> Landlords in poorer areas earn “basically double” those in more affluent districts — an extra $50 per apartment per month, after expenses. The outperformance, calculated from national surveys, held even when researchers factored in faster price rises in richer areas.
“The reason is that property values, mortgages and taxes are much lower in downmarket neighbourhoods, but rents aren’t that much lower,” says Desmond.
There are caveats: the relationship is not true in a few top cities, such as New York, but does apply to places like Indianapolis and Buffalo, where “most folks live in America”. Landlords in poorer areas do experience greater variability in profits: some take large losses because their tenants default.
So the last sentence acknowledges the greater risk of renting in poorer areas. Now if you have even a basic economic understanding, you realize that higher risk investments need to offer higher returns. If renting in rich areas offered the same return as investing in poor areas with lower risk, you would have a lot fewer rentals in poor areas.
higher risk means that i need to charge more on each client to make up for the losses that i make on others. it doesn't give me higher returns on average.
if landlords earn double over a long period of time then the risk isn't as high as they claim.
You would think that you could arbitrage this problem away by increasing the landlord size (and proportionally undercutting rents).
I.e. if 10% of renters will wreck their house but rents are higher by 30% on the whole, then a large landlord should be able to shrink that gap (i.e. principle of insurance - they can eat the loss) - versus a small landlord who would want extra padding to account for the risk.
So the last sentence acknowledges the greater risk of renting in poorer areas. Now if you have even a basic economic understanding, you realize that higher risk investments need to offer higher returns. If renting in rich areas offered the same return as investing in poor areas with lower risk, you would have a lot fewer rentals in poor areas.