Disrupting the real estate investment market seems a needed shake-up these days, what with so many new investors getting into the game after the economic downturn. It was in this fertile soil that Roofstock began with the questions: If there a better way to sell investment properties without lost income or emptying the houses of tenants? How can investment properties trade hands painlessly and quickly?
Thus Roofstock was born, the only online marketplace that allows investors to buy leased single-family homes without interrupting tenant occupancy. Whole ownership or fractional ownership, investors get vetted homes with current cash flow.
The Oakland-based startup knew first-hand exactly how hectic a hot real estate market can be, and how to handle it. In addition to making their homebase in one of the fastest growing and most expensive markets in the U.S., Roofstock founders Gary Beasley and Gregor Watson both have chops worth billions when it comes to real estate investing: Beasley served as co-CEO of Starwood Waypoint Residential Trust and president of ZipRealty, while Watson founded 643 Capital Management, which invested more than $1 billion in homes throughout the nation.
I spoke with Beasley to learn more about Roofstock, and what he thinks about the cyclical nature of the real estate market.
Tell me about your company. How did it get started?
Roofstock got started in May of 2015. I left Starwood Waypoint to found Roofstock with my Co-founder Gregor Watson. The genesis of the business was to address pain points for investors in the real estate space. Having experienced as a large owner/operator the pain of trying to sell properties efficiently, and also finding that the only way to really acquire properties was to buy them vacant off the MLS or from auction, it just seemed to make so much sense to create a marketplace where these homes could be bought and sold in a cash-flowing state with tenants in place. The properties have already been renovated and they're occupied.
We had hundreds of people running around the country acquiring, renovating, and leasing homes to end up with a finished product, which was a leased home, and it seemed crazy to me that when we wanted to start selling hundreds of these homes, we were told by the brokerage community to get them vacant so they could sell them. It made no sense. We'd done all the work.
So, Gregor and I created this marketplace where instead of paying 10% to 12% all-in to sell these these properties, which is what it cost you between the brokerage commission, the lost rent, and the CAPEX getting something for a retail sale, we'll sell it on our site for 2.5% all-in. That's the entire seller cost.
How do you attract buyers?
We attract investors directly to our website pretty efficiently. We have a lot of institutional as well as retail buyers. The idea is to take homes, initially from large owners like my old company and some of the other largest REITs and private funds, and help them selectively sell homes really efficiently. We introduce the asset class to new investors and provide a real plug-and-play marketplace and investment solution for anyone from those who might be looking to buy their first investment property, all the way up to sophisticated investors who already know what they want, and they're just looking for the inventory that meets their investment criteria. They could find that too, and then everything in between.
How is this new or different?
In many ways. First of all, there is no go-to place on the Internet right now, or really anywhere, to buy leased properties that are already cash flowing, that have all the diligence done up front so you can buy them very much like you're buying a book. It's an e-commerce environment. You can go on and search for properties by various criteria, all of which have tenants in them already. Typically, when you're looking to buy a property today - an investment property - almost exclusively the homes that you see are vacant, and then you don't really know what they're going to rent for. You have to go through and do a lot of the work.
This is the first time we've sort of turned that process on its head. We're buying the properties cash-flowing, providing inspection reports, 3D maps, title work, financial pro-formas, and tenant vetting. All of that is done up front in our diligence room. That can't be found anywhere else.
This is a large investment you're expecting people to make over the Internet. How are you overcoming that trust factor?
Having bought thousands of homes myself through my old companies -- and the same with my partner, Gregor -- we asked ourselves, what did we really need to do to solve that last mile issue? Providing these 3D maps was really, really important so you could do a virtual walkthrough of these homes from anywhere in the world, vacant, so even though they're occupied today and they have furniture in them you have an exact, animated, replica tour of the home. You can see what it looks like without the furnishings in it.
The second important provision was to have a thorough inspection report that's done by a third party inspector that's there on the site for you to review. Everything else you could sort of do remotely. We needed to have transparent information on the site, vetting the tenant as well as local property managers. Then moreover, we have a 30-day money back guarantee. If you buy a home off of Roofstock and for whatever reason you're not happy, we'll resell it for you for free. And if we have to sell if for less to find a clearing price, we'll cover the difference.
How did you fund the initial business? Is it all self-funded?
Yeah, we self-funded it at the very beginning, but very quickly we raised a Series A. We started the business in April, and then we funded a Series A in mid-May of 2015 from Khosla Ventures.
You're now creating a marketplace dealing with market transactions with an asset class that tends to be historically cyclical. How do you see that playing out for you as a fintech startup?
Well, there are roughly a million transactions a year -- investor transactions in good times and bad -- so it's just a matter of pricing. Our job is to serve up inventory and then let investors make decisions on what makes sense for them. It's not as if we're necessarily taking principal risk as a marketplace, but what we are doing is availing people to research both past trends and forecasts from experts looking at job growth forecasts, recent pricing trends, and all those types of things. Our goal over time is just to keep getting better and better about putting lots of information out there for people to consume, and then people can make their own decisions about if it's the right point in the cycle for them to either be buyers or sellers. Interestingly, there's always people on both sides of these trades, and that's what we're looking to do.
The nice thing about this asset class -- which is one of the things that drew me to it -- is rents tend to be pretty sticky downward, in that even when prices dropped dramatically in the late 2000s, rents didn't really drop much. In fact, in some markets, rents went up because, if you remember, lots of people were losing their homes then. We went from 69% home ownership to 63% or so right now, so then you had millions of new renter households so that put pressure on rents. What's interesting is while you do have exposure to prices of these homes going up and down with housing prices, there's a certain stability to the fact that they're leased. No matter what happens to the value of that home, you're getting your rent. Even if the value of the home were to drop 20%, your rent is unlikely to drop meaningfully, if at all, because that's locked in. So, unless you're forced to sell something in a down part of the cycle, it doesn't affect you as much as if, say, you were in some place or some investment where you needed liquidity at a certain unattractive point in the cycle.
Not that this asset class is immune to cycles, as no investment is, but I think if you're prudent about leverage and have the right investment horizon, you can ride out the cycles. Again, you have your renter in there to cover your debt service and your operating expenses, and hopefully provide a nice return through good times and bad.
You are offering what could for many people be fairly substantial investments with a potentially bad outcome for them, if a tenant stop paying. There could be significant losses, and that could potentially lead to a lot of consumer pushback. What do you say about that and how do you plan to deal with that?
Any investment has risk, of course. What we try to do is minimize the risk and increase transparency to the degree possible here.
First, we do a background work on the tenants. We check their payment history. We make sure they're current on their rent. We make sure that they've been through an appropriate background check, which all quality property managers do. We make sure that they have an appropriate income-to-rent ratio and that they've put down an appropriate deposit. We attempt to certify the tenant going in, if you will. All the homes on our site, you can see the tenant certification's been done.
We also work with a property management company, so you as an investor can rely that Roofstock is not doing the property management ourselves. We don't do that, but we interview thoroughly all the property managers we recommend off of our site and we hold them accountable for good customer service. One of the primary things that they do for customers is collections and leasing: keeping the properties in good working order and keeping them leased. We also have the collective buying power of the crowd, because you as an individual investor are not out there alone, the only representative with a property management firm. We have ultimately thousands of clients who are using these property managers, and we can make sure they're doing a good job for you, which helps to mitigate the risk.
Also, these homes as an asset class tend to run fairly high occupancy, at around 95%, plus or minus on an annualized basis -- call it 5% vacancy factor. In some places the vacancy factor is maybe 7%, and in other places a little bit less, like the East Bay. As long as you have a home that's in good working order in a decent area, which is all the areas that we're offering homes for sale, your chances of having a long-term vacancy are fairly low.
Where do you see yourself integrating with other parts of the FinTech environment?
On the financing side, we definitely want to offer point-of-sale financing to investors, which we are doing currently. You can go to our site in the financing area, get pre-approved, and apply for financing to LLCs or foreign nationals.
Ultimately, the vision is to have a marketplace on the financing side in a similar way to how we have the marketplace for the homes now. You would have multiple options in how to finance the purchase of these homes, and competition for your business. That's going to be an important feature over time for us, in particular for retail investors, most of whom want financing in some way, shape, or form.
There's also a lot of interesting things going on in insurance today in fintech, and there's ways to integrate there. For example, you could imagine a real-time insurance quote and options on each home so you know when you take that down exactly what your insurance is going to cost.
If you look at all these various elements of the transaction, there are interesting things going on in many of them. Our plan is not necessarily to do all of those things ourselves, but partner with best-in-class partners to really drive down the costs and increase efficiencies throughout the whole transaction and ownership process.
