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Will a New Real Estate Asset Class Help Solve America’s Impending Retirement Crisis?

Think back to the world after WWII. America had just won a war, it was the center of the manufacturing world and cities were being built and connected by a huge spike in infrastructure spending. The average family was blessed with gainful employment, low cost of living, and a host of newly affordable technologies like microwaves and refrigerators that added up to a comfortable way of life. Many households were able to sustain themselves on one income and the promise of company pensions and social security gave a sense of assurance that led many to have large families.

But the promise of the future didn’t pan out as many had thought. Children born in this baby booming era had family units started needing two incomes to maintain their standard of living as America had to compete with other hungrier nations in an increasingly globalized world economy.

investment in infrastructureFast forward to today. Advances in medicine are helping people live longer and birthrates have never recovered. All of this adds up to mean that, for the first time in human history, there are more people over the age of 65 than under the age of five. This top heavy distribution of the population is putting a strain on the systems that were set in place to help seniors afford a comfortable lifestyle in retirement. A recent Harvard Business Review article paints this gloomy picture:

“[…] we predict the U.S. will soon be facing rates of elder poverty unseen since the Great Depression; in fact, one study shows that more than one in three retiring Americans will find themselves in or near poverty in the next 10 years. This wave of older poor Americans will strain our social safety net programs and budgets as the country copes with providing low-income elder shelter, food, and health care.

This will likely not just have an impact on state and federal governments; it could also tear at the social fabric of America in fundamental and destructive ways. It’s bad enough that incomes have stagnated for all but the richest Americans; what happens when an entire generation, many of whose members have worked hard all their lives, suddenly have little to show for it?”

birth ratesMany seniors are “cash poor,” it is true, but a lot of them happen to be “house rich.” The bygone ideals of owning a house and paying off debt has left many of them with lots of equity in their homes, by some estimates over six trillion dollars worth. While not having a mortgage gives many seniors peace of mind, historically low bond yields and social security shortfalls have left them without enough fixed income to support the rising cost of living.

Finding a way for seniors to tap the equity in their homes is not a new idea. In the 60’s a novel approach to annuities was designed that would pay out the equity in someone’s home until they die and thus the reverse mortgage was born. Reverse mortgages put a senior lien on a home and are paid in full by the heirs or by a sale. The terms of the arrangement generally don’t allow owners to move and rent their house if they need to relocate. This didn’t sit well with many senior advocates and a number of seniors and their heirs have filed class action suits against some reverse mortgage companies.

As reverse mortgages are starting to become less favorable because of their seemingly predatory nature, another solution emerges in the form of life estates. Life estates are the ownership rights to a house for the duration of their life. Investors can purchase a house from a senior but grant them a life estate. “In Europe we have been doing this for hundreds of years,” says Fabrizio Tiso, cofounder of retirement solution Irene. He is Italian and he started his company after he saw an obvious lack of options for seniors while he worked at Boston Consulting Group. “I kept thinking that the way it is in Europe, where people invest in each property individually is flawed,” Tiso said, “it would be much less risky to package them up into a larger fund.”

This is absolutely true. Estimating a lifespan for an investment you create a risk that the person will live longer than the calculation. This most famously happened in France with a woman named Jeanne Calment. She sold her home’s inherticance with a reservation of the life estate at 90 for monthly payments until her death. She then went on to become the oldest living person in the world at 120, outliving the person who entered into the deal with her.

So, Fabrizio’s approach with Irene is a little different. Their investors pool money to purchase houses from seniors. They pay out a lump sum upon the purchase and a monthly payment for the rest of their lives. The fund pays for the taxes, insurance and upkeep of the homes in order to give the seniors a guaranteed, steady income. “We want to make these peoples’ lives easier so we don’t want them to have to worry about house expenses,” he said.

Obviously, it will take a lot to help the millions of seniors that can’t afford retirement. One report showed that “today, about 12.4 percent of the population aged 65 or older is still in the workforce, up from 3 percent in 2000.” This will require more options for retirees to be able to generate income from their assets. Today, thanks to companies like Irene, they have one more.

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