Titan Properties USA

Real estate investors seem to be taking it from all sides these days. Not only are interest rates, property taxes, and construction costs up significantly from a few years ago, but more and more legislation is being passed to make investing in and managing real estate more difficult, arduous, and expensive. 

And, of course, it should come as no surprise that most of this legislation will not only hurt real estate investors but will make the problems that need solving all the worse.

I have discussed the moves toward rent control and tenant screening restrictions elsewhere. Fortunately, the bill we’re looking at today has not yet passed or even made it out of committee. If it does, it could very well be the most damaging legislation yet for real estate investors.

The bill being proposed has the euphemistic title of the Affordable Housing and Homeownership Protection Act and was introduced by senators Tina Smith, Jack Reed, and Tammy Baldwin. The goal of the bill, as Senator Tina Smith’s press release puts it, is to “help Main Street compete with Wall Street.” The press release says, as of today:

“Low-income Americans are particularly strained—the National Low Income Housing Coalition estimates 73% of extremely low-income households spend more than half their income on housing. Unsurprisingly, homelessness has risen in line with housing prices and is up 15% since 2019.”

And what’s the main cause of this? Well, it’s us dastardly real estate investors, of course:

“[I]nvestors are buying a greater share of single-family homes sold each year—many of which they hold as rentals—preventing more families from reaching homeownership and often driving up rents. Most households cannot compete with the largest investors, usually private equity and other institutional investors, who can use their financial might to make all-cash offers, waive contingencies, and provide other concessions individuals are unable to match. Through November, more than one out of every four single-family homes sold in 2023 were bought by investors, not hardworking households—a 69% increase from investors’ pre-pandemic share of home purchases.”

Thereby, the bill proposes to tax real estate investors every time they purchase a single-family residence at a graduated rate, depending on how many properties they own. Apparently, “private equity and other institutional investors” include mom-and-pop investors with 15 rentals. 

Here’s how the tax would work:  

  • 16-25 SFR owned: 1% of purchase price
  • 26-100 SFR owned: 3% of purchase price
  • More than 100 SFR owned: 5% of purchase price

Obviously, this would be quite detrimental to investors—even more so because just about everything in this press release is wrong or misleading.

Is Wall Street Buying Up Main Street? 

It became a popular meme in the post-COVID era to complain that large Wall Street hedge funds in general, BlackRock in particular, were buying up houses throughout the United States. The theory went that these companies were driving up home prices with the express goal of making the United States a nation of renters in a sort of neo-feudalist dystopia.

There are plenty of valid criticisms to be made of Wall Street in general and BlackRock in particular, but this isn’t one of them.

In 2018, there were approximately 83.3 million single-family houses in the United States. Institutional investors own but a tiny fraction of these. As Gary Beasley points out in a December 2021 Forbes article:

“Researchers at my company, Roofstock, estimate that large-scale landlords today own approximately 450,000 of the roughly 20 million single-family rentals in the U.S. While this represents considerable growth over the past decade, it represents less than 2.5% of all single-family rentals and less than 0.5% of all single-family homes (including owner-occupied).”

In addition, at least one of these firms, VineBrook Homes, is starting to liquidate a larger portion of its holdings

Yet the myth persists. Just recently, where I live, The Kansas City Beacon published a piece about how “five companies own 8,000 Kansas City area homes” and that this was “creating intense competition for residents.” Using data from the Mid-America Regional Council, they produced the following chart:

Investors of Single-Family Residences - The Kansas City Beacon
Investors of Single-Family Residences – The Kansas City Beacon

Five companies owning 8,000 houses in the KC metro area or investors owning almost 15,000 single-family residences in Jackson County (the largest county in the metro area) sound like a lot—that is until you realize there are 296,000 parcels in Jackson County alone. 

While many of those are commercial or industrial or vacant land, it wouldn’t be surprising if there were close to 800,000 houses in the nine counties that make up the Kansas City metro area. In this case, those five gigantic companies own a single, solitary percent of Kansas City housing stock.

Real Estate Investors and Single-Family Residences

If the government really wanted to prevent Wall Street from buying up single-family houses, it could just set a hard cap at 1,000 properties. No hedge fund would settle for less than that. Since that’s not what this bill does, we should look at the role of real estate investors in general, as this bill is clearly directed at all of us.

According to CoreLogic, the percentage of homes purchased by investors of any size had actually been declining precipitously from a high of 29% in 2013 to just 20.5% in the fourth quarter of 2020. 

Investor Purchase Percentage of Total Home Sales (2006-2020) - Vox
Investor Purchase Percentage of Total Home Sales (2006-2020) – Vox

At that point, the number of investor-purchased properties skyrocketed. Investors bought just shy of 40,000 properties in Q1 2020, about 20,000 less than the year before, but then pushed 100,000 in Q4 of 2021.

But like a flash in the pan, the SFR craze fell right back down to Earth and finished Q4 2023 below where it had been in Q4 2019. Overall, investors purchased 30% less in the third quarter of 2023 than 2022, which Senator Tina Smith conveniently left out.

Investor Purchases Nationally (2000-2024) - Redfin
Investor Purchases Nationally (2000-2024) – Redfin

There have now been six straight quarters where investors have purchased fewer properties than the quarter before.

YoY Growth in Investor Purchases Nationally (2000-2024) - Redfin
YoY Growth in Investor Purchases Nationally (2000-2024) – Redfin

Except for the aberration of 2021, it’s simply not true to say that investors are buying up a substantially larger percentage of single-family residences than before.

What This Bill Will Do

One of the most perplexing things about this proposed act is that it’s being portrayed as if it were going after institutional investors. How exactly someone who owns 100 rental properties (let alone 15) qualifies as an “institution” on the level of some Wall Street hedge fund is left unexplained.

Regardless, the bill will, quite obviously, reduce the number of properties that real estate investors purchase. This will have two major effects:

  1. It will reduce the number of blighted properties being purchased and rehabbed.
  2. It will reduce demand for properties in low-income neighborhoods.

The reason for the first effect is, as Laurie Goodman and Edward Golding of the Urban Institute have noted, investors: 

“…have two significant comparative advantages over owner-occupants in purchasing homes that need significant repair. First, they have expertise and can realize economies of scale when doing major renovation work. Second, they have a financing advantage because they can pay cash sourced from capital markets…”

Indeed, flippers focus almost exclusively on properties that need to be rehabilitated. And many flippers are also landlords who own over 15 properties. 

Our company has focused almost exclusively on the BRRRR method, and almost every property we have bought has needed fairly significant repairs.

On the other hand, “most recent buyers who purchased new homes were looking to avoid renovations,” according to a survey by the National Association of Realtors. Another survey found that “buying a fixer-upper” was the fourth most common regret among recent homebuyers. Given that most homebuyers don’t buy fixer-uppers, that statistic is rather telling.

It’s an axiom of economics that if you tax something, you will get less of it. In this case, the government would be taxing the renovation of houses. So, expect less of it. If you’re a fan of urban blight, this bill is for you!

The second effect may sound good at first, namely, that there would be less demand for low-income housing. But the reason for this is that a large percentage of low-income single-family houses are rentals. Some people act as if renting is a bad thing, but for many people, it’s more affordable and/or provides more flexibility than buying. Many are renting to save money in order to buy in the future. In short, renting in and of itself is not a bad thing.

However, reducing the number of potential investors by taxing them will not simply increase the number of homeowners who buy such properties. That’s because many people in low-income neighborhoods also, unfortunately, have bad credit. And since the 2008 crash, banks have been (rightfully) very careful about lending to those who are a significant credit risk.

Thus, you are likely to see a flight of capital away from low-income neighborhoods, which are the neighborhoods that need investment the absolute most. This would mean fewer properties in these neighborhoods will be bought and repaired. And most notably, the properties in these neighborhoods that need repairs will be the ones least likely to be renovated. 

So, more blight. But furthermore, it will mean fewer units are available to rent out. Less supply means higher prices. Just as building more units will “slow the growth in rents,” as an analysis of dozens of studies by three directors of NYU’s Furman Center showed, renovating currently existing but unlivable housing stock will do the same. 

In other words, this bill will push rents up, at least in low-income neighborhoods. It will thereby hurt the people it’s intended to help. 

Final Thoughts

The unaffordability of housing in today’s market has to do with many factors, most notably insufficient supply and high interest rates. Hopefully, interest rates will come down as inflation cools. 

But otherwise, the best thing the government can do to reduce housing costs is to stimulate building. Indeed, the National Association of Home Builders found that, as of May 2021, “On a dollar basis, applied to the current average price ($394,300) of a new home, regulation accounts for $93,870 of the final house price.” Cutting that down would be a good place to start.

Unnecessarily punishing real estate investors with higher taxes won’t do anything to stymie this problem, however. It won’t even punish Wall Street firms who can easily switch to another niche. On the other hand, many smaller real estate investors have made a career out of real estate and cannot so easily do something else. 

Thus, it will be the small-to-mid-sized investors who are hurt by this bill the most, as well as the communities who have to deal with the extra blight and urban decay it would bring.

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