As markets continue their volatile run into the middle of the year, one alternative investment that has seen increased growth and demand is single-family rentals. While public stocks and bonds have had a rough go in recent months, and inflation causes cash flow issues for investors big and small, cash-generating assets like rental properties have increasingly drawn public attention.
Roofstock is one company working to bring single-family rentals to a wider audience, and change historic attitudes about selling property with tenants in place. Despite starting as just a marketplace for the SFR sector, the company has grown to provide property and asset management solutions to owners across the country.
The company also recently raised a sizable $240 million Series E led by Softbank’s Vision Fund 2, which raised its valuation to $1.94 million (at the time). Now, it looks to expand its services across the entire SFR community and enable investors to buy, sell and manage single-family rentals through its proptech platform.
FinLedger had the opportunity to speak with Gary Beasley, Roofstock CEO, about the company’s journey thus far, the state of the SFR market and his plans for Roofstock moving forward.
Q: First off, can you just describe Roofstock and the services you offer?
A: Roofstock is a marketplace for investors in the single-family rental (SFR) sector, and we’ve grown from really being just a marketplace where properties trade over the years to now a full platform where we’re relevant to all investors. Whether you are looking to trade or just optimize ownership, and that’s been an important evolution of the company. Over the past few years we’ve expanded into property and asset management, where we could now be relevant to all 10 million owners of SFRs around the country. So we have a nice mix of institutional and retail business, which is also important for us as we really are at the center of a lot of the activity in the space. There’s been a lot of homes that are trading between types of investors, institutions to retail, retail to institutions and as a marketplace. At the center of this we could help create a lot of the liquidity that’s necessary in this space.
Q: Why did you set out to do this, and how have you seen the industry change since you started?
A: When we started Roofstock, we were setting out to address some specific pain points for buyers and sellers of single-family rentals. Prior to this, I was running a public REIT called Starwood Waypoint, a residential trust. We also had some private funds that owned a number of houses, and we were trying to liquidate those funds. What we were finding was, it was very difficult to sell them with tenants in place. There was no ecosystem for a leased rental home to be sold. It’s not like an apartment building, and you’d never empty an apartment building to sell it. Why should you empty a single-family rental to sell it? But that’s what all the brokers at the time were telling us. There were no groups set up to really, really market a portfolio of leased homes to investors. So we said, that’s silly, that has a lot of the value to be created by creating these cash flowing assets. They should be able to be traded more freely, without vacating them. And that was the simple idea, so my partners and I set off to build that marketplace where we could package up either individual homes with tenants in them, or portfolios of homes with tenants in them and and offer them to investors anywhere in the country. Really anywhere in the world. Try to break down those geographic barriers because that’s one of the other pain points for single-family rental investors. Historically they have purchased homes within an hour’s drive of where they live. What we were able to do with Roofstock is start to unlock the whole country for them. So you don’t have to invest in your own backyard, which is nice from a diversification standpoint.
Your other question is how it’s changed. I would say in a few ways. Investors have, first of all, the industry has matured a lot. There’s been tens of billions of dollars of capital that’s flowed through it, and people have gotten a lot more comfortable transacting purely online. That’s when we first started Roofstock. No one was sure whether people would buy $200,000 items online, it was sight unseen. This was before Carvana, and even before people were trading cars. I mean it was small ticket items that were traded online. So our bet was if we presented the homes properly, and had the right business model, that people would do it and in fact they did. That’s what people have gotten—increasingly comfortable with online transactions. COVID was an accelerant to that obviously. And then I would say just the overall acceptance of SFR as an institutional asset class has increased dramatically since we started the company. We were on the cusp of having a handful of public companies with a couple years of results. Now you’ve got sort of a decade of results from multiple companies, and a ton of interest in the space and it’s really been validated through sort of a public lens, which is very different than where we were before. So it’s definitely matured.
Q: When you look at that crossover between retail and institutional investors, what are the biggest differences between them when it comes to pain points?
A: I would say the pain points are similar on the sell side for both segments. The challenge with the historical way is you own a rental home with a tenant in it. Let’s say you have six months left on the lease. If you decide you want to sell it, without selling through a platform like Roofstock, you need to wait for the lease to run out. You need to hire a broker to spiff it up a little bit, put it on the MLS, wait several months for closing and get your cash. When you add up all those costs, it’s about 10 to 12%. It’s a lot, half of it is broker fees and half of its loss report. Loss of rent and some CapEx (Capital Expenditure) to fix up. You get it. So you’re getting 88 cents on the dollar or something like that. With Roofstock, you just push it over to us. We do the work to prepare it for sale, and you sell it with a tenant in place. You don’t have to wait for the vacancy, because there is no vacancy. So you net a lot more, even if you sell it for a little bit of a discount to say the full fair market price. You can offer the investor coming in a little bit of a discount, which is helpful for someone coming in and you still net a lot more. It’s that on the buy side.
The pain points, really, for investors are finding good investment homes. For individuals. It’s a pain point, it has been, how do you do it where you don’t live and we’ve really addressed that. They get cash flow from the beginning, because they’re cash flow ready homes, they’re either occupied already or ready for tenancy. You avoid the need to have to find a contractor and do renovations, and find a way to hook you up with the property manager or we offer that service. It’s really kind of offering that immediate cash flow.
Then for the institutional investors, we’re able to find and source properties for them that they otherwise wouldn’t be able to find, because we can find off-market transactions and bring them to them. Because we’ve mapped the whole universe of homes in the country, and are building out this network of owner. It’s really providing access on the internet for buyers to inventory that they want to buy. Those institutional owners don’t necessarily need financing or insurance or other things we can help retail buyers with. They have all that. They’re really looking for supply and we can help them with that. And then there’s a pain point if you are an institutional investor, and you don’t have a platform. There’s, let’s call it, a half a dozen or dozen decent sized platforms. They’ve all built fully integrated operating platforms. But there are lots and lots of global investors who would love to have SFR portfolios, but don’t have platforms. What we’re able to do is, we’ve created this concept at least internally, it’s kind of like our real estate investment cloud. People can plug into it, and rent it, and it’s just like a Salesforce or AWS and you don’t need your own infrastructure. You could rent ours as long as you’d like, and we can help you assess the whole universe of homes, make offers, acquire them on your behalf, renovate them, manage them, do all the reporting. You could be a pure capital partner and leverage Roofstock, because otherwise that’s a really big pain point. You either have to just buy public company stock of a REIT, or try to do a joint venture with one of those groups which sometimes can be tricky. Or build your own platform, which is hundreds of people and tens of millions of dollars. So we are that kind of unique on-ramp and infrastructure for that capital. I think that solves a real pain point.
Q: Let’s talk about that supply issue. Obviously right now people are trying to get into housing but there’s no housing supply. How does Roofstock deal with that and do you think this is going to work itself out?
A: Well, it does tend to work itself out. The question is over what timeframe? As we know, real estate markets are cyclical. We’re starting to see supply inch up a little bit over the last couple of months. You might have seen some of those statistics, but it’s still very tight by historical standards. I would say in a lot of markets we’re between one and two months of inventory, where a lot of people think maybe five to six months is more equilibrium. What’s exacerbating it now with interest rates going up, is if you’ve got that 3% mortgage and you were thinking about either upsizing, because you’re having another child or downsizing because maybe you’re an empty nester, into a 5% or 5.5% mortgage into homes that have appreciated dramatically. It’s a really hard thing to get your head around, so most people are going to stay and that supply is not entering the market. I do think you’ll see some people getting priced out of the market with higher rates, and so demand should and will abate a bit with interest rates, but you still do have a fair amount of the population that is flush with cash. They’re cash buyers and those people are unaffected.
I do think you’re starting to see fewer offers on homes, but prices are still really strong because maybe there’s not 12 offers, maybe there’s five, but it’s still trading at a similar price. We’ll see what happens over the upcoming months. I think we’re going to need to see at least a dramatic reduction in home price growth. I think that’s got to happen before too long, because interest rates are a powerful lever for what people can pay. We’re payment driven, so I think you’ll see home prices growth go from 15% or 20% down to kind of single-digit growth by the end of the year. I really do believe that and and maybe down to more mid-single digits next year, which is a healthier level.
I think some markets you may see some price adjustments, or some price declines. I think nationally, I still feel like it’s unlikely. There’s been really only one periods during our history where we’ve had absolute price declines. That was the great financial crisis that was multiple years. That was a credit driven bubble. Right now, everyone’s got equity in their homes because of the appreciation, so that’s an obvious difference, right? You don’t have people who with a slight drop in price all of a sudden are underwater with a bunch of floating rate that their debt is being reset at higher rates, and that was just a really unusual set of circumstances. Maybe what you do see is more supply coming back onto the market, or at least with less demand with interest rates, supply builds up a little bit, maybe more power shifts to buyers.
I was at the conference in Laguna Beach, there was a housing conference and an economist who was there described the moment we’re at right now as “peak fear.” That’s what he believed we were at when you look at the public market meltdown. Broadly, but specifically attack and war in Ukraine and supply chain issues. China and COVID lockdowns, exacerbating supply chain issues, eight plus percent inflation, you just sort of check through all these things. What he was positing is put yourself a year in the future and think about each of these things that we’re dealing with, and it’s more likely they are going to be better than worse. Inflation a year from now is likely to be half what it is today, just given the comps and and what’s going to hopefully happen with the supply chain. Hopefully it will feel a lot better if we’re in 4% to 4.5% inflation and not than 8.5% Hopefully things have resolved in Europe, and hopefully we’re largely through COVID in a lot of these parts of Asia. If you just kind of check through a lot of these things, you can see a world where the market, tech stocks and stock market has stabilized and finds a new level. I left that conference a bit more optimistic, when you put it in perspective like that, maybe we are at a moment of peak fear. It’s hard to look beyond that because you’re in it at that moment. I’m very curious to see how things unfold over the next couple of quarters and how things are trending with a lot of these metrics.
Q: Staying on the topic of fear, where do you see environmental action taking place? How does it affect your business, and how does it affect where people are moving and living and things like that?
A: There’s two angles to that. There’s house climate change sort of affecting where people are living and that’s kind of a separate topic. The other is ESG. There’s an awful lot of interest in ESG for lots of reasons. Across sort of all industries, but it’s a very hot topic in real estate today because the built environment does contribute so much to carbon. I’m involved a little bit in a real estate organization through Stanford, and we’re starting to get involved. There’s a new school there for climate and sustainability. It’s the first new school at Stanford in 70 years, and this was launched in response to the global climate crisis. We’re going to be doing some work. They’re trying to help with some of the research that they’re going to be doing, and making sure that’s linked to the private sector.
What could we be doing as large owners of real estate, residential or commercial or others? What problems do we have, whether its energy efficiency, green building, using recycled materials, and all that kind of stuff. It’s when you have a new school like this being formed, it shows you that there’s real commitment and real interest in this and when you talk to anybody raising money, thats 25% to 50% of their conversations. What’s your ESG strategy? A lot of times I think the actions follow the capital, and the capital is demanding ESG strategies. It’s not just the environmental, but it’s the the governance and the social, diversity and equity, and so all that stuff is being taken really, really seriously. I think to varying degrees at all companies, and starting with some of the larger companies that are getting these external pressures that we have.
We are working on a comprehensive ESG strategy ourselves. We talked about it at our all-hands meeting last week. I put someone in charge of it. We’ve committed to the board to have a comprehensive strategy this year, and we’re working on it and going to do what we can to reduce our carbon footprint. We’ve got some interesting ideas on how we can help people who we are touching through our marketplace to do the same.
Q: Tracking is obviously a big part of it. On a different hand, but similarly, blockchain is all about transparency too. I just want to hear your thoughts on how that’s gonna change things for Roofstock’s business and where you see that moving forward?
A: We’re excited about the application of blockchain to our business. We set up a task force a number of months ago to explore how we could use blockchain to bring efficiencies to our marketplace. We’ve come up with a pretty interesting product, which is effectively a way to tokenize a single-family rental home and think about it as an NFT for a house, where it can be owned in that tokenized structure which creates a lot of efficiencies for trading.
Once it’s in that structure, think about a house in a box, and then you have all the information out there on the home so you could create a situation where the buyer and seller have the same information, which is unusual in a real estate transaction. The seller always has more information, right? But in a world of a blockchain, you could post this token for sale and have all the history and everything associated with that home available to both buyers and sellers, and look at external valuations and all that and make an assessment in what you want to pay for the token. The beauty of it is, at least the way we’re envisioning it, is it could be already paired with financing. The loan goes along with the token. If you’re looking to buy a rental home right now with financing, you have to get your own loan and you have to apply for it with a bank or whatever and it takes 30 to 60 days. If we are able to to execute this the way that it appears we can, the loan would go with a token. The lender doesn’t care who owns the token, as long as you qualify to buy it you can, and that would be a big unlock and create a lot of liquidity. We’re all about squeezing out friction, cost, the time it takes to transact and the misery of it. That is a way, if we can productize it the way that I believe we can, and we’re going to test it out in a couple months here with a handful of homes. If that works then we could be a place where people could come and mint tokens, and we can manage the homes for them and then create a lot of efficiencies.
Q: Looking at just management, what are the biggest challenges when it came to really taking that on and just what have you learned?
A: The challenge in our space is the way that transactions work. There’s something like 20 or 25 players who could be involved in a transaction, and everybody uses different systems. Some people are more technologically savvy than others. A lot gets lost in translation. We’re trying to bring a lot of efficiencies to that whole closing process. We can control the front end through our own shopping experience, and then once something gets under contract, we are still working with title, escrow, lenders and all the old more traditional ecosystem. One of the challenges has been, how do we squeeze as much of inefficiency out while working with a lot of this analog world and slowly trying to digitize pieces of it. That’s probably the biggest challenge because there still are a lot of legacy players, with a lot of legacy processes that aren’t necessarily that interested in transforming the way that things have been done. It’s the classic Innovators dilemma. It works pretty well for a lot of the incumbent players, but we’re making progress.
We ourselves have bought a couple of property managers, and we’ve invested significantly in the technology to support those businesses. We’re going to continue to grow those businesses and and we do believe that we could build a very large, highly profitable business that delivers great customer service. This is where the application of technology could be a double benefit It could help deliver more responsiveness, better customer service and a better experience, along with better margins for the business. You could take this old guard industry that’s kind of sleepy, and turn it into actually a pretty exciting business with great recurring revenues which can delight customers. I’ve got a background in hospitality and that’s what we do in the hospitality world. We’d like to take a page out of that here. It’s early days, but we’re looking to make significant investments there.
Those are some of the some of the challenges. It’s just trying to innovate in an old guard industry. It continues to be challenging, has been since we started, and will continue to be. But with all the investment in PropTech over the last five years, you’re starting to see change happening in a lot of these different spaces. I was just down at Stanford yesterday. I was talking to a couple of the classes and there’s a lot more interest now in there I would say. Significant interest, because Stanford has not been a place that cranks out traditional real estate practitioners. But they see PropTech as a really interesting space, where people are coming from technology or all these other things, and saying “How can I apply this to PropTech?” This seems like a place where there’s still a lot of opportunity, big TAM (Total Available Market) and big problems to solve. So that’s kind of fun.
Q: I know we’re almost done but I haven’t asked you a pretty big question. Roofstock recently raised a $240 million Series E led by SoftBank’s Vision 2 Fund. How do you plan on using that funding to further Roofstock’s goals moving forward?
A: It’s nice to be well capitalized in an uncertain market, and so we were cognizant of the fact that we do have a strong balance sheet and we’ll look to use it wisely. We are open to select M&A opportunities, and that’s one of the reasons we raised as much as we did. Fortunately, Softbank has a long term view. They’re big supporters of the business. They’ve been terrific through the process and there’s not pressure to put that money to work quickly or do anything like that. We will use it to continue to build out our business and continue to invest a bit more in marketing. We haven’t invested much historically to build our brand. We’re looking to use a little bit of that money to help elevate our profile, and invest in a lot of the product, tech and data science that we’ve really been wanting to do. We wanted to make sure we had plenty of capital to lean into some of that stuff. I believe that in times like this, having capital is a strategic weapon and we’ll be prepared to take advantage of that.