In a competitive and efficient market, he’ll profit on average to the tune of the risk-free interest rate (~2% or so now) but higher since renting is not risk-free. So you could start by figuring out his risks in renting out to you.
The real estate market is far from efficient. Transaction costs are very high and good data is hard to come by. I think a bottom-up approach would be far more accurate than an economics-based approach that uses assumptions that are extremely inaccurate for this situation.
Hang on, his return on his capital may be the risk-free rate plus risk compensation, but Omid’s $1000/month is not the landlord’s capital, it’s his revenue! Unless you have a good way of mapping rent payments onto the amount of capital tied up in the building, I don’t see how your answer is useful.
Revenue from a renter is simply investment income, and we’d expect the income from an apartment-bond to, like any other investment, be squeezed down to equal other investments after adjusting for risk and diversification and taxes etc.
Yes. I do not see how this answers my objection. You still have not provided a way of dividing up the $1000 into money used for maintenance and money taken out as profit, which was the original question. All you’ve said is that the second component should be equal to 3% or so of the investment; since we have no idea what the investment was, this is unhelpful.
The investment income is the revenue from the renter less expenses in running the building.
There’s also a non-obvious positive risk, too. Specifically, the appreciation of real estate prices. If the landlord owns a $120k house that they expect to increase in value 1%/year over their mortgage rate, then that’s another $100/month that the landlord doesn’t have to get in rent.
In other words, the landlord is holding an equity position in the real estate they are leasing to you. This equity position can appreciate, giving a non-rent-collection profit source that increases the price they are willing to pay for the real estate in the first place, lowering their profit as a percentage of capital invested.
But it can also fall, as we witnessed not too many years ago… Any speculation on real estate will already have been priced in and the expected profit from buying a house minimal.
To borrow your phrasing—in a competitive and efficient market, the expected profit from buying a house is equal to the risk-free interest rate. So my math actually was rather bogus—I should have talked about how the landlord should expect his $20k equity stake to appreciate at the risk-free interest rate (~2%), which would shave $400/year off the amount of collected rent needed to justify the house price in the first place.
In a competitive and efficient market, he’ll profit on average to the tune of the risk-free interest rate (~2% or so now) but higher since renting is not risk-free. So you could start by figuring out his risks in renting out to you.
The real estate market is far from efficient. Transaction costs are very high and good data is hard to come by. I think a bottom-up approach would be far more accurate than an economics-based approach that uses assumptions that are extremely inaccurate for this situation.
Hang on, his return on his capital may be the risk-free rate plus risk compensation, but Omid’s $1000/month is not the landlord’s capital, it’s his revenue! Unless you have a good way of mapping rent payments onto the amount of capital tied up in the building, I don’t see how your answer is useful.
Revenue from a renter is simply investment income, and we’d expect the income from an apartment-bond to, like any other investment, be squeezed down to equal other investments after adjusting for risk and diversification and taxes etc.
Yes. I do not see how this answers my objection. You still have not provided a way of dividing up the $1000 into money used for maintenance and money taken out as profit, which was the original question. All you’ve said is that the second component should be equal to 3% or so of the investment; since we have no idea what the investment was, this is unhelpful.
The investment income is the revenue from the renter less expenses in running the building.
There’s also a non-obvious positive risk, too. Specifically, the appreciation of real estate prices. If the landlord owns a $120k house that they expect to increase in value 1%/year over their mortgage rate, then that’s another $100/month that the landlord doesn’t have to get in rent.
In other words, the landlord is holding an equity position in the real estate they are leasing to you. This equity position can appreciate, giving a non-rent-collection profit source that increases the price they are willing to pay for the real estate in the first place, lowering their profit as a percentage of capital invested.
But it can also fall, as we witnessed not too many years ago… Any speculation on real estate will already have been priced in and the expected profit from buying a house minimal.
To borrow your phrasing—in a competitive and efficient market, the expected profit from buying a house is equal to the risk-free interest rate. So my math actually was rather bogus—I should have talked about how the landlord should expect his $20k equity stake to appreciate at the risk-free interest rate (~2%), which would shave $400/year off the amount of collected rent needed to justify the house price in the first place.