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August 18, 2020

August 11, 2020

112. An MLS for Single-Family Investors and How to Buy Fractional Shares of SFRs with Gary Beasley

In this episode, we’re joined by Gary Beasley, Founder and CEO of Roofstock Capital to discuss how Roofstock helps single-family real estate investors buy and sell their properties, and how you can buy fractional shares of single-family rentals via Roofstock One.

Gary has experience in finance and in real estate across all asset classes. He notes that he prefers asset classes with a heavy operational component, such as hospitality or SFRs, because there are some levers you can pull to add additional value.

Roofstock is an investment marketplace for SFR investors. In a simple sense, it’s like an Amazon for houses. Retail investors can go to Roofstock and shop for houses around the country. The idea was to create a high-transparency, low-friction, low-cost, tech-enabled platform where investors could buy homes or shares of homes as easily as any other online transaction. Fundamentally, Roofstock wanted to break down the geographic barriers to investing in real estate.

Why Single-Family Homes?

Gary was investing in SFRs personally, and it turned into an actual business. They raised substantial capital from institutional investors. Gary great a Real Estate Investment Trust (REIT) with several thousand homes. He learned the business this way and continued to build the business for investors as an operator. This evolved into the need for an online marketplace for single-family homes.

“Single-family housing is the largest asset class in the country, it’s about $25T that sits in U.S. houses. The MLS is a pretty good ecosystem for owner-occupants to trade properties, but there was nothing designed for the investor market. If you wanted to a buy a home that was already cash flowing, there was no marketplace for that. There’s about $3T of assets that are long-term rentals.”

Fundamentally, they focused on SFRs because nobody else was doing it, it was an under-served area in a huge market.

In general, there are no qualifications to invest on Roofstock. However, for Roofstock One, the fractional shares of homes, you must be an accredited investor. This is considered a security.

Roofstock vs MLS

When investing with the MLS in another area, you’re generally going to look for homes in the are first and set up some appointments. Then you may fly to that area and start touring homes, making offers, speaking with agents, and getting to know some contractors and management companies. Then you’d fly home and attempt to manage the process remotely.

At Roofstock, they pull yields and neighborhood profiles that match your searches, and all of the relevant service providers are in place to execute the transactions remotely. You can see all the information you need without hopping on a plane. Many folks want to continue to deploy capital outside of their drive zone. Roofstock actually seamlessly integrates the process of selecting a property manager, lender, insurance provider, and other ancillary services from their database of vetted professionals.

Regarding contractors, the homes are either already occupied or they are rent-ready. If homes need a lot of work, they kick them back to the seller for renovations. Roofstock qualifies the properties as rent-ready before listing them. At this point, contractors aren’t a necessary part of the process. In the future, Roofstock does plan to add more distressed properties along with a vetted list of contractors. Right now, Roofstock works with value add investors by listing the properties after those investors have purchased the property, rehabbed it, and rented it out.

Structure of Fractional Ownership

The current structure is with K-1s. Effectively, you’re owning a 1/10th share of the interest of the home. It’s almost like a REIT of one house. There’s debt and equity on the house. All taxes and depreciation pass through as if you were on title. You just own a share of that home as it sits in the vehicle. Currently the homes sit in DSTs, but this structure may be changed in the future. Each property has it’s own ownership vehicle, all income and expenses are tracked to a particular property. From the investor side, this is a unique vehicle that allows them to take $100K and spread it across 5 or 10 houses instead of one home. It gives the investors choices and the ease of creating a diversified portfolio.

Roofstock began with 70 houses (700 shares), and they have sold out of these shares. They’re looking to add properties and add new markets for another round of offerings. They are looking to spread the offerings between some higher-yield assets and some higher-growth assets.

Future of RE and Tech

Gary sees a big future for consumer and investor-friendly models. Once customers start to see the benefits of the lower costs, higher transparency, and digitization of documents such as a low barrier to entry, higher accessibility, and higher efficiency, we will have the democratization of investing.

Despite the rise of institutional investors in SFRs, Gary doesn’t see this involvement as a threat to individual investors. Institutional money is generally looking for more distressed properties to do a more aggressive value-add. Single-family homes are such a large market, it won’t be a problem at a national level. There may be some markets that are more fragmented with higher amounts of institutional money. Institutional money owns about 2% of the market right now and doesn’t have a realistic path to even 10% – which would still leave 90% of the homes owned by individuals.

There’s always room for local expertise. Institutional capital tries to invest in these areas to learn this inside information, but there are many subtleties in real estate that only locals may know with their connections in the area.

To learn more about Roofstock and Roofstock One visit: www.roofstock.com/