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?

5 Comments:

Blogger moonvalley said...

What a great article. We've really seen renting as Arbitrage in our case..formerly owners we've been renting a place that's currently on the block for 4m..for a pittance.We're moving, to a new rental property even though the owners hate to see us go..as they could use the income. The new place only valued (haha) at 900k..bigger house, less land..same money in rent. Just waiting for things to bottom out to use the money we've saved to buy.

Mar 22, 2006, 10:33:00 AM  
Anonymous Anonymous said...

A $600,000 property would cost about $4600 per month to own. Using a 3% appreciation rate and a 33% tax rate and with $10,000 for closing costs, it would take about 4 years to break even, vs. renting for $2300.

http://www.dinkytown.net/java/MortgageRentvsBuy.html

Mar 22, 2006, 12:35:00 PM  
Blogger renting in mass said...

Actually, the landlord is paying that $2,000 to the mortgage company. But the guy is better off renting than buying.


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

Mar 22, 2006, 6:20:00 PM  
Blogger grim said...

While the 2,000 dollar bills didn't exchange hands, exploiting the opportunity has the same net effect on the renter in comparison.

jb

Mar 23, 2006, 4:37:00 AM  
Blogger Rachel said...

I wonder if that property is still worth 4500/ month (mortgage payment)! Hopefully those posters that waited for the market to bottom out were very patient.

Aug 27, 2009, 7:53:00 PM  

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