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In Defense of Landlords

  • Piqsels

Tags CapitalismLabor and Wages

05/04/2020

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Landlords have come under particular scrutiny in the last few months, especially with the coronavirus-induced shutdown of the economy. Fannie Mae, Freddie Mac, and HUD suspended all evictions on their properties and several municipalities have done the same. Petitions for a rent strike have also been floated amongst several advocacy groups.

These measures mostly have to do with the coronavirus and government’s power grab during it, but a more general hostility still exists. The puzzling popularity of Marxism, even if muted by its continuous failures, is also still around. And the Marxist left has certainly gotten more vocal about its disdain for landlords recently. One group called People’s Action has called for a “National Homes Guarantee” that would “decommodify” real estate by “taxing the appreciation of privately owned homes.” An even more radical group, Landlord Euthanization, even has Mao Zedong (the man responsible for more deaths than any other person in world history) as its avatar. To sum up these sentiments, we can quote the utterly mundane, yet popular Twitter user Existential Comics,

Landlords do not “provide” housing. Construction workers provide housing. Landlords, in fact, do the opposite of providing housing. They take the houses that were built for people to live in, hold them hostage for rent, and evict anyone who can't pay.

While this has a (small) ring of superficial truth to it, if you dig deeper, it becomes rather absurd. After all, construction workers are paid a salary. Does Existential Comics want these construction workers to be paid a salary by the developer and then own the property as well? Or does he want the construction workers to forgo their salaries and simply take ownership of whatever percentage of the property they contributed to afterward? 

How many construction workers would even accept such an arrangement?

And if some did, would they be allowed to charge rent to a tenant after the property has been built or is that still theft?

Profits and the “Labor Theory of Value”

Right off the bat, many seem to have a grossly inflated view of how much landlords actually make on their investments. They forget or downplay how much property taxes, insurance, maintenance, landscaping, common area utilities, and the like cost. And that’s before the mortgage, which most properties have.

According to CBRE, in 2019 the cap rate for infill multifamily properties was 5.11 and 5.37 for suburban multifamilies. A cap rate is the percent return that a property would make with no debt, so a 5.11 percent and 5.37 percent return, respectively. Although that beats inflation, it’s nothing to write home about.

As far as residential home developers go, the average profit margin in 2019 was 7.6 percent. This would amount to an 8.3 percent raise for each construction worker if they were given the entirety of the profit. How many would want to wait until a house was entirely built and sold (often over a year) before receiving their wages in a lump sum, even if it was 8.3 percent more?

And this really comes to the crux of the matter. Anti-landlord radicals and Marxists are relying on the thoroughly refuted labor theory of value. As Existential Comics makes perfectly clear,

Rent is theft. Profit is theft. Interest is theft. Look, it isn't complicated. If you are making money that didn't come from your own labor, then it is coming from someone else's labor. You are stealing their money.

Perhaps some of this mindset comes from the term “landlord” itself, which is an antiquated term from the Middle Ages. Regardless, the assertion that “rent is theft” is, of course, false. The labor theory of value itself is rather absurd. Marx required that only “socially necessary abstract labor” be embodied in a commodity, but this is just window dressing. Wouldn’t the social necessity of something be on a continuum from useless to extremely useful? Why would there be a hard break between “socially necessary” and “socially unnecessary”?

Spending ten hours piling up dirt could be considered not “socially necessary” and thereby of no value. But the whole concept breaks down when comparing something of little value to something of much value. For example, spending ten hours putting together a box would be considered “socially necessary,” and by this theory the box would embody ten hours of labor. But would that box be worth twice as much a computer that took only five hours to build? By what possible means do we address how “socially necessary” different types of labor are and how valuable they should be considered? And if they are valued differently, shouldn’t the person whose labor is valued higher earn a higher wage? And regardless of their income, shouldn’t they be allowed to invest any money that they don’t need or want to use on consumption immediately?

Quite obviously, the amount of labor put into a product is irrelevant to its value. No one thinks this way when mulling over a purchase, because it’s superfluous to their decision. The value of a product is its subjective value to the end buyer on the open market.

What Landlords Provide

Returning to property owners, we can look at the landlord and see that he or she offers three things:

  1. Managerial oversight
  2. Risk mitigation
  3. Time preference

Managerial oversight includes everything from hiring maintenance technicians and leasing agents, to coordinating financing and capital improvements, to formulating policies, procedures, and so on. Of course, not all landlords do this. Many exchange money for time and outsource this responsibility to a property management company.

Even still, the capitalist offers the latter two list items. Although it is unfortunate to lose one’s job, a construction worker doesn’t bear the risk of a project going under. At worst, the worker simply stops making a wage. A real estate investment—be it a new development or the acquisition of an existing building—can and often does lose money. Although the average profit on a new development is 7.6 percent and the average return on a multifamily infill property with no loan is 5.2 percent per year, some profits are higher and some are lower. And some, of course, are negative. How many construction workers would take 8.3 percent more on average knowing that it could be substantially less or even negative?

There’s something in stock investing called a “beta,” which measures an individual stock’s volatility. The higher its volatility, the lower its price. Given that there is risk in an investment such as real estate, including the risk of it losing money (as we saw en masse in 2008), having a guaranteed salary is often a better bet. Same goes for a tenant whose rent is not contingent on their lease’s terms as set by the market, but on the volatile performance of the property they live in. Such an arrangement doesn’t require Marxist twitter users. It’s actually rather mundane, and is referred to as a housing cooperative, in which individuals buy membership in the cooperative instead of a unit (as in condos) or the building itself.

The final point is time preference, which was alluded to above. This was the nail that Eugen von Böhm-Bawerk put in the coffin of the Marxist theory of labor exploitation. As G.P. Manish explains,

Once you accept the subjective theory of value, you actually realize the laborer is getting the value of everything he puts in because of the time difference between the value of the labor and the output he creates that is going to be sold in the future….The reason the worker accepts this arrangement is because he does not have the means to sustain himself through this production process. That’s what the capitalist does. He bears the burden of uncertainty…and has the means to provide wages to the worker while the production process is underway.

This example plays perfectly with the construction workers, who would rather receive 91.7 percent of the value of the home in wages than wait for the property to be sold or rented and risk any volatility in price. It also applies to renters who either have yet to acquire the savings to purchase a property or would prefer not to use their savings to do so. In fact, many tenants will eventually become landlords after they’ve saved up enough to purchase investment properties. just as many landlords were once tenants. Indeed, at least for residential properties, rental properties are still a heavily middle-class investment: in 2015 74.4 percent of rental properties were owned by individual investors and not corporations. 

Conclusion

If an individual makes more income than they need, should we really demand that they consume it all? Obviously, they should be allowed to invest their savings in long-term projects. In this way, a property owner could just as well have put their money in the stock market or in bonds as into real estate. To eliminate the landlord from an economy is effectively to completely socialize it and go fully communist. The barbarism and totalitarianism of previous communist regimes is almost certain to come with such a decision.

There are plenty of bad landlords out there to be sure. But then again, there are plenty of bad tenants, including “professional tenants” who try to game the system or those who simply do major damage to their units. That being said, most landlords and most tenants are decent people. The “bad ones” are usually just those who fall on hard times and have a difficult time paying rent or affording necessary repairs.

And let’s not pretend like the government has a good track record in this department as disastrous housing projects such as Pruitt-Igoe and Cabrini-Green have clearly shown.

Every industry has good and bad actors, and property ownership is no different. It’s an important segment of the economy that, if overly restricted by the government, will push needed capital away from construction, renovations, and the like. Real estate development provides managerial oversight, risk mitigation, and fulfills the higher time preferences of construction workers while landlording does the same for tenants.

Author:

Andrew Syrios

Andrew Syrios is a partner in the real estate investment firm Stewardship Properties. He graduated from the University of Oregon with a degree in Business Administration and a Minor in History.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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Piqsels
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