Yes, millennials and institutional investors have problems that could hardly be solved if they don’t work together.
Day in and day out, you can see articles about the home affordability crisis. Usually, they all show the same picture: prices are skyrocketing, salaries quite the contrary, and the Global Financial Crisis made banks increase their down payment requirements. All of this has made millennials unable to access homeownership, or to put it other way, reluctantly paying their landlord´s mortgage instead of theirs.
How does this affect Institutional Investors?
Well, while there are articles about home unaffordability, there are also a ton of articles about institutional capital entering the residential space. It seems like residential investment for rent is the best thing that ever happened. All of the sudden we realized that people need a place to live. No matter what, people will always need a roof over their heads.
The problem is that the only way that big investors have found to invest in apartments for rent in Spain is by Build-to-Rent (BTR). New developments that will be destined for rent. Although providing a good solution, this strategy has two problems. First, new developments are mostly in the outskirts of the city where land is available. Second, there is a lot of competition. Every other investor is bidding for the same BTR projects, resulting in low yields in not that great locations. Additionally, there is the construction risk and not getting cashflow immediately.
How can Millennials solve them this problem?
Rent-to-Own. Millennials can pay rent but can’t save enough for the mortgage down payment. This provides a great opportunity for investors: Millennials source the property they would like to buy, investors buy it and rent it to them with the right to buy it down the road, asking for only a 5% entry payment.
This model kills two birds with one stone. Investors get properties already with a tenant and millennials get the opportunity to rent their dream house and buy it bit by bit.
Rent-to-Own as an Asset Class
Rent-to-Own is not new in the world, but it has been institutionalized very recently, having great upside and growth for the years to come. You can find great companies arising in this model in the United States such as Home Partners of America, ZeroDown and Divvy Homes with over 30,000 homes combined.
In a low-yield world, operational efficiencies provide immense value for investors. Having tenants for the long term that have skin in the game reduces maintenance and rotation expenses.
However, the primary reason why Rent-to-Own will grow as an Asset Class is the origination capacity it has. As the affordability crisis is so big, the number of properties you get from potential tenants is huge, finding pipeline in all types of locations.
Buying properties selected by the tenants themselves, having certainty before buying and cashflow from day one is the name of the game. As the Real Estate legend Sam Zell says “I’ve always believed in buying into in-place demand rather than trying to create it.”
By solving a problem to young people, investors have the opportunity to create a bigger and better-located portfolio while having an impact on society.
This is our challenge in Vidoqui, allowing our generation to dream again about being homeowners while providing cash flow to institutional investors.
Juan Manuel Bello de León
Founder & CEO Vidoqui