Build-to-Rent Housing Bans: A Case of Zoning Overreach

The rest of the single-family rental market is dominated by “mom and pop” landlords who own a handful of buildings and usually live in the same area. Single-family rentals grew in the Sunbelt following the Great Recession’s wave of foreclosures. Contrary to scholarly worries about so-called financialization, single-family rentals remain arguably the least financialized housing in the United States. According to one estimate based on 2015 data, the share of single-family rentals owned by institutional investors, including real estate investment trusts (REITs), was 1.2 percent, or roughly 180,000 houses. That figure may exclude homes owned by regional real estate companies, which are not publicly traded.

Zooming in on the Nashville area, researchers find that REIT-owned properties are concentrated in areas with newer homes and educated, middle-income residents.

Sources agree that, through 2019, the number of corporate-owned rental houses was small but growing briskly. But it is not clear whether corporate home purchases have risen since 2019. Redfin data show that investor purchases steadily rose starting in 2006, dropped in 2020, and rebounded to an all-time high in 2022. But Redfin’s methodology makes no distinction between corporations and the dominant mom-and-pop investors. The National Association of Realtors finds that purchases by “companies, corporations, or limited liability companies (LLCs)” were a smaller share of home sales in 2020 and 2021 than in any year since 2011.

Single-family rentals are especially attractive to families with children. Of households in single-family rentals, 47 percent have children, compared with 27 percent of multifamily renters and 31 percent of single-family owner occupants. Single-family rentals, especially BTR homes, have lower turnover and vacancy rates than multifamily rentals, which is appealing to investors.

In addition to attracting long-term renters, single-family rentals are common landing spots for families who have moved to a new area and are not quite ready to buy. Among households that earn at least $60,000, have children, and have moved across state lines in the past 12 months, 33 percent rent single-family homes. Of comparable households that have not moved across state lines, just 12 percent rent single-family homes.

Neighbors’ Concerns about Single-Family Rental Housing

When single-family homes are purchased by investors, home-owning neighbors worry. One concern is that landlords will not perform maintenance. A Lauderdale, Minnesota, resident said, “There’s not a lot of incentive to improve the property.” Another concern is with the renters themselves. A Charlotte, North Carolina, homeowners’ association president noted that “people who own their homes usually take more pride in their property.”

In the full-contact housing market of 2021 and 2022, investors have boxed out some mortgage-reliant homebuyers. A Florida man told a reporter, “I put an offer on three different homes, just to find out that later on I was overbid by a cash buyer from another place.”

It is certainly true that skepticism toward investors can be a polite screen for prejudice against renters. But neighbors’ concerns have a straightforward logic and are, no doubt, often validated by experience.

How Build-to-Rent Homes Can Lower the Pressure

BTR homes can alleviate neighbors’ concerns without depriving renters of spacious housing options. By adding new supply to the single-family rental market, BTR homes lower the demand for investor purchases of existing houses in the area, because both types of housing must compete to serve the same pool of renters.

Concerns about next-door spillovers, such as property neglect, are also ameliorated in a BTR subdivision. Because a single owner manages all the properties, it has a direct interest in preventing negative spillovers. Renters vote with their feet, creating expensive turnovers for landlords. In multifamily buildings, managers have found it worthwhile to offer free apartments to coordinators who host fun events and welcome new residents; better community improves retention.

Thus, BTR homes create a new financial incentive for maintenance. In addition, they motivate managers to keep higher standards for tenants, given that those who make neighbors feel unsafe become a financial risk.

Regulatory Environment

Traditionally, local land use regulation has been silent on the question of ownership. Commercial districts, for example, do not distinguish between family-owned businesses, partnerships, or public corporations.

Banning rental occupancy risks falling afoul of legal protections, both because it sharply curtails property rights and because it may discriminate against protected classes, including racial minorities who are more likely to rent than to own. North Carolina and New Jersey courts have found that owner-occupancy requirements violate the state constitution. Those two states, at least, delegate the power to regulate use, not ownership.

One state away, however, several Atlanta suburbs have begun regulating BTR subdivisions, although they have not attempted to limit investor purchases of single-family homes:

• The city of Alpharetta has restricted most of its residential zones to “For-Sale” development since earlier than 2014.
• Clayton County has banned BTR homes entirely.
• The city of Woodstock has restricted communities in which 20 percent or more of homes are rentals to its R3 zone and added costly exterior material requirements.
• The city of Holly Springs requires planned BTR districts to apply for discretionary approval.
• Cherokee County limits single-family developments in which 10 percent or more of homes are rentals to its RD3 zone.
• Forsyth County has instructed staff to prepare an ordinance limiting BTR homes.

In response to the rising tide of local regulation, Georgia legislators in February 2022 introduced bipartisan legislation to clarify that the state’s grant of zoning powers does not extend to regulating ownership. The bill did not come to a vote.

The Need for State Legislation

Legislators, both in Georgia and elsewhere, would do well to rein in the regulation of ownership. Although—so far—only a handful of jurisdictions are regulating a single type of rental property, leaving the precedent unchallenged would open the door for a massive expansion of city power to regulate private ownership.

State legislatures could use the approach taken in Georgia’s bill, SB 494, specifically protecting BTR homes. They could also address the underlying question at a deeper level by clarifying that their zoning-enabling statutes, like North Carolina’s, do not empower cities or counties to regulate ownership.

Outside of Georgia, state legislatures should be proactive about preventing bans on BTR homes. Doing so while the issue is merely prospective allows the legislature to head off action by local governments rather than directly preempting them.

Bigger-Picture Solutions

Allowing BTR homes will not solve the broader housing cost crisis; only housing abundance can do that. And in growing, high-demand regions, the only way to achieve housing abundance is through a long-term commitment to permitting more homes of all kinds—multifamily, single-family, for rent, and to own. State and local leaders alike have roles to play in ensuring that laws and ordinances reflect a commitment to housing abundance and building the communities that make a house a home.