Wednesday, September 14, 2016

Owning a fraction of house - the new economy

Fractionalization of real estate has already occurred in australia. To me, I feel it is a monstrosity.
This is not helping younger people to own property.
But rather aiding the ability of the older/richer people's increasing share/ownership of the real estate and artificially inflating the price of property and preventing it from dropping despite the much anticipated rate hike (if it happens and it will be gradual anyway).

For the longest time, there have been two ways of “living” somewhere:
  • Renting, in which case you own 0% of your residence
  • Owning, in which case you own 100% (typically using a bank mortgage as a 30-year crutch to owning all 100%)
But why not own 91% of your house? 95%? 87%? Home ownership rates have been falling, partially because millennials can’t afford to buy homes — and when/if they can, they might find 300% of their net worth concentrated in a single asset class (i.e., the exact opposite of diversification) — their house.
There’s no such thing as a free lunch, and in this case Point’s lunch comes in the form of capital appreciation (more on the historical magnitude of this in a bit). If the house appreciates in value, Point shares in that upside. If the house depreciates in value, Point gets paid back after the bank, but before the homeowner, in the event of a sale. If the property depreciates enough, Point may lose some of its money, without the homeowner being in default; on the flip side, if the house greatly appreciates in value, Point will make far more than a traditional “coupon” from a mortgage. This type of equity-like exposure creates alignment between the homeowner and investor. There’s a terrific article on this subject in this Wharton article, “Don’t Reform Housing Finance — Reinvent It“.
On the opposite side, imagine you’re a big investor looking for capital protection and appreciation. There are few asset classes that have outperformed super-prime real estate in the last 60 years. Consider that the median home in Palo Alto sold for less than $20,000 in 1956, versus $2.5 million today — an appreciation rate of 12,500%. Compare that to an approximate 5000% return for the S&P 500 over the same period (much higher with dividend reinvestment, but you’d need to pay taxes on said dividends, making this calculation challenging).
Of course, for an investor to invest passively not in a single house but in a broad basket of homes would have been challenging, if not impossible. The investor would need to deal with finding and serving tenants, paying annual real estate taxes, and fixing toilets (maintenance) … across many, many properties.
Using technology, Point brings diversification to residential homeowners (diversify out) and investors (diversify in). It’s not like a home equity line of credit (HELOC) or a mortgage with monthly payments; it’s an aligned investment — that is, equity. It’s rethinking the fundamentals of residential real estate ownership — making single-family residential real estate a liquid, tradeable asset class.