The next generation of homeowners will own less than 100% of their houses.
Exploring Home Equity Co-Investment as a Solution to the Housing Affordability Crisis
Introduction
The dream of owning a home is evolving for the next generation of buyers. With skyrocketing property prices, limited supply, and high interest rates expected to persist, many younger potential homeowners are rethinking traditional homeownership. Affordability is boxing out younger buyers, pushing some to nearly abandon the idea altogether.
Recent statistics from the National Association of Realtors (NAR) reflect this shift:
- Average age of a homebuyer in the U.S. in 2024: 56 years old
- Median age of a first-time buyer: 38 years old
Both are record highs, highlighting the increasing challenges faced by younger generations.
Why Are Younger Buyers Being Left Out?
- High Opportunity Costs: Millennials and Gen Z place a high value on social life, travel, and meaningful work. They also see greater financial upside in investments like crypto, NFTs, growth stocks, or paying down student loans. Being "house poor" means sacrificing these priorities.
- Economic Barriers: Limited housing supply and persistent high interest rates make it difficult to afford a home without significant financial backing.
- Changing Financial Strategies: Younger buyers question whether they should tie up so much money in a home. What are they missing out on? Flexibility to invest elsewhere, financial liquidity, and the ability to pursue other life goals.
Introducing Home Equity Co-Investment
These trends are leading to the rise of home equity co-investment products and funds. Several companies already offer these innovative solutions in various U.S. markets.
How Does It Work?
- Investor Partnerships: Co-investment programs pool investor capital, which homebuyers can tap into to help fund their down payments.
- Avoid PMI: By increasing the down payment, buyers can avoid Private Mortgage Insurance (PMI).
- Lower Loan Value: A larger down payment reduces the loan-to-value ratio, resulting in lower mortgage payments.
- Silent Partners: Investors act as silent partners with no monthly payments required.
- Flexible Terms: Most co-investment products have no repayment deadlines. Investors receive a return when the home is sold.
Benefits for Homebuyers
- Increased Affordability: Access additional funds without depleting personal savings.
- Financial Flexibility: Lower mortgage payments free up cash for other investments or expenses.
- Shared Risk: Mitigate financial burden by sharing investment with co-investors.
- Avoid PMI: Save money by eliminating the need for Private Mortgage Insurance.
Benefits for Investors
- Market-Specific Investments: Opportunity to invest in local residential real estate markets.
- Diversification: Pooled investments provide diversification and reduce risk.
- Liquidity Options: Investment pools offer redemption liquidity and access to secondary markets.
- Passive Exposure: Gain exposure to real estate without the responsibilities of property management.
Comparative Overview of Leading Co-Investment Companies
Here's a comparative overview of Unison, EquiFi, and Rook Capital, focusing on their co-investment programs for homebuyers:
| Feature | Unison | EquiFi | Rook Capital |
|---|---|---|---|
| Upfront Fees | Charges a 3.9% transaction fee based on the investment amount, deducted at closing. | Does not charge upfront fees for their co-investment program. | No upfront fees; Rook Capital covers all closing costs associated with their investment. |
| Appreciation Sharing | Typically receives 1.5 times the percentage invested. For example, a 10% investment results in a 15% share of future appreciation. | Shares appreciate proportionally to their initial investment. Thus, a 10% investment results in a 10% share of future appreciation. | Shares appreciation proportionally to their investment. A 10% investment results in a 10% share of future appreciation. |
| Monthly Payments | No monthly payments; settlement occurs upon sale of the home or after a 30-year term. | No monthly payments; settlement occurs upon sale of the home or at the end of the agreement term. | No monthly payments; settlement occurs upon sale of the home or after a 30-year term. |
| Markets Active In | Available in 30 states, including Arizona, California, Colorado, Florida, Illinois, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Virginia, Washington, and D.C. | Primarily operates in California, with plans to expand to other states. | Operates in select markets; specific states not publicly listed. |
This table provides a side-by-side comparison to help you understand the key aspects of each company's co-investment offerings.
The Bigger Impact on Society
House affordability doesn't just affect individual buyers; it has broader implications:
- Wealth Creation: Homeownership is a traditional pathway to building wealth. Making it more accessible helps close the wealth gap.
- Family Formation: Affordable housing encourages younger generations to settle down and start families.
- Community Strength: Homeowners are more likely to invest in their communities, enhancing social cohesion and local economies.
By introducing a second partner to finance a portion of the home, buyers can reduce their debt from 80% to 70% and still own the same property. This financial flexibility can have a ripple effect, strengthening communities and promoting economic stability.
SoloHomes: Part of the Solution
At SoloHomes, we recognize the challenges faced by today's potential homeowners. Our mission is to be a piece of the puzzle that gives the next generation an on-ramp into the real estate market, so they can experience the financial, emotional, and communal benefits of homeownership.
Why SoloHomes?
- Consumer Choice: We believe consumers need more choices. Co-investment is one way to provide that.
- Innovative Solutions: We're committed to offering solutions that help buyers avoid PMI, lower loan values, and enjoy reduced mortgage payments.
- Community Focus: By making homeownership more accessible, we're helping to build stronger communities.
Conclusion
Far too many people with great jobs still can’t afford to own real estate in the towns they love. It's time to embrace innovative solutions like home equity co-investment. Not only does it make homeownership attainable, but it also allows buyers and investors to share in the benefits.