Hedge Funds, Housing… and Happier Renters?
By: Jenna Louie, Chief Innovation and Strategy Officer at Ivory Innovations
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We’re trying something new at Ivory Innovations – sharing a perspective about a recent trend or issue area we’ve seen in the housing world. But we don’t just focus on issues at Ivory; we focus on solutions. So in each post you’ll hear about some of the innovators we’re meeting through the Ivory Prize and how they’re changing the industry.
This is a perspective. We’d love to hear your thoughts.
How Hedge Funds Impact the Affordability of the Single-Family Housing Market
Housing is unaffordable for millions in the US. There are a lot of reasons for this, but a recent scapegoat has been the “financialization” of housing – that single family homes are increasingly seen as an asset class for investment returns, rather than simply as the place where an average family lives and pays their mortgage.
Whole new facets have emerged in the industry. “Single family rentals (SFR)” or “build to rent (BTR)” or any number of startups that allow any investor to own a slice of a single home or a portfolio of homes for as little as $5. But some of the harshest attention has been on large institutional investors who, depending on the stat, are either responsible for 24% of all single family home purchases, especially in growing markets like Atlanta and Charlotte, or are a drop in the bucket of ownership at just over 3% of all single family homes across the country.
The Impact of Legislative Measures on Hedge Funds in Housing
In December 2023, this spotlight narrowed to a laser beam with the introduction of legislation in Congress that attempts to stop institutional investors from competing in this market.
The bill would require hedge funds, defined as corporations, partnerships or real estate investment trusts that manage funds pooled from investors, to sell off all the single-family homes they own over a 10-year period, and eventually prohibit such companies from owning any single-family homes at all. During the decade-long phaseout period, the bill would impose stiff tax penalties, with the proceeds reserved for down-payment assistance for individuals looking to buy homes from corporate owners. (New York Times)
Removing institutional investors from single family housing, or so the story goes, makes it easier for the average American to once again buy a house. When Linda and Sally and every other buyer in markets from Phoenix to Indianapolis isn’t competing with Wall Street for their starter home, prices go down, more average folks get on the homeownership-to-wealth-creation ladder, and everyone wins. There are a number of excellent analyses of this argument, which range from disagreement to maybe to policy recommendations; I’d encourage you to take a look.
My perspective is: what if there’s another way to look at the role of institutional investors in the housing market?
Reassessing the Narrative: Happier Renters Through Institutional Ownership
Two organizations – Roots Real Estate and Up&Up – demonstrate the potential for what a better single family rental market, at scale, could look like. Both operate in the same markets that are known for their concentration of institutional owners (Atlanta and Charlotte + the Midwest), and both are providing renters with significant financial benefits that just wouldn’t be possible without an institutional* owner behind the scenes.
Roots Real Estate
Specifically, Roots Real Estate gives renters back a portion of their rent each quarter as a thank you for paying rent on time, reporting maintenance issues in a timely manner, and being a good neighbor. Renters can invest this quarterly rebate into an investment vehicle that holds their rental property and the others that Roots manages. In effect, renters have the chance to earn a diversified return in the real estate market and benefit from treating their rental home well.
2. Up&Up
Up&Up converts the typical two-month security deposit into a starting sum in an Up&Up wallet. When renters pay rent on time, their wallet grows through Up&Up’s contributions. These include a share of the rental profits they generate by paying rent on time and keeping property expenses low and increases that mirror the value of the house itself; if the home value grows, their Up&Up Wallet will grow at the same rate as the landlord's would. At any time, even before the end of the lease, residents can convert their Up&Up Wallet to cash or to a down payment to buy the home they're renting.
Both of these models work because they are backed by institutional investors – no normal mom and pop landlord would have the savvy to set up financial vehicles that enable this kind of diversified investment (for Roots) or profit sharing (for Up&Up). And isn’t that a good thing, to enable models that allow renters to financially benefit from renting?
Future Outlook: Redefining Institutional Involvement in Single-Family Rentals
Who knows what Congress will do or whether institutional investors will hold and manage their portfolios forever; these homes are, after all, investments – and most asset classes have up and down cycles and a sell date to hit a targeted return. And of course there are bad actors out there – but there are also some good ones.
We can assume that the single family rental market will continue – whether with institutional investors, or without. Roots and Up&Up provide a new model for what that might look like – what the benefits of institutional ownership can create. I’d love to see legislative focus that enables landlords to better support renters like this than simply saying “get out.”
The perspective above is my own, and does not represent a viewpoint of Ivory Innovations.
*After publication, founder Larry Dorfman clarified that Roots Real Estate is self-funded and has zero institutional funding partners, such as hedge funds.