How A Biden Administration May Affect Real Estate Investors
A Perspective on Possible New Rules and Regulations
By: Rick Sharga, EVP, RealtyTrac
In spite of—and in some ways perhaps because of—a global pandemic, one of the most contentious presidential elections in the nation’s history, and even the invasion of killer hornets into the Pacific Northwest, 2020 has turned out to be a banner year for the U.S. residential real estate market.
Existing home sales, which suffered due to government shelter-in-place orders during the Spring, rebounded strongly through the Summer and well into the Fall, driven in no small part by historically low mortgage interest rates which improved affordability even as home prices continued to climb. COVID-19, ironically, accelerated a trend that the market had already begun to see, as Millennial renters began exiting urban areas and becoming suburban homeowners in large numbers. With working from home now a viable and probably long-term option for employees across the country, the demand grew for homes large enough to accommodate a home office and with enough space between neighbors to foster a sense of a healthier, safer environment. All of this resulted in a 3% increase in existing home sales, and about a 20% increase in new home sales in 2020 – both well above most analysts’ forecasts at the outset of the year, and a far cry from the disaster many market observers predicted when the pandemic struck in March.
It’s possible that the market would have performed even better had it not been for an historical lack of inventory—by October, there was less than 3 months’ supply of existing homes available for sale, compared to the normal level of 6 months. But a market this strong typically provides a very healthy environment for real estate investors. Fix-and-flip investors find a ready market for properties they rehabilitate, and buy-and-hold investors provide rental properties for households unable to find or afford homes to purchase.
As the U.S. economy continues to recover from the pandemic-induced recession, most economists believe that the housing market will carry its momentum into 2021. But for investors there’s another variable to factor into the equation for next year: the Biden Administration. What should investors expect as the White House welcomes a new First Family?
Will Campaign Promises Become Policy?
One of the concerns voiced by investors is that President Biden might actually implement some of the ideas discussed during the campaign by Candidate Biden. Two of these are particularly worrisome for investors: the elimination of 1031 Exchanges, and a tax on flippers.
“Biden has talked about removing the 1031 Exchange program, which would discourage real estate investments,” according to Eric Paulsen, CEO of Topside Real Estate in Newport Beach, CA. Section 1031 of the Internal Revenue Code allows investors to defer paying capital gains taxes on investment property sales if they reinvest the proceeds into a similar investment property within a specified time frame. Typically, an investor has 45 days to identify the replacement property and 180 days to complete the transaction.
The Biden Plan for Mobilizing American Talent and Heart to Create a 21st Century Caregiving and Educational Workforce calls for spending $775 billion over the next 10 years, paid for in large part “by rolling back unproductive and unequal tax breaks for real estate investors with incomes over $400,000.” A senior Biden campaign official more specifically spelled out that a Biden Administration would “take aim at so-called like-kind exchanges,” and would “prevent investors from using real-estate losses to lower their income tax bills” according to Bloomberg.
Paulsen believes that these sorts of actions would “disincentivize” real estate investing in general by taking away many of the benefits of real estate investing, and making it less attractive compared to other “investment classes” such as stocks and bonds.
Long-time fix-and-flip investor Tim Herriage, CEO of DFWInvestors.com, believes that market conditions will continue to be positive for investors, but is concerned about a “worst-case scenario,” pointing out that “there has been a lot of talk from Democratic members of Congress about legislating against flippers, including a flipper tax in Bernie Sanders’ campaign platform.”
The Sanders Campaign did, in fact, recommend placing “a 25% House Flipping tax on speculators who sell a non-owner-occupied property, if sold for more than it was purchased within 5 years of purchase.” Besides the questionable grammar, this policy—which would be intended to create more affordable housing—would make flipping much less profitable and probably lead to fewer fix-and-flip investors in the market. That would actually remove a viable sales option for financially distressed homeowners, and inevitably reduce the inventory of homes coming to market, thereby raising the cost of the remaining inventory, making homes even less affordable than they are today. While there’s been no word from the Biden Campaign on implementing such a tax, it’s certainly worth paying attention to as the Federal Government’s deficit continues to balloon, and politicians will search for new sources of revenue.
What About the Rental Market?
The Biden Campaign has earmarked $640 billion over the next 10 years to address the country’s affordable housing problems. Much of the money, and many of the programs, are geared towards helping renters find and be able to afford safe, adequate housing for their families. The Biden Plan for Investing in Our Communities Through Housing includes a wide variety of programs ranging from rolling back discriminatory zoning laws to enhancing consumer protections from evictions and foreclosures; but it also includes an increased amount of government rent subsidies and investments in new affordable housing units.
While details of the programs proposed in the Biden housing outline are still being developed, the focus on providing funding to create more rental inventory and also providing funding to help tenants make their monthly payments both sound like potential opportunities for real estate investors.
Ed Renwick, CEO of Raineth Housing, which offers affordable single family rental homes in Ohio, Missouri, and Kansas, believes that a Biden Administration will ultimately be good for landlords. “A Biden Administration will help third-quartile earners—my tenant base—survive the COVID-driven economic downturn,” Renwick said. He believes that a Biden Administration would be more likely to provide the kind of government stimulus program that will fund state and local governments, enabling them to provide much-needed services, and also enable lower wage earners to be able to make their rental payments—all good news for investors who own rental properties.
More good news is that there is no mention in any of the Biden proposals of implementing national rent controls, which had been prominently touted in the Sanders Campaign.
Does a New Administration = New Outlook for Investors?
“Real estate investors have succeeded—and failed—under both Democratic and Republican administrations,” Paulsen noted. So, while he believes that investors are adaptable and resilient, he offers a note of caution about the impact of uncertainty on the market, and the need for the incoming administration to establish its policies quickly and clearly. “What I really worry about is that no one wants to play the game if they don’t know what the rules are.”
Herriage is bullish on the market dynamics, and that the Biden Campaign’s plans for a $15,000 tax incentive for first-time buyers will stimulate demand, which is ultimately good for fix-and-flip investors. “I think house flippers who can find inventory are going to have a great next four years,” he added. “If you can buy pre-existing inventory, there will be a big market.”
In addition to the change in administrations and their housing policies, real estate investors will need to navigate the country’s economic recovery, which in turn will be largely dependent on efforts to get COVID-19 under control. But as the Millennials reach prime homebuying age, and Gen-Z starts moving into its household formation stage, savvy investors should be able to find opportunities for success regardless of who’s residing at 1600 Pennsylvania Avenue.
