American landlords derive more profit from renters in low-income neighborhoods • Hacker News Board

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

#21

Post by mruts » Sat, Mar 23, 2019, 2:17 PM UTC

DataWorker wrote: post #14

spo81rty wrote: post #11

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.

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.

The efficient market hypothesis posits that you can only make higher returns by increasing your risk. So it would make sense that landlords make higher returns from poor renters than rich renters. They have to price in the substantial risk (volatility of returns).

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

#22

Post by mruts » Sat, Mar 23, 2019, 2:21 PM UTC

Simon_says wrote: post #5

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

I'm not sure why you are being downvoted, because this is 100% the case. EMH posits that all risk-adjusted returns move toward the market Sharpe ratio. You can then modify the returns/vol by buying or selling at the risk-free rate.

So when renting to a poor person, you are going to demand the market Sharpe ratio by making them pay more in order to keep your risk adjusted returns in line the efficient frontier point.

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

#23

Post by mruts » Sat, Mar 23, 2019, 2:22 PM UTC

tobylane wrote: post #7

Simon_says wrote: post #5

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

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?

If the risk wasn't higher, landlords wouldn't make more profit, would they?

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

#24

Post by jessaustin » Sat, Mar 23, 2019, 2:22 PM UTC

kjbfojbejib wrote: post #12

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…

...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?

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

#25

Post by Spooky23 » Sat, Mar 23, 2019, 2:24 PM UTC

spo81rty wrote: post #11

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.

No.... they benefit from cartel pricing based on Section 8 prevailing rent. Being a slumlord is an immensely profitable business.

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

#26

Post by mruts » Sat, Mar 23, 2019, 2:30 PM UTC

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).

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

#27

Post by slfnflctd » Sat, Mar 23, 2019, 2:34 PM UTC

hamilyon2 wrote: post #4

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

Payday loans make absolutely no sense, either.

I just looked up one single company running this particular swindle-- they have over a thousand locations and do over a billion a year in revenue.

Edit: Again, this is only one company, which currently only exists in a little over half of U.S. states.

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

#28

Post by paulddraper » Sat, Mar 23, 2019, 2:38 PM UTC

DataWorker wrote: post #14

spo81rty wrote: post #11

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.

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.

> even considering those costs

But there is an overall expected value premium to be paid on low-risk purchases (or to be gained on high-risk purchases)

On average, you will lose money by purchasing insurance. (That's how insurance derive a profit.) However, people are generally happy to do that, because they value the certainty of it, even if overall it's the arthemtically subpar choice.

I expect that you will make profit from the stock market than a CD, even after averaging bear and bull years.

I'd expect that low-income rental are riskier investments, and that landlords are more likely to lose money, but overall the expected value of return is higher. That's just how markets work.

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

#29

Post by patio11 » Sat, Mar 23, 2019, 2:42 PM UTC

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.

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

#30

Post by bluedino » Sat, Mar 23, 2019, 2:46 PM UTC

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-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.