5 ms·

> made the required rent higher If, all along, you could have rented it out for more money ... why were you planning to rent it out for less money? I get that

> made the required rent higher If, all along, you could have rented it out for more money ... why were you planning to rent it out for less money? I get that you wouldn't have to, but it appears that the "market rate rent" was higher than you initially anticipated. As a corollary, assuming that you had initially planned on the highest rent that the market would bear...it seems that after a year of unexpected delays you'd most likely still choose to finish the project even at a loss. This is because all the loss would have already been sunk cost that you can't change anymore, and at the "original maximum rent the market would bear" you'd still make your IRR/ROI on the marginal future investment of finishing the construction. So, assuming you couldn't raise the rent, you'd lose money either way, but you'd lose less money by finishing the construction vs. losing more money by abandoning the project entirely.

bfeynman 4y ago
My guess is they probably put more money into it (higher quality appliances and such) to get higher rent that would give acceptable cap rate.
bobkazamakis 4y ago
They want all risk to be put on external factors, that way their business can make profit without any - a tale as old as time.
brewdad 4y ago
Because outside of an economics textbook, no one has perfect information on what the market will bear.
s1artibartfast 4y ago
Your comment only makes sense if you ignore the rest of the sentence you quoted. "It also made the required rent higher to recoup those costs and try to be profitable (that deal will lose money)." required rent =/= planned rent =/= actual rent Higher costs than expected can easily cause a project that would be profitable to be a loss.
- mannerheim 4y ago
  To be fair, GP has a point: unexpected expenses and delays in construction represent sunk costs, and don't matter with respect to maximising profits, as the landlord should pick the price which maximises profits with respect to whatever the operating costs of the apartment are, without considering the cost of construction. However, as sibling comments to yours mentioned, there are flaws to this perspective: - You can make the apartments 'better' and charge a premium on top of whatever the better appliances cost. So if that raises operating costs by $100/unit month, raise rent by $200/unit month. - Real life doesn't always map perfectly onto microeconomic theory. In particular, discovering the profit-maximising price is tricky. However, I would still argue that the landlord would rationally still pick whatever they would assume the profit-maximising price would be. - Since everyone else is probably facing delays and cost overruns, probably not as much construction is getting done as might have been assumed, therefore the landlord faces less competition than anticipated and can raise rent higher than expected without losing too many prospective tenants.
  - s1artibartfast 4y ago
    My point is that the GP's point isnt applicable, and critiquing a statement that was not made . >If, all along, you could have rented it out for more money ... why were you planning to rent it out for less money? ... the original post never said they would rent it out for less money. Nor did it say they would rent it out for more money. They only said the rent required to break even went up. This is clear in the original post, which says they could not achieve this higher rent required to break even.
    - mannerheim 4y ago
      I think implicit here > This was almost a year delay and added cost overruns, etc. It also made the required rent higher to recoup those costs and try to be profitable (that deal will lose money). is the 'try to be profitable' that implies they did end up raising rent higher than otherwise planned, but you are right that this isn't necessarily true.

bfeynman 4y ago

My guess is they probably put more money into it (higher quality appliances and such) to get higher rent that would give acceptable cap rate.

bobkazamakis 4y ago

They want all risk to be put on external factors, that way their business can make profit without any - a tale as old as time.

brewdad 4y ago

Because outside of an economics textbook, no one has perfect information on what the market will bear.

s1artibartfast 4y ago

Your comment only makes sense if you ignore the rest of the sentence you quoted. "It also made the required rent higher to recoup those costs and try to be profitable (that deal will lose money)." required rent =/= planned rent =/= actual rent Higher costs than expected can easily cause a project that would be profitable to be a loss.

mannerheim 4y ago
To be fair, GP has a point: unexpected expenses and delays in construction represent sunk costs, and don't matter with respect to maximising profits, as the landlord should pick the price which maximises profits with respect to whatever the operating costs of the apartment are, without considering the cost of construction. However, as sibling comments to yours mentioned, there are flaws to this perspective: - You can make the apartments 'better' and charge a premium on top of whatever the better appliances cost. So if that raises operating costs by $100/unit month, raise rent by $200/unit month. - Real life doesn't always map perfectly onto microeconomic theory. In particular, discovering the profit-maximising price is tricky. However, I would still argue that the landlord would rationally still pick whatever they would assume the profit-maximising price would be. - Since everyone else is probably facing delays and cost overruns, probably not as much construction is getting done as might have been assumed, therefore the landlord faces less competition than anticipated and can raise rent higher than expected without losing too many prospective tenants.
- s1artibartfast 4y ago
  My point is that the GP's point isnt applicable, and critiquing a statement that was not made . >If, all along, you could have rented it out for more money ... why were you planning to rent it out for less money? ... the original post never said they would rent it out for less money. Nor did it say they would rent it out for more money. They only said the rent required to break even went up. This is clear in the original post, which says they could not achieve this higher rent required to break even.
  - mannerheim 4y ago
    I think implicit here > This was almost a year delay and added cost overruns, etc. It also made the required rent higher to recoup those costs and try to be profitable (that deal will lose money). is the 'try to be profitable' that implies they did end up raising rent higher than otherwise planned, but you are right that this isn't necessarily true.