A Real Estate Equity Investing Model for Young People
Art by Clarissa Liu
Surveys suggest the goal of home ownership appears to be turning younger Americans away from a focus on building long-term wealth. According to a recent report published by Bankrate, Millennials, more than any other generation, are tapping into retirement accounts, living longer with family and selling off personal items to save for their first home’s down payment.
While Millennials may feel the most financially strapped, they’re also forced to be the most resourceful when it comes to funding their down payment and closing costs for their first home, Bankrate reports. Millennial homeowners not only report actively saving more for a home purchase than Gen Xers and Baby Boomers, they are also more likely to have resorted to more desperate measures, such as tapping into retirement savings (13%) and selling personal items like jewelry or a car (12%).
Deborah Kearns, mortgage analyst with Bankrate, says it is good to see Millennials taking advantage of homebuyer grants and loan assistance programs, “but their desperation becomes obvious when you see them forced to sell off personal items and tap into retirement savings at twice the rate their parents had to.”
“Tapping into retirement savings is a risky move that can put your future at risk,” Kearns warns. “You might be better off looking into down payment assistance programs, special low-down payment loan programs or buying a less expensive home to keep your costs more affordable.”
A related “Modern Money” survey by Ameriprise Financial suggests most investors (70%) continue to say owning a home is as good of an investment as it was a decade ago. However, while the clear majority (92%) of respondents were homeowners and despite many viewing homeownership as a good investment, financial returns were not the primary reason they bought their home. In fact, top driver is that it gives them “a sense of pride in being a homeowner.”
The remaining eight percent of respondents who identify as renters say the top reason they don’t own is that renting provides more flexibility. These investors are applying the money they could have used to buy a home toward other financial goals. For example, 71% of this smaller group is using the money to save for retirement, while 55% say they are allocating some of the money toward traveling.
With these figures in mind, Bill Walker, chief revenue officer at Unison, says his firm’s new approach to providing equity investment backing to individual home buyers should be attractive to many financial advisers and their clients. Unlike a home equity loan, homeowners who partner with Unison don’t garner any added debt, monthly payments or interest. Unison can also help prospective home buyers, generally by doubling their down payment. In return, Unison shares in a negotiated portion of the home’s value when owners are ready to sell.
“At the core, we are helping people with financial flexibility,” Walker suggests. “When it comes to the younger people in particular, we are helping them to be first-time home buyers, which can be a very powerful tool to generate long-term wealth. We have seen our assistance keep people from tapping into their 401(k) for a housing loan, and we also help them avoid tapping the bank of mom and dad. We are compensated by taking a percentage of the change in value of the home in the future, up or down. We win when our customers win and we help offset the loss if prices decline. For consumers, the outcome is lower average monthly housing bills and interest rates on the mortgaged portion of the home that are very attractive. For younger people, by having the lower monthly payment, it frees up their cash for things like their 401(k) or a 529 college savings plan.”
Walker emphasizes that his firm’s incentive in this arrangement is to take advantage of the long-term trajectory of the housing market.
“That is precisely what the home owners are taking advantage of as well, and so our incentives are aligned in that respect,” Walker says. “Being able to explain that we sit on the same side of the table as the consumer, and that we would share in any losses on the home’s value at sale, is very helpful as we explain this new approach to consumers. It does take a real conversation to educate people about this approach, because people think first to draw parallels to products they already understand—which is usually the debt products. But when we break it down for them, it resonates that they have a professional equity investor on the same side of the table as them.”
Walker points out that, in conversations with advisers, he commonly hears concerns that clients are over-leveraged in terms of their wealth tied into the housing markets.
“Over time, as people pay down their mortgages, home prices should be appreciating,” he explains. “This is a positive thing, but like with stocks and how a growing portfolio drifts out of its original balance, housing wealth works the same way. The challenge is that you can’t really diversify your housing wealth as you could a stock portfolio. Our approach can help investors and their advisers address this challenge of over-concentration.”
Walker notes that the Millennials in his firm’s client base tend to view housing—and especially before they start a family—as more utilitarian than previous generations.
“For many young people today, a house is a place to call home base for all of their life’s adventures,” he says. “Young people are very open to this idea of the shared economy. We think our approach to making equity investments in homes alongside individuals falls right in line with that. We don’t tell our partners what they can or can’t do with their home—we’re a silent equity investor. We help free up their finances for their travel goals, their hobbies and their retirements.”