At first glance it might seem too good to be true, a cosy starter condo near Toronto’s Liberty Village for less than $20,000. A chance to “get off the rental treadmill,” according to a recent real estate listing on Realtor.ca.
But there’s a big catch: you’re only buying a tiny part of this tiny home, 2.5 per cent, to be exact.
It’s called fractional or attainable ownership, and though experts warn there are risks, it’s being touted as one way for aspiring homeowners to get a foothold on the property ladder. It could even alleviate some of the distress in the current condo market by offering an alternative for those struggling with high interest rates.
“If you look at the number of Canadians that simply can’t do it the regular way now, it’s in the hundreds of thousands, it’s a massive problem, unless you have the bank of mom and dad,” said Rob Richards, founder and CEO of alternative ownership startup Key Living.
Many people are simply struggling to save a down payment. Others, such as newcomers to Canada or the self-employed, can have difficulty qualifying for a mortgage.
Key Living is one of a handful of companies that facilitate this kind of home-ownership arrangement. It owns not just condos but a variety of property types, acts as a digital marketplace for independently owned listings on its website, and kicks in money toward equity from an impact fund.
The 15 Stafford St. E. unit, which is no longer listed on Realtor.ca but is still advertised on Key’s website, is owned by a corporation, which would retain ownership of the other 97.5 per cent.
Under Key’s three-year plan, you’d pay about $16,300 upfront to the owner, and monthly payments of $2,488. Part of the monthly amount would go toward rent, but part of it would be an “equity payment” through a legal contract, Richards said. In this example, just $50 a month would go toward equity, the rest toward rent and things like insurance and condo fees, but you can choose to contribute more.
The idea is that you would hopefully, eventually, purchase the property outright from the owner, using the equity acquired during the arrangement to secure a mortgage with a bank or other lender. You can always choose to put in more to get there sooner.
For Key’s three-year program, the end purchase price is calculated based on third-party real estate data such as the home price index, and on the assumption of a five per cent yearly price increase under the five-year program.
Key kicks in money for equity — $450 to $600 for every $1,000 of the initial down payment and equity deposits — Richards said, because its mission is to help people buy homes. The benefit for the owners, he added, is that they get a resident who takes great care of the property because of their stake in it.
Plus if someone loses their job, for example, the owner could deduct the rent from the built-up equity for a couple of months. In the worst-case scenario a resident could “leave gracefully with what they’ve got left from their equity account,” Richards said, which would include the upfront payment.
At the end of the term the arrangement can be extended, Richards said, but under the three-year program there’s a “reset” to market rent and monthly payments would likely increase.
Most of its listings are in the GTA, but Key is hoping to expand, Richards added, especially as the condo market struggles. Due to rising interest rates, condos such as the not quite 700-square-foot one-bedroom Stafford Street unit have become less appealing for investors to purchase or hold on to.
The Bank of Canada’s key interest rate is three per cent after recent cuts, but is still much higher than the historic lows during the pandemic. About 1.2 million mortgages are up for renewal this year, according to a recent Royal LePage report, and 85 per cent were locked in when rates were at or below one per cent.
Fractional ownership is “popular in markets that are extremely unaffordable,” said Avis Devine, an associate professor of real estate finance and sustainability at the York Schulich School of Business. Despite the condo market softening somewhat, the average price in the GTA remains almost $680,000, out of reach for many, according to the latest numbers from the Toronto Regional Real Estate Board.
But it’s important to understand the risks with this kind of ownership, Devine added. When investing in a Real Estate Investment Trust (REIT), a company that owns or finances real estate, risk is spread out across multiple buildings. With fractional ownership it’s just one unit.
Jack Favilukis, an associate professor of finance with UBC’s Sauder School of Business, said in an email that while “fractional home investing is probably a good idea for some people,” from an investment standpoint, like Devine, he sees better products available.
Richards said the approach exposes fractional owners to less risk than a traditional mortgage, and they would only be on the hook for minor repairs. The big difference between something like a REIT and this model, he said, is that you get to live in the unit.
“It’s about financial inclusion for so many people who are left off the property ladder as a means to build wealth, and that’s just wrong, that’s not the Canadian way. We’ve got to fix it.”
