"A persistent misconception is that
rent simply equals the cost of ownership plus a profit margin. A crucial
economic principle is that input costs do not determine prices; the
value of outputs determines them. Input costs are important insofar as
they affect supply. In a market, rent is determined by supply and demand
for housing services, not by a landlord’s costs. The landlord’s cost
structure is largely irrelevant to the market-clearing price.
The difference in monthly costs between owning and renting in large cities can be great. For instance, the typical monthly rent
for a two-bedroom apartment in San Francisco can be a few thousand
dollars less than the monthly mortgage payments, including principal and
interest, for a similar property. This trend is observed in many areas
across the United States, especially in regions experiencing rapid
growth or facing macroeconomic conditions in which interest rates rise
quickly.
Characterizing landlords as reaping
significant profits oversimplifies the situation by failing to account
for the broader financial context and the risks landlords face.
Successful landlords may make great gains nominally, but the typical
yield on a unit is actually quite low.
In some states, yield (income generated by the property expressed as a
percent of the asset’s cost) can be around 6-7%, but large cities tend
to have a lower yield, typically around 2-5%—an amount insufficient to
change a renter’s ability to generate wealth.
While tenants pay a fixed rent,
landlords bear unpredictable, non-negotiable costs, such as maintenance.
Maintenance can include routine wear and tear, as well as catastrophic
repairs or the replacement of costly appliances. Landlords are
contractually and, oftentimes, statutorily obligated to maintain the
unit’s full “output” value. If the property depreciates, that is another
cost absorbed by the landlord and not the tenant. They also have to
bear the financial risks of legal compliance, which can include costs
related to having tenants, such as rent controls, or general risks, such
as insurance. When landlords have negative carry
(when monthly rental income falls below the combined costs of debt
service, maintenance, and taxes), landlords are effectively subsidizing
tenants. That latter point might be obvious, but what may be less
obvious is how common negative carry actually is. According to a report
by DoorLoop, only “35% of landlords say their rental properties are
profitable year after year. This percentage held steady from 2023 to
2024 even as rental prices rose sharply.” and “38% of landlords say
their rental properties break even financially (mortgage and expenses)
but don’t generate consistent profit.”
A significant and underappreciated advantage for renters is the ability to benefit
from a landlord’s historical investment. A landlord who acquired a
multi-unit building a decade ago operates on a cost basis, and likely a
mortgage interest rate that is no longer available in the current
market. Due to the lower entry price, the landlord can accept a lower
yield (rent as a percentage of the current property value) than a new
buyer could achieve. For those familiar, this can be illustrated by the
standard supply-and-demand model:
landlords who bought at different prices shift the supply curve to the
right, resulting in lower equilibrium rent than if units had to be
financed at current prices.
This creates what might be called a
travel-back-in-time effect. Renting from an established landlord allows
tenants to access housing at a price point anchored to historical costs,
effectively insulating them from the full impact of rising interest
rates and price appreciation. For individuals seeking to maximize net
worth, the cost of paying a landlord’s overhead can be substantially
lower than the opportunity cost of committing a large down payment to an
illiquid, concentrated asset.
Economies of scale
Beyond historical cost advantages, scale
matters. Landlords, particularly those managing multi-unit
developments, generate value through operational efficiencies that
single-family homeowners cannot replicate. Research on rental housing
economies of scale demonstrates that costs per unit tend to decrease
as the number of units increases, due to shared infrastructure, bulk
purchasing power, and specialized management. This scale efficiency
manifests in several ways. By pooling costs, landlords can lower the
price of housing services for tenants. The development costs of new or
renovated housing can be reduced through bulk orders with suppliers and vendor consolidation.
Renters in multi-unit buildings benefit from shared infrastructure,
such as roofs, foundations, and HVAC systems. These shared resources,
when calculated per square foot, are significantly more efficient than
those in single-family homes.
Creating a Buffer for Renters
By leveraging the historical cost
advantage borne by the landlord, renters effectively gain a competitive
financial buffer. Renters can secure a similar consumption good, i.e.,
shelter, at a discount relative to the current frontier cost of a
mortgage. The delta between the market rent and the counterfactual
homeownership scenario allows renters to use different wealth-generation
vehicles.
That means that renting is not
“throwing money away”; rather, it is the purchase of a thing without
the attendant risks of over-leverage, illiquidity, and concentrated
asset exposure. By assuming the risks of property devaluation,
legislative changes, physical depreciation, and liability, landlords
enable tenants to allocate
capital toward other potentially liquid uses, including seeking higher
returns on capital. When that occurs, landlords are not barriers to
wealth, but rather, providers of financial flexibility and absorbers of
real estate volatility, enabling tenants to maintain optionality. If
renters allocate the capital intended for a down payment to a
diversified portfolio of equities, they may often achieve returns greater than those of a single property.
Obviously, this relationship is not
without trade-offs. Renters face the risk of eviction, rent increases,
and limited long-term security. These vulnerabilities can have
significant financial and emotional impacts. However, these challenges
do not negate the fundamental economic function landlords serves.
Do Landlords Hoard Units?
Some affordability activists make the
claim that landlords are “hoarding” tens of thousands of unoccupied
units, such as the oft-cited figure
of 60,000–90,000 vacant homes in San Francisco. This is a curious
argument and may imply some ignorance of how housing markets, and
markets in general, function. Supply and demand never achieve perfect,
instantaneous matching; some inventory is always in transition or needs
to be called up. High rents and prices in places like San Francisco are
the market’s clearest signal of insufficient supply relative to demand,
not evidence of deliberate withholding.
Even still, the “vacant units” number
is largely a mirage. Census and city data include short-term vacancies,
units between tenants, in the process of being sold, renovated, or
prepared for re-rental. Many others are unfit for habitation (e.g.,
severely dilapidated or in need of major repairs), or are simply not
rentable or sellable at current market conditions without significant
investment. Recent reports show San Francisco’s effective rental vacancy
rate (units actually available and ready for occupancy) hovers around
3–5% in 2025–2026, among the lowest in the nation and well below a
reasonable benchmark for smooth turnover. While overall reported
vacancies include these transitional categories, they don’t represent
“hoarded” stock. True long-term deliberate vacancies (e.g., vacation
homes and luxury units held empty for speculation) exist but are a tiny
fraction, not enough to suppress prices meaningfully.
Some of these activists have proposed an “empty homes tax”
to penalize landlords who have vacant units. Such a scheme discourages
investment because it erodes a landlord’s margin, as there will
inevitably be durations when tenants churn. It may also discourage
upkeep, as landlords may avoid taking time to renovate between occupants
because that is a period when they would be taxed.
Even if some curmudgeony owners were
trying to “hoard” for profit, ironically, adding substantial new supply
would undermine that strategy by increasing competition and capturing
those potential gains for different landlords/developers and future
residents instead. The real delusion is pretending that vacancies prove
abundance when they coexist with skyrocketing costs, precisely because
overall long-run supply has failed to keep pace with population and job
growth in high-demand areas."
