By Kevin Cox
In Australia today, the dream of home ownership is a struggle and needs the support of “The Bank of Mum and Dad”. House prices have continued to rise relative to income. Today, house prices are ten times the average income, whereas fifty years ago, house prices were five times the average. Relative rents have increased, and it takes longer to obtain a deposit. A policy change is needed.
Build to Rent perpetuates the problem even if it temporarily lowers rent. Even removing negative gearing from rental properties is a temporary solution. We need a way to address the underlying problem of renters paying for investors' unearned income without receiving anything in return.
Build to Rent and Buy (BTRAB) is a housing finance approach to remove the underlying problem of unearned income in the housing market. It combines the benefits of owning a home with the flexibility of renting. It uses Community Capital Markets, where properties are put into a permanent marketplace managed by a shareholder company or cooperative.
When a renter occupies a dwelling, they become its custodian and pay rent, some of which becomes equity in the property, making them investors/renters. Renters can sell their equity while still living in the property, and when they vacate, they receive their equity as an investment in the whole market.
The rent depends on the property's capital value, the cost of operating the BTRAB and the renter's income. The financial cost of operating a BTRAB is low as occupiers buy equity as part of a rent payment, and no extra money is created in a BTRAB as loans.
Capital in a BTRAB moves at least double the speed of a regular housing market, and Capital gains and losses are shared. The approach can benefit Developers, Investors, Governments, Renters, and Society by providing more affordable housing, increasing market participation, derisking developments, and reducing wealth inequality.
Build to Rent (BTR)
The following outlines the potential advantages and disadvantages of BTR in the current real estate market.
The Advantages of Build to Rent include
- A consistent revenue stream for developers and investors
- Stability for renters, who can stay in the property for longer.
- The development of high-quality rental housing.
- Provision of amenities and services not typically found in traditional rental properties.
- Energy efficiency from economies of scale and design.
- Improvement of renters' overall quality of life, as BTR properties are often designed with community spaces and amenities.
- Increasing the supply of rental housing in a given area leads to more affordable rents in the long term.
- Professional property management services ensure the property is well-maintained, which benefits renters.
- It can include flexible lease options, such as short-term rentals, which can appeal to renters with more transient lifestyles.
The Disadvantages include
- More expensive for renters.
- Renters have less incentive to look after the dwelling.
- Lower profitability for investors in the short term.
- Increased rent prices in the surrounding area.
- Little advantage for renters who want to purchase a home in the future.
- It can take longer to build and develop than traditional rental properties.
- Resistance from local communities or governments not supportive of large-scale development projects.
- Greater regulatory scrutiny than traditional rental properties.
- Less responsive to individual renters' specific needs and preferences, as BTR properties are often designed to appeal to a broad range of renters.
- Developers and Investors may need help managing properties with many tenants.
- It provides a different level of personalisation than owning a home, as renters are limited in the changes they can make to the property.
- Renters will not benefit from appreciating property values as in home ownership.
- Less responsive to the needs of renters with special needs, as BTR properties are often built to a standard design.
- Challenges in attracting and retaining renters, particularly in areas with a high supply of ownership and rental housing.
- Challenges in dealing with crime and vandalism, as BTR properties are often located in areas with high population densities.
In summary, BTR provides the advantages of single ownership of a group of houses but with the disadvantages of renting and low returns for investors who are often looking for Capital gains.
Build to Rent and Buy (BTRAB)
BTRAB provides the advantages of group ownership of many houses with private ownership of a person's home. BTRAB is lowest-cost financing.
BTRAB is a Community Capital Market. It is a permanent market into which owners and investors sell their properties. A BTRAB is an investor-shareholder organisation that runs a marketplace of properties. When an occupier pays rent, 50% of the rent becomes equity in the property, so they become a part-owner. The minimum rent depends upon the property's Capital value, the occupier's income, and the cost of operating the BTRAB. The maximum rent is the outstanding equity.
If a member vacates a property, they receive their equity in their home as an investment in the whole market. Investors must sell a percentage of their investments each month and receive cash for the 50% of the equity purchased by renters. Renters become equity holders, and their rent stays the same until they have 100% equity in the dwelling; then, it drops back to a lower rent like a body corporate fee. Renters can sell their equity to other investors while still living in their property.
The financial cost of operating a BTRAB is nearly zero as occupiers buy equity when paying rent. No extra money is created in BTRAB as investor loans are separate from BTRAB even though BTRAB equity may guarantee the loans. Investors borrow money but not renters. Investors must sell a small portion of their investments each month, where the price is the price on the open market, which can go up and down.
Capital in a BTRAB moves at least twice the speed of a regular housing market. This means Capital does not stagnate until the house is sold. The house is sold continuously. This means some money is available for further investment and reduces the need for interest-bearing loans.
The Capital market is liquid, as every investor puts up a monthly amount to sell, and every renter pays an amount each month. Both buyers and sellers can have offers to buy and sell at the BTRAB fixed price.
Rentals are periodically revalued, and investors and renters share Capital gains and losses.
Because it is a permanent market, the selling costs are lower than the cost of a tenant moving house or a buyer purchasing a house.
The savings are shared between investors and renters. Importantly there is no unearned income inside the BTRAR. It is expected that investors will get at least 25% more and renters will save at least 25% as the cost of Community Capital Markets is likely to be half the cost of a regular Capital Market.
Advantages to Governments
Governments can invest their land into the BTRAR and sell it continuously. The money can go into consolidated revenue or subsidise rents or community facilities without raising taxes.
Governments do not have to set up new programs or change legislation. They can adapt existing housing market regulations.
As well as giving greater flexibility and reducing costs governments can leave housing prices inflated while making housing affordable for new entrants. A more efficient Housing Market will benefit all and reduce wealth inequality without the need for taxes to transfer funds from the rich to the poor.
Advantages to Developers
Developers can build higher quality dwellings with more facilities and sell for the same or lower prices. Developers have a greater market because more people can invest and more people can afford to rent. In particular, downsizers and upsizers can borrow money secured against their existing homes to invest in new developments. Alternatively, existing homes can become part of the Community Capital Market.
Developers will keep control during development and will not require fixed-price contracts but can adjust costs as the development continues de-risking developments.
Developers can work closely with the government to provide Community Facilities as part of the development and improve the attractiveness to renters/buyers.
Advantages to Investors
Investors in property no longer worry about looking after and maintaining the properties. That task falls to the BTRAB and occupiers. Investors get a fixed continuous stream of secure local income suited to retirees and superannuation funds. Investment returns can still include Capital Gains and are "safe as houses".
Advantages to Renters
Renters become investors and build up wealth with each rent payment. Rents can adjust within a wide range and can be tied to a person's income. Renters can move to another dwelling without losing Capital, making it much easier to move to other places. It allows people to move to meet their changing circumstances without a large financial penalty.
It makes sense for investors to invest close to home in investments over which they have some influence and control. It makes sense for as many people as possible to become investors through their everyday purchases. It makes sense for those with money to invest to benefit themselves and others in the society in which they live. It makes sense to reduce the effect of external factors like the price of oil on local business activities. It makes sense for everyone to benefit from innovations and improvements in working together. Build To Rent And Buy satisfies all these criteria and can be introduced incrementally for little cost.
The Mathematics of Community Capital Markets
Given a Capital value of $100,000, a return on investment of 5%, a depreciation rate of 5%, and no other operating costs. A renter pays 5% each year for the use of the Capital and 5% to replace the Capital. With Community Capital Markets, the 5% to replace the Capital is a sale of Capital to the renter from investors. The renter gets future income from using the 5% of the Capital purchased.
With regular Capital Markets, the 5% covering depreciation stays with the investors. Investors get unearned income as they receive a payment to cover depreciation and return nothing to renters.
It requires a change to shareholder agreements and a simple accounting change and can be introduced for any Capital Market.