Owning a home was once considered a rite of passage, a concept embedded into the fabric of society, as American as apple pie. But as of late, this cornerstone of the American Dream has become a status symbol and a marker of achievement and success. For too many, purchasing a home is now out of reach. Decades of socioeconomic change has overhauled the way we live—and the way we think about buying a home. In fact, the notion of homeownership has transformed from a widely attainable goal to a modern-day luxury.
But is it really too difficult to own a home? Or have people simply convinced themselves renting is the only viable option, without considering what else is out there? Let’s take a look at one of the new alternatives to traditional lending, aimed at making homeownership possible for more people: co-investing.
The Expiring Mortgage Concept
As we look to the future of homeownership, it helps to understand the past. The mortgage as we know it today was born out of the Great Depression. In a bid to help the country get back on its feet, the Federal Housing Administration began issuing low down payment home loans. But the advent of the home loan came when a new home cost $3,900—about twice the annual average income. Over the course of the last eighty years, price-to-income ratios have shifted, and today, an average-priced home is unattainable for an average wage earner in three-fourths of the top 100 national markets. And while it takes an average of 4.53 times the median household income to own in 2019, in some regions of the country, it costs an eye-gouging 9.54 times the median income to own.
Why We Want to Own
If the cost and level of effort to buy is so high, why do Americans so avidly pursue homeownership? Motivations vary from person to person, but security and stability top the list. While a home is considered foundational to forming families, it’s also regularly considered foundational to financial success. Despite housing market ebbs and flows, owning property is generally regarded as a sound investment. Even with modest inflation, being a property owner can generate ongoing passive income and is integral to building wealth in the long term.
And government policy and perks over the years have only fueled the notion that buying a home is best. Homeowners have the option to deduct their mortgage interest, plus local property taxes, from their federal income taxes. Additionally, profits from a home sale are tax-free as long as another home is purchased within two years. In fact, deductions related to owning a home now comprise the largest category of tax breaks available to most individuals.
Plight of the Millennials
Now into their late-thirties, millennials account for the largest group of homebuyers. More than other generations, they’re impacted by certain financial factors that make owning a home more challenging. The biggest culprit? Staggering student loan debt. Forty-five percent of millennials have it, and it costs them nearly $400 per month, crippling budgets and making mortgage payments more out of reach than ever. On top of the obvious ongoing financial impact of interest-bearing student loans, millennials also struggle to build strong credit as a down-stream side effect of college debt, a requirement for securing a traditional bank mortgage. Add job scarcity and a penchant for living in high-cost cities, where housing supply is inelastic, and it’s easy to see just how high the odds are stacked.
And when millennials are able to purchase a home, 68 percent regret it, primarily for financial reasons like underestimating the carrying costs and being ill-prepared for relentless monthly payments.
A New Option: The Co-Investing Model
In an industry that’s been slow to change, the way people think about real estate financing is finally evolving, and new companies are offering expanded options to buyers. One such model is home co-investing. Instead of taking out a mortgage from a bank, buyers work with a partnering company to purchase a home. Co-investors share the equity in your property, treating it as an investment, and in exchange, offer discounted monthly payments. Instead of taking on debt with a mortgage, buyers partner with co-investors to purchase a home or investment property—or restructure their current financing to significantly reduce monthly payments. Most importantly, with home co-investing, the buyer retains full ownership of the property, with their name alone on the title.
How It Works
When purchasing a property via home co-investing, buyers make a minimum initial investment in a home, similar to a down payment. Then a partner company co-invests, covering the remaining cost of the home. Payments are usually fixed for a set term and purchase equity back from the co-investing company along the way. Since payments are lower than with a traditional loan, the extra savings can be used to pay down student loans, cover property management fees on rentals, or be put toward other investments.
The Flexible Way to Own
Another unique benefit offered by some home co-investing models is the flexibility to cash in and out of one’s equity without taking out an expensive home equity line of credit or resetting the term. Property owners can buy more equity when they want, or sell equity for cash if needed. Owners can even tap their equity to make property improvements, and most co-investors will freeze the value of the home, then reevaluate after renovations, passing any new equity brought on by the improvements to the owner.
Down Market Protection
When buying with a co-investing company, owners don’t just share the upside of owning a home. If home values go down, co-investors will help shoulder the burden of depreciation, too. While it varies by company, most will allow owners to sell anytime, even in a down market. That means if there’s a loss, it’s split proportionally based on the equity split at the time of sale.
At the end of the term, if owners aren’t ready to sell and the co-investor still owns equity, they can partner again for another term–or purchase the home outright.
For many would-be buyers, especially cash-strapped millennials or those looking to buy an income property, co-investing brings a welcome new choice to a space where options have been limited. The model offers control, equity and ownership, combined with lower payments and more financial flexibility.
This article has been contributed by Jena Beaver.