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A Unique Passive Income Opportunity With Rental Properties

Roofstock rental properties

The goal of most investment is to create passive income. Rental properties are an excellent way to do this, but it takes a lot of time and effort to find and evaluate homes, find and evaluate tenants, and manage the properties. Investing in already-leased single-family rental properties with good tenants accomplishes the goal immediately.

Gary Beasley, CEO of Roofstock, estimates single-family rental properties hold about $3 trillion in assets.

“The housing market is large,” Beasley said. “Overall, it’s around $30 trillion.”

Single-family rentals make up about 10% of that market. That’s about 16 million rental homes. Maybe 1-2% are owned by institutions. Amounting to a million investment transactions per year, that’s a transaction volume of about $200 billion.

The State of the U.S. Single-Family Rental Market

“I ran a single-family rental business owning 15,000 houses,” Beasley said. “If you could leased single-family rental homes in an online environment, they would already be cash flowing. Roofstock seeks to bring down transaction costs and increase liquidity.”

Homes normally trade through the Multiple Listing Service (MLS), but it’s designed primarily to sell non-occupied homes. A home with tenants is often viewed as a negative. If a rental property has good tenants, however, it provides immediate cash flow. That could be a positive, but the market for occupied single-family rentals is fragmented and underserved.

Finding a rental property used to mean finding a local rental unit and vetting the tenants and property personally. Beasley and co-founder Gregor Watson envisioned being able to break down geographical barriers by providing a way to buy inspected, reliably income-generating properties online.

“You could sit in Gettysburg and buy homes in Phoenix or Orlando,” Beasley said.

They executed a Series A round led by Khosla Ventures in May 2015 for $6.25 million. In December 2015, another $7 million came in from Bain Capital Ventures. A Series B round in December 2016 brought in $20 million from Lightspeed Venture Partners.

Their product is “a nicely packaged single-family rental home sold in the marketplace,” and Roofstock is currently the only platform focusing on that. Beasley and Watson had previously bought a lot of vacant homes spending millions of dollars on their former platforms. They realized that the time and money required to invest in properties and manage them once tenants were found discouraged potential investors.

“We’re allowing investors to own properties after all the hard work is done,” Beasley said. “On our platform, they can see inspection reports on the homes and background information on the tenants as well as see valuation reports and take virtual tours. It’s not like buying a vacant home where you don’t know how much it will cost to fix it up and find a tenant. It’s already cash flowing.”

A Roofstock Case Study

Beasley recounted an example where Gregor Watson owned about 1,500 homes in Dallas and wanted to sell 500. “The first broker he called said, ‘I don’t have 500 signs’. The next one said, ‘Why don’t you call me when you get those tenants out?’ Nobody knew how to sell them. What you have to do is let the lease run out. You might have to spend money to spiff it up. It could cost 10% or more.”

With Roofstock, there’s a 2.5% standard seller fee. On the buyer side, it costs a half point to use the marketplace. The investor can buy the entire property, handle all the paperwork, hook up with the lender, and put $25K down. Then he gets the house.

“One client bought a house on our site during a flight 45 minutes after registering. It’s not quite as easy as buying a book yet, but that’s our goal,” Beasley said.

Roofstock opens up an asset class making it super easy with a digital layer of enhanced reporting. There is good financing for individuals allowing them to borrow up to 80% with a minimum of 20% down. Because the properties are vetted, there’s no need for a long closing period.

We call it TLC: transparency, liquidity, and control for investors,” Beasley said.

What Makes a Good Single-Family Rental Property

To meet Roofstock’s criteria, a property must pass their certification process. It must be in a neighborhood considered a good market with viable liquidity for investors on both buy and sell sides. They will not certify homes with structural issues or other big question marks, such as a tenant not current on their rent or a property with an inflated price.

“The idea is to create liquidity,” Beasley said. “That includes buying and selling at prices low enough to move properties and offer a big selection of homes. Some people are looking for yield, others want great school districts or appreciation.”

Roofstock certifies third-party property managers to provide ongoing maintenance and collect rents. They collect data to monitor performance.

“Other companies sell vacant homes that might make good rental properties,” Beasley said, “but we get properties ready for immediate cash flow.”

The platform has a wide selection of single-family rental homes with filters to narrow selections according to price, location, and more. There’s even a “make an offer” section for bargain hunters.

With several thousand homes in the certification process, Beasley is optimistic that early returns indicate Roofstock will continue to profit quarterly. He said buyers on the site range from institutional funds, retail buyers, experienced investors, and individuals who are new to buying investment properties.

What Kind of Investors Roofstock is Attracting

“What’s been surprising is the number of first-time buyers using the site,” he said. “A fair number of millennials are buying their first property through Roofstock, and it isn’t for their primary residence. This allows them to buy a property a year and build up a portfolio.”

Many investors are buying multiple properties on Roofstock, Beasley said. They’re finding people buying homes in markets where they do not live, diversifying, then putting money into different markets. Seventy-five percent of buyers are buying homes over 1,000 miles from where they live.

Roofstock also facilitates 1031 exchanges where investors sell apartment buildings and roll proceeds into bundles of single-family rental homes.

“We’ve done several of those types of transactions,” Beasley said.

The Future of Real Estate Investing

Beasley sees the direction of the real estate investing going up and to the right. As it continues to become more institutionalized, he anticipates more individual investors will feel comfortable getting in.

“From a macro standpoint,” he said, “you’ll see a lot more rental homes on the market. More people will be renters because financing is not readily available. It’s getting difficult to make the numbers work for entry-level housing. Millennials are putting off buying, which creates more demand for rental homes.”

Roofstock plans to grow their marketplace past its current 12 U.S. markets. The goal is to build a community of owners over time who integrate better with lenders and find easier ways to finance purchases. Beasley believes that having an ongoing relationship with people who purchase from them will make it easy to sell and buy additional homes, therefore they are continuing to grow supply channels.

“In time, we’ll look more like an Airbnb,” he said. “Sellers will be able to start the process and upload homes to the site, begin the certification process on their own, perform 3D mapping, schedule evaluations and inspections, and more. It will be a self-serve supply model all the way.”

Authors:

Written with Nicki Jacoby.

Allen Taylor
Allen Taylor

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Allen Taylor

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