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If there is one term that encompasses the tech revolution we have seen in the past three decades, it is disruption. Every tech company claims to be disrupting their industry, or every industry. Much of the push to disrupt comes from the venture capitalists that give these companies their life blood of funding. In order to be worth the risk of investing in a speculative technology investors want to know that the payoff will be large and the largest payoff possible comes with disruption.
It is this same idea of disruption that led one of the world’s most successful venture capitalists, Marc Andreesen, to fund one of the world’s most infamous founders, WeWork’s Adam Nemann. Neumann’s new company, Flow, is a residential real estate play that rents luxury apartments with community services and allows renters to use a percentage of their rent towards the equity of their homes.
Little is known about how the company will achieve this but Neumann has already purchased a number of high-end apartment complexes to roll out the concept. Flow could certainly become one of the biggest names in the apartment industry but the bigger question is whether or not the concept will disrupt the rental property industry, or if it needs disrupting at all.
Homeownership has been one of the main ways that Americans have been able to accumulate wealth. Right now homeownership is a bit low historically, although it is still much higher than it was after the financial crisis of 2008. Finding more ways for people to become homeowners certainly could help many achieve financial freedom. But what Flow seems set to do, allow people to buy equity with their rental payments, is not the same as financial freedom.
Buying a home in the U.S. almost always means getting a mortgage. American mortgages are a unique financial institution that allows people to lock-in a borrowing rate for 30 years. Few other countries in the world grant this ability to borrow against an asset for such a long period of time. What it seems like Flow plans to do, sell equity of their properties to renters, is not the same as giving them the ability to secure cheap, long-term debt.
What buying into an equity program like Flow actually does is grant a renter’s ability to borrow money to the company itself. Now Flow will be the ones getting the loans, likely with worse terms than the renter would get by themselves. What renters will really be buying is equity in the company. This asset could quickly turn into a liability if the company doesn’t perform well (or acts fraudulently as many accused Neumann of doing with WeWork).
What is keeping most Americans from owning a home is not the lack of opportunities but the general unaffordability of property in most cities. If Newman and Andreesen really wanted to disrupt the real estate industry, what they should be building are more affordable places to live. Another luxury apartment company, no matter how novel their concept, will do little to nothing to change the situation of most renters. I do admire both entrepreneurs for taking on such a pressing problem, but maybe some industries don’t need disruption, they need more positive market forces.
Researching this article I found a great interactive map that shows the changes in the amount of mortgages countrywide. It is one of the best visualizations of the recovery from the 2008 financial crisis I have seen to date.