This Startup Wants To Sell You A Slice of A Rental Home (#GotBitcoin?)
As more investors turn landlord, Roofstock aims to make housing bets similar to buying stocks and bonds. This Startup Wants To Sell You A Slice of A Rental Home (#GotBitcoin?)
Vacationers have long enjoyed shared ownership of homes. Now, a California startup is hoping investors will buy portions of houses as well.
Roofstock, which operates a website where investors buy and sell occupied rental properties without disturbing tenants, has launched a marketplace where investors can buy stakes as low as 10% in single-family rental homes.
The company’s executives say they hope to make housing investments more like buying stocks and bonds at a time when investors are on a frenzied house hunt.
Since last decade’s housing crash, investors have sought new ways to get a piece of the $26 trillion market for U.S. residential real estate while also wagering on demographic trends that point to a lasting suburban rental class.
Big investors like Blackstone Group LP and Barry Sternlicht gobbled up foreclosed homes by the thousand after the crash and created national rental-home companies. Droves of smaller investors have followed the financiers into landlording. They are being aided by service providers that emerged to cater to big investors, from companies that cut far-flung lawns to those that buy rental-home loans and bundle them into securities that are sold on Wall Street.
Last year, 11.3% of U.S. home purchases were made by investors, the highest portion on record, according to CoreLogic Inc. This year, shares of big rental firms Invitation Homes Inc. and American Homes 4 Rent have outperformed the broader stock market, surging 36% and 27%, respectively.
Roofstock Chief Executive Gary Beasley previously ran Mr. Sternlicht’s publicly traded rental company, which is now part of Invitation. He said his new venture aims for investors who want more direct exposure to rising rents and home-price appreciation than they might get buying single-family home stocks, but who aren’t interested in becoming landlords themselves.
“It’s kind of like how you can go to a store and buy ingredients and cook your own dinner and clean up afterward, or you can just go to a restaurant and eat,” he said. “This is eating at the restaurant.”
The idea: Buying stakes in a number of individual homes lets investors pinpoint their investments without concentrating bets on a single property, Mr. Beasley said. That is a contrast to buying shares in outfits like Invitation, which owns more than 80,000 homes across the country.
Roofstock, which holds a 10% stake in each property, has so far offered shares in about 50 houses. They are located around Indianapolis, Atlanta, Houston and Dallas, all popular with Wall Street’s rental players for their job growth and relatively inexpensive homes. The properties range from a $96,000 split-level east of Atlanta that is walking distance from two schools to a $245,000, five-bedroom brick ranch in a sprawling subdivision outside Dallas. A 10% share in the former costs $5,040; $12,500 in the latter.
The risks, of course, are the same as owning rental properties outright: pricey repairs pop up, tenants turn out to be deadbeats, a big employer bolts town, the neighborhood falls out of favor. Plus, there are management expenses paid to Roofstock’s property-management arm, which finds tenants, collects rent and maintains the properties.
If all goes well, though, Roofstock says the shares can return between 5% and 7% annually.
One of the homes Roofstock is selling in pieces is a 17-year-old three-bedroom, two bathroom house in Temple, Ga., that Roofstock spent $145,000 purchasing and renovating. The company financed half with a loan, leaving $72,500 in equity, and set aside 2% of the home’s value, or $2,900, in a reserve account for repairs. Dividing the resulting $74,500 into 10 shares makes them $7,540 apiece.
Over the course of a year, the property’s $1,200 monthly rent—minus a 5% cushion for vacancy and about $9,500 in estimated annual costs like property taxes, loan payments and management expenses—leaves $4,157 in annual profits, or about $416 per share, according to Roofstock.
That would generate an annual yield of about 5.5%. But two months of missed rent could cut that return roughly in half.
And what about investors who want to sell their shares? That is more complicated. Investors who purchase shares in Roofstock homes are prevented from selling for six months. After that lockup expires, investors are free to sell their shares for whatever price they can fetch on Roofstock’s platform. If they don’t find a buyer for a price they like, Roofstock will buy back shares at a 7.5% discount to market value.
Distributions are paid quarterly. The shares currently are available only to accredited investors, generally those earning more than $200,000 a year or with a net worth of more than $1 million excluding their primary residence. Mr. Beasley said Roofstock hopes to open the program to all investors by next year.
Point, Click, Own: Firms Transform How to Buy Investment Homes
Real estate startups exploit new technologies and data on house rentals developed after the housing bust.
Buying a home as an investment property has long been too complex or daunting a process for all but the wealthy. Thanks to a group of real estate startups, that may be changing.
The companies enable individuals to assemble a portfolio of rental homes throughout the country relatively hassle-free. Without ever visiting the properties, investors can buy and manage homes with a few clicks of a mouse or taps on the phone.
Roofstock, an Oakland, Calif.-based firm founded in 2015, offers an online marketplace where buyers and sellers trade about 500 rental homes a month in cities such as Atlanta, Indianapolis and Houston. The homes, which sell for prices ranging from $50,000 to $400,000, typically come with tenants in place.
REI Nation LLC and JWB Real Estate Capital are getting into what is known as the turnkey business in regional markets. They buy, upgrade and lease houses, then sell them to investors.
Other firms are poised to offer investors ways to build their residential portfolios sliver by sliver. Compound, a startup based in New York, is launching an app this month that will enable investors to buy small stakes in condominiums in cities such as New York, Miami, Nashville and Austin. The minimum investment: $50.
Compound empowers even investors without much cash “to participate in the growth of cities where they live and work but can’t afford to buy,” said Janine Yorio, the firm’s co-founder and chief executive.
The proliferation of the businesses reflects how small investors are searching for fresh alternatives when ultralow interest rates have made bondholdings less attractive and a record stock-market run strikes many as vulnerable to a pullback.
Firms like REI and JWB say that investors are getting annual returns after fees and expenses of 7% to 9%. That compares to the yield on the benchmark 10-year U.S. Treasury note, which has been stuck below 2% for months. Home buyers also keep any profit from selling the properties.
“Investors are looking under every rock for ways to have additional cash flow,” said Paul Pagnato, founder and chief executive of PagnatoKarp Partners, LLC, a Reston, Va., firm that advises families on investments. Real estate is particularly conducive to that, he said.
Homebuying services are also taking advantage of new technologies and data on house rentals developed after the housing bust. Firms like Blackstone Group Inc. and Starwood Capital Group bought tens of thousands of houses at discounted prices and converted them into rentals. Along the way, they figured out how to use the latest mobile and cloud-computing technology to manage and upgrade homes on a large scale.
Many of the entrepreneurs behind the new firms learned the business after working at the larger operations. Roofstock founder Gary Beasley was one of the players behind Starwood Waypoint Residential Trust, which went public in 2014.
“We didn’t know when we first started buying homes whether we could do it profitably on any scale,” he said.
Roofstock, whose financial backers include Bain Capital Ventures, recently started a new business which enables investors to buy stakes as low as 10% in single family houses. Roofstock retains at least a 10% stake in each house. The rest of the equity is divided up among investors.
Each startup operates a bit differently, but many follow a similar formula. In a typical deal at JWB, the firm buys a house in the Jacksonville, Fla., region and upgrades it for a total cost of, say, $130,000. JWB also finds a tenant for it paying about $1,175 a month. Then it sells the tenanted house for $150,000. Investors typically pay with about 20% in cash and borrow the rest.
Owners can manage the house themselves or hire a local firm. Most use JWB’s management arm. Rent increases and an eventual sale of the house can boost returns. But investors shouldn’t expect to make a quick buck by flipping the house soon after they buy it, cautioned Alex Sifakis, JWB’s president.
“This isn’t a get rich quick scheme,” he said. “You’re buying for market value. We tell clients they should hold for a minimum of five years or you shouldn’t buy it.”
Even holding it entails risks. Investors who buy houses sight-unseen can be hurt by an unforeseen maintenance bill or by the vagaries of the rental market. They might even have to reach into their own pockets if they have borrowed to buy the house, and home prices tend to flatten or fall during tough economic times.
“You’re getting equity like returns so you need to take some risk,” Mr. Beasley said.
Still, the appeal of a steady return from rental properties is attracting a crowd, especially as rents rise throughout the U.S.
REI got its start in Memphis, Tenn., developing rental housing for Federal Express pilots who wanted to invest in single-family homes without the headaches of management, said Chris Clothier, a partner in the family-owned firm.
Last year, REI sold about 1,000 homes in eight cities. “There are investors that want to swing the hammers and slap the paint themselves,” Mr. Clothier said. “But there are way more investors who want to be passive.”
Billy Maloney, a 37-year-old graphic designer in Los Angeles, said he had bought and sold investment properties through REI to grow his retirement savings. He owns a home in Memphis, one in Jacksonville and has bought and sold two in Cleveland.
“ I’m…thinking like an investor where your money goes further out of state,” he said.
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