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MHN Asks: Is There a Need for More Regulation in the SFR Industry?

April 25, 2024

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Two SFR bills that would limit institutional investors' involvement in the sector are raising concerns. Quinn Residences' Richard Ross weighs in.

Following the 2008 housing crisis, many institutional investors entered the single-family rental sector, snatching up homes in foreclosure. Ever since, their involvement in this housing niche has been steadily increasing. According to a Yardi Matrix report, institutional investors own about 3 to 4 percent of all single-family rentals across the U.S. And while multifamily investment was muted during the slowdown of 2023, they remained active.

But recently, Oregon Senator Jeff Merkley and Washington’s 9th congressional district Representative Adam Smith came up with two bills—Stop Predatory Investing Act and the End Hedge Fund Control of American Homes Act—that are tailored to halt institutional investors’ involvement in the SFR sector. If enacted, one of them would require investors to divest their holdings and refrain from buying more houses, while the other would force them to pay $10,000 per unit owned into a fund dedicated to first-time homebuyers, Columnist Lew Sichelman told Multi-Housing News in a viewpoint article.

So why have these SFR bills been proposed? How much disruption would they really bring to the industry? To answer these questions and others, we talked with Richard Ross, CEO of Quinn Residences, a company founded in 2020, and developing, acquiring and operating single-family homes, exclusively for rent. Quinn Residences’ portfolio is located primarily in the Southern U.S. and comprises more than 5,200 homes across 39 communities in five states.

How would you describe the SFR sector at the start of the second quarter of 2024?

Ross: In a word, I would describe it as tentative. Investments in the space have been at a standstill for the past 12 to 18 months due to the dramatic increase in interest rates and overall cost of capital, coupled with a need for more transactions and a wide gap in bid versus ask prices of recently completed communities.

What’s your forecast for the SFR sector for the rest of 2024?

Ross: I predict it will be bullish for the remainder of the year. As long-term interest rates stabilize and the path to cuts in short-term rates becomes more apparent, we can anticipate a substantial increase in new investment and sales of completed communities.

Looking ahead to 2025 and beyond, the outlook is very promising. I expect the housing supply will remain critically low, and demand will continue to rise as the population ages and families seek more reasonably priced options.

But despite this lack of supply, more regulatory barriers are on the horizon. What’s your take on the two SFR bills?

Ross: The Stop Predatory Investing Act and the End Hedge Fund Control of American Homes Act bills exacerbate the existing challenges in the housing market. If enacted, these bills would significantly diminish the availability of safe, quality, affordably priced housing for hundreds of thousands of renter households nationwide.

They would also restrict middle-class families’ access to rental properties located in neighborhoods near quality schools, employment centers and transportation corridors. Moreover, these bills would disincentivize the building and development of new, much-needed rental housing units. This would hinder efforts to alleviate the housing shortage, worsen the affordability crisis, and stifle innovation and entrepreneurialism in America’s housing market by creating regulatory barriers and discouraging investment.

As a result, if passed, these bills would not only fail to address the root causes of the housing affordability crisis, but also worsen the situation by limiting housing options and impeding progress towards innovative solutions.

What do you think prompted lawmakers to create these bills?

Ross: Though these bills were proposed to address perceived issues in the housing market, they rather stem from a political reaction to an erroneous perception that the current housing affordability crisis is due to the ‘control’ of the housing market by hedge funds. This is not factually supported.

The notion that major providers of single-family rental homes wield control over housing markets is unfounded. These providers encompass a diverse range of entities, including publicly traded corporations, family-owned businesses and individual homeowners, all playing crucial roles in local housing ecosystems.

If these bills pass into law, what choices will you and other SFR owners and investors have to remain compliant?

Ross: If these bills pass into law, single-family rental owners and investors may face limited options to comply, likely leading to unintended consequences. For instance, divestment requirements can lead to fire sales, destabilizing and disrupting local housing markets.

How would these bills impact SFR investment and development?

Ross: These bills will stifle future investment and exacerbate an already existing housing crisis. Large investors are few in number and have a limited impact on the overall investor percentage in the housing market.

Institutional and small investors heavily target under-market-value homes requiring significant repairs, often more than what first-time homebuyers are willing to invest. Most mega investors (Editor’s Note: investors that own at least 1,000 units) will buy these properties and invest a large amount in upfront capital to have them repaired.

For added perspective, the Urban Institute wrote that ‘Institutional investors can put a more competitive bid on properties that need repairs, as they can repair these homes in a more cost-efficient manner than most homeowners can.’

Tell us more about the potential impact of these bills on housing affordability.

Ross: The recent increase in mortgage rates, coupled with escalating prices, is rendering a ‘starter home’ unattainable for most first-time homebuyers. Additionally, rents are experiencing significant nationwide hikes. If these bills are enacted, they will eliminate a functional, vital source of new housing, potentially aggravating American rent inflation by reducing the supply of quality homes.

Is there more regulation really needed in the industry? What would help you and other SFR players to grow your businesses while easing housing affordability?

Ross: There is no need for additional regulation in the SFR industry as it is already governed by Federal Fair Housing standards and numerous state and local laws.

To alleviate housing affordability issues, the key requirement is simply more homes. This can be facilitated by streamlining the outdated and complex web of municipal regulations that hinder entitlement and construction processes for new homes. In addition, home construction has seen minimal innovation and improvement since World War II. New technologies development and methods are necessary to expedite market development and reduce the overall construction costs of building a home.

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