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Rehab to Rent Issue Brief

Rehab to Rent Issue Brief

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David Abromowitz and John Griffith explain why ramping up the pace of rehab-to-rent would benefit the economy.
David Abromowitz and John Griffith explain why ramping up the pace of rehab-to-rent would benefit the economy.

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Published by: Center for American Progress on Oct 12, 2011
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1Center for American Progress | Rehabilitate to Rent: Focusing Resources to Revive the Housing
Rehabilitate to Rent
Focusing Resources to Revive the Housing Market
By David Abromowitz and John GriffithOctober 2011
 A growing chorus o policymakers and economiss around he counry suppor conver-ing vacan oreclosed homes ino aordable renal unis, a process we call rehab-o-ren.” Simply pu, wih an esimaed 1 million or more homes or sale and in oreclosurehan we have owner-occupan buyers or oday, our counry needs more buyers iner-esed in becoming landlords so we can remove or-sale signs rom hese properies andspeed a broader housing marke recovery.Some policy expers, including ormer Obama budge direcorPeer Orszag , argue hasubsanial new ax benes are needed o enice privae invesors o make such pur-chases on a larger scale. Orszag suggess an immediae ax wrie-o o 100 percen o hecos o he house o invesors who buy vacan houses and ren hem ou, a ype o “asdepreciaion.” He esimaes he subsidy would cos he governmen $10 billion annually o spur invesors o purchase and ren an exra 250,000 homes a year. Wihou a doub, ramping up he pace o rehab-o-ren would bene he economy.Geting hese so-called real esae-owned, or REO properies—usually vacan housesnow owned by lenders who oreclosed upon he ormer owners—o he gluted or-salemarke would help he broader economy. And in specic local housing markes whereoo many o hese REO properies bligh neighborhoods, atracing any poenial REO buyers would be very worhwhile.Bu do poenial invesors really need more ax incenives? Ta’s doubul. An unargeedand inecien approach ha relies on ax credis would unduly reward hose ha arelikely o ge in he game anyway while leaving ou oher groups, such as nonpro organi-zaions, wih an imporan o role o play bu who ace real barriers o paricipaion.
2Center for American Progress | Rehabilitate to Rent: Focusing Resources to Revive the Housing
Lack of tax incentives is not the major barrier to rehab-to-rent
Te ederal governmen’s recenrequesor public eedback on he disposiion o he250,000 REO properies owned by he Federal Housing Adminisraion and he wogovernmen-conrolled morgage nance gians, Fannie Mae, and Freddie Mac, pro-duced roughly 4,000 responses , many rom privae groups already engaged in similarrenal programs—and many more rom invesor groups orming unds o jump inohe rehab-o-ren marke.Consider Amhers Securiies Group, an Ausin-based broker-dealer ha specializesin residenial morgage-backed securiies. Te rm recenly launched a program opurchase disressed single-amily properies and conver hem o renal unis, accordingo Senior Managing Direcor Laurie Goodman. “Tis is a good business opporuniy or ineresed invesors o ren he disressed homes as he renal marke srenghens,Goodman said inesimony o he Senae Subcommitee on Housing, ransporaion,and Communiy Developmen las monh. As Goodman noed,Naional Associaion o Realors daa rom July 2011 shows ha 18 percen o exising home sales were o inves-ors paying cash, mos o whom were likely concenraing on disressed properies.  Anoher company, Renu Managemen LLC, an Indianapolis-based rm ha special-izes in he acquisiion and managemen o renal properies, recenly compleed a sudy assessing he easibiliy o purchasing, rehabiliaing, and rening REO properies on alarge scale. “We ound viabiliy in his as a commercial oering o insiuional inves-ors,”saidprincipal om Eggleson a a Cener or American Progress even las monh.Te reurns o invesors or single-amily renals were comparable o hose ha invesorsin aparmen properies usually arge wih upron invesmen in renovaing he housesusually repaid wihin a ve-year period, Eggleson said.“We simply need o change our hinking and allow he capial ha’s on he sidelineso ranser signican single-amily ownership so hey can achieve he same reurns asmuliamily now generaes,” Eggleson said.Given his already srong and growing ineres in rehab-o-ren, unargeed bonus ax incenives are no wha is needed. Indeed, invesors already enjoy signican ax incen-ives. When homes are bough and rened ou, owners ge a ax deducion or depre-ciaion o roughly 4 percen per year o he purchase price. Renal invesors hereorealready ge a larger wrie-o han he approximaely 2.5 percen per year depreciaiondeduced rom owning an oce building or a shopping cener.I hese invesors ren ou he properies or more han a year, and sell or a pro, heir“capial gains” are axed a only 15 percen (and 25 percen on a porion o recapureddepreciaion) under he Bush-era ax raes in eec unil he end o 2012. And heorganizers o invesmen groups being ormed o buy up oreclosed homes also may be
3Center for American Progress | Rehabilitate to Rent: Focusing Resources to Revive the Housing
planning o ake advanage o he so-called “carried ineres” ax advanage. Carried iner-es ax reamen means ha when enrepreneurs pro rom puting hese deals ogeher,hey pay only low capial gains raes insead o he 35 percen ordinary income rae ha Americans in higher ax brackes pay on service income ha hey earn.On op o his, cerain exising ax code incenives ha were inended o unnel privaeinvesmen ino home ownership are a he hear o exacerbaing he oversupply o oreclosed homes siting on he marke. Vas amouns o invesmen in subprime andalernaive morgages owed hrough eniies called real esae morgage invesmenconduis, or REMICS, which enjoy a special ax break. REMICs would normally pay a business-level income ax (in addiion o he ax invesors would pay on he income hey receive rom he REMIC), bu he ax code gives REMICs a special exempion, addingo billions in oregone governmen revenue each year. Te exempion is mosly inendedo atrac privae invesmen ino he home morgage marke.Bu REMIC invesors are only supposed o keep his ax break i hey are makingloans, no i hey are piling up and siting on oreclosed houses. Commenaors suchas ormer Assisan reasury Secreary Michael Barr (beore he joined reasury, whilehe was a senior ellow a he Cener or American Progress) and ohers havelongnoedha he rules REMICs operae under conribue o he glu in he marke andhe lack o loan modicaions and principal reducions ha would avoidurher ore-closures. New special ax breaks or privae invesors in oreclosed homes may urnou o have similar uninended negaive consequences in he uure.Some ailored governmen acion o help overcome hese marke ricions may benecessary o accelerae he pace o rehab-o-ren, bu an across he board ax subsidy is he wrong approach.
A better approach for rehab-to-rent
Insead, he ederal governmen should dedicae resources o reducing he specic barrierso paricipaion in rehab-o-ren. Te public’s ineres would be beter served by a argeedsubsidy o give mission-driven nonpro groups a prominen sea a he bidding able.Tese groups almos always have access o less capial han or-pro invesors, whichcould impede heir abiliy o buy REO properies in bulk. Bu hese eniies end o haveclose communiy ies and a vesed ineres in neighborhood sabilizaion, which meanshey’re more likely o keep he rens aordable and reain a long-erm sake in he propery.Ta’s a goal worhy o invesing public dollars.

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