this post was submitted on 27 Feb 2024
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Essentially, there's four different things going on:
We can simplify it a bit by imagining a 0%-down, 0-principal-payment mortgage: if mortgage rates are 6% (for easy math), then every $100K of home value costs $6K/yr in interest, or $500/mo. So, at 6%, a "fair" rent on a $500K house is $2500/mo.
What that means in reality is that with $100K invested in the down payment, the owner is paying $2000/mo in interest (with the rental money), and is "earning" $500/mo on their $100K investment. (Plus, on average, they are investing 1/360th of the $400K owed on the house in home equity through principal payments... greatly oversimplifying compound interest and amortization schedules).
That $100K in the stock market could instead earn, on average, about 9% in equities, or ~$750/mo. That's the opportunity cost; instead of buying a rental property, the next best alternative is likely something like stocks.
But the owner also gets exposure to the housing market, and could also earn a return on home appreciation.
Now let's add the 5th component: damage, maintenance, vacancy, and "deadbeat" tenants. Owners also take on the risk that renters will not pay their rent, that they won't be able to find renters consistently, or that the home will be damaged. There are lots of horror stories of tenants doing $50K of damage in a year they only paid $20K in rent.
Anyway, all that said, it's a lot more complicated than just "paying their mortgage for them". I don't know what it's like in your area, but in the market where I live, rental prices are not covering the full mortgage payments... but it still usually works out if housing prices continue to go up forever. Once that bubble bursts, a lot of rental property owners are going to be losing a lot of money—especially since home appreciation was their only profit in the first place!
This comment so far ignored maintenance costs and land taxes, but they should probably add another $500/mo to both sides of this equation; it doesn't affect the rest of the analysis, though, since it should effectively be a wash between the owner and the renter.
So (feelings opinions)
It sounds like owners are taking on a whole lot of risk just so the banks don't. If that's the case then is the equity actually good enough to merit me being the banks money armor?
And 80% agree with the equity argument, I just can't help not have hope for the future and am literally asking who is gonna buy my house in 40 years? Less kids are being born, this country is falling into Republican hands so can't rely on selling my house to immigrants now can I?
I feel like Americans have known why we're here for so long and now this generation doesn't. I can't tell if it's for a reason someone is keeping secret or if the answer doesn't exist bc we're not supposed to be here anymore.
A sad but serious answer is that your house will either be worth less or worthless because of climate change (looking at you, Florida, but also wildfires/water scarcity) or extra valuable for those seeking climate refuge.
Completely seriously, it was a major consideration when my wife and I decided to move to where we are now, to one of the safest areas of our country for climate change risks.
Same, though living on the coast I want to get a place that will likely not be underwater in the next decade or so.
https://www.floodmap.net/