A growing chorus of policymakers and economists around the country support converting vacant foreclosed homes into affordable rental units, a process we call “rehab-to-rent.” Simply put, with an estimated 1 million or more homes for sale and in foreclosure than we have owner-occupant buyers for today, our country needs more buyers interested in becoming landlords so we can remove for-sale signs from these properties and speed a broader housing market recovery.
Some policy experts, including former Obama budget director Peter Orszag, argue that substantial new tax benefits are needed to entice private investors to make such purchases on a larger scale. Orszag suggests an immediate tax write-off of 100 percent of the cost of the house to investors who buy vacant houses and rent them out, a type of “fast depreciation.” He estimates the subsidy would cost the government $10 billion annually to spur investors to purchase and rent an extra 250,000 homes a year.
Without a doubt, ramping up the pace of rehab-to-rent would benefit the economy. Getting these so-called real estate-owned, or REO properties—usually vacant houses now owned by lenders who foreclosed upon the former owners—off the glutted for-sale market would help the broader economy. And in specific local housing markets where too many of these REO properties blight neighborhoods, attracting any potential REO buyers would be very worthwhile.
But do potential investors really need more tax incentives? That’s doubtful. An untargeted and inefficient approach that relies on tax credits would unduly reward those that are likely to get in the game anyway while leaving out other groups, such as nonprofit organizations, with an important to role to play but who face real barriers to participation.
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