Exclusive: A plan for getting housing wealth to renters
Building wealth via homeownership is a time-tested American tradition. Now a new project is trying to replicate that mechanism in the rental market.
Why it matters: Most people who rent homes in the U.S. do so because they're priced out of the housing market. That excludes them from the forced-savings device that is a mortgage.
What they're saying: "Our hope is if it’s successful, this becomes a new form of ESG investment, and a new way to look at rentership," says Priscilla Almodovar, the outgoing CEO of Enterprise Community Partners, which built this project. (She's about to take up a new job as the CEO of Fannie Mae.)
- "We’ve set this up so that over 10 years it simulates what the median homeowner might have experienced."
The big picture: The Renter Wealth Creation Fund, run by Enterprise, expects to take roughly half of the housing appreciation on some $1 billion of rental property and give it to long-term renters.
How it works: Enterprise, and its investors, will work with sponsors who will put up millions of dollars of their own money to buy rental developments with the aid of loans from Fannie Mae, Freddie Mac, the Federal Housing Administration, and others.
- All of the projects will be affordable housing, with priority given to those targeting households earning 80% of median income or less.
- Many will be part of the Low-Income Housing Tax Credit program, or Section 8 housing.
The payout: At the end of the lifespan of about 8-10 years for each project, the property will be sold or refinanced, with a target total return of 10% per year. Typically the owners remain the same in a refinance; in the event of a sale, there's often a covenant restriction ensuring the units remain affordable.
- Investors in the Renter Wealth Creation Fund will receive a 4% return, plus 20% of the excess return over that — an estimated 5% in all. The other 80% of returns above 4% — the remaining 5% per year — will be given to renters who rented for at least four years.
- Renters will also receive cash back when they make their rent payments on time.
Between the lines: While a 4% return is relatively modest for property investors, Enterprise has lined up foundations and family offices that concentrate on impact investing to fund the riskier portion of the investment. If there are losses, those investors would experience them first, before the traditional equity investors in the fund.
Pencil it out: The average American renter has a much lower total 10-year housing cost (about $210,000, in current dollars) than the average homeowner ($440,000), according to data from Zillow. But thanks to home-price appreciation and the fact that mortgage principal is paid down over time, homeowners end up building roughly $190,000 in home equity over that time.
- Under the Enterprise model, the renter paying $210,000 in rent would end up getting a check for about $55,000.
- The net cost of rentership thereby drops to about $155,000 over 10 years, well below the $250,000 net cost of ownership.
The bottom line: This model is new, and therefore unproven. But if it works, it could revolutionize affordability for those who need it most.
Editor's note: This story has been updated to specify that the foundations and family offices focused on impact investing will fund the riskier portion of the capital, and that traditional equity investors are also involved.