Quality versus quantity in the single-family rental market - Metropolitan Planning Council

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Quality versus quantity in the single-family rental market

Flickr user David Meyer (cc).

Between 2012 and 2014, nearly 200,000 single-family homes were purchased by institutional investors and converted into rental properties.

Many renters have stories about absentee landlords. In most cases, it’s a matter of inconvenience, such as untimely repairs. On the other hand, many landlords own multiple properties and juggle a variety of demands. But imagine trying to get the attention of the new breed of landlord: the “institutional investor” that may own up to 45,000 single-family rental units.

These institutional investors began to target single-family homes after the housing boom and bust created a large stock of cheap, available properties due to foreclosure and distressed sales. The decision to convert these properties into rentals was a response to the limited number of individuals in a position to take on a mortgage. In 2012, nearly 6.5 percent of national single-family home purchases were by business buyers, which includes institutional investors along with private-equity firms and hedge funds. The total property count of institutional investor-owned homes purchased between 2012 and 2014 is estimated at 200,000. These 200,000 homes account for about 1.5 percent of the nation’s housing stock, which may seem minuscule, but the distribution has tended to be very concentrated. Communities in Atlanta, Phoenix, Los Angeles and Chicago have been identified as the hardest hit. In addition to the many economic implications this strategy has on the housing market, especially within communities with a high concentration of such purchases, there lies the pressing issue of whether investors make good landlords.

“If you knew the amount of properties we had…”

Dangerous conditions

In a recent survey conducted on a sample of investor-owned rental property tenants in metro Atlanta, less than half of the participants reported a good relationship with their landlord and they cited reasons such as poor property and management services quality. Outside of Atlanta, other renters have been unsatisfied with their investor landlords. One couple in Los Angeles had to vacate their home after falling ill due to mold. The couple maintains that their landlord continued to pursue back rent for months despite the uninhabitable conditions.

Even more concerning is that worst case scenarios have become realities for some renters in investor-owned properties. In one such case, property managers in Arizona not only neglected to install a fence around one of their property’s pools, they denied the tenant’s request to do so. The issue was a safety concern for the Cedillos family, who occupied the home, as well as a requirement for code compliance. Ultimately, the neglect resulted in the death of a two-year-old child who crawled through a doggie door and drowned in the unfenced pool. The employee who reportedly denied the Cedillos a fence claims she does not remember denying the fence or even working with the family, stating, “If you knew the amount of properties we had…”

The upshot

If investors are going to continue purchasing single-family rental homes by the hundreds and thousands across a wide geography, then the capacity of investors and their property managers to oversee a vast housing stock and so many tenants needs to be a larger part of the policy and financial discussions regarding the investor-owned model. While these concerns apply to a variety of landlord types, the recent surge in single-family home purchase and conversion to rental on behalf of institutional investors highlights a specific facet of the problem.

And it appears this budding industry is here to stay. Some of the largest investors have founded the National Rental Home Council to advocate for the single-family rental industry’s ability to provide homes and catalyze economic activity, including job creation. Provided these claims are true, this may just be the beginning; projections show institutional single-family rental growing into a trillion-dollar industry.

As mentioned, Chicago is one of the top cities pursued by institutional investors. According to the Institute for Housing Studies at DePaul University, business buyers accounted for about 14 percent of single-family property sales during 2012 and 2013 in Cook County. In the first nine months of 2013, eight institutional investors purchased nearly 3,200 homes in the Chicago region, and at the beginning of 2014, Invitation Homes singularly owned over 2,500 properties.

The Chicago region has an opportunity to incorporate issues regarding the investor-owned model, landlord responsibilities and tenant protection into policy discussions rather than risking widespread occurrences of dissatisfied tenants or even tragedy. In July 2013, Illinois Attorney General Lisa Madigan granted $70 million to organizations across the state to support revitalization and housing counseling. The funds are a portion of the $25 billion 2012 National Mortgage Servicing Settlement, the largest consumer financial protection settlement in U.S. history, which penalized the nation’s top five mortgage servicers for illegal foreclosure-related activities.

In conjunction with the Metropolitan Mayors Caucus, the South Suburban Mayors and Managers Association, and the Center for Community Progress, the Metropolitan Planning Council (MPC) was a recipient of settlement funds. This team is currently working with the law firm of Ancel Glink and the Institute for Housing Studies at DePaul University to establish an affordable and high-impact code enforcement strategy in Chicago’s south suburbs to improve rental processes and quality of life in rental properties. This strategy seeks to develop a database for tracking troubled properties, provide incentives to remedy code violations, and publish a manual of best practices for rental property code enforcement strategies. MPC hopes this work can optimize the single-family rental model in the Chicago region and safeguard against mishaps other markets have experienced.

Learn more about institutional investors' impacts with other posts in this series:

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