The Department of the Treasury and the Internal Revenue Service released new guidance that is “designed to expand the use of income annuities in 401(k) plans.”
Oct. 25--Joe Nelson says he has a solution for dealing with the thousands of "zombie" homes in Indianapolis.
He's willing to buy pretty much all the unwanted, vacant houses in the city that he can get his hands on, rehab them and fill them with low-income renters.
All on his own dime, without any government subsidies.
This isn't a pipe dream. It's happening.
Nelson heads a San Diego company called Mt. Helix Real Estate Investment Fund that has shelled out more than $10 million in the past year to buy and start fixing up more than 300 run-down Indianapolis houses, saving many from demolition.
And Mt. Helix is just getting warmed up. Nelson says he can scare up enough investor money to buy another 3,000 to 5,000 decrepit Indianapolis houses -- a plan that, if realized, could essentially eliminate Indianapolis' vacant home problem.
The buying spree has thrust the little-known California company into the local spotlight as one of the biggest single-family housing landlords in the city. At least two other out-of-state investment groups, American Homes 4 Rent of Agoura Hills, Calif., and American Residential Properties of Scottsdale, Ariz., also are buying up hundreds of houses in the metro area.
What makes Mt. Helix stand out is its focus on buying vacant homes in distressed neighborhoods surrounding Downtown and turning them into low-income rentals.
In contrast, the other big investor groups active in Indianapolis are buying habitable houses in stable neighborhoods and catering more to middle-class renters.
"There is no model for what we are doing," acknowledges Nelson, 49, a talkative former telecommunications consultant who lives in San Diego but has spent much of his time over the past year in Indianapolis, where he keeps an apartment. "We are building the ship as we sail."
Vacant or "zombie homes," as they're often called, are a vexing problem in Indianapolis, which ranked this year among the top 10 cities in the country for the percentage of its foreclosed houses that were vacant. The city's land bank of unwanted homes contains over 600 properties and its annual sale of tax-delinquent properties has ranged from 2,000 to more than 4,000 in recent years, with many of those being vacant houses. More than 1,000 homes have been razed by the city in the past three years.
City showing caution
City officials don't quite know what to make of Nelson and his two-year-old company, named for a mountain next to its offices in San Diego.
"My gut reaction is some concern," said Jeff Roeder, deputy director of the Department of Metropolitan Development. "The volume of property and concentration of property they are purchasing is significant. There are just a lot of questions regarding the longevity of this investment. If it doesn't cash flow for them, do they just walk away?"
Roeder, who's in charge of drawing up a new plan for dealing with the 600 vacant properties currently in city hands, says he worries that if Mt. Helix's plan doesn't work, the company might dump its hundreds of houses back on the market -- sinking any hopes of recovery for some of the city's most downtrodden neighborhoods.
On the other hand, Roeder said, "Right now there's no reason not to believe Joe Nelson and his intentions and the corporate intentions. They're putting (vacant homes) back on the tax rolls and in person they say all the right things about working with the neighborhoods."
Joe Hanson, an executive at the Indianapolis Neighborhood Housing Partnership, which helps coordinate housing initiatives in the city, also reserves judgment on Mt. Helix's plan, saying the company is making what amounts to a risky business bet that others have failed at.
Up to now in Indianapolis, single-family rentals have traditionally been the province of mom-and-pop landlords. In addition, housing agencies and nonprofit development groups have spent millions of dollars to create clusters of rental housing from single-family homes in distressed neighborhoods where traditional lender-financed homeownership is scarce. Those projects, often financed with philanthropic donations and government subsidies, have met with limited success, Hanson said.
"This is unproven," Hanson said of Mt. Helix's plan to buy hundreds of houses across many neighborhoods and manage them as for-profit, low-income rentals. "Scattered-site housing is something that the affordable housing sector hasn't unlocked."
Apartments have always been easier to adapt for low-income housing, he said, because they're concentrated, sharing parking lots, clubhouses and sometimes heating and cooling systems that make them cheaper to run.
Hanson said he's never seen a company try to create such a large holding of rental housing using millions of dollars in private money and no government subsidies (except for federal Section 8 housing payments that tenants qualify for). "No one else is bringing this kind of capital into the market. I'd like to think they are coming in in a sophisticated way and doing it right. There are a lot of risks in the business."
The rise of big investment groups in the single-family residential rental business has been spurred by several market trends: a drop in home prices since the 2007-2009 recession, a plentiful supply of homes for sale, a strong rental market, and institutional investor demand for investment products that generate solid returns.
The more than $10 million that Mt. Helix has tapped to buy houses in Indianapolis comes from its five principals and a handful of their friends and family, Nelson said. Once a large enough pool of homes is rehabbed and rented, Mt. Helix plans to swap out the insiders' money for long-term financing on Wall Street, where institutional investors like insurance companies are increasingly willing to put funds into packaged rental home portfolios of hundreds of units, Nelson said.
Mt. Helix will try to structure its housing portfolios so they pay attractive returns based on steady rental income, Nelson says. That will require Mt. Helix to maintain high occupancy rates in its houses, probably over 90 percent. In the long term, possibly 10 years or longer, Mt. Helix plans to sell the homes back to tenants or other homeowner-buyers once housing values rebound and stabilize, returning more profits for investors, Nelson said.
CDC likes what it sees
In the Eastside neighborhood of Martindale-Brightwood, where Mt. Helix has focused its early buying, Josephine Rogers says she couldn't be happier with Mt. Helix.
The executive director of Martindale-Brightwood Community Development Corp., a nonprofit neighborhood development group, Rogers worked with Nelson in selling 64 CDC-owned houses to Mt. Helix last year.
"They have done a very good job," Rogers said. "Joe keeps his word. What he tells me, happens. He doesn't over-promise."
The houses Mt. Helix bought from the CDC are ones that the CDC built with the help of government tax credits from 1998 to 2000, only to see the project fail. Under CDC management, the houses slid into disrepair and 70 percent of them ended up vacant, many stripped of wiring, plumbing and fixtures by vandals.
"We spent a lot of money and it was to no (avail)," Rogers said. "Even when the CDC would board them up, they would go and take the boards down. It was sad."
In a construction blitz, Mt. Helix has now fixed up and found tenants for most of the 64 houses it bought from the CDC, plus another 40 or so in the neighborhood, which is pockmarked with 700 abandoned houses, Rogers said.
The San Diego company was willing to pay $9,000 to $10,000 each for the 64 CDC houses, two to three times their market value, because it wants to use Martindale-Brightwood as a demonstration project for its ambitious, multicity home rehab plans, Nelson said.
"We paid the extra to make it work," Nelson said. "This was a project we wanted to do with the CDC. It was a chance to demonstrate our commitment ... to the CDC, the city and other cities."
While Mt. Helix has focused its home-buying in Indianapolis, it's also begun buying houses in Columbus, Ohio, and in Kentucky and has plans to expand to other cites later, Nelson said.
Accompanied by Rogers and a CDC board member, Nelson showed off two run-down Martindale-Brightwood houses Mt. Helix bought and renovated. One was a candidate for demolition, in such bad shape that even its flooring had to be replaced, along with all electrical wiring and the plumbing.
As Nelson stood on the new floor in the house at 2828 Gale St., four construction workers rebuilt interior walls with new studs and fresh drywall.
Not far away, on Holloway Avenue, Mt. Helix has bought and fixed up five houses, including a three-bedroom house in the 1800 block where Nelson offered a walk-through the day before the first tenant moved in.
The house sported the standardized look and furnishings that Mt. Helix puts in all its houses: new beige carpeting, refurbished kitchen appliances, a 200-amp electrical panel and all-electric heating and cooling systems.
The standardization borrows from the mass-produced Levittown subdivisions that were hastily built after World War II on Long Island, N.Y., and in Philadelphia and other cities where housing was scarce. Mt. Helix keeps costs down because it buys items in bulk at discounted prices and its maintenance staff can more easily do repairs since every house is identically outfitted, Nelson said.
Mt. Helix employs only electricians and construction managers. It contracts with construction crews of about a dozen workers per crew who descend on a house and completely rehab it in two to three weeks, Nelson said. The managers inspect houses weekly and pay crews only when the work is done right, Nelson said.
Rehab costs typically run $20,000 to $30,000 a house, with the worst so far topping $50,000, he said.
One of the first things done on every house: Installing new electric meters and boxes so the house can be alarmed against thieves who are notorious for stripping items of value from vacant homes in the neighborhoods where Mt. Helix is buying.
"We don't let them linger," Nelson said "We go in, alarm them and provide security. The police have been very helpful. The only thing, oddly enough, that we've had stolen was one alarm."
Rents range from $650 to $750 a month plus utilities for most of Mt. Helix's houses. That puts its rent in the low range for newly rehabbed houses with multiple bedrooms.
Standing outside the latest fixed-up home on Holloway, Elizabeth M. Gore, a board member of Martindale-Brightwood CDC, said, "I thank God that the community is going to have people who want to live in our neighborhood again."
One success story
One of those newcomers is Shameskie Gray, who said she moved into a Mt. Helix home from a Northside apartment last spring with her daughter and boyfriend to be closer to her job at a Downtown Indianapolis hospital.
"I was kind of deterred at first because of the area," Gray said. "There's an abandoned house on either side of me." But she likes the fact that her rent of $625 a month is $75 less than at her apartment and that "everything is totally new" in her three-bedroom house, Gray said.
She also praised maintenance, saying, "They're really good with callbacks. I really do like that." When her daughter locked herself out of the house, Gray said, Mt. Helix's rental office even sent someone out to unlock it.
Chelsi Smeltzer, who runs the 10-person leasing and maintenance office that Mt. Helix has opened in Martindale-Brightwood, said about 40 percent of Mt. Helix's tenants so far are single mothers and a third of its homes are rented to tenants who receive Section 8 housing subsidies for the poor.
Nelson said demand for Mt. Helix's rehabbed homes is strong. "We have a waiting list a mile long. It's been a nice surprise."
This month, Mt. Helix's crews were rehabbing more than a dozen houses a week as the company continued to buy more. It bought 150 houses last month at the annual sale of tax-delinquent properties held by the Marion County treasurer's office.
Given its preference for buying run-down houses, Mt. Helix owns dozens of properties cited for violations of county health and safety laws by the Marion County Health and Hospital Corp.
"We have hundreds of violations, I'm sure, but most of those are because we inherited properties" with outstanding violations, Nelson said. "It's very rare that Health and Hospital actually fines us. We are one of the groups making an active effort to address those (property complaints)."
A Health and Hospital Corp. spokesman said the agency doesn't track citations per property owner, so it can't say how many citations are outstanding against Mt. Helix properties or how many have been resolved.
Investor groups flourish
Mt. Helix's president, Steven J. Lifton, said buying run-down houses amounts to a competitive cost advantage for Mt. Helix as it goes up against other institutional investors to sell their portfolios of single-family homes on Wall Street.
"I see us filling a void that's overlooked by other people," Lifton said. "No question about it, that's our niche. And I tell you, I think these (Indianapolis) neighborhoods are better than some neighborhoods in California and Nevada, where houses cost twice as much."
Lifton previously co-ran a family-owned apartment management company, National Property Investors, based in New York, where he lives. He also is a managing member of Lifton Financial Group in New York.
Lifton said National Property formerly managed two large apartment complexes in Indianapolis. That gave him a familiarity with the city, which he's visited three times, and is one reason Mt. Helix started buying houses in Indianapolis, Lifton said.
Housing officials around the country are still trying to understand the impact of big investor groups and the large portfolios of rental houses they're building in many major U.S. cities.
"Areas with sizable distressed property inventory and high growth potential saw heavy investor activity ... such as Oakland, Phoenix and Las Vegas. ... Major concerns surround the ability and willingness of absentee owners to invest in and maintain properties, with low- to moderate-income renters bearing the burden," said a recent report from the Federal Reserve Bank of San Francisco.
The Fed study doesn't predict how the institutional dollars might impact cities and housing markets. But Nelson is willing to share his upbeat vision.
He said Mt. Helix's mass purchases of houses have the ability to breathe new life in Indianapolis neighborhoods that have been written off by mainstream landlords, small business and lenders.
"We're looking to buy and rehab the properties that have really been left behind. Turn what was a possum- and stray-cat house into a clean, non-blighted asset. We understand we can't stabilize these neighborhoods with rentals. But right now there is no alternative."
Call Star reporter Jeff Swiatek at (317) 444-6483. Follow him on Twitter: @JeffSwiatek.
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