Landlords are amazing.
That’s perhaps a perverse, controversial statement in these Mamdani-ish times, where “free” socialist housing is all the rage. In popular imagination, landlords are rent-seeking middlemen, extracting value from shelter they did not “create,” skimming from tenants who have no alternative, riding the fiat money printer and dysfunctional zoning regulations all the way to the bank (read: overvalued housing market).
It is a tidy morality tale. It is also mostly wrong.
Since most of us regular consumers have to live somewhere, we’re sooner or later asking ourselves whether we should own or rent our dwellings. And at dining tables with friends and extended family, the owning-vs-renting conversation often comes up.
Most people think of paying rent as “wasted” money. It’s money straight into a landlord’s pocket that you’ll never recoup, and it’s a pure expense. At least paying down a mortgage gets you (partial, gradual) ownership of your home, a real asset. Since the (often tax-deductible) interest you’re charged is lower than the rent you’d otherwise have paid, mortgaging one’s finances to the hilt is a good idea, right?
First of all, renting vs owning is a silly dichotomy: it’s all renting. The only question is whether you’re renting money from a bank or the actual apartment from a landlord. Essentially, it’s all just a balance sheet question in your own personal finances.
You either rent the dwelling, or you rent the out-of-thin-air money that the bank created to buy the house on your behalf. You’re either on the hook for paying rent to a landlord or on the hook for paying a bank money rent, i.e., “interest.” (With the 50-year mortgages that President Trump recently floated, there’s some sense in which you’re renting from the government, too.)
The question isn’t to rent or not to rent, but how much financial leverage you’re hungry for or willing to stomach, and how tied down you want or need to be. In a healthy housing market, it’s about specifying the exact properties (pun intended) of your living arrangements.
Dead Money and Offloaded Financial Responsibility
When you’re “buying a home,” you aren’t just forking over dough for a dwelling like any other market transaction. You are underwriting a leveraged real estate business on your own personal balance sheet! You have suppliers of physical material (builders, plumbers, maintenance, electricians) as well as financial capital (banks). You’ve got to appease the government via (often hefty) taxes, and usually a mandatory insurance company with regular premiums. In most Western housing markets, too, the money-banks-regulation-real estate industrial complex is so dysfunctional that the very expensive and tedious transaction itself might take months or years. If the market tanks, or there’s some “unpredictable” event like COVID or the 2008 Financial Crisis, you’re stuck rolling payments for years.
From the renter’s perspective, the pesky funds I hand over every month are far from “dead”; they are premiums paid to avoid large, lumpy expenses and risks to my balance sheet. I’m buying options, geographic mobility, freedom from regulatory and tax uncertainty. When the roof leaks or the boiler fails, it is not my bank balances that take a hit. When interest rates rise or property values fall, it is not my equity on the line.
The landlord is the residual claimant: He takes all the financial risks involved in the arrangement. And while many economic risks remain hidden and invisible to a consumer unless they happen, like an insurance company, the service they provide is valuable. (Nobody would say that car insurance premiums were “wasted” just because you didn’t crash your car.)
Speaking of insurance, the landlord likely has some insurance arrangement that goes well above yours — more expensive, more coverage, more widely ranging.
Next, taxes. Most jurisdictions impose a property tax for the privilege of owning a home. While economists find them efficient (in the sense, “nondistortionary”), most people hate them. Fine, economically speaking, property taxes translate into the rent I’m paying, but a property tax is yet another thing you’d be on the hook for if you owned the home instead of just renting it.
Last, and this is the biggest one: opportunity cost. If you own your home, you can’t really leave — unless the market, a suitable buyer, five sets of bureaucrats, a few realtors and financing requirements happen to align. I can cancel my lease with a few months’ notice, and I’m out, no questions asked.
Financial opportunity cost is a real thing as well. You’re stuck paying into a financial product that returns you approximately the low-ish single-digit interest on your mortgage. That’s not a great savings vehicle; I’d much rather keep my surplus funds regularly dollar-cost-averaging into the stock market’s long-run return of 9.7 percent, the fantastic decade the S&P 500 just had (15 percent), gold’s steady 9 percent, or bitcoin’s 25-90 percent (adjust depending on timeframe and repeat-probability going forward).
For thirty (or fifty) years, you’ve committed yourself to saving in a financial product that returns you only about the interest you’ve already paid on your mortgage, plus whatever few percentage points your house may appreciate going forward. True, you get the ability to cheaply go 7x long on a hard asset, but there’s hidden risk in there: everything from interest-rate sensitivity to housing market collapse. And to be frank, I’d much rather watch my unencumbered bitcoin fall 30 percent in value — which it has done many times in the past, and recovered — than try to fall asleep in my overleveraged house, suddenly underwater because the housing market fell.
Historically, house price appreciation was quite respectable, depending on the monetary regime and timeframe, somewhere between six and eight percent, which reimburses you somewhat for your maintenance troubles. With demographic declines, uncertain economic outlooks, and plenty of threats to real estate’s outsized monetary premium on the horizon, there’s no guarantee you’ll see that sort of return again. Whereas when I’m renting a home, I can invest in whatever I please — and much more easily achieve a decent diversification should I wish to do so. (Most American households’ net wealth is locked up in illiquid housing assets.)
Importantly, I offload all of these practical and financial troubles to someone else. They are on the financial hook for hijacking their personal balance sheet to a physical domain, nestled between a profit-hungry bank and a rapacious government. They are financially liable for maintenance, for repairs, for keeping the house in working order.
The upside is that the owner gets to decide what, like, the bathroom redecoration looks like. Maybe build a new porch.
From the consumer’s point of view, landlords exist to absorb risks that households should be wary of carrying themselves. They borrow so I don’t have to; they lever themselves up so I can stay liquid; they hold the legacy asset while I keep the options.
Landlords of the world, I salute you for your service!
