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. This Startup Wants To Sell, This Startup Wants To Sell