Real estate ownership is expensive.

It’s no secret; in fact, it’s right there in the name ‘landlord’. Despite the increasingly high financial barriers to entry, aspirations of real estate ownership remain deeply engrained in the North American psyche to the point that homeownership and a stable, middle-class lifestyle are near synonymous.

For many, homeownership was almost an expected part of life. Today, not so much. The time when two young people could save for a couple of years and come up with a 20% down payment on a starter home in downtown Toronto, is lone gone.

Now, we younger generations face a troubling paradox: homeownership still remains one of the most reliable ways to ensure a middle class lifestyle of financial prosperity for you and your family, however, the rising value of real estate (one of the underlying factors in homeownership being so attractive) decoupled from wages and average income potential, has made it impossible for young people to actually break into the housing market.

Indeed, according to a 2019 study conducted by the Canadian real estate site, Zoocasa, one needs to be in the top 10% of earners in Toronto, with an income of at least $124,554.00, to be able to afford to purchase a house in Toronto.

So, how are the other 90% of us not earning six figures annually supposed to become homeowners in the cities and communities we call home?

The truth is, there are many potential solutions to this issue of real estate ownership becoming inaccessible. They range from iBuyers that help purchase your home for you like Open Door and Properly, to leasing options from companies like Invitation Homes, to co-living arrangements like Bungalow, Common or Sociable Living to co-equity solutions like Key.

All of these varying models have their pros and cons which make them attractive to different demographics based on what they are looking for. For myself, I must admit an open bias towards co-equity models (I do work for Key, after all) but I would be the first to say that they are not the be-all-end-all solution to everyone’s real estate needs, and I would encourage the reader to consider their own needs and evaluate their options accordingly.

That said, what is a co-equity model of real estate ownership, and how does it work?

Simply put, a co-equity solution enables consumers to purchase real estate in small fractions with the remaining equity in the property being financed and owned by equity partners. As the value of the real estate appreciates all of the various equity partners shares in the property appreciate on a pro-rata basis.

So, if I owned 10% of a property, and my equity partner owned 90% of the property, and over the course of 2 years, the property appreciated by 15%, my 10% and my partners 90% would each appreciate by 15% accordingly. The obvious benefit of such an arrangement is that it allows consumers access to the benefits of participation in the real estate market far sooner, and with far more flexibility, than traditional methods.

The downside of a co-equity model is naturally that you lose out on the potential to benefit from the increased leverage of traditional purchasing pathways by way of utilizing mortgage debt. With a 20% down mortgage, you can quintuple your purchasing power and reap 100% of any appreciation in your property. Though, of course, the opposite remains true where if your property value decreases you retain your full mortgage debt burden, but the underlying property is no longer sufficiently valuable to cover the debt obligation – this is how many over-leveraged consumers get into trouble.

However, for those who find themselves struggling to save the recommended 20% for a down payment in a city where real estate continues to get further and further out of reach; or those who expect to move every couple of years but who still want to participate in the powerful wealth generation provided by access to the real estate market; or even those who want passive exposure to the benefits of real estate in a particular area without committing themselves fully, co-equity models provide an excellent service.

If you’re interested in the co-equity solution that we’re pioneering here in Toronto please get in touch, I’d be more than happy to speak with you. You can reach me a russell@keyliving.com