For many, real estate is the most expensive asset they purchase, and they obtain debt to close on a property in the form of a mortgage. On average, over the long term, across the United States, real estate increases in value at about the same rate as inflation, or about 3.9% a year. Up until recently, mortgage interest rates were less than 3%; this meant that even after paying interest on a loan, on average, based on average price appreciation, owners would come out ahead. With interest rates edging higher now and the average appreciation rate of 3.9%, the average person’s interest on their loan may be more than the overall appreciation of the property by the time they sell.*
So what strategy can one use not to overpay as interest rates increase?
I will suggest two possible strategies.

1. Buy a two or three-family home

By purchasing a two or three-family home, you buy yourself a residence and a business as a landlord. You live in one of the units and rent out the others. The idea is that rent from the other units covers your mortgage, insurance, and taxes, so you can live for free and keep all of the price appreciation.
But many people do not want to live in a multi-family home, or there are not any multi-family homes in the neighborhood they want to live in. Or perhaps they want to live in a one-family home out of privacy or other concerns. What options are there for those people?

2. Sell some of your home equity

With rising interest rates and rising home prices, the average person borrows more money and pays more interest. If you have less debt on your home, you will pay less interest. One way to do this is to offer great estate investors some equity in your home and use that money to pay down the mortgage.
One way to sell equity in your home to real estate investors is if your property is or will be held in the name of an LLC, you’d sell membership units of the LLC to investors. Since the LLC owns the home, the limited members in the LLC will have an equity interest in it. You will still have the majority stake in the LLC and remain the managing or general partner with complete control over the LLC and, therefore, the property.
But since the limited partners own part of your equity, you can have less debt and pay less interest.** Note that selling shares of a company to passive real estate investors if offering securities. One way to legally sell these securities to non-accredited investors (people with a net worth of less than $1 million or income of under $200,000) is by offering the shares through a registered Funding Portal. Invown (invown.com) is a platform that offers this service for homeowners.

Why would an investor buy my home equity?

With inflation, money loses its buying power. If inflation is 8%, $100 from last year is now worth $92 in spending power. Purchasing real estate is one potential method to maintain the value of their capital.

Risks for the Investor

All investments contain risk, and investing in private real estate also comes with a risk, including the potential of losing invested capital. In addition, by investing in owner-occupied homes, the investor only gets paid when the home sells or if there is some other equity event such as a refinance. If the homeowner never sells or refinances the property, the investor may not gain access to their returns.

This article is for illustrative purposes only, and it is neither mortgage advice nor investment advice. Please consult a certified financial advisor or accountant for personalized guidance to suit your individual situation.
*According to Redfin, as of 2022, the average homeownership duration has risen to roughly 13 years. If one had a $100,000 mortgage at 6% they would have paid $70,090.98 in interest over that period. A $100,000 home appreciating at 3.9% over the same period would be worth $164,437.97. In other words, at 6% interest rate over the average 13-year hold period, the homeowner would have paid $5,653.01 more in interest than how much the home appreciated. Of course, if interest rates go up beyond 6% the gulf between interest paid and appreciation gets wider.
**Here is a simplified hypothetical example using the following assumptions:
The owner keeps the property for 13 years, then sells
$500,000 purchase price
20% downpayment (mortgage for $400,000)
6% interest rate
3.9% average annual home appreciation
Based on this example, I will present two hypothetical scenarios.

A traditional scenario where the owner makes regular monthly mortgage payments:

• The monthly principal and interest payment is $2,398
• Total interest payments through year 13 would be $280,364
• By the end of year 13, the property would have appreciated by $329,496.12 to $829,469.22
• Mortgage balance at the end of 13 years would be $306,244
• The sale of the property at the end of year 13 would put $523,251.84 into the homeowner’s pocket.

A scenario where owner sells $50,000 worth of equity and uses the funds to pay down the mortgage

• Continuing to pay the mortgage of $2,398.20 monthly
• Total interest payments through year 13 would be $222,044 – $58,320 saving went to pay principal
• By the end of year 13, the property would have appreciated by $329,496.12 to $829,469.22
• The mortgage balance at the end of 13 years would be $197,924.10
• The $50,000 sold to real estate investors would have appreciated by $32,946.92
• The mortgage payoff, plus equity investor payout, at the end of 13 years, would be $280,870
• The sale of the property at the end of year 13 would put $548,626.22 into the homeowner’s pocket

The owner gains $25,374.38 compared to the traditional scenario above.

Note that this is a simplified example for illustrative purposes that would change significantly and maybe less favorable if interest rates go down or if appreciation is higher. Please consult a certified financial advisor or accountant for personalized advice.