Don’t think you can buy a home? Here’s how some people are finding workarounds.
For many millennials, the idea of buying a home seems as outrageous as a day trip to the moon. We don’t want to give up on the American dream of the white picket fence, but we’re stuck. There’s no white space between that part of life when we have enough money to buy a house, and the transient lifestyle of a month-to-month lease. We can’t find a way in.
In fact, millennials are on track to the lowest level of homeownership since the 50s. The way real estate works today feels rigged against our generation.
So what are we going to do about it? What are we doing now, to set ourselves up to make that investment? What can we imagine doing one day?
Option A: Since it feels financially impossible, many of us get stuck.
Many of us have decided that getting into real estate is impossible and have stopped trying. Why?
A lot of times, getting the money for a down payment is just too hard. On average, we spend around 30% of our paychecks on rent. In cities like Boston, San Francisco or New York, we can expect to spend 40% or more of our take-home pay in rent. And if home values are rising, we get doubly screwed — when houses get more expensive, competition for rentals increases and more people are priced out.
Even worse, we watched our parents’ generation take a tumble as homeowners ended up underwater on their mortgages. Some still haven’t recovered. We saw lots of smart people people take a bet on real estate and lose. If your house is 70% of your net worth, that’s a real problem. Is it any surprise that we’re nervous to do the same thing?
Even if we did feel ready to make the commitment, we’re not sure buying a home makes any financial sense anymore. Sinking all of your money into one asset seems crazy, more so if we choose that asset based on things like where we want to live, instead of financial return.
Yet the vast majority of us still want to be homeowners.
In our last post, we asked you how you’re thinking about all this, and by far the biggest workaround you’ve found is that in today’s world, the only way to be able to afford it is to buy together. In other words…
Option B: We ask for help to make this financially possible.
Gone are the days of graduating college with savings necessary for a down payment. Instead, for many of us, buying a home is something only possible with explicit or implicit help from those around us.
What used to be a transactional relationship between us and a bank has become a community effort. More and more, we’re finding that coming up with the money to buy a home means reaching out and working with other people. The biggest workaround we’ve found is that we don’t do it alone anymore.
Workaround #1. We’re getting financial help from our parents.
Many of us plan to ask our parents to help with the down payment. The IRS lets us each take up to $28K per person tax free under their gift exclusion. If we’re lucky enough to have parents who can afford to give this much, that can make a major dent in down payment savings, though it still may not be enough in many high income areas. Remember Susie? She bought a property with her parents in order to be able to afford it.
But setting this up isn’t always that easy. Not only does it require receiving the money as a true gift for the tax benefits (meaning if you take it with the understanding that you’ll pay your parents back, you’re in violation of the law), but it also requires us to be privileged enough to have family with that much capital available to give out with no expectation of return.
It’s actually quite common: 75% of millennials who have bought a home have gotten help from their parents.
Let’s let that sink in. Three quarters of the people in our generation who manage to cross the bridge to homeownership have parents who can help them. What does that mean for those of us who don’t? What does that mean for the financial or retirement goals of our parents’ generation, if the status quo today is that it’s both expected and necessary that they help?
Workaround #2. We’re figuring out how to earn money from spaces
Things have changed since our parents graduated college. Instead of marrying and buying a house right away, many of us spend our 20s living with roommates to save on costs and staying in Airbnbs instead of hotels when we visit new places. It’s no wonder that many of us think about lowering the cost of real estate by renting out or Airbnb-ing rooms.
Some of us are already doing this in the properties we already rent as part of our savings for a down payment — though depending on our leases, this can put us in a legal gray area. Even more of us are thinking that when we finally can own, renting out a room or two will be a way to make it financially viable. The dream of living for free while a roommate pays all the costs is pretty compelling — if we can make it work. Unfortunately most of us are still stuck, and end up being that roommate for someone else.
Option C: We dream about a different kind of financial future.
Many of us want to create a new model like John, who bought a house with his friend. We want something different than our parents had. We heard from people combining ownership with communal living and shared spaces. We heard from someone, let’s call her Jane, about her dream of buying an apartment building with friends and each friend taking one unit. We heard from someone else about borrowing from multiple friends to afford the down payment.
Another person talked about diversifying his risk by buying into his friends’ mortgages, creating small pools of financial co-ownership with people he knew. While it doesn’t solve the problem of needing enough capital up front, it at least allows him to avoid overexposure in one house.
Co-owning opens the possibility for an introduction of ownership into the sharing economy, but it brings along with it complexity. How do we set up things like this legally? What if someone wants to leave? We’re already scared of the long term commitment to real estate — what if we add a long term commitment to a friend or group of friends? How would the introduction of financial investment into sharing spaces change our relationships with the people we do it with?
Let’s figure out some design principles.
We know that the way we buy and sell homes will change. It has to. It’s absurd to think that in fifteen years, this process will still be the same, when we all can see how broken and inaccessible it is.
It’s up to us to shape the change. It’s up to us to decide what the critical pieces are going to be and what kind of system we want to build. We want to know what you want to see.
For us, it’s attainability. Real estate doesn’t fit with the way we live — we are often both too mobile and too financially insecure to play in the real estate market as it exists today. We deserve a way to enter the real estate market without needing hundreds of thousands of dollars and a 30 year plan. What about you?
We’re exploring the ways the real estate game is rigged against our generation, and how we can fix it in a series of posts. In our next post, we’ll explore how you actually go about buying a home and where that process breaks down for our generation. We’d love to hear from you about how you navigated the process of investing in real estate once you had the capital— reach out here.