October 5, 2017

JF1129: Buy Cash-Flowing Properties Online with Gary Beasley

Gary created Roofstock with intentions to attempt to democratize the real estate investing world. Not only does his company and the technology help him with his investing, but also helps anyone who would like to invest in single family homes anywhere in the country. They have already negotiated deals with property management companies, an important aspect when 90% of his investors are investing in markets they don’t live in. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Gary Beasley Background:
-CEO and co-founder, Roofstock, first online marketplace for investing in leased single-family rental homes -Provides research, analytics and insights to evaluate and purchase independently certified properties at set prices.
-Served as CEO of Joie de Vivre Hospitality, then the second largest boutique hotel management company
-Integrated more than $800 million of resort properties for KSL Resorts, and spent five years as CFO of online brokerage pioneer ZipRealty
-Based in Oakland, California
-Say hi to him at www.roofstock.com
-Best Ever Book: Guns, Germs and Steel

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of fluff. We’ve spoken to Barbara Corcoran from Shark Tank, Robert Kiyosaki, the author of Rich Dad, Poor Dad, Tony Hawk – he is a successful entrepreneur, that’s for sure; Emmitt Smith – he develops real estate (if you didn’t know that, go listen to his episode), and a whole bunch of others.

With us today, Gary Beasley. How are you doing, my friend?

Gary Beasley: I’m doing great, Joe. How are you?

Joe Fairless: I’m doing well, nice to have you on the show. A little bit about Gary – he is the CEO and co-founder of Roofstock, the first online marketplace for investing in leased single-family rental homes. Him and his company are based in Oakland, California. With that being said, Gary, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Gary Beasley: Sure, happy to. I’ve been at the intersection of real estate and technology for the majority of my career. I’ve spent some time in the resort and hotel business, I was CFO at one of the first online residential brokerages called ZipRealty; we took that public in ’04. Most recently, I got involved in the single-family rental business with some partner; we started buying homes during the downturn in 2009 and built a platform called Waypoint Homes, which we ultimately took public in 2014.

Currently, I’m running Roofstock, which I co-founded with Gregor Watson two years ago. As you mentioned, we’re the first marketplace that’s focused on selling homes that are investment homes, that have tenants in place. So you can buy them and have cashflow day one, and if you’re selling the homes, you don’t have to vacate them. So it’s very low cost, low friction, diligence is done upfront; you get to buy homes more like a book on Amazon. We’re really trying to increase liquidity and open up, democratize the investing market for real estate.

Joe Fairless: What’s the difference between Roofstock and Memphis Invest?

Gary Beasley: Memphis Invest, for those of you listeners who don’t know, is a turnkey company in Memphis. So with Memphis Invest you are buying homes that already have tenants in them. I think the difference would be when you come to Roofstock you could buy homes all over the country, and we have a little bit more variety of products, you can choose to use different property managers… I would say it’s similar in that you’re buying a cash-flowing product; it’s a much different UI in the ability to shop and buy properties, and you can buy them in many different markets around the country.

Joe Fairless: Okay. I’m really looking forward to diving in here, but I just wanted to comment that I hadn’t heard of Roofstock until — I think it was two days ago, and actually on my website I have a “Invest With Joe” form, and accredited investors who want to get to know me fill it out, and we can potentially partner on future stuff… And one of the gentlemen who reached out to me, he told me that he had invested with you all, and I hadn’t heard of it. He had a good experience, and I was like “Roofstock? I can’t believe I haven’t come across them before”, because I feel like I’ve interviewed everyone in this space.

It was cool, and it’s such a coincidence that two days ago I was doing some research on you all, and then I just happened to see on my calendar that I was talking to you today. So one, I just wanted to mention that as a point of social credibility for everyone listening, that I have spoken to someone who has invested with you all on a couple properties… So now a couple of follow-up questions on your business.

As an investor who is looking to purchase turnkey properties, it’s one thing to identify the opportunity, it’s another to successfully see it through from a management standpoint, so how do you all set up the investor for success on the latter part?

Gary Beasley: Great question, really important dealing with that last mile, which is the operations. At Roofstock, a part of our goal here is to really separate operations from investing, and we do that by certifying local property managers who pass through our screen, and we make sure that they’ve been around for a while, they have good accounting software, good customer service ratings etc., enough scale. So we certify them, and when you buy a home through our site, you can select which property manager you would like to use, and it gets transferred over pre-closing, so it’s seamless.

That’s a really important part of our business, plus we’ve built an app that allows us to suck in the data from all the property managers and monitor the performance on behalf of all the clients. So we can benchmark you and make sure that the property managers are doing a good job, make sure you’re not being overcharged for things and hold them accountable for service. We also have negotiated bulk pricing with all the property managers, so you can get pricing that’s similar to an institutional investor, even though you’re a mom-and-pop investor. They’ll handle all the leasing, repair and maintenance, collections, turns, all those types of things that need to be done in the market.

One of the things to keep in mind – over 90% of our investors through Roofstock are investing in markets where they do not live, so it’s really critical for us to have those in-market property management relationships that perform well.

Joe Fairless: Another point of emphasis if I were an investor looking to purchase a turnkey property would be the quality of renovation that the property just went through, so how do you qualify the quality of the renovation that likely just took place?

Gary Beasley: These homes are already occupied, so unlike some of the turnkey operations where they’re buying homes and they’re renovating them and just leasing them, our homes have already been renovated and leased, so they have sort of a cashflow history to them already. What we do is we have them inspected, and the inspection reports are all on our website, so you can review the inspection report; there is cost estimates of any repairs that would need to be made, either immediately or at the next occupancy.

We estimate the useful life of all the major systems and things like that, and that’s all built into the underwriting of the asset. So that’s how we do it – we have a whole series of inspectors we work with, and we use our app to [unintelligible [00:07:13].06] properties.

Joe Fairless: I’ve learned the difference of economic versus physical occupancy the hard way, where physical occupancy is the number of people living at a place; economic – the number of people paying to live at the place. So with the property, when you have a resident in it, what type of qualification process does that resident go through and what type of assurances – if any – does the purchaser have?

Gary Beasley: We started off by design getting our inventory from some of the largest institutional owners; several of them are public, some of the large private companies… They all have very similar screening processes – the tenants have been through background checks, they have at least three times income to rent ratio, no prior evictions etc. That’s part of our tenant certification. So for a home to show up on our site, not only does it have to pass our home certification, it has to pass our tenant certification, and also we have to have a certified property manager there. So all of those three legs of the stool need to be there, that’s really important.

As we continue to broaden our supply partners, we do put through each of these property managers who are managing the homes that are being sold, we evaluate the screen that the tenants have been through, and over time we’ll continue to expose more and more of that information to buyers, about payment history, the various screens that they’ve been through etc. That’s as we sort of broaden the number of sellers that we put through the platform. But to date, it’s been fairly uniform and really a very high standard of care that the leasing companies have used.

Joe Fairless: And what are the ways Roofstock makes money?

Gary Beasley: We make money principally by getting a fee from the sellers when the properties sell. We typically charge 2,5% your seller, so it’s obviously less than the traditional fee, and we have a 0,5% marketplace fee for buyers, which gets buyers access to our platform and all the diligence materials on our site, as well as all of our closing tools etc.

Joe Fairless: Got it. So per transaction, your company is making 3% on the total transaction amount. What type of challenges have you come across since you’ve launched, and what year did you launch?

Gary Beasley: We launched exactly two years ago. There were a couple big challenges we’ve faced and so far overcome. One was could we actually get people to buy $100,000+ items site unseen over the internet, in a marketplace environment? And the answer is yes, we’ve sold hundreds of homes this way.
Two is can we actually source proprietary supply from sellers, who would agree to sell them with tenants in place, through Roofstock, not through a traditional MLS environment, and really have enough supply to create a vibrant marketplace? And that has actually worked, too. So the buying chunky items site unseen and getting supply going were both big challenges we’ve overcome.

I’d say the biggest challenge any marketplace faces, like ours, is balancing supply and demand. When we first started off, we felt like we had plenty of supply, because we had a couple hundred homes from some big sellers. We sold through that inventory and now we have a lot of demand, looking for supplies for going back and now filling the supply bucket again. That’s one of the constant challenges with any marketplace – balancing those two elements. Depending on what week it is, I’m more worried about either supply or demand, which I guess it’s the sign of a healthy marketplace as it’s being built.

Joe Fairless: With the sellers, what is their motivation for selling with Roofstock versus a local broker?

Gary Beasley: Well, when I was selling homes running my last company, it was costing me 10%-12% all in, because there’s a 5% or 6% broker commission, plus I was losing on average about four months of income, because I’d have to vacate it to sell it on the MLS, and that’s 3 or 4 points. And then I was having to spiff the homes up to sell them to retail buyers… So it was 10-12 points, versus 2,5% through us. And half of that 10%-12% is your lost income and cap-ex to spiff it up to sell it on the MLS, the other half is the traditional commission… But we don’t have any of that. Our commission is half as much, plus there’s no lost income and no cap-ex to sell it.

So you could actually as a seller sell it for a little bit less and still net more, and it’s easier; you get your money faster because you don’t have to wait for the home to vacate. So it’s a really compelling value proposition for the sellers.
On the buy side it’s interesting and compelling too, because you don’t need a big team of people to go out and make a bunch of offers and renovate homes to get them cash-flowing; they’re already cash-flowing. So you could really be more of an investor, and it’s almost real estate as a service. You’re buying these cash-flowing homes across the country, in a diversified way, and relying on our software and business processes to enable that, and it’s a very low fee.

Joe Fairless: I guess in my mind I’m trying to do an apples to apples comparison, and in my mind it’s not apples to apples, so help me understand this a little bit… Because when you mentioned the 10%-12%, you said broker fees – got it, that makes sense; apples to apples in my mind. 5% or 6%, and total 3% to what you all do…

Gary Beasley: It’s 2,5% to the seller, because we get 0,5% from the buyer.

Joe Fairless: Oh, okay, got it. Fair enough. So 2,5%, thanks. But on the other side, four months of lost income, plus you have to fix it up… But if they’re fixing it up, don’t they have to fix it up to have a tenant in there already to bring it to Roofstock? Isn’t that the whole thing?

Gary Beasley: Yeah, to maximize the value on the MLS typically you wanna do maybe some paint and carpet and landscaping, things like that. We’re not talking about a major renovation, but it’s typically a few thousand dollars to present it and compare well with other homes that are being sold retail. But the bigger issue is you’ve got several months of vacant rent where there’s no income. So you’re carrying the home, you’re paying the mortgage, you’re paying taxes, and there’s no rent coming in.

The average gross yield on these homes is about 10%-12%.  A 12% gross yield home means you’re getting 1% of the value of the home every month, in rent. So if you lose four months of rent, that’s 4% of the value of your home of cash that you don’t have, that you otherwise would have. So that’s how you get to that [unintelligible [00:13:40].25]

Joe Fairless: I totally understand that. I totally get it. If you were to put it on the MLS and it takes four months to sell, four months of lost rent. Got it. But in order to sell on Roofstock, don’t they have to have a tenant in place?

Gary Beasley: The tenant is already in place, so they’re continuing to collect that rent as the owner, during the marketing process.

Joe Fairless: Got it. But what I was thinking is if I have a house, I’m fixing it up, and I’m deciding “Do I sell it with a broker, local, or do I sell it via Roofstock?” If I choose to sell it via Roofstock, then I have to get a tenant in place and I have to make sure it’s obviously move-in ready, because there has to be a tenant in there.

Gary Beasley: Exactly. We’re starting to work with a lot of traditional fix and flip partners who instead of fixing up homes, they’re buying and selling in retail, they’re starting to now put tenants in them and sell them through Roofstock, because they could get paid while they wait and sort of get a yield… But the typical sellers right now have homes that are already occupied, and they’re looking to sell them, and the choice is “Do I wait for the tenant to move out, or do I move it over and sell it through Roofstock?”

Joe Fairless: Oh, okay, I’m with you. Based on your experience – you’ve been in the real estate industry in some form or fashion (real estate and technology, for sure), what is your best advice ever for the best real estate listeners?

Gary Beasley: The best real estate advice – I would say for me it’s developing a thesis and then having enough conviction around it, even when people may not agree with you. I would say from my experience, for example when we first started buying the single-family rental homes, a lot of people thought we were crazy, and probably one of the biggest mistakes that I’ve made is not raising more money earlier to do it. My partners and I had conviction, but because so many people said “You’re crazy. You’re buying houses? The world’s ending.”

So my advice would be that – develop conviction around a thesis and then go for it, execute. Obviously, you have the right time horizon, and don’t over leverage yourself. Stick to your guns, and remember, real estate is cyclical. If you invest in the right points in the cycle, eventually you end up doing well.

Joe Fairless: I’m all about when we make mistakes we learn from them, so maybe they’re not a mistake; I get that mentality, but what are three mistakes that you’ve made that come to mind? And again, I understand if they turn into growth experiences etc., but what are three mistakes that you’ve made in this business that come to mind?

Gary Beasley: As I think back on it, not raising enough money early enough in one of my earlier ventures, worried about, say, [unintelligible [00:16:17].17] creating too much dilution by raising too much money at a lower valuation at an earlier company. We didn’t raise enough money, had to raise money again, and then had to raise it at a lower valuation, so it kind of got washed out a little bit. That’s something that I advise entrepreneurs – when the money is there, generally, raise more rather than less, and accept a little bit dilution.

I would say a mistake I made early in my life personally was I rented for a very long time while homes went up in value, and finally decided to buy, and ended up buying at the peak of the market, when I could have bought at a much better time.

Joe Fairless: What year did you buy?

Gary Beasley: 2005.

Joe Fairless: Oh, congratulations… In California?

Gary Beasley: Yeah, it was fantastic.

Joe Fairless: There you go. [laughs] Do you still have the place?

Gary Beasley: I do.

Joe Fairless: It doesn’t really matter, since you still have it, but is it worth more than 2005?

Gary Beasley: Yes, it’s definitely worth more than it was in 2005, but had I bought it in a different time in the cycle it would have been much better. Again, it comes down to timing with a lot of these things with real estate.

I would say another mistake that I’ve made – this is more related to building a company in the real estate space, or really in any space – is not acting quickly enough when you have a bad hire who you know is not gonna work out. I just think in general making a change when your gut tells you you need to do so, you sort of bite the bullet and do it, whether you’re building a company in real estate or anything else… That’s just a lesson that I learned over time – you have to sort of take the pain.

Joe Fairless: Absolutely. And usually, they are relieved when you fire them.

Gary Beasley: Correct.

Joe Fairless: Because it’s clear that it’s not working out. They feel it, they understand it, and they’re meant to do bigger and better things in some other area of their life.

Gary Beasley: Absolutely.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Gary Beasley: Sure!

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:18:18].17] to [00:19:20].28]

Joe Fairless: Okay, best ever book you’ve read?

Gary Beasley: Gosh, probably Guns, Germs and Steel by Jared Diamond.

Joe Fairless: What’s the best ever transaction you’ve done in business or real estate?

Gary Beasley: Probably when I was in the resort business we bought an iconic resort for about 50% of what the prior owner paid for it ten years prior. We bought it at a very good time in the cycle, and ended up selling it a few years later for about three times what we paid for it.

Joe Fairless: Best ever way you like to give back?

Gary Beasley: I like to give back to youth and kids. I’ve been involved in a non-profit called Build for a number of years. It teaches disadvantaged kids in high school about entrepreneurship and it helps them get into college and on to life success. I find that very rewarding.

Joe Fairless: And how can the Best Ever listeners get in touch with you or learn more about your company?

Gary Beasley: To learn more about Roofstock, they can go directly to our website, which is Roofstock.com. You can follow us on Twitter, @Roofstock, or me personally, @GaryBeas2013… That’s my Twitter handle.

Joe Fairless: I’m guessing I know what year you joined Twitter. [laughter] Gary, thank you for being on the show. Thanks for talking through the business model of Roofstock, the approach that you take as an entrepreneur, the lessons learned along the way that are applicable not only to real estate investing, but also to business building as a whole… The business model, as well as talking through the competitive advantage that you all have.

So thanks for being on the show; I hope you have a best ever day, and we’ll talk to you soon.

Gary Beasley: Thanks, Joe. I appreciate it.


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