When it comes to investing, the first thing that likely comes to mind is Wall Street and the stock market. And while this is always a solid option to place your money, another great option for anyone looking to expand their portfolio is real estate investing.
At its core, investing is real estate involves buying, owning and managing a property or properties that you hope will increase in value of over time through development. Then, at a certain point, the owner may rent or sell the space to add profit to their own pocket. Seems simple right?
Well, like other forms of investing, real estate investing can also include a few bumps in the road. But that is where a company like Roofstock comes in.
Founded in 2015, Roofstock has come a long way since its inception. From launching its own online marketplace for “cost-efficient and transparent real estate purchases,” to having its own system that educates people on how to invest in real estate, this company is truly changing the sector’s landscape.
In fact, one aspect of Roofstock that sets the firm apart is how investors can own fractional shares of select properties. How does it work? Well, let’s hear from Roofstock themselves to find out.
I had the chance to discuss the company with Suresh Srinivasan, Chief Marketing Officer of Roofstock, and how the company is helping investors diversify their portfolios through real estate investing.
InvestorPlace: Tell us a little about you, your background and how you arrived at Roofstock.
Suresh Srinivasan, Chief Marketing Officer of Roofstock: For over two decades, I’ve built a career in tech leadership, marketing and product development. I’ve been exclusively focused in the real estate industry for the last 10 years. Prior to joining Roofstock as CMO, I was on the leadership team at Xome, where I helped build the online real estate marketplace into a category leader. Before that, I founded and grew several tech companies that reached acquisition. Early in my career, I helped lead brand management at Activision Blizzard (NASDAQ:ATVI) through the company’s launch of the WarCraft, Diablo and StarCraft games.
I met the founders of Roofstock in 2017 and we immediately connected on a shared vision for how real estate investing should work. From my prior experience building an online investment property marketplace, I understood that there was a high-level of pent-up demand for investing from people across all walks of life (from teachers to firemen to doctors and more). I also knew that for most of them that owning investment properties seemed out of reach and too fraught with risk. This prevented most of them from participating.
Our shared vision contemplated how we might flip this all on its head and reimagine how real estate investing is done. The possibility of making real estate investing more accessible is what brought me to Roofstock 3-plus years ago and we continue to relentlessly march toward that vision.
InvestorPlace: In a few sentences, what is Roofstock? How does the fractional ownership process work?
Roofstock: Roofstock is the leading online marketplace for investors in the $4 trillion single-family rental (SFR) home sector. Its clients range from “mom-and-pop” investors who are buying or selling individual homes, to some of the largest global investors who aim to buy or sell thousands of properties at once. The company provides extensive resources for investors to buy, own and sell real estate online — including data analytics, property management oversight and other tools to make investing easier and more rewarding.
Fractional ownership of tangible assets like real estate is an interesting concept, and one that we’ve been exploring at Roofstock for the last few years. In 2019, we were the first to market with a beta fractional investment offering called Roofstock One. Participants in that beta program were able to purchase shares in fully-managed rental homes. With a starting price of $5,000 per share, the fractional ownership model was intended to mirror the economics of direct ownership without the hassles, responsibilities or significant capital typically associated with direct home ownership. Roofstock is developing the next generation of Roofstock One for investors interested in fractional shares and is expected to release the offering later in 2021.
InvestorPlace: Why real estate investing? What makes rental homes an attractive asset class?
Roofstock: Rental homes have several characteristics that most investors find attractive. These investments generate steady cash flow, typically experience rent and price appreciation over time (making them a great inflation hedge), offer tax benefits and have a variety of financing options that make it accessible to everyday people. Studies have shown that unlike other assets, the SFR market is generally uncorrelated to equities and bond markets, which makes it an important tool to achieve portfolio diversification.
Also, through the market volatility of 2020, the SFR asset class performed remarkably well. SFRs didn’t suffer the same swings of the equities market nor have the same challenges as the commercial real estate asset class. People prioritized quality homes during the pandemic, with many deciding to move into suburban rentals to access more space. Investors of every stripe have taken notice of the residential market as a result. As the leading platform for investors who want to buy, manage and sell properties, Roofstock is at the center of a tidal wave of interest currently pouring into this sector.
InvestorPlace: How does Roofstock value its properties?
Roofstock: Sellers set the asking price for properties on Roofstock’s marketplace. To help inform both buyers and sellers about a property’s potential value, Roofstock uses a proprietary AI-driven underwriting engine that automates the evaluation of hundreds of independent variables for a given property, including prices of surrounding homes, proximity to quality schools and desirable amenities, crime rates, population growth, job market information and much more.
InvestorPlace: According to the Roofstock website, the company has markets in cities across 27 states in the U.S. Is there a process in selecting each market? What makes a “good” and “bad” market?
Roofstock: Markets are selected based on characteristics that are attractive to investors. These characteristics typically include positive population growth and job centers, certain demographic characteristics and pent up demand for single-family housing. Roofstock is constantly looking to offer investors options to access opportunities in a variety of locations, and is always evaluating new markets for potential expansion.
InvestorPlace: The real estate investment industry is full of quality businesses, which I’m sure makes it very competitive. That said, how does Roofstock differentiate itself from other platforms?
Roofstock: Roofstock’s goal is to make real estate investing “stock market simple” for everyone, from the individual investor who wants to invest just a few thousand dollars to global fund managers who need to invest billions. We believe the interplay of multiple customer types atop a single marketplace like Roofstock creates positive network effects that benefits all parties.
A money manager at a large private equity fund or sovereign wealth fund that seeks a simple, turnkey and more direct method to access the single-family rental market at scale is an example of an institutional customer profile. Institutional interest is at an all-time high since the SFR asset class has proven to be extremely resilient (vs commercial real estate and large multi-family) in the wake of the pandemic, with surging demand for single-family homes, all time high occupancy rates and rents.
The power of Roofstock is that the same capabilities it offers institutional clients are also available to the everyday retail investor looking to buy their first investment home or small portfolio of properties. No matter the size of the client, Roofstock gives them the tools they need to meet their investment goals. These customers have a strong desire for an easier, more productive, transparent and cost-efficient way to directly invest in residential real estate, where geography is no longer a barrier. Roofstock is the only solution that has the infrastructure, scale and flexibility to meet these diverse needs.
InvestorPlace: One aspect of the company that seems very unique is the Roofstock Academy. Can you explain a bit about what that is, and how a participant could benefit?
Roofstock: Roofstock Academy is Roofstock’s educational master class created to equip retail real estate investors across all experience levels with tools and information they need to take their real estate game to the next level. We describe it as the training program built to help people become successful real estate investors without having to make dozens of costly mistakes on their own.
The program includes one-on-one coaching with tenured real estate investment veterans, on-demand lectures, a personalized single-family rental playbook, and assistance and support from a vibrant community of other investors who are enthusiastic about learning and sharing knowledge.
This community has quickly become one of the most popular features of the program, as people value the opportunity to connect with other real estate investors across a spectrum of experience levels.
We don’t believe there is really any other program on the market that offers as much value as the Roofstock Academy.
InvestorPlace: In your opinion, what are some of the headwinds and tailwinds for the real estate investing industry over the next 5-10 years?
Roofstock: The health of the economy and real estate are inextricably linked. The outlook really hinges on the country’s ability to rein in COVID-19 and policies used to get the economy on track.
Overall, I expect single-family rentals to see continued strong performance due to the following seven fundamental characteristics of the economy and the housing market:
- High unemployment: Eviction moratoriums and mortgage forbearance have largely prevented a catastrophic shock to the economy. Unemployment should fall as the economy reopens further and while many believe there will be a surge in foreclosures, I disagree with that forecast. We may see a slight uptick in mortgage defaults when these restrictions are lifted, but the number of homeowners with positive equity is at record levels, and tech innovators abound to help owners quickly tap their equity or sell outright to help weather financial hardships.
- Loose monetary policy: With the CARES act we saw $2 trillion in stimulus pumped into the economy and there is likely more to come. This creates upward pressure on asset prices and the owners of assets, like real estate, stand to benefit.
- Low interest rates: Interest rates are low and should remain low for many years. This is a great benefit to investors who, for example, can lock-in a low fixed rate loan for a long duration. Debt has a magnifying effect on investment returns, and in an environment where asset values are rising rapidly, locking in low, fixed costs are great. I think investors should be careful to not over-leverage though, as there is uncertainty around long-term implications of COVID-19, such as new outbreaks, strains, etc. Investors should factor this when thinking of overall risk to revenues.
- Consumer housing preferences: The pandemic prompted a rapid shift toward a preference for the suburbs vs. city center and toward larger dwelling spaces as people valued health, safety and convenience more than ever. I believe that remote work possibilities and rising taxes in large cities (due to declining revenues) will continue to contribute to this shift for the foreseeable future. Investors in SFR should benefit from this trend.
- Strong rental demand and changing homeownership trends: I believe we will continue to see growth in rental demand. We have millennials who have been putting off ownership much longer than prior generations plus we have baby boomers who will seek to minimize monthly commitments and expenses, sell their homes, and choose to rent instead. Combined, this is a significant percent of the US population that will continue to fuel demand for affordable rentals.
- Inventory supply/demand imbalances: Single-family home prices have and will continue to rise given a lack of adequate supply to meet the surge in demand. Housing starts have not been keeping up with household formation for many years, and the rising costs of materials and labor may prevent loads of new supply from being created, especially at the entry level. This imbalance can create opportunities for some (think land developers, builders, flippers), but can also make it difficult to source great turnkey investment opportunities.
- Growth of remote real estate investing: In hot markets, rents generally don’t rise as quickly as home prices do, so there will be continued downward pressure on cap rates. When you couple this with a lack of supply, I believe investors who live in already high-priced (low cap rate) markets will lean more toward remote real estate investing, where they can use technology like Roofstock to make investments across the US where the risk/reward trade-offs may be more favorable.
InvestorPlace: How could a potential investor benefit from adding real estate to their investment portfolio?
Roofstock: Real estate has historically proven to be one of the best ways to build wealth over time. The nature of owning an investment property, which is an appreciating asset with monthly cash flow, positions real estate investments much like an inflation-adjusted bond with an equity component attached.
As such, real estate is a valuable part of a diversified investment portfolio. The asset class is uncorrelated to the equity market’s volatility, which makes real estate an attractive investment during times of economic uncertainty. In the current environment where there are concerns of inflated valuations in the stock market, real estate can serve as a balance to investors’ exposures to equities.
On the date of publication, Nick Clarkson did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nick Clarkson is a web editor at InvestorPlace.
In The InvestorPlace Q&A, we invite a manager to speak directly to Main Street investors, whether discussing their firm’s technologies, strategies or investments for the year ahead. Our goal is to put the spotlight on fund managers and other institutional investors of note, providing a detailed look into their management styles, world views and investing strategies. Read past interviews here.