Even 0% interest rate loans need to be paid back at some point. With real estate being over-built, it's going to sit empty. Eventually the payments can't be made. Then you get credit defaults. Then people need cash and you get a liquidity crisis. And then it all falls down.
The loans are being repaid but they're being repaid tax-free from other sources. If you own multiple properties and one of them sits vacant, you can count the 'missed out on income' as a loss against your company. The amount of income you write off as losses is based on the rent you were _previously charging_. IOW I have no incentive to rent my unit at a lower cost if it's basically acting as a tax shelter for my other properties. If the combination of those two things goes negative then yeah, the world gets interesting.
> The amount of income you write off as losses is based on the rent you were _previously charging_. IOW I have no incentive to rent my unit at a lower cost if it's basically acting as a tax shelter for my other properties.
$1 in income is worth significantly more than $1 in tax deductions.
Writing off tax losses isn't equivalent to income. The losses just reduce your taxable income. There isn't actually much upside to having a property sit vacant just to take losses on it, unless you're in some extremely weird tax scenario.
If someone was renting a property at $1000/month, it's still better to re-rent it at $800/month than to reduce your tax bill by something like $400/month (or whatever the taxes would be on the $1000 rent offset).
The point of letting a property sit empty is because vacancy is an "expense". EBITDA is imaginary, and the owner can pretend the building's "revenue" is anything. Sure 100% "vacancy" means no actual income and gigantic loses. But, the owner can use the inflated "revenue" to apply for more debt. And the cycle continues.
But! It might not be better if you are leveraged based on last known rental rate.
Something is broken in the real estate lending market because landlords do prefer lack of occupancy to lowered rents. I don’t know the industry well enough to know why but it’s definitely a pattern.
Surely it's because when you've borrowed a lot against a highly-valued property you don't want its perceived value to be reduced (by having low rents) in case that triggers the lender to recall the loans. But I too don't know enough about the commercial real estate "industry".
One explanation that I have heard that sort of makes sense is that by refusing to lower asking rents they prevent existing tenets from seeking rent reductions.
So the calculation is probably some combination of projected increase in occupancy, projected rent reductions of existing tenants, tax implications, and potential loan recalls.
My guess is most landlords are just trying to hold on till the end of the pandemic and hope that rents and valuations snap back quickly.
Sure, I understand that you can reduce you taxable income by actually spending money maintaining the property or paying down the loan, but I was responding to the parent suggesting you could label "money you didn't earn" an expense.
