Paths to Homeownership: It's Time for Accountants to Take a Closer Look
Guest contributor Alex Kjorven, CPA, CA is the Chief Product Officer at Ourboro Inc. and a recipient of The Global and Mail’s 2022 Report on Business Changemakers Award. In this article, Alex explains the homeownership options opening up to Canadians that accountants can explore with their clients.
Buying a home in Canada has never been more expensive. Soaring prices and rising interest rates have pushed housing affordability to historic lows, disproportionately affecting younger generations and those without access to family wealth. According to a 2021 report by CIBC, 30%of first-time buyers received financial contributions from their families, further emphasizing the wealth divide.
Amidst the deafening discourse and finger-pointing surrounding these troubling trends, as finance professionals, we can sometimes be rather stubborn when it comes to embracing new financial tools and innovations. It's understandable—creativity and accounting haven't always mixed well for us in the past.
However, homeownership isn't just about financial implications. While many of you may be reading this with your investor hats on, it's important to recognize that residential real estate is an emotional journey. It has been a stable means of generational wealth creation, fostering long-term financial stability and nurturing stable and engaged communities.
It’s no surprise that numerous new and exciting models are emerging across Canada to disrupt this sector. Some are introducing ways to give more people a share of the pie, while others are using innovative financial models to help get more people into homes. It's time to explore a few of these innovations.
Shared Equity: The Co-Investment Solution
Shared equity investments, or professional co-ownership, are game-changing financial innovations making waves in the housing market. Where government-backed shared equity incentive programs have been limited in their reach and applicability, private sector players have stepped in to act as co-investors alongside homebuyers. Companies, like Toronto-based Ourboro, contribute towards the down payment in exchange for a share of future appreciation upon the home's sale. This approach significantly reduces the amount buyers need to contribute toward a down payment. It can save buyers years or even decades of renting while trying to accumulate sufficient savings and allow them to enter the market sooner and begin building equity.
These programs primarily cater to early homeowners aiming to break into the market. When the home is sold at a profit, both the investor and homeowner benefit, and the homeowner can then leverage those tax-exempt funds to invest in their next home, ideally one they can fully own. Otherwise, for those looking to purchase a forever home with a shared equity partner, they’ll need a financial plan in place to buy out the co-investor’s share at the appreciated value.
Rent-to-Own: The Bridge to Homeownership
Rent-to-own programs, as the name suggests, allows renters to take more incremental steps towards homeownership. Various models exist, ranging from private agreements with landlords that function like call options to purchase the home at a predetermined price, to more sophisticated platforms like Key, which enable renters to gradually increase their equity share in the home over time.
Rent-to-own programs appeal to those looking to enhance their mortgage readiness while enjoying greater housing stability compared to standard lease agreements. Before committing to a rent-to-own contract, it's crucial to consider deposit requirements, agreement termination options, and the rights and responsibilities as a tenant.
Fractional Investing: A Slice of the Real Estate Pie
As fewer people manage to move out of the rental pool, we must acknowledge that the unattainable may also be the undesirable for many. Renting may very well be a preference for some individuals, and our housing supply and investment options must evolve accordingly.
Fractional investing or “propsharing”, offered by companies like Addy or Willow, allows investors to pool their resources and collectively own a property. This approach provides access to real estate opportunities that would otherwise be out of reach.
Fractional investing differs from traditional Real Estate Investment Trusts (REITs) in that it focuses on contributing to a single property rather than a portfolio of assets. It presents an exciting opportunity for retail investors to invest directly into commercial or residential real estate opportunities across a spectrum of build forms and development stages.
As this investment class matures, eligibility for RRSP, TFSA or FHSA inclusion may become a possibility. Regardless, it is vital to conduct thorough due diligence before entrusting savings to any investment manager and carefully evaluate the underlying properties and associated risks.
These are just a few examples of emerging trends aiming to open up access to real estate ownership and investing. Accountants can be at the forefront of these innovations by helping their clients realize and evaluate these new possibilities in homeownership.
Please note, the views expressed in our guest articles are the views of the guest writers.