Differentiate Investor's expected rent from offer rent

[davidrpugh]

@danftang

In order to decide whether or not the buy an additional house, an Investor agent needs to compute its expected rental income (over the next year). Later, if Investor purchased the additional house, the Investor must decide what rent to charge before putting house on the rental market.

The current implementation assumes that, when deciding whether or not to buy the additional house, the Investor expects to receive some markup over its expected mortgage payment as rent payments. Later when deciding what rent to charge it sets rent to be the same markup over mortgage payments. This process seems to be leading to Investor bankruptcies as investors are consistently over estimating rental income.

I propose the following: separate the rule used to forecast expected rental income from the rule used to determine actual rent.

• When considering whether or not to purchase an additional house, forecast expected rental income from that house using an extrapolative rule similar to the following:

future_rental_income = lambda * average_rental_income + (1 - lambda) * old_average_rental_income

• When setting actual rent continue to use the same "markup" over mortgage payment formula.

If large numbers of rental properties are going vacant this will sharply pull down average rental income which, via the above formula, would reduce expected rental income for a new investor. This reduction in expected rental income (all else equal) would reduce the probability of a new investor purchasing an additional property.

Thoughts?

[danftang]

Sounds reasonable, can we use a similar method to decide to sell existing buy-to-let houses too?

My only qualm is that we've got this arbitrary future horizon of one year. Would it be worth generalising this so that we integrate over all future profits multiplied by a discounting function (with finite support)?

[davidrpugh]

@danftang

An Investor thinking about selling one of its rental properties would want to take expected future rent into account. Let's keep discussion of discrete choice problem for investors on issue #2.

I agree that the time horizon of one year arbitrary. Typically when deciding whether to undertake an investment one would want to look at something like the net present value (NPV) of future cash flows.