Earlier quoted context omitted.
TFA also makes another good point but somehow makes it sound evil; In low-cost cities, landlord profit rates rise steeply alongside neighborhood poverty. But in expensive cities, the reverse is true. In expensive cities, landlords make money through appreciation and gentrification (which is bad enough for the poor). In lower-cost, more economically hard-hit cities, they make it on the backs of the poor. If the home v…
>of course the rent will have to be higher to provide the necessary return on capital Rent is set by supply and demand. There's no law - economic or otherwise - saying that it is necessary for landlords or anybody else to yield a return on capital. In reality if the value of a home is falling or flat landlords do often try to raise rents in order to recoup losses and sometimes this leads to even greater losses as ten…
Investment opportunities are also a market with supply and demand. The demand for a high risk investment with low expected return is approximately zero.
If there are more attractive investment opportunities (higher expected return with lower risk) then money will flow there instead.
US treasuries provide a backstop for the minimum expected return on capital. It’s throwing away money to invest in something non-liquid with an expected return lower than, say, 1 month T-bills, which are currently about 2.5% APY.
Of course it’s possible to lose money renting a particular unit, or over a particular timescale, but we’re talking about the long-term macroeconomics, where this is not the case. Hence expected rate of return, which has an average and variance.
In that sense the long-term macroeconomics dictate that yes there is an “economic law” which says rental properties must provide a positive return on capital. Or else there would be no market for rental properties.