> Rent is set by supply and demand. There's no law - economic or otherwise - saying that it is necessary for landlords or anybody else to yield a return on capital.
Investment opportunities are also a market with supply and demand. The demand for a high risk investment with low expected return is approximately zero.
If there are more attractive investment opportunities (higher expected return with lower risk) then money will flow there instead.
US treasuries provide a backstop for the minimum expected return on capital. It’s throwing away money to invest in something non-liquid with an expected return lower than, say, 1 month T-bills, which are currently about 2.5% APY.
Of course it’s possible to lose money renting a particular unit, or over a particular timescale, but we’re talking about the long-term macroeconomics, where this is not the case. Hence expected rate of return, which has an average and variance.
In that sense the long-term macroeconomics dictate that yes there is an “economic law” which says rental properties must provide a positive return on capital. Or else there would be no market for rental properties.
> rental properties must provide a positive return on capital
To new investors.
GP's point is that the causality is from rent to sale price. In any year any owner (or agent) more or less tries to charge the rent they can get. If this declines, there's nothing an individual owner can do about it. Badly wanting more doesn't open up any new channels to charge more rent (and may even lead you to play your hand sub-optimally).
But a prospective new owner certainly looks at the return, and won't bother to invest if T-bills would pay as well, and hence the sale price will adjust. (And of course buyers may pay for things other than rent, like a belief that prices will rise.)
I am definitely not saying that it’s impossible to lose money renting. But if you can’t charge enough rent to cover your costs, then eventually you sell and go buy a unit somewhere else that is profitable, or stop renting entirely, or declare bankruptcy, or....
This puts downward pressure on real estate prices in areas which are unprofitable by increasing inventory and decreasing investor demand for rental property.
Market equilibrium will tend to drive prices to the point where units can be profitably rented, and rent will be higher in areas that are depreciating rather than appreciating. This is not a law in the sense of a inviolable law of physics, but I believe it is generally accepted macroeconomic theory.
>This puts downward pressure on real estate prices in areas which are unprofitable by increasing inventory and decreasing investor demand for rental property.
Yep, and when this happens it opens up a new market - prior renters who were priced out of the mortgage market before can now become homeowners.
There's no economic law stating that middlemen have to take a large cut.
Investment opportunities are also a market with supply and demand. The demand for a high risk investment with low expected return is approximately zero.
If there are more attractive investment opportunities (higher expected return with lower risk) then money will flow there instead.
US treasuries provide a backstop for the minimum expected return on capital. It’s throwing away money to invest in something non-liquid with an expected return lower than, say, 1 month T-bills, which are currently about 2.5% APY.
Of course it’s possible to lose money renting a particular unit, or over a particular timescale, but we’re talking about the long-term macroeconomics, where this is not the case. Hence expected rate of return, which has an average and variance.
In that sense the long-term macroeconomics dictate that yes there is an “economic law” which says rental properties must provide a positive return on capital. Or else there would be no market for rental properties.