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> How is it that a tax deduction can offset the cost of leaving a property vacant? I can't comprehensively answer this, because I'm not in the business and tho

> How is it that a tax deduction can offset the cost of leaving a property vacant? I can't comprehensively answer this, because I'm not in the business and those that are, are tight-lipped about it. But it's definitely a contributing factor to high rates of empty storefronts [1]: “If these landlords have deep pockets and large property portfolios, it may make more financial sense to claim a tax loss on vacant property than to rent at a non-optimal value.” I'm assuming here that if this is a model that works in the commercial property investment market, it probably works in the residential property investment market too, as long as the investor has deep enough pockets and a long-enough financial strategy. Smaller, short-term residential property owners -- the individual landlord or small-time property management company -- probably wouldn't get as much of an advantage out of this. > Or does it only offset the cost of what the unit would actually rent for at rates that naturally clear the supply/demand curve? I dunno. I think we can make some educated guesses here. If you own 1,000 single-family dwellings in a high-demand metropolitan area, like Sacramento, you've probably paid for those properties with cash or with foreign investment capital. There's no mortgage payment on it, so your costs for letting it sit empty are relatively low. So let's say you maintain a 90% occupancy rate at rents that are significantly higher than they would be if you were forced by some regulation to maintain closer to 100%. Instead of rents varying from $2000/mo to $2700/mo for 100% of your properties, you ask for $2800/mo for 90% of your properties, and then your well-heeled mustache-twirling tax advisers find ways to write down the remaining 10% at as close to a $2800/mo loss each as possible. Hey, if anybody complains, you can just blame "the market". > Could a vacancy tax fix this? Some people think so, but I haven't seen a deep enough investigative piece to be certain. That's mostly what I wish for: a thorough investigation into this aspect of the housing problem that leads to some smart strategies for fixing it. Population growth alone just doesn't explain the massive increase in cost of housing. [1]: https://nypost.com/2018/03/30/de-blasio-eyes-vacancy-tax-for-greedy-landlords-seeking-top-dollar/ https://nypost.com/2018/03/30/de-blasio-eyes-vacancy-tax-for...

closeparen 8y ago
Foreign-ness of the investment capital may be important to the perceived moral valence if the transaction, but money is money. The strategy of squatting on vacant property is essentially patience. For it to pay off, you do have to eventually rent it out (or sell it) when you think prices are high enough. For example, if you have deep enough pockets you might move during a recession, but wait until the recession is over to sell your old house, because you get a better price. If you never sell it, you’re tying up capital for no reason. The higher interest rates are, the more you’re losing in opportunity cost by owning a vacant building. Patience has probably been especially abundant in this decade of historically low interest rates. Since no tax rate is 100%, a writeoff is never as good as a profit. It only softens the blow, which might extend the landlord’s patience in waiting for rents to cycle back up to $2800. Another thing that happens is the project’s financing is contingent on a certain average rent, but the contract doesn’t factor in $0 rent empty units, just leaves them out of the calculation. This is essentially a bug. It’s one reason landlords give signing bonus concessions instead of just lowering the rent. In markets seeing runaway costs, vacancy is at historic lows. No one is investigating this too thoroughly because fixing it wouldn’t be very fruitful.

closeparen 8y ago

Foreign-ness of the investment capital may be important to the perceived moral valence if the transaction, but money is money. The strategy of squatting on vacant property is essentially patience. For it to pay off, you do have to eventually rent it out (or sell it) when you think prices are high enough. For example, if you have deep enough pockets you might move during a recession, but wait until the recession is over to sell your old house, because you get a better price. If you never sell it, you’re tying up capital for no reason. The higher interest rates are, the more you’re losing in opportunity cost by owning a vacant building. Patience has probably been especially abundant in this decade of historically low interest rates. Since no tax rate is 100%, a writeoff is never as good as a profit. It only softens the blow, which might extend the landlord’s patience in waiting for rents to cycle back up to $2800. Another thing that happens is the project’s financing is contingent on a certain average rent, but the contract doesn’t factor in $0 rent empty units, just leaves them out of the calculation. This is essentially a bug. It’s one reason landlords give signing bonus concessions instead of just lowering the rent. In markets seeing runaway costs, vacancy is at historic lows. No one is investigating this too thoroughly because fixing it wouldn’t be very fruitful.