Renters Should Build Equity, Devil In The Details
Daniel Mandel, MBA
Senior Financial Analyst @ NexMetro Communities | Financial Modeling, Excel Proficiency
I was inspired to write this article after reading “Arrangements Pop Up for Renters to Own Stakes in Their Apartment Complexes” written by Bendix Anderson and published online by National Real Estate Investor on July 22, 2020. Real Estate developers are looking for creative ways to enable renters to purchase equity in the apartment building that they live in. In theory, it is a great idea to allow renters to slowly accumulate equity in the place they live as this mechanism is akin to a forced savings account. However, the devil lies in the details for the mechanics of these ownership structures as I have four (4) major concerns
1. How the equity vets for renters
2. The rights that renters obtain as a equity stakeholder
3. The fees borne by the renters to purchase the equity stake
4. How lenders will react to this new structure as non-recourse Fannie Mae, FHA, and Freddie Mac debt continue to be the best risk adjusted financing option for apartment owners
The article profiles Rhove, a financial technology company based in Columbus, as one company offering this option. Rhove has partnered with Kaufman Development on Gravity, mid-rise mixed-use apartment building in Columbus. According to the Anderson,
"The renters at Gravity effectively become stakeholders in the mixed-use development, which welcomed its first residents in April. Each household starts with a $50 ownership stake, provided by the developer as a “rebate on rent.” Each household can then increase that ownership stake—many choose to do so by $50 or $100 a month—with a 1.99 percent transaction fee."
While I applaud the real estate industry for creating new innovations, I caution renters to look at the details before jumping in to buy an ownership stake.
Sources
22, Bendix Anderson | Jul. “Arrangements Pop Up for Renters to Own Stakes in Their Apartment Complexes.” National Real Estate Investor, 23 July 2020, www.nreionline.com/multifamily/arrangements-pop-renters-own-stakes-their-apartment-complexes.