The Key To Boarding Wealth Is To Own A Home | Zain Jaffer And Sahil Gupta
Most people don't know that the key to boarding wealth is owning a home. It's not something you hear about every day, but it can be one of the best ways to create financial stability for your future. Start by listening to this episode about the benefits of homeownership, and then take steps towards your future with confidence!
Noah is a modern finance company helping homeowners tap into their home value to meet their financial goals without incurring new monthly payments or interest. Founded in 2016 and headquartered in San Francisco, Noah's innovative equity sharing model is a debt-free alternative to traditional home equity loans and HELOCs.
For more information visit www.noah.co.
The Key To Boarding Wealth Is To Own A Home | Zain Jaffer And Sahil Gupta
I'm not necessarily suggesting everyone should own their home or even that everyone should own 100% of their home. There are certain cases where it might make sense to be a renter but there's no disputing the metric you laid out. The key to building wealth is to own your home. I love the psychology of it, which you allude to. It's forcing you to save.
Financial discipline is something that lacks. This is why renters are very unbankable. It's hard to sell products to them because they're in the mindset of doing the way you do. Human beings are so adaptable. It's a lot easier to adapt to a change in your living costs and keep spending. Forcing yourself to save is very unnatural. You have to do the uncomfortable thing.
It’s easy to spend and take on more debt. It’s a lot harder to save your money, be disciplined and cut back. For young people who are early in their careers, probably the single most powerful thing they can do is to either save up some percentage of their income and save for that down payment for the home or invest in a 401(k). Do some type of investment and let it compound over time.
If I could go back, I started living in San Francisco in 2008. I was living in an area called SoMa or South of Market. In 2008, nobody wanted to live there. It was almost a ghost part of the city. You only had some offices but not a lot of residential construction there. Fast forward, it's one of the hottest real estate markets in San Francisco. I thought to myself that if I could go back and somehow put $50,000 or $100,000 down and buy even a 2-bedroom condo there, the value would have doubled if not tripled easily. I agree with you.
Getting on that path to homeownership makes a ton of sense. The good thing is that the market has tremendous options for consumers. You have companies that enable you with down payment assistance and companies that do things like rent-to-own. You have a variety of options, including an FHA loan with 3% down to get started. Once people get started, it creates that discipline that you're talking about.
The other fact that I tried to get my head around is your net worth grows at the end of the day, once you've owned your home but you're still only able to stay in the home that you've owned. As you want to jump to another home, you've got to sell your home at the market price and buy another home at a market price. If you want to move upwards and expand, it's tough. The trick is finding out how to own your home but also save enough money to buy at least one other piece of real estate.
For young people early in their careers, the single most powerful thing they can do is to save up some of the percentages of their income.
That way, you're growing faster than the market is growing at least if you want to buy a new home. You hear stories of someone who says, “I bought this home for $50,000.” They sell it for $300,000 later but the new home they want to move to costs $500,000. That $200,000 is a massive Delta. The lifestyle didn't change much. The trick is to figure out how to save and become an investor rather than a spender and take someone else's mortgage as a renter.
We see that with some of our clients. One way to do that, for example, is I'm in home A and I want to buy a home B, you could leverage the equity of home A to purchase home B. That way, you don't have to sell home A. You can keep your first home. You can utilize the appreciation and the equity of your 1st home to put the down payment for your 2nd home.
As you move into the second home because you can afford the mortgage, you then can rent your first home. Keep in mind that you don't have to own 100% of that home either. As long as you have the majority of the ownership, you can rent that property and then somebody else is paying your mortgage on the first property while you are living in the second home. Hopefully, it's moving up, in terms of the type of home and the neighborhood that you want to live in as well.
I was looking through some stats on homeownership and only 65% of Americans and speaking of the UK, 63% of the population owns a home when you contrast that to other nations. I'm not necessarily saying it's too low because you could look at North Korea where it’s zero but that's a heartless example. You could look at Japan at 61% or Germany at 51%.
On the other spectrum and this is interesting, India has 86.6% homeownership, although this is out-of-date data. I have heard some people lie about homeownership to avoid rental tax. China has 89% and a lot of countries you wouldn't expect homeownership to be high. In Romania, it’s 96% allegedly. Russia has 87%. Any global trends you're seeing with regards to homeownership?
A lot of those countries have that immigrant mentality, if you may, which is for savings. They often talk about you should only spend as much as you own and not overstretch yourself. To that extent, that creates that discipline of savings in those countries. There are two more trends here. I can talk about my experience in India. A lot of children end up living with their parents, even when they are adults. Unlike the US, the UK or developed nations, once they go to college at eighteen, they mostly are out of the house and then start paying for themselves, which is great in its own stuff.
In India, a lot of the time adult children are living with their parents late into their twenties up until they get married. What's happening then is the 5, 10 years you were working but living at home with your parents, you're essentially saving money because you are not paying, in dollar terms, thousands of dollars in rent every month. That creates a significant amount of savings. When you're looking to buy a home, it's easy to do that. That's one aspect that happened in places like India.
It's a very American mentality not to do that. It's an American or Western mentality to leave the home as soon as you can. I come from an Indian family as well. Nearly every one of the older generations lived with their parents or have a marriage and one of the children would move to the in-law’s home. It's the way things are done.
It's bizarre and controversial. I had to fight quite hard to gain the freedom and independence to go get my place as a rental. It's a challenge, especially for immigrants, who are first born, maybe in the country where they're trying to wrestle with the Eastern tradition of staying with your parents and family versus going out being free and renting.
Germany, US and UK’s homeownership rate is lower than in some of the other places. Access to credit is relatively easy. It's cheaper for people to live on their own because even if all their money is going towards rent, they have access to credit cards, loans and other things to supplement that lifestyle. The countries that have the most advanced capital markets and mortgage debt markets have a lower homeownership rate compared to India, China, Romania and Russia, which don't have the most advanced mortgage and capital markets. The forced discipline and the early savings contribute to a higher homeownership rate. They've had multiple aspects here.
Why do you advocate for people to tap equity from their homes? Your whole company is built around this thesis. Maybe we can talk through some of the reasons why people would want to tap into the equity that is built in their homes.
Before I jump into specifically why people tap into the equity, I'll take a step back and say, no one does. We started as a company to say we want to build a modern approach to housing finance. Housing finance has traditionally been a debt-based approach in the US. We want to bring a modern approach to that because debt works but there are times when you need more options than that.
Housing finance has traditionally been a debt-based approach in the US.
We have two unique financial products. We have one that helps people buy homes through a partnership-based model. We then have one which helps existing homeowners pull the equity out. In both cases, what Noah can do is to say that the home buyer and the homeowner needs liquidity. They need cash at a point in time. We provide them with cash and don't charge them any interest or monthly payments.
Think about it as an interest-free payment-free loan, essentially, even though it's not debt. In exchange, we share in a portion of the future appreciation of the house. If the value of the house goes up over time, Noah benefits from that appreciation. If the value of the home goes down, we also take the downside risk with consumers.
It's almost like you're buying a share of their home in return to give them cash. They don't have to sell the home outright or go through a traditional refinancing process. They don't have to pay it back. They give up a future profit in the property.
That's the way we think about it. That's the analogy I gave where Apple can issue some shares, get some cash and use it to generate a return for themselves. Our homeowner partners can do the same thing. They can get access to their home equity through Noah and don't have to worry about making a payment on it every month. In exchange, they are giving up a small portion of the future appreciation of the house, essentially.
Why are people doing this? Why are they giving up precious equity in the home that they work so hard to build? I know this is not the case or at least if it is the case, it's not the majority use case, it’s the minority use case. As a last resort of financing and they're in trouble, they've got other debts to pay or it's a last resort situation, that's what comes to mind for a lot of people when they hear something like tap into your precious home equity. Maybe you can shed light on that. What the more generic use cases are?
I talk about the home equity access product that we have. This is helping people who tap into equity. A classic case says you were an existing homeowner. You bought your home for $500,000 years ago and had a mortgage on that house. Fast forward, the house is worth $1 million. You've seen tremendous appreciation and your mortgage is only $300,000. You have $700,000 of equity in your home. The reality is back in the days, you could walk into a big bank and get a home equity loan easily or a HELOC. Most of the big banks have pulled back from the HELOC market and no longer make those univariable rate loans essentially.
They're very hard to qualify for too. You need to have excellent credit.
It's essentially a black box. You have to have a 740 plus FICO score and have a very low debt-to-income, which means they don't want life to happen to you. Once you buy a home and you have a family, you have rising expenses. What ends up happening is that this homeowner is what we know called being asset rich and cash poor.
They are asset rich because they have $700,000 on equity. They are cash poor because even if they make $100,000, $150,000 of household income between husband and wife and two children, all that money goes away. They have a mortgage, student loans, kids’ education, so on and so forth. This is the profile of somebody who is a part of a growing family who comes to Noah and says, “I would like $100,000 because I'm thinking of doing some home improvement work. I'm a business owner so I want to invest in my small business.”
They can't get a home renovation loan without increasing their monthly payment. They already are maxed out on credit cards or something else so they are looking at Noah and saying, “This is a great way. I get to tap into my equity. I don't have to make any payments to Noah for the next 5 or 10 years easily.” If the house appreciates, Noah takes a minority stake, the majority of the appreciation still stays with the homeowners essentially.
That is why people love working with us. They don't view us as a partner of last resort. In many cases, we have clients who have FICO scores of 720, 780 and 820. They like the fact that there is no payment with Noah. It's more cashflow. At the end of the day, we drive successful financial outcomes for consumers by improving their cashflow situation, which is the number one thing that they want to optimize for.
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About Zain Jaffer:
Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at the age of 14 and later moved to the US as an immigrant to found Vungle, after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780m.
His achievements have garnered international recognition and acclaim; he is the recipient of prestigious awards such as "Forbes 30 Under 30", "Inc. Magazine's 35 Under 35," and the "SF Business Times Tech & Innovation Award." He is regularly featured in major business & tech publications such as The Wall Street Journal, VentureBeat, and TechCrunch.
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