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What if your landlord provided a pension and healthcare insurance? The REIT Hybrid solution.

Young adults have a difficult decision to make in deciding whether to purchase a home or rent in today's market.  Hope is fading for a more robust housing market in 2011 with each month of falling median prices.  Maybe it's time to take a closer look at this trend and see how the trajectory can be changed.  With so many U.S. banks holding millions of unsold and foreclosed homes, all indications point to continued weakness in the housing market.  Most analysis focuses on the number of months of inventory of unsold homes and holds the assumption that the average American will still want to own a home.  

What if home ownership is a dying trend?  What if young people today don't want a home as badly as their parents?  It is conceivable given the risks associated with owning a home and the lifetime burden of debt that comes with it.  Young people must have doubts about the long held belief that home ownership equals security.  It should surprise no one if this is the case because many home buyers, or would be home buyers, are still shell shocked by the precarious drop in prices and the continued weakness in the residential housing market.  It is risky to purchase something that will likely go down in price, especially if it was purchased with borrowed money.  Perhaps the solution to this problem isn't to stimulate more demand for single family homes and apartments but to shift the supply over to another market altogether where demand will be much greater.

We all need a place to live but we are left with only two real choices; owning or renting.  The merits of home ownership have always been to increase net worth and to enjoy some security.  Renting, on the other hand, provides an individual with the freedom to move from one place to another without the hassle of selling or taking on debt.  When we gain access to credit, we weigh the merits of our two choices before deciding what life style suits us.  Time shares don't do it because you can't live in the same place year round and you still have to borrow money.  

What we need is a third choice, a choice that currently doesn't exist but one whose time has come.  What if the third option enabled us to have the freedom to move from one place to another as our needs change but we could still build equity?  A third hybrid option that provides the benefits of both home ownership and renting with very few of the downside factors.  Now that would be cool.

Anyway, housing and banks going bust isn't the only challenge facing the U.S. economy.  Federal and state budgets are struggling to pay for entitlement programs like Medicare and social security and government employee pensions are creating a squeeze on budgets that intensifies each year.  It is only a matter of time before governments will need to renege on these entitlements.  Employers can't pick up the costs for pensions and healthcare if they want to remain competitive so we need a third option here too.  Average people need access to affordable healthcare insurance and the opportunity to save money.  Forced savings plans are well established with employers and government alike.  Every paycheque has various deductions and employees accept the reduction in income.  

What if the third option for housing and the third option for pensions/healthcare  were one solution?  Consider how quickly people adapt to mandatory salary deductions for a pension or for healthcare insurance.  Could it work in reverse?  Rather than money being deducted from a person's salary, the payment could be attached to another obligatory payment.  An example would be adding your property taxes to your mortgage payment.  We quickly get used to the payment and accept the two payments as essentially one.  Often people will quote their mortgage payment including property taxes, having forgotten they are two separate payments.  If this concept works for mortgage payments and insurance deductions from salary, it can work for rent payments as well.  The third option will need to solve the housing crisis, banking crisis, healthcare crisis and pension crisis.  A REIT Hybrid might be the ticket.

A REIT Hybrid is a concept that would enable average people to build equity without taking on any debt and they could freely move from city to city without the hassle of selling a home.  In this solution, U.S. banks that are holding thousands of foreclosed houses and apartments would transfer ownership of these properties into a publicly traded corporation (REIT).  The value of these foreclosed homes would not be based on the single family housing market because all the homes in a REIT Hybrid will be rented and owned by the corporation.  The value will be based on cash flow from rent so in many cases, the market value of the property will be higher.  This means banks will recoup higher prices through the shares sold in the REIT Hybrid corporation.  The bank can keep some of the shares or sell all of them in an IPO.  This REIT corporation would provide tenants with access to pension and healthcare benefits in a manner similar to how employers provides access to these benefits for their employees. 

Let's take this concept further with an example.  A large bank in the U.S. sells all of its' foreclosed houses and apartments into a newly formed REIT Hybrid corporation called the 'American Housing Corporation' or 'AHC' for short.  The bank establishes the maintenance and income guarantee reserves when the IPO is established and many of the former home owners remain in the AHC owned property and begin paying rent.  AHC would be a very large entity with properties all over the United States and providing homes to thousands of tenants paying rent to the corporation.  These tenants would not be typical renters because AHC provides its' tenants with the opportunity to both save money and gain access to healthcare benefits.  This would create a whole new market as individuals weigh the merits of home ownership, renting or REIT Hybrid living.

So how does it work?  First, every tenant living in an AHC property would need to sign a lease and there would be incentives for tenants to sign long term leases.  If a tenant signs a one year lease, 4% of their rent goes into an account held by AHC in trust for the tenant.  If the tenant signs a fifteen year lease, 7% of the rent goes to savings and a twenty-five year lease would net the tenant 9% savings.  Regardless of how long the lease signed, the rent is the same in all cases so the tenant is rewarded through contributions to their savings account rather than a reduction in rent.  For example, an apartment that rents for $1000 per month would reward the one year tenant $40 per month and the twenty five year tenant $90 per month.  Tenants would have limited access to these funds in a manner similar to employer savings and pension plans, so anyone living in an AHC property will inevitably accumulate savings.

A second benefit of a REIT Hybrid is that the tenants can also purchase healthcare insurance through their landlord.  AHC could negotiate excellent insurance rates on behalf of its' thousands of tenants so the premiums would be lower than any tenant could get as a single insured.  By purchasing healthcare insurance through their landlord, ordinary people gain access to cheaper healthcare insurance by simply moving into an AHC property.  The premium is added to the rent payment and separate from the savings account.  In later years when the tenant is reaching the end of their lease or after accumulating significant savings, the tenant could choose to offset their premiums using their savings account.  A third benefit of a REIT Hybrid is that tenants can move from an apartment to a house and back to an apartment without having to break their lease.  They can also move from city to city without breaking their lease and their savings and healthcare benefits will remain in tact.  Tenants can earn credits in their AHC savings account for improvements they make to the property and earn sweat equity like home owners.  Conversely, AHC has access to tenant savings if damage is done to the property so the corporation is protected as well.

Reserve funds for maintenance and dividend income guarantees for the investor would ensure the shareholder is protected as well.  Investors would know by the number and length of leases signed whether AHC is a good investment.  If tenants have thousands of dollars in their savings account and have signed a very long term lease, they are unlikely to break their lease and risk losing some of their savings.  Furthermore, if the average person had the choice of moving into a REIT Hybrid property, why would anyone want to own a home?  Just living in one of the properties owned by AHC or another REIT Hybrid corporation give the tenant all the benefits of home ownership because their net worth grows every month and they don't need to borrow any money.  Additionally, these people get access to a savings plan, healthcare benefits and can easily move if they are transferred for work or for family reasons. 

So how would a REIT Hybrid work in the real world?  Freddie Mac and Fannie Mae should take all their foreclosed houses and apartments and convert them into a REIT Hybrid corporation.  After the IPO is issued, Freddie and Fannie will get their money back by selling their shares so the taxpayers get some money back.  Meanwhile, the previous home owners could remain in their home and start paying rent and saving money again without having to move or borrow money ever again.  No credit, no problem could be their mantra.

By providing average people with access to a savings program and healthcare insurance, the federal government can get out of the business of housing and healthcare insurance.  A REIT Hybrid provides social benefits funded by capitalist principles.  Shift the paradigm.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.