The Miseducation of Real Estate
The Miseducation of Real Estate
As a real estate practitioner, and African American woman, I advocate stronger integration of property ownership into solutions for advancing economic mobility of Charlotte’s minority constituency. Given the American economic system in relation to wealth generation, and African Americans’ turbulent relationship to property ownership, institutional and government resources need to make a significant shift in how we prepare the citizenry for wealth as it relates to property ownership. Educating people on the nuances of the financial benefits can achieve immediate and long term goals. Managing a house as a financial tool with knowledge from a more sophisticated homeownership program can address economic mobility because of the increased opportunity to capitalize equity.
Charlotte, North Carolina like many American cities, has an issue with the economic mobility of its African American residents. Initiatives such as Project LIFT and Leading on Opportunity are led by institutions who are attempting to address economic mobility through the lens of education, workforce readiness, and social capital. These approaches are desperately needed, but one important pillar is often overlooked: real estate ownership. The Joint Center for Housing Studies by Harvard University notes real estate is “an important steady path to building wealth and stability.” Americans historically invest in owning real estate because of that fact. Real estate in America is essential to wealth, seeing as how real estate comprises the majority of American non-financial assets. The financial benefits can be many if one knows how to use the asset, and it is this level of sophistication that should be integrated into homeownership programs.
An integration of real estate into solving social issues can be centered on three pillars of real estate: cash flow, equity and appreciation. This urban.org report expounds on the numerous methods of drawing liquidity from a real estate asset.
Cash Flow
A real estate asset can solve an immediate need for cash. House hacking, where an individual owns a multi family unit (duplex, small apartment structure) and lives in one of the units as a primary residence is a great example of creating positive cash flow. Renting out a room or unit offsets the living costs of the primary residence.
Equity
Simply, put equity is the difference between the fair market price of a property and what you owe on the property. Equity can be a shield against financial disruptions. Equity can increase when the debt on the asset is paid down or when there is an increase the fair market value of the asset (also known as appreciation) occurs.
Appreciation
First time homebuyers need to consider the likelihood and signals of their asset appreciating over time. In other words, are people going to value this asset more in the future, than they do now?
A real life example: A person wanted to buy a house in 2009. At that time, the alignment of federal and local policy, and economic context aligned to present an opportunity. President Obama’s administration passed a housing policy which offered an $8,000 tax rebate for first time homebuyers. The rebate, along with the HouseCharlotte Program, which offered $7,500 in down payment assistance, and the greatest recession since the Great Depression made purchasing a home possible. After the purchase, the buyer used the federal tax rebate and tax deduction on the interest of the home to eliminate debt. The buyer also got a roommate, so the positive cash flow was designated to savings. Six years later, the buyer invested in another property to create positive cash flow. Meanwhile, equity is being built through payments against the mortgage and the asset has appreciated in value. Both properties in 2020 have $185,000 in equity.
When I explain cash flow, equity, and appreciation to first time homebuyers, I am met with a thoughtful silence. Potential homeowners don’t initially view their home as a major financial tool. As a first time homebuyer, the challenge of qualifying for a mortgage and having the down payment consumes the thought process.
Often, these first time homebuyers programs offer information so one can qualify for purchasing, maintaining and keeping a home. However, I challenge decision makers to reimagine these programs, so that potential homeowners can understand the full financial power of the asset they are determined to acquire and become agents of change within financial systems.
Increasing ownership will require involvement from banks, federal and local governments, and a major shift amongst practitioners in the real estate industry. We must provide a sophisticated education program for those seeking homeownership that reveals the complexities of real estate so that equity and appreciation gains can be actualized at market value. That is how generational wealth is created, and economic mobility is achieved. - Jennifer Duru
Jennifer Duru an expert at solving problems and managing special projects in the real estate, political and social areas.
Carolina Reimagined is a collaboration between Jennifer Duru and CLT Public Relations