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Why Family Offices Should Know About Home Equity Investments

January 24, 2023

Family Wealth Report

Multi-family residential properties are popular for their strong cash flows and attractive risk-adjusted returns over the long term.

They are typically less complex than office space, retail, or hotels. Like multi-family properties decades ago, residential homes have evolved into viable and profitable assets. Common routes to the residential home market include direct purchases, single-family rental vehicles (SFRs), and residential mortgage-backed securities (RMBS).

However, these strategies are subject to prevailing interest rates. In addition, direct purchases and SFRs require sizable capital outlays to acquire and maintain the properties, making them difficult to scale.

Furthermore, none of these assets provide exposure to a relatively untapped asset class – residential home value growth in owner-occupied homes. Historical home values have proven resilient over the long term and even through decades of economic cycles, averaging 5.4 per cent growth annually since 1975. (Source: St Louis Fed.) Regarding tappable home equity – the amount homeowners can access while keeping at least 20 per cent equity in their homes – market value stood at approximately $10.3 trillion as of Q3 2022. (Source: Black Knight.) Even as that number fluctuates, this large pool of high-quality investible assets remains available.

Home equity investments (HEIs) represent an attractive alternative to traditional financing by enabling homeowners to share the gains in their home values with investors in exchange for upfront cash. HEIs should appeal to the large number of homeowners with good credit and quality homes who still may not meet the requirements for other financing options. With more flexible qualification criteria, HEIs enable more homeowners to tap into their equity. While homeowners do typically need significant home equity for an HEI – around 25 per cent – credit requirements for qualifying are usually less stringent. Although different HEI providers may vary, a typical investment amount is 30 per cent or less of the total home value.

This article originally appeared on Family Wealth Report. Read the full article here.