Federal Rental Housing Production Incentives:

Effect on Rents and Investor Returns

RCED-85-114: Published: May 10, 1985. Publicly Released: May 10, 1985.

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In response to a congressional request, GAO reported on a cash flow model which measures how various production incentives affect lower income families' rent and investors' after-tax rates of return.

The federal government has been encouraging private development of rental housing by providing tax incentives, federal mortgage insurance, and direct financing subsidies which, together with rental assistance to supplement tenant rents, have been aimed at making multifamily rental housing more affordable to lower income families. For each production incentive, a model was developed to measure the after-tax rate of return at a given rent level or the rent level given an assumed after-tax rate of return. The model results showed that rental housing production incentives can either increase investor profitability or lower rents. Under the Economic Recovery Tax Act, tax incentives increased the rate of return from 15 to 16 percent, benefits from federal mortgage insurance increased the rate of return from 16 percent to about 25 percent, and financing subsidies further increased the rate of return from about 25 percent to 29 percent. As the rate of return increases, more private investment in new rental housing should occur. This increase in the supply of rental housing should reduce rents. However, the extent to which rates of return increase or rents are reduced depends largely on the rate of return required to induce development of rental housing, the availability of production incentives to investors, the competitive nature of rental housing markets, and the degree of rent control exercised by the government.

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