When Vacancies Are an Asset

By Anne Wyatt

Problem: The U.S. Department of Housing and Urban Development estimates a current shortage of five million affordable rental units nationwide — and it expects that shortage to grow.

Possible solution: Renting out more of the 15 million vacant units across the country (more than 11 percent of the total housing stock). What's needed is a better understanding of vacant units and the reasons why some landlords do not rent them out.

Housing solutions are often narrowly framed in terms of the need for new affordable housing units (and new subsidy). This limited perspective glosses over the potential use of existing units. With the current number of public housing units in the U.S. at about 1.2 million, according to HUD, a vast bump up in construction would be required to meet current needs.

New affordable subsidized housing units, public or private, cost upwards of $150,000 per unit and often face community opposition. Building our way out of the affordable rental housing crisis appears unlikely. Using an existing housing resource more efficiently could add to available rental stock more quickly and less expensively.

Understanding vacant units

Definitions are in order. "Vacant" and "abandoned" are often used interchangeably, but abandoned units are really a subset of vacant units — except when they are occupied (by squatters, for instance). The lack of universal definitions complicates assessment efforts, according to the authors of the article "Vacant and Abandoned Properties: Turning Liabilities Into Assets" in the HUD periodical Evidence Matters. Generally, a unit is considered "abandoned" if it is empty, maintenance and upkeep are neglected, and property taxes are not paid.

Foreclosed homes, which may be temporarily vacant, in disrepair, and with property taxes in arrears, are other examples of a definitional gray area: Are they abandoned or just temporarily neglected and vacant? How long does a housing unit have to sit empty before qualifying as abandoned?

For the purposes of affordable housing, two categories, "seasonal, recreational, or occasional use" and "other vacant," totaling more than six percent of the nation's housing stock, deserve the attention of planners and policy makers. Houses temporarily empty because of sale and rental transaction timelines are unlikely to be used.

While luxury vacation homes have a low probability of becoming affordable housing, there is an opportunity in the second home category. Seasonal, recreational, or occasional use homes comprise the largest percentage of vacant units, with more than 4.5 million units available nationwide.

With protections and incentives, some owners who only occasionally use second homes or who rent them out nightly through websites such as VrBO or Airbnb may opt to rent to nontransient tenants instead. Elimination of federal tax deductions, which now allow for mortgage interest and other deductions for unoccupied second homes, would change the current incentive structure.

The 3.6 million "other vacant" units equal three times the current public housing stock nationwide. These units are a relatively unexplored opportunity for provision of affordable housing units. Recognizing the need for more data, the Census Bureastarted including expanded detail on "other vacant" units in 2012.

The primary listed reasons for "other vacant" units include: personal or family reasons, needs repairs, foreclosure, being repaired, storage, and don't know. These six categories comprise about 70 percent of "other vacant" units, or 2.5 million units nationwide, half the HUD estimate for the affordable housing shortage.

As we better understand the breakdown of "other vacant" units and the rationale of property owners, it is reasonable to believe that at least in some cases, with protections and incentives, owners of these units would repair them or convert them from storage in order to rent them to those in need of affordable housing.

Moreover, in addition to counted empty "seasonal" and "other vacant" units, there could be a number of uncounted affordable units in the form of single basement and attic apartments within private homes. These could meet the Census Bureau's definition of housing units, with modifications — such as installation of interior or exterior doors — or without. Thus, incentives could both get more use from existing units and generate even more housing units.

The landlord's risk

Consider a home owner with a single rental unit adjacent to or attached to the home. He could rent his unit but opts not to: Every few months his son visits; he is afraid tenants will not take care of the unit; he does not like the prospect of negotiating a lease or asking for rent; he stores personal items there.

Rental risks to landlords, real and perceived, monetary and nonmonetary, stack up. While some risks are quantifiable, others are not. Risks affect potential landlords differently. Monetary risk, including the necessity for expensive repairs, may pose an extra challenge, and the same is true of privacy issues. Landlord risks include the following:

• Monetary. Damage to unit, unpaid rent, negative return on investment
• Hassle factor. Management requirements, maintenance inconveniences, unauthorized residents and activities, pets, and guests
• Legal and governmental issues. Illegal activities in unit forcing legal eviction, including drugs or prostitution; tenant lawsuit against landlord; licensing, permitting, and tax reporting challenges
• Privacy. Smoke, noise, presence of tenants and their guests can all impinge on privacy.
• Ending rental term. Inability or perceived difficulty to evict tenants as landlord circumstances change, exacerbated by rent controls and other renter protections

Monetary risk is quantifiable. Physical damage to housing units — plumbing, electrical, carpentry repairs — can add up quickly. One inconsiderate or malicious tenant can easily cause thousands of dollars' damage.

Rick Gulino, director of neighborhood development and resident services at People's Self-Help Housing, a nonprofit housing developer and management company in San Luis Obispo, California, reports maintenance and cleaning turnaround fees for units in average condition run from $995 to $2,420 per unit, depending on the size of unit and condition and whether carpets must be replaced. Even these "average" turnover costs are substantial, particularly in terms of rent from affordable units, which may be as little as a few hundred dollars a month.

Legal threats and "hassle factors" — the potential of having to quit what you are doing to deal with a faulty water heater — are not so easy to quantify. Beyond these threats, tenant protections and rent control ordinances can make evictions difficult or impossible. By taking on a renter, a landlord may be obligated to house the tenant, even under changing, difficult circumstances.

So what if we switched up the thinking and considered landlord protections, as opposed to tenant protections? Suggesting landlord protections does not go over very well in a room full of housing advocates. I found this out firsthand in 2013, when I suggested a bundle of protections to give landlords incentives to rent units in my hometown, San Luis Obispo.

The conventional wisdom, there as in other places, has been that less powerful tenants need protections against unscrupulous landlords. I managed to avoid getting thrown out of the conference room on the top floor of the local social services department by adjusting my term from "landlord protections" to "landlord relationships" and "landlord incentives." Still, there was grumbling.

Over time, I have received grudging acknowledgment that landlords need protection against careless or unscrupulous tenants and a reasonable exit plan if they are going to consider renting more affordable units. In our attempts to protect tenants, we have left landlord needs out of the equation. We do not see or hear from them, but there is reason to believe many — particularly landlords with a single unit to rent, an attic, or a basement apartment — quietly withdraw housing units from the rental pool and use what could be decent housing units for storage, occasional guest use, or renting through online booking websites.

Increasing vacancy rates over time support this assertion, although there are a variety of reasons for vacancies. Census housing estimates suggest there has been a gradual increase in housing vacancy since the 1970s, when vacancy rates were at about 8.5 percent. In the 1980s vacancies climbed to 11 percent, and in recent years have climbed higher. While the percentage increase is relatively small, the absolute number increase is substantial: There were six million vacant units in 1970; there are 15 million vacant units today.

How can we entice landlords to rent existing affordable units to people who need them? If we can better understand motivations and interactions, we may be able to bridge the gap, guiding more tenants into suitable housing and more communities out of housing binds.

Landlord challenges increase when the rental unit is an affordable one. Beyond the fact that lower priced, more affordable rents mean less income for the landlord than higher rents do, a greater proportion of prospective tenants for inexpensive units are likely to be unable to pay high security deposits. (In some jurisdictions, laws may also limit security deposit collection.)

Further, tenants in need of affordable housing may be more likely than others to have spotty financial records and rental and job histories. For landlords, a pool of rental applicants with bad credit histories, gaps in employment, and possible prison records is a deal breaker.

Landlord incentives would combat both real and perceived landlord risks. These incentives could include tenant screening and placement assistance; responsible renter training and certification programs; a security deposit and damage funding pool to cover physical damage, unpaid rent, and other losses; disruptive behavior intervention programs and problem mediation; and expedited evictions in cases where clear agreements are not honored.

Do the math: At the low-income affordable end of the market, gross landlord income from affordable rentals is often negligible in terms of total income.

Gross rent from "low-end" affordable studios may be under $10,000 per year. Net rent may be far less. One careless tenant can easily do this amount of damage.

Given this reality, landlords with higher incomes have even less inclination to rent. With the best-case scenario as minimal additional income and the worst-case scenario being aggravation and loss, many will choose not to rent their units. Landlords with an apartment that is part of or next to their own home may be more inclined to opt out.

Carrots and sticks

Changing federal tax codes could go a long way toward providing incentives for using vacant units as affordable housing. Right now, mortgage interest and other deductions incentivize vacant units. If these incentives were eliminated, some portion of vacant units would shift to full-time occupied housing.

Conversely, tax incentives could be provided to landlords who rent affordable units during the time they rent them. France is well known for tenant protections. In Paris, however, where there is a chronic squeeze on affordable rentals, officials have implemented a system to limit taxes on income from affordable rentals in targeted areas and have created an unpaid rents insurance fund.

According to a 2013 article in The Atlantic, "a potential burden is taken off landlords' shoulders, who may then consider lower income tenants less of a risk and thus take more of them on." Incentive programs could similarly limit tax rates on rental income from affordable rentals, or they could set a threshold under which no income taxes are levied (such as a UK program to encourage home sharing), or tax credits could be offered.

Another option is to create or empower nonprofit management companies (third parties) to build landlord relationships and find the right tenants for empty spaces. If these agencies have responsibility for management and maintenance and evictions, they can shoulder some risks of rental and incentivize use of vacant units.

Affordable rentals will continue to be at a premium in rising real estate markets, limiting market solutions. A robust portfolio of housing stock owned by nonprofit housing providers will buffer against both current and future shortage.

Many renters rent because they want flexibility to move around. Yet they don't like being forced to move. Scott Smith, executive director of the Housing Authority of San Luis Obispo, reports that in his experience of managing thousands of rental units, "When low-income renters have the option to choose month-to-month or longer term rental agreements, the majority choose the shorter month-to-month option."

Similarly, a private landlord laments that her tenants sign only a six-month lease (as opposed to the one-year term she wanted). Yet, the tenants are unhappy that she advertises the unit to find future tenants part way through the short lease period.

Defining "vacant" units would help. Housing elements should both quantify these units and contain policies and programs to more effectively use vacant units. San Luis Obispo County included a modest program to promote more efficient use of existing housing that is vacant or underused through advocacy, education, and support — financial or otherwise, for example, landlord incentives and tenant screening and matching assistance.

More research may be needed. Better understanding landlord needs would go a long way toward solutions. In addition to the help noted earlier, could owners of vacant units be matched with a target group of tenants they may be interested in providing housing for, say veterans or emancipated youth?

Opportunity is staring us in the face. Understanding the needs of landlords and reasons for vacant units can help us serve low-income tenants seeking housing options. Strengthening our relationships with landlords, incentives, and creative partnerships could open doors now closed. An increasing stock of vacant housing units is a trend in the wrong direction. n

Anne Wyatt is a housing policy planner in San Luis Obispo, California. She may be reached at a.reneewyatt@gmail.com.

Resources

U.S. Census Bureau vacancy categories: www.census.gov/housing/hvs/definitions.html

"Other Vacant Housing Units: 2000, 2005, 2010": www.census.gov/prod/2013pubs/h121-13-01.pdf

HUD, "Vacant and Abandoned Properties: Turning Liabilities Into Assets," Evidence Matters (Winter 2014): www.huduser.org/portal/periodicals/em/winter14/highlight1.html

HUD, "Preserving Affordable Rental Housing: A Snapshot of Growing Needs, Current Threats, and Innovative Solutions," Evidence Matters (Summer 2013): www.huduser.org/portal/periodicals/em/summer13/highlight1.html

"New Rent Laws Aim to Keep Paris From Becoming Only for the Rich," CityLab: www.citylab.com/cityfixer/2013/07/new-rent-laws-aim-keep-paris-becoming-only-rich/6187