In our last podcast, Bob and I interviewed Lisa Gansky, author of The Mesh and founder of http://meshing.it/.
The idea behind “the mesh” is that businesses are challenging traditional models of ownership in new and profitable ways. Think Netflix or ZipCar or even Groupon.
During our conversation with Lisa, I remembered a “meshy” idea I came up with a long time ago – one that requires extensive domain knowledge about real estate that I don’t have …
Why is it that our only options for home ownership ultimately come down to own or rent? Why can’t we find a middle ground between these two options? Owning your own home has traditionally been part of the American Dream, and for many, owning your home is a fine investment. However, some financial advisors are challenging the conventional wisdom about home ownership, especially after the recent housing crisis. Is it really sound to have the vast majority of your personal wealth tied up in a single investment? And that investment turned out to me more volatile than everyone assumed.
I’d like the option of having a looser connection between the home I occupy and my real estate investment. Essentially, I would like the option to invest in a real estate investment trust (REIT) that agreed to purchase my house and rent it back to me. Assuming all the legal and managerial details could be worked out, this would give me many of the advantages of home ownership and eliminate many of the disadvantages. I would have the universe of “for sale” homes available to me, and I would have the pride of ownership associated with calling my home “mine.” However, the investment vehicle could be set up in such a way that I would not be subject to the same liquidity issues associated with traditional home ownership – I could move more easily without being stuck with a house (there should still be financial consequences to this, but they would not be so severe). Also, if I wanted to move back to San Francisco to be near a good baseball team, I could live in a “modest” $500,000 house but invest a smaller amount toward my ownership of that house – an amount that was more appropriate to my personal financial situation.
Note that I’d still have to pay appropriate rent, management fees, etc. based on the actual cost of the house, so this wouldn’t be a golden ticket to live beyond my means. In fact, it would have the opposite effect. During the housing crisis, many people gambled on jumbo mortgages under the assumption that housing prices would continue to go up and they’d get to cash in on a high-leverage investment. This worked for many people, but when the bottom fell out of the housing market, it devastated our economy and many families’ lives. A combination REIT/RENT living arrangement would force you to acknowledge how much you are paying for your current accommodations while spreading the investment risk across hundreds or thousands of homes, presumably across multiple communities and regions.
Here’s an example, heavy on arm-waving (remember, this is squarely outside my area of expertise): if I buy a home with “no money down” resulting in a mortgage that demands a $1,000 payment each month, I’m only “investing” a tiny amount of principal each month (most of my payment goes to interest at first). On a thirty-year fixed note, my equity – my actual investment – is going to be close to zero for several years. If I decide to move after five years – barring a distinct jump in my home’s value – I will be lucky to break even, and I might even lose money (since it costs 3-6% in fees to sell a home). If I really wanted to treat that home as an investment (especially if I don’t intend to live in it for thirty years), I would need to pay more than the minimum payment each month, let’s say an additional $100/month toward principal. If I did so, then after five years, I’d at least have $6,000 (plus or minus the fluctuation in the value of my home) – this would probably cover my fees if I sold the house, assuming it didn’t fluctuate much in value.
Now imagine a business existed that could buy that same home for me and rent it back to me for $1,000/month (more likely it would have to be $1,200/month or more to account for managerial fees and my greatly reduced exposure to real estate market risk). In addition, in order to “use” this service, I’d have to invest in it – let’s say another $100/month. After five years, I’d have a $6,000 investment in the REIT, plus or minus the fluctuation of the value of all the homes in the REIT. If I wanted to move, I’d have to pay some sort of service fee, but it wouldn’t necessarily wipe out my investment, and it would be a heck of a lot more convenient than having to sell my home. It’s like a 100% timeshare on my home.
The “co-op” nature of this is key to making it work … plenty of REITs exist already, but I don’t know of any that take advantage of the magic that happens when people feel ownership for their dwelling (i.e., they tend not to trash it). In fact, this idea came to me about 15 years ago when I moved into a really nice apartment complex in Las Colinas (outside of Dallas, TX). It was so nice that I wanted to own part of it, so I looked into investing in the company that managed the complex. It was too much of a hassle, so I abandoned the idea, but I couldn’t help but think that such a nice place should encourage its residents to invest in it. Everybody wins – the ownership company would get more capital (presumably at a premium) and residents would get to participate as owners in their community.
There is probably a good reason nobody’s done this, but our conversation with Lisa reminded me of this idea and convinced me that it’s worth challenging assumptions about ownership. I don’t know if this one is a good idea – but it’s certainly meshy! It’s also an idea I have no desire to pursue and no background knowledge to make work. Maybe it will inspire a meshy idea that works for you.