Democratic Senators File a Bill to Undercut SFR Institutional Investment

A number of Democratic senators are looking to eliminate extensive institutional investment in single-family rentals. Senators Sherrod Brown (D-Ohio), Ron Wyden (D-Ore.), and others introduced a bill called the Stop Predatory Investing Act. However, the chances it could pass into law are highly unlikely.

The text of the act targets any taxpayer that owns 50 or more single-family properties. If made into law, such owners would be unable to deduct depreciation and interest from their taxes. The move would make profitably owning and operating properties highly unlikely. Interest, given current financing rates, would become a significant additional carrying cost. Depreciation is key to typical CRE investment strategies as it allows recognition of non-cash expenses that can reduce taxes, even if the property has a positive net operating income.

“In the case of a disqualified single family property owner, no deduction shall be allowed under this chapter for any interest paid or accrued in connection with any single family residential rental property owned (directly or indirectly) by such disqualified single family property owner.”

The definition would rule out the scale of investment that institutions seek. By explicitly mentioning direct or indirect ownership, the bill might also prevent strategies of having a separate legal entity as the owner for each property.

Interestingly, the bill exempts any taxpayer that builds the structures or buys them before there is a residential occupancy, meaning build-to-rent would still be possible.

“In too many communities in Ohio, big investors funded by Wall Street buy up homes that could have gone to first-time homebuyers, then jack up rent, neglect repairs, and threaten families with eviction,” Brown said in a statement. “Our bill will help prevent corporate landlords from driving up local housing prices, and put power back in the hands of working families, who need a safe, affordable place to live and raise their children.”

Some national lawmakers have targeted mass purchases of single-family properties for severe criticism since last year.

The current state of SFR institutional ownership is complicated. Yes, such purchases had grown to nearly 20% of ongoing sales last year, according to Redfin. The National Association of Homebuilders said, “Although the causes of the affordability crisis vary, purchases by institutional investors or private firms of for-sale and for-rent units to rent or flip to sell for higher prices are potentially making first-time homeownership more challenging, which limits the ability to build wealth.”

Also, median prices that institutional investors pay are about 26% lower than the median prices in the same states, according to a National Association of Realtors study. Institutions aim at lower-cost houses to make the numbers work. They don’t tend to drive up prices so much as offer cash deals that are attractive to sellers.

The bill seems more a discussion piece than anything else. Senate Democrats would still need to have 60 votes to close out a filibuster and the Republican-controlled House seems unlikely to vote for such a measure.

However, with an upcoming election year, there is no way to absolutely handicap such a bill’s chances.