Up until recent years, REITs were pretty much the only option for investors who wanted to invest in real estate, but lacked a strong professional background in the industry. The economic crisis, low interest rates and the rise of algo-trading led millions of investors to search for real estate investment opportunities and dozens of crowdfunding platforms were founded to serve this growing market.

One of the fastest growing and fascinating startups is Oakland-based RoofStock, which just announced another $20M B round led by Lightspeed Venture Partners, just eight months after launching. The company was founded in 2015 by savvy real estate managers Gary Beasley, CEO and Gregor Watson, Chairman. Beasley served as co-CEO of Starwood Waypoint Residential Trust and president of ZipRealty, while Watson was a partner at McKinley Partners and later founded 643 Capital Management, which has invested over $1B in single family homes nationally.

gary-beasley-and-gregor-watson-2

Gregor Watson (left) and Gary Beasley

 

We met to discuss about their journey in Roofstock, the real estate markets and tech.

Omri Barzilay: For the ones who are not familiar with the company, what is Roofstock?

Gregor Watson: Roofstock is a marketplace and transaction platform which take the pain out of investing in real estate.   We reduce the costs, friction and time associated with buying and selling along with providing a transparent, easy to use platform.  Our goal is to simplify the process by effectively separating “investing” from “operations.”

Gary Beasley: We believe every investor has a right to invest in real estate, and Roofstock is focused on making it broadly accessible to investors large and small.  We are at our core democratizing real estate investing, opening up the asset class and removing many of the barriers that have hindered access to less experienced investors.

Barzilay: Does Roofstock buy the properties on the website itself?

Watson:  As a marketplace and transaction platform, Roofstock does not own any of the homes on the site. We provide information about the homes, inspection reports, valuation estimates, data around the tenants, school scores and other important information that allows investors to make an investment decision before purchasing a property, rather than leaving that for a post-offer diligence period.

Barzilay: Do you guarantee a certain yield to your investors?

Beasley: Roofstock does not currently guarantee a yield for investors, but instead we offer tools for investors to easily evaluate potential returns under numerous potential scenarios.  A yield guarantee is something we are considering and may offer in the future as we get more and more data and scale.  Since the homes we offer on Roofstock are already rented, and the tenants have been certified to ensure an acceptable income to rent ratio and payment history, this provides an additional level of comfort for investors not available on other platforms.  We do selectively offer rent guarantees, however, which gets investors part of the way there, and continue to evaluate and consider other guarantees and insurance products that could reduce investor risk.

Barzilay: We have seen many crowdsourcing solutions in recent years, including Fundrise, Realtyshares and others which raised a lot of capital. How are you different from them and from other, more traditional, turnkey companies?

Watson: The founding team at Roofstock has invested in over $4B in US housing and has used that very deep, but concentrated knowledge to create a platform that is focused on providing access to certified investment homes in a historically fragmented sector. We do one thing, which is rental homes, and we do it very well.  Roofstock allows investors multiple ways to invest in this sector.  The majority of our transactions today have been whole ownership, but we also offer fractional ownership in a basket of homes. Roofstock also provides a 30-day money back guarantee if investors don’t like the home for any reason.

Barzilay: What’s the story behind Roofstock, how was it all started?

Watson:  I came up with the idea when I was frustrated by the process of selling 500 homes in Dallas from one of my early funds. The old way of doing things was expensive, time consuming and did not make sense. The brokers I spoke with wanted me to move the tenants out of the homes so they could put a sign in the front yard and sell it to someone else in town. I knew the best buyer for this asset that had real cash flow was likely not down the street, and we had done the hard work already.  We bought the home, cleaned it up, found a renter and it was cash flowing. The best buyer could be in San Francisco, New York or Hong Kong.  I knew I had to create an online marketplace to expose this yield to the world.  Once we got into the idea we realized it was much bigger than just marketing homes.   We could develop an end to end solution and effectively take the cost and pain for the investor eventually out of the equation

Beasley:  I first learned about the idea for Roofstock when I got a call from a couple of the partners from Khosla Ventures who were considering funding the idea.  My co-founder Gregor had pitched them on the concept, and they were calling me as a channel check, since I was co-CEO of one of the largest public single-family rental platforms at the time.  We talked for an hour and a half, and I told them we’d definitely use the platform to buy and sell if it existed.  Long story short, they and Gregor came back to me and pitched me on quitting my day job and founding the business with Gregor.  The rest is history!

Barzilay: You were able to bring Khoshla, Bain and now also Lightspeed as investors. How active they are in the company and what extra value they brought so far?

Watson: We are super lucky to have such a great group of investors. The thing that has surprised me the most about VC investors is how much they are willing to help. They have been amazing when it comes to recruiting talent to the Roofstock team, making introduction to strategic partners or helping with spots we are having a hard time on.

Barzilay: Another notable investor is Eric Wu, the founder of OpenDoor. Is he involved in the company? Are there any relationships between the companies?

Beasley: Eric is a great entrepreneur and we love what they are building at OpenDoor.   We compare notes on both of our companies and are always looking for ways to work together. We have not figured out a way yet as we have not had any market overlap until very recently, but we are exploring some ideas and I am sure we will in time.

Barzilay: Gary, you are coming with an extensive real estate and tech experience in companies such as ZipRealty and Starwood Waypoint. What opportunities do you see in the real estate technology market?

Beasley: The real estate sector is perhaps the largest financial services vertical that has yet to be transformed by technology.  In my opinion, this is inevitable, although structural inertia makes adoption a bit slower in real estate than many sectors.  Given the high fees, Byzantine processes and long timelines for closing, the sector is ripe for innovation.

Barzilay: Many real estate startups are trying to replace the real estate agent. Do you think real estate agent will become obsolete? What’s the future of the brokerage industry?

Watson: There will always be a role for a real estate agent and trusted advisor. Like many industries, these roles change over time.  We expect the increase in technology to be a big help in terms of productivity in the real estate agents world.

Beasley: While investors are free to use our site directly to access our proprietary inventory, we are also actively working with agents to help them grow their business by paying referral fees on clients they register on Roofstock who purchase properties through our platform.  In our research, we learned that on average real estate agent sell a home to their client every 5-7 years. Roofstock offers a way for agents to monetize their client relationships by earning a referral fee on investment properties purchased in markets around the country.  It is a win-win.

Barzilay: Do you think that real estate prices will continue to rise in the next few years?
Beasley: As a marketplace, we are constantly looking for better and better data and research that we can make available to investors and can inform our forecasts.  We review numerous home price appreciation forecasts on a regular basis, and all of them today anticipate some level of price growth…where they vary is the rate of growth.  Given the increasing job growth, household formation and lack of new single-family supply being added, we do believe prices should trend up and to the right over time.  Also, real estate is an excellent inflation hedge, so if the new administration is as stimulative as it appears it may be, it could lead to higher inflation than we have seen in some time, which would tend to put upward pressure on hard asset values

Barzilay: What should we expect from Roofstock in the near future?

Watson: We recently launched two new markets and will be launching others in the near future. We are also very excited about the asset management app which is in development and combines machine learning and market analytics to provide a powerful tool for the retail investor.   As always, we will keep looking for ways to reduce friction and cost in every step of the process.

Beasley: Our goal is to grow the marketplace every day and continue to make the process of buying and selling properties easier and easier.  Expect us to expand our geographic footprint, grow our inventory, improve and simplify our shopping and buying experience, streamline and accelerate the closing process, introduce our asset management tools, and offer additional financing options.  Stay tuned!

 

Reposted from Forbes