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Classes and Real Estate:  the formation of classes


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This assignment is designed to show you how, over time, classes are created through market exchange relations.  In this example, renters do not necessarily start out as a low-income group (though often they do), and capitalists do not necessarily end up as a high-income class (though often they already are in that class).  For our purposes, we can assume that they start with almost equal wealth.  However, over time, wealth is transferred from renters to owners and that is how they become distinct classes at some point.  The same logic applies to workers and owners, but in this example, we’re focusing on housing rather than workplaces.  It’s important to understand how market relationships and private property laws create these classes in a capitalist system.


Owning and renting: class formation

Start simple: a two class situation, a capitalist and a low-income person.  The low-income person cannot afford to buy a car, but can afford $26 a day to rent one ($800 a month).  He lives day-to-day, paycheck to paycheck because he has a low-income job.  The investor has the money to buy a car outright, but instead of investing $30,000 of her own money, she cleverly borrows from a bank to buy the car.  This makes it possible to have the renters pay for the car.  Here’s how:  the bank loans her $30,000 at 5% interest over 10 years.   Monthly loan payments are about $400 (interest and principal).   Half the $800 from the renter goes to the bank to repay the car, the other half is cash flow income, profit, which adds up to about $9,600 a year.  Over ten years, the capitalist also accumulates equity (asset wealth) by paying off the car (with the renter’s money), owning it, and making 100% profit when she sells it (for $16,000).  Meanwhile, she wisely put the $400 a month extra cash flow into the stock market and earned 10% a year, adding up to a total of $81,000 over ten years!  Imagine if she owned a fleet of cars, like the owners of Hertz!

Now compare the two after ten years:

Capitalist banker: + $8,184 (interest on $30,000 over ten years at 5%)

Capitalist car owner: + $97,000 (10 years of rent income $48,000, invested to become $81,000 + sale price of used car $16,000)

Renter: – $48,000 (renting car)

So, think about it:  those who can’t afford to buy a car, who therefore must rent, basically pay for a car that the capitalist will own, can sell, and has also gotten an income from it.  In the big picture, wealth is shifted from the lower income class to higher-income class, which is precisely how some people become the higher income class. Yes, the capitalist does take a risk, and yes, the capitalist doesn’t have use the car for himself.  But the capitalist uses the car in a different way: by renting it the capitalist increases his/her wealth by getting wealth from renters.  The renter’s payments to the capitalist exceed the cost of the loan payments that the capitalist makes for the car.   Not only do the renters pay for the capitalist to own the car, but because the amount exceeds the cost of the car, the capitalist also creates a “cash flow” profit.  At the end of ten years, when the car is paid for, the renter has nothing to show for his money.  He owns nothing.   This is a typical poor-class situation: not enough to buy so has to rent, and in so doing, remains poor as wealth is transferred to others who get wealthy.

But if the renter had the money to buy the car, half of the $800 a month he paid to the capitalist could have been used to buy the car for himself, rather buy it for for the capitalist.  In ten years, a non-renter would pay $38,184 over ten years and would own the car.  If he then sold it for $16,000, as the capitalist did, then he would be at a loss of only  $22, 184 for using the car ten years.  But it gets even better for the non-renter.  If he had put same $400 a month cash into the stockmarket that the renter had been paying the capitalist, then the non-renter would have accumulated $81,000 over ten years, as the capitalist did!   Minus car costs, he would have been ahead by + $58,816.  This is the typical middle-class situation: has enough not to rent, but not enough to become a capitalist.

In reality, poor people can afford cars.  However, it’s a different story when it comes to housing.  About a third of US residents cannot afford a home and they rent an apartment from capitalists.  The number of renters is increasing.   To see in detail how this works with housing rentals, let’s pretend to be a capitalist and see how we could go about making an actual investment.  You may realize along they way that if you save your money, you could become a small-time capitalist. You might get rich!  Yay!  (But maybe off of the poor, ohhh.)

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Based on the examples listed above, fill in the appropriate information below.

1. Apartment renter / tenant

This full time worker makes $30,000 per year, has $2000 in savings, and needs to rent an apartment.

Pick any major urban area in in Michigan (exclude Midland, Bay City)
MAKE SURE THAT THE RENTS ARE IN THE SAME AREA AS #2 BELOW (So you may want to start #2 below, find a property to buy, then return to here and find rents in that area).

Name of city or area:

Find the cost of two different 1 or 2 room apartments:

1. Monthly rental rate:

2. Monthly rental rate:

Choose one above.  This person rented for 30 years.  How much did she/he pay in total?  $

2. Capitalist / investor-owner / landlord

This person inherited $500,000 dollars from his/her parents and will “invest” part of it, but use the same technique as the car owner:  get a loan.  Find a multi-family unit for sale anywhere in Michigan, preferably more than 3 units, at

The property must be in good condition, not vacant or rundown. Otherwise, it’s not a good investment.

Link to building you found:

Price of building: $

Number of units in building:
Rent (assume rent per unit per month is same as one for the renter above, unless rents are stated in that advert): $

Owner’s expenses
Assume owner’s annual water utilities bill per year ($150 per unit per year): $

Assume owner’s annual management costs ($100 per unit per year): $

Add the two together for expenses per year:

We will use this data below.

3. Financing
Get a loan for the building, use little of your own money, and have the renters pay for the building that you will own!  A loan for property is called a mortgage loan.  How it works:  You borrow from a bank; the bank loans you most of the price of the property.  Usually a bank will require you to put down between 20-25% of the price of the property.  In other words, the bank will loan you 75-80% of the price.  The bank pays the seller and then you repay the bank over time with monthly payments. The price of the loan is “interest.”  The amount you borrowed is “principal.”  Your monthly payment includes payments on the interest and on the principal. Paying these over time is called amortization.  Even though you as the borrower get legal “title” of the property when the bank pays the seller, you don’t really have full and clear possession of the property until the bank is paid in full.  (If you, the borrower, default on the loan, then the bank takes possession of the property and sells it to recoup its money.)  Usually monthly payments also include home insurance (to another company) and property taxes (to the local government).  By borrowing the money from the bank, you used the bank’s money, not your own (except your 20-25% down payment).  And by renting, you are repaying the loan with someone else’s money (that of renters).  So, by investing just 25% of your own money, you will eventually own 100%, and you will also generate a cash flow income because the rent payments will be more than enough to cover the monthly payments.  This is one way wealth is transferred from those with less to those with more, and contributes to the formation of classes.

Go to

Plug in the details into the web page to get the total monthly mortgage payment to the bank:

Apartment building price: $

Down Payment (enter 25%): $
Mortgage Loan Type: 30 year fixed, 5% interest rate

— click on “More Options” —
Property Tax Rate: 2%    enter “2%”

Home Insurance: Multiply building price x  .02 = $       .  Now divide that figure by 12 to get monthly insurance costs $          and then enter this number into the webpage (“Home Insurance”) for the monthly insurance cost that factors into the total monthly mortgage payment that will appear in the circle on that page.

Mortgage Information:
A.  Total monthly mortgage payment for one month (includes principal, interest, property tax, and insurance) — middle of the circle:  $
B. Principal and Interest only per month:
C. Total Mortgage payments for one year (multiply A by 12 months) = $

D. Total mortgage payments over 30 years (multiply above by 30 years) = $
E.  Click on the “Loan Amortization” tab.  It shows your wealth gains and the bank’s wealth gains over time.

(a) Your mortgage payments over 30 years will add up to $

(b) Put your cursor over the graph, left side, and a box will pop up with “Year 1” information. Get the figure for Principal paid ($   )  and for  “Interest” — which is how much wealth the bank gets ($  ).

**The amount you have paid toward principal is the amount of the property that you own and is known as your equity.  Equity is one type of wealth you are accumulating. For instance, if you borrowed $200,000 to buy a duplex, and after 20 years you paid $150,000 and owe $50,000, then you have built up $150,000 in equity (wealth). You own that portion of the home (the bank still owes $50,000 worth of the home).

4. Cash Flow Income
The renter’s payments to you should more than cover the mortgage payments and leave you with a surpluse.  If they don’t, then it’s a bad investment.  If they do, then renter’s rent gives you another kind of wealth: income.  That’s because you only need some of their rent payments to pay the mortgage and other expenses.  After you have paid your bills, the remaining income is “cash flow,” yours to spend or invest.  Let’s see how much your cash flow income is:

Cash flow income per year

(Step 1) Calculate the owner’s annual GROSS INCOME from renters.  Amount a renter pays per month $      x 12 = $   Multiply that by the number of units: $

(Step 2) GROSS EXPENSES:  Add the “Owner’s expenses” for a year from above (2.B) $      to your mortgage payments for one year (above 3 C) $     .  2B + 3C  = $

By the way, gross income should be larger than gross expenses.  If it’s not, then the price of the building is too high, or the amount of rents is too low.  If so, find another property.
(Step 3) Subtract (2) from (1): $     This is your net annual cash flow income.

5. First Year wealth transfer
How much total wealth is the owner getting from the renters in the first year?  That would be equity plus cash flow.  
Add up:
1. Net annual cash flow income from above $
2. First year equity gain from above $

Equals:  the total wealth transferred from the renters to the owner in one year: $

3.  So, what’s the return on your initial investment (the 25% down payment you made for this deal)?  Divide the total wealth transferred to you by the 25% down payment you made.  Example: my total wealth transferred the first year is $25,613 and my 25% down payment from above was $48,725 = 0.52.  That’s a 52% profit rate!  Wow!

Profit rate:

6. Total wealth transferred over loan period
But there’s more!  The building increases in value each year.  It’s called “compounded value.”  How much is the building worth after 30 years? It should go up with inflation.   Let’s assume a modest 4% increase in value of the building per year.
Go to

Plug in: interest rate per time period: 4%
Number of time periods: = 30

Present Value:  price of building

How much will the building be worth after 30 years (future value)?  $

Now let’s figure how much total wealth was gained by the owner over the life of the loan, 30 years.

1.  Calculate the NET ANNUAL INCOME for 30 years [from #4 (3) above x 30]  = $
2. Add that to the value of the building after 30 years (from above) = total wealth gained by capitalist property owner $
ADD 1 and 2 for capitalists total wealth after the building has been paid over 30 years: $

3. Now compare a renter to the capitalist.  How much real estate wealth does the renter have after renting for 30 years? $

7. Non Profit Situation

If a government program enabled tenants to buy and own the building as a non-profit, and cease thereby to be renters / tenants, how much would each buyer-owner’s rent be per month?

To get this amount, go to the section above on the loan, get the “Total monthly mortgage payment all included: $     ” and divide that by the number of tenants / units.  $______________

That amount is what the buyers would pay per month to buy the building for themselves.  They would also own the building after 30 years.  That means they could also gain the compounded value of the building.  So, take the compounded value of the building over 30 years and divide that by the number of units.  How much did each accumulate over thirty years as the property increased in value?   $

8. Essay Questions

Now answer the following regarding the housing property relationships you just worked on:

1.  Using examples from the data above, summarize how tenants (renters), by renting, transfer wealth to capitalists and therefore over time become a lower-income class while owners become wealthy class over time.

2. Summarize how the home buyers in the non-profit situation compare to the renters.   How would the formation of classes be changed if such a program existed?    

3.  Consider how national politics are shaped.  In light of the housing situations of this activity, explain why wealthy landlords tend to support small government (fewer government run non-profits) and lower taxes, in contrast to poorer people who tend to support higher taxes on the wealthy and bigger government (more government-run non-profits)?

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