Okay, somebody help me out here. Maybe I'm missing something, but the basic equation is that you as tenant are paying the landlords costs plus their profit. How can renting ever be cheaper than buying?
In some housing markets, if you were to buy a home (using a mortgage, with current interest rates) and immediately rent it out at market rate, you’d be losing tons of money. The price-rent ratio varies dramatically from city to city and even between different types of properties.
Because you, as someone who is buying a $500k house with 20% down in 2025, are going to have much higher costs than your landlord, who bought it for $100k in 1995 and has already paid it off.
Bake in the fact that many rented houses today were either purchased or refinanced with the historic-low interest rates of ~2021, and there is really just a time difference between someone with pre-existing capital to invest years ago that you didn't have.
That’s not true at all. Rent is determined by demand and supply—not by a landlord’s costs. Plenty of landlords operate at a loss; rent just helps make the loss more manageable.
Eg. when you live in a premium apartment. For even moderately nice houses 20 years of rent would pay a third of the home's value at the start of the renting period. And rent will never increase as much as the property value, no taxes and maintenance. It's much cheaper AND simpler, especially if you are unsure how long you stay.
Rents go up but the landlords costs stay static. A lot of small landlords start out at something close to break even from a cash flow perspective. At this point the landlords “profit” is the appreciation.
That said the cash flow gets better over time as rents increase.
I suppose depends on the ownership structure of housing stock. If it is mostly repaid mortgages, eg. inherited housing or investment stock, then the rental need not be tied to mortgage costs, but rather investment yield, which may be lower.
No, but the landlord has those too. Or at least, some landlords have them.
So, you have the landlord having mortgage costs, maintenance costs, insurance costs, and still wanting a profit. And you have the homeowner, having mortgage costs, maintenance costs, insurance costs, but getting to keep what would have been the landlord's profit.
1. Many small landlords are not very financially sophisticated and won't factor in all costs when setting rent prices. For example, maintenance costs are often treated as one-time events ("the water heater broke") and not something to build into the cost of owning the home. I have relatives like this, and they generally view the appreciation on the property as their profit.
2. It's not uncommon for "landlords" to be renting out part of the house they're still living in. In these cases the rent can be somewhat arbitrarily related to the cost of the mortgage.
3. More sophisticated landlords often still have to compete with rents set by (1) and (2). At least in some markets.