Imagine This on the Horizon…
Thinking Outside the Box to Solve the Housing Shortage
By Suzanne Andresen
We have recently seen some concerning legislative attempts to continue the demonizing of real estate investors who are allegedly gobbling up all the assets in front of homeowners. Let’s look a little deeper into this and really contemplate the “evil landlords.”
We can start with a quote from David Howard, CEO of the National Rental Home Council. Howard is regularly in DC lobbying for the rental real estate industry. He recently shared the bill “End Hedge Fund Control of American Homes Act” proposed by Senator Jeff Merkley (D-OR) and Representative Adam Smith (D-WA). This is a bill targeting the legitimate development, investment, and ownership activities of America’s leading providers and builders of professionally managed single-family rental homes and communities. Those evil landlords.
What we fail to take into consideration is the intent of the rental tenant’s perspective. My niece who is 26, has no intention of purchasing a home and just entered into her fourth lease, after several moves back home for extended time frames. It had nothing to do with the cost of rent, as my brother was paying her rent for a one-bedroom apartment in midtown Manhattan. She simply moved out mid-lease and back home to live with her mom.
My brother continued to pay the rent, and actually could have sublet the unit for years. I negotiated the lease for him the October following the COVID outbreak. As I watched the vacancy rate rise as it showed the units available on their floor plan website, I kept calling back and asking when they wanted to accept my offer? They eventually did, and we had a smoking good deal with sublet rights. At today’s market rate and with the rental control components to NYC housing, he would have cleared $1,000+ per month.
That said, there is clearly a housing shortage, and we need to collaboratively try to figure out how to fix some of the most important issues. There is some truth in prominent cities having an increased focus for some of the REITs investment strategies. But there is also a similar, less interesting element to the less popular cities. There are actual zombie housing markets, but some of this goes a bit deeper than just the image of the house or location.
We all know the challenges home buyers face as they diligently put money aside in savings for their down payment and closing costs. Now let’s look at the REO and zombie assets these first-time homebuyers feel they can afford. The most likely financing will be a 203K loan product or something similar. This is a significant challenge for a first-time home buyer to attempt.
We have seen a shortage of materials all over the country, with costs increasing every month. Now imagine the miscalculations of the new homebuyers as they run out of money and are only 92% complete, with no additional funding available. They face default and the loss of their American Dream along with the years of diligent savings. Heartbreaking, and not the cause of any real estate investor.
There are additional shortcomings along the way. Let’s take a step back and look at the now-vacant house. If it is not located in an up-and-coming market, it may go into foreclosure or even a tax sale. Foreclosures are great opportunities for the next buyer if there is one. When there is not — the town gets it back. They have the right to have a tax sale but may keep the asset on their books for years. My town has several. Some are land only and one is actually 27 acres on the water. As an elected official, I think there is opportunity on the horizon. At the same time, the allocated taxes for the properties have not been paid for years, essentially diminishing the services the town can offer.
I have a solution. Ever hear of a 529? It is a tax-advantaged savings plan to encourage savings for future education costs, paid to qualified tuition plans. This is authorized through Section 529 of the Internal Revenue Code. It is sponsored by a state, state agencies or educational institutions and administered through an approved financial institution. Let’s call this a 529-C, for college education.
Now let’s create a 529-R for rental conversions to homeownership. Each month a tenant can contribute up to 4% or whatever the tax law allows, which can be matched by the landlord — all tax free. Similar to the 529-C, the account follows the tenant from state to state, and years of contributions are accrued.
Let’s go back to a tenant, not yet ready to buy a home. Like my niece, she could have been depositing and receiving matched funds into her 529-R account for years. What a terrific solution, fostering home ownership, when the buyer is ready. The person who opens the 529-R plan account is called the account holder or the saver. The person the account is opened for is called the beneficiary or the tenant. The account holder and the beneficiary can be the same person.
Next issue— solved. What happens if the tenant never buys a home? As of 2024, the following rules apply to 529 plan rollovers to Roth IRAs: The 529 plan must be under the beneficiary’s name for a minimum of 15 years. Yearly conversions cannot exceed annual Roth IRA contribution limits. The lifetime 529 to Roth IRA rollover limit is $35,000. We could replicate this to the 529-R. Now we have created a conversion strategy for a lifelong tenant, who can either purchase a house or contribute to their IRA — or both, if they have saved enough through the years.
Now the tenant and landlord are partners in homeownership. What a terrific solution.
Are the landlords and real estate investors still demons? I think not.
