How home equity investments, income share agreements, and music royalties work, and how they have elements of equity and debt.
Topics covered include:
- How a home equity investment differs from a home mortgage
- What is the cost of home equity investments
- How funding education through income share agreements has changed
- Why artists sell royalties to their work
- How individuals can invest in music royalties
Show Notes
Bond market: Bowie Bonds and the Evolution of the Bond Market—Faster Capital
Episode Sponsors
Delete Me – Use code David20 to get 20% off
Become a Better Investor With Our Investing Checklist
Become a Better Investor With Our Investing Checklist
Master successful investing with our Checklist and get expert weekly insights to help you build your wealth with confidence.
Related Episodes
493: The Housing Affordability Crisis: What Caused It and How to Fix It
349: Forward and Reverse Mortgages: When To Take Them Out and When to Pay Them Off
307: Income Share Agreements—Good for Students or Investors?
Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 494. It’s titled “When to Sell Equity and When to Borrow. The Guide for Homeowners, Students, and Artists.”
After last week’s episode 493 on the affordable housing crisis, I received an email from a PR agency—and I get dozens of emails from PR agencies, but this one I looked at, and it mentioned that homeowners were waiting for interest rates to fall below 6% before they move, and there’s a backlog of people that haven’t moved.
The PR company was representing a company named Unlock, which provides home equity investments, sometimes known as home equity share agreements. Essentially, instead of borrowing money, a homeowner could receive a payment in exchange for the future upside or appreciation in the home, the equity.
Home Equity Share Agreements
This got me thinking over the past week. I wasn’t that familiar with home equity share agreements. But considering other situations where we have to decide “Should we borrow money, or should we give up some equity?” We discussed this five years ago in an episode that I’ll link to in the show notes on income share agreements, where a student could borrow money, take out a loan to pay tuition for some training or college degree, or they could give up some of their future earnings potential, and the payback of that tuition assistance would be based on the future share of income. It’s a way of selling equity in yourself.
Another option that we’ll explore in this episode relates to artists. Artists that have written a song or performed a song, and have a copyright to it, intellectual property—they have the option of selling the upside in that song in terms of future income streams from royalties. It’s like selling equity, but in this case, it’s equity in a future income stream for a copyrighted asset. Let’s go ahead and take a look at those examples, and then we’ll step back and derive some principles for deciding when we should potentially sell equity or when it would be more advantageous to borrow money.
There are a number of companies—they’re new, they’re fintech startups—in the home equity share agreement space. One is Unlock, another is Point. I think Point is interesting, because they recently, last May, packaged up some of these home equity share agreements into securities and sold them on Wall Street. Institutional investors were willing to buy a security that was tied to the home appreciation of residential homes. This was the second securitization that has been done. That’s good news for this brand new market because now there’s a source of capital to fund these home equity share agreements.
Home Equity Share Agreement Examples
I went through a number of examples that I could find, and let’s say you have a house that’s worth half a million dollars—this is an exercise that Unlock did on their site—and you want to borrow 10% of that home value, so it’d be about $50,000.
Now, perhaps you have $200,000 in equity in this home, because you have a $300,000 mortgage, and you just don’t want to go out and take out a home equity line because it’s variable rate debt, and the interest rate is higher than you would like, and you have a 30-year mortgage at 3%, and so you don’t want to do a cash-out refinancing, which basically means you’re getting a brand new mortgage at a higher interest rate, and in the US, mortgage rates are just over 6% right now. So you think about “Okay, I’m going to do a home equity investment with a firm like Unlock.”
As a Money For the Rest of Us Plus member, you are able to listen to the podcast in an ad-free format and have access to the written transcript for each week’s episode. For listeners with hearing or other impairments that would like access to transcripts please send an email to team@moneyfortherestofus.com Learn More About Plus Membership »
