A place for residents of Marin County, CA and others to express their views regarding the real estate bubble and in particular the Marin real estate market
Tuesday, March 21, 2006
Renting as a Form of Arbitrage in Today's Market
A poster over at Ben Jones' blog made this rather articulate point. I thought it deserved repeating and commenting on by the intelligent readership on this blog:
I see renting in the current market as a profitable arbitrage opportunity. Arbitrage opportunities arise when market inefficiencies exist: apples are selling downtown for $1/lb and uptown for $1.50/lb An arbitrageur can make a risk-free profit of fifty cents per pound by buying downtown and selling uptown.
The same can be said of the rental market. In an efficient market, the cost of renting closely approximates the cost of owning, with some nominal premium on ownership for tax benefits, pride of ownership, etc. However, when the price of ownership deviates from that of renting by as much as 100% or more, there’s an opportunity to profit from the price imbalance. My rental unit costs $2300 to rent and would cost approximately $4500 to own. My landlord is actually paying me roughly $2000/mo to live here (allowing for an ownership premium) by continuing to rent the unit rather than selling it out from under me (yes, he bought the unit for much less than the current going-rate, but he incurs an opportunity cost by not selling for a profit and investing the proceeds elsewhere). I take that $2000/mo and invest it in the stock market, where the long-term gains are much better than in real estate. It’s really a great opportunity. Where else can you get $2000/mo risk free just by occupying a building?
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