How do residential property owners make leasing decisions, and how do their decision-making processes differ from other businesses? The primary goal of owners of rental properties is to maximize their return on their investments. Property owners purchase their buildings with some combination of cash and debt. Thus, their leasing, pricing, and tenant-selection decisions will seek to ensure they can cover any debt obligations while maximizing the return they receive on the cash they invest in their businesses. Simple though this may seem, in reality, there are several unique characteristics about real estate investing and property management that add complexity to property owner’s decision-making processes.

The first difference is that owners of residential rental properties earn returns in at least two ways—cash flow from operating the building and longer-term price appreciation of the property itself. (We could add another layer of complexity by adding in tax benefits, but that’s for another time.) Property owners are thus both speculators and managers of a cash-producing business. Depending on their financial situations and investment goals, property owners will weigh either cash flow or price appreciation more heavily in their investment decisions. For example, a developer may buy a small rental building with the long-term goal of remodeling or redeveloping the building in the future. For this owner, the short-term cash flow matters less than the long-term appreciation. While the investor may still wish to earn as much as possible in monthly rent, they may be more risk-averse, preferring stability to maximizing short-term returns.

Another difference that makes operating rental properties different from many other businesses is that property owners seek to maximize their return on two dimensions—time and scale. Scale is easy enough to understand. When negotiating leases or renegotiating lease extensions, property owners want to extract a profitable rent. But property owners also want to keep tenants, particularly reliable tenants, in their units for long periods, maximizing the stream of rent payments they receive into the future. When tenants turnover, property owners risk a long-term vacancy and often marketing, maintenance, and other costs.

Not only do property owners want to lease to tenants who will occupy their units for long durations, they care about tenant quality and reliability across several dimensions. In this way, when leasing units, property owners are both sellers (selling residential services) and consumers. Tenants, of course, shop for units, but landlords also shop for high-quality tenants. Residential leasing is thus an example of a matching market. Tenants want to find a high-quality, well-managed unit at a low price. And property owners want to find tenants who will pay their rent on time, maintain their unit, and not bother their neighbors.

Although researchers have studied the implications of matching exhaustively in the contexts of labor, organ donation, and marriage markets, it has received less attention in housing (see, for example, the work of Alvin Roth). One concern with matching markets is that some buyers or sellers will not find matches due to their two-sided nature. This may be an issue for renters or property owners who have bad reputations (or, perhaps, face discrimination in rental markets). But housing shortages (or surpluses) and poverty notwithstanding, property owners can usually fill vacant units, and tenants can find units to rent.

Matching may be more informative to understand how property owners decide to set rents and offer concessions. If they care about tenant reliability, property owners may seek to attract high-quality tenants by offering lower-than-market rents or concessions such a free rent or unit improvements. Particularly when leasing to new tenants, however, property owners can only imperfectly assess tenant reliability. While they can require background checks and references, they ultimately have limited information on how a prospective tenant will treat their unit and reliably pay rent. Thus, as some researchers have found, property owners may focus on retaining high-quality tenants once they are already in their units (and thus had the opportunity to prove their reliability).

Although not exhaustive, this short discussion of the unique characteristics of rental businesses highlights the challenges in predicting how property owners make decisions, ex-ante. Traditionally, at least in common discourses, housing researchers argue that short-term profit calculations are the primary driver of rental owner decision making. This perspective assumes that owners care little about tenant retention (to say nothing about tenant wellbeing), rather they seek to extract as much as they can from tenants as quickly as possible. But by studying the investment goals of property owners and, particularly, the importance of tenant retention, it becomes clear that they will base decisions on more than just short-term returns. One of our goals in this project is to begin documenting some of the factors influencing rental owner decision-making. We hope that this understanding will help policy-makers design better responses to housing insecurity during the pandemic and in the wake of future disasters.