Last month I posted a point and a counterpoint about the effect of investor money in the housing market. My point was that investor money, whether in the form of large corporate investors or small one, follows demand. When demand rises and a market isn’t delivering a certain type of housing, money follows that demand. When investors buy single-family homes, rehabilitate them and turn them into rentals, that’s an indication that the market is constrained and not building enough new rental housing. If policy makers want to stop this, the best solution isn’t taxing the investors, but creating new housing and maybe even incentivizing investors to renovate existing housing for sale.
James Mitchell made the counterpoint, that the solution to this problem is “increased taxes and regulations for institutions.” Mitchell suggest that if an investor owns a set number of single-family homes, “there needs to be an added tax to diminish purchasing power.” He does agree with me, too, that we should offer incentives like “tax breaks to institutions that offer 10% of their portfolio a year to an end user will encourage them to release more inventory to the market because the benefits can offset capital gains taxes, for instance.” But there is currently no regulation that encourages institutions to release homes.
Kurt Carlton, president and co-founder of New Western, a national private real estate investment marketplace, works with smaller investors. I’ve heard from many of these smaller investors over the last two years frustrated with both the threat of regulation and feeling as though they are being unfairly cast as “predators.” In fact, Ohio Senator Sharrod Brown, a Democrat, has put the word “predator” in his proposed legislation to “crack down” on investors that are buying housing in markets across the country. I’ve been clear over the last year, I’m not concerned about the size of investors, whether it is a grandma flipping a house down the street or a Real Estate Investment Trust with billions in assets, the bottom line is the same: allow more housing and these issues fade.
I asked Carlton to respond to the targeting of investors. I agree with Carlton that investors “breathe new life” into often rundown properties. I’m especially concerned about intimidating investors because this kind of housing, older and offline, is a critical source of supply for families at 50 percent of Area Medium Income (AMI). Whether for sale or rental, these homes are often all that those families can afford, and we need to keep them in plentiful supply.
Here’s my questions and Carlton’s responses.
You call out, “an underreported yet significant player in this saga is the independent investor” as being essential to solving what the NAHB has pointed out as scarcity driven price increases; lack of supply of housing in the face of rising demand. However, the dominant narrative in the media is that these investors are hoarding housing, driving up prices. How do you reconcile your view and that narrative?
In the current housing landscape, the prevalent narrative that paints independent investors as major contributors to the hoarding of housing and the consequential surge in prices is a gross oversimplification, and a more in-depth understanding reveals a nuanced story.
At New Western, our primary collaboration is with independent home rehabbers – many of whom have been independently active for years, while some others sporadically invest as a creative outlet. Over the past year, we’ve observed a significant shift where these independent investors have reclaimed the single-family residential investment market from larger institutional investors and iBuyers.
The properties we procure and subsequently offer on our marketplace to over 150,000 investors nationwide are predominantly those that are uninhabitable and unlikely to attract the interest of an average homebuyer. The U.S. Census cites over 15 million vacant homes – these are precisely the properties we target. Our aim is not only to revamp and modernize these homes but to reintroduce them to the market. Therefore, rather than contributing to the housing shortage and price surge, our investors are actively addressing the supply gap by transforming otherwise neglected properties into desirable homes.
You suggest that “these investors, focusing on flipping homes, are set to revamp and reintroduce 350,000 previously uninhabitable properties back to the market. While this doesn’t solve the entire problem, it’s a step forward.” Yet Senator Sharrod Brown has introduced legislation to “crack down” on these investors. What’s your response to that legislation and the sentiment behind it?
In response to Senator Sherrod Brown’s “Stop Predatory Investing Act,” I’d like to clarify a few points. This legislation primarily targets large investors and private equity firms who acquire 50 or more single-family rental homes, with the belief that these entities predominantly convert habitable houses into rentals. While these firms are providing much needed supply to those who need to rent, the concern is that these large institutions are accruing wealth through property appreciation and debt reduction, benefits historically channeled towards middle-class homeowners. It’s a hot political topic because homeownership has traditionally been a linchpin of the American dream, serving as a primary means for many to amass wealth and ascend to middle-class status.
However, it’s essential to differentiate between these large institutional investors and the independent investors we collaborate with at New Western. The 150,000 inventors on our platform typically focus on properties in dire need of renovation, which many residential buyers might overlook. Once refurbished, these typically represent a category of homes valued approximately 30 percent below the median market. In other words, this introduces a new, much-needed supply of affordable homes at price points builders struggle to deliver.
In essence, our independent local investors are essentially filling a gap in the housing market and can be viewed as champions of the same cause Senator Brown advocates for. Their contributions are vital in providing affordable housing options and should be recognized as such.
If the media, public officials, and the public think investing in real estate is predatory, what do you suggest as a strategy to see these investors as “every hand on deck is vital to address this national challenge?”
There are three main strategies to drive home here:
- We are heading into a “great renovation” era and real estate investors will play a vital role in solving some of our biggest challenges. It’s essential to recognize that while local real estate investors are far from nonprofit volunteers, their objectives undeniably resonate with community needs. Often, these investors breathe new life into properties that were previously uninhabitable.
- A big opportunity to help address the affordability issue is literally around every corner.Today, the U.S. faces a pressing demand for 5 million additional homes, a need that remains unaddressed by the current housing supply. It’s somewhat ironic that we’re dealing with a scarcity of inventory driving up prices, even as there exists an astounding 15 million vacant homes across the nation.
- The current supply challenge requires numerous small-scale and innovative solutions. In this arena, small businesses often outshine broader national initiatives in effectiveness and adaptability.Real estate functions on a hyperlocal basis. Individual cities, neighborhoods, even down to specific blocks, demand tailor-made strategies. This bespoke approach aligns perfectly with the skills of local rehabbers who possess intimate knowledge of their areas. This isn’t a challenge that institutional investors, large-scale builders, or the government can holistically address head on, but small business, in the form of local real estate investing can.
In essence, we need a concerted, community-driven effort, reminiscent of the “all boats to Dunkirk” mobilization. Local investors are instrumental in navigating the complexities of this housing challenge.