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Comment by billmalarky | Hacker News Reader

> He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.

The value landlords provide is the assumption of risk. The premium you pay to rent is in exchange for vastly limiting your exposure to said risk.

This is why offloading the risk onto creditors (ie purchasing real estate with borrowed money under an LLC) is so lucrative. You reap all of the rewards of property ownership, but none of the downside. In a failure scenario your creditors are on the hook, not you.

I should probably add that banks are not stupid and it is very difficult, but not impossible, to get a loan for real estate investment under an LLC.

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> The value landlords provide is the assumption of risk. The premium you pay to rent is in exchange for vastly limiting your exposure to said risk.

In hot housing markets, the value they provide is having access to the capital necessary to own property.

A 30 year old hairdresser in Seattle isn't renting because they don't want to deal with risk - they are renting because they can't save up a $XY,000 downpayment, and tie their entire salary into interest payments.

Mind you, the capital requirements for property ownership are pretty insane, and our low interest rates really don't help matters any (Home prices have ballooned, in part, thanks to them.)

> A 30 year old hairdresser in Seattle isn't renting because they don't want to deal with risk - they are renting because they can't save up a $XY,000 downpayment, and tie their entire salary into interest payments.

If you're talking about cities like Seattle, the reason that a 30-year-old hairdresser would have a difficult time purchasing a place is because prices have been pushed absurdly high due to two factors:

a) a housing shortage (primarily in the SF Bay Area, but Seattle has similar problems, and the SF housing problems spill over into other nearby cities)

b) speculative purchasing by foreign entities

The second point is less relevant Seattle than it is to nearby Vancouver - and nowhere is it more true than in New York City - but it still has a huge inflationary impact on property values in a way that doesn't benefit any local residents at all (the properties are used as places to park money by people who don't live there, and may never even have visited the US).

I'm starting to think it is less about foreign investments, like a few other comments have noted, and more about changes at the top end of the middle class.

Along with the large amounts of growth, wages in the upper middle class have really increased a lot. If you look at tech workers, it was pretty common to see average tech employees pulling in $75k-$150k a decade ago; today employees at a similar level and set of skills are pulling $200-350k. As a result, there's a ton of money in the high end available to purchase housing in the area.

Saving for a down payment is a challenge, but less so if it's relatively easy to tuck away an extra $100k a year. This is likely available to a tech earner but not the Seattle hair dresser, unless they have also increased their asking rates for a haircut the last few years.

The zoning laws keep it that way.

In a truly fair market, the new tech class buys newer, larger homes or apartments while the hair dresser buys their old starter home or bachelor pad.

Hot housing markets are extremely high risk high reward investments.

Buying NYC real estate for example, it is practically impossible to use a traditional "buy and hold" strategy and have the rents cover the cost of investment (typically rent covers more like 50% of operating costs in NYC). You pretty much only make money in NYC REI via speculation (ie the property goes up in value) not from paying down the mortgage with rents.

The solution to high pricing is to increase supply of housing. Mind you _this_ is an area where landlords do have high rent-seeking behavior in the political sense. Landlords are incentivized to push for increased regulation that limits new development whenever possible. As much as I hate to use him as an example due to his "lightning rod effect," Trump, for example would see his net worth plummet if NYC development regulations were relaxed.

> The solution to high pricing is to increase supply of housing.

... for a given amount of money. However, money is easier to create than houses.

Last I heard, NYC is literally running out of pavement space for pedestrians, let alone vehicles, and increasing the supply of housing still hasn't brought prices down.

NYC has tons of regulations that _drastically_ limit the supply of new housing. New supply hasn't even come close to keeping up with new growth. New supply is a drop in the bucket.

https://www.nytimes.com/interactive/2016/05/19/upshot/forty-...

> Last I heard, NYC is literally running out of pavement space for pedestrians, let alone vehicles

That's news to me, as someone who lives and works in the two busiest and most crowded neighborhoods in the city

> and increasing the supply of housing still hasn't brought prices down.

Yes, but that's because of the way new housing has been constructed (skewed towards luxury buildings, which are purchased by foreign speculators as ways to park money essentially tax-free). That means that many of these new units that are constructed don't actually increase the supply of housing, because speculative purchasers tend not to rent out the units (it's not worth it, given their goals).

> (NYC running out of space for pedestrians) is news to me, as someone who lives and works in the two busiest and most crowded neighborhoods in the city

I assume that's a reference to this - https://www.nytimes.com/2016/07/01/nyregion/new-york-city-ov...

It is not. Brooklyn, Queens and Bronx are littered two story houses.

The same applies to a 30 year old doctor in Vancouver, and I would imagine other Canadian cities soon enough.

Were 30 year old hairdressers ever able to afford a home inside a major metro area? I'm sure one could have afforded a home in Seattle 40 years ago, but the Seattle metro area wasn't even among America's top 20 largest metros until the 70's.
The problem with the assumption that something is wrong with Seattle's housing market is that people's perceptions of what Seattle "is" haven't changed to reflect the fact that Seattle today is as large as Chicago was in 1930. No one expects a hairdresser to be able to have been able to afford property within Chicago's city center at any point in modern history. That's because everyone alive has always known Chicago to be a massive metropolis whereas many long term residents of Seattle still remember a time when the city was an also-ran in terms of size and economic prosperity. Just think of all the towns that were absorbed into what is now called Chicagoland.
People who live as far as 85 miles away from downtown Chicago (Kentland Indiana is part of the Chicago MSA) still consider themselves to live "in" Chicago and they are even included as such in Chicago's Metropolitan Statistical Area. People's perceptions of what constitutes "Seattle" need to change to reflect the current reality of the city's size and influence.

Source: http://peakbagger.com/PBGeog/histmetropop.aspx

Sure, probably. The hairdresser who cut my hair when I was a child managed to buy a home in the Chicago metro area about 20 years ago. Maybe she had another source of income but I don't think so.

what if the hairdresser wants to move in with a roommate? or gets married? or has kids? Or open a new shop somewhere else? There are many reasons why someone may not want to own their property, and have to deal with transacting it.

> The value landlords provide is the assumption of risk. The premium you pay to rent is in exchange for vastly limiting your exposure to said risk.

Are there any risks that affect only the landlord, and not the renter, other than the possibility of losing ownership?

For example, if you rent a plot of land for farming, what risks does the owner of that land face that you do not?

Personal injury lawsuits.

You risk negative returns on the property, or losses compared to your opportunity cost.

If you had $1 million in 2007, it would have been more profitable to invest it in Google than to buy a two houses in Mt View and rent them out. That is the risk the landlord is assuming. There are examples where you have a negative return as well.

The owner risks the tenant destroying the capital value of the property.

http://www.cbc.ca/news/canada/ottawa/multimedia/rental-unit-...

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&o...

In the US with civil forfeiture, the police can seize the property.

https://www.cannalawblog.com/asset-forfeiture-why-your-marij...

Remember that Canada has civil forfeiture too: https://beta.theglobeandmail.com/news/national/civil-forfeit...

That the value of the land might go down? Risk means financial downside, you can lose money on real estate on a multitude of things, millions of investors do every year.

Real estate is not as easy to diversify as stocks and bonds, certain unexpected and uninsurable external shocks can have disastrous effects on the profitability of your investment. Things such as new rent control, property tax increase, termite damage, spiteful tenants, corrupt HoA, and sudden market volatility can all cause you to lose significant money.

I'm not getting the message behind the Churchill quote, landlords clearly have operating expenses to commit towards keeping a plot of land and shelter in useful or livable condition.

Sure they do, but we now have a ton of anti slumlord laws because there was a long precedent of landlords being slumlords.

A renter's financial risk is limited to his/her lease agreement. This could be the remainder of the rent due according to the lease (ie if there are 6 months left on the lease agreement you will need to pay 6X rent). In practice typically a renter is usually on the hook for the security deposit or a month's rent, so long as they can find another renter to take over their lease.

The owner assumes the total risk for the property.

As a basic example, consider starting a lease vs buying a property in 2007. If you were a renter when the real estate market collapsed in 2008 you were stuck paying higher than the market rate (most likely) until your lease ended, at which point your rent probably dropped to market rate. No biggie.

If you bought property at the top of the market in 2007 for say $500k, and the value of that property dropped to $250k in 2008, you are now paying a $500k mortgage payment for a property worth half that amount. Rent used to cover your mortgage payment but now the market rate for rent in the same property has halved so now instead of breaking even every month on your property you have to pay $1,000 a month for someone else to live in your property just to not default on the mortgage. Odds of having to declare bankruptcy in this scenario are high.

> Odds of having to declare bankruptcy in this scenario are high.

Not at all. If you could not afford your property because of a loss of income, you are eligible for another mortgage after a short sale or foreclosure within a year. If you can't document a loss of income, its only 3 years to get another mortgage.

Temporary credit damage? Indeed, but not necessarily bankruptcy.

Of course. I was wanting to keep my example reductionist on purpose to answer mrow84's question in an easily understandable way.

If farmer renting land can decide year-to-year whether it is worth it to him to farm the land. If the renter determines that a particular lease is not profitable, he is free to do something else. The landowner has no such option; he's stuck with the land.

The renter generally pays a higher price per year than an owner but has greater options and less risk.

This is generally true of renting vs buying. If you go to distant city for a one-week vacation, you are likely to rent accommodations and a car rather than buy them. At the end of the week you can just walk away, whereas the owner must concern himself with generating an income with his property.

What risk? I bought the flat I live in to make risk lower. If you live on somebody else's property, you are more vulnerable and owner can limit how you treat the property.

What will happen if the economy collapses and the value of your flat is worth half what you paid for it and you lose your job?

I guess we should also consider what happens when the economy collapses and the value but not the cost of your rented living space is worth half what the landlord paid for it and you lose your job.

I have a place to live in, while if I would be renting, I would have no more money for rent and had to move. I am not speculating on that flat with intention to sell. I live in it.

You've lost your job and were only able to get a job that paid half, how do you make your mortgage payment? If you are renting you are not locked into the property, you have the flexibility to move to a lower cost flat.

It’s not uncommon to find fixed-rate mortgages that are significantly cheaper than the corresponding rent for the same home. The risk is only high the first decade, and then it becomes a huge safety net.

The monthly mandatory payment on my mortgage is now a lot lower then typical rent (I have freedom to pay more if I wish to). It was roughly same as rent for few years, but it went down as I paid the debt.

If my salary would go down to half and my husband would got unemployed, we would still be able to pay it. You don't have to buy the most expensive flat there is in the city. And if we were not, that would still be not that much different then not being able to pay rent.

In really really the worst case, you move to that lower cost flat and have bank take away your flat (since you aint paying mortgage it is theirs). But it is less likely to happen then being unable to pay rent because we got sick simultaneously with economy tanking.

What I'm describing is a generalization since you asked about the differences in risk between renting and ownership.

It sounds like you have taken a series of (wise) steps to significantly limit your exposure to the risk involved with property ownership. This doesn't make the rule invalid though it makes you the exception to the rule.

> In really really the worst case, you move to that lower cost flat and have bank take away your flat (since you aint paying mortgage it is theirs).

In the event of the real estate market tanking, like it did in 2008, this is not what happens in a worst case scenario. You are still liable for the cost of the mortgage you owe, if the property loses more value on the open market than the amount left that you owe on the mortgage you can't just give back the property to cancel the mortgage. You might owe $300k left on the mortgage (because you originally bought the house for $500k for example) but now the property is only selling on the market for $250k. In this scenario you can't "give back" the property because even then you still owe the bank $50k. If you can't pay, you must declare bankruptcy in addition to losing the property. So now you have no home and also your credit is so destroyed that landlords refuse to rent to you. This is a very real scenario and happened to a LOT of people during the US real estate crisis.

You can in the US - most mortgages are written in a way that let's you walk away from them if they are underwater.

It depends on where you are renting. Some jurisdictions have extremely tenant friendly laws [ which is how you end up with people paying $400/mo rents for 3 bedroom apartments in West Village or in Upper East Side ], while others don't.

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