Legal Insights
Editor’s note: This is Part 2 of a two-part series on PE ownership of single-family rentals. Part 1 covered why institutional capital entered the sector; the problems created by scale, concentration, and limited data; federal bills; and state and local legislative activity. The full article is available here.
Part 1 mapped the legislative terrain: why institutional capital moved into single-family rentals, how acquisitions concentrated in Sun Belt submarkets, and the state and federal ownership caps now under consideration. That context matters. But sponsors are more likely to lose money through risks already producing settlements, tax and structuring problems, and operating failures. This installment focuses on those exposures and on what sponsors can do now.
Enforcement to date has largely bypassed legislative debate. While statehouses debated caps and divestiture timelines, federal regulators and state attorneys general used existing consumer-protection, antitrust, and fair-housing laws against the largest operators. The cases involved undisclosed fees, algorithmic rent-setting, improper security-deposit retention, and eviction practices that violated local notice rules. None required new legislation.
That pattern—existing law applied at platform scale—is the immediate risk sponsors face. The exposure is not theoretical or limited to bad actors. It follows from standardizing practices across large portfolios. A single noncompliant lease addendum, fee schedule, or screening rule can support a class action rather than an individual dispute. The rest of this article identifies those practices and explains how to audit them before a lawsuit does.
Enforcement Under Existing Law: The Nearer-Term Exposure
For most platforms, the nearer-term exposure comes from existing law applied to current operating practices. Algorithmic revenue-management software used to set residential rents has drawn sustained antitrust scrutiny. In 2024, the Department of Justice, joined by a coalition of state attorneys general, sued RealPage. The complaint alleges that RealPage’s YieldStar and AI Revenue Management software let competing landlords share nonpublic pricing data and coordinate rent increases—effectively enabling algorithmic price-fixing. Private class actions based on parallel theories were consolidated in the Middle District of Tennessee in In re RealPage, Inc. Rental Software Antitrust Litigation, MDL No. 3071. Several major residential landlords have been added as defendants. Comparable claims target other vendors and their licensees, and a growing number of municipalities have restricted the use of nonpublic competitor data in rent-setting recommendations. Any sponsor using a third-party pricing tool should know what data the vendor ingests, whether the operator accepts recommendations automatically or documents human overrides, and what indemnities, audit rights, and data-sourcing representations the vendor agreement provides.
Consumer-protection enforcement has focused on ancillary fees, security-deposit handling, and eviction filings, and it has reached the largest operators in the sector. In FTC v. Invitation Homes (2024), the FTC took action against Invitation Homes, the country’s largest single-family rental operator. The FTC alleged that the company charged undisclosed mandatory fees, including a smart home technology fee tenants could not decline; failed to return security deposits within deadlines required by state law; and filed eviction actions during COVID-era moratoriums. Invitation Homes agreed to pay approximately $48 million in relief to affected tenants. The case was the first major federal enforcement action targeting fee and deposit practices at a single-family rental platform. Federal regulators have pursued similar fee-disclosure theories against large multifamily operators. State attorneys general have overlapping authority under state consumer-protection laws, and private class actions often follow public enforcement.
The exposure is narrower and easier to test than it may seem. The recurring claims are straightforward: a fee labeled optional was mandatory in practice; a resident could not decline a fee or did not receive the service; deposit deductions were not itemized within the statutory period; or an eviction filing relied on a defective notice. Start with the documents. Sample resident ledgers, the current lease and all addenda, deposit disposition letters from the last two years, and eviction logs for the five largest markets. That review takes days, not months, and costs far less than discovery.
Automated tenant screening creates similar fair-housing risk. Sponsors often assume the vendor bears that risk. A settlement limiting the use of screening scores shows that the operator can be liable too. The key questions are which inputs the model uses, whether any input proxies a protected characteristic, whether adverse-action notices identify the actual basis for denial, and whether the operator can override a score. Portfolio-wide criteria create the greatest risk because their uniform use can support a disparate-impact claim at scale.
These risks scale with the platform, not the individual home. A pricing method, lease addendum, fee schedule, or screening rule applied across tens of thousands of units can turn a routine landlord-tenant dispute into a class action.
Tax and Structuring Risks
Proposals to deny depreciation and interest deductions to large single-family rental owners or impose per-home fees above a home-count threshold target the levered return model. Even if they do not pass, include them in the sensitivity analysis for funds with seven- to ten-year holds. These rules could affect core deductions, not just compliance costs. Sponsors should also track proposals that condition like-kind exchange treatment, opportunity-zone benefits, or agency-financing eligibility on owner-occupancy or ownership scale. Opportunity-zone rules have changed since enactment, so structures that rely on them need a current review.
Entity structure now carries regulatory consequences, not just tax and liability consequences. Property-level special purpose entities may fall below ownership caps individually but exceed them when affiliate-attribution rules aggregate holdings. REIT and blocker structures for tax-exempt and non-U.S. investors may fall within definitions tied to institutional investors or assets under management. Joint ventures with local operators, homebuilders, or public agencies can change the analysis either way. Test the current structure chart against the threshold definitions in pending legislation in each core market. Do not assume entity separation will hold.
Practical Steps for Sponsors
Map jurisdictional exposure at the submarket level. Track enacted and pending measures in each core market, including county and municipal actions. Use census-tract data where caps or purchase restrictions apply by tract.
Stress-test the structure chart against threshold definitions. Apply affiliate and common-control attribution rules in pending bills, including provisions that reach preferred equity and participating debt. Identify where the portfolio would cross a threshold.
Audit the operating practices most likely to attract enforcement. Review pricing methods and vendor arrangements, fee schedules and disclosures, security-deposit handling, screening criteria, eviction filings, and habitability and maintenance response. Prioritize practices used across the portfolio.
Address regulatory change in fund and deal documents. Check whether limited partnership agreements allow forced dispositions, extended hold periods, or transfers to compliant vehicles; whether purchase agreements allocate risk for tenant or nonprofit purchase rights and regulatory changes between signing and closing; and whether credit facilities and securitizations allow divestiture or substitution obligations.
Diligence the exit, not just the entry. Assume that a buyer three to seven years from now will review rental-registration compliance, fee practices, eviction history, and habitability records. Clean data in these areas will affect valuation.
Engage locally and early. Sponsors with a record of prompt maintenance, capital investment, build-to-rent delivery, and resident retention start from a better position in legislative hearings, entitlement proceedings, and public-private partnerships than sponsors who appear only to oppose a bill. Build that record before it is needed.
Conclusion
Single-family rentals are unlikely to lose institutional capital. The fundamentals that drew investors to the sector remain intact, and the operating and financing infrastructure built over the last fifteen years is difficult to replicate. But the asset class now faces the regulatory scrutiny of a regulated industry, not ordinary residential real estate.
Sponsors that treat this shift as a diligence, structuring, and operating issue will underwrite better, avoid forced sales created by new legislation, and retain the flexibility to buy when others cannot. Sponsors that wait for the debate to end will be reacting to rules they did not help shape.
This DE Insight is for general information only; it is not legal advice. Legislative and enforcement developments move quickly, and this article describes general patterns, not the law of any particular jurisdiction. Sponsors should confirm current requirements in each market with counsel before acting.
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This DarrowEverett Insight should not be construed as legal advice or a legal opinion. This Insight is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. Please reach out to us if you need help addressing any of the issues discussed in this Insight, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.
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