Warren Buffett once told Becky Quick on CNBC that he'd buy up a couple hundred thousand single-family homes if it were more practical for him to do so.
Real estate is one of those areas where expertise, research, and hard work can yield what investors call “alpha.” It's what a successful investor is able to generate over their benchmarks. Many of the folks who actively managed mutual funds aren't able to generate any alpha.
There are ways to generate alpha in real estate investing because there are so many factors in each deal. You could have a motivated seller looking to move away. You could have existing tenants who pay on a regular basis, signed a long lease, or are otherwise very attractive and low headache. You could learn that a big employer is moving into, or out of, an area.
It's hard to find an edge if you're buying shares of Apple on the open market. You probably won't learn anything that gives you an edge.
If you want to do something Warren Buffett wants to do, but can't feasibly do at the scale he needs (he invests billions, he just doesn't have the capacity to invest in single family homes… even if he wants to!), there's a real estate company called Roofstock that can help get you there.
What is Roofstock?
Roofstock is a company that helps investors buy single-family homes as rental properties. The biggest piece is the marketplace, where you can browse properties for sale and filter them on a variety of factors. The biggest advantage of this method is that they are selling homes with tenants already living in them.
But this isn't eBay and this isn't a small purchase, so they know they have to do a lot of research into each property.
Roofstock certifies each house that is listed on their platform. They do this by inspecting the property using a professional investment property inspection service. If there are repairs or maintenance needs, those are estimated and included in the property's valuation. This is also when you'll see photos, floor plans, and a title report.
Here's the information listed on each property report:
- Market, neighborhood, and local school insights
- Interior & exterior inspection reports
- Property valuation & comparables
- Tenant payment history & lease details
- Preliminary title report
- Major repair cost estimates, if applicable
- Visualizations of appreciation, income & total returns
- Detailed financial pro forma & return estimates
They also offer service during the acquisition process (such as financing, you only need 20% down on the purchase) as well as provide references on property management companies after the sale. All purchases come with a 30-day money back guarantee as well as guaranteed rent (and no property management fees until it is leased) on any properties that don't have tenants.
Most of the properties are, however, NOT owned by Roofstock. You're buying from another seller, which can be a small time operator or a larger company. They sometimes sell properties that they've acquired and rehabbed, but that's less common.
Why would an investor want to sell a rental property when there are already tenants in them? There are a lot of reasons. It's possible that another opportunity presented itself and they need the equity to take advantage. Maybe they've changed their investment plan and want to diversify into other categories. Maybe they just want the money out of the house to use somewhere else, perhaps pay for college or another big purchase.
I used to invest in rental properties and a common strategy is to buy several lower-priced properties for cash, rehab them, and then refinance a group of houses into one loan. We didn't have leverage because each home was too cheap for a bank to be interested. Then, the homes in that area became too expensive, we were cash poor, and we couldn't get enough of them to bundle into a single loan. So we ended up selling the homes even though they had tenants and were otherwise fine.
Rooftstock 30-Day Satisfaction Guarantee
The Roofstock 30-Day Satisfaction Guarantee was fascinating to me because it's not like you're buying a t-shirt or an appliance, this is a house.
As it turns out, if you buy the house and you are not satisfied, you can get your money back. What actually happens is they re-list the property on the platform and not charge you their seller's fee. You don't get your money back immediately, you have to wait until it sells, and Roofstock may repurchase it from you after 90 days.
When you buy a property, you have all the customary fees associated with buying any property – title insurance fee, loan origination fees (if necessary), recording fees, document preparation, and closing fees, etc. Those go to the various entities involved in the sale.
Roofstock collects a Marketplace Fee of 0.5% of the Contract Price and payable when you agree to buy the property. That's what secures the property.
If you decide you want to sell your property, they charge 2.5%. One advantage of the platform is that you don't need to vacate the property to sell it.
Roofstock has partnerships in two areas – financing and property management services. It's in these areas that they can help facilitate the process so if you need financing, because you only need 20% down, they have integrated lending partners that have many options. You can use your own lender too, they just have a bullpen at the ready.
Then, after the sale, they also have property management companies that you can use after the sale. You can, of course, also use your own or manage it yourself if you are nearby.
Is Roofstock For You?
There are a lot of ways to invest in real estate and this is the first platform I've seen where you can buy actual property. It's not the crowdfunding real estate approach where buy a piece of a property, you're buying the whole thing. This is also why you don't have to be an accredited investor to participate, it's not a crowdfunded investment, you're buying a house and anyone can buy a house.
If you want to invest in single family homes as rentals, this is likely one of the simplest turnkey ways to do it. The fact that Roofstock only charges 3% on each transaction (0.5% from the buyer, 2.5% from the seller) makes it a really attractive option if you find homes you like on the platform. Many crowdfunded real estate platforms charge a bit more (much of it is hidden in the spread of what they collect in payments and what they pay out to investors, usually a basis point).
In the end, it comes down to what is available on the platform and to find out, you can register for free.