get a loan to build another apartment complex. Where this gets tricky is that the max cashflow a building can generate is decreased when you lower rents in leases for for finance and accounting purposes,but when you give someone 1/2/3 months free rent the "max theoretical monthly rent" remains the same as if you hadn't given them the free rent. Thus, while the 2 months free rent is an effective ~18% rent decrease for the tenant, it doesn't impact the ability for the development company to borrow, and thats why it is widely used.

mbajkowski 7y ago
This seems about right. Also, there is a time frame when a new complex after completion transitions from a short term builder/construction loan to a long term permanent loan. For that loan as mentioned above the building is valued at theoretical sum of it leases by the bank. Thus for that loan it is better to show high actual rents and extrapolate to secure a better loan value / term.

matchbok 7y ago

Nobody says the rent will go down. That's not the argument. Increasing supply simply ensures tomorrow's rent is lower than it would be otherwise.

PorterDuff 7y ago

Perhaps it's similar to the economics of retail gasoline prices at gas stations.