This guide outlines why landlording is not rent-seeking, and is of benefit to the wider community
Owning rental property and collecting rent is a time-honored business. Yet some argue that landlords don’t provide value — they simply extract money from tenants.
What is rent-seeking?
Rent-seeking is an economic concept that refers to extracting value without creating anything of value in return. The “rent” in rent-seeking refers to economic rent — payments for access to an asset, resource, or market that exceed the costs of keeping that asset available. Rent-seeking activities aim to gain control of existing “rents” without creating any benefits for society.
Classic examples of rent-seeking include monopolies that limit output and raise prices far beyond costs, special interest groups lobbying the government for tax, subsidy, or regulatory laws that benefit them at the expense of others, and some licensing schemes that protect members at the cost of competition and consumer prices. In the common critique, landlording is seen as rent-seeking since landlords supposedly just extract money from tenants for housing that would exist anyway.
The majority consensus among economists nowadays is that many of these behaviors labeled “rent-seeking” do involve creating value, bearing risks, and promoting market efficiency alongside self-interest. We must examine specific cases of revenue management rather than assuming certain whole business models inherently create no value.
What is Landlording?
Landlording refers to owning real estate property with the purpose of renting, or leasing, it to tenants in exchange for rent payments over time. Landlords bear the costs and responsibilities of purchasing, maintaining, and managing rental properties. Key responsibilities typical of landlording include:
- Finding/purchasing viable rental real estate properties
- Making repairs and physical upkeep on properties
- Advertising vacant rental units to find tenants
- Screening tenant applications and managing leases
- Ensuring rental income covers expenses like mortgages, property taxes, insurance
- Enforcing lease terms and handling evictions if necessary
Landlording is a spectrum from small-scale landlords with a single rental unit to large, professionalized landlords and property management companies owning multiple rental properties. Landlording provides an income from real estate as well as the possibility of long-term real estate investment growth rather than quick buying/selling.
Landlords clearly must expend effort and resources to fulfill these functions. They also take on financial risks of property ownership and maintenance. The question is whether they create commensurate value or only extract undeserved rents. We must examine this question keeping real-world landlording activities in mind.
Points to Remember as a Landlord
As a landlord, you need to get the rental income on time to generate profits out of your investment. But there are a few important points to keep in mind as you do it.
Investment and Risk
One key counterpoint to the rent-seeking critique is that landlording involves major investments and financial risks. Landlords put their own capital and debt on the line to provide housing units.
The typical small landlord takes substantial loans and mortgage obligations to purchase rental properties. They have had to regularly spend money on maintenance, repairs, and other ownership costs for decades.
Unlike stock or bond investments that involve little personal liability, landlords accept the risks of huge expenses from unforeseen events like major repairs, tenant damages, fines, or periods of vacancy without income. They also face risks from market shifts—both the overall economy’s impacts on rents and real estate values and local impacts like new nearby developments.
By accepting these capital risks to acquire and operate rental housing, taking on debt, and delaying profit for years into the future, landlords empirically enable rental housing access in society rather than just extracting short-term gain. Risk management strategies such as tenant screening and property maintenance can be effective when working with a proactive rental manager in Northern Virginia to be on track.
Maintenance and Improvement
Beyond major financial risks and investments tied to real estate ownership, landlords crucially take responsibility for maintaining, repairing, and improving rental properties. Tenants directly benefit from having livable, functional homes without bearing the hassles or responsibilities for structural and appliance repairs, yard upkeep, interior finishes upgrades over time, and overall care that maintains safety and quality standards.
Many landlords also proactively renovate and add value to distressed or outdated properties. Upgrading kitchens, flooring, bathrooms, and energy systems to modern standards for both appeal and functionality.
Landlords thereby improve neighborhood aesthetics and livability as well as increase housing quality. This counters any notion that they leech off a fixed supply without contributing.
Economic Contribution
Landlords enable housing flexibility and mobility by providing rental options. In the US, over one-third of households rent rather than own their residence.
Many renters are young households getting established. Others may be temporary workers or have short-term local tenures. Without professional landlords operating viable rental housing, labor flexibility and economic growth would suffer across communities.
Additionally, efficient rental markets lower barriers to workforce entry for employers. Affordable housing enables workers and businesses to be located in proximity.
When housing costs are reasonable for workers to enter a local job market, the economy benefits. By providing and maintaining an inventory of rented housing units, landlords facilitate community growth and optimize housing utility much more than if they let houses sit vacant as pure absentee owners.
Does Property Market Volatility Impact Landlords?
As hands-on real estate investors, landlords are highly exposed to real estate market swings and property valuation cycles. When the overall housing market declines or local markets see falling property values, landlords face direct risks.
Declines in property valuations quickly translate to lower equity for landlords, making it harder to access additional financing for purchases or improvements. Many landlords rely on drawing equity out as market prices rise to fund maintenance, expansion, or even everyday costs, so they can get caught in a vice when valuations decline.
Market volatility also impacts rents landlords can charge and vacancy rates they might face with turnover. While rents do not necessarily track neatly with sales pricing, rents also decline when local property markets weaken. Coupled with higher vacancies, this pinches landlord incomes right when they are most vulnerable to the valuation declines on their assets.
Professional landlords that are prepared and better capitalized to absorb cycles and risks, continue consolidating through down markets. The impacts of market volatility reveal which landlords created true value-generating housing capacity rather than temporarily benefiting from asset bubbles.
Both property market volatility and cycles have major implications for landlords of all sizes – testing their savvy, preparation, and professionalization as housing providers navigate risks.
Final words
As you can see, landlording is not just seeking rent. You need to play a managing role and cater to the needs of tenants while delivering a positive experience. This will eventually help you secure the maximum ROI on your property investment.
