The economics of rental

[LoBagola]

The proliferation of peer-to-peer rental companies has made me curious about the history of rent. Who invented the idea of renting out your house and what were the circumstances? when does renting an asset become superior to buying? when does renting something out becoming economically feasible?  off-hand I know it wouldn't make any sense to rent out a pair of scissors, so I think it has something to do with initial costs of acquisition and running costs. 

 

Here in Australia we have peer-to-peer car rental (car next door), hardware tool libraries (the tool library), private car space rental (divvy), green produce made at home (ripenear), websites to rent out your unused household items like vacuum cleaners or sewing machines (open shed). There are plenty more interesting companies although they no longer fall under the category of renting out your assets. What I find so exciting about this is not the advertised communal or environmental benefits, but that it makes it possible to live, at the same standard, on so much less. Your unused assets become efficient and you may no longer lose money on them—you might even make some!

Edited May 1, 2015 by LoBagola

[aleph_1]

I don't know who invented the idea of renting but I'm pretty sure that a feudal serf couldn't rent anything. Well-established property rights are a prerequisite to rents. There may have been numerous inventions and re-inventions of rentals throughout history.

 

What I am familiar with is the feasibility of rents. At base, it is worth owning if the costs of ownership are less than the costs of renting. "Costs" should be interpreted to include financial and nonfinancial costs. If a rental makes you money but consumes your life then it may not be worth it. As an example, I bought a 6-plex in Sacramento, CA that was in reasonably good shape and fully rented. When I bought it the rents just covered the mortgage. As units became available, my wife and I would fix them up and turn them around at a higher rent. By the time we sold the 6-plex (one year), the rents had increased by 50% and we were making a tidy profit month-to-month. However, the property value had doubled so we sold (2001). In addition, we had some "problem tenants" that made my wife miserable.

 

On a 3-plex we owned, in the course of three years the rents tripled (after renovations) and so did the property value. We could have kept the 3-plex and received a few thousand dollars per month in rent or sell it and get several hundred thousand dollars cash in hand. At the time (2002) I reasoned that if someone bought the property from me and tried to do what I was doing (rent the units), and if the new owner put 20% down and had a large loan, then the new owners would lose money month-to-month. This indicated to me that property values had risen too much too fast and this it was a good time to sell.

 

What I didn't know is how irrationally markets can behave when goosed by the fed. The Greenspan bubble was burst by Bernanke in 2006. The housing market teetered over in 2007 and crashed in 2008. I was completely out of California real estate in 2005. It just didn't make sense to me. All of my US real estate is now in Texas.

 

Concerning peer-to-peer rentals, the same analysis applies. Ownership is preferable if the rents cover the financial and personal costs. Renting may be the way to go if the cost of renting is less than the cost of ownership. For example, in my experience boats and RV's are better rented than owned. The same is often true of vacation property.

 

The historical problem with renting many assets is the cost of advertising relative to the rents received. This is becoming mitigated by the internet. One must still consider the losses due to theft, damage, wear and tear, and the amount of one's life spent in the endeavor. Dealing with people can also be problematic. Going to court costs you more than small claims fees and payment to execute writs. It is also a lot of stress. I know. And you can't get blood from a turnip. Good luck!