By Mary L. Dahl
April 30, 2009
The underlying problem is the price of real estate. Keep in mind that rental properties are investments, and inherently carry some risk to the buyer. Before a landlord can charge any rent at all, he or she has to buy the property, sometimes rehab it, and then market or advertise it. So, let's say you bought a house as an investment, for $180,000, with a 20% cash down payment, on a 7% loan for 15 years. The 20% down payment will require cash, up front, of $36,000. The remaining $144,000 mortgage will require monthly principal and interest payments of $1,294.31. In addition, the borough will collect real estate taxes of about $1,800 per year and the homeowner's insurance will run about $360 per year, maybe more for a rental property. Add it up, $1,294.31 principal and interest, + $150 taxes + $30 insurance, and you have a total cost, to the landlord, of $1,474.31 every month, just for the privledge of risking $36,000 cash and a $144,000 mortgage on a rental property.
This is why rents are high. The landlord bought the property as an investment and wants to cover those expenses; the only way to do that is to charge enough rent to at least break even. Then, after 15 years, the property will be paid off and the rents, when received, will pay back the $36,000 paid up front as a down payment, plus eventually become net cash flow. This is the goal. It takes time and involves risk.
I do not condone landlords who do not maintain and keep up their properties. I do not condone landlords who gouge or mistreat their tenants. I do not condone landlords who charge twice the normal per square foot rate. I do want tenants to understand, however, that landlords must charge enough to cover the cost of owning the property. Even older, smaller, fixer-uppers cost quite a bit to buy, and they are money pits, in many cases.
The bottom line is that rents will always reflect the underlying cost of the real estate being rented; if they did not, no one would take the risks required to buy the property as a rental in the first place.
Mary L. Dahl
About: "Certified Financial Planner, author, business owner, interested in financial literacy for the public."
Received April 27, 2008 - Published April 30, 2009
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