The Stop Predatory Investing Act was recently proposed by the US Congress to prevent large institutional investors from taking advantage of small-time investors. If passed, this act could have a major impact on real estate investors across the country. In this blog post, we’ll be exploring what the Stop Predatory Investing Act is, why it was introduced, and how it could affect real estate investors and homebuyers.
Overview of the Stop Predatory Investing Act
The Stop Predatory Investing Act is a proposed piece of legislation that aims to protect consumers and small investors from predatory practices in the real estate industry. The Chair of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Sherrod Brown introduced the Act on July 11, 2023. Co-sponsors for the bill include Senator Ron Wyden (D-OR), Tina Smith (D-MN), Jeff Merkley (D-OR), Jack Reed (D-RI), John Fetterman (D-PA), Elizabeth Warren (D-MA), and Tammy Baldwin (D-WI).
The Act seeks to specifically address concerns regarding large investors, private equity firms, and real estate investment trusts (REITs) that may be taking advantage of vulnerable communities and engaging in exploitative practices. The ACT seeks to prevent these entities from monopolizing the housing market and making it more difficult for individuals and families to afford homes.
The Stop Predatory Investing Act would prevent an investor who buys 50 or more new single-family rental homes from deducting interest or depreciation on those properties. This removes or limits a financial incentive to invest in the properties and lowers the overall profitability of the transactions. However, if an investor sold one of those properties to a homebuyer or qualified nonprofit, there would be an allowance for some types of deductions. The ACT would also have incentives to encourage new construction of affordable housing. Lastly, the bill would grandfather in properties that have already been purchased so that deductions could continue as a way to protect current renters of single-family homes.
Why Was the Stop Predatory Investing Act Introduced?
In 2021, it was reported that there was a shortage of 3.8M homes in the nation. Many of the available homes were becoming too pricey for first-time homebuyers to afford and the same is true today. Large investors (including private equity firms, REITs and publicly traded companies) are buying single-family homes and are competing with those first-time homebuyers.
Large investors also increased purchases over the pandemic which further drove up home prices. Certain zip codes are seeing large investors account for more than 50% of recent purchases. Many large investors focus on smaller, affordable homes. They can outbid first-time homebuyers looking for starter homes due to being able to pay all cash and the speed in which they can search for, make decisions, and acquire properties.
Some of these specific challenges are why the Stop Predatory Investing Act was introduced. In communities that have been made vulnerable by the pandemic or a change in the local economy, individuals and families still deserve a chance to achieve homeownership. In addition to first-time homebuyers, addressing housing affordability for consumers overall would be an additional benefit.
How First Time Homebuyers Lose Out to Investors
One of the key issues addressed by the Stop Predatory Investing Act is the impact of real estate investors on first time homebuyers. It is no secret that in many markets across the country, first time homebuyers face stiff competition from investors, particularly when it comes to affordable housing options. This can make it incredibly difficult for individuals and families looking to enter the housing market for the first time.
First time homebuyers often face a variety of challenges that investors do not. For starters, investors typically have more financial resources at their disposal, which allows them to make all-cash offers or bid above the asking price. This puts first time homebuyers, who are often working with limited budgets, at a significant disadvantage. In addition, investors frequently have existing real estate portfolios, which gives them the flexibility to wait for the perfect property and negotiate more favorable terms. This can leave first time homebuyers scrambling to find a suitable home before prices rise even further.
Another issue that arises when investors dominate the housing market is the potential for displacement. In some cases, investors may purchase properties and then convert them into rentals, driving up rental prices in the process. This can force existing tenants, including low-income individuals and families, out of their homes and make it even harder for first time homebuyers to find affordable options.
The Stop Predatory Investing Act seeks to address these issues by implementing regulations that would level the playing field for first time homebuyers. It aims to promote fair competition in the housing market and create more opportunities for individuals and families looking to purchase their first homes. While the Act could face opposition from institutional or large investors, most would agree that it is important that first-time homebuyers are not continuously losing out to investors in the real estate market.
How the Stop Predatory Investing Act Could Impact Real Estate Investors
The Stop Predatory Investing Act could have a significant impact on real estate investors, including those who invest in residential and commercial rental properties. The proposed legislation aims to protect homeowners from predatory lending practices, but it could also lead to changes in the real estate investment industry.
One potential change that could impact real estate investors is new regulations related to property flipping. Property flipping refers to buying a property with the intention of quickly selling it for a profit. This practice has become increasingly popular in recent years, and some experts have raised concerns about its potential negative impact on local real estate markets. Although not specifically mentioned in the proposed legislation, if the Stop Predatory Investing Act is passed, it could lead to a desire to introduce further legislation with tighter regulations on property flipping, which would make it more difficult for small and large real estate investors to profit from this strategy.
Another area of concern for real estate investors is the potential limitations on real estate investment trusts (REITs). REITs are investment vehicles that allow investors to pool their resources to invest in real estate assets. These trusts have become increasingly popular in recent years, particularly among private equity firms, who often use them to raise funds for real estate projects. However, if the Stop Predatory Investing Act is passed, it could lead to stricter regulations on REITs, which could make them less attractive to investors.
Finally, the Stop Predatory Investing Act does appear to preserve support for low-income housing tax credit investments. These investments allow developers to build affordable housing for low-income residents while receiving tax credits in return. If the proposed legislation is passed, owners can continue to take deductions on properties that are financed using Low-Income Housing Tax Credits (LIHTC) and still in their affordability period, and on build-for-rent single-family housing. In addition to these positive aspects of the bill, smaller investors could benefit similarly to first-time homebuyers if the Act makes the real estate buying market more competitive.
In summary, while the Stop Predatory Investing Act aims to protect homeowners, it could also have significant implications for real estate investors. Property flipping regulations and limitations on REITs are just a few examples of how this legislation could influence future legislation that could impact the industry. However, some of the goals that the bill seeks to achieve could benefit Investors who are taking advantage of Low-Income Housing Tax Credits and could also benefit smaller single-family investors. Investors should monitor the progress of this bill closely and consider how it may impact their investment strategies moving forward.
How does the Stop Predatory Investing Act Help Housing Affordability?
Affordable housing is defined by the U.S. Department of Housing and Urban Development as housing on which the occupant is paying no more than 30 percent of gross income for housing costs, including utilities. Today, 20.3 million U.S. households pay more than 50 percent of their income for the home they live in. With the Social Security Administration showing the National Average Wage Index as 8.9% higher in 2021 vs. 2020, many may think that an increase in yearly wages is an easy answer to achieve housing affordability.
According to Statista, the avg sales price of a new home was $392K in 2020, while the average in 2021 was $464K. That’s an 18% increase and a little more than double the percentage increase in wages when looking at the previous wage index that we showed. According to Freddie Mac, in September 2023, the U.S. average mortgage rate was about 7%. For every $1,000 in a higher price difference of a home, a homebuyer could expect to pay about $7 extra in monthly mortgage payments. With the average sales price between 2020 and 2021 increasing by $72,000, that’s about $500 more in monthly mortgage payments! No wonder housing affordability is an issue that some members in Congress want to address right now.
In addition to rising home prices which could be caused by several factors nationally and locally, don’t forget about inflation. Inflation is often thought of as making your trip to the grocery store or gas station more costly, but it also affects home prices. At a national level, the federal government can implement policies to raise interest rates to fight inflation. This causes lenders to raise mortgage interest rates making those monthly payments that borrowers have to pay higher, and homes less affordable.
The Stop Predatory Investing Act addresses housing affordability by reducing one of the factors that can cause housing prices to rise – institutional investors raising prices by outbidding smaller investors and individual homebuyers. The Act also protects incentives for building new affordable rental housing and continuing the operations of existing affordable rental housing. An additional benefit is the allowance of deductions when a property is sold by an institutional buyer to an individual homebuyer or qualified non-profit that is focused on the creation, development or preservation of affordable housing.
In Conclusion
The Stop Predatory Investing Act aims to protect first-time homebuyers and renters by regulating real estate investment practices. The Act could have existing and future impacts on real estate investors, including potential changes to property flipping regulations and REITs. While some institutional investors may find the new regulations restrictive and potentially causing less profitability, others interested parties may see the Act as a way to level the playing field and promote fair competition for smaller investors. Overall, it is too soon to predict the full extent of the Act’s impact, as it has not yet been passed into law. However, it is clear that real estate investors will need to stay up-to-date on any changes to the regulatory landscape, as they may affect their investments and profitability. It remains to be seen whether the Stop Predatory Investing Act will achieve its goal of protecting consumers while also promoting healthy competition in the real estate industry.
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